UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-K
(Mark
One)
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2010
or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
file number 000-51653
DEALERTRACK
HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)\
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Delaware
(State
or other jurisdiction
of
incorporation or organization)
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52-2336218
(I.R.S.
Employer
Identification
Number)
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1111
Marcus Ave., Suite M04
Lake
Success, NY 11042
(Address
of principal executive offices, including zip code)
(516) 734-3600
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock, $0.01 Par Value Per Share
(Title
of each class)
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The
NASDAQ Stock Market, LLC
(Name
of exchange on which registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. 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 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company o
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|||
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(Do
not check if a smaller reporting
company)
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||||||
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
The
aggregate market value of the common stock held by non-affiliates of the
registrant as of June 30, 2010, the last business day of the registrant’s
most recently completed second fiscal quarter, was approximately
$655 million (based on the closing price for the registrant’s common stock
on the NASDAQ Global Market of $16.45 per share).
As of
February 1, 2011, 40,859,942 shares of the registrant’s common stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The
Registrant intends to file a proxy statement pursuant to Regulation 14A
within 120 days of the end of the fiscal year ended December 31, 2010.
Portions of such proxy statement are incorporated by reference into
Part III of this Annual Report on Form 10-K.
TABLE
OF CONTENTS
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Page
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Item 1. Business
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3
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Item 1A.
Risk Factors
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13
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Item 1B.
Unresolved Staff Comments
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22
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Item 2.
Properties
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22
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Item 3.
Legal Proceedings
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22
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Item 4.
[Removed and Reserved]
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22
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Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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23
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Item 6.
Selected Consolidated Financial Data
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23
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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
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25
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Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
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46
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Item 8.
Financial Statements and Supplementary Data
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47
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Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
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79
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Item 9A.
Controls and Procedures
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79
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Item 9B.
Other Information
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80
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Item 10.
Directors, Executive Officers and Corporate Governance
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80
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Item 11.
Executive Compensation
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80
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Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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80
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Item 13.
Certain Relationships and Related Transactions, and Director
Independence
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80
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Item 14.
Principal Accountant Fees and Services
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81
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Item 15.
Exhibits and Financial Statement Schedule
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81
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EX-21.1:
LIST OF SUBSIDIARIES
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EX-23.1:
CONSENT OF PRICEWATERHOUSECOOPERS LLP
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EX-31.1:
CERTIFICATION
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EX-31.2:
CERTIFICATION
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EX-32.1:
CERTIFICATIONS
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2
PART
I
Item 1. Business
Certain statements in this Annual
Report on Form
10-K are
“forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These
statements involve a number of risks, uncertainties and other factors that could
cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by
these forward-looking statements. Factors which could materially affect such
forward-looking statements can be found in the section entitled “Risk Factors”
in Part 1, Item 1A in this Annual Report on Form 10-K. Investors are urged to
consider these factors carefully in evaluating the forward-looking statements
and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements made herein are only made as of the
date hereof and we will undertake no obligation to publicly update such
forward-looking statements to reflect subsequent events or
circumstances.
References in this Annual Report
on Form 10-K
to “DealerTrack,” the
“Company,” “our” or “we” are to DealerTrack Holdings, Inc., a Delaware
corporation, and/or its subsidiaries.
Overview
DealerTrack’s
intuitive and high-value software solutions enhance efficiency and profitability
for all major segments of the automotive retail industry, including dealers,
lenders, OEMs, agents and aftermarket providers. We believe our solution set for
dealers is the industry’s most comprehensive. DealerTrack operates the
industry’s largest online credit application network in the United States,
connecting approximately 17,000 dealers with over 950 lenders. Our dealer
management system (“DMS”) provides dealers with easy-to-use tools and real-time
data access that will streamline any automotive business. Dealers using
DealerTrack AAX get the inventory management tools and services needed to
accelerate turns and increase profits. Our sales and finance and
insurance (“F&I”) solution enables dealers to streamline the entire
sales process while structuring all types of deals from a single integrated
platform. DealerTrack’s compliance solution helps dealers meet legal and
regulatory requirements and protect their assets. DealerTrack’s family of
companies also includes data and consulting services providers,
ALG and Chrome Systems.
On
January 31, 2011, we acquired triVIN Holdings, Inc. (“triVIN”), now known as
DealerTrack Processing Solutions, Inc., a leading provider of automobile title
management services to lenders and vehicle registration services to automobile
dealers. This acquisition will significantly expand our transaction business and
further strengthen our relationship with lenders and automobile
dealers.
We are a
Delaware corporation formed in August 2001. We are organized as a holding
company and conduct a substantial amount of our business through our
subsidiaries, including ALG, Inc., Chrome Systems, Inc., DealerTrack AAX, Inc.,
DealerTrack Aftermarket Services, Inc., Inc., DealerTrack Canada, Inc.,
DealerTrack Digital Services, Inc., DealerTrack, Inc., DealerTrack Processing
Solutions, Inc., and DealerTrack Systems, Inc.
We
maintain a website at www.dealertrack.com. We make
available, free of charge through our website, our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits
thereto, and any amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable
after the reports are electronically filed with, or furnished to the Securities
and Exchange Commission (the “SEC”). Our reports that are filed with, or
furnished to, the SEC are also available at the SEC’s website at www.sec.gov. You may also
obtain copies of any of our reports filed with, or furnished to, the SEC, free
of charge, at the SEC’s public reference room at 100 F Street, N.E., Washington,
DC 20549.
Our
Market
Dealers
and lenders had traditionally relied upon fax and mail delivery methods for
processing their F&I offerings. This method produced lengthy processing
times and increased the cost of assisting the consumer to obtain financing or
insurance. For example, legacy paper systems required the consumer to fill out a
paper credit application for each of the lenders to which he or she applied. The
dealer then faxed the credit application to each lender and awaited a series of
return faxes. When a lender approved the consumer’s credit application, the
consumer manually signed a paper finance or lease contract with the dealer, who
then delivered it with ancillary documents to the lender via mail or overnight
courier. The lender then manually checked the contract for any errors or
omissions and if the contract or ancillary documents were accurate and complete,
the lender paid the dealer for the assignment of the contract. The cumbersome
nature of this process can limit the range of options available to consumers and
delay the availability of financing.
Even when
dealers have also employed technology to address inefficiencies in a variety of
their traditional workflow processes inefficiencies still remained. For example,
dealers have made significant investments in dealer management system (“DMS”)
software to streamline their back office functions, such as accounting,
inventory, communications with manufacturers, parts and service, and have
deployed customer relationship management (“CRM”) software to track consumer
behavior and maintain active post-sale relationships with consumers to increase
aftermarket sales and future automobile sales. However, these DMS and CRM
software systems typically reside within the physical dealership and have not
historically been fully integrated with each other, resulting in new
inefficiencies. These inefficiencies slow the sales and customer management
process, as different and sometimes contradictory information is recorded on
separate systems.
3
We
believe our solution
set for dealers is the industry’s most comprehensive, providing value for every
department in a dealership. DealerTrack’s low cost, high value web-based
solutions are generally open and flexible. Our network improves efficiency and
reduces processing time for dealers, lenders, and other participants, and
integrates the products and services of third-party service and information
providers, such as credit reporting agencies and aftermarket
providers.
Our
on-demand credit application processing and electronic contracting products
eliminate expensive and time-consuming inefficiencies in legacy paper systems,
and thereby decrease lenders’ costs of originating loans or leases. We also
offer a contract-processing solution, which can provide lenders with retail
automotive contracts and related documents in a digital or electronic
format.
We
primarily generate revenue on either a transaction or subscription basis,
depending on the customer and the product or service
provided.
Our
Customers
Our
primary customers are dealers and lenders. DealerTrack uses a
Software-as-a-Service (“SaaS”) model, which the company believes is a superior
method for delivering products and services to these customers. Our customers
can access our highly specialized applications on-demand, avoiding the expense
and difficulty of installing and maintaining them independently.
Dealers
We offer
franchised and independent dealers a suite of low-cost on-demand DMS,
compliance, sales and F&I, and inventory management solutions that
significantly shorten financing processing times, increase efficiencies across
the dealership, and allow dealers to spend more time selling automobiles. The
subscription agreements with our dealers typically run for one to three years,
with one-year automatic extensions, except for our DMS agreements, which
generally have more flexible terms.
Our
automated, web-based credit application-processing product allows automotive
dealers to originate and route their consumers’ credit application information.
This product has eliminated the need to fax a paper application to each lender
to which a consumer applies for financing. Once a dealer enters a consumer’s
information into our system, the dealer can distribute the credit application
data electronically to one or multiple lenders and obtain credit decisions
quickly and efficiently and at no charge.
We offer
a comprehensive DMS, allowing dealers to manage functions across their entire
business, and a complete suite of other subscription solutions that complement
our credit application processing product, allowing dealers to integrate and
better manage their business processes. We offer a compliance solution that
helps dealers comply with red flags and other governmental regulations, and
offers reporting functions. Additionally, DealerTrack AAX helps dealers manage
their inventory and pricing and our sales and F&I solutions streamline the
vehicle and aftermarket sales processes. Included in our sales and
F&I solutions are products that allows dealers and consumers to complete
finance contracts electronically, which a dealer can then transmit to
participating lenders for funding, further streamlining the financing process
and reducing transaction costs for both dealers and lenders. We give each
dealership the ability to select the specific tools they need to reduce costs,
increase profits and sell more vehicles.
Lenders
Our
network of lenders includes national and regional prime, near prime and
non-prime lenders; regional and local banks, captive lenders and credit unions.
Our agreements with our lender customers are typically transaction based and run
for two years, with one-year automatic extensions.
Our
on-demand credit application processing and electronic contracting products
eliminate expensive and time-consuming inefficiencies in legacy paper systems,
and thereby decrease lenders’ costs of originating loans or leases. We also
offer a contract-processing solution, which can provide lenders with retail
automotive contracts and related documents in a digital or electronic format. We
believe our solutions significantly streamline the financing process and improve
the efficiency and/or profitability of each financing transaction. We
electronically transmit complete credit application and contract data, reducing
costs and errors and improving efficiency for both prime and non-prime lenders.
We also believe that our credit application processing product enables our
lender customers to increase credit originations. Our network is configured to
enable our lender customers to connect easily with dealers with whom they can
establish new business relations. We believe that lenders that utilize our
solutions experience a significant competitive advantage over lenders that rely
on the legacy paper and fax processes.
OEM’s
We offer
vehicle manufacturers comprehensive technology and consulting solutions to
improve online interactions and awareness, increase vehicle and accessories
sales, and streamline interactions with franchised dealerships. Our solutions
help improve residual vehicle values and consumer brand perception with
automotive original equipment manufacturer (“OEM”) consulting services and tools
from ALG. Our solutions boost the selling power of a dealer website and maximize
accessories sales with fully functional and customizable build, price and
competitive-comparison solutions from Chrome. In addition, the DealerTrack DMS
streamlines manufacturer interactions by integrating warranty claims, part
orders and returns, and financial statement submission.
4
Aftermarket
Providers
The
DealerTrack Aftermarket Network™ gives dealers access to real-time contract
rating information and quote generation, and provides digital contracting for
aftermarket products and services. The aftermarket sales and contracting process
was previously executed through individual aftermarket providers’ websites or
through a cumbersome paper-based process prone to frequent delays and errors.
Our on-demand connection between dealers and aftermarket providers creates a
faster process, improves accuracy, and eliminates duplicate data entry for both
dealers and aftermarket providers. We believe this more efficient process
combined with the use of our on-demand electronic menu product makes it possible
for dealers to more effectively sell aftermarket products and
services.
Other
Service and Information Providers
Our
web-based solutions enable third-party service and information providers to
deliver their products and services more broadly and efficiently, which
increases the value of our integrated solutions to our dealer customers. We
believe we offer our third-party service and information providers a secure and
efficient means of delivering their data to our dealer and lender customers. For
example, the credit reporting agencies can provide dealers with consumers’
credit reports electronically and integrate the delivery of the prospective
consumers’ credit reports with our credit application processing and other
products. Additionally, our inventory management solution integrates real time
pricing data and wholesale auction data to give dealers access to available
market information.
Our
Web-based Credit Application Network
Our U.S.
and Canadian web-based credit application networks are independent and do not
give any single lender preference over any other lender. Each dealer sees its
individualized list of available lenders listed alphabetically, based on our
proprietary matching process, and can typically transmit credit application
information simultaneously to multiple lenders that they select. Lenders’
responses to requests for financing through our network are presented back to
the dealer in their order of response.
Our
Growth Strategy
Our
growth strategy is to leverage our position as a leading provider of on-demand
software solutions to the U.S. and Canadian automotive retail industries. Key
elements of our growth strategy are:
Expand
Our Customer Base
We intend
to increase our market penetration by expanding our automotive dealer and lender
customer base through the efforts of our direct sales force. While as of
December 31, 2010 we had over 950 active lender customers in the United
States, we will focus on adding select regional banks, credit unions, financing
companies and the captive financing affiliates of automotive manufacturers to
our network. We also intend to increase the number of other service and
information providers in our networks by adding, among others, insurance and
other aftermarket service providers. Additionally, we have increased our
installation capacity for our DMS business and streamlined the installation
process for our inventory solutions in order to help expand our customer base in
these areas.
Sell
Additional Products and Services to Our Existing Customers
We
believe that a significant market opportunity exists for us to sell additional
products and services to our approximately 17,000 dealer customers that utilize
our credit application processing product, or have purchased one or more of our
subscription-based products or services. Similarly, the over 950 lenders that
utilize our U.S. credit application processing network represent a market
opportunity for us to sell our electronic and digital contracting
solutions.
Expand
Our Offerings
We expect
to expand our suite of products and services to address the evolving needs of
our customers. We market our products as four integrated solutions: DMS,
Sales/Finance & Insurance, Data Services and Inventory Management. We have
identified a number of opportunities to leverage our network of relationships
and our core competencies to benefit dealers, lenders and other service and
information providers.
For
example, with regards to the DealerTrack DMS, we expanded our penetration of OEM
accounts with the signing of Porsche, Volvo and Toyota. The deployments at
Porsche and Toyota are scheduled for the first quarter of 2011, and the Volvo
deployment is slated for the second quarter of 2011. We also provided
significant DMS enhancements for Honda and General Motors in the United States
and introduced our DMS in Canada. We are committed to being an open technology
partner with our dealers and further integrating our solutions with third
parties to meet their needs. We also are continuing to add reporting capability
to our compliance solution and third-party integrations to our DMS and inventory
management solutions.
Pursue
Acquisitions and Strategic Alliances
We have
augmented the growth of our business by completing strategic acquisitions
including, most recently, our acquisition of triVIN on January 31, 2011. In
executing our acquisition strategy, we have focused on identifying businesses
that we believe will increase our market share or that have products, services
and technology that are complementary to our product and service offerings. We
believe that our success in completing these acquisitions and integrating them
into our business has allowed us to maintain our leadership position in the
industry, enhance our network of relationships and accelerate our growth. We
intend to continue to grow and advance our business through acquisitions and
strategic alliances. We believe that acquisitions and strategic alliances will
allow us to enhance our product and service offerings, sell new products using
our networks, strengthen technology offerings and/or increase our market
share.
5
Our
Solutions
DealerTrack
markets its dealer-facing solutions under the DealerTrack Performance Suite
umbrella brand. Each solution fits within four categories: DMS, Sales/Finance
& Insurance, Inventory Management and Data Services.
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Solutions
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Products
and Services
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Revenue
Type
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DMS:
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• DealerTrack
DMS
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•
Subscription
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• SalesMaker
™
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•
Subscription
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• DealerTrack
eMenu™
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•
Subscription
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• DealerTrack
Aftermarket Network™
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•
Transaction
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Sales/Finance
& Insurance:
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• DealerTrack credit
application network (On-line
credit
application processing platform and credit
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•
Transaction
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bureau
access platform)
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•
BookOut
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•
Subscription
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• DealerTrack Compliance
Solution™
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• Subscription and
Transaction
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• DealerTrack
eContracting ™
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• Subscription and
Transaction
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• eDocs (for
lenders)
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•
Transaction
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• DealTransfer
®
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•
Subscription
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Inventory
Management:
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• DealerTrack AAX
®
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•
Subscription
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Data
Services:
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• ALG Residual Value
Guides
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•
Subscription
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• ALG Data
Services
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• Subscription and
Transaction
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• Chrome New Vehicle
Data
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•
Subscription
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• Chrome Carbook
Pro
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•
Subscription
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• Chrome
Construct
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•
Subscription
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• Chrome Automotive
Description Services
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•
Subscription
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• Chrome
IQ
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•
Subscription
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• Chrome
BookLink
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•
Subscription
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• Chrome Carbook
Showroom ®
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•
Subscription
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• Chrome PC Carbook
®
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•
Subscription
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• Chrome Fleet
Edition
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•
Subscription
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• Chrome Interactive
Media
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•
Subscription
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• Chrome Accessories
Solution
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•
Subscription
|
6
DMS
Solutions:
DealerTrack DMS —DealerTrack
DMS is a dealer management system that gives dealers control of their business
across every department. It is an open and secure platform that allows dealers
to integrate and manage all the primary functions of their store operations
including: vehicle sales, portfolio management, showroom management, service
department, general ledger, automated dispatching, parts inventory and
invoicing, electronic repair order, service price guides, vehicle inventory,
contact management, payroll and personnel management.
SalesMaker ™ —
SalesMaker is a profit management system enabling dealers to search the hundreds
of current lender programs in our database, and, within seconds, find the
financing or lease program that is best for a consumer and the most profitable
for the dealership. SalesMaker also assists dealers in finding financing for
consumers with low credit scores, while maximizing their own profit. In
addition, dealers can quickly pre-qualify prospective consumers and then match
the best lender program against their available inventory.
DealerTrack eMenu ™ —
DealerTrack eMenu allows dealers to consistently present consumers with the full
array of insurance and other aftermarket product options they offer in a menu
format. The product also creates an auditable record of the disclosures to
consumers during the aftermarket sales process, helping to reduce dealers’
potential legal risks. DealerTrack eMenu is also a product offering in the
compliance solution.
DealerTrack Aftermarket
Network ™ — The DealerTrack Aftermarket Network, provides real-time
aftermarket contract rating and quote generation from participating providers of
aftermarket products. Categories of aftermarket products represented on the
network include extended service contracts, GAP, etch, credit life and
disability insurance, and vehicle recovery systems. Since the DealerTrack
Aftermarket Network is fully integrated into the DealerTrack network, we expect
both dealers and aftermarket providers will benefit from improved accuracy and
elimination of duplicate data entry.
Sales/Finance
& Insurance:
DealerTrack credit application
network — Our DealerTrack credit application network facilitates the
online credit application process by enabling dealers to transmit a consumer’s
credit application information to one or multiple lenders and obtain credit
decisions quickly and efficiently as well as pull credit bureau data. Generally,
our dealer customers maintain active relationships with numerous lenders. We
offer each lender customer the option to provide other value-added services to
dealers that facilitate the financing process, including dealer reserve
statements, payoff quotes, prospect reports for consumers nearing the end of
their current loan or lease and reports of current financing rates and
programs.
BookOut — With BookOut, a
dealer can quickly and easily look up used automobile values by year/make/model
or vehicle identification number for use in the credit application process. We
currently offer separate BookOut subscriptions for data provided by Black Book,
Kelley Blue Book and NADA. These products facilitate the financing process by
providing dealers with reliable valuation information about the relevant
automobile. BookOut is also a product offering in the inventory management
solution.
DealerTrack Compliance
Solution ™ — DealerTrack compliance solution provides automotive dealers
with a safe and reliable method to sign, store and protect customer and
financing activity at the dealership. It also provides safeguards, such as
limited access to sensitive information based on a user’s role and permission,
to help reduce compliance risk by handling every customer financing deal
consistently.
DealerTrack eContracting and
eDocs — Our DealerTrack eContracting product allows dealers to obtain
electronic signatures and transmit contracts and contract information
electronically to lenders that participate in eContracting. eContracting
increases the speed of the automotive financing process by replacing the
cumbersome paper contracting process with an efficient electronic process. Our
eDocs digital contract processing service receives paper-based contracts from
dealers, digitizes the contracts and submits them electronically to the
appropriate lender. Together, eDocs and eContracting enable lenders to create a
100% digital contract workflow.
DealTransfer® —
DealTransfer permits dealers to transfer transaction information directly
between select dealer management systems and our DealerTrack credit application
network with just a few mouse clicks. This allows dealers to avoid reentering
transaction information once the information is on any of the dealer’s
systems.
Inventory
Management Solution:
DealerTrack AAX ® —
DealerTrack AAX is a full-featured inventory system. Dealers can
identify high-profit, fast turning vehicles quickly and easily adjust price to
be more competitive. The robust enterprise reporting is designed for
multi-store inventory optimization. Daily performance tracking is
enabled by real time reporting and custom built inventory
modeling. Consulting services optimize inventory management and
enhance product performance. The solution also includes functionality to help a
dealer appraise vehicles, merchandise vehicles, source vehicles and access
vehicle pricing recommendations, vehicle performance scores, as well as
dealership transactional history. In addition, DealerTrack Mobile AAX, a
wireless appraisal solution with direct access to all the leading value
guidebooks, allows dealers to provide immediate vehicle valuations from nearly
any location using the built-in VIN scanning capability.
Data
Services:
ALG Residual Value Guides —
ALG Residual Value Guides are the industry standard for the residual value
forecasting of vehicles. New car residual values are available in a national
percentage guide, as well as regional dollar guides. Lenders and dealers use ALG
Residual Value Guides as the basis to create leasing programs for new and used
automotive leases.
ALG Data Services — ALG
is the primary provider of vehicle residual value data to automotive industry
participants, including manufacturers, banks and other lenders, desking software
companies and automotive websites.
Chrome New Vehicle Data —
Chrome New Vehicle Data identifies automobile prices, as well as the standard
and optional equipment available on particular automobiles. Dealers provide
Chrome’s data on their websites and lenders use the data in making financing
decisions.
Chrome Carbook Pro – Chrome
Carbook Pro is a flexible, multi-user, web-based research and reporting tool for
fleet professionals. Fleet professionals can license only the
components they need or the complete set and activate components on a
user-by-user basis.
7
Chrome Construct — Chrome
Construct combines vehicle research, configuration and comparison tools into a
single web service. The data is provided and maintained by Chrome.
Chrome Automotive Description
Service (“ADS”) and ChromeIQ — Chrome ADS
is a web service that turns a VIN into a rich description of a vehicle,
including prices, options, colors and standard equipment. Chrome IQ converts
batches of VINs into rich vehicle descriptions.
Chrome BookLink— Chrome
BookLink allows customers to quickly and easily map between Chrome's New Vehicle
Data and a used book provider without having to implement, host, or update
mapping tables.
Chrome Carbook Showroom ®, PC Carbook ® and Carbook Fleet Edition —
Carbook Showroom, PC Carbook and Carbook Fleet Edition provide automotive
specification and pricing information. These products enable dealers, fleet
managers, financial institutions and consumers to specify and price a new and
used automobile online, which helps promote standardized information among these
parties and facilitates the initial contact between buyer and
seller.
Chrome Interactive Media —
Chrome Interactive Media includes vehicle still photographs and full motion
vehicle video for use on dealer and auto industry portal websites. The products
are used to present an accurate, high-impact view of vehicles to facilitate
sales.
Chrome Accessories Solution —
Chrome Accessories Solution provides OEMs with a complete digital marketing
and accessories sales system for their dealer network and websites. This
includes a catalog of accessories with eCommerce capabilities for dealer
websites and an in-showroom sales and fulfillment system. A dealer/reseller
version is also available, Accessories Essential, which is a simple, seamless
and cost-effective solution that plugs-in dealership websites.
International
Our
subsidiary, DealerTrack Canada Inc., is a leading provider of on-demand credit
application and contract processing services to the indirect automotive finance
industry in Canada. Historically, we have provided our Canadian customers with
only our credit application and contract processing products. Presently, we are
also offering them select subscription products. For the year ended
December 31, 2010, 2009 and 2008, our Canadian operations generated
approximately 12%, 11% and 11% of our net revenue, respectively.
Technology
Our
technology platform is robust, flexible and extendable and is designed to be
integrated with a variety of other technology platforms. We believe our open
architecture is fully scalable and designed for high availability, reliability
and security. Product development expense for the years ended December 31,
2010, 2009 and 2008 was $13.4 million, $14.0 million and
$11.7 million, respectively. Our technology includes the following primary
components:
Web-Based
Interface
Our
customers access the majority of our on-demand application products and services
through an easy-to-use web-based interface. Our web-based delivery method gives
us control over our applications and permits us to make modifications at a
single central location for each application. We easily add new functionality
and deliver new products to our customers by updating our software on a regular
basis.
Partner
Integration
We
utilize a variety of various integration technologies to facilitate the
interfaces to our many partners. We are a member of both Standards for
Technology in Automotive Retail (“STAR”) and American Financial Services
Association (“AFSA”) and are committed to supporting published standards as
they evolve.
Infrastructure
Our
technology infrastructure is hosted externally and consists of a production site
and disaster recovery sites. Our production sites are fully hardware redundant.
Our customers depend on the availability and reliability of our products and
services and we employ system redundancy in order to minimize system
downtime.
8
Security
DealerTrack
offers a secure, reliable and trusted service and has built our Security Program
utilizing a “Defense in Depth” security strategy. Our multi layered approach is
designed to protect DealerTrack’s applications, physical infrastructure and
network infrastructure. The DealerTrack website environments adhere to the
highest security standards and have deployed a multi-tiered firewall
infrastructure that allows for highly controlled data segmentation. DealerTrack
has also deployed intrusion detection systems to alert of any potential network
security threats. Our firewalls and intrusion detection systems are both managed
and monitored continuously by an independent security management company. Our
internet communications are encrypted using https/SSL 128-bit encryption. We
also utilize a commercial software solution to securely manage user access to
our applications. Incoming traffic is authenticated before it is authorized for
access in-to the application. Once a user has been authorized, access control to
specific functions within the site is performed by the application. Our access
control system is highly granular and includes the granting and revocation of
user permissions to functions on the website. DealerTrack’s Security Program
includes having external and internal vulnerability assessments performed on a
regular basis to test for security vulnerabilities. We have
implemented robust patch management and server hardening processes to protect
against security vulnerabilities inherent in many industry-standard software,
systems and applications. DealerTrack uses a leading anti-virus
solution to protect its servers and workstations.
DealerTrack
maintains a certification from Cybertrust, Inc. (Verizon Business Services), a
leading industry security certification body. This certification program entails
a comprehensive evaluation of our Security Program, including extensive testing
of our website’s perimeter defenses.
Customer
Development and Retention
Sales
Our sales
resources are focused on four primary areas: dealers, lenders, aftermarket
providers and other industry providers. Our sales resources strive to increase
the number of products and services purchased or used by existing customers and
also to sell products and services to new customers. Our dealer sales resources
focus on selling our subscription-based products and services to dealers through
field sales and telesales efforts, and also support the implementation of
subscription-based and transaction-based products for dealers. Lender
relationships are managed by a team that also focuses on adding more lenders to
our DealerTrack credit application network and increasing the use of our
eContracting and eDocs solutions. Relationships with our aftermarket providers
are managed by a team that also focuses on adding more aftermarket providers to
the network. Relationships with automotive manufacturers are managed by a
dedicated OEM relationship management team that is also responsible for
introducing our solutions to the automotive manufacturers. Relationships with
other providers are managed across various areas of our
organization.
Training
We
believe that training is important to enhancing the DealerTrack brand and
reputation and increasing utilization of our products and services. Training is
conducted via telephone, the Internet and in person at the dealership. In
training our dealers, we emphasize utilizing our network to help them increase
profitability and efficiencies.
Marketing
Our
marketing strategy is to establish our brand as the leading provider of
on-demand software solutions for dealers, lenders, OEM’s, aftermarket providers
and other industry providers. Our marketing approach is to employ multiple
off-line and on-line channels, targeted at key executives and other decision
makers within the automotive retail industry, such as:
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advertising in automotive trade
magazines and other
periodicals;
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public relations through press
releases and publication of news and thought leadership
articles;
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direct marketing employing mail
and e-mail delivered to buyers and influencers in dealer and lender
markets;
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participation in industry
events;
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employing our website to offer
services, and provide product and company
information;
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search marketing to increase
visibility in search engine result pages;
and
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promotions and sponsorships on
national and regional
levels.
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Customer
Service
We
believe superior customer support is important to retaining and expanding our
customer base. We have a comprehensive technical support program to assist our
customers in maximizing the value they get from our products and services and
solving any problems or issues. We provide telephone support, e-mail support and
online information and consulting services about our products and services. Our
customer service group handles general customer inquiries, such as questions
about resetting passwords, how to subscribe to products and services, the status
of product subscriptions and how to use our products and services, and is
available to customers by telephone, e-mail or over the web. Our technical
support specialists are extensively trained in the use of our products and
services.
9
Competition
The
market for our solutions in the U.S. automotive retail industry is highly
competitive, fragmented and subject to changing technology, shifting customer
needs and frequent introductions of new products and services. Our current
principal competitors include:
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web-based automotive finance
credit application processors, including AppOne, CUDL, Finance Express,
Open Dealer Exchange, and
RouteOne;
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proprietary finance credit
application processing systems, including those used and provided to
dealers by American Honda Finance Corp., Volkswagen Credit and BMW
Financial Services;
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dealer
management system providers, including ADP, Inc., The Reynolds and
Reynolds Company, Auto/Mate Dealership Systems and AutoSoft,
Inc.;
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automotive retail sales desking
providers, including ADP, Inc. and Market Scan Information Systems,
Inc.;
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vehicle
configuration providers, including Autodata Solutions Company and JATO
Dynamics, Inc.;
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providers
of vehicle electronic registration solutions, including CVR and
TitleTec;
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providers of services related to
aftermarket products, including MenuVantage and the StoneEagle
Group;
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providers
of inventory analytic tools, including First Look, LLC, vAuto, Inc.,
vinSolutions and eLEAD,
and;
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providers
of compliance solutions; including Compli, RouteOne, CREDCO and the three
credit reporting agencies.
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DealerTrack
also competes with warranty and insurance providers, as well as software
providers, among others, in the market for menu-selling products and services.
Some of our competitors may be able to devote greater resources to the
development, promotion and sale of their products and services than we can to
ours, which could allow them to respond more quickly than we can to new
technologies and changes in customer needs. In particular, RouteOne, a joint
venture formed and controlled by Chrysler Financial Corporation (“CFC”), Ford
Motor Credit Corporation (“FMCC”), General Motors Acceptance Corporation now
known as Ally Financial (“Ally”) and Toyota Financial Services (“TFS”). RouteOne
has relationships with FMCC and TFS and other affiliated captive lenders that
are not part of our network and had an exclusive relationship with Ally until
February 10, 2010, when we entered into a strategic relationship with Ally.
Under the terms of the agreement, Ally will be listed as a financing option on
the DealerTrack credit application processing network. Ally is available to
General Motors and Chrysler dealers, as well as dealers of other manufacturers
that Ally elects to do business with. Ally will continue to accept credit
applications through a competitive system. Additionally, on January 21, 2009,
ADP, Inc. and Reynolds, announced a joint venture, Open Dealer Exchange, who may
have the ability to build on its joint venture partner’s relationships in
providing DMS software to over 80% of U.S. franchised dealers. Our ability to
remain competitive will depend to a great extent upon our ability to execute our
growth strategy, as well as our ongoing performance in the areas of product
development and customer support.
Government
Regulation
The
indirect automotive financing and automotive retail industries are subject to
extensive and complex federal and state regulations. Our customers, such as
banks, finance companies, savings associations, credit unions and other lenders,
and automotive dealers, operate in markets that are subject to rigorous
regulatory oversight and supervision. Our customers must ensure that our
products and services work within the extensive and evolving regulatory
requirements applicable to them, including those under the Consumer Credit
Protection Act, the Gramm-Leach-Bliley Act (the “GLB Act”), the FACT Act of
2003, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”), the Federal Reserve Board’s regulations relating to consumer
protection and privacy, the Interagency Guidelines Establishing Information
Security Standards, the Interagency Guidance on Response Programs for
Unauthorized Access to Customer Information and Customer Notice, the Federal
Trade Commission’s (“FTC”) Privacy Rule, Safeguards Rule, and Consumer Report
Information Disposal Rule, Regulation AB, the regulations of the Federal
Reserve Board, the Fair Credit Reporting Act (“FCRA”) and other state and local
laws and regulations. In addition, entities such as the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency, the Office
of Thrift Supervision, the National Credit Union Administration and the FTC have
the authority to promulgate rules and regulations that may impact our customers,
which could place additional demands on us.
On July
21, 2011, authority to promulgate and enforce federal consumer financial law,
including many consumer protection regulations, will transfer to the Bureau of
Consumer Financial Protection (“CFPB”) established by the Dodd-Frank
Act. While most franchised auto dealers are exempted from the
supervisory authority of the CFPB, independent and buy-here-pay-here dealers
generally are not. For those dealers, DealerTrack may be subject to
supervision and examination by the CFPB as a “service
provider.” Similar to its clients, DealerTrack may also be subject to
changes in existing consumer financial protection law rulemaking by the
CFPB. The Dodd-Frank Act also streamlined the administrative
procedures for the FTC to promulgate unfair and deceptive practices regulations
for the retail automotive industry. It is possible that the FTC will
issue regulations that may affect DealerTrack and the products and services we
offer to dealers.
10
The role
of our products and services in assisting our customers’ compliance with these
requirements depends on a variety of factors, including the particular
functionality, interactive design, and classification of the customer. We are
not a party to the actual transactions that occur in our network. Our lender,
aftermarket provider and automotive dealer customers must assess and determine
what applicable laws and regulations require of them and are responsible for
ensuring that their use of our product and services conform to their regulatory
needs.
Consumer
Privacy and Data Security Laws
Consumer
privacy and data security laws on the federal and state levels govern the
privacy and security of consumer information generally and may apply to our
business in our capacity as a service provider for regulated financial
institutions and automotive dealers that are subject to the GLB Act and
applicable regulations, including the FTC’s Privacy Rule, Safeguards Rule and
Consumer Report Information Disposal Rule.
These
laws and regulations restrict our customers’ ability to share nonpublic personal
consumer information with non-affiliated companies, as well as with affiliates
under certain circumstances. They also require certain standards for information
security plans and operations, including standards for consumer information
protection and disposal, and notices to consumers in the event of certain
security breaches. If we, a lender, an aftermarket provider or a dealer
experience a security breach resulting in unauthorized access to consumer
information provided through our network, we may be subject to claims from such
consumers or enforcement actions by state or federal regulatory
authorities.
Legislation
is pending on the federal level and in most states that could impose additional
duties on us relating to the collection, use or disclosure of consumer
information, as well as obligations to secure that information. For example,
Massachusetts has issued specific security requirements for data of
Massachusetts residents. Currently, 46 states and the District of
Columbia have laws mandating notices to affected consumers in the event of an
actual or suspected unauthorized access to or use of information contained
within our system. In December 2009, the U.S. House of Representatives passed a
bill that would provide for a uniform national notice policy for security
breaches and the U.S. Senate held hearings on a similar bill in September 2010.
The FTC and federal banking regulators have also issued regulations requiring
regulated financial institutions to obtain certain assurances and contractual
protections relating to the security and disposal of information maintained by
service providers such as us.
While we
believe our current business model is consistent with existing laws and
regulations, emerging case law and regulatory enforcement initiatives, as well
as the passage of new laws and regulations, may limit our ability to use
information in our current products and to develop additional revenue streams in
the future.
Fair
Credit Reporting Act
The FCRA
imposes limitations on the collection, distribution and use of consumer report
information and imposes various requirements on providers and users of consumer
reports and any information contained in such reports. Among other things, the
FCRA limits the use and transfer of information that qualifies as a consumer
report, and imposes requirements on providers of information to credit reporting
agencies and resellers of consumer reports with respect to ensuring the accuracy
and completeness of the information and assisting consumers who dispute
information in their consumer reports or seek to obtain information involving
theft of their identity. The communication or use of consumer report information
in violation of the FCRA could, among other things, result in a provider of
information or reseller of consumer reports being deemed a consumer reporting
agency, which would subject the provider or reseller to all of the compliance
requirements applicable to consumer reporting agencies contained in the FCRA and
applicable regulations. Willful violations of the FCRA can result in statutory
and punitive damages. A new regulation, the Risk-Based Pricing Rule, requires
creditors to give risk-based pricing notices to certain consumers whose credit
score precluded them from getting the best terms for credit or alternatively to
provide a credit score disclosure notice to all credit applicants.
State
Laws and Regulations
The GLB
Act and the FCRA contain provisions that preempt some state laws to the extent
the state laws seek to regulate the distribution and use of consumer
information. The GLB Act does not limit states’ rights to enact privacy
legislation that provides greater protections to consumers than those provided
by the GLB Act. The FCRA generally prohibits states from imposing any
requirements with respect only to certain specified matters and it is possible
that some state legislatures or agencies may limit the ability of businesses to
disclose consumer information beyond the limitations provided for in the GLB Act
or the FCRA. For example, almost all states permit consumers to “freeze” their
credit bureau files under certain circumstances and the three national credit
bureaus (Equifax, Experian and TransUnion) now give this right to all customers.
Our automotive dealer customers remain subject to the laws of their respective
states in such matters as consumer protection and unfair and deceptive trade
practices. Recently, certain states have passed laws requiring specific security
protections for maintaining or transmitting the personal information of state
residents.
11
Revised
Uniform Commercial Code Section 9-105, E-SIGN and UETA
In the
United States, the enforceability of electronic transactions is primarily
governed by the Electronic Signatures in Global and National Commerce Act (the
“E-SIGN Act”), a federal law enacted in 2000 that largely preempts inconsistent
state law, and the Uniform Electronic Transactions Act (“UETA”), a uniform state
law that was finalized by the National Conference of Commissioners on Uniform
State Laws in 1999 and has been adopted by almost every state. Case law has
generally upheld the use of electronic signatures in commercial transactions and
in consumer transactions where proper notice is provided and the consumer
consents to transact business electronically are obtained. The Revised Uniform
Commercial Code Section 9-105 (“UCC 9-105”) provides requirements to
perfect security interests in electronic chattel paper. These laws impact the
degree to which the lenders in our network use our electronic contracting
(“eContracting”) product. We believe that our eContracting product enables the
perfection of a security interest in electronic chattel paper by meeting the
transfer of “control” requirements of UCC 9-105. Certain of our financial
institution clients have received third-party legal opinions to this effect.
However, this issue has not been challenged in any legal proceeding. If a court
were to find that our eContracting product is not sufficient to perfect a
security interest in electronic chattel paper, or if existing laws were to
change, our business, prospects, financial condition and results of operations
could be materially adversely affected. Federal and state regulatory
requirements imposed on our lender customers, such as the SEC’s
Regulation AB relating to servicers of asset backed securities, may also
result in our incurring additional expenses to facilitate lender compliance
regarding the use of our eContracting product.
Internet
Regulation
We are
subject to federal, state and local laws applicable to companies conducting
business on the Internet. Today, there are relatively few laws specifically
directed towards online services. However, due to the increasing popularity and
use of the Internet and online services, laws and regulations may be adopted
with respect to the Internet or online services covering issues such as online
contracts, user privacy, freedom of expression, pricing, fraud liability,
content and quality of products and services, taxation, advertising,
intellectual property rights and information security. Proposals currently under
consideration with respect to Internet regulation by federal, state, local and
foreign governmental organizations include, but are not limited to, the
following matters: on-line content, user privacy, restrictions on email and
wireless device communications, data security requirements, taxation, access
charges and so-called “net neutrality”, liability for third-party activities
such as unauthorized database access, and jurisdiction. The FTC has expressed
its desire for regulation of Internet tracking mechanisms such as “cookies” or
“web bugs.” Moreover, we do not know how existing laws relating to these issues
will be applied to the Internet and whether federal preemption of state laws
will apply.
Intellectual
Property
Our
success depends, in large part, on our intellectual property and other
proprietary rights. We rely on a combination of patent, copyright, trademark and
trade secret laws, employee and third-party non-disclosure agreements and other
methods to protect our intellectual property and other proprietary rights. In
addition, we license technology from third parties.
We have
been issued a number of utility patents in the United States and have patent
applications pending in the United States, Canada and Europe, including patents
that relate to a system and method for credit application processing and
routing. We have both registered and unregistered copyrights on aspects of our
technology. We have a U.S. federal registration for the mark “DealerTrack.” We
also have U.S. federal registrations and pending registrations for several
additional marks we use and claim common law rights in other marks we use. We
also have filed some of these marks in foreign jurisdictions. The duration of
our various trademark registrations varies by mark and jurisdiction of
registration. In addition, we rely, in some circumstances, on trade secrets law
to protect our technology, in part by requiring confidentiality agreements from
our vendors, corporate partners, employees, consultants, advisors and
others.
Industry
Trends
We are
impacted by trends in both the automotive industry and the credit finance
markets. Our financial results are impacted by trends in the number of dealers
serviced and the level of indirect financing and leasing by our participating
lender customers, special promotions by automobile manufacturers and the level
of indirect financing and leasing by captive finance companies not available in
our network. The United States and global economies are currently undergoing a
period of economic uncertainty, and the financing environment, automobile
industry and stock markets are experiencing high levels of volatility. The
relative tightening of the credit markets has caused a significant decline in
the number of lending relationships between the various lenders and dealers
available through our network as dealers and lenders have exited the market, as
well as reduced the total number of vehicles financed. Purchases of new
automobiles are typically discretionary for consumers and have been, and may
continue to be, affected by negative trends in the economy, including the cost
of energy and gasoline, the availability and cost of credit, the declining
residential and commercial real estate markets, reductions in business and
consumer confidence, stock market volatility and increased unemployment. 2008
and 2009 were the worst years for selling vehicles since 1982 and while
automobile sales increased in 2010 over 2009, overall they will remain low as
compared to historical levels. As a result of reduced car sales and the general
economic environment, two major automobile manufacturers, Chrysler and General
Motors (“GM”) filed and then emerged from bankruptcy. This has had a significant
impact on their franchised dealers both in terms of dealer closing and the
financial viability of their remaining dealers. Toyota suffered significant
recalls that limited its ability to sell new vehicles for a period of time.
Together, these factors have meaningfully impacted our transaction volume and
subscription cancellations compared to historical levels.
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Due to
the economic downturn, there has been continued automotive dealer consolidation
and the number of franchised automotive dealers declined in 2009 and 2010. GM
and Chrysler stated that they notified approximately 1,124 and 789 dealers,
respectively, that one or more of their franchise licenses would be terminated.
Federal legislation has led GM and Chrysler to agree to reinstatement of some of
these dealers. Ford Motor Company announced in October 2010, plans to close 35%,
or about 175 of their 500 Lincoln dealerships. As a result of these factors, we
cannot predict the timing and impact these dealership reductions will have on
our subscription revenue. The elimination by GM, Ford, and Chrysler dealers with
subscription products has led to an increase in cancellations and will most
likely result in additional cancellations of those subscriptions and
corresponding loss of revenue. Further, a reduction in the number of automotive
dealers reduces the number of opportunities we have to sell our subscription
products. Additionally, dealers who close their businesses may not pay the
amounts owed to us, resulting in a potential increase in our bad debt
expense.
Volatility
in our stock price, declines in our market capitalization and material declines
in revenue and profitability could impair the carrying value of our goodwill,
deferred tax assets and other long-lived assets. Due to cumulative U.S. book
losses incurred in recent years, and uncertainty as to the extent and timing of
profitability in future periods, management has recorded a valuation allowance
on our U.S. deferred tax assets. Additionally, we may be required to write off
some of our goodwill or long-lived assets if these conditions worsen for a
period of time.
Employees
As of December 31, 2010, we had approximately
1,200 employees. None of our employees is represented by a labor union. We have
not experienced any work stoppages and believe that our relations with our
employees are good.
In
connection with the acquisition of triVIN, on January 31, 2011, we added
approximately 500 employees to our workforce.
Item 1A. Risk
Factors
You should
carefully consider the following risk factors, as well as the more detailed
descriptions of our business elsewhere in this Annual Report on Form 10-K . Our business, prospects, financial
condition or results of operations could be materially and adversely affected by
the following:
Economic
trends that affect the automotive retail industry or the indirect automotive
financing industry may have a negative effect on our business.
Economic trends that negatively affect the automotive retail
industry or the indirect automotive financing industry may adversely affect our
business by further reducing the amount of indirect automobile financing
transactions that we earn revenue on, the number of lender or automotive dealer
customers that subscribe to our products and services or money that our
customers spend on our products and services. Purchases of new automobiles are
typically discretionary for consumers and have been, and may continue to be,
affected by negative trends in the economy, including the cost of energy and
gasoline, the availability and cost of credit, the declining residential and
commercial real estate markets, reductions in business and consumer confidence,
stock market volatility and increased unemployment. A reduction in the number of
automobiles purchased by consumers could continue to adversely affect our lender
and dealer customers and lead to a reduction in transaction volumes and in
spending by these customers on our subscription products and services. While new
car sales increased slightly in 2010, they remain below historical levels.
Additionally, a certain number of our lender customers are dependent on
continued access to the capital markets, in order to fund their lending
activities. These negative trends may result in our lenders further reducing the
number of automobile dealers that they service or the number of contracts that
they make which could result in a reduction in the number of credit applications
that are processed through our network. Additionally, due to the
economic downturn, there has been continued automotive dealer consolidation and
the number of franchised automotive dealers declined in 2010. To the extent that
these dealers have subscription products, the consolidation will result in
cancellation of those products. Further, a reduction in the number of automotive
dealers reduces the number of opportunities we have to sell our subscription
products. Additionally, dealers who close their businesses may choose to not pay
those amounts owed to us, resulting in an increase in our bad debt.
Any such
reductions in transactions or subscriptions or an increase in our bad debt could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
We
may be unable to continue to compete effectively in our industry.
Competition in the automotive retail technology
industry is intense. The indirect automotive retail finance industry is highly
fragmented and is served by a variety of entities, including DMS providers,
web-based automotive finance credit application processors, the proprietary
credit application processing systems of the lender affiliates of automobile
manufacturers, automotive retail sales desking providers and vehicle
configuration providers. DealerTrack also competes with warranty and insurance
providers, as well as software providers, among others, in the market for DMS,
menu-selling products and services, compliance products,
electronic registration solutions, and inventory analytics. Some of our
competitors have longer operating histories, greater name recognition and
significantly greater financial, technical, marketing and other resources than
we do. Many of these competitors also have longstanding relationships with
dealers and may offer dealers other products and services that we do not
provide. As a result, these companies may be able to respond more quickly to new
or emerging technologies and changes in customer demands or to devote greater
resources to the development, promotion and sale of their products and services
than we can to ours. We expect the market to continue to attract new competitors
and new technologies, possibly involving alternative technologies that are more
sophisticated and cost-effective than our technology. There can be no assurance
that we will be able to compete successfully against current or future
competitors or that competitive pressures we face will not materially adversely
affect our business, prospects, financial condition and results of
operations.
13
We
may face increased competition from AppOne, CUDL, Finance Express, Open Dealer
Exchange and RouteOne.
ADP, Inc.
and Reynolds and Reynolds, the two largest providers of DMS systems, have formed
Open Dealer Exchange as a joint venture to compete with our online portal
application business. ADP and Reynolds and Reynolds are also the owners of CVR,
a joint venture that competes in the electronic registration solution
space. Open Dealer Exchange plans to leverage its owners’ penetration
of the DMS space to better integrate the loan origination process into the
dealer's transactional, point-of-sale system, thereby giving them a competitive
advantage. Additionally, our network of lenders does not include the captive
lenders affiliated with Ford Motor Company or Toyota Motor Corporation, two of
the owners of RouteOne. This gives RouteOne the ability to offer its dealers
access to captive or other lenders that are not in our network. RouteOne was
launched in November 2003, and officially re-launched in July 2004. A
significant number of independent lenders, including many of the independent
lenders in our network, are participating on the RouteOne credit application
processing and routing portal. If either Open Dealer Exchange and/or RouteOne
increases the number of independent lenders on its credit application processing
and routing portal and/or offers products and services that better address the
needs of our customers or offer our customers a lower-cost alternative, and/or
our dealer customers more integrated systems, our business, prospects, financial
condition and results of operations could be materially adversely affected. In
addition, if a substantial amount of our current customers migrate from our
network to Open Dealer Exchange or RouteOne, our ability to sell additional
products and services to, or earn transaction services revenue from, these
customers could diminish. We believe that both Open Dealer Exchange and RouteOne
have repeatedly approached certain of our largest lender customers seeking to
have them join their credit application processing and routing portal. In
addition, CU Direct Corporation, through its CUDL portal, has directly targeted
credit unions, which comprise a large number of our lender customers. Finance
Express and AppOne have targeted the independent dealer
channel.
Some
vendors of software products used by automotive dealers, including certain of
our competitors, are designing their software and using financial or other
incentives to make it more difficult for our customers to use our products and
services.
Currently, some software vendors, including some of our
competitors, have designed their software systems in order to make it difficult
to integrate with third-party products and services such as ours and others have
announced their intention to do so. Some software vendors also use financial or
other incentives to encourage their customers to purchase such vendors’ products
and services. These obstacles could make it more difficult for us to compete
with these vendors and could have a material adverse effect on our business,
prospects, financial condition and results of operations. Further, we have
agreements in place with various third-party software providers to facilitate
integration between their software and our network, and we cannot assure you
that each of these agreements will remain in place or that during the terms of
these agreements these third parties will not increase the cost or level of
difficulty in maintaining integration with their software. Additionally, we
integrate certain of our solutions and services with other third parties’
software programs. These third parties may design or utilize their software in a
manner that makes it more difficult for us to continue to integrate our
solutions and services in the same manner, or at all. These developments could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
Our
systems and network may be subject to security breaches, interruptions, failures
and/or other errors or may be harmed by other events beyond our
control.
Our systems may be subject to security breaches.
Our success depends on the confidence of dealers, lenders, the major credit
reporting agencies and our other network participants in our ability to transmit
confidential information securely over the Internet and operate our computer
systems and operations without significant disruption or failure. We transmit
substantial amounts of confidential information, including non-public personal
information, over the Internet. Moreover, even if our security measures are
adequate, concerns over the security of transactions conducted on the Internet
and commercial online services, which may be heightened by any well-publicized
compromise of security, may deter customers from using our products and
services. If our security measures are breached and unauthorized access is
obtained to confidential information, our network may be perceived as not being
secure and our customers may curtail or stop using our network or other systems.
Any failure by, or lack of confidence in, our secure online products and
services could have a material adverse effect on our business, prospects,
financial condition and results of operations.
Despite our focus on Internet security, we may not be able to stop unauthorized
attempts to gain access to or disrupt the transmission of communications among
our network participants. Advances in computer capabilities, new discoveries in
the field of cryptography, or other events or developments could result in a
compromise or breach of the algorithms used by our products and services to
protect certain data contained in our databases and the information being
transferred.
Although we generally limit warranties and
liabilities relating to security in our customer contracts, third parties may
seek to hold us liable for any losses suffered as a result of unauthorized
access to their confidential information or non-public personal information. We
may not have limited our warranties and liabilities sufficiently or have
adequate insurance to cover these losses. We may be required to expend
significant capital and other resources to protect against security breaches or
to alleviate the problems caused. Our security measures may not be sufficient to
prevent security breaches, and failure to prevent security breaches could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
14
Our
network and systems may be vulnerable to interruptions or failures.
From time to time, we have experienced, and may experience in
the future, network or system slowdowns and interruptions. These network and
system slowdowns and interruptions may interfere with our ability to do
business. Although we regularly back up data and take other measures to protect
against data loss and system failures, there is still risk that we may lose
critical data or experience network failures. Such failures or disruptions may
result in lost revenue opportunities for our customers, which could result in
litigation against us or a loss of customers. Additionally, we have service
level agreement with certain of our customer that may result in penalties or
trigger cancelation rights in the event of a network slowdown or interruption.
This could have a material adverse effect on our business, prospects, financial
condition and results of operations.
Undetected errors
in our software may harm our operations.
Our software may contain undetected errors,
defects or bugs. Although we have not suffered significant harm from any errors,
defects or bugs to date, we may discover significant errors, defects or bugs in
the future that we may not be able to correct or correct in a timely manner. Our
products and services are integrated with products and systems developed by
third parties. Complex third-party software programs may contain undetected
errors, defects or bugs when they are first introduced or as new versions are
released. It is possible that errors, defects or bugs will be found in our
existing or future products and services or third-party products upon which our
products and services are dependent, with the possible results of delays in, or
loss of market acceptance of, our products and services, diversion of our
resources, injury to our reputation, increased service and warranty expenses and
payment of damages.
Our
systems may be harmed by events beyond our control.
Our computer systems and operations are vulnerable to damage or
interruption from natural disasters, such as fires, floods and hurricanes, power
outages, telecommunications failures, terrorist attacks, network service outages
and disruptions, “denial of service” attacks, computer viruses, break-ins,
sabotage and other similar events beyond our control. The occurrence of a
natural disaster or unanticipated problems at our facilities in the New York
metropolitan area or at any third-party facility we utilize, such as our
disaster recovery center in Waltham, Massachusetts, could cause interruptions or
delays in our business, loss of data or could render us unable to provide our
products and services. In addition, the failure of a third-party facility to
provide the data communications capacity required by us, as a result of human
error, bankruptcy, natural disaster or other operational disruption, could cause
interruptions to our computer systems and operations. The occurrence of any or
all of these events could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Our
failure or inability to execute any element of our business strategy could
adversely affect our operations.
Our business, prospects, financial condition and results of operations
depend on our ability to execute our business strategy, which includes the
following key elements:
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expanding
our customer base;
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selling additional products and
services to our existing
customers;
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expanding our offerings;
and
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pursuing acquisitions and
strategic alliances.
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We may not succeed in implementing a portion or all of our business
strategy and, even if we do succeed, our strategy may not have the favorable
impact on operations that we anticipate. Our success depends on our ability to
leverage our distribution channel and value proposition for dealers, lenders and
other service and information providers, offer a broad array of solutions,
provide convenient, high-quality products and services, maintain our
technological position and implement other elements of our business
strategy.
We may not be able to effectively manage the expansion of our
operations or achieve the rapid execution necessary to fully avail ourselves of
the market opportunity for our products and services. If we are unable to
adequately implement our business strategy, our business, prospects, financial
condition and results of operations could be materially adversely
affected.
Our
revenue, operating results and profitability will vary from quarter to quarter,
which may result in volatility in our stock price.
Our
revenue, operating results and profitability have varied in the past and are
likely to continue to vary significantly from quarter to quarter. This may lead
to volatility in our stock price. These variations are due to several factors
related to the number of transactions we process and to the number of
subscriptions to our products and services, including:
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the
volume of new and used automobiles financed or leased by our participating
lender customers;
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the timing, size and nature of
our subscriptions and any cancellations
thereof;
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automobile manufacturers or their
captive lenders offering special incentive programs such as discount
pricing or low cost
financing;
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the timing of acquisitions or
divestitures of businesses, products and
services;
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unpredictable sales
cycles;
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product and price competition
regarding our products and services and those of our participating
lenders;
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changes in our operating
expenses;
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the
seasonality of car sales;
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the timing of introduction and
market acceptance of new products, services or product enhancements by us
or our competitors;
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foreign currency fluctuations,
particularly the U.S. dollar vs. the Canadian
dollar;
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personnel changes;
and
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fluctuations
in economic and financial market
conditions.
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As a result of these fluctuations, we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful. We cannot assure you that future revenue and results of operations
will not vary substantially from quarter to quarter. It is also possible that in
future quarters, our results of operations will be below the expectations of
equity research analysts, investors or our announced guidance. In any of these
cases, the price of our stock could be materially adversely
affected.
We
may be unable to develop and bring products and services in development and new
products and services to market in a timely manner.
Our success depends in part upon our ability to
bring to market the products and services that we have in development and offer
new products and services that meet changing customer needs. The time, expense
and effort associated with developing and offering these new products and
services may be greater than anticipated. The length of the development cycle
varies depending on the nature and complexity of the product, the availability
of development, product management and other internal resources, and the role,
if any, of strategic partners. If we are unable to develop and bring additional
products and services to market in a timely manner, we could lose market share
to competitors who are able to offer these additional products and services,
which could also materially adversely affect our business, prospects, financial
condition and results of operations.
We
are subject, directly and indirectly, to extensive and complex federal and state
regulation and new regulations and/or changes to existing regulations may
adversely affect our business.
The indirect
automotive financing and automotive retail industries are subject to extensive
and complex federal and state regulation.
We are directly and indirectly subject to various laws and regulations. Federal
laws and regulations governing privacy and security of consumer information
generally apply in the context of our business to our clients and to us as a
service provider that certain regulations obligate our clients to monitor. These
include the GLB Act and regulations implementing its information safeguarding
requirements, the Interagency Guidelines Establishing Information Security
Standards, the Interagency Guidance on Response Programs for Unauthorized Access
to Customer Information and Customer Notice, the Junk Fax Prevention Act of
2005, the CAN-SPAM Act of 2003, the Telephone Consumer Protection Act and
applicable FCC telemarketing rules, and the Federal Trade Commission’s Privacy
Rule, Safeguards Rule, Consumer Report Information Disposal Rule, Telemarketing
Sales Rule, and Red Flags Rule, as well as the FCRA. If we, or a lender or
dealer discloses or uses consumer information provided through our system in
violation of these or other laws, or engage in other prohibited conduct, we may
be subject to claims or enforcement actions by state or federal regulators. We
cannot predict whether such claims or enforcement actions will arise or the
extent to which, if at all, we may be held liable. Such claims or enforcement
actions could have a material adverse effect on our business prospects,
financial condition and results of operations.
A majority of states have passed, or are currently
contemplating, consumer protection, privacy, and data security laws or
regulations that may relate to our business. The FCRA contains certain
provisions that explicitly preempt some state laws to the extent the state laws
seek to regulate certain specified areas, including the responsibilities of
persons furnishing information to consumer reporting agencies. Unlike the FCRA,
however, the GLB Act does not limit the ability of the states to enact privacy
legislation that provides greater protections to consumers than those provided
by the GLB Act. Some state legislatures or regulatory agencies have imposed, and
others may impose, greater restrictions on the disclosure of consumer
information than are already contained in the GLB Act and its implementing
regulations, the Interagency Guidelines or the FTC’s rules. Any such legislation
or regulation could adversely impact our ability to provide our customers with
the products and services they require and that are necessary to make our
products and services attractive to them.
If a federal or state government or agency, such as the
federal CFPB or FTC, imposes additional legislative and/or regulatory
requirements on us or our customers, or prohibits or limits our activities as
currently conducted, we may be required to modify or terminate our products and
services in a manner which could undermine our attractiveness or availability to
dealers and/or lenders doing business in that jurisdiction.
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The
use of our electronic contracting product by lenders is governed by relatively
new laws.
In
the United States, the enforceability of electronic transactions is primarily
governed by the Electronic Signatures in Global and National Commerce Act, a
federal law enacted in 2000 that largely preempts inconsistent state law, and
the Uniform Electronic Transactions Act, a uniform state law that was finalized
by the National Conference of Commissioners on Uniform State Laws in 1999 and
has now been adopted by every state. Case law has generally upheld the use of
electronic signatures in commercial transactions and in consumer transactions
where proper notice is provided and consumer consent to conducting business
electronically is obtained. UCC 9-105 provides requirements to perfect security
interests in electronic chattel paper. These laws impact the degree to which the
lenders in our network use our electronic contracting product. We believe that
our electronic contracting product enables the perfection of a security interest
in electronic chattel paper by meeting the transfer of “control” requirements of
UCC 9-105. Certain of our financial institution clients have received
third-party legal opinions to that effect. However, this issue has not been
challenged in any legal proceeding. If a court were to find that our electronic
contracting product is not sufficient to perfect a security interest in
electronic chattel paper, or if existing laws were to change, our business,
prospects, financial condition and results of operations could be materially
adversely affected. Federal and state regulatory requirements imposed on our
lender customers, such as the SEC’s Regulation AB relating to servicers of
asset backed securities, may also result in our incurring additional expenses to
facilitate lender compliance regarding the use of our electronic contracting
product.
New
legislation or changes in existing legislation may adversely affect our
business.
Our
ability to conduct, and our cost of conducting, business may be adversely
affected by a number of legislative and regulatory proposals concerning aspects
of the Internet, which are currently under consideration by federal, state,
local and foreign governments and various courts. These proposals include, but
are not limited to, the following matters: on-line content, user privacy,
taxation, access charges, and so-called “net-neutrality” liability of
third-party activities and jurisdiction. Moreover, we do not know how existing
laws relating to these or other issues will be applied to the Internet. The
adoption of new laws or the application of existing laws could decrease the
growth in the use of the Internet, which could in turn decrease the demand for
our products and services, increase our cost of doing business or otherwise have
a material adverse effect on our business, prospects, financial condition and
results of operations. Furthermore, government restrictions on Internet content
or anti-“net neutrality” legislation could slow the growth of Internet use and
decrease acceptance of the Internet as a communications and commercial medium
and thereby have a material adverse effect on our business, prospects, financial
condition and results of operations.
We
utilize certain key technologies from, and integrate our network with, third
parties and may be unable to replace those technologies if they become obsolete,
unavailable or incompatible with our products or services.
Our
proprietary software is designed to work in conjunction with certain software
and hardware from third-party vendors, including Microsoft, IBM, Oracle, SAP and
eOriginal. Any significant interruption in the supply of such third-party
software or hardware could have a material adverse effect on our ability to
offer our products unless and until we can replace the functionality provided by
these products and services. In addition, we are dependent upon these third
parties’ ability to enhance their current products, develop new products on a
timely and cost-effective basis and respond to emerging industry standards and
other technological changes. There can be no assurance that we would be able to
replace the functionality provided by the third-party software currently
incorporated into our products or services in the event that such technologies
becomes obsolete or incompatible with future versions of our products or
services or is otherwise not adequately maintained or updated. Any delay in or
inability to replace any such functionality could have a material adverse effect
on our business, prospects, financial condition and results of operations.
Furthermore, delays in the release of new and upgraded versions of third-party
software products could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Our
business operations may be disrupted if our planned Enterprise Resource Planning
(“ERP”) system implementation is not successful
We
are in the process of converting our various business information systems to a
single ERP. We have committed significant resources to this
conversion and it will be phased in over multiple years. The
conversion process is extremely complex, in part, because of the wide range of
processes and the multiple legacy systems that must be integrated. We
are using a controlled project plan that we believe will provide an adequate
allocation of resources. However, such a plan, or a divergence from
it, may result in cost overruns, project delays, or business
interruptions. During the conversion process, we may be limited in
our ability to integrate any business that we may want to
acquire. Failure to properly or adequately address these issues could
result in significant costs or impact our ability to perform necessary business
operations which could have a material adverse effect on our business,
prospects, financial condition and results of operations.
We
may be unable to adequately protect, and we may incur significant costs in
defending, our intellectual property and other proprietary rights.
Our
success depends, in large part, on our ability to protect our intellectual
property and other proprietary rights. We rely upon a combination of trademark,
trade secret, copyright, patent and unfair competition laws, as well as license
agreements and other contractual provisions, to protect our intellectual
property and other proprietary rights. In addition, we attempt to protect our
intellectual property and proprietary information by requiring certain of our
employees and consultants to enter into confidentiality, non-competition and
assignment of inventions agreements. To the extent that our intellectual
property and other proprietary rights are not adequately protected, third
parties might gain access to our proprietary information, develop and market
products and services similar to ours, or use trademarks similar to ours.
Existing U.S. federal and state intellectual property laws offer only limited
protection. Moreover, the laws of Canada, and any other foreign countries in
which we may market our products and services in the future, may afford little
or no effective protection of our intellectual property. If we resort to legal
proceedings to enforce our intellectual property rights or to determine the
validity and scope of the intellectual property or other proprietary rights of
others, the proceedings could be burdensome and expensive, and we may not
prevail. The failure to adequately protect our intellectual property and other
proprietary rights, or manage costs associated with enforcing those rights,
could have a material adverse effect on our business, prospects, financial
condition and results of operations.
17
We
own the Internet domain names “dealertrack.com,” “alg.com,”
“chrome.com,” “delaertrack.ca”and certain other domain names. The
regulation of domain names in the United States and foreign countries may
change. Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names, any or all of which may dilute the strength of our domain names. We may
not acquire or maintain our domain names in all of the countries in which our
websites may be accessed or for any or all of the top-level domain names that
may be introduced. The relationship between regulations governing domain names
and laws protecting intellectual property rights is unclear. Therefore, we may
not be able to prevent third parties from acquiring domain names that infringe
or otherwise decrease the value of our trademarks and other intellectual
property rights.
A
license agreement we have with a lender customer restricts our ability to
utilize the technology licensed under this agreement beyond the automotive
finance industry.
An
affiliate of JPMorgan claims certain proprietary rights with respect to certain
technology developed as of February 1, 2001. We have an exclusive,
perpetual, irrevocable, royalty-free license throughout the world to use this
technology in connection with the sale, leasing and financing of automobiles
only, and the right to market, distribute and sub-license this technology solely
to automotive dealerships, consumers and lenders in connection with the sale,
leasing and financing of automobiles only. The license agreement defines
“automobile” as a passenger vehicle or light truck, snowmobiles, recreational
vehicles, motorcycles, boats and other watercraft and commercial vehicles and
excludes manufactured homes. We may be limited in our ability to utilize the
licensed technology beyond the automotive finance industry.
Claims
that we or our technologies infringe upon the intellectual property or other
proprietary rights of a third party may require us to incur significant costs,
enter into royalty or licensing agreements or develop or license substitute
technology.
We
may in the future be subject to claims that our technologies in our products and
services infringe upon the intellectual property or other proprietary rights of
a third party. In addition, the vendors providing us with technology that we use
in our own technology could become subject to similar infringement claims.
Although we believe that our products and services do not infringe any
intellectual property or other proprietary rights, we cannot assure you that our
products and services do not, or that they will not in the future, infringe
intellectual property or other proprietary rights held by others. Any claims of
infringement could cause us to incur substantial costs defending against the
claim, even if the claim is without merit, and could distract our management
from our business. Moreover, any settlement or adverse judgment resulting from
the claim could require us to pay substantial amounts, or obtain a license to
continue to use the products and services that is the subject of the claim,
and/or otherwise restrict or prohibit our use of the technology. There can be no
assurance that we would be able to obtain a license on commercially reasonable
terms from the third party asserting any particular claim, if at all, that we
would be able to successfully develop alternative technology on a timely basis,
if at all, or that we would be able to obtain a license from another provider of
suitable alternative technology to permit us to continue offering, and our
customers to continue using, the products and services. In addition, we
generally provide in our customer agreements for certain products and services
that we will indemnify our customers against third-party infringement claims
relating to technology we provide to those customers, which could obligate us to
pay damages if the products and services were found to be infringing.
Infringement claims asserted against us, our vendors or our customers may have a
material adverse effect on our business, prospects, financial condition and
results of operations.
We
could be sued for contract or product liability claims, and such lawsuits may
disrupt our business, divert management’s attention or have an adverse effect on
our financial results.
We
provide guarantees to subscribers of certain of our products and services that
the data they receive through these products and services will be accurate.
Additionally, general errors, defects or other performance problems in our
products and services could result in financial or other damages to our
customers or consumers. There can be no assurance that any limitations of
liability set forth in our contracts would be enforceable or would otherwise
protect us from liability for damages. We maintain general liability insurance
coverage, including coverage for errors and omissions in excess of the
applicable deductible amount. There can be no assurance that this coverage will
continue to be available on acceptable terms or in sufficient amounts to cover
one or more large claims, or that the insurer will not deny coverage for any
future claim. The successful assertion of one or more large claims against us
that exceeds available insurance coverage, or the occurrence of changes in our
insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, could have a material adverse effect on
our business, prospects, financial condition and results of operations.
Furthermore, litigation, regardless of its outcome, could result in substantial
cost to us and divert management’s attention from our operations. Any contract
liability claim or litigation against us could, therefore, have a material
adverse effect on our business, prospects, financial condition and results of
operations. In addition, some of our products and services are business-critical
for our dealer and lender customers and a failure or inability to meet a
customer’s expectations could seriously damage our reputation and affect our
ability to retain existing business or attract new business.
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We
have made strategic acquisitions in the past and intend to do so in the future.
If we are unable to find suitable acquisitions or partners or to achieve
expected benefits from such acquisitions or partnerships, there could be a
material adverse effect on our business, prospects, financial condition and
results of operations.
Since 2001, we have acquired numerous businesses,
including, most recently, our acquisition of triVIN, on January 31, 2011. As
part of our ongoing business strategy to expand product offerings and acquire
new technology, we frequently engage in discussions with third parties
regarding, and enter into agreements relating to, possible acquisitions,
strategic alliances and joint ventures. There may be significant competition for
acquisition targets in our industry, or we may not be able to identify suitable
acquisition candidates or negotiate attractive terms for acquisitions. If we are
unable to identify future acquisition opportunities, reach agreement with such
third parties or obtain the financing necessary to make such acquisitions, we
could lose market share to competitors who are able to make such acquisitions,
which could have a material adverse effect on our business, prospects, financial
condition and results of operations.
Even if we are able to complete acquisitions or enter
into alliances and joint ventures that we believe will be successful, such
transactions are inherently risky. Significant risks to these transactions
include the following:
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integration and restructuring
costs, both one-time and
ongoing;
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maintaining sufficient controls,
policies and procedures;
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diversion of management’s
attention from ongoing business
operations;
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establishing new informational,
operational and financial systems to meet the needs of our
business;
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losing key employees, customers
and vendors;
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failing to achieve anticipated
synergies, including with respect to complementary products or services;
and
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unanticipated and unknown
liabilities.
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If
we are not successful in completing acquisitions in the future, we may be
required to reevaluate our acquisition strategy. We also may incur substantial
expenses and devote significant management time and resources in seeking to
complete acquisitions. In addition, we could use substantial portions of our
available cash to pay all or a portion of the purchase prices of future
acquisitions. If we do not achieve the anticipated benefits of our acquisitions
as rapidly to the extent anticipated by our management and financial or industry
analysts, and others may not perceive the same benefits of the acquisition as we
do. If these risks materialize, our stock price could be materially adversely
affected.
Any
acquisitions that we complete may dilute your ownership interest in us, may have
adverse effects on our business, prospects, financial condition and results of
operations and may cause unanticipated liabilities.
Future acquisitions may involve the issuance of
our equity securities as payment, in part or in full, for the businesses or
assets acquired. Any future issuances of equity securities would dilute our
existing stockholders’ ownership interests. Future acquisitions may also
decrease our earnings or earnings per share and the benefits derived by us from
an acquisition might not outweigh or might not exceed the dilutive effect of the
acquisition. We also may incur additional indebtedness, have future impairment
of assets, or suffer adverse tax and accounting consequences in connection with
any future acquisitions.
We
may not successfully integrate recent or future acquisitions.
The integration of acquisitions involves a number of risks and presents
financial, managerial and operational challenges. We may have difficulty, and
may incur unanticipated expenses related to, integrating management and
personnel from these acquired entities with our management and personnel.
Failure to successfully integrate recent acquisitions or future acquisitions
could have a material adverse effect on our business, prospects, financial
condition and results of operations.
We
are dependent on our key management, direct sales force and technical personnel
for continued success.
Our company has grown significantly in size and scope in recent years, and our
management remains concentrated in a small number of key employees. Our future
success depends to a meaningful extent on our executive officers and other key
employees, including members of our direct sales force and technology staff,
such as our software developers and other senior technical personnel. We rely
primarily on our direct sales force to sell subscription products and services
to automotive dealers. We may need to hire additional sales, customer service,
integration and training personnel in the near-term and beyond if we are to
achieve revenue growth in the future. The loss of the services of any individual
or group of individuals could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Competition for qualified personnel in the technology
industry is intense and we compete for these personnel with other technology
companies that have greater financial and other resources than we do. Our future
success will depend in large part on our ability to attract, retain and motivate
highly qualified personnel, and there can be no assurance that we will be able
to do so. Any difficulty in hiring or retaining needed personnel, or increased
costs related thereto could have a material adverse effect on our business,
prospects, financial condition and results of operations.
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We
may need additional capital in the future, which may not be available to us, and
if we raise additional capital, it may dilute our stockholders’ ownership in
us.
We may need to raise additional funds through
public or private debt or equity financings in order to meet various objectives,
such as:
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acquiring businesses, customer,
technologies, products and
services;
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taking advantage of growth
opportunities, including more rapid
expansion;
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making capital improvements to
increase our capacity;
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developing new services or
products; and
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responding to competitive
pressures.
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Any debt incurred by us could impair our ability to obtain
additional financing for working capital, capital expenditures or further
acquisitions. Covenants governing any debt we incur would likely restrict our
ability to take specific actions, including our ability to pay dividends or
distributions on, or redeem or repurchase our capital stock, enter into
transactions with affiliates, merge, consolidate or sell our assets or make
capital expenditure investments. In addition, the use of a substantial portion
of the cash generated by our operations to cover debt service obligations and
any security interests we grant on our assets could limit our financial and
business flexibility.
Any additional capital raised through the sale of equity, or convertible debt
securities may dilute our stockholders’ respective ownership percentages in us.
Furthermore, any additional debt or equity financing we may need may not be
available on terms favorable to us, or at all. If future financing is not
available or is not available on acceptable terms, we may not be able to raise
additional capital, which could significantly limit our ability to implement our
business plan. In addition, we may issue securities, including debt securities
that may have rights, preferences and privileges senior to our common
stock.
Our
lender customers may elect to use competing third-party services, either in
addition to or instead of our network.
Our
lender customers continue to receive credit applications and purchase retail
installment sales and lease contracts directly from their dealer customers
through traditional indirect financing methods, including via facsimile and
other electronic means of communication, in addition to using our network. Many
of our lender customers are involved in other ventures as participants and/or as
equity holders, and such ventures or newly created ventures may compete with us
and our network now and in the future. Continued use of alternative methods to
ours by these lender customers may have a material adverse effect on our
business, prospects, financial condition and results of operations.
Some
provisions in our certificate of incorporation and by-laws may deter third
parties from acquiring us.
Our fifth amended and restated certificate of incorporation and our
amended and restated by-laws contain provisions that may make the acquisition of
our company more difficult without the approval of our board of directors,
including, but not limited to, the following:
|
|
•
|
our board of directors is
classified into three classes, each of which serves for a staggered
three-year term;
|
|
|
•
|
only our board of directors may
call special meetings of our
stockholders;
|
|
|
•
|
we have authorized undesignated
preferred stock, the terms of which may be established and shares of which
may be issued without stockholder
approval;
|
|
|
•
|
our stockholders have only
limited rights to amend our by-laws;
and
|
|
|
•
|
we require advance notice for
stockholder proposals.
|
These anti-takeover defenses could discourage, delay or prevent a transaction
involving a change in control of our company. These provisions could also
discourage proxy contests and make it more difficult for you and other
stockholders to elect directors of your choosing and cause us to take other
corporate actions you desire. In addition, because our board of directors is
responsible for appointing the members of our management team, these provisions
could in turn affect any attempt by our stockholders to replace current members
of our management team.
In
addition, we are subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits “business combinations”
between a publicly-held Delaware corporation and an “interested stockholder,”
which is generally defined as a stockholder who becomes a beneficial owner of
15% or more of a Delaware corporation’s voting stock, for a three-year period
following the date that such stockholder became an interested stockholder.
Section 203 could have the effect of delaying, deferring or preventing a
change in control of our company that our stockholders might consider to be in
their best interests.
20
If
our intangible assets, such as trademarks and goodwill, become impaired we may
be required to record a significant non-cash charge to earnings which would
negatively impact our results of operations.
Under
accounting principles generally accepted in the United States, we review our
intangible assets, including our trademarks licenses and goodwill, for
impairment annually in the fourth quarter of each fiscal year, or more
frequently if events or changes in circumstances indicate the carrying value of
our intangible assets may not be fully recoverable. The carrying value of our
intangible assets may not be recoverable due to factors such as a decline in our
stock price and market capitalization, reduced estimates of future cash flows,
including those associated with the specific brands to which intangibles relate,
or slower growth rates in our industry. Estimates of future cash flows are based
on a long-term financial outlook of our operations and the specific brands to
which the intangible assets relate. However, actual performance in the near-term
or long-term could be materially different from these forecasts, which could
impact future estimates and the recorded value of the intangibles. For example,
a significant, sustained decline in our stock price and market capitalization
may result in impairment of certain of our intangible assets, including
goodwill, and a significant charge to earnings in our financial statements
during the period in which an impairment is determined to exist. For ten days
between October 24, 2008 and November 21, 2008, the day of January 21, 2009 and
for six trading days between March 3, 2009 and March 10, 2009, our market
capitalization dropped below the carrying value of our consolidated net
assets. Despite the fact that our market capitalization was below our
book value for twelve days we do not believe that there has been an impairment
based on the duration and depth of the market decline as well as an implied
control premium. A control premium is the amount that a buyer is
willing to pay over the current market price of a company as indicated by the
market capitalization, in order to acquire a controlling
interest. The premium is justified by the expected synergies, such as
the expected increase in cash flow resulting from the cost savings and revenue
enhancements. However, due to the ongoing uncertainty in market conditions,
which may continue to negatively impact our market capitalization, we will
continue to monitor and evaluate the carrying value of our
goodwill. In the event we had to reduce the carrying value of our
goodwill, any such impairment charge could materially reduce our results of
operations.
The
price of our common stock may be volatile, particularly given the economic
downturn and volatility in domestic and international stock
markets.
The trading price of our common stock may
fluctuate substantially. Factors that could cause fluctuations in the trading
price of our common stock include, but are not limited to:
|
|
•
|
price and volume fluctuations in
the overall stock market from time to
time;
|
|
|
•
|
actual or anticipated changes in
our earnings or fluctuations in our operating results or in the
expectations of equity research
analysts;
|
|
|
•
|
trends in the automotive and
automotive finance
industries;
|
|
|
•
|
catastrophic
events;
|
|
|
•
|
fluctuations
in the credit markets, including the pricing and availability of
credit;
|
|
|
•
|
loss of one or more significant
customers or strategic
alliances;
|
|
|
•
|
significant acquisitions,
strategic alliances, joint ventures or capital commitments by us or our
competitors;
|
|
|
•
|
legal or regulatory matters,
including legal decisions affecting the indirect automotive finance
industry or involving the enforceability or order of priority of security
interests of electronic chattel paper affecting our electronic contracting
product;
|
|
|
•
|
Large
block of trades of our common stock;
and
|
|
|
•
|
additions or departures of key
employees.
|
The stock
market in general, the NASDAQ Global Market, and the market for technology
companies in particular, have experienced extreme price and volume fluctuations.
These fluctuations have often been unrelated or disproportionate to operating
performance. These forces reached unprecedented levels in the second
half of 2008 through the first quarter of 2009, resulting in the bankruptcy or
acquisition of, or government assistance to, several major domestic and
international financial institutions and a material decline in economic
conditions. In particular, the U.S. equity markets experienced significant price
and volume fluctuations that have affected the market prices of equity
securities of many technology companies. These broad market and industry factors
could materially and adversely affect the market price of our stock, regardless
of our actual operating performance.
21
In
the past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been brought against
that company. Due to the potential volatility of our stock price, we may
therefore be the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert management’s attention
and resources from our business.
Item 1B. Unresolved Staff
Comments
None.
Item 2. Properties
Our corporate headquarters are located in Lake Success, New York, where we lease
approximately 75,000 square feet of office space. Our principal offices are
located in Santa Barbara, California; Portland, Oregon; Wilmington, Ohio;
Mississauga, Ontario; Dallas, Texas; Memphis, Tennessee; Irvine, California; and
South Jordan, Utah. We lease all of the office space for our principle
offices.
In
connection with the acquisition of triVIN, on January 31, 2011, we assumed
approximately 27,000 square feet of office space in Groton, Connecticut and
approximately 92,000 square feet of office space in Sacramento,
California.
We believe our existing facilities are adequate to
meet our current requirements.
Item 3. Legal
Proceedings
From time
to time, we are a party to litigation matters arising in connection with the
normal course of our business, none of which is expected to have a material
adverse effect on us. In addition to the litigation matters arising in
connection with the normal course of our business, we are party to the
litigation described below.
DealerTrack, Inc. v.
Finance Express et al., CV-06-2335; DealerTrack Inc. v. RouteOne and
Finance Express et al., CV-06-6864; and DealerTrack Inc. v. RouteOne and
Finance Express et al., CV-07-215
On
April 18, 2006, we filed a Complaint and Demand for Jury Trial against
David Huber, Finance Express LLC (Finance Express), and three of their unnamed
dealer customers in the United States District Court for the Central District of
California, Civil Action No. CV-06-2335 AG (FMOx). The complaint sought
declaratory and injunctive relief, as well as damages, against the defendants
for infringement of the U.S. Patent No. 5,878,403 (the ’403 Patent)
Patent and the 6,587,841 (the ’841 Patent). Finance Express denied infringement
and challenged the validity and enforceability of the
patents-in-suit.
On
October 27, 2006, we filed a Complaint and Demand for Jury Trial against
RouteOne, David Huber and Finance Express in the United States District Court
for the Central District of California, Civil Action No. CV-06-6864 (SJF).
The complaint sought declaratory and injunctive relief as well as damages
against the defendants for infringement of the ’403 Patent and the ’841 Patent.
On November 28, 2006 and December 4, 2006, respectively, defendants
RouteOne, David Huber and Finance Express filed their answers. The defendants
denied infringement and challenged the validity and enforceability of the
patents-in-suit.
On
February 20, 2007, we filed a Complaint and Demand for Jury Trial against
RouteOne LLC (RouteOne), David Huber and Finance Express in the United States
District Court for the Central District of California, Civil Action
No. CV-07-215 (CWx). The complaint sought declaratory and injunctive relief
as well as damages against the defendants for infringement of U.S. Patent
No. 7,181,427 (the ’427 Patent). On April 13, 2007 and April 17,
2007, respectively, defendants RouteOne, David Huber and Finance Express filed
their answers. The defendants denied infringement and challenged the validity
and enforceability of the ’427 Patent.
The
DealerTrack, Inc. v. Finance Express et al., CV-06-2335 action, the DealerTrack
Inc. v. RouteOne and Finance Express et al., CV-06-6864 action and the
DealerTrack v. RouteOne and Finance Express et al., CV-07-215 action,
described above, were consolidated by the court. A hearing on claims
construction, referred to as a “Markman ” hearing, was held
on September 25, 2007. Fact and expert discovery and motions for summary
judgment have substantially been completed.
On
July 21, 2008 and September 30, 2008, the court issued summary
judgment orders disposing of certain issues and preserving other issues for
trial.
On
July 8, 2009, the court held Claims 1-4 of DealerTrack’s patent
7,181,427 was invalid for failure to comply with a standard required by the
recently decided case in the Court of Appeals of the Federal Circuit of In re
Bilski. On August 11, 2009, the court entered into a judgment granting
summary judgment. On September 8 , 2009, DealerTrack filed a notice of
appeal in the United States Court of Appeals for the Federal Circuit in regards
to the finding of non-infringement of patent 6,587,841, the invalidity of patent
7,181,427, and the claim construction order to the extent that it was relied
upon to find the judgments of non-infringement and invalidity. In October 2010,
the United States Court of Appeals set a briefing schedule. DealerTrack filed
its appellant’s brief in the case on October 29, 2010 and reply briefs were
filed by both RouteOne and Finance Express in early December 2010. DealerTrack
filed its reply brief on January 18, 2011.
We
believe that the potential liability from all current litigations will not have
a material effect on our financial position or results of operations when
resolved in a future period.
Item 4. [Removed and
Reserved]
22
PART
II
Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market
Information
As
of January 31, 2011, there were 27 holders of record of our common stock.
Our common stock is listed and traded on the NASDAQ Global Market under the
symbol “TRAK”. The following table sets forth the range of high and low sales
prices for the common stock in each quarter of 2010 and 2009, as reported by the
NASDAQ Global Market.
|
|
High
|
Low
|
||||||
|
Year Ended December 31,
2010
|
||||||||
|
Fourth
Quarter
|
$ | 21.27 | $ | 16.47 | ||||
|
Third
Quarter
|
$ | 17.94 | $ | 14.40 | ||||
|
Second
Quarter
|
$ | 18.63 | $ | 15.03 | ||||
|
First
Quarter
|
$ | 19.99 | $ | 13.33 | ||||
|
Year Ended December 31,
2009
|
||||||||
|
Fourth
Quarter
|
$ | 19.69 | $ | 15.86 | ||||
|
Third
Quarter
|
$ | 21.80 | $ | 14.94 | ||||
|
Second
Quarter
|
$ | 17.94 | $ | 12.71 | ||||
|
First
Quarter
|
$ | 14.50 | $ | 9.27 | ||||
Dividend
Policy
We
have not paid any cash dividends on our common stock and currently intend to
retain any future earnings for use in our business.
Repurchases
From
time to time, in connection with the vesting of restricted common stock under
our incentive award plans, we may receive shares of our common stock from
certain restricted common stockholders in consideration of the tax withholdings
due upon the vesting of restricted common stock.
The
following table sets forth the repurchases for the three months ended December
31, 2010:
|
Total
|
Maximum
|
|||||||||||||||
|
Number of
|
Number
|
|||||||||||||||
|
Shares
|
of Shares
|
|||||||||||||||
|
Purchased
|
That
|
|||||||||||||||
|
as Part of
|
May Yet be
|
|||||||||||||||
|
Total Number
|
Average Price
|
Publicly
|
Purchased
|
|||||||||||||
|
of Shares
|
Paid per
|
Announced
|
Under the
|
|||||||||||||
|
Period
|
Purchased
|
Share
|
Program
|
Program
|
||||||||||||
|
October 2010
|
— | $ | — | n/a | n/a | |||||||||||
|
November 2010
|
1,697 | $ | 18.61 | n/a | n/a | |||||||||||
|
December 2010
|
— | $ | — | n/a | n/a | |||||||||||
Item 6. Selected
Consolidated Financial Data
The
selected consolidated financial data as of December 31, 2010 and 2009 and
for each of the three years in the period ended December 31, 2010 have been
derived from our consolidated financial statements and related notes thereto
included elsewhere herein, which have been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm. The selected historical
consolidated financial data as of December 31, 2008, 2007 and
December 31, 2006 and for each of the two years in the period ended
December 31, 2007 have been derived from our audited consolidated financial
statements and related notes thereto, which are not included in this filing, and
which have also been audited by PricewaterhouseCoopers LLP.
We
completed acquisitions during the periods presented below, the operating results
of which have been included in our historical results of operations from the
respective acquisition dates. These acquisitions have significantly affected our
revenue, results of operations and financial condition. Accordingly, the results
of operations for the periods presented may not be comparable due to these
acquisitions.
23
The
following selected consolidated financial data should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in Part II, Item 7 in this Annual Report on Form 10-K and
“Financial Statements and Supplementary Data” in Part II, Item 8 in
this Annual Report on Form 10-K.”
|
Year Ended December 31,
|
||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(in thousands, except per share and share amounts)
|
||||||||||||||||||||
|
Consolidated Statements of
Operations Data:
|
||||||||||||||||||||
|
Net
revenue
|
$ | 243,826 | $ | 225,626 | $ | 242,706 | $ | 233,845 | $ | 173,272 | ||||||||||
|
Income
(loss) from operations
|
$ | 655 | $ | (10,950 | ) | $ | 7,052 | $ | 27,531 | $ | 20,739 | |||||||||
|
Income
(loss) before (provision for) benefit from income
taxes
|
$ | 2,764 | $ | (7,853 | ) | $ | 5,697 | $ | 32,786 | $ | 26,133 | |||||||||
|
Net
(loss) income
|
$ | (27,833 | ) | $ | (4,334 | ) | $ | 1,736 | $ | 19,752 | $ | 19,336 | ||||||||
|
Basic
net (loss) income per share applicable to common stockholders
(1)
|
$ | (0.69 | ) | $ | (0.11 | ) | $ | 0.04 | $ | 0.49 | $ | 0.53 | ||||||||
|
Diluted
net (loss) income per share applicable to common
stockholders (1)
|
$ | (0.69 | ) | $ | (0.11 | ) | $ | 0.04 | $ | 0.47 | $ | 0.51 | ||||||||
|
Weighted
average common stock outstanding (basic)
|
40,322,939 | 39,524,544 | 40,461,896 | 39,351,138 | 36,064,796 | |||||||||||||||
|
Weighted
average common stock outstanding (diluted)
|
40,322,939 | 39,524,544 | 41,538,379 | 40,886,482 | 37,500,164 | |||||||||||||||
|
As of December 31,
|
||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Consolidated
Balance Sheets Data:
|
|
|
|
|
|
|||||||||||||||
|
Cash
and cash equivalents, short-term and long-term investments
|
$ | 195,307 | $ | 202,964 | $ | 203,198 | $ | 220,144 | $ | 171,195 | ||||||||||
|
Working
capital (2)
|
$ | 200,942 | $ | 191,894 | $ | 197,797 | $ | 222,810 | $ | 168,817 | ||||||||||
|
Total
assets
|
$ | 458,963 | $ | 472,327 | $ | 437,215 | $ | 482,926 | $ | 321,513 | ||||||||||
|
Capital
lease obligations (short and long-term), due to acquirees (short and
long-term), deferred revenue (short and long-term) and other long-term
liabilities
|
$ | 11,572 | $ | 13,398 | $ | 17,272 | $ | 15,888 | $ | 13,269 | ||||||||||
|
(Accumulated
deficit) retained earnings
|
$ | (11,909 | ) | $ | 15,924 | $ | 20,258 | $ | 18,522 | $ | (1,230 | ) | ||||||||
|
Total
stockholders’ equity
|
$ | 408,917 | $ | 420,886 | $ | 396,220 | $ | 438,362 | $ | 284,337 | ||||||||||
|
(1)
|
Earnings per share data for the
years ended December 31, 2008, 2007 and 2006 had been retroactively
adjusted to conform to the provisions of ASC Topic 260, Earnings Per
Share, which did not
have a significant impact on our historical earnings per share
calculation. For further information, please refer to Note 2 in the
accompanying notes to the consolidated financial statements included in
this Annual Report on Form
10-K.
|
|
(2)
|
Working capital is defined as
current assets less current
liabilities.
|
24
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
You should
read the following discussion and analysis of our financial condition and
results of operations in conjunction with our consolidated financial statements
and related notes thereto. In addition, you should read the sections entitled
“Cautionary Statements Relating to Forward-Looking Statements” and “Risk
Factors” in Part 1, Item 1 and Item 1A, respectively, in this
Annual Report on Form
10-K .
Overview
DealerTrack’s
intuitive and high-value software solutions enhance efficiency and profitability
for all major segments of the automotive retail industry, including dealers,
lenders, OEMs, agents and aftermarket providers. We believe our solution set for
dealers is the industry’s most comprehensive. DealerTrack operates the
industry’s largest online credit application network in the United States,
connecting approximately 17,000 dealers with over 950 lenders. Our dealer
management system (“DMS”) provides dealers with easy-to-use tools with real-time
data access that will streamline any automotive business. Dealers using
DealerTrack AAX get the inventory management tools and services needed to
accelerate turns and increase profits. Our sales and finance & insurance
(“F&I”) solution enables dealers to streamline the entire sales process
while structuring all types of deals from a single integrated platform.
DealerTrack’s compliance solution helps dealers meet legal and regulatory
requirements and protect their assets. DealerTrack’s family of companies also
includes data and consulting services providers, ALG and Chrome
Systems.
On
January 31, 2011, we acquired triVIN, a leading provider of automobile title
management services to lenders and vehicle registration services to automobile
dealers. This acquisition will significantly expand our transaction business and
further strengthen our relationship with lenders and automobile
dealers.
We are a Delaware corporation formed in
August 2001. We are organized as a holding company and conduct a
substantial amount of our business through our subsidiaries including ALG, Inc.,
Chrome Systems, Inc., DealerTrack AAX, Inc., DealerTrack Aftermarket Services,
Inc., Inc., DealerTrack Canada, Inc., DealerTrack Digital Services, Inc.,
DealerTrack, Inc., DealerTrack Processing Solutions, Inc., and DealerTrack
Systems, Inc.
We monitor our performance as a business using a number of measures
that are not found in our consolidated financial statements. These measures
include the number of active dealers, lenders and active lender to dealership
relationships in the DealerTrack network, the number of subscribing dealers in
the DealerTrack network, the number of transactions processed, the average
transaction price and the average monthly subscription revenue per subscribing
dealership. We believe that improvements in these metrics will result in
improvements in our financial performance over time. We also view the
acquisition and successful integration of acquired companies as important
milestones in the growth of our business as these acquired companies bring new
products to our customers and expand our technological capabilities. We believe
that successful acquisitions will also lead to improvements in our financial
performance over time. In the near term, however, the purchase accounting
treatment of acquisitions can have a negative impact on our statement of
operations as the depreciation and amortization expenses associated with
acquired assets, as well as particular intangibles (which tend to have a
relatively short useful life), can be substantial in the first several years
following an acquisition. As a result, we monitor our non-GAAP financial
measures and other business statistics as a measure of operating performance in
addition to net (loss) income and the other measures included in our
consolidated financial statements.
The following is a table consisting of non-GAAP
financial measures and certain other business statistics that management is
continually monitoring (amounts in thousands are adjusted EBITDA, adjusted net
income, capital expenditure data and transactions processed):
|
Year Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Non-GAAP
Financial Measures and Other Business Statistics:
|
||||||||||||
|
Adjusted
EBITDA (Non-GAAP) (1)
|
$ | 42,070 | $ | 34,438 | $ | 47,912 | ||||||
|
Adjusted
net income (Non-GAAP) (1)
|
$ | 21,943 | $ | 19,967 | $ | 34,714 | ||||||
|
Capital
expenditures, software and website development costs
|
$ |
30,938
|
$ | 21,336 | $ | 16,783 | ||||||
|
Active
dealers in our network as of end of the year (2)
|
16,829 | 16,690 | 19,652 | |||||||||
|
Active
lenders in our network as of end of year (3)
|
970 | 823 | 733 | |||||||||
|
Active
lender to dealer relationships as of end of the year
(4)
|
137,058 | 118,209 | 156,437 | |||||||||
|
Subscribing
dealers in our network as of end of the year (5)
|
13,996 | 13,852 | 14,342 | |||||||||
|
Transactions
processed (6)
|
49,373 | 51,402 | 79,655 | |||||||||
|
Average
transaction price (7)
|
$ | 2.10 | $ | 1.84 | $ | 1.66 | ||||||
|
Average
monthly subscription revenue per subscribing dealership
(8)
|
$ | 749 | $ | 676 | $ | 550 | ||||||
|
(1)
|
Adjusted EBITDA is a non-GAAP
financial measure that represents GAAP net (loss) income excluding
interest, taxes, depreciation and amortization expenses, contra-revenue
and may exclude certain items such as: impairment charges, restructuring
charges, acquisition-related earn-out compensation expense and
professional service fees, realized gains or (losses) on securities and
certain other non-recurring items. Adjusted net income is a non-GAAP
financial measure that represents GAAP net (loss) income excluding
stock-based compensation expense, the amortization of acquired
identifiable intangibles, contra-revenue and may also exclude certain
items such as: impairment charges, restructuring charges,
acquisition-related earn-out compensation expense and professional service
fees, realized gains or (losses) on securities and certain other
non-recurring items. These adjustments to net income, which are shown
before taxes, are adjusted for their tax impact. Adjusted EBITDA and
adjusted net income are presented because management believes they provide
additional information with respect to the performance of our fundamental
business activities and is also frequently used by securities analysts,
investors and other interested parties in the evaluation of comparable
companies. We rely on adjusted EBITDA and adjusted net income as a primary
measure to review and assess the operating performance of our company and
management team in connection with our executive compensation plan
incentive payments.
|
25
Adjusted
EBITDA and adjusted net income have limitations as an analytical tool and you
should not consider them in isolation from, or as a substitute for analysis of
our results as reported under GAAP. Some of these limitations are:
|
|
•
|
Adjusted EBITDA and adjusted net
income do not reflect our cash expenditures or future requirements for
capital expenditures or contractual
commitments;
|
|
|
•
|
Adjusted EBITDA and adjusted net
income do 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 will often have to be replaced in the future, and adjusted
EBITDA and adjusted net income do not reflect any cash requirements for
such replacements;
|
|
|
•
|
Non-cash
compensation is and will remain a key element of our overall long-term
incentive compensation package, although we exclude it from adjusted net
income when evaluating our ongoing performance for a particular
period;
|
|
|
•
|
Adjusted
EBITDA and adjusted net income do not reflect the impact of certain
charges or gains resulting from matters we consider not to be indicative
of our ongoing operations; and
|
|
|
•
|
Other companies may calculate
adjusted EBITDA and adjusted net income differently than we do, limiting
its usefulness as a comparative
measure.
|
Because
of these limitations, adjusted EBITDA and adjusted net income should not be
considered as a measure of discretionary cash available to us to invest in the
growth of our business. We compensate for these limitations by relying primarily
on our GAAP results and using adjusted EBITDA, and adjusted net income only as a
supplement to our GAAP results. Adjusted EBITDA and adjusted net income are
measures of our performance that are not required by, or presented in accordance
with, GAAP. Adjusted EBITDA and adjusted net income are not a measurement of our
financial performance under GAAP and should not be considered as an alternative
to net income, operating income or any other performance measures derived in
accordance with GAAP or as an alternative to cash flow from operating activities
as a measure of our liquidity.
The
following table sets forth the reconciliation of adjusted EBITDA, a non-GAAP
financial measure, from net (loss) income, our most directly comparable
financial measure in accordance with GAAP (in thousands):
|
Year Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
GAAP
net (loss) income
|
$
|
(27,833
|
)
|
$
|
(4,334
|
)
|
$
|
1,736
|
||||
|
Interest
income
|
(525
|
)
|
(1,081
|
)
|
(4,720
|
)
|
||||||
|
Interest
expense
|
175
|
221
|
324
|
|||||||||
|
Provision
for (benefit from) income taxes
|
30,597
|
(3,519
|
)
|
3,961
|
||||||||
|
Depreciation
of property and equipment and amortization of capitalized software and
website costs
|
17,329
|
14,719
|
13,295
|
|||||||||
|
Amortization
of acquired identifiable intangibles
|
19,424
|
20,341
|
26,781
|
|||||||||
|
EBITDA
(Non-GAAP)
|
39,167
|
26,347
|
41,377
|
|||||||||
|
Adjustments:
|
||||||||||||
|
Restructuring
costs (including amounts related to stock-based
compensation)
|
—
|
6,686
|
—
|
|||||||||
|
Acquisition
related and other non-recurring professional fees
|
1,905
|
2,407
|
579
|
|||||||||
|
Contra-revenue
(9)
|
1,580
|
—
|
—
|
|||||||||
|
Realized
(gain) loss on securities
|
(582
|
)
|
(1,393
|
)
|
5,956
|
|||||||
|
Reversal
of pre-acquisition accrued contingency
|
—
|
(609
|
)
|
—
|
||||||||
|
Acquisition
related earn-out compensation expense
|
—
|
1,000
|
—
|
|||||||||
|
Adjusted
EBITDA (Non-GAAP)
|
$
|
42,070
|
$
|
34,438
|
$
|
47,912
|
||||||
26
The
following table sets forth the reconciliation of adjusted net income, a non-GAAP
financial measure, from net (loss) income, our most directly comparable
financial measure in accordance with GAAP (in thousands):
|
Year Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
GAAP
net (loss) income
|
$
|
(27,833
|
)
|
$
|
(4,334
|
)
|
$
|
1,736
|
||||
|
Adjustments:
|
||||||||||||
|
Deferred
tax asset valuation allowance (non-taxable) (10)
|
28,406
|
—
|
—
|
|||||||||
|
Amortization
of acquired identifiable intangibles
|
19,424
|
20,341
|
26,781
|
|||||||||
|
Restructuring
costs (including amounts related to stock-based
compensation)
|
—
|
6,686
|
—
|
|||||||||
|
Acquisition
related and other non-recurring professional fees
|
1,905
|
2,407
|
579
|
|||||||||
|
Contra-revenue
(9)
|
1,580
|
—
|
—
|
|||||||||
|
Realized
(gain) loss on securities (non-taxable)
|
(582
|
)
|
(1,393
|
)
|
5,956
|
|||||||
|
Reversal
of pre-acquisition accrued contingency (non-taxable)
|
—
|
(609
|
)
|
—
|
||||||||
|
Acquisition
related earn-out compensation expense
|
—
|
1,000
|
—
|
|||||||||
|
Amended
state tax returns impact (non-taxable)
|
101
|
(1,070
|
)
|
—
|
||||||||
|
Stock-based
compensation (excluding restructuring costs)
|
11,233
|
13,104
|
13,991
|
|||||||||
|
Tax
impact of adjustments (11)
|
(12,291
|
)
|
(16,165
|
)
|
(14,329
|
)
|
||||||
|
|
||||||||||||
|
Adjusted
net income (Non-GAAP)
|
$
|
21,943
|
$
|
19,967
|
$
|
34,714
|
||||||
|
(2)
|
We consider a dealer to be active
as of a date if the dealer completed at least one revenue-generating
credit application processing transaction using the U.S. DealerTrack
network during the most recently ended calendar month. The number of
active U.S. dealers is based on the number of dealer accounts as
communicated by lenders on the DealerTrack
network.
|
|
(3)
|
We consider a lender to be active
in the DealerTrack network as of a date if it is accepting credit
application data electronically from U.S. dealers in the DealerTrack
network.
|
|
(4)
|
Each
lender to dealer relationship represents a pair between an active U.S.
lender and an active U.S. dealer at the end of a given
period.
|
|
(5)
|
Represents
the number of dealerships with one or more active subscriptions on the
DealerTrack or DealerTrack Canada networks at the end of a given
period.
|
|
(6)
|
Represents revenue-generating
transactions processed in the DealerTrack, DealerTrack Digital Services
and DealerTrack Canada networks at the end of a given
period.
|
|
(7)
|
Represents
the average revenue earned per transaction processed in the DealerTrack,
DealerTrack Aftermarket Services, DealerTrack Digital Services and
DealerTrack Canada networks during a given period. Revenue used in the
calculation adds back
contra-revenue.
|
|
(8)
|
Represents
net subscription revenue divided by average subscribing dealers for a
given period in the DealerTrack and DealerTrack Canada
networks.
|
|
(9)
|
For
further information please refer to Note 16 in the accompanying notes to
the consolidated financial statements included in this Annual Report on
Form 10-K.
|
|
(10)
|
At
December 31, 2010, management determined that the ultimate realization of
deferred tax assets for U.S. federal and state income tax purposes was not
considered more likely than not, primarily due to limited taxable income
in the federal carry back period, anticipated insufficient future taxable
income and cumulative U.S. book losses incurred in recent years. As a
result of cumulative U.S. book losses incurred in recent years and
uncertainty as to the extent and timing of profitability in future
periods, we recorded a full valuation allowance of $28.4 million against
our net U.S. deferred tax assets, excluding deferred tax liabilities
related to indefinite-lived assets, for the year ended December 31, 2010.
For further information please refer to Note 10 in the accompanying notes
to the consolidated financial statements included in this Annual Report on
Form 10-K.
|
|
(11)
|
The
tax impact of adjustments for the year ended December 31, 2010, are based
on a U.S. statutory tax rate of 36.9% applied to taxable adjustments other
than amortization of acquired identifiable intangibles and stock-based
compensation expense, which are based on a blended tax rate of 35.4% and
36.7%, respectively. The tax impact of adjustments for the year ended
December 31, 2009, are based on a U.S. effective tax rate of 37.8% applied
to taxable adjustments other than amortization of acquired identifiable
intangibles and stock-based compensation expense, which are based on a
blended tax rate of 37.0% and 37.8%, respectively. The tax impact of
adjustments for the year ended December 31, 2008, are based on a U.S.
effective tax rate of 34.8% applied to taxable adjustments other than
amortization of acquired identifiable intangibles and stock-based
compensation expense, which are based on a blended tax rate of 34.6% and
34.8%, respectively.
|
27
Revenue
Transaction Services Revenue.
Transaction services revenue consists of revenue earned from our lender
customers for each credit application or contract that dealers submit to them.
We also earn transaction services revenue from lender customers for each
financing contract executed via our electronic contracting and digital contract
processing solutions, as well as for any portfolio residual value analyses we
perform for them. We also earn transaction services revenue from dealers or
other service and information providers, such as aftermarket providers,
accessory providers and credit report providers, for each fee-bearing product
accessed by dealers.
Subscription
Services Revenue. Subscription services revenue consists of revenue
earned from our customers (typically on a monthly basis) for use of our
subscription or license-based products and services. Our subscription services
enable dealer customers to manage their dealership data and operations, compare
various financing and leasing options and programs, sell insurance and other
aftermarket products, analyze inventory and execute financing contracts
electronically.
Other Revenue. Other revenue
consists of revenue primarily earned through forms programming, data conversion,
training and hardware and equipment sales from our DMS solution, shipping
commissions earned from our digital contract business, consulting and analytical
revenue earned from ALG, and training fees earned from our inventory management
solution.
Operating
Expenses
Cost of Revenue. Cost
of revenue primarily consists of expenses related to running our network
infrastructure (including Internet connectivity, hosting expenses, and data
storage), amortization expense on acquired intangible assets, capitalized
software and website development costs, compensation and related benefits for
network and technology development personnel, amounts paid to third parties
pursuant to contracts under which a portion of certain revenue is owed to those
third parties (revenue share) and direct costs for data licenses and direct
costs (printing, binding and delivery) associated with our residual value
guides. Cost of revenue also includes hardware costs associated with our DMS
product offering, and compensation, related benefits and travel expenses
associated with DMS installation personnel.
Product Development
Expenses. Product development expenses consist primarily of compensation
and related benefits, consulting fees and other operating expenses associated
with our product development departments. The product development departments
perform research and development, as well as enhance and maintain existing
products.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses consist primarily
of compensation and related benefits, facility costs and professional services
fees for our sales, marketing, customer service and administrative
functions.
We allocate overhead such as occupancy and telecommunications
charges, and depreciation expense based on headcount, as we believe this to be
the most accurate measure. As a result, a portion of general overhead expenses
is reflected in our cost of revenue and each operating expense
category.
We
allocated the restructuring costs related to our January 5, 2009 realignment of
our workforce and business to the appropriate cost of revenue and operating
expense categories based on each of the terminated employees’ respective
functions. For further information, please refer to Note 15 in the accompanying
notes to the consolidated financial statements included in this Annual Report on
Form 10-K.
Acquisitions
and Related Amortization Expense
We have grown our business since inception through
a combination of organic growth and acquisitions. The operating results of each
business acquired have been included in our consolidated financial statements
from the respective dates of acquisition.
Our
acquisitions have been recorded under the purchase method of accounting,
pursuant to which the total purchase price, is allocated to the net assets
acquired based upon estimates of the fair value of those assets. Any excess
purchase price is allocated to goodwill. Amortization expense relating to
intangible assets is recorded as a cost of revenue.
On
January 31, 2011, we acquired triVIN for a purchase price of $131.0 million in
cash, net of acquired cash and a working capital adjustment. triVIN is a leading
provider of automobile title management services to lenders and vehicle
registration services to automobile dealers. This acquisition will significantly
expand our transaction business, and further strengthen our relationship with
lenders and automobile dealers. We expensed approximately $0.5 million of
professional fees associated with the acquisition in 2010. We expect to expense
an additional approximately $0.2 million of professional fees in the first
quarter of 2011. We are in the process of finalizing the fair value assessment
for the acquired assets and liabilities, which is expected to be completed
during the first quarter of 2011.
28
Critical
Accounting Policies and Estimates
Our management’s discussion and analysis of our
financial condition and results of our operations is based on our consolidated
financial statements, which have been prepared in accordance with GAAP. The
preparation of these consolidated financial statements requires management to
make estimates and judgments that affect the amounts reported for assets,
liabilities, revenue, expenses and the disclosure of contingent
liabilities.
Our critical accounting policies are those that we believe are both
important to the portrayal of our financial condition and results of operations
and that involve difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. The estimates are based on historical experience and on various
assumptions about the ultimate outcome of future events. Our actual results may
differ from these estimates if unforeseen events occur or should the assumptions
used in the estimation process differ from actual results.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Revenue
Recognition
Transaction Services
Revenue. Transaction services revenue consists of revenue earned from our
lender customers for each credit application or contract that dealers submit to
them. We also earn transaction services revenue from lender customers for each
financing contract executed via our electronic contracting and digital contract
processing solutions, as well as for any portfolio residual value analyses we
perform for them. We also earn transaction services revenue from dealers or
other service and information providers, such as aftermarket, accessory and
credit report providers, for each fee-bearing product accessed by
dealers.
We offer our web-based service to lenders for the electronic receipt of
credit application data and contract data for automobile financing transactions
in consideration for a transaction fee. This service is sold based upon
contracts that include fixed or determinable prices and that do not include the
right of return or other similar provisions or significant post service
obligations. Credit application and digital and electronic contracting
processing revenue is recognized on a per transaction basis, after customer
receipt and when collectability is reasonably assured. Set-up fees charged to
the lenders for establishing connections, if any, are recognized ratably over
the expected customer relationship period of four years.
Our credit report service provides our dealer customers the ability to access
credit reports from several major credit reporting agencies or resellers online.
We sell this service based upon contracts with the customer or credit report
provider, as applicable, that include fixed or determinable prices and that do
not include the right of return or other similar provisions or other significant
post-service obligations. We recognize credit report revenue on a per
transaction basis, when services are rendered and when collectability is
reasonably assured. We offer these credit reports on both a reseller and an
agency basis. We recognize revenue from all but one provider of credit reports
on a net basis due to the fact that we are not considered the primary obligor,
and recognize revenue on a gross basis with respect to one of the providers as
we have the risk of loss and are considered the primary obligor in the
transaction.
Subscription Services
Revenue. Subscription services revenue consists of revenue earned from
our customers (typically on a monthly basis) for use of our subscription or
license-based products and services. Our subscription services enable dealer
customers to manage their dealership data and operations, compare various
financing and leasing options and programs, sell insurance and other aftermarket
products, analyze inventory and execute financing contracts electronically.
These subscription services are typically sold based upon contracts that include
fixed or determinable prices and that do not include the right of return or
other similar provisions or significant post service obligations. We recognize
revenue from such contracts ratably over the contract period. We recognize
set-up fees, if any, ratably over the expected customer relationship of three
years. For contracts that contain two or more products or services, we recognize
revenue in accordance with the above policy using relative fair value when the
delivered product has stand alone value.
Other
Revenue. Other revenue consists of revenue primarily earned
through forms programming, data conversion, training and hardware and equipment
sales from our DMS solution, shipping commissions earned from our digital
contract business, consulting and analytical revenue earned from ALG, and
training fees earned form our inventory management solution. Other revenue is
recognized upon performance.
Our revenue is presented net of a provision for sales credits, which are
estimated based on historical results, and established in the period in which
services are provided.
Allowance
for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. The amount of the
allowance account is based on historical experience and our analysis of the
accounts receivable balance outstanding. While credit losses have historically
been within our expectations when the provisions are established, we cannot
guarantee that we will continue to experience the same credit loss rates that we
have in the past. If the financial condition of our customers were to
deteriorate, resulting in their inability to make payments, additional
allowances may be required which would result in an additional expense in the
period that this determination was made.
29
Software
and Website Development Costs and Amortization
We
capitalize costs of materials, consultants and payroll and payroll-related costs
incurred by employees involved in developing internal use computer software.
Costs incurred during the preliminary project and post-implementation stages are
charged to expense. Software and website development costs are amortized on a
straight-line basis over estimated useful lives ranging from two to five years.
We perform periodic reviews to ensure that unamortized software and website
costs remain recoverable from future revenue. Capitalized software and website
development costs, net, were $29.9 million and $21.2 million as of
December 31, 2010 and 2009, respectively. Amortization expense totaled $9.7
million, $7.6 million and $7.4 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
Goodwill,
Intangibles and Long-lived Assets
We record
as goodwill the excess of purchase price over the fair value of the tangible and
identifiable intangible assets acquired. Goodwill is tested annually for
impairment as well as whenever events or circumstances change that would make it
more likely than not that an impairment may have occurred. Goodwill is tested
for impairment using a two-step approach. The first step tests for potential
goodwill impairment by comparing the fair value of our one reporting unit to our
carrying value. If the fair value of the reporting unit is less than its
carrying value the second step is to record an impairment loss to the extent
that the implied fair value of the goodwill of the reporting unit is less than
its carrying value.
Goodwill
is required to be assessed at the operating segment or lower level. We
determined that the components of our one operating segment have similar
economic characteristics, nature of products, distribution, shared resources and
type of customer such that the components should be aggregated into a single
reporting unit for purposes of performing the impairment test for goodwill. We
perform our annual impairment analysis as of the first day of the fourth
quarter. The evaluation of impairment involves comparing the current estimated
fair value of our reporting unit to the carrying value, including goodwill. We
estimate the fair value of our reporting unit by primarily using a market
capitalization approach, and also looking at the outlook for the business. The
results of our most recent annual assessments performed on October 1, 2010 and
2009 did not indicate any impairment of our goodwill. As of October 1, 2010, our
market capitalization was approximately $689 million compared to our book value,
including goodwill, of approximately $430 million. As of October 1,
2009, our market capitalization was approximately $750 million compared to our
book value, including goodwill, of approximately $418 million.
We
evaluate our long-lived assets, including property and equipment and
finite-lived intangible assets for potential impairment on an individual asset
basis or at the lowest level asset grouping for which cash flows can be
separately identified. Intangible asset impairments are assessed whenever
changes in circumstances could indicate that the carrying amounts of those
productive assets exceed their projected undiscounted cash flows. When it is
determined that impairment exists, the related asset group is written down to
its estimated fair market value. The determination of future cash flows and the estimated
fair value of long-lived assets, involve significant estimates on the part of
management. In order to estimate the fair value of a long-lived asset, we may
engage a third party to assist with the valuation.
Our
process for assessing potential triggering events may include, but is not
limited to, analysis of the following:
|
|
§
|
any
sustained decline in the company's stock price below book
value;
|
|
|
§
|
results
of our goodwill impairment test;
|
|
|
§
|
sales
and operating trends affecting products and
groupings;
|
|
|
§
|
the
impact on current and future operating results related to industry
statistics including fluctuation of lending relationships between
financing sources and automobile dealers, actual and projected annual
vehicle sales, and the number of dealers within our
network;
|
|
|
§
|
any
losses of key acquired customer relationships;
and
|
|
|
§
|
changes
to or obsolescence of acquired technology, data, and
trademarks.
|
We also
evaluate the remaining useful life of our long-lived assets on a periodic basis
to determine whether events or circumstances warrant a revision to the remaining
estimated amortization period.
As
discussed in Note 6 of our consolidated financial statements included in this
Annual Report on Form 10-K, during the fourth quarter of 2008, as a result of a
specific event, we recorded an impairment of an intangible asset of
approximately $1.9 million to cost of revenue.
Income
Taxes
We
account for income taxes in accordance with the provisions of ASC Topic 740,
Accounting for Income
Taxes, which requires deferred tax assets and liabilities to be
recognized for the future tax consequences attributable to differences between
the consolidated financial statement carrying amounts of assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be reversed. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Due to cumulative U.S. book losses in current and recent years and uncertainty
as to the extent and timing of profitability in future years management has
recorded a full valuation allowance on our U.S. net deferred tax assets,
excluding deferred tax liabilities related to indefinite-lived assets. For
further information please refer to Note 10 in the accompanying notes to the
consolidated financial statements included in this Annual Report on Form 10-K.
The total
liability for the uncertain tax positions recorded in our consolidated balance
sheet in accrued other liabilities as of December 31, 2010 and December 31,
2009, was $1.0 million and $0.8 million, respectively.
30
Interest
and penalties, if any, related to tax positions taken in our tax returns are
recorded in interest expense and general and administrative expenses,
respectively, in our consolidated statement of operations. As of December 31,
2010 and December 31, 2009, we have accrued interest and penalties related to
tax positions taken on our tax returns of approximately $0.1 million and
$47,000, respectively.
Retail
Sales Tax
The
Ontario Ministry of Revenue (the “Ministry”) has conducted a retail sales tax
field audit on the financial records of our Canadian subsidiary, DealerTrack
Canada, Inc. (formerly known as DealerAccess Canada, Inc.), for the period from
March 1, 2001 through May 31, 2003 (“Audit Period”). We received a
formal assessment from the Ministry indicating unpaid Ontario retail sales tax
totaling approximately $0.2 million, plus interest. Although we disputed
the Ministry’s findings, the assessment, including interest, was paid in order
to avoid potential future interest and penalties.
As part
of the purchase agreement dated December 31, 2003 between us and Bank of
Montreal for the purchase of 100% of the issued and outstanding capital stock of
DealerAccess, Inc., Bank of Montreal agreed to indemnify us specifically for
this potential liability for all sales tax periods prior to January 1,
2004. The potential sales tax liability for the period covered by this
indemnification is now closed due to the statutory expiration of the periods
open for audit by the Ministry. All amounts paid to the Ministry by us for this
assessment were reimbursed by the Bank of Montreal under this indemnity.
We
undertook a comprehensive review of the audit findings of the Ministry using
external tax experts. Our position has been that these lender revenue
transactions were not subject to Ontario retail sales tax. We filed a formal
Notice of Objection with the Ministry on December 12, 2005. We received a
letter dated November 2, 2007 from an appeals officer of the Ministry
stating that the assessment was, in his opinion, properly raised and he
recommended his confirmation to senior management of the
Ministry.
We
received a letter dated December 21, 2007 from the Ministry stating that no
change should be made to the appeals officer’s opinion. A Notice of Appeal was
timely filed on our behalf with the Superior Court of Justice on March 18,
2008 to challenge the assessment because we did not believe these services were
subject to sales tax. On December 15, 2008, the Ministry filed its response
to our Notice of Appeal. The response reiterated the Ministry’s position that
the transactions were subject to Ontario retail sales tax.
In
October 2010, the parties agreed to settlement of this matter. The Minutes of
Settlement provided that the Ministry reimburse us $0.1 million, plus interest,
for a total payment of $0.2 million, which was received on October 29, 2010.
Under the terms of the indemnity agreement with The Bank of Montreal, we
forwarded the settlement payment to the bank.
This
settlement applied only to the Audit Period and did not cover any potential
liability for subsequent periods, which were not included in the audit.
Additionally, this settlement did not conclude on the taxability of our lender
revenue transactions. We have not accrued any related sales tax liability for
the period subsequent to May 31, 2003 for these lender revenue
transactions. This appeal was supported by the financial institutions whose
source revenue transactions were subject to the assessment. These financial
institutions agreed to participate in the cost of the litigation. In January
2011, we were notified by the Ministry that they will now conduct an Ontario
retail sales tax audit in March 2011 for the period March 1, 2007 through June
30, 2010.
In the
event we are obligated to charge sales tax for this type of transaction, we
believe this Canadian subsidiary’s contractual arrangements with its lender
customers obligate these customers to pay all sales taxes that are levied or
imposed by any taxing authority by reason of the transactions contemplated under
the particular contractual arrangement. In the event of any failure to pay such
amounts by our customers, we would be required to pay the obligation, which
could range from $5.0 million (CAD) to $5.5 million (CAD), including
penalties and interest.
Stock-Based
Compensation Expense and Assumptions
Stock-Based Compensation
Expense
Stock-based
compensation cost is measured at the grant date based on the fair value of the
award, and recognized as an expense over the requisite service period, net of an
estimated forfeiture rate. We have four types of stock-based compensation
expense programs: stock options, restricted common stock, restricted stock
units, and performance stock units.
31
The
following summarizes stock-based compensation expense recognized for the three
years ended December 31, 2010, 2009 and 2008 (in thousands):
|
Year Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Stock
options
|
$ | 5,732 | $ | 10,535 | $ | 8,630 | ||||||
|
Restricted
common stock
|
1,670 | 4,599 | 5,361 | |||||||||
|
Restricted
stock units
|
3,354 | 1,855 | — | |||||||||
|
Performance
stock units
|
477 | — | — | |||||||||
|
Total
stock-based compensation expense
|
$ | 11,233 | $ | 16,989 | $ | 13,991 | ||||||
A summary
of the unamortized stock-based compensation expense and associated weighted
average remaining amortization periods for stock options, restricted common
stock, restricted stock units and performance stock units is presented
below:
|
Weighted
|
||||||||
|
Unamortized
|
Average
|
|||||||
|
Stock
-Based
|
Remaining
|
|||||||
|
Compensation
Expense
(in thousands)
|
Amortization
Period
(in years)
|
|||||||
|
Stock
options
|
$ | 8,522 | 2.39 | |||||
|
Restricted
common stock
|
$ | 311 | 0.53 | |||||
|
Restricted
stock units
|
$ | 8,508 | 2.55 | |||||
|
Performance
stock units
|
$ | 1,220 | 2.09 | |||||
Stock-Based Compensation
Assumptions and Vesting Requirements
Determining
the appropriate fair value model and calculating the fair value of stock-based
payment awards require the input of highly subjective assumptions, including the
expected life, expected stock price volatility, and the number of expected
options, restricted stock units, restricted common stock or performance stock
units that will be forfeited prior to the completion of the vesting
requirements. We use the Black-Scholes and binomial lattice-based valuation
pricing models to value our stock-based awards.
Expected
Life
Due to
our limited public company history, the expected life for stock-based awards
granted before December 31, 2007 was determined based on the “simplified” method
under the provisions of ASC Topic 718-10, Compensation – Stock
Compensation. Beginning with options granted in 2008 the expected life
was determined based upon the experience of similar entities whose shares are
publicly traded, with the exception of options granted under the Stock Option
Exchange Program (“SOEP”). We continue to apply this expected life methodology
to future award grants.
The
expected life under the SOEP was determined with the assistance of an
independent third party by means of Monte-Carlo simulations of future stock
price based upon “in-the-money”, vesting schedule, contractual term, current
life to date and applied an annual termination rate (after vesting) to the
outstanding options in the simulation to reflect the probability of exercise
behavior. For further information on the SOEP, please refer to Note 11 in the
accompanying notes to the consolidated financial statements included in this
Annual Report on Form 10-K.
Expected Stock Price
Volatility
Due to
our limited public company history, the expected volatility for stock-based
awards granted before September 2009 was determined based on the expected
volatility and of similar entities whose shares are publicly traded. Beginning
in September 2009, we began estimating our expected volatility using a
time-weighted average of our historical volatility in combination with the
historical volatility of similar entities whose common shares are publicly
traded. We continued to apply this volatility methodology to future award
grants.
Risk-Free Interest Rate and
Dividend Yield
The
risk-free interest rates used for all stock-based awards granted were the actual
U.S. Treasury zero-coupon rates for bonds matching our expected life of an
option on the date of grant.
The
expected dividend yield is not applicable to any stock-based awards granted as
we have not paid any dividends and intend to retain any future earnings for use
in our business.
32
Option Vesting
Requirements
Options
granted generally vest over a period of four years (three years for directors)
from the vesting commencement date, with the exception of options granted under
the SOEP. Options granted generally expire seven years from the date of grant,
except for stock options granted prior to July 11, 2007, which expire ten years
from the date of grant. Options to the extent unvested, expire on the date of
termination of employment, and to the extent vested, generally expire at the end
of the three-month period following termination of employment, except in the
case of executive officers, who under certain conditions have a twelve-month
period following termination of employment to exercise. Exchanged options
granted under the SOEP will vest 25% after six months from the new grant date,
25% twelve months from the new grant date, and 1/48 from the new options grant
date each month thereafter.
Restricted Common Stock and
Restricted Stock Unit Vesting Requirements
Restricted
common stock and restricted stock unit’s granted are generally subject to an
annual cliff vest of four years (one year for directors) from the
vesting commencement date, with the exception of the Long-Term Incentive Plan
(“LTIP”) and performance stock unit awards (noted below).
LTIP and Performance Stock
Unit Vesting Requirements
The LTIP
awards were earned upon the achievement of EBITDA and market-based targets for
the fiscal years 2007, 2008 and 2009 and the grantee’s continuous employment in
active service until January 31, 2010.
The
performance stock unit awards are earned upon the achievement of adjusted net
income and total shareholder return targets and the grantee’s continuous
employment in active service until January 31, 2013.
Application
of alternative assumptions could produce significantly different estimates of
the fair value of stock-based compensation and consequently, the related amounts
recognized in our consolidated statements of operations.
Fair
Value Measurements
Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Inputs used to measure fair value
are prioritized into a three-level fair value hierarchy. This hierarchy requires
entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair values are
as follows:
|
|
·
|
Level
1 – Quoted prices (unadjusted) in active markets that are accessible at
the measurement date for assets or liabilities. The fair value hierarchy
gives the highest priority to Level 1
inputs.
|
|
|
·
|
Level
2 – Observable prices that are based on inputs not quoted on active
markets, but corroborated by market
data.
|
|
|
·
|
Level
3 – Unobservable inputs are used when little or no market data is
available. The fair value hierarchy gives the lowest priority to Level 3
inputs.
|
We have
segregated all financial assets that are measured at fair value on a recurring
basis into the most appropriate level within the fair value hierarchy based on
the inputs used to determine the fair value at the measurement date in the table
below.
33
Financial
assets measured at fair value on a recurring basis include the following as of
December 31, 2010 and 2009 (in thousands):
|
As of December 31, 2010
|
Quoted Prices in
Active Markets
(Level 1)
|
Significant Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
December 31,
2010
|
||||||||||||
|
Cash
equivalents (1)
|
$ | 139,010 | $ | — | $ | — | $ | 139,010 | ||||||||
|
Short-term
investments (3) (4)
|
40 | — | 450 | 490 | ||||||||||||
|
Long-term
investments (5)
|
— | — | 2,254 | 2,254 | ||||||||||||
|
Total
|
$ | 139,050 | $ | — | $ | 2,704 | $ | 141,754 | ||||||||
|
As of December 31, 2009
|
Quoted Prices in
Active Markets
(Level 1)
|
Significant Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
December 31,
2009
|
||||||||||||
|
Cash
equivalents (1) (2)
|
$ | 163,615 | $ | — | $ | — | $ | 163,615 | ||||||||
|
Short-term
investments (3)
|
1,484 | — | — | 1,484 | ||||||||||||
|
Long-term
investments (4) (5)
|
— | — | 3,971 | 3,971 | ||||||||||||
|
Total
|
$ | 165,099 | $ | — | $ | 3,971 | $ | 169,070 | ||||||||
|
(1)
|
Cash
equivalents consist primarily of money market funds with original maturity
dates of three months or less, for which we determine fair value through
quoted market prices.
|
|
(2)
|
In
our Quarterly Report on Form 10-Q for the three months ended March 31,
2010, Level 1 cash equivalents of approximately $163.6 million as of
December 31, 2009 was revised from $127.6 million as previously disclosed
in the fair value measurement footnote in our Annual Report on Form 10-K
for the year ended December 31, 2009 filed with the SEC on February
24, 2010 to reflect the inclusion of a money market account held at
December 31, 2009 that was incorrectly omitted from our original footnote
disclosure. Amounts classified as cash and cash equivalents on our audited
balance sheet at December 31, 2009 were correctly
stated.
|
|
(3)
|
As
of December 31, 2010 and 2009, Level 1 short-term investments include
investments in tax-advantaged preferred securities, for which we
determined fair value based on the quoted market prices of underlying
securities. During the year ended December 31, 2010, we sold a portion of
our Level 1 investments in tax-advantaged preferred securities for
approximately $1.4 million and recorded a gain in the statement of
operations of approximately $0.6
million.
|
|
(4)
|
Level
3 investments include an auction rate security (“ARS”) invested in a
tax-exempt state government obligation that was valued at par with a value
of $0.4 million, or 0.1% of our total assets, and $1.6 million, or 0.3% of
our total assets, as of December 31, 2010 and 2009, respectively. Our
intent is not to hold the ARS invested in a tax-exempt state government
obligation to maturity, but rather to use the interest reset feature to
provide liquidity. However, should the marketplace auctions continue to
fail we may hold the security to maturity. As of December 31, 2009, we
classified this as long-term due to the maturity date of the security
being September 2011, coupled with ongoing failed auctions in the
marketplace. As of December 31, 2010, this security was re-classified to
short-term due to the maturity date of September 2011. In October 2010,
approximately $1.1 million of this security was redeemed by the issuer at
par.
|
|
(5)
|
Level
3 long-term investments include a tax-advantaged preferred stock of a
financial institution with a fair value of $2.3 million, or 0.5% of our
total assets and $2.4 million, or 0.5% of our total assets, as of December
31, 2010 and 2009, respectively. It is uncertain whether we will be able
to liquidate these securities within the next twelve months; as such we
have classified them as long-term on our consolidated balance sheets. Due
to the lack of observable market quotes we utilized valuation models that
rely exclusively on Level 3 inputs including those that are based on
expected cash flow streams, including assessments of counterparty credit
quality, default risk underlying the security, discount rates and overall
capital market liquidity.
|
34
A
reconciliation of the beginning and ending balances of Level 3 investments as of
December 31, 2009 and 2010, is as follows (in thousands):
|
Balance
as of January 1, 2009
|
$ | 1,550 | ||
|
Reclassification
from Level 2 investments to Level 3 investments (6)
|
1,360 | |||
|
Realized
gain on securities included in the statement of operations
(6)
|
716 | |||
|
Unrealized
gain on securities recorded in other comprehensive income
(6)
|
345 | |||
|
Balance
as of December 31, 2009
|
$ | 3,971 | ||
|
Unrealized
loss on securities recorded in other comprehensive income
(6)
|
(167 | ) | ||
|
Partial
redemption of auction rate security (4)
|
(1,100 | ) | ||
|
Balance
as of December 31, 2010
|
$ | 2,704 |
|
(6)
|
Level
2 investments in certain tax-advantaged preferred stock trusts held as of
January 1, 2009 dissolved and the underlying preferred stock investments
were distributed during 2009. As a result of these dissolutions, we
measured the fair value of the Level 3 long-term tax-advantaged preferred
stock on the distribution date and determined that the value increased
from $1.4 million as of December 31, 2008 to $2.1 million on the
distribution date and as a result we recorded a realized gain in the
statement of operations of $0.7 million. Subsequent to the trust
dissolution, we re-measured the fair value on December 31, 2009 and 2010
and determined that the value had increased and recorded a gain in other
comprehensive income of $0.3 million and approximately $0.2 million,
respectively. The total value of the tax-advantaged preferred stock of a
financial institution included in the $4.0 million of Level 3 investments
as of December 31, 2009 is $2.4 million. The total value of the
tax-advantaged preferred stock of a financial institution included in the
$2.7 million of Level 3 investments as of December 31, 2010 is $2.3
million.
|
2008
Other-than-temporary impairment charge
During the year ended December 31, 2008, we recorded
an other-than-temporary impairment charge related to certain ARS invested in
tax-advantaged preferred stock trusts in which the underlying equities are
preferred stock. Based upon our assessment we reduced the fair value of the
investments in the preferred stock from $9.6 million to $3.7 million and
recorded an other-than-temporary charge of $6.0 million to earnings. These ARS
were associated with failed auctions.
Realignment
of Workforce and Business
On
January 5, 2009, we announced a realignment of our workforce and business aimed
at sharpening our focus on high growth opportunities and to reflect current
market conditions. We reduced our workforce by approximately 90 people, or 8% of
our total employees, including several executive and senior-level positions. As
a result of the realignment, we incurred total restructuring costs during the
three months ended March 31, 2009 of approximately $6.7 million, including
approximately $3.9 million of net non-cash compensation expense.
The table
below sets forth the significant cash components and activity associated with
the realignment of workforce and business under the restructuring program for
the year ended December 31, 2009 (in thousands):
|
Balance as of
January 1, 2009
|
Charges
|
Cash Payments
|
Balance as of
December 31, 2009
|
|||||||||||||
|
Severance
|
$ | — | $ | 2,683 | $ | 2,683 | $ | — | ||||||||
|
Other
benefits
|
— | 156 | 156 | — | ||||||||||||
|
Total
|
$ | — | $ | 2,839 | $ | 2,839 | $ | — | ||||||||
35
Results
of Operations
The
following table sets forth the selected consolidated statements of operations
for the periods indicated:
|
Year Ended December 31,
|
||||||||||||||||||||||||
|
2010
|
2009
|
2008
|
||||||||||||||||||||||
|
$ Amount
|
% of Net
Revenue
|
$ Amount
|
% of Net
Revenue
|
$ Amount
|
% of Net
Revenue
|
|||||||||||||||||||
|
(in thousands, except percentages)
|
||||||||||||||||||||||||
|
Consolidated
Statements of Operations:
|
||||||||||||||||||||||||
|
Net
revenue
|
$ | 243,826 | 100.0 | % | $ | 225,626 | 100.0 | % | $ | 242,706 | 100.0 | % | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||
|
Cost
of revenue (1)
|
124,070 | 50.9 | 113,875 | 50.5 | 113,731 | 46.9 | ||||||||||||||||||
|
Product
development (1)
|
13,386 | 5.5 | 13,994 | 6.2 | 11,658 | 4.8 | ||||||||||||||||||
|
Selling,
general and administrative (1)
|
105,715 | 43.3 | 108,707 | 48.2 | 110,265 | 45.4 | ||||||||||||||||||
|
Total
operating expenses
|
243,171 | 99.7 | 236,576 | 104.9 | 235,654 | 97.1 | ||||||||||||||||||
|
Income
(loss) from operations
|
655 | 0.3 | (10,950 | ) | (4.9 | ) | 7,052 | 2.9 | ||||||||||||||||
|
Interest
income
|
525 | 0.2 | 1,081 | 0.5 | 4,720 | 1.9 | ||||||||||||||||||
|
Interest
expense
|
(175 | ) | (0.1 | ) | (221 | ) | (0.1 | ) | (324 | ) | (0.1 | ) | ||||||||||||
|
Other
income, net
|
1,177 | 0.5 | 844 | 0.4 | 205 | 0.1 | ||||||||||||||||||
|
Realized
gain (loss) on securities
|
582 | 0.2 | 1,393 | 0.6 | (5,956 | ) | (2.4 | ) | ||||||||||||||||
|
Income
(loss) before (provision for) benefit from income taxes
|
2,764 | 1.1 | (7,853 | ) | (3.5 | ) | 5,697 | 2.4 | ||||||||||||||||
|
(Provision
for) benefit from income taxes, net
|
(30,597 | ) | (12.5 | ) | 3,519 | 1.6 | (3,961 | ) | (1.7 | ) | ||||||||||||||
|
Net
(loss) income
|
$ | (27,833 | ) | (11.4 | )% | $ | (4,334 | ) | (1.9 | )% | $ | 1,736 | 0.7 | % | ||||||||||
(1)
Stock-based compensation expense recorded for the years ended December 31, 2010,
2009 and 2008 was classified as follows:
|
Year Ended December 31,
|
||||||||||||||||||||||||
|
2010
|
2009
|
2008
|
||||||||||||||||||||||
|
$ Amount
|
% of Net
Revenue
|
$ Amount
|
% of Net
Revenue
|
$ Amount
|
% of Net
Revenue
|
|||||||||||||||||||
|
(in thousands, except percentages)
|
||||||||||||||||||||||||
|
Cost
of revenue
|
$ | 1,640 | 0.7 | % | $ | 2,354 | 1.0 | % | $ | 2,497 | 1.0 | % | ||||||||||||
|
Product
development
|
614 | 0.3 | 755 | 0.3 | 712 | 0.3 | ||||||||||||||||||
|
Selling,
general and administrative
|
8,979 | 3.7 | 13,880 | 6.2 | 10,782 | 4.4 | ||||||||||||||||||
36
Years
Ended December 31, 2010 and 2009
Revenue
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
|
(in
thousands, except percentages)
|
||||||||||||||||
|
Transaction
services revenue
|
$ | 102,000 | $ | 94,406 | $ | 7,594 | 8 | % | ||||||||
|
Subscription
services revenue
|
123,547 | 114,931 | 8,616 | 7 | % | |||||||||||
|
Other
|
18,279 | 16,289 | 1,990 | 12 | % | |||||||||||
|
Total
net revenue
|
$ | 243,826 | $ | 225,626 | $ | 18,200 | 8 | % | ||||||||
Total net
revenue increased $18.2 million, or 8%, to $243.8 million for the year
ended December 31, 2010 from $225.6 million for the year ended
December 31, 2009.
Transaction Services Revenue.
Transaction services revenue increased $7.6 million, or 8%, to
$102.0 million for the year ended December 31, 2010 from
$94.4 million for the year ended December 31, 2009. The increase in
transaction revenue is due to improving credit markets, an increase in
automobile sales and the addition of Ally to our lender network. As seen in the
table below, these industry trends had a positive impact on many of our key
business metrics for the year ended December 31, 2010 as compared to the same
period in 2009.
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
|
Average
transaction price (excludes impact of contra-revenue)
|
$ | 2.10 | $ | 1.84 | $ | 0.26 | 14 | % | ||||||||
|
Active
lenders in our network as of end of period
|
970 | 823 | 147 | 18 | % | |||||||||||
|
Active
lender to dealer relationships (“LDRs”)
|
137,058 | 118,209 | 18,849 | 16 | % | |||||||||||
|
Transactions
processed (in thousands, except percentages)
|
49,373 | 51,402 | (2,029 | ) | (4 | )% | ||||||||||
Our
average transaction price increased 14% which resulted in a $12.8 million
increase in revenue; this increase was partially offset by a $3.7 million
decrease due to a 4% decline in the volume of transactions processed through the
DealerTrack network, and $1.6 million in contra-revenue related to revenue
earned from our strategic relationship with Ally recorded during the year ended
December 31, 2010. Contributing factors to the increase in average transaction
price and decrease in the number of transactions processed were the significant
decrease in revenue generating credit bureau transactions that impacted the
number of transactions, but did not materially impact revenue due to their low
price point; the decrease in transactions processed through the DealerTrack
network was negatively impacted by an increase in demand in the third quarter of
2009 due to the cash for clunkers program; an 18% increase in lender customers
active on our network who are generally lower transaction volume customers with
a higher price per transaction; and a 16% increase in our number of LDRs. The
increase in our number of LDRs was impacted, in part, by our strategic
relationship with Ally.
Subscription Services
Revenue. Subscription services revenue increased $8.6 million, or
7%, to $123.5 million for the year ended December 31, 2010 from
$114.9 million for the year ended December 31, 2009. The increase in
subscription revenue is due to the following improvements in our key business
metrics for the year ended December 31, 2010 as compared to the same period in
2009.
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
|
Average
monthly spend per subscribing dealer
|
$ | 749 | $ | 676 | $ | 73 | 11 | % | ||||||||
|
Subscribing
dealers in our network as of end of the period
|
13,996 | 13,852 | 144 | 1 | % | |||||||||||
The 11%
increase in average monthly spend per subscribing dealer contributed $12.1
million to subscription services revenue, offset by a decrease of $3.5 million
related to a decline in the average number of subscribing dealers in our
network. The increase in average monthly spend per subscribing dealer is
primarily due to the continued success of selling DMS, inventory management and
compliance solutions, including our ability to cross sell those solutions to
existing customers and by the cancellation of a disproportionate number of lower
priced subscriptions as dealerships consolidate, go out of business, or
cut-costs.
Other Revenue. Other revenue
increased $2.0 million, or 12%, to $18.3 million for the year ended
December 31, 2010 from $16.3 million for the year ended December 31, 2009. The
$2.0 million increase was primarily due to an increase in training and
consulting revenue and hardware sales from our DMS business.
37
Operating
Expenses
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
|
(in
thousands, except percentages)
|
||||||||||||||||
|
Cost
of revenue
|
$ | 124,070 | $ | 113,875 | $ | 10,195 | 9 | % | ||||||||
|
Product
development
|
13,386 | 13,994 | (608 | ) | (4 | )% | ||||||||||
|
Selling,
general and administrative
|
105,715 | 108,707 | (2,992 | ) | (3 | )% | ||||||||||
|
Total
operating expenses
|
$ | 243,171 | $ | 236,576 | $ | 6,595 | 3 | % | ||||||||
Cost of Revenue. Cost
of revenue increased $10.2 million, or 9%, to $124.1 million for the year
ended December 31, 2010 from $113.9 million for the year ended
December 31, 2009. The $10.2 million increase was primarily the result
of a $3.2 million increase in technology expense, which includes hosting
expenses, technology support and other consulting expenses, $1.6 million in
third party costs related to an increase in the number of subscriptions sold for
our compliance and inventory management solutions, $1.1 million in increased
hardware costs on equipment sales and maintenance costs associated with our DMS
solution, $1.8 million in increased temporary labor and shipping costs as a
result of growing volume of eDocs transactions, an increase of $1.3 million in
amortization and depreciation charges and an increase of $4.6 million in salary
compensation and related benefit costs primarily due to headcount additions and
an increase in payroll and other taxes. These changes were partially offset by a
decrease of $2.0 million in bonus compensation, a decrease of $0.4 million
primarily due to severance and related benefit costs paid in the first quarter
of 2009 resulting from the realignment of our workforce and business, a decrease
of $0.4 million in revenue share and a decrease of $0.7 million in stock-based
compensation expense.
Product Development Expenses.
Product development expenses decreased $0.6 million, or 4%, to $13.4 million for
the year ended December 31, 2010 from $14.0 million for the year ended
December 31, 2009. The $0.6 million decrease was primarily a result of a
reduction in bonus and other discretionary compensation of $0.6 million and $0.2
million of severance and related benefit costs paid in the first quarter of 2009
resulting from the realignment of our workforce and business. These changes were
partially offset by an increase of $0.4 million in salary compensation and
related benefit costs primarily due to headcount additions and an increase in
payroll and other taxes.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses decreased $3.0
million, or 3%, to $105.7 million for the year ended December 31, 2010 from
$108.7 million for year ended December 31, 2009. The $3.0 million
decrease in selling, general and administrative expenses was primarily the
result of a $6.1 million severance and stock-based compensation charge recorded
during the first quarter of 2009 resulting from the realignment of our workforce
and business. Additionally, there were decreases of $0.9 million in bad debt
expense due to successful collections efforts and as fewer dealerships
consolidate or go out of business, $1.4 million in bonus compensation expense,
$1.5 million in selling and marketing expenses due to continued cost containment
efforts, $1.0 million in stock-based compensation expense, $1.3 million of
professional fees related to decreased consulting services and litigation, $0.7
million in deal related costs, and $1.0 million of additional consideration
related to the acquisition of AutoStyleMart, Inc. that was recorded during the
three months ended September 30, 2009. These changes were partially offset by
$8.0 million of increased salary compensation and related benefit costs
primarily due to general and acquired headcount additions, severance, commission
and an increase in payroll and other taxes, $1.3 million in travel related
expenses, $0.5 million in office and computer related supplies and materials
resulting from headcount additions and increased replacement supplies and
equipment needs, $0.3 million in depreciation expense, $0.2 million in temporary
labor costs primarily associated with our DMS business, and a $0.2 million gain
from the sale of the SCS business in 2009, which was classified as a contra
expense in SG&A.
Interest
Income
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
|
(in
thousands, except percentages)
|
||||||||||||||||
|
Interest
Income
|
$ | 525 | $ | 1,081 | $ | (556 | ) | (51 | )% | |||||||
Interest
income decreased $0.6 million, or 51%, to $0.5 million for the year ended
December 31, 2010 from $1.1 million for the year ended
December 31, 2009. The $0.6 million decrease is primarily related to the
decline in our weighted average interest rate to approximately 0.3% for the year
ended December 31, 2010 from approximately 0.7% for the year ended December 31,
2009.
38
Other
Income
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
|
(in
thousands, except percentages)
|
||||||||||||||||
|
Other
income
|
$ | 1,177 | $ | 844 | $ | 333 | 39 | % | ||||||||
Other
income increased $0.3 million, or 39%, to $1.2 million for the year ended
December 31, 2010 from $0.8 million for the year ended
December 31, 2009. The $0.3 million increase is primarily due to $0.8
million of income earned from our sales solution resulting from non-recurring
activities outside its ordinary operations and a settlement of $0.4 million
received during the first quarter of 2010 related to the cancellation of a
services agreement for our eDocs business. These changes were partially offset
by decreases of $0.6 million due to a reversal of a pre-acquisition sales tax
liability and $0.2 million relating to a settlement received from a lender that
exited the indirect lending market in Canada and terminated their
contract.
Realized
Gain on Securities
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
|
(in
thousands, except percentages)
|
||||||||||||||||
|
Realized
gain on securities
|
$ | 582 | $ | 1,393 | $ | (811 | ) | (58 | )% | |||||||
During
the year ended December 31, 2010, we sold a portion of our investments in
tax-advantaged preferred securities for approximately $1.4 million and recorded
a gain in the statement of operations of approximately $0.6 million. For the
year ended December 31, 2009, the gain on securities of $1.4 million is
primarily due to the sale of a portion of our investments in tax-advantaged
preferred securities for approximately $2.1 million which resulted in a gain
recorded in the statement of operations of approximately $0.9 million. For further information,
please refer to Note 3 in the accompanying notes to the consolidated
financial statements included in this Annual Report on Form 10-K.
(Provision for) Benefit from Income
Taxes, net
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2010
|
2009
|
$ Amount
|
Percent
|
|||||||||||||
|
|
(in
thousands, except percentages)
|
|||||||||||||||
|
(Provision
for) benefit from income taxes, net
|
$ | (30,597 | ) | $ | 3,519 | $ | (34,116 | ) | (969 | )% | ||||||
The net
provision for income taxes for the year ended December 31, 2010 of
$30.6 million consisted primarily of the recognition of a U.S. deferred tax
valuation allowance of $28.4 million, $2.1 million of state income tax expense
and $2.2 million of tax expense for our Canadian subsidiary, partially offset by
$2.1 million of federal income tax benefit. The primary component of the federal
income tax benefit of $2.1 million is the result of tax loss carry backs. The
benefit for income taxes for the year ended December 31, 2009 of
$3.5 million consisted primarily of $5.5 million of federal income tax
benefit and $1.6 million of state income tax benefit, offset by $3.6 million of
tax expense for our Canadian subsidiary. Included in tax expense for our
Canadian subsidiary for the years ended December 31, 2010 and 2009 is $0.7
million, for a permanent item relating to intangible amortization. These amounts
have a 27.0% and 8.9% impact on the effective tax rate for the year ended
December 31, 2010 and 2009, respectively. Our effective tax rate for the year
ended December 31, 2010 is 1,107.0% compared with 44.8% for the year ended
December 31, 2009.
While we
have been forecasting sufficient U.S. book taxable income in future periods, we
are currently in a three-year cumulative pretax book loss position in the United
States. In connection with the acquisition of triVIN we expect the
amortization expense associated with the acquired intangibles will negatively
impact our future U.S. income streams. Due to the negative impact from the
amortization expense associated with the acquired triVIN intangibles we
determined that the ultimate realization of deferred tax assets for U.S. federal
and state income tax purposes was not considered more likely than not, primarily
due to limited taxable income in the federal carry back period, anticipated
insufficient future taxable income and cumulative U.S. book losses incurred in
recent years. As a result of cumulative U.S. book losses incurred in recent
years and uncertainty as to the extent and timing of profitability in future
periods, we recorded a full valuation allowance of $28.4 million against our net
U.S. deferred tax assets, excluding deferred tax liabilities related to
indefinite-lived assets for the year ended December 31, 2010.
As a
result of establishing a full valuation allowance against our net
U.S. deferred tax assets, excluding deferred tax liabilities related to
indefinite-lived assets, we did not recognize any deferred tax benefits related
to U.S. net losses incurred during the year ended December 31, 2010. We
will maintain a full valuation allowance on our net U.S. deferred tax assets
until sufficient positive evidence exists to support reversal of the valuation
allowance.
39
Years
Ended December 31, 2009 and 2008
Revenue
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2009
|
2008
|
$ Amount
|
Percent
|
|||||||||||||
|
(in
thousands, except percentages)
|
||||||||||||||||
|
Transaction
services revenue
|
$ | 94,406 | $ | 132,419 | $ | (38,013 | ) | (29 | )% | |||||||
|
Subscription
services revenue
|
114,931 | 94,690 | 20,241 | 21 | % | |||||||||||
|
Other
|
16,289 | 15,597 | 692 | 4 | % | |||||||||||
|
Total
net revenue
|
$ | 225,626 | $ | 242,706 | $ | (17,080 | ) | (7 | )% | |||||||
Total
net revenue decreased $17.1 million, or 7%, to $225.6 million for the
year ended December 31, 2009 from $242.7 million for the year ended
December 31, 2008.
Transaction Services
Revenue. Transaction services revenue decreased $38.0 million, or
29%, to $94.4 million for the year ended December 31, 2009 from
$132.4 million for the year ended December 31, 2008. The decrease in
transaction revenue was due to the negative trends in the economy, including
availability of credit and record low automobile sales. As seen in the table
below, these negative trends adversely impacted many of our key business metrics
for the year ended December 31, 2009 as compared to the same period in 2008,
namely active lender to dealer relationships and transactions
processed.
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2009
|
2008
|
Amount
|
Percent
|
|||||||||||||
|
Average
transaction price
|
$ | 1.84 | $ | 1.66 | $ | 0.18 | 11 | % | ||||||||
|
Active
lenders in our network as of end of period
|
823 | 733 | 90 | 12 | % | |||||||||||
|
Active
lender to dealer relationships (“LDRs”)
|
118,209 | 156,437 | (38,228 | ) | (24 | )% | ||||||||||
|
Transactions
processed (in thousands, except percentages)
|
51,402 | 79,655 | (28,253 | ) | (35 | )% | ||||||||||
The
volume of transactions processed through the DealerTrack network decreased 35%
which resulted in a $46.9 million decline in revenue; this decrease was
partially offset by a $9.3 million increase in revenue due to an 11% increase in
our average transaction price. Contributing factors to the decrease in the
number of transactions processed and the increase in average transaction price
were the significant decrease in revenue generating credit bureau transactions
which impacted the number of transactions, but did not materially impact revenue
due to their low price point; a 24% decrease in the number of LDRs, and a 12%
increase in lender customers active in our network who are generally lower
transaction volume customers with a higher price per transaction. In addition,
the tightening of the credit market together with the continual decline in
vehicle sales, increased market share of captive lenders, and in particular
captive lenders not on the DealerTrack network, and independent finance
companies and credit unions collectively losing share, caused a meaningful
impact on our transaction volume compared to historical levels. The decrease in
LDRs was primarily due to lenders continuing to exit the auto financing market,
lenders limiting the number of dealers they lend through and dealership
closings.
Subscription Services
Revenue. Subscription services revenue increased $20.2 million, or
21%, to $114.9 million for the year ended December 31, 2009 from
$94.7 million for the year ended December 31, 2008. The increase in
subscription revenue was due to the following changes in our key business
metrics for the year ended December 31, 2009 as compared to the same period in
2008.
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2009
|
2008
|
Amount
|
Percent
|
|||||||||||||
|
Average
monthly spend per subscribing dealer
|
$ | 676 | $ | 550 | $ | 126 | 23 | % | ||||||||
|
Subscribing
dealers in our network as of end of the period
|
13,852 | 14,342 | (490 | ) | (3 | )% | ||||||||||
The 23%
increase in the average monthly spend per subscribing dealer contributed $21.3
million to subscription services revenue, offset by a decrease of $1.1 million
related to the decline in the average number of subscribing dealer in our
network. The increase in average monthly spend per subscribing dealer was
positively impacted by the acquisition of AAX, and the continued success selling
our DMS solution, including our ability to cross sell existing customers and by
the cancellation of a disproportionate number of lower priced subscriptions as
dealerships consolidated, went of business, or cut-costs. Subscription revenue
includes $14.3 million related to acquired
customers.
40
Other Revenue. Other revenue
increased $0.7 million, or 4%, to $16.3 million for the year ended December
31, 2009 from $15.6 million for the year ended December 31, 2008. The $0.7
million increase was primarily due to a $1.7 million increase in forms
programming, data conversion and training revenue from our DMS business, offset
by a decrease of $0.4 million in revenue associated with our SCS business which
we exited in February 2009 and a decrease in ALG consulting and analytical
revenue of $0.5 million.
Operating
Expenses
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2009
|
2008
|
$ Amount
|
Percent
|
|||||||||||||
|
(in
thousands, except percentages)
|
||||||||||||||||
|
Cost
of revenue
|
$ | 113,875 | $ | 113,731 | $ | 144 | 0 | % | ||||||||
|
Product
development
|
13,994 | 11,658 | 2,336 | 20 | % | |||||||||||
|
Selling,
general and administrative
|
108,707 | 110,265 | (1,558 | ) | (1 | )% | ||||||||||
|
Total
operating expenses
|
$ | 236,576 | $ | 235,654 | $ | 922 | 0 | % | ||||||||
Cost of Revenue. Cost
of revenue increased $0.2 million to $113.9 million for the year ended
December 31, 2009 from $113.7 million for the year ended
December 31, 2008. The $0.2 million increase was primarily the result
of increased bonus compensation of $2.7 million, increases in salary
compensation and related benefits of $1.5 million related to the acquisition of
AAX and $0.5 million primarily due to headcount additions, $0.4 million
primarily due to severance and related benefit costs paid in the first quarter
of 2009 resulting from the realignment of our workforce and business, increased
technology expense of $1.9 million which includes hosting expenses,
technology support, and other consulting expenses, $0.6 million in software
amortization and depreciation charges, $3.5 million in third party costs related
to our compliance and inventory management solutions as a result of the
acquisition of AAX, $0.9 million in compensation related to an increase in
installation headcount and hardware costs associated with our DMS product
offering, and $0.4 million in costs due to opening of a second processing
facility in Memphis, Tennessee for our eDocs solution. These changes were
partially offset by a decrease in salary compensation and related benefit costs
of $2.6 million due to the sale of the SCS business in 2009, decrease in
amortization of intangible assets of approximately $6.6 million resulting
from fully amortized acquired intangibles, and an increase in amortization of
intangible assets during the year ended December 31, 2008 of approximately $1.9
million related to an impaired application processing contract with a service
provider where the remaining amortization was accelerated and recorded to cost
of revenue. Additionally, there were decreases in revenue share expenses of $2.1
million, cost of revenue for eContracting of $0.5 million due to a decrease in
revenue as a result of decreased volume, and $0.3 million in marketing expenses
due to continued cost containment efforts.
Product Development Expenses.
Product development expenses increased $2.3 million, or 20%, to $14.0 million
for the year ended December 31, 2009 from $11.7 million for the year
ended December 31, 2008. The $2.3 million increase was primarily a result
of increased bonus compensation of $0.8 million, an increase of $0.2 million
primarily due to severance and related benefit costs paid in the first quarter
of 2009 resulting from the realignment of our workforce and business, an
increase of $1.9 million in salary compensation and related benefit costs
related to the acquisition of AAX. These changes were partially offset by
decreases in salary compensation and related benefits of $0.6 million related to
the sale of the SCS business in 2009 and $0.4 million primarily due to a 5%
reduction in base pay and no merit increases for employees in 2009.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses decreased $1.6
million, or 1%, to $108.7 million for the year ended December 31, 2009 from
$110.3 million for year ended December 31, 2008. The $1.6 million
decrease in selling, general and administrative expenses was primarily the
result of a decrease in professional fees of $6.6 million related primarily to
litigation, a decrease in salary compensation and related benefits of $6.4
million primarily due to a 5% reduction in base pay and no merit increases for
employees in 2009, a decrease of $1.9 million in marketing and travel
related expenses due to continued cost containment efforts, a decrease of $2.1
million in bad debt expense, a decrease in accounting and other professional
fees of $1.3 million, and a decrease of $0.6 million in public company costs
related primarily to recruiting fees paid in 2008 to search for a new member for
the board of directors, reduced compliance costs as a result of hiring internal
resources and a decrease in printing related costs, a decrease of $0.8 million
in stock-based compensation expense primarily due to cancellations during the
year and a decrease in expense from our employee stock purchase plan during
2009. These changes were partially offset by a $6.1 million severance and
stock-based compensation charge recorded during the first quarter of 2009
resulting from the realignment of our workforce and business. Additionally,
there were increases in salary compensation and related benefits of $6.0 million
related to the acquisition of AAX, bonus compensation of $1.8 million, $0.6
million in depreciation expense, $2.2 million of professional fees primarily due
to an increase in deal-related costs resulting from the acquisition of AAX and
another potential acquisition we decided not to complete, $0.8 million in
selling and an increase of $1.0 million of contingent earn-out compensation
expense relating to AutoStyleMart acquisition.
41
Interest
Income
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2009
|
2008
|
$ Amount
|
Percent
|
|||||||||||||
|
(in
thousands, except percentages)
|
||||||||||||||||
|
Interest
Income
|
$ | 1,081 | $ | 4,720 | $ | (3,639 | ) | (77 | )% | |||||||
Interest
income decreased $3.6 million to $1.1 million for the year ended
December 31, 2009 from $4.7 million for the year ended
December 31, 2008. The $3.6 million decrease is primarily related to the
decrease in our weighted average interest rate to approximately 0.7% for the
year ended December 31, 2009 from approximately 2.4% for the year ended December
31, 2008.
Other
Income
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2009
|
2008
|
$ Amount
|
Percent
|
|||||||||||||
|
(in
thousands, except percentages)
|
||||||||||||||||
|
Other
income
|
$ | 844 | $ | 205 | $ | 639 | 312 | % | ||||||||
Other
income increased $0.6 million to $0.8 million for the year ended
December 31, 2009 from $0.2 million for the year ended
December 31, 2008. The $0.6 million increase is primarily due to a reversal
of a pre-acquisition sales tax liability. The contingency was resolved
subsequent to the close of the purchase accounting allocation period, as such,
the $0.6 million was recorded as other income in the 2009 consolidated statement
of operations.
Realized
Gain (Loss) on Securities
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2009
|
2008
|
$ Amount
|
Percent
|
|||||||||||||
|
(in
thousands, except percentages)
|
||||||||||||||||
|
Realized
gain (loss) on securities
|
$ | 1,393 | $ | (5,956 | ) | $ | 7,349 | 123 | % | |||||||
For the
year ended December 31, 2009, the gain on securities of $1.4 million was
primarily due to the sale of a portion of our investments in tax-advantaged
preferred securities for approximately $2.1 million which resulted in a gain
recorded in the statement of operations of approximately $0.9 million. For further information,
please refer to Note 3 in the accompanying notes to the consolidated
financial statements included in this Annual Report on Form 10-K.
We
measured the fair value of our auction rate securities at each of the quarters
in 2008, and determined in the third and fourth quarters of 2008 that the
valuation of certain of our auction rate securities had significantly declined
from the previously reported amounts. As a result, we recognized a $6.0 million
impairment charge during the year ended December 31, 2008.
Benefit
from (Provision for) for Income Taxes, Net
|
Year Ended December 31,
|
Variance
|
|||||||||||||||
|
2009
|
2008
|
$ Amount
|
Percent
|
|||||||||||||
|
|
(in thousands, except
percentages)
|
|||||||||||||||
|
Benefit
from (provision for) income taxes, net
|
$ | 3,519 | $ | (3,961 | ) | $ | 7,480 | 189 | % | |||||||
The
benefit for income taxes for the year ended December 31, 2009 of
$3.5 million consisted primarily of $5.5 million of federal income tax
benefit and $1.6 million of state income tax benefit, offset by $3.6 million of
tax expense for our Canadian subsidiary. Included in our state income tax
benefit for the year ended December 31, 2009 is $1.1 million, net of reserves of
$0.3 million, for refunds receivable due to the filing of amended tax returns
for certain states. This had a 13.6% impact on the effective tax rate for
the year ended December 31, 2009. The provision for income taxes for the
year ended December 31, 2008 of $4.0 million consisted primarily of $0.7 million
of federal tax expense, $0.6 million of state income tax benefit, and $3.9
million of tax expense for our Canadian subsidiary. Included in tax expense for
our Canadian subsidiary for the year ended December 31, 2009 and 2008 is $0.7
million and $1.2 million, respectively, for a permanent item relating to
intangible amortization. These amounts had an 8.9% and 20.2% impact on the
effective tax rate for the year ended December 31, 2009 and 2008, respectively.
Our effective tax rate for the year ended December 31, 2009 was 44.8% compared
with 69.5% for the year ended December 31, 2008. The primary reason for the
variation in tax rates was the impairment loss on auction rate securities
recorded during the year ended December 31, 2008. No tax benefit was
recorded with respect to the impairment loss recorded on the auction rate
securities. If such securities were sold and the losses were realized for
tax purposes, the losses on such sales would be capital losses. Capital
losses generally may only be used to offset income from capital gains.
Since we did not anticipate any capital gains in the foreseeable future, no tax
benefit was recorded with respect to the impairment losses as it was not more
likely than not that tax benefits would ultimately be realized from such losses.
A full valuation allowance was booked for the losses. Had it not been for the
significant tax rate variation resulting from the impact of the impairment
losses, our effective tax rate for the year ended December 31, 2008 would have
been 34.0%. The primary reason for the increase in tax rate in 2009 compared to
the 2008 rate excluding the impact of the impairment losses, was the impact of
filing the amended income tax returns offset by the impact of rate changes on
deferred taxes, tax return true-ups, effect of foreign repatriation, and a
decrease in tax exempt or tax preferred income as a percentage of overall
pre-tax income.
42
Quarterly
Results of Operations
The
following table presents our unaudited quarterly consolidated results of
operations for each of the eight quarters ended December 31, 2010. The
unaudited quarterly consolidated information has been prepared substantially on
the same basis as our audited consolidated financial statements. You should read
the following tables presenting our quarterly consolidated results of operations
in conjunction with our audited consolidated financial statements for our full
years and the related notes. This table includes all adjustments, consisting
only of normal recurring adjustments, that we consider necessary for the fair
statement of our consolidated financial position and operating results for the
quarters presented. The operating results for any quarters are not necessarily
indicative of the operating results for any future period.
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
(in
thousands, except for share and per share data)
|
||||||||||||||||
|
2010
|
||||||||||||||||
|
Net
revenue
|
$ | 56,785 | $ | 61,907 | $ | 63,128 | $ | 62,006 | ||||||||
|
Gross
profit
|
26,068 | 30,642 | 31,444 | 31,602 | ||||||||||||
|
Operating
(loss) income
|
(4,938 | ) | 43 | 2,411 | 3,139 | |||||||||||
|
Net
(loss) income
|
(2,451 | ) | (117 | ) | 1,182 | (26,447 | ) | |||||||||
|
Basic
net (loss) income per share applicable to common stockholders
(1)
|
$ | (0.06 | ) | $ | (0.00 | ) | $ | 0.03 | $ | (0.65 | ) | |||||
|
Diluted
net (loss) income per share applicable to common stockholders
(1)
|
$ | (0.06 | ) | $ | (0.00 | ) | $ | 0.03 | $ | (0.65 | ) | |||||
|
Weighted
average common stock outstanding (basic)
|
40,154,275 | 40,271,983 | 40,404,126 | 40,595,939 | ||||||||||||
|
Weighted
average shares common stock outstanding (diluted)
|
40,154,275 | 40,271,983 | 41,354,680 | 40,595,939 | ||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Quarter (2)
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
(in
thousands, except for share and per share data)
|
||||||||||||||||
|
2009
|
||||||||||||||||
|
Net
revenue
|
$ | 55,700 | $ | 57,870 | $ | 58,809 | $ | 53,247 | ||||||||
|
Gross
profit
|
26,579 | 29,018 | 30,144 | 26,010 | ||||||||||||
|
Operating
(loss) income
|
(9,871 | ) | 224 | 1,282 | (2,585 | ) | ||||||||||
|
Net
(loss) income
|
(5,625 | ) | 2,187 | (215 | ) | (681 | ) | |||||||||
|
Basic
net (loss) income per share applicable to common stockholders
(1)
|
$ | (0.14 | ) | $ | 0.05 | $ | (0.01 | ) | $ | (0.02 | ) | |||||
|
Diluted
net (loss) income per share applicable to common stockholders
(1)
|
$ | (0.14 | ) | $ | 0.05 | $ | (0.01 | ) | $ | (0.02 | ) | |||||
|
Weighted
average common stock outstanding (basic)
|
39,095,730 | 39,499,313 | 39,705,553 | 39,787,985 | ||||||||||||
|
Weighted
average shares common stock outstanding (diluted)
|
39,095,730 | 40,458,174 | 39,705,553 | 39,787,985 | ||||||||||||
|
(1)
|
The addition of earnings per
share by quarter may not equal total earnings per share for the
year.
|
|
(2)
|
Included
in the first quarter of 2009 net loss is a restructuring cost of
approximately $6.7 million, including approximately $3.9 million of net
non-cash compensation expense, related to the realignment of our workforce
and business on January 5, 2009. For further information, please refer to
Note 15 in the accompanying notes to the consolidated financial statements
included in this Annual Report on Form
10-K.
|
43
Liquidity
and Capital Resources
Our
liquidity requirements will continue to be for working capital, acquisitions,
capital expenditures and general corporate purposes. Our capital expenditures,
software and website development costs for the year ended December 31, 2010
were $30.9 million, of which $27.7 million was in cash. We expect to
finance our future liquidity needs through working capital and cash flows from
operations, however future acquisitions or other strategic initiatives may
require us to incur or seek additional financing. Additionally, we are currently
negotiating a $125.0 million credit facility expected to be completed in the
first quarter of 2011 for future acquisitions and general corporate
expenses.
As
of December 31, 2010, we had $192.6 million of cash and cash
equivalents, $0.5 million in short-term investments, $2.3 million in long-term
investments and $200.9 million in working capital, as compared to $197.5
million of cash and cash equivalents, $1.5 million in short-term investments,
$4.0 million in long-term investments and $191.9 million in working capital as
of December 31, 2009.
Under the
terms of a merger agreement with AutoStyleMart, Inc., entered into on August 1,
2007, we have a future contingent payment obligation of up to $11.0 million
based upon the achievement of certain operational targets from February 2008
through February 2011. As of December 31, 2009, we determined that certain
operational targets were probable of being achieved and recorded a liability of
$1.0 million. The $1.0 million was deemed compensation for services, as payment
was contingent on certain former stockholders remaining employees or consultants
of DealerTrack for a certain period. The $1.0 million of additional
consideration was paid in the first quarter of 2010. Additional purchase
consideration, if any, is not expected to be significant and will be recorded as
compensation expense when the contingency is resolved.
On
February 10, 2010, DealerTrack, Inc., entered into a strategic relationship with
Ally. Under the terms of the agreement, Ally was listed as a financing
option on the DealerTrack credit application processing network and DealerTrack
agreed to make a one-time payment to Ally of $15.0 million that was paid in May
2010.
On March
31, 2010, in connection with our DMS business, we entered into a non-cancellable
equipment and software purchase agreement with a vendor. Under the terms of the
agreement, we committed to purchasing certain equipment and software in 2011
totaling approximately $2.7 million, excluding applicable taxes. As of December
31, 2010, we have not accepted title or risk for loss of the aforementioned
equipment or software.
During
2010, we began a project to implement an ERP system. In connection with the ERP
project, in April 2010, we entered into an agreement with an ERP
provider to purchase certain software licenses and implementation
consulting services. For the year ended December 31, 2010, external capital
expenditures related to the ERP project were approximately $4.4 million and we
expect to spend an additional estimated $3.3 million in
2011.
On
January 31, 2011, we acquired triVIN for a purchase price of approximately
$131.0 million in cash, net of acquired cash and a working capital adjustment.
triVIN is a leading provider of automobile title management services to lenders
and vehicle registration services to automobile dealers. This acquisition will
significantly expand our transaction business, and further strengthen our
relationship with lenders and automobile dealers. We expensed approximately $0.5
million of professional fees associated with the acquisition in 2010. We expect
to expense an additional approximately $0.2 million of professional fees in the
first quarter of 2011. We are in the process of finalizing the fair value
assessment for the acquired assets and liabilities, which is expected to be
completed during the first quarter of 2011.
On
February 1, 2011, we acquired the Automotive Information Center (“AIC”) price
and specifications business from R.L. Polk & Co. for a purchase price of
approximately $3.2 million in cash. This acquisition will allow our Data
Services business to expand its customer base. We are in the process of
finalizing the fair value assessment for the acquired assets and liabilities,
which is expected to be completed during the first quarter of 2011.
The following table sets
forth the cash flow components for the following periods (in
thousands):
|
Year Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
|
(in
thousands)
|
|||||||||||
|
Net
cash provided by operating activities
|
$ | 19,148 | $ | 45,467 | $ | 61,494 | ||||||
|
Net
cash (used in) provided by investing activities
|
(28,208 | ) | (8,283 | ) | 94,874 | |||||||
|
Net
cash provided by (used in) financing activities
|
3,525 | 2,109 | (47,816 | ) | ||||||||
44
Operating
Activities
Net cash
provided by operating activities of $19.1 million for the year ended
December 31, 2010 was primarily attributable to net loss of $27.8 million, which
includes depreciation and amortization of $36.8 million, stock-based
compensation expense of $11.2 million, a provision for doubtful
accounts and sales credits of $5.5 million, and a deferred tax provision of
$29.2 million primarily due to a tax valuation allowance recorded during
2010, partially offset by a decrease in accounts payable and accrued expenses of
$1.4 million, an increase in accounts receivable of $12.1 million due
to an increase in both transaction and subscription revenue, a gain of
$0.6 million realized on the sale of securities, a stock-based compensation
windfall tax benefit of $1.7 million, and an increase in prepaid expenses
and other assets of $9.6 million due to prepaid taxes of $6.7 million and
Ally costs of $3.2 million, and an increase in other assets of
$10.6 million due to the $15.0 million payment to Ally in May 2010.
Net cash provided by operating activities of $45.5 million for the year ended
December 31, 2009 was primarily attributable to net loss of $4.3 million,
which includes depreciation and amortization of $35.1 million, stock-based
compensation expense of $17.0 million, a provision for doubtful accounts and
sales credits of $7.7 million, an increase in accounts payable and accrued
expenses of $3.0 million, a decrease in prepaid expenses and other current
assets of $3.7 million, partially offset by a deferred tax benefit of $7.3
million, an increase in accounts receivable of $6.3 million due to an increase
in subscription revenues and the acquisition of AAX , a stock-based compensation
windfall tax benefit of $0.7 million, a gain of $1.4 million realized on the
sale or conversion of securities, a decrease in other long-term liabilities of
$0.6 million, and a $0.6 million reversal of a pre-acquisition sales tax
liability contingency resolved subsequent to the close of the purchase
accounting allocation period. Net cash provided
by operating activities of $61.5 million for the year ended December 31,
2008 was primarily attributable to net income of $1.7 million, which
includes depreciation and amortization of $40.1 million, stock-based
compensation expense of $14.0 million, a provision for doubtful accounts and
sales credits of $9.6 million, an impairment recognized on auction rate
securities of $6.0 million, an increase to deferred revenue and other current
liabilities of $1.7 million, and an increase in other long-term liabilities
of $1.5 million, partially offset by decreases in accounts payable and accrued
expenses of $6.7 million, a deferred tax benefit of $2.1 million, a
stock-based compensation windfall tax benefit of $0.4 million, an increase
in prepaid expenses and other current assets of $2.9 million, and an increase in
accounts receivable of $1.6 million.
Investing
Activities
Net cash used in investing activities of $28.2 million for the year ended
December 31, 2010 was primarily attributable to the payment for the acquisition
of intangible assets of $3.0 million, capital expenditures of $10.8 million and
capitalized software and website development costs of $16.9 million,
partially offset by the net sale of short-term investments of $2.5 million. Net
cash used in investing activities of $8.3 million for the year ended December
31, 2009 was primarily attributable to the sale of short-term investments of
$44.6 million offset by the payment for the acquisition of AAX business and
intangible assets of $30.9 million, the payment of the Curomax additional
purchase consideration of $1.8 million, the payment of ALG additional purchase
consideration of $1.9 million, capital expenditures of $5.4 million, capitalized
software and website development costs of $13.0 million. Net cash provided by
investing activities of $94.9 million for the year ended December 31, 2008
was primarily attributable to the net sale of investments of $115.8 million
offset by capital expenditures of $6.5 million, capitalized software and
website development costs of $8.6 million, and the payment for net assets
acquired of $6.0 million.
Financing
Activities
Net
cash provided by financing activities of $3.5 million for the year ended
December 31, 2010 was primarily attributable to net proceeds received from the
exercise of employee stock options of $2.3 million, employee stock purchases
under our employee stock purchase plan of $0.7 million and a stock-based
compensation windfall tax benefit of $1.7 million, partially offset by
payment for shares surrendered for taxes of $0.6 million related to restricted
common stock and restricted stock units vesting, and principal payments on
capital lease obligations of $0.5 million. Net cash provided by financing
activities of $2.1 million for the year ended December 31, 2009 was primarily
attributable to net proceeds received from the exercise of employee stock
options of $2.2 million, employee stock purchases under our employee stock
purchase plan of $0.9 million, and a stock-based compensation windfall tax
benefit of $0.7 million, partially offset by payment for shares surrendered for
taxes of $0.4 million related to restricted stock vesting, principal payments on
notes payable of $0.8 million, and principal payments on capital lease
obligations of $0.4 million. Net cash used in financing activities of $47.8
million for the year ended December 31, 2008 was primarily attributable to
the repurchase of 3.0 million shares of common stock for an aggregate price of
approximately $49.8 million, offset by net proceeds received from employee stock
purchases under our employee stock purchase plan of $1.7 million and the
exercise of employee stock options of $1.0 million.
Contractual
Obligations
The
following table summarizes our contractual obligations as of December 31,
2010 (in thousands):
|
Less
Than
|
After
|
|||||||||||||||||||
|
Total
|
1 Year
|
1-3 Years
|
4-5 Years
|
5 Years
|
||||||||||||||||
|
Operating
lease obligations
|
$ | 29,620 | $ | 5,245 | $ | 9,310 | $ | 7,262 | $ | 7,803 | ||||||||||
|
Capital
lease obligations
|
507 | 339 | 150 | 18 | — | |||||||||||||||
|
Purchase
commitment
|
2,655
|
2,655
|
||||||||||||||||||
|
Total
contractual cash obligation
|
$ |
32,782
|
$ |
8,239
|
$ | 9,460 | $ | 7,280 | $ | 7,803 | ||||||||||
Pursuant
to employment or severance agreements with certain employees, we had a
commitment to pay severance of approximately $4.6 million as of December
31, 2010, in the event of termination without cause, as defined in the
agreements, as well as certain potential gross-up payments to the extent any
such severance payment would constitute an excess parachute payment under the
Internal Revenue Code. Additionally, if there is a change in control, we will
also have a commitment to pay additional severance of $1.9 million as of
December 31, 2010.
The total
liability for the uncertain tax positions recorded in our consolidated balance
sheet in accrued other liabilities as of December 31, 2010 and December 31,
2009, was $1.0 million and 0.8 million, respectively. Interest and penalties, if
any, related to tax positions taken in our tax returns are recorded in interest
expense and general and administrative expenses, respectively, in our
consolidated statement of operations. As of December 31, 2010 and December 31,
2009, we have accrued interest and penalties related to tax positions taken on
our tax returns of approximately $0.1 million and $47,000,
respectively.
45
Please
refer to the Liquidity and Capital Resources section for contractual obligations
related to AutoStyleMart, Inc.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements or relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which are
typically established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
Effects
of Inflation
Our
monetary assets, consisting primarily of cash and cash equivalents, receivables
and long-term investments, and our non-monetary assets, consisting primarily of
intangible assets and goodwill, are not affected significantly by inflation. We
believe that replacement costs of equipment, furniture and leasehold
improvements will not materially affect our operations. However, the rate of
inflation affects our expenses, which may not be readily recoverable in the
prices of products and services we offer.
Recent
Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance
to amend the disclosure requirements related to recurring and nonrecurring fair
value measurements. The guidance requires new disclosures for significant
transfers in and out of Level 1 and Level 2 fair value measurements and to
provide a gross presentation of the activities, including purchases, sales,
issuances, and settlements, within the Level 3 rollforward. The guidance also
clarifies existing fair value disclosures about the level of disaggregation and
about inputs and valuation techniques used to measure fair value. The new
disclosure requirements are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about the Level 3
rollforward, which are effective for fiscal years beginning after December 15,
2010. The adoption of the new disclosure requirements applicable for our first
quarter of 2010 did not have a material impact on our consolidated financial
statements. We do not expect the full adoption of the guidance to have a
material impact on our fair value measurement disclosures.
In
December 2010, the FASB issued guidance to amend the disclosure requirements of
supplementary pro forma information for business combinations. The guidance
addresses the diversity in practice about the interpretation of the pro forma
revenue and earnings disclosure requirements for business combinations. The
amendments specify that if a public entity presents comparative financial
statements, the entity should disclose revenue and earnings of the combined
entity as though the business combination(s) that occurred during the current
year had occurred as of the beginning of the comparable prior annual reporting
period only. The amendments also expand the supplemental pro forma disclosures
to include a description of the nature and amount of material, nonrecurring pro
forma adjustments directly attributable to the business combination included in
the reported pro forma revenue and earnings. The amendments are effective
prospectively 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, 2010. We are currently
evaluating the impact of this guidance on our consolidated financial
statements.
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
Foreign
Currency Exposure
We
only have operations located in, and provide services to, customers in the
United States and Canada. Our earnings are affected by fluctuations in the value
of the U.S. dollar as compared with the Canadian dollar. Our exposure is
mitigated, in part, by the fact that we incur certain operating costs in the
same foreign currency in which revenue is denominated. The foreign currency
exposure that does exist is limited by the fact that the majority of
transactions are paid according to our standard payment terms, which are
generally short-term in nature.
Interest
Rate Exposure
As
of December 31, 2010, we had cash, cash equivalents, short-term and
long-term investments of $195.3 million invested in money market
instruments, tax-exempt state government obligations and tax advantaged
preferred securities. Such investments are subject to interest rate and credit
risk. Our general policy of investing in securities with original maturities of
three months or less minimizes our interest and credit risk. On January 31,
2011, we acquired triVIN for approximately $131.0 million in cash, net of
acquired cash and a working capital adjustment, which will significantly reduce
our future interest income.
Reductions
in interest rates and changes in investments could materially impact our
interest income and may impact future reported operating results. An
interest rate fluctuation of 1% would have an effect of approximately $1.0
million, or $0.2 per share, on future reported operating
results.
46
Item 8. Financial
Statements and Supplementary Data
INDEX
TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
|
Page
|
||
|
DEALERTRACK
HOLDINGS, INC.:
|
|
|
|
Report of Independent Registered
Public Accounting Firm
|
48
|
|
|
Consolidated Balance
Sheets
|
49
|
|
|
Consolidated Statements of
Operations
|
50
|
|
|
Consolidated Statements of Cash
Flows
|
51
|
|
|
Consolidated Statements of
Stockholders’ Equity and Comprehensive Income (Loss)
|
52
|
|
|
Notes to Consolidated Financial
Statements
|
55
|
|
|
Schedule II — Valuation and
Qualifying Accounts
|
79
|
47
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders of DealerTrack Holdings, Inc.:
In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of DealerTrack
Holdings, Inc. and its subsidiaries at December 31, 2010 and 2009, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2010 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2010, based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for these financial statements and the financial statement schedule,
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in Management’s Report on Internal Control Over Financial Reporting
appearing under Part II, Item 9A in this Annual Report on Form 10-K.
Our responsibility is to express opinions on these financial statements, on the
financial statement schedule, and on the Company’s internal control over
financial reporting based on our integrated 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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial
statements included 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. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
|
/s/
PricewaterhouseCoopers
LLP
|
New York,
New York
February
17, 2011
48
DEALERTRACK
HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(in
thousands,
|
||||||||
|
except
share and per share
|
||||||||
|
amounts)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 192,563 | $ | 197,509 | ||||
|
Investments
|
490 | 1,484 | ||||||
|
Accounts
receivable, net of allowances of $3,258 and $2,677 as of December 31,
2010 and 2009, respectively
|
24,273 | 17,478 | ||||||
|
Prepaid
expenses and other current assets
|
17,929 | 9,620 | ||||||
|
Total
current assets
|
235,255 | 226,091 | ||||||
|
Investments
— long-term
|
2,254 | 3,971 | ||||||
|
Property
and equipment, net
|
18,875 | 13,514 | ||||||
|
Software
and website developments costs, net
|
29,875 | 21,158 | ||||||
|
Intangible
assets, net
|
23,163 | 41,604 | ||||||
|
Goodwill
|
136,408 | 134,747 | ||||||
|
Deferred
tax assets – long-term
|
1,015 | 29,699 | ||||||
|
Other
assets — long-term
|
12,118 | 1,543 | ||||||
|
Total
assets
|
$ | 458,963 | $ | 472,327 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 5,241 | $ | 3,919 | ||||
|
Accrued
compensation and benefits
|
10,823 | 11,717 | ||||||
|
Accrued
liabilities — other
|
12,511 | 11,324 | ||||||
|
Deferred
revenues
|
5,010 | 4,992 | ||||||
|
Deferred
tax liability
|
411 | — | ||||||
|
Due
to acquirees
|
— | 1,820 | ||||||
|
Capital
leases payable
|
317 | 425 | ||||||
|
Total
current liabilities
|
34,313 | 34,197 | ||||||
|
Capital
leases payable — long-term
|
165 | 281 | ||||||
|
Deferred
tax liabilities — long-term
|
9,488 | 11,083 | ||||||
|
Deferred
revenues — long-term
|
3,254 | 3,299 | ||||||
|
Other
liabilities — long-term
|
2,826 | 2,581 | ||||||
|
Total
liabilities
|
50,046 | 51,441 | ||||||
|
Commitments
and contingencies (Note 13)
|
||||||||
|
Stockholders’
equity
|
||||||||
|
Preferred
stock, $0.01 par value; 10,000,000 shares authorized and no shares issued
and outstanding as of December 31, 2010 and 2009,
respectively
|
— | — | ||||||
|
Common
stock, $0.01 par value; 175,000,000 shares authorized; 43,748,237 shares
issued and 40,673,042 shares outstanding as of December 31, 2010; and
43,469,945 shares issued and 40,430,330 shares outstanding as of
December 31, 2009
|
437 | 435 | ||||||
|
Treasury
stock, at cost, 3,075,195 and 3,039,615 shares as of December 31,
2010 and 2009, respectively
|
(51,083 | ) | (50,440 | ) | ||||
|
Additional
paid-in capital
|
463,614 | 448,816 | ||||||
|
Accumulated
other comprehensive income
|
7,858 | 6,151 | ||||||
|
(Accumulated
deficit) retained earnings
|
(11,909 | ) | 15,924 | |||||
|
Total
stockholders’ equity
|
408,917 | 420,886 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 458,963 | $ | 472,327 | ||||
The
accompanying notes are an integral part of these financial
statements.
49
DEALERTRACK
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
thousands, except per share and share amounts)
|
||||||||||||
|
Revenue
|
||||||||||||
|
Net
revenue
|
$ | 243,826 | $ | 225,626 | $ | 242,706 | ||||||
|
Operating
expenses :
|
||||||||||||
|
Cost
of revenue (1)
|
124,070 | 113,875 | 113,731 | |||||||||
|
Product
development (1)
|
13,386 | 13,994 | 11,658 | |||||||||
|
Selling,
general and administrative (1)
|
105,715 | 108,707 | 110,265 | |||||||||
|
Total
operating expenses
|
243,171 | 236,576 | 235,654 | |||||||||
|
Income
(loss) from operations
|
655 | (10,950 | ) | 7,052 | ||||||||
|
Interest
income
|
525 | 1,081 | 4,720 | |||||||||
|
Interest
expense
|
(175 | ) | (221 | ) | (324 | ) | ||||||
|
Other
income
|
1,177 | 844 | 205 | |||||||||
|
Realized gain (loss)
on securities (Note 3)
|
582 | 1,393 | (5,956 | ) | ||||||||
|
Income
(loss) before (provision for) benefit from income taxes
|
2,764 | (7,853 | ) | 5,697 | ||||||||
|
(Provision
for) benefit from income taxes, net
|
(30,597 | ) | 3,519 | (3,961 | ) | |||||||
|
Net
(loss) income
|
$ | (27,833 | ) | $ | (4,334 | ) | $ | 1,736 | ||||
|
Basic
net (loss) income per share applicable to common stockholders
(2)
|
$ | (0.69 | ) | $ | (0.11 | ) | $ | 0.04 | ||||
|
Diluted
net (loss) income per share applicable to common stockholders
(2)
|
$ | (0.69 | ) | $ | (0.11 | ) | $ | 0.04 | ||||
|
Weighted
average common stock outstanding (basic)
|
40,322,939 | 39,524,544 | 40,461,896 | |||||||||
|
Weighted
average common stock outstanding (diluted)
|
40,322,939 | 39,524,544 | 41,538,379 | |||||||||
|
(1)
|
Stock-based
compensation expense recorded for the years ended December 31, 2010, 2009
and 2008 was classified as follows:
|
|
Year Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cost
of revenue
|
$ | 1,640 | $ | 2,354 | $ | 2,497 | ||||||
|
Product
development
|
614 | 755 | 712 | |||||||||
|
Selling,
general and administrative
|
8,979 | 13,880 | 10,782 | |||||||||
Included
in stock-based compensation expense for the year ended December 31, 2009 was
$3.9 million of stock-based compensation expense related to the realignment of
our workforce and business on January 5, 2009, which was primarily allocated to
selling, general. and administrative expenses. For further information, please
refer to Note 15.
|
(2)
|
Earnings
per share data presented for the year ended December 31, 2008 had been
retroactively adjusted to conform to the provisions of ASC Topic 260,
Earnings Per
Share, which did not have a significant impact on our historical
earnings per share calculation. For further information, please refer to
Note 2.
|
The
accompanying notes are an integral part of these financial
statements
50
DEALERTRACK
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Operating
activities:
|
||||||||||||
|
Net
(loss) income
|
$ | (27,833 | ) | $ | (4,334 | ) | $ | 1,736 | ||||
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
36,753 |
35,060
|
40,076 | |||||||||
|
Deferred
tax provision (benefit)
|
29,174 | (7,262 | ) | (2,051 | ) | |||||||
|
Stock-based
compensation expense
|
11,233 | 16,989 | 13,991 | |||||||||
|
Provision
for doubtful accounts and sales credits
|
5,488 | 7,698 | 9,639 | |||||||||
|
Loss
(gain) on sale of property and equipment
|
23 | (184 | ) | — | ||||||||
|
Reversal
of pre-acquisition accrued contingency
|
— | (609 | ) | — | ||||||||
|
Amortization
of bond premium
|
— |
55
|
132 | |||||||||
|
Amortization
of deferred interest
|
68 | 152 | 178 | |||||||||
|
Deferred
compensation
|
— | 300 | 264 | |||||||||
|
Amortization
of bank financing costs
|
— | — | 30 | |||||||||
|
Stock-based
compensation windfall tax benefit
|
(1,714 | ) | (673 | ) | (418 | ) | ||||||
|
Realized
(gain) loss on securities
|
(582 | ) | (1,393 | ) | 5,956 | |||||||
|
Changes
in operating assets and liabilities, net of effects of
acquisitions:
|
||||||||||||
|
Accounts
receivable
|
(12,059 | ) | (6,342 | ) | (1,634 | ) | ||||||
|
Prepaid
expenses and other current assets
|
(9,627 | ) | 3,725 | (2,928 | ) | |||||||
|
Accounts
payable and accrued expenses
|
(1,403 | ) | 3,025 | (6,678 | ) | |||||||
|
Deferred
revenue
|
7 | 14 | 1,650 | |||||||||
|
Other
liabilities — long-term
|
(1 | ) | (642 | ) | 1,501 | |||||||
|
Deferred
rent
|
195 | 145 | 473 | |||||||||
|
Other
assets — long-term
|
(10,574 | ) | (257 | ) | (423 | ) | ||||||
|
Net
cash provided by operating activities
|
19,148 | 45,467 | 61,494 | |||||||||
|
Investing
activities:
|
||||||||||||
|
Capital
expenditures
|
(10,801 | ) | (5,360 | ) | (6,502 | ) | ||||||
|
Restricted
cash
|
— | 142 | 149 | |||||||||
|
Purchase
of investments
|
— | — | (549,159 | ) | ||||||||
|
Sale
of investments
|
2,519 | 44,569 | 664,932 | |||||||||
|
Capitalized
software and website development costs
|
(16,899 | ) | (13,021 | ) | (8,560 | ) | ||||||
|
Proceeds
from sale of property and equipment
|
1 | 109 | 3 | |||||||||
|
Payment
for acquisition of business and intangible assets, net of acquired
cash
|
(3,028 | ) | (34,722 | ) | (5,989 | ) | ||||||
|
Net
cash (used in) provided by investing activities
|
(28,208 | ) | (8,283 | ) | 94,874 | |||||||
|
Financing
activities:
|
||||||||||||
|
Principal
payments on capital lease obligations
|
(513 | ) | (414 | ) | (742 | ) | ||||||
|
Proceeds
from the exercise of employee stock options
|
2,270 | 2,202 | 951 | |||||||||
|
Proceeds
from employee stock purchase plan
|
697 | 875 | 1,691 | |||||||||
|
Purchase
of treasury stock
|
(643 | ) | (379 | ) | (49,922 | ) | ||||||
|
Principal
payments on notes payable
|
— | (848 | ) | (212 | ) | |||||||
|
Stock-based
compensation windfall tax benefit
|
1,714 | 673 | 418 | |||||||||
|
Net
cash provided by (used in) financing activities
|
3,525 | 2,109 | (47,816 | ) | ||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(5,535 | ) | 39,293 | 108,552 | ||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
589 | 2,760 | (3,660 | ) | ||||||||
|
Cash
and cash equivalents, beginning of year
|
197,509 | 155,456 | 50,564 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 192,563 | $ | 197,509 | $ | 155,456 | ||||||
|
Year Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
|
(in
thousands)
|
|||||||||||
|
Supplemental
disclosure:
|
||||||||||||
|
Cash
paid for:
|
||||||||||||
|
Income
taxes
|
$ | 6,776 | $ | 4,961 | $ | 6,995 | ||||||
|
Interest
|
57 | 60 | 128 | |||||||||
|
Non-cash
investing and financing activities:
|
||||||||||||
|
Accrued
capitalized hardware, software and fixed assets
|
2,872 | 2,515 | 795 | |||||||||
|
Assets
acquired under capital leases
|
289 | 307 | — | |||||||||
|
Capitalized
stock-based compensation
|
77 | 133 | 59 | |||||||||
|
Asset
sale through note receivable
|
— | 500 | — | |||||||||
|
Deferred
compensation reversal to equity
|
— | 300 | 264 | |||||||||
|
Acquisition
of capitalized software through note payable
|
— | — | 867 | |||||||||
|
Payable
for acquired intangible assets
|
— | — | 500 | |||||||||
The
accompanying notes are an integral part of these financial
statements.
51
DEALERTRACK
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE
INCOME (LOSS)
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Common Stock,
|
Additional
|
Deferred
|
Other
|
Total
|
||||||||||||||||||||||||||||||||||||||||||||
|
Preferred Stock
|
Common Stock
|
In Treasury
|
Paid-In
|
Stock-Based
|
Comprehensive
|
Retained
|
Stockholders’
|
Comprehensive
|
||||||||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Compensation
|
(Loss)
|
Earnings
|
Equity
|
Income
|
|||||||||||||||||||||||||||||||||||||
|
(in
thousands, except share amounts)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance
as of January 1, 2008
|
— | $ | — | 42,556,925 | $ | 426 | 4,202 | $ | (139 | ) | $ | 413,428 | $ | (2,056 | ) | $ | 8,181 | $ | 18,522 | $ | 438,362 | $ | — | |||||||||||||||||||||||||
|
Exercise
of stock options
|
— | — | 102,182 | 1 | — | — | 950 | — | — | — | 951 | |||||||||||||||||||||||||||||||||||||
|
Directors
deferred compensation stock units
|
— | — | 17,638 | — | — | — | 264 | — | — | — | 264 | |||||||||||||||||||||||||||||||||||||
|
Issuances
of common stock under employee stock purchase plan
|
— | — | 123,587 | 1 | — | — | 1,690 | — | — | — | 1,691 | |||||||||||||||||||||||||||||||||||||
|
Compensation
expense related to employee stock purchase plan
|
— | — | — | — | — | — | 299 | — | — | — | 299 | |||||||||||||||||||||||||||||||||||||
|
Tax
benefit from the exercise of stock options and restricted common
stock
|
— | — | — | — | — | — | (1 | ) | — | — | — | (1 | ) | |||||||||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
— | — | — | — | — | — | — | — | (10,926 | ) | — | (10,926 | ) | (10,926 | ) | |||||||||||||||||||||||||||||||||
|
Treasury
stock
|
— | — | — | — | 3,003,919 | (49,922 | ) | — | — | — | (49,922 | ) | ||||||||||||||||||||||||||||||||||||
|
Unrealized
gain on available for sale securities
|
— | — | — | — | — | — | — | — | 15 | — | 15 | 15 | ||||||||||||||||||||||||||||||||||||
|
Issuance
of restricted common stock grants
|
— | — | 49,357 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
|
Stock-based
compensation expense (APB 25)
|
— | — | — | — | — | — | — | 1,196 | — | — | 1,196 | |||||||||||||||||||||||||||||||||||||
|
Stock-based
compensation expense (FAS 123(R))
|
— | — | — | — | — | — | 7,191 | — | — | — | 7,191 | |||||||||||||||||||||||||||||||||||||
|
Restricted
common stock-based compensation expense (APB 25)
|
— | — | — | — | — | — | — | 342 | — | — | 342 | |||||||||||||||||||||||||||||||||||||
|
Restricted
common stock-based compensation expense (FAS 123(R))
|
— | — | — | — | — | — | 5,022 | — | — | — | 5,022 | |||||||||||||||||||||||||||||||||||||
|
Options
and restricted common stock cancellations
|
— | — | (7,952 | ) | — | — | — | (72 | ) | 72 | — | — | — | |||||||||||||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | — | — | — | — | 1,736 | 1,736 | 1,736 | ||||||||||||||||||||||||||||||||||||
|
Comprehensive
income
|
$ | 18,721 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Balance
as of December 31, 2008
|
— | $ | — | 42,841,737 | $ | 428 | 3,008,121 | $ | (50,061 | ) | $ | 428,771 | $ | (446 | ) | $ | (2,730 | ) | $ | 20,258 | $ | 396,220 | ||||||||||||||||||||||||||
52
DEALERTRACK
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE
INCOME (LOSS)
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Common Stock,
|
Additional
|
Deferred
|
Other
|
Total
|
||||||||||||||||||||||||||||||||||||||||||||
|
Preferred Stock
|
Common Stock
|
In Treasury
|
Paid-In
|
Stock-Based
|
Comprehensive
|
Retained
|
Stockholders’
|
Comprehensive
|
||||||||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Compensation
|
Income
|
Earnings
|
Equity
|
Income
|
|||||||||||||||||||||||||||||||||||||
|
(in
thousands, except share amounts)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Exercise
of stock options
|
— | $ | — | 592,964 | $ | 6 | — | $ | — | $ | 2,196 | $ | — | $ | — | $ | — | $ | 2,202 | $ | ||||||||||||||||||||||||||||
|
Directors
deferred compensation stock units
|
— | — | 18,097 | — | — | — | 300 | — | — | — | 300 | |||||||||||||||||||||||||||||||||||||
|
Issuances
of common stock under employee stock purchase plan
|
— | — | 61,595 | 1 | — | — | 874 | — | — | — | 875 | |||||||||||||||||||||||||||||||||||||
|
Compensation
expense related to employee stock purchase plan
|
— | — | — | — | — | — | 60 | — | — | — | 60 | |||||||||||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
— | — | — | — | — | — | — | — | 7,928 | — | 7,928 | 7,928 | ||||||||||||||||||||||||||||||||||||
|
Treasury
stock
|
— | — | — | — | 31,494 | (379 | ) | — | — | — | (379 | ) | ||||||||||||||||||||||||||||||||||||
|
Unrealized
gain on auction rate securities
|
— | — | — | — | — | — | — | — | 968 | — | 968 | 968 | ||||||||||||||||||||||||||||||||||||
|
Reversal
of unrealized gain on available for sale securities
|
— | — | — | — | — | — | — | — | (15 | ) | — | (15 | ) | (15 | ) | |||||||||||||||||||||||||||||||||
|
Issuance
of restricted common stock grants
|
— | — | 61,243 | 1 | — | — | (1 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
Stock-based
compensation expense (APB 25)
|
— | — | — | — | — | — | — | 280 | — | — | 280 | |||||||||||||||||||||||||||||||||||||
|
Stock-based
compensation expense (FAS 123(R))
|
— | — | — | — | — | — | 10,314 | — | — | — | 10,314 | |||||||||||||||||||||||||||||||||||||
|
Restricted
common stock-based compensation expense (APB 25)
|
— | — | — | — | — | — | — | 118 | — | — | 118 | |||||||||||||||||||||||||||||||||||||
|
Restricted
common stock-based compensation expense (FAS 123(R))
|
— | — | — | — | — | — | 6,350 | — | — | — | 6,350 | |||||||||||||||||||||||||||||||||||||
|
Options
and restricted common stock cancellations
|
— | — | (105,691 | ) | (1 | ) | — | — | (48 | ) | 48 | — | — | (1 | ) | |||||||||||||||||||||||||||||||||
|
Net
loss
|
— | — | — | — | — | — | — | — | — | (4,334 | ) | (4,334 | ) | (4,334 | ) | |||||||||||||||||||||||||||||||||
|
Comprehensive
income
|
$ | 23,268 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Balance
as of December 31, 2009
|
— | $ | — | 43,469,945 | $ | 435 | 3,039,615 | $ | (50,440 | ) | $ | 448,816 | $ | — | $ | 6,151 | $ | 15,924 | $ | 420,886 | ||||||||||||||||||||||||||||
53
DEALERTRACK
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)
|
|
Accumulated
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
Common Stock,
|
Additional
|
Deferred
|
Other
|
Total
|
||||||||||||||||||||||||||||||||||||||||||||
|
Preferred Stock
|
Common Stock
|
In Treasury
|
Paid-In
|
Stock-Based
|
Comprehensive
|
Accumulated
|
Stockholders’
|
Comprehensive
|
||||||||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Compensation
|
Income
|
Deficit
|
Equity
|
Loss
|
|||||||||||||||||||||||||||||||||||||
|
(in
thousands, except share amounts)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Exercise
of stock options
|
— | $ | — | 372,269 | $ | 3 | — | $ | — | $ | 2,267 | $ | — | $ | — | $ | — | $ | 2,270 | $ | ||||||||||||||||||||||||||||
|
Expired
stock options
|
(841 | ) | (841 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Issuances
of common stock under employee stock purchase plan
|
— | — | 42,098 | — | — | — | 697 | — | — | — | 697 | |||||||||||||||||||||||||||||||||||||
|
Tax
benefit from the exercise of stock options and restricted common
stock
|
— | — | — | — | — | — | 1,364 | — | — | — | 1,364 | |||||||||||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
— | — | — | — | — | — | — | — | 2,481 | — | 2,481 | 2,481 | ||||||||||||||||||||||||||||||||||||
|
Treasury
stock
|
— | — | — | — | 35,580 | (643 | ) | — | — | — | (643 | ) | ||||||||||||||||||||||||||||||||||||
|
Unrealized
loss on available for sale securities
|
— | — | — | — | — | — | — | — | (185 | ) | — | (185 | ) | (185 | ) | |||||||||||||||||||||||||||||||||
|
Reversal
of unrealized gain on available for sale securities
|
— | — | — | — | — | — | — | — | (589 | ) | — | (589 | ) | (589 | ) | |||||||||||||||||||||||||||||||||
|
Issuance
of restricted common stock grants
|
— | — | 169,728 | 2 | — | — | (2 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
Stock-based
compensation expense
|
— | — | — | — | — | — | 5,809 | — | — | — | 5,809 | |||||||||||||||||||||||||||||||||||||
|
Restricted
common stock-based compensation expense
|
— | — | — | — | — | — | 5,501 | — | — | — | 5,501 | |||||||||||||||||||||||||||||||||||||
|
Restricted
common stock cancellations
|
— | — | (305,803 | ) | (3 | ) | — | — | 3 | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
Net
loss
|
— | — | — | — | — | — | — | — | — | (27,833 | ) | (27,833 | ) | (27,833 | ) | |||||||||||||||||||||||||||||||||
|
Comprehensive
loss
|
$ |
(2,858
|
) | |||||||||||||||||||||||||||||||||||||||||||||
|
Balance
as of December 31, 2010
|
— | $ | — | 43,748,237 | $ | 437 | 3,075,195 | $ | (51,083 | ) | $ | 463,614 | $ | — | $ | 7,858 | $ | (11,909 | ) | $ | 408,917 | |||||||||||||||||||||||||||
The
accompanying notes are an integral part of these financial
statements.
54
DEALERTRACK
HOLDINGS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Business Description and Basis of Presentation
Business
Description
DealerTrack’s
intuitive and high-value software solutions enhance efficiency and profitability
for all major segments of the automotive retail industry, including dealers,
lenders, OEMs, agents and aftermarket providers. We believe our solution set for
dealers is the industry’s most comprehensive. DealerTrack operates the
industry’s largest online credit application network in the United States,
connecting approximately 17,000 dealers with over 950 lenders. Our
dealer management system (“DMS”) provides dealers with easy-to-use tools with
real-time data access that will streamline any automotive business. Dealers
using DealerTrack AAX get the inventory management tools and services
needed to accelerate turns and increase profits. Our sales and finance &
insurance (“F&I”) solution enables dealers to streamline the entire
sales process while structuring all types of deals from a single integrated
platform. DealerTrack’s compliance solution helps dealers meet legal and
regulatory requirements and protect their assets. DealerTrack’s family of
companies also includes data and consulting services providers ALG and Chrome
Systems.
Basis of
Presentation
The
consolidated financial statements of DealerTrack Holdings, Inc. have been
prepared in accordance with accounting principles generally accepted in the
United States of America.
The
accompanying consolidated financial statements include the accounts of
DealerTrack Holdings, Inc. and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated.
2.
Summary of Significant Accounting Policies
Use of
Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and the disclosure of contingent amounts in our consolidated financial
statements and the accompanying notes. Actual results could differ from those
estimates.
On
an on-going basis, we evaluate our estimates, including those related to the
accounts receivable allowance, the fair value of financial assets, acquired
intangible assets, goodwill, and other assets and liabilities; the useful lives
of intangible assets, property and equipment, capitalized software and website
development costs; assumptions used to calculate stock-based compensation
including volatility, expected life and forfeiture rate; and income taxes
(including recoverability of deferred taxes), among others. We base our
estimates on historical experience and on other various assumptions that are
believed to be reasonable, the results of which form the basis for making
judgments about the carrying values of assets and liabilities.
Revenue
Recognition
Transaction Services
Revenue. Transaction services revenue consists of revenue earned from our
lender customers for each credit application or contract that dealers submit to
them. We also earn transaction services revenue from lender customers for each
financing contract executed via our electronic contracting and digital contract
processing solutions, as well as for any portfolio residual value analyses we
perform for them. We also earn transaction services revenue from dealers or
other service and information providers, such as aftermarket, accessory and
credit report providers, for each fee-bearing product accessed by
dealers.
We
offer web-based service to lenders for the electronic receipt of credit
application data and contract data for automotive financing transactions in
consideration for a transaction fee. This service is sold based upon contracts
that include fixed or determinable prices and that do not include the right of
return or other similar provisions or significant post service obligations.
Credit application and digital and electronic contracting processing revenue is
recognized on a per transaction basis, after customer receipt and when
collectability is reasonably assured. Set-up fees charged to the lenders for
establishing connections, if any, are recognized ratably over the expected
customer relationship period of four years.
Our
credit report service provides our dealer customers the ability to access credit
reports from several major credit reporting agencies or resellers online. We
sell this service based upon contracts with the customer or report provider, as
applicable, that include fixed or determinable prices and that does not include
the right of return or other similar provisions or other significant post
service obligations. We recognize credit report revenue on a per transaction
basis, when services are rendered and when collectability is reasonably assured.
We offer these credit reports on both a reseller and an agency basis. We
recognize revenue from all but one provider of credit reports on a net basis due
to the fact that we are not considered the primary obligor, and recognize
revenue on a gross basis with respect to one of the providers as we have the
risk of loss and are considered the primary obligor in the
transaction.
Subscription Services
Revenue. Subscription services revenue consists of revenue earned from
our customers (typically on a monthly basis) for use of our subscription or
license-based products and services. Our subscription services enable dealer
customers to manage their dealership data and operations, compare various
financing and leasing options and programs, sell insurance and other aftermarket
products, analyze inventory and execute financing contracts electronically.
These subscription services are typically sold based upon contracts that include
fixed or determinable prices and that do not include the right of return or
other similar provisions or significant post service obligations. We recognize
revenue from such contracts ratably over the contract period. We recognize
set-up fees, if any, ratably over the expected customer relationship of three
years. For contracts that contain two or more products or services, we recognize
revenue in accordance with the above policy using relative fair value when the
delivered product has stand alone value.
55
Other Revenue. Other
revenue consists of revenue primarily earned through forms programming, data
conversion, training and hardware and equipment sales from our DMS solution,
shipping commissions earned from our digital contract business, consulting and
analytical revenue earned from ALG, and training fees earned from our inventory
management solution. Other revenue is recognized upon performance.
Our
revenue is presented net of a provision for sales credits, which is estimated
based on historical results, and established in the period in which services are
provided.
Shipping
Costs
Shipping
charges billed to customers are included in net revenue and the related shipping
costs are included in cost of revenue.
Cash and
Cash Equivalents
Cash
and cash equivalents consist of cash and highly liquid investments purchased
with original maturity of three months or less.
Short-term
and long-term Investments
Short-term
and long-term investments as of December 31, 2010 and 2009 consist of
auction rate securities that are invested in tax-exempt state government
obligations and tax-advantaged preferred securities. We classify investment
securities as available for sale and report them at fair value. For the year
ended December 31, 2010, there were unrealized losses of $0.2 million, and for
the years ended December 31, 2009 and 2008, there were unrealized gains of $1.0
million, and $15,000, respectively, which is included in accumulated other
comprehensive income. For further information regarding the fair value
measurements of our investments, please refer to Note 3.
Translation
of Non-U.S. Currencies
We
have maintained business operations in Canada since January 1, 2004. The
translation of assets and liabilities denominated in foreign currency into U.S.
dollars is made at the prevailing rate of exchange at the balance sheet date.
Revenue, costs and expenses are translated at the average exchange rates during
the period. Translation adjustments are reflected in accumulated other
comprehensive income on our consolidated balance sheets, while gains and losses
resulting from foreign currency transactions are included in our consolidated
statements of operations. Amounts resulting from foreign currency transactions
included in our statement of operations were not material for the years ended
December 31, 2010, 2009 and 2008.
Allowance
for Doubtful Accounts
We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. The amount of the
allowance account is based on historical experience and our analysis of the
accounts receivable balance outstanding. While credit losses have historically
been within our expectations and the provisions established, we cannot guarantee
that we will continue to experience the same credit loss rates that we have in
the past. If the financial condition of our customers were to deteriorate,
resulting in their inability to make payments, additional allowances may be
required which would result in an additional expense in the period that this
determination was made.
Property,
Equipment and Depreciation
Property
and equipment are stated at cost less accumulated depreciation, which is
provided for by charges to income over the estimated useful lives of the assets
using the straight-line method. Maintenance and repairs are charged to operating
expenses as incurred. Upon sale or other disposition, the applicable amounts of
asset cost and accumulated depreciation are removed from the accounts and the
net amount, less proceeds from disposal, is charged or credited to
income.
Software
and Website Development Costs and Amortization
We
capitalize costs of materials, consultants and payroll and payroll-related costs
incurred by employees involved in developing internal use computer software.
Costs incurred during the preliminary project and post-implementation stages are
charged to expense. Software and website development costs are amortized on a
straight-line basis over estimated useful lives ranging from two to five years.
We perform periodic reviews to ensure that unamortized software and website
costs remain recoverable from future revenue. Capitalized software and website
development costs, net, were $29.9 million and $21.2 million as of
December 31, 2010 and 2009, respectively. Amortization expense totaled $9.7
million, $7.6 million and $7.4 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
Goodwill,
Intangibles and Long-lived Assets
We
record as goodwill the excess of purchase price over the fair value of the
tangible and identifiable intangible assets acquired. Goodwill is tested
annually for impairment as well as whenever events or circumstances change that
would make it more likely than not that an impairment may have occurred.
Goodwill is tested for impairment using a two-step approach. The first step
tests for potential goodwill impairment by comparing the fair value of our one
reporting unit to its carrying value. If the fair value of the reporting unit is
less than its carrying value the second step is to record an impairment loss to
the extent that the implied fair value of the goodwill of the reporting unit is
less than its carrying value.
56
Goodwill
is required to be assessed at the operating segment or lower level. We
determined that the components of our one operating segment have similar
economic characteristics, nature of products, distribution, shared resources and
type of customer such that the components should be aggregated into a single
reporting unit for purposes of performing the impairment test for goodwill. We
perform our annual impairment analysis as of the first day of the fourth
quarter. The evaluation of impairment involves comparing the current estimated
fair value of our reporting unit to the carrying value, including goodwill. We
estimate the fair value of our reporting unit by primarily using a market
capitalization approach, and also looking at the outlook for the business. The
results of our most recent annual assessments performed on October 1, 2010 and
2009 did not indicate any impairment of our goodwill. As of October 1, 2010, our
market capitalization was approximately $689 million compared to our book value,
including goodwill, of approximately $430 million. As of October 1, 2009, our
market capitalization was approximately $750 million compared to our book value,
including goodwill, of approximately $418 million.
We
evaluate our long-lived assets, including property and equipment and
finite-lived intangible assets for potential impairment on an individual asset
basis or at the lowest level asset grouping for which cash flows can be
separately identified. Intangible asset impairments are assessed whenever
changes in circumstances could indicate that the carrying amounts of those
productive assets exceed their projected undiscounted cash flows. When it is
determined that impairment exists, the related asset group is written down to
its estimated fair market value. The determination of future cash flows and the estimated
fair value of long-lived assets, involve significant estimates on the part of
management. In order to estimate the fair value of a long-lived asset, we may
engage a third party to assist with the valuation.
Our
process for assessing potential triggering events may include, but is not
limited to, analysis of the following:
|
|
§
|
any
sustained decline in the company's stock price below book
value;
|
|
|
§
|
results
of our goodwill impairment test;
|
|
|
§
|
sales
and operating trends affecting products and
groupings;
|
|
|
§
|
the
impact on current and future operating results related to industry
statistics including fluctuation of lending relationships between
financing sources and automobile dealers, actual and projected annual
vehicle sales, and the number of dealers within our
network;
|
|
|
§
|
any
losses of key acquired customer relationships;
and
|
|
|
§
|
changes
to or obsolescence of acquired technology, data, and
trademarks.
|
We also
evaluate the remaining useful life of our long-lived assets on a periodic basis
to determine whether events or circumstances warrant a revision to the remaining
estimated amortization period.
As
discussed in Note 6 of our consolidated financial statements, during the fourth
quarter of 2008, as a result of a specific event, we recorded and impairment of
an intangible asset of approximately $1.9 million to cost of
revenue.
Income
Taxes
We
account for income taxes in accordance with the provisions of ASC Topic 740,
Accounting for Income
Taxes, which requires deferred tax assets and liabilities to be
recognized for the future tax consequences attributable to differences between
the consolidated financial statement carrying amounts of assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be reversed. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Due to cumulative U.S. book losses in current and recent years and uncertainty
as to the extent and timing of profitability in future years management has
recorded a full valuation allowance as of December 31, 2010 on our U.S. net
deferred tax assets excluding deferred tax liabilities related to
indefinite-lived assets. For further information please refer to Note 10 in the
accompanying notes to the consolidated financial statements included in this
Annual Report on Form 10-K.
The total
liability for the uncertain tax positions recorded in our consolidated balance
sheet in accrued other liabilities as of December 31, 2010 and December 31,
2009, was $1.0 million and $0.8 million, respectively.
Interest
and penalties, if any, related to tax positions taken in our tax returns are
recorded in interest expense and general and administrative expenses,
respectively, in our consolidated statement of operations. As of December 31,
2010 and December 31, 2009, we have accrued interest and penalties related to
tax positions taken on our tax returns of approximately $0.1 million and
$47,000, respectively.
Advertising
Expenses
We
expense the cost of advertising and promoting our services as incurred. Such
costs are included in selling, general and administrative expenses in the
consolidated statements of operations and totaled $1.0 million,
$1.3 million and $1.4 million for the years ended December 31, 2010,
2009 and 2008, respectively.
57
Concentration
of Credit Risk
Our
assets that are exposed to concentrations of credit risk consist primarily of
cash, cash equivalents, short-term and long-term investments and receivables
from clients. We place our cash, cash equivalents, short-term and long-term
investments with financial institutions. We regularly evaluate the
creditworthiness of the issuers in which we invest. Our trade receivables are
spread over many customers. We maintain an allowance for uncollectible accounts
receivable based on expected collectability and perform ongoing credit
evaluations of customers’ financial condition. As of December 31, 2010 and
2009, no customer accounted for more than 10% of our accounts receivable. For
the three years ended December 31, 2010, no customer accounted for more
than 10% of our revenue.
Our
revenue is generated from customers associated with the automotive
industry.
Net (Loss)
Income per Share
We
compute net (loss) income per share in accordance with FASB ASC Topic 260, Earnings Per Share, (“ASC
Topic 260”). Under ASC Topic 260, stock-based payment awards that contain rights
to receive non-forfeitable dividends (whether paid or unpaid) are participating
securities, and should be included in the two-class method of computing earnings
per share. Our nonvested restricted common stock, which includes our long-term
incentive equity awards, are considered participating securities since the
stock-based awards contain a non-forfeitable right to dividends irrespective of
whether the awards ultimately vest and, therefore, have been included in the
denominator of both the basic and diluted earnings per share
calculations.
Basic
earnings per share is calculated by dividing net (loss) income, adjusted for
amounts allocated to participating securities under two-class method, if
applicable, by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is calculated by dividing net income by
the weighted average number of common shares outstanding, assuming dilution,
during the period. Diluted earnings per share is calculated by dividing net
(loss) income, adjusted for amounts allocated to participating securities under
two-class method, if applicable, by the weighted average number of common shares
outstanding, assuming dilution, during the period. The diluted earnings per
share calculation assumes (i) all stock options which are in the money are
exercised at the beginning of the period and (ii) if applicable, unvested awards
that are considered to be contingently issuable shares because they contain
either a performance or market condition will be included in diluted earnings
per share if dilutive and if their conditions have (a) been satisfied at the
reporting date or (b) would have been satisfied if the reporting date was the
end of the contingency period.
The
following table sets forth the computation of basic and diluted net (loss)
income per share for the years ended December 31, 2010, 2009, and 2008, (in
thousands, except share and per share amounts):
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
(loss) income
|
$
|
(27,833
|
)
|
$
|
(4,334
|
)
|
$
|
1,736
|
||||
|
Net
income allocated to participating securities under two-class method
(2)
|
—
|
—
|
(36
|
)
|
||||||||
|
Net
(loss) income applicable to common stockholders
|
$
|
(27,833
|
)
|
$
|
(4,334
|
)
|
$
|
1,700
|
||||
|
Denominator:
|
||||||||||||
|
Weighted
average common stock outstanding (basic)
|
40,322,939
|
39,524,544
|
40,461,896
|
|||||||||
|
Common
equivalent shares from options to purchase common stock and restricted
common stock units (1)
|
—
|
—
|
1,076,483
|
|||||||||
|
Weighted
average common stock outstanding (diluted)
|
40,322,939
|
39,524,544
|
41,538,379
|
|||||||||
|
Basic
net (loss) income per share applicable to common stockholders
(2)
|
$
|
(0.69
|
)
|
$
|
(0.11
|
)
|
$
|
0.04
|
||||
|
Diluted
net (loss) income per share applicable to common stockholders
(2)
|
$
|
(0.69
|
)
|
$
|
(0.11
|
)
|
$
|
0.04
|
||||
58
The
following is a summary of the weighted securities outstanding during the years
ended December 31, 2010, 2009, and 2008, that have been excluded from the
diluted net (loss) income per share calculation because the effect would have
been antidilutive:
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Stock
options
|
4,815,508 | 4,292,789 | 2,252,509 | |||||||||
|
Restricted
stock units (1)
|
804,895 | 629,041 | — | |||||||||
|
Performance
stock units
|
48,240 | — | — | |||||||||
|
Total
antidilutive awards
|
5,668,643 | 4,921,830 | 2,252,509 | |||||||||
|
(1)
|
Our restricted common stock units
are not considered participating securities since they do not contain a
non-forfeitable right to dividends and have, therefore, not been included
in the denominator for basic earnings per share
calculations.
|
|
(2)
|
Earnings
per share data for the year ended December 31, 2008 had been retroactively
adjusted to conform to the provisions of ASC Topic 260, which did not have
a significant impact on our historical earnings per share calculation.
Additionally, as the two-step method does not allocate losses to
participating securities there is no allocation for 2009 and
2010.
|
Stock-Based
Compensation Expense and Assumptions
Stock-Based Compensation
Expense
Stock-based
compensation is measured at the grant date based on the fair value of the award,
and recognized as an expense over the requisite service period, net of an
estimated forfeiture rate. We have four types of stock-based compensation
programs: stock options, restricted common stock, restricted stock units and
performance stock units.
The
following summarizes stock-based compensation expense recognized for the three
years ended December 31, 2010, 2009 and 2008 (in thousands):
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Stock
options
|
$ | 5,732 | $ | 10,535 | $ | 8,630 | ||||||
|
Restricted
common stock (1)
|
1,670 | 4,599 | 5,361 | |||||||||
|
Restricted
stock units
|
3,354 | 1,855 | — | |||||||||
|
Performance
stock units (2)
|
477 | — | — | |||||||||
|
Total
stock-based compensation expense (3)
|
$ | 11,233 | $ | 16,989 | $ | 13,991 | ||||||
|
(1)
|
Awards
granted under the Long-Term Incentive Plan (“LTIP”) consisted of
restricted common stock. Each individual’s total award was allocated
50% to achieving earnings before interest, taxes, depreciation and
amortization (“EBITDA Performance Award”) and 50% to the market value of
our common stock (“Market Value Award”). For further information
regarding our stock-based compensation plans, please refer to Note
11.
|
The
expense recorded to restricted common stock includes expense related to the
EBITDA Performance Award and the Market Value Award for the years ended December
31, 2010, 2009 and 2008, is as follows (in thousands):
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
EBITDA
Performance Award
|
$ | 40 | $ | 486 | $ | 682 | ||||||
|
Market
Value Award
|
45 | 258 | 750 | |||||||||
|
Total
|
$ | 85 | $ | 744 | $ | 1,432 | ||||||
|
(2)
|
Performance
stock units granted to certain executive officers consisted of restricted
stock units. Each individual’s total award was allocated 50% to
achieving adjusted net income (“ANI”) targets for the year ended December
31, 2010 (“ANI Performance Award”) and 50% to the total shareholder return
(“TSR”) of our common stock as compared to other companies in the NASDAQ
Internet Index in the aggregate for the fiscal years 2010, 2011 and 2012
(“TSR Performance Award”). For further information regarding our
stock-based compensation plans, please refer to Note
11.
|
59
The
expense recorded to performance stock units includes expense related to the ANI
Performance Award and the TSR Performance Award for the year ended December 31,
2010 is as follows (in thousands):
|
December 31, 2010
|
||||
|
ANI
Performance Award
|
$ | 157 | ||
|
TSR
Performance Award
|
320 | |||
|
Total
|
$ | 477 | ||
|
(3)
|
Included
in stock-based compensation expense for the year ended December 31, 2009
was $3.9 million of stock-based compensation expense related to the
realignment of our workforce and business on January 5, 2009. For further
information about the realignment of our workforce and business, please
refer to Note 15.
|
The
income tax benefit related to stock-based compensation expense for the years
ended December 31, 2010, 2009 and 2008, was $4.0 million (offset by a full
valuation allowance), $6.2 million and $5.0 million, respectively.
A summary
of the unamortized stock-based compensation expense and associated weighted
average remaining amortization periods for stock options, restricted common
stock, restricted stock units and performance stock units is presented
below:
|
Weighted
|
||||||||
|
Unamortized
|
Average
|
|||||||
|
Stock
-Based
|
Remaining
|
|||||||
|
Compensation Expense
(in thousands)
|
Amortization
Period
(in years)
|
|||||||
|
Stock
options
|
$ | 8,522 | 2.39 | |||||
|
Restricted
common stock
|
$ | 311 | 0.53 | |||||
|
Restricted
stock units
|
$ | 8,508 | 2.55 | |||||
|
Performance
stock units
|
$ | 1,220 | 2.09 | |||||
Stock-Based Compensation
Assumptions and Vesting Requirements
Determining
the appropriate fair value model and calculating the fair value of the
stock-based payment awards require the input of highly subjective assumptions,
including the expected life, expected stock price volatility, and the number of
expected options, restricted stock units, restricted common stock or performance
stock units that will be forfeited prior to the completion of the vesting
requirements. We use the Black-Scholes and binomial lattice-based valuation
pricing models to value our stock-based awards.
Expected
Life
Due to
our limited public company history, the expected life for stock-based awards
granted before December 31, 2007 was determined based on the “simplified” method
under the provisions of ASC Topic 718-10, Compensation – Stock
Compensation. Beginning with options granted in 2008 the expected life
was determined based upon the experience of similar entities whose shares are
publicly traded, with the exception of options granted under the Stock Option
Exchange Program (“SOEP”). We continue to apply this expected life methodology
to future award grants.
The
expected life under the SOEP was determined with the assistance of an
independent third party by means of Monte-Carlo simulations of future stock
price based upon “in-the-money”, vesting schedule, contractual term, current
life to date and applied an annual termination rate (after vesting) to the
outstanding options in the simulation to reflect the probability of exercise
behavior. For further information on the SOEP, please refer to Note
11.
Expected Stock Price
Volatility
Due to
our limited public company history, the expected volatility for stock-based
awards granted before September 2009 was determined based on the expected
volatility of similar entities whose shares are publicly traded. Beginning in
September 2009, we began estimating our expected volatility using a
time-weighted average of our historical volatility in combination with the
historical volatility of similar entities whose common shares are publicly
traded. We continued to apply this volatility methodology to future award
grants.
Risk-Free Interest Rate and
Dividend Yield
The
risk-free interest rates used for all stock-based awards granted were the actual
U.S. Treasury zero-coupon rates for bonds matching our expected life of an
option on the date of grant.
60
The
expected dividend yield is not applicable to any stock-based awards granted as
we have not paid any dividends and intend to retain any future earnings for use
in our business.
Option Vesting
Requirements
Options
granted generally vest over a period of four years (three years for directors)
from the vesting commencement date, with the exception of options granted under
the SOEP. Options granted generally expire seven years from the date of grant,
except for stock options granted prior to July 11, 2007, which expire ten years
from the date of grant. Options to the extent unvested, expire on the date of
termination of employment, and to the extent vested, generally expire at the end
of the three-month period following termination of employment, except in the
case of executive officers, who under certain conditions have a twelve-month
period following termination of employment to exercise. Exchanged options
granted under the SOEP will vest 25% after six months from the new grant date,
25% twelve months from the new grant date, and 1/48 from the new options grant
date each month thereafter.
Restricted Common Stock and
Restricted Stock Unit Vesting Requirements
Restricted
common stock and restricted stock unit’s granted are generally subject to an
annual cliff vest of four years (one year for directors) from the vesting
commencement date, with the exception of the LTIP and performance stock unit
awards (noted below).
LTIP and Performance Stock
Unit Vesting Requirements
The LTIP
awards were earned upon the achievement of EBITDA and market-based targets for
the fiscal years 2007, 2008 and 2009 and the grantee’s continuous employment in
active service until January 31, 2010.
The
performance stock unit awards are earned upon the achievement of adjusted net
income and total shareholder return targets and the grantee’s continuous
employment in active service until January 31, 2013.
For the
year ended December 31, 2010, 2009 and 2008, the fair market value of each
share-based award grant has been estimated on the date of grant using the
Black-Scholes Option Pricing Model with the following assumptions:
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Expected
volatility
|
50.3 | % | 48.6 – 51.6 | % | 47.0 – 48.6 | % | ||||||
|
Expected
dividend yield
|
0 | % | 0 | % | 0 | % | ||||||
|
Expected
life (in years)
|
4.18 | 4.18 – 4.47 | 4.33 – 4.47 | |||||||||
|
Risk-free
interest rate
|
0.94 – 1.91 | % | 1.62 – 2.12 | % | 2.35 – 3.14 | % | ||||||
|
Weighted-average
fair value of stock options granted
|
$ | 6.32 | $ | 5.79 | $ | 9.61 | ||||||
|
Weighted-average
fair value of restricted common stock granted
|
— | $ | 15.43 | $ | 19.91 | |||||||
|
Weighted-average
fair value of restricted stock units granted
|
$ | 15.30 | $ | 12.03 | — | |||||||
The
fair value of the EBITDA Performance Award has been estimated on the date of
grant using a Black-Scholes valuation pricing model with the following
weighted-average assumptions:
|
July 21, 2007
|
November 2, 2006
|
August 2, 2006
|
||||||||||
|
Expected
volatility
|
47.0
|
%
|
40.0
|
%
|
40.0
|
%
|
||||||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
0
|
%%
|
||||||
|
Expected
life (in years)
|
2.37
|
%
|
3.16
|
3.42
|
|
|||||||
|
Risk-free
interest rate
|
4.43
|
%
|
4.91
|
%
|
4.99
|
%
|
||||||
|
Weighted-average
fair value of EBITDA Performance Award
|
$
|
38.01
|
$
|
25.39
|
$
|
18.95
|
||||||
The
fair value of the Market Value Award has been estimated on the date of grant
using a binomial lattice-based valuation pricing model with the following
weighted-average assumptions:
|
July 21, 2007
|
November 2, 2006
|
August 2, 2006
|
||||||||||
|
Expected
volatility
|
47.0
|
%
|
40.0
|
%
|
40.0
|
%
|
||||||
|
Expected
dividend yield
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
||||||
|
Expected
life (in years)
|
2.37
|
1.16-3.16
|
1.41-3.42
|
|
||||||||
|
Risk-free
interest rate
|
4.43
|
%
|
4.55-4.91
|
%
|
4.83-4.99
|
%
|
||||||
|
Weighted-average
fair value of Market Value Award
|
$
|
29.77
|
$
|
15.86
|
$
|
7.49
|
||||||
61
The fair
value of the ANI Performance Award has been estimated on the date of grant using
a Black-Scholes valuation pricing model with the following weighted-average
assumptions
|
Expected
volatility
|
50.3
|
%
|
||
|
Expected
dividend yield
|
0
|
%
|
||
|
Expected
life (in years)
|
4.18
|
|
||
|
Risk-free
interest rate
|
1.33
|
%
|
||
|
Weighted-average
fair value of ANI Performance Award
|
$
|
16.91
|
|
The fair
value of the TSR Award has been estimated on the date of grant using a binomial
lattice-based valuation pricing model with the following weighted-average
assumptions:
|
|
||||
|
Expected
volatility
|
50.3
|
%
|
||
|
Expected
dividend yield
|
0
|
%
|
||
|
Expected
life (in years)
|
4.18
|
|
||
|
Risk-free
interest rate
|
1.33
|
%
|
||
|
Weighted-average
fair value of TSR Award
|
$
|
17.52
|
|
Application
of alternative assumptions could produce significantly different estimates of
the fair value of stock-based compensation and consequently, the related amounts
recognized in our consolidated statements of
operations.
For
further information on our stock-based compensation programs, please refer to
Note 11.
Recent
Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance
to amend the disclosure requirements related to recurring and nonrecurring fair
value measurements. The guidance requires new disclosures for significant
transfers in and out of Level 1 and Level 2 fair value measurements and to
provide a gross presentation of the activities, including purchases, sales,
issuances, and settlements, within the Level 3 rollforward. The guidance also
clarifies existing fair value disclosures about the level of disaggregation and
about inputs and valuation techniques used to measure fair value. The new
disclosure requirements are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about the Level 3
rollforward, which are effective for fiscal years beginning after December 15,
2010. The adoption of the new disclosure requirements applicable for our first
quarter of 2010 did not have a material impact on our consolidated financial
statements. We do not expect the full adoption of the guidance to have a
material impact on our fair value measurement disclosures.
In
December 2010, the FASB issued guidance to amend the disclosure requirements of
supplementary pro forma information for business combinations. The guidance
addresses the diversity in practice about the interpretation of the pro forma
revenue and earnings disclosure requirements for business combinations. The
amendments specify that if a public entity presents comparative financial
statements, the entity should disclose revenue and earnings of the combined
entity as though the business combination(s) that occurred during the current
year had occurred as of the beginning of the comparable prior annual reporting
period only. The amendments also expand the supplemental pro forma disclosures
to include a description of the nature and amount of material, nonrecurring pro
forma adjustments directly attributable to the business combination included in
the reported pro forma revenue and earnings. The amendments are effective
prospectively 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, 2010. We are currently
evaluating the impact of this guidance on our consolidated financial
statements.
3.
Fair Value Measurements
Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Inputs used to measure fair value
are prioritized into a three-level fair value hierarchy. This hierarchy requires
entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair values are
as follows:
|
|
·
|
Level
1 – Quoted prices (unadjusted) in active markets that are accessible at
the measurement date for assets or liabilities. The fair value hierarchy
gives the highest priority to Level 1
inputs.
|
|
|
·
|
Level
2 – Observable prices that are based on inputs not quoted on active
markets, but corroborated by market
data.
|
|
|
·
|
Level
3 – Unobservable inputs are used when little or no market data is
available. The fair value hierarchy gives the lowest priority to Level 3
inputs.
|
We have
segregated all financial assets that are measured at fair value on a recurring
basis into the most appropriate level within the fair value hierarchy based on
the inputs used to determine the fair value at the measurement date in the table
below.
62
Financial
assets measured at fair value on a recurring basis include the following as of
December 31, 2010 and 2009 (in thousands):
|
As of December 31, 2010
|
Quoted Prices in
Active Markets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
December 31, 2010
|
||||||||||||
|
Cash
equivalents (1)
|
$ | 139,010 | $ | — | $ | — | $ | 139,010 | ||||||||
|
Short-term
investments (3) (4)
|
40 |
|
— | 450 | 490 | |||||||||||
|
Long-term
investments (5)
|
— | — | 2,254 | 2,254 | ||||||||||||
|
Total
|
$ | 139,050 | $ | — | $ | 2,704 | $ | 141,754 | ||||||||
|
As of December 31, 2009
|
Quoted Prices in
Active Markets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
December 31, 2009
|
||||||||||||
|
Cash
equivalents (1) (2)
|
$ | 163,615 | $ | — | $ | — | $ | 163,615 | ||||||||
|
Short-term
investments (3)
|
1,484 | — | — | 1,484 | ||||||||||||
|
Long-term
investments (4)(5)
|
— | — | 3,971 | 3,971 | ||||||||||||
|
Total
|
$ | 165,099 | $ | — | $ | 3,971 | $ | 169,070 | ||||||||
|
(1)
|
Cash
equivalents consist primarily of money market funds with original maturity
dates of three months or less, for which we determine fair value through
quoted market prices.
|
|
(2)
|
In
our Quarterly Report on Form 10-Q for the three months ended March 31,
2010, Level 1 cash equivalents of approximately $163.6 million as of
December 31, 2009 was revised from $127.6 million as previously disclosed
in the fair value measurements footnoted in our Annual Report on Form 10-K
for the year ended December 31, 2009 filed with the SEC on February 24,
2010 to reflect the inclusion of a money market account held at December
31, 2009 that was incorrectly omitted from our original footnote
disclosure. Amounts classified as cash and cash equivalent on our audited
balance sheet at December 31, 2009 were correctly
stated.
|
|
(3)
|
As
of December 31, 2010 and 2009, Level 1 short-term investments include
investments in tax-advantaged preferred securities, for which we
determined fair value based on the quoted market prices of underlying
securities. During the year ended December 31, 2010, we sold a portion of
our Level 1 investments in tax-advantaged preferred securities for
approximately $1.4 million and recorded a gain in the statement of
operations of approximately $0.6
million.
|
|
(4)
|
Level
3 investments include an auction rate security (“ARS”) invested in a
tax-exempt state government obligation that was valued at par with a value
of $0.4 million, or 0.1% of our total assets, and $1.6 million, or 0.3% of
our total assets, as of December 31, 2010 and 2009, respectively. Our
intent is not to hold the ARS invested in tax-exempt state government
obligations to maturity, but rather to use the interest reset feature to
provide liquidity. However, should the marketplace auctions continue to
fail we may hold the security to maturity. As of December 31, 2009, we
have classified this as long-term due to the maturity date of the security
being September 2011, coupled with ongoing failed auctions in the
marketplace. As of December 31, 2010, this security was re-classified to
short-term due to the maturity date of September 2011. In October 2010,
approximately $1.1 million of this security was redeemed by the issuer at
par.
|
|
(5)
|
Level
3 long-term investments include a tax-advantaged preferred stock of a
financial institution with a fair value of $2.3 million, or 0.5% of our
total assets and $2.4 million, or 0.5% of our total assets, as of December
31, 2010 and 2009, respectively. It is uncertain whether we will be able
to liquidate these securities within the next twelve months; as such we
have classified them as long-term on our consolidated balance sheets. Due
to the lack of observable market quotes we utilized valuation models that
rely exclusively on Level 3 inputs including those that are based on
expected cash flow streams, including assessments of counterparty credit
quality, default risk underlying the security, discount rates and overall
capital market liquidity.
|
63
A
reconciliation of the beginning and ending balances of Level 3 investments as of
December 31, 2009 and 2010, is as follows (in thousands):
|
Balance
as of January 1, 2009
|
$
|
1,550
|
||
|
Reclassification
from Level 2 investments to Level 3 investments (6)
|
1,360
|
|||
|
Realized
gain on securities included in the statement of operations
(6)
|
716
|
|||
|
Unrealized
gain on securities recorded in other comprehensive income
(6)
|
345
|
|||
|
Balance
as of December 31, 2009
|
$
|
3,971
|
||
|
Unrealized
loss on securities recorded in other comprehensive income
(6)
|
(167
|
)
|
||
|
Partial
redemption of auction rate security (4)
|
(1,100
|
)
|
||
|
Balance
as of December 31, 2010
|
$
|
2,704
|
|
(6)
|
Level
2 investments in certain tax-advantaged preferred stock trusts held as of
January 1, 2009 dissolved and the underlying preferred stock investments
were distributed during 2009. As a result of these dissolutions, we
measured the fair value of the Level 3 long-term tax-advantaged preferred
stock on the distribution date and determined that the value increased
from $1.4 million as of December 31, 2008 to $2.1 million on the
distribution date and as a result we recorded a realized gain in the
statement of operations of $0.7 million. Subsequent to the trust
dissolution, we re-measured the fair value on December 31, 2009 and 2010
and determined that the value had increased and recorded a gain in other
comprehensive income of $0.3 million and approximately $0.2 million,
respectively. The total value of the tax-advantaged preferred stock of a
financial institution included in the $4.0 million of Level 3 investments
as of December 31, 2009 is $2.4 million. The total value of the
tax-advantaged preferred stock of a financial institution included in the
$2.7 million of Level 3 investments as of December 31, 2010 is $2.3
million.
|
2008
Other-than-temporary impairment charge
During
the year ended December 31, 2008, we recorded an other-than-temporary impairment
charge related to certain ARS invested in tax-advantaged preferred stock trusts
in which the underlying equities are preferred stock. Based upon our assessment
we reduced the fair value of the investments in the preferred stock from $9.6
million to $3.7 million and recorded an other-than-temporary charge of $6.0
million to earnings. These ARS were associated with failed
auctions.
4.
Business Combinations
AAX
Acquisition
On
January 23, 2009, we acquired the AAX® suite of inventory management solutions
and other assets, including without limitation all of the capital stock of AAX
(collectively, AAX), from JM Dealer Services, Inc., a subsidiary of JM Family
Enterprises, Inc., for a purchase price of $30.9 million (net of a purchase
price adjustment of $1.7 million, which is discussed below). For the year ended
December 31, 2009, we expensed approximately $0.5 million of professional
fees associated with this acquisition, which is classified in selling, general
and administrative expenses.
This
acquisition was recorded under the purchase method of accounting, resulting in
the total purchase price being allocated to the assets acquired and liabilities
assumed according to their estimated fair values at the date of acquisition as
follows (in thousands):
|
Current
assets
|
$
|
489
|
||
|
Property
and equipment
|
1,035
|
|||
|
Intangible
assets
|
16,639
|
|||
|
Goodwill
|
15,348
|
|||
|
Total
assets acquired
|
33,511
|
|||
|
Total
liabilities assumed
|
(2,636
|
)
|
||
|
Net
assets acquired
|
$
|
30,875
|
The
liabilities assumed includes a $2.3 million deferred tax liability that relates
primarily to the future amortization of certain acquired
intangibles.
We
allocated the amounts of intangible assets and goodwill based on fair value as
follows: approximately $7.4 million of the purchase price has been allocated to
customer contracts (weighted-average useful life is 6.5 years), $6.2 million to
acquired technology and database (weighted-average useful life is 4.2 years),
$2.0 million to the AAX trade name (seven year useful life), and $1.0 million to
a non-compete agreement (four year useful life). The useful life for
each of the above acquired long-term intangible assets was determined based on
the period which the asset is expected to contribute directly or indirectly to
our future cash flows. We recorded approximately $15.3 million in goodwill,
which represents the remainder of the excess of the purchase price over the fair
value of the net assets acquired. The allocated value of goodwill primarily
relates to the acquired workforce and the anticipated synergies resulting from
combining AAX with our current inventory management solution, and $13.0 million
of the goodwill recorded is deductible for tax purposes.
64
Certain
acquired intangibles in our AAX acquisition are being amortized using an
accelerated method of amortization. In determining amortization expense
under our accelerated method for any given period, we calculate the expected
cash flows for that period that were used in determining the acquired value of
the asset and divide that amount by the total expected cash flows over the
estimated life of the asset. We multiply that percentage by the initial
carrying value of the asset to arrive at the amortization expense for that
period. Based on the nature of the asset and how the asset is valued in
purchase accounting, we believe that this method better approximates the
distribution of cash flows generated by the acquired intangible asset. We
will also continue to use the straight line method for certain intangible assets
if there is no better pattern in which the asset’s economic benefits are
consumed or otherwise used up.
The
results of AAX were included in our consolidated statement of operations from
the date of acquisition. AAX revenue for 2009 was $18.4 million. We are unable
to provide AAX earnings since acquisition since we do not have stand-alone
earnings reporting for AAX.
Under the
terms of the purchase agreement the seller was granted the right to service
credits of $2.5 million, which may be applied against fees that are charged in
connection with their purchase of any future products or services of
DealerTrack. These service credits expire on January 23, 2013. The service
credits are being recorded as a reduction in revenue as they are utilized. As of
December 31, 2010, approximately $0.2 million of the service credits have been
utilized by the seller.
Under the
terms of a merger agreement with ASM, entered into on August 1, 2007, we have a
future contingent payment obligation of up to $11.0 million based upon the
achievement of certain operational targets from February 2008 through February
2011. As of December 31, 2009, we determined that certain operational targets
were probable of being achieved and recorded a liability of $1.0 million. The
$1.0 million was deemed compensation for services, as payment was also
contingent on certain former stockholders remaining employees or consultants of
DealerTrack for a certain period. The $1.0 million of additional consideration
was paid in the first quarter of 2010. Additional purchase consideration, if
any, is not expected to be significant and will be recorded as compensation
expense when the contingency is resolved.
In
connection with the purchase of ALG on May 25, 2005, we had a contractual
agreement with the seller to pay an additional $0.8 million per year for 2006
through 2010. During the year ended December 31, 2010, we made the final payment
of $0.8 million relating to this agreement. There was additional contingent
consideration of up to $11.3 million that could be paid contingent upon future
increases in revenue of ALG and another one of our subsidiaries through December
2009. The total amount of contingent consideration paid or accrued as of
December 31, 2010 was $3.1 million, of which, the final payment of $1.1 million
was accrued in 2009 and paid in the first quarter of 2010. The additional
purchase price consideration was recorded as goodwill in the applicable period
on our consolidated balance sheet.
Property
and equipment are recorded at cost and consist of the following (dollars in
thousands):
|
Estimated
|
||||||||||
|
Useful
|
||||||||||
|
Life
|
December 31,
|
|||||||||
|
(in years)
|
2010
|
2009
|
||||||||
|
Computer
equipment
|
3 -
5
|
$
|
32,525
|
$
|
22,662
|
|||||
|
Office
equipment
|
5
|
3,784
|
3,550
|
|||||||
|
Furniture
and fixtures
|
5
|
3,378
|
3,343
|
|||||||
|
Leasehold
improvements
|
3
-13
|
3,361
|
3,188
|
|||||||
|
Total
property and equipment, gross
|
43,048
|
32,743
|
||||||||
|
Less:
Accumulated depreciation and amortization
|
(24,173
|
)
|
(19,229
|
)
|
||||||
|
Total
property and equipment, net
|
$
|
18,875
|
$
|
13,514
|
||||||
Depreciation
and amortization expense for the years ended December 31, 2010, 2009 and
2008, is as follows (in thousands):
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Depreciation
and amortization expense
|
$ | 7,621 | $ | 7,126 | $ | 5,884 | ||||||
65
6.
Intangible Assets
Intangible
assets are recorded at estimated fair value and are amortized ratably over their
estimated useful lives. The gross book value, accumulated amortization and
amortization periods of the intangible assets were as follows (dollars in
thousands):
|
December 31, 2010
|
December 31, 2009
|
|||||||||||||||||||
|
Gross
|
Gross
|
Amortization
|
||||||||||||||||||
|
Book
|
Accumulated
|
Book
|
Accumulated
|
Period
|
||||||||||||||||
|
Value
|
Amortization
|
Value
|
Amortization
|
(in years)
|
||||||||||||||||
|
Customer contracts
|
$
|
37,028
|
$
|
(30,283
|
)
|
$
|
40,352
|
$
|
(24,769
|
)
|
2-7
|
|
||||||||
|
Database
|
13,292
|
(12,421
|
)
|
13,825
|
(10,945
|
)
|
3-6
|
|||||||||||||
|
Trade
names
|
10,601
|
(6,135
|
)
|
12,510
|
(6,924
|
)
|
2-10
|
|||||||||||||
|
Technology
|
27,543
|
(16,991
|
)
|
27,170
|
(11,110
|
)
|
1-5
|
|||||||||||||
|
Non-compete
agreements
|
1,389
|
(860
|
)
|
6,585
|
(5,090
|
)
|
3-5
|
|||||||||||||
|
Total
|
$
|
89,853
|
$
|
(66,690
|
)
|
$
|
100,442
|
$
|
(58,838
|
)
|
||||||||||
Amortization
expense related to intangibles for the years ended December 31, 2010, 2009
and 2008, is as follows (in thousands):
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Intangible
amortization expense
|
$ | 19,424 | $ | 20,341 | $ | 26,781 | ||||||
Amortization
expense that will be charged to income for the subsequent five years and
thereafter is estimated, based on the December 31, 2010 book value, as
follows (in thousands):
|
2011
|
$
|
10,913
|
||
|
2012
|
5,803
|
|||
|
2013
|
3,744
|
|||
|
2014
|
1,840
|
|||
|
2015
|
863
|
|||
|
Thereafter
|
—
|
|||
|
Total
|
$
|
23,163
|
During
May 2006, as a part of our acquisition of Global Fax, LLC, we recorded an
intangible asset of $4.4 million related to an application processing contract
with a service provider. During the fourth quarter of 2008, we were notified by
the service provider that they would be cancelling their contract and as such
management concluded that this asset was impaired and accelerated the remaining
amortization of approximately $1.9 million to cost of revenue.
7.
Goodwill
The
changes in the carrying amount of goodwill for the years ended December 31, 2009
and 2010 is as follows (in thousands):
|
Balance
as of January 1, 2009
|
$
|
114,886
|
||
|
Acquisition
of AAX (Note 4)
|
15,348
|
|||
|
Impact
of change in Canadian dollar exchange rate
|
3,587
|
|||
|
Purchase
price adjustment – ALG (Note 4)
|
1,126
|
|||
|
Other
|
(200
|
)
|
||
|
Balance
as of December 31, 2009
|
$
|
134,747
|
||
|
Impact
of change in Canadian dollar exchange rate
|
1,301
|
|||
|
Other
|
360
|
|||
|
Balance
as of December 31, 2010
|
$
|
136,408
|
||
66
8.
Accrued Liabilities - Other
Following
is a summary of the components of other accrued liabilities (in
thousands):
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Customer
deposits
|
$ | 2,398 | $ | 2,357 | ||||
|
Professional
fees
|
2,178 | 2,280 | ||||||
|
Computer
equipment
|
1,693 | 21 | ||||||
|
Software
licenses
|
1,262 | 1,325 | ||||||
|
Sales
taxes
|
1,102 | 883 | ||||||
|
Revenue
share
|
1,043 | 1,284 | ||||||
|
Other
|
2,835 | 3,174 | ||||||
|
Total
accrued liabilities - other
|
$ | 12,511 | $ | 11,324 | ||||
9.
Retirement Plans
At
December 31, 2010, we maintained two retirement plans in which employees are
eligible to participate.
U.S.
employees are eligible to participate in a 401(k) plan which covers
substantially all employees meeting certain age requirements in accordance with
section 401(k) of the Internal Revenue Code. Under the provisions of the 401(k)
plan, we have the ability to make matching contributions equal to a percentage
of the employee’s voluntary contribution, as well as an additional matching
contribution at year end and a nonelective contribution. Effective April 1,
2009, we discontinued new matching contributions to the plan. As of December 31,
2009, we elected to make a 1% matching contribution on eligible earnings under
the 401(k) plan. Effective January 1, 2010, we reinstated the employer matching
contributions to the 401(k) plan. In addition, at December 31, 2010, we elected
to make an additional matching contribution covering all employees who were
active participants on the last day of the plan year in the amount of $0.5
million, or approximately 70% of matching contributions made during the year.
Total contributions under the plan for the years ended December 31, 2010,
2009 and 2008 were $1.3 million, $1.0 million and $1.5 million,
respectively.
Canadian
employees are eligible to participate in a registered retirement savings plan
(“RRSP”) which covers all full time employees. Under the provisions of the RRSP,
we are required to match 100% of employee contributions to the plan up to 6% of
eligible earnings. Our contributions under the RRSP for the years ended December
31, 2010, 2009 and 2008 were $0.6 million, $0.3 million and $0.5 million
respectively.
67
10.
Income Taxes
The
components of our income (loss) before income taxes for the years ended December
31, 2010, 2009 and 2008, is as follows (in thousands):
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
United
States
|
$
|
(2,375
|
)
|
$
|
(16,676
|
)
|
$
|
(2,467
|
)
|
|||
|
Canada
|
5,139
|
8,823
|
8,164
|
|||||||||
|
Total
income (loss) before taxes
|
$
|
2,764
|
$
|
(7,853
|
)
|
$
|
5,697
|
|||||
The
components of our (provision for) benefit from income taxes for the years ended
December 31, 2010, 2009 and 2008, is as follows (in thousands):
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Current tax:
|
||||||||||||
|
Federal
|
$
|
1,476
|
|
$
|
(383
|
) |
$
|
(2,440
|
) | |||
|
State
and local
|
(810
|
) |
1,066
|
|
(290
|
) | ||||||
|
Canada
|
(2,089
|
) |
(4,426
|
) |
(3,283
|
) | ||||||
|
Total
current tax
|
(1,423
|
) |
(3,743
|
) |
(6,013
|
) | ||||||
|
Deferred
tax:
|
||||||||||||
|
Federal
|
(27,759
|
) |
5,915
|
|
1,783
|
|
||||||
|
State
and local
|
(1,306
|
) |
498
|
|
913
|
|
||||||
|
Canada
|
(109
|
) |
849
|
|
(644
|
) | ||||||
|
Total
deferred tax
|
(29,174
|
) |
7,262
|
|
2,052
|
|
||||||
|
(Provision
for) benefit from income taxes, net
|
$
|
(30,597
|
) |
$
|
3,519
|
|
$
|
(3,961
|
) | |||
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes using enacted tax rates in effect in
the year in which the differences are expected to reverse. During the year ended
December 31, 2010, due to cumulative U.S. book losses and anticipated
insufficient taxable income management determined the need for a full valuation
allowance, and recorded it against our net U.S. deferred tax assets, excluding
deferred tax liabilities related to indefinite-lived assets.
68
Deferred
tax assets and liabilities as of December 31, 2010 and 2009 consisted of
the amounts shown below:
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carryforwards
|
$
|
3,497
|
$
|
3,363
|
||||
|
Depreciation
and amortization
|
—
|
77
|
||||||
|
Deferred
compensation
|
14,740
|
15,438
|
||||||
|
Acquired
intangibles
|
17,600
|
4,973
|
||||||
|
Tax
credits
|
1,938
|
1,367
|
||||||
|
Impairment
loss
|
1,141
|
1,135
|
||||||
|
Other
|
3,361
|
4,290
|
||||||
|
Total
deferred tax assets
|
42,277
|
30,643
|
||||||
|
Deferred
tax liabilities:
|
||||||||
|
Acquired
Intangibles
|
(11,324
|
)
|
(738
|
)
|
||||
|
Capitalized
software and website development
|
(4,484
|
)
|
(3,564
|
)
|
||||
|
Depreciation
and amortization
|
(12
|
)
|
—
|
|||||
|
Other
|
(2,574
|
)
|
(1,088
|
)
|
||||
|
Total
deferred tax assets, net
|
23,883
|
25,253
|
||||||
|
Deferred
tax asset valuation allowance
|
(32,637
|
)
|
(3,862
|
)
|
||||
|
Total
Deferred tax (liabilities) assets, net
|
$
|
(8,754
|
)
|
$
|
21,391
|
|||
As of
December 31, 2010, our $23.9 million net deferred tax asset is the result of
temporary differences between book and tax accounting. These
temporary differences primarily relate to stock compensation, intangible
amortization and net operating losses. Deferred tax assets are
recognized subject to managements judgment that realization is more likely than
not. Our ability to realize a deferred tax asset is based on our
ability to generate sufficient future taxable income. The
establishment of a valuation allowance requires an assessment of both positive
and negative evidence on a jurisdiction-by-jurisdiction basis and reflects that
likelihood of realization of the deferred tax assets.
While we
have been forecasting sufficient U.S. book taxable income in future periods, we
are currently in a three-year cumulative pretax book loss position in the United
States. In connection with the acquisition of triVIN Holdings, Inc.
(“triVIN”), we expect the amortization expense associated with the acquired
intangibles will negatively impact our future U.S. income
streams. Due to the negative impact from the amortization expense
associated with the acquired triVIN intangibles we determined that the ultimate
realization of deferred tax assets for U.S. federal and state income tax
purposes was not considered more likely than not, primarily due to limited
taxable income in the federal carry back period, anticipated insufficient future
taxable income and cumulative U.S. book losses incurred in recent years. As a
result of cumulative U.S. book losses incurred in recent years and uncertainty
as to the extent and timing of profitability in future periods, we recorded a
full valuation allowance of $28.4 million against our net U.S. deferred tax
assets, excluding deferred tax liabilities related to indefinite-lived assets,
for the year ended December 31, 2010.
As a
result of establishing a full valuation allowance against our net
U.S. deferred tax assets, excluding deferred tax liabilities related to
indefinite-lived assets, we did not recognize any deferred tax benefits related
to U.S. operations during the year ended December 31, 2010. We will
maintain a full valuation allowance on our net U.S. deferred tax assets until
sufficient positive evidence exists to support reversal of the valuation
allowance.
The
Company’s deferred tax assets as of December 31, 2010 have been reduced in
accordance with ASC Topic 718. As such, foreign tax credit carryforwards which
were increased due to excess tax benefits from the exercise of stock options are
not recorded as deferred tax assets. Instead such amounts will be recorded as an
addition to stockholders’ equity and will reduce current taxes payable if and
when the carryovers are utilized. Deferred tax assets and the related valuation
allowance in the above presentation have been reduced by the $1.3 million effect
of excess tax deductions from stock options.
For the
year ended December 31, 2010, we had a valuation allowance of $32.6 million, of
which approximately $1.1 million represents an allowance against our state net
operating losses, $1.2 million represents an allowance against our impairment
loss for auction rate securities, $1.9 million represents an allowance against
our foreign tax credits and $28.4 million represents an allowance against our
net U.S. deferred tax assets excluding deferred tax liabilities related to
indefinite-lived assets. For the year ended December 31, 2009 we had a
valuation allowance of $3.9 million, of which approximately $1.1 million
represents an allowance against our state net operating losses, $1.5 million
represents an allowance against our impairment loss for auction rate securities,
and $1.3 million represents an allowance against our foreign tax
credits.
69
As of
December 31, 2010 and 2009, we had U.S. federal net operating loss
carryforwards of $6.3 million. These loss carryforwards are subject to
limitation under Section 382 of the Internal Revenue Code. These losses are
available to reduce future taxable income and expire in varying amounts
beginning in 2022. We have state net operating losses which expire in various
times and amounts through 2027.
As of
December 31, 2010 and 2009, we had U.S. federal foreign tax credit carryovers of
$1.9 million and $1.3 million respectively. These credits are available to
offset future federal income tax subject to limitation and expire in varying
amounts beginning in 2018.
As of
December 31, 2009, all Canadian net operating loss carryforwards from prior
periods were fully utilized.
The
difference in income tax expense between the amount computed using the statutory
federal income tax rate and our effective tax rate is primarily due to state
taxes and the valuation allowance recorded on our net deferred tax assets. The
effect of change in tax rate for 2010 and 2009 is primarily due to state taxes,
differences in foreign tax rates and the valuation allowance recorded on our net
U.S. deferred tax assets. The effect of change in tax rate for 2009 and 2008 is
primarily due to state taxes, differences in foreign tax rates, benefits derived
from tax exempt income, effects of foreign repatriation and changes in earnings
mix.
The
analysis of the effective tax rate for the years ended December 31, 2010, 2009
and 2008, is as follows:
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Pre-tax
book income
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||||
|
State
taxes
|
5.1
|
|
2.3
|
|
(2.7
|
)
|
||||||
|
Foreign
rate differential
|
(14.5
|
)
|
(6.2
|
)
|
18.8
|
|
||||||
|
Deferred
tax rate adjustment
|
(5.4
|
)
|
2.2
|
|
(7.9
|
)
|
||||||
|
Valuation
allowance
|
1,020.5
|
|
(9.7
|
)
|
38.3
|
|
||||||
|
Adjust
tax balances
|
25.7
|
|
(2.2
|
)
|
(7.0
|
)
|
||||||
|
Other
|
11.6
|
|
23.4
|
|
(5.0
|
)
|
||||||
|
Total
|
1,107.0
|
%
|
44.8
|
%
|
69.5
|
%
|
||||||
We do not
provide for deferred taxes on the temporary differences related to investments
in foreign subsidiaries since such profits are considered to be permanently
reinvested. The amount of deferred taxes on the temporary differences related to
investments in foreign subsidiaries is not practicable to determine at this
time.
We do not
expect any significant increase or decrease in our unrecognized tax benefits
within the next 12 months. We have adopted the revisions of generally accepted
accounting principles, now included in ASC Topic 740 with respect to accounting
for uncertain tax positions. ASC Topic 740 specifies the way public companies
are to account for uncertainty in income taxes and prescribes the methodology
for recognizing, reversing, and measuring the tax benefits of a tax position
taken, or expected to be taken, in a tax return. Our adoption of ASC Topic 740
did not result in any change to the level of our liability for uncertain tax
positions, and there was no adjustment to our retained earnings for the
cumulative effect of an accounting change.
We file a
consolidated US income tax return and tax returns in various state and local
jurisdictions. Certain of our subsidiaries also file income tax returns in
Canada. The Internal Revenue Service (“IRS”) has concluded a review of our
consolidated federal income tax return for the periods ended December 31, 2006
and December 31, 2007 with no income tax adjustments. The IRS completed an
examination of DealerTrack Systems, Inc. (f/k/a Arkona, Inc.) for the period
ended March 31, 2006 (pre-acquisition period). The federal audit was concluded
with no income tax adjustments. All of our other significant taxing
jurisdictions are closed for years prior to 2006. Our amended return filings in
California, Pennsylvania, New York and Texas are under review by each of the
respective states. In addition, we are appealing Pennsylvania’s
assessment to our 2006 and 2007 tax return filings.
Interest
and penalties, if any, related to tax positions taken in our tax returns are
recorded in interest expense and general and administrative expenses,
respectively, in our consolidated statement of operations. At December 31, 2010
and December 31, 2009, we accrued interest and penalties related to tax
positions taken on our tax returns of approximately $0.1 million and $47,000,
respectively.
70
A
year-over-year reconciliation of our liability for uncertain tax positions is as
follows (dollars in millions):
|
Balance
January 1, 2010
|
$ | 0.8 | ||
|
Additions
|
0.2 | |||
|
Statue
expiration
|
— | |||
|
Payments
|
— | |||
|
Balance
December 31, 2010
|
$ | 1.0 | ||
|
Balance
January 1, 2009
|
$ | 0.5 | ||
|
Additions
|
0.4 | |||
|
Statue
expiration
|
(0.1 | ) | ||
|
Payments
|
— | |||
|
Balance
December 31, 2009
|
$ | 0.8 | ||
|
Balance
January 1, 2008
|
$ | 0.1 | ||
|
Additions
|
0.4 | |||
|
Payments
|
— | |||
|
Balance
December 31, 2008
|
$ | 0.5 |
As of
December 31, 2010, approximately $0.7 million of the liability for
uncertain tax positions recorded in our balance sheet would affect our effective
rate upon resolution of the uncertain tax positions.
11.
Stock Option and Deferred Compensation Plans
Third Amended and Restated 2005
Incentive Award Plan
Currently,
we grant stock options, restricted common stock awards, and restricted stock
units, under the 2005 Incentive Award Plan. There is an aggregate of 14,105,847
shares authorized for issuance under the 2005 Plan. As of December 31,
2010, there are 3,766,217 shares available for future issuance.
Stock
Options
|
Weighted-Average
|
||||||||||||||||
|
Remaining
|
Aggregate
|
|||||||||||||||
|
Number of
|
Weighted-Average
|
Contractual Life
|
Intrinsic Value
|
|||||||||||||
|
Shares
|
Exercise Price
|
(in years)
|
(in thousands)
|
|||||||||||||
|
Outstanding
as of January 1, 2010
|
4,434,842 | $ | 15.01 | |||||||||||||
|
Options
Granted
|
800,720 | 15.20 | ||||||||||||||
|
Options
Exercised
|
(372,269 | ) | 6.10 | |||||||||||||
|
Options
Forfeited
|
(77,976 | ) | 17.66 | |||||||||||||
|
Options
Expired
|
(66,882 | ) | 22.68 | |||||||||||||
|
Outstanding
as of December 31, 2010
|
4,718,435 | 15.59 | 4.37 | $ | 28,602 | |||||||||||
|
Vested
and unvested expected to vest as of December 31, 2010
|
4,641,375 | 15.59 | 4.36 | 28,246 | ||||||||||||
|
Options
exercisable as of December 31, 2010
|
3,229,005 | $ | 15.49 | 3.84 | $ | 21,352 | ||||||||||
The
exercise prices range from $2.80 to $47.98 for stock options outstanding and
exercisable for the year ended December 31, 2010. The aggregate intrinsic value
of options outstanding, vested and unvested expected to vest, and exercisable,
represents the total pre-tax intrinsic value, based on our closing stock price
of $20.07 on December 31, 2010.
71
The
intrinsic value of the stock options exercised during the years ended December
31, 2010, 2009 and 2008 was approximately $4.2 million, $6.1 million
and $1.1 million, respectively.
|
Restricted Common Stock Awards
|
Restricted Common Stock Units
|
Performance Stock Units
|
||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Number of
|
Average Grant
|
Number of
|
Average Grant
|
Number of
|
Average Grant
|
|||||||||||||||||||
|
Shares
|
Date Fair Value
|
Shares
|
Date Fair Value
|
Shares
|
Date Fair Value
|
|||||||||||||||||||
|
Non-vested
shares as of January 1, 2010
|
620,868 | $ | 12.32 | 683,925 | $ | 12.04 | — | $ | — | |||||||||||||||
|
Shares
granted
|
— | — | 385,491 | 15.30 | 129,860 | 17.22 | ||||||||||||||||||
|
Shares
vested
|
(279,439 | ) | 14.32 | (169,769 | ) | 12.02 | — | — | ||||||||||||||||
|
Shares
canceled/expired/forfeited
|
(305,803 | ) | 8.20 | (44,287 | ) | 13.25 | — | — | ||||||||||||||||
|
Non-vested
shares as of December 31, 2010
|
35,626 | $ | 32.06 | 855,360 | $ | 13.45 | 129,860 | $ | 17.22 | |||||||||||||||
The total
fair value for restricted common stock awards and restricted common stock units
that vested during the year ended December 31, 2010, 2009 and 2008, is as
follows (in thousands):
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Restricted
common stock awards
|
$ | 4,856 | $ | 2,939 | $ | 2,735 | ||||||
|
Restricted
common stock units
|
$ | 3,064 | $ | — | $ | — | ||||||
Employee
Stock Purchase Plan (“ESPP”)
For
employees eligible to participate on the first date of an offering period, the
purchase price of shares of common stock under the ESPP will be 95% of the fair
market value of the shares on the last day of the offering period, which is the
date of purchase. As of December 31, 2010, the total number of shares of common
stock reserved, issued and available for future issuance under the ESPP is
1,500,000, 328,619 and 1,171,381, respectively.
Employees’
Deferred Compensation Plan
The
Employees’ Deferred Compensation Plan is a non-qualified retirement plan that
allows a select group of our management to elect to defer certain bonuses that
would otherwise be payable to the employee. Amounts deferred under the
Employees’ Deferred Compensation Plan are general liabilities of ours and are
represented by bookkeeping accounts maintained on behalf of the participants.
Such accounts are deemed to be invested in share units that track the value of
our common stock. Distributions will generally be made to a participant
following the participant’s termination of employment or other separation from
service, following a change of control if so elected, or over a fixed period of
time elected by the participant prior to the deferral. Distributions will
generally be made in the form of shares of our common stock. As of
December 31, 2010, 2,177 deferred stock units were recorded under a memo
account, 1,309 shares have been distributed, and 147,823 shares of common stock
are reserved and available for distribution under the Employees’ Deferred
Compensation Plan.
Directors’
Deferred Compensation Plan
The
Directors’ Deferred Compensation Plan is a non-qualified retirement plan that
allows each board member to elect to defer certain fees that would otherwise be
payable to the director. Amounts deferred under the Directors’ Deferred
Compensation Plan are general liabilities of ours and are represented by
bookkeeping accounts maintained on behalf of the participants. Such accounts are
deemed to be invested in share units that track the value of our common stock.
Distributions will generally be made to a participant following the
participant’s termination of service following a change of control if so
elected, or over a fixed period of time elected by the participant prior to the
deferral. Distributions will generally be made in the form of shares of our
common stock. As of December 31, 2010, 58,785 deferred stock units were
recorded under a memo account, 8,972 shares have been distributed, and 16,215
shares of common stock are reserved and available for distribution under the
Directors’ Deferred Compensation Plan.
72
LTIP
Awards
granted under the LTIP, consisted of 455,000 shares of restricted common stock
(net of cancellations). Each individual’s total award was allocated 50% to
achieving EBITDA, as adjusted to reflect any future acquisitions (“EBITDA
Performance Award”) and 50% to the market value of our common stock (“Market
Value Award”). The total fair value of the entire EBITDA Performance Award was
$6.0 million (prior to estimated forfeitures), of which, in 2007, we began
expensing the amount associated with the 2007 award as it was deemed probable
that the threshold for the year ending December 31, 2007 would be met. The
EBITDA target for 2007 was achieved. As of December 31, 2009, no amounts were
expensed related to the EBITDA Performance Awards for 2008 and 2009 as the
targets were not achieved. The total value of the entire Market Value Award was
$2.5 million (including estimated forfeitures), which was expensed on a
straight-line basis from the date of grant over the applicable service period.
As long as the service condition was satisfied, the expense was not reversible,
even if the market conditions were not satisfied.
During
the year ended December 31, 2009, 96,667 shares of long-term performance equity
awards were cancelled and the vesting of 38,333 shares of long-term performance
equity awards were accelerated due to the departure of certain executive
officers, most of which were in connection with the realignment of our workforce
and business as discussed in Note 15. For the year ended December 31, 2009, we
reversed approximately $0.5 million of stock-based compensation expense related
to the cancelled shares and recorded stock-based compensation expense of
approximately $0.2 million related to the accelerated shares.
On
January 31, 2010, 151,697 shares of long-term performance equity awards vested
relating to the 2007 EBITDA Performance Award and the 2007 Market Value Award
and the remaining 303,303 shares of long-term performance equity awards were
cancelled as the 2008 and 2009 EBITDA and Market Value targets were not
achieved.
Performance
Stock Units
On March
9, 2010, 129,860 performance stock units were granted to certain executive
officers. The actual number of performance stock units to be delivered is
subject to adjustment ranging from 0% (threshold) to 137.5% (maximum) based
solely upon the achievement of certain performance targets and other vesting
conditions. Each individual’s award was allocated 50% to achieving ANI targets
for the year ended December 31, 2010 (“ANI Performance Award”) and 50% to the
TSR of our common stock as compared to other companies in the NASDAQ Internet
Index in the aggregate for the fiscal years 2010, 2011 and 2012 (“TSR
Performance Award”). The awards will be earned based upon our achievement of ANI
and TSR targets, but will not vest unless the grantee remains continuously
employed in active service until January 31, 2013. In addition, the performance
stock units are subject to forfeiture if the company’s performance goals are not
achieved. The awards are subject to acceleration in full if an executive is
terminated without cause, or resigns for good reason within twelve months of a
change in control. We have valued the ANI Performance Award and the TSR
Performance Award using the Black-Scholes and Monte Carlo valuation pricing
models, respectively. The total fair value of the ANI Performance Award was $0.6
million, which we began expensing during the first quarter of 2010 as it was
deemed probable that we would achieve a portion of the ANI targets for 2010. For
the year ended December 31, 2010, 51% of the ANI Performance Award, or 33,114
shares, were earned based on actual 2010 results. The total fair value of the
TSR Performance Award was $1.1 million, which is expensed on a straight-line
basis from the date of grant over the applicable service period. As long as the
service condition is satisfied, the expense is not reversed, even in the event
the TSR Performance Award targets are not achieved. The measurement period for
the TSR Performance Award is through December 31, 2012 and, as such, no awards
have been earned as of December 31, 2010.
On August
7, 2009, the Company commenced a tender offer to its employees (excluding
executive officers and members of the board of directors) to exchange
outstanding options to purchase shares of our common stock granted prior to
August 7, 2008, that have an exercise price per share greater than $22.82
(“Eligible Options”) for a lesser number of new options to purchase shares of
the Company’s common stock with an exercise price equal to the closing price of
our common stock on the Nasdaq Global Select Market on the date of grant,
subject to certain conditions. The exchange offer expired on September 3, 2009
and pursuant to the exchange offer, 571,763 Eligible Options were tendered,
representing 64% of the total Eligible Options qualified for the exchange. On
September 4, 2009, we granted an aggregate of 435,247 stock options in exchange
for the Eligible Options surrendered. The incremental fair value stock-based
compensation expense related to the 435,247 exchanged stock options is
approximately $54,000. The incremental expense of $54,000 will be amortized over
the new vesting schedule of 25% six months from the new grant date, 25% twelve
months from the new grant date, and 1/48 from the new options date each month
thereafter. We adopted the pooling method of accounting, whereby we are
recognizing the unamortized stock-based compensation expense of the original
award plus the incremental expense of the new grant over the new vesting
schedule.
12.
Stock Repurchase Program
On March
18, 2008, the board of directors approved a stock repurchase program under which
we were authorized to spend up to $75.0 million to repurchase shares of our
common stock. The stock repurchase program expired on March 31, 2009. From
inception of the program through its expiration, we repurchased approximately
3.0 million shares of common stock for an aggregate price of approximately $49.8
million. There were no repurchases during 2009.
73
13.
Commitments and Contingencies
Operating
Leases
We lease
our office space and various office equipment under cancelable and noncancelable
operating leases which expire on various dates through October 15, 2018. In
general, leases relating to real estate include rent escalation clauses relating
to increases in operating costs. Some leases also include renewal options of up
to 5 years.
In
connection with the acquisition of triVIN, on January 31, 2011, we assumed
approximately 27,000 square feet of office space in Groton, Connecticut and
92,000 square feet of office space in Sacramento, California.
Operating
lease expense for the years ended December 31, 2010, 2009 and 2008, is as
follows (in thousands):
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Operating
lease expense
|
$ | 5,366 | $ | 5,479 | $ | 5,006 | ||||||
Future
minimum rental payments under the noncancelable operating leases are as follows
(in thousands):
|
Years
Ending December 31,
|
||||
|
2011
|
$
|
5,
245
|
||
|
2012
|
4,913
|
|||
|
2013
|
4,397
|
|||
|
2014
|
3,745
|
|||
|
2015
|
3,517
|
|||
|
Thereafter
|
7,803
|
|||
|
Total
|
$
|
29,620
|
The
following is an analysis of the leased property under capital leases by major
property class as of December 31, 2010 and 2009 (in thousands):
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Computer
equipment
|
$
|
1,880
|
|
$
|
1,591
|
|
||
|
Furniture
and fixtures
|
197
|
|
197
|
|
||||
|
2,077
|
|
1,788
|
||||||
|
Less:
Accumulated depreciation
|
(1,656
|
)
|
(1,229
|
)
|
||||
|
Total
capital leases, net
|
$
|
421
|
|
$
|
559
|
|
||
Future
minimum rental payments under the capital leases are as follows (in
thousands):
|
Years
Ending December 31,
|
||||
|
2011
|
$
|
339
|
|
|
|
2012
|
134
|
|
||
|
2013
|
16
|
|
||
|
2014
|
16
|
|
||
|
2015
|
2
|
|
||
|
Total
minimum lease payments
|
507
|
|
||
|
Less:
Amount representing taxes, included in total minimum lease
payments
|
(20
|
)
|
||
|
Net
minimum lease payments
|
487
|
|||
|
Less:
Amount representing interest
|
(25
|
)
|
||
|
Present
value of net minimum lease payments
|
$
|
462
|
|
|
74
Purchase
Commitment
On March
31, 2010, in connection with our DMS business, we entered into a non-cancellable
equipment and software purchase agreement with a vendor. Under the terms of the
agreement, we committed to purchasing certain equipment and software in 2011
totaling approximately $2.7 million, excluding applicable taxes. As of December
31, 2010, we have not accepted title or risk of loss of the aforementioned
equipment or software.
Contingencies
We are a
party to a variety of agreements pursuant to which we may be obligated to
indemnify the other party with respect to breach of contract, infringement and
other matters. Typically, these obligations arise in the context of agreements
entered into by us, under which we customarily agree to hold the other party
harmless against losses arising from breaches of representations, warranties
and/or covenants. In these circumstances, payment by us is generally conditioned
on the other party making a claim pursuant to the procedures specified in the
particular agreement, which procedures typically allow us to challenge the other
party’s claims. Further, our obligations under these agreements may be limited
to indemnification of third-party claims only and limited in terms of time
and/or amount. In some instances, we may have recourse against third parties for
certain payments made by us.
It is not
possible to predict the maximum potential amount of future payments under these
or similar agreements due to the conditional nature of our obligations and the
unique facts and circumstances involved in each particular agreement. To date,
we have not been required to make any material payments. We believe that if we
were to incur a loss in any of these matters, it is not probable that such loss
would have a material effect on our business or financial
condition.
Refer to
Note 4 for additional contingencies resulting from our business
combinations.
Retail
Sales Tax
The
Ontario Ministry of Revenue (the “Ministry”) has conducted a retail sales tax
field audit on the financial records of our Canadian subsidiary, DealerTrack
Canada, Inc. (formerly known as DealerAccess Canada, Inc.), for the period from
March 1, 2001 through May 31, 2003 (“Audit Period”). We received a
formal assessment from the Ministry indicating unpaid Ontario retail sales tax
totaling approximately $0.2 million, plus interest. Although we disputed
the Ministry’s findings, the assessment, including interest, was paid in order
to avoid potential future interest and penalties.
As part
of the purchase agreement dated December 31, 2003 between us and Bank of
Montreal for the purchase of 100% of the issued and outstanding capital stock of
DealerAccess, Inc., Bank of Montreal agreed to indemnify us specifically for
this potential liability for all sales tax periods prior to January 1,
2004. The potential sales tax liability for the period covered by this
indemnification is now closed due to the statutory expiration of the periods
open for audit by the Ministry. All amounts paid to the Ministry by us for this
assessment were reimbursed by the Bank of Montreal under this
indemnity.
We
undertook a comprehensive review of the audit findings of the Ministry using
external tax experts. Our position has been that these lender revenue
transactions were not subject to Ontario retail sales tax. We filed a formal
Notice of Objection with the Ministry on December 12, 2005. We received a
letter dated November 2, 2007 from an appeals officer of the Ministry
stating that the assessment was, in his opinion, properly raised and he
recommended his confirmation to senior management of the
Ministry.
We
received a letter dated December 21, 2007 from the Ministry stating that no
change should be made to the appeals officer’s opinion. A Notice of Appeal was
timely filed on our behalf with the Superior Court of Justice on March 18,
2008 to challenge the assessment because we did not believe these services were
subject to sales tax. On December 15, 2008, the Ministry filed its response
to our Notice of Appeal. The response reiterated the Ministry’s position that
the transactions were subject to Ontario retail sales
tax.
In
October 2010, the parties agreed to settlement of this matter. The Minutes of
Settlement provided that the Ministry reimburse us $0.1 million, plus interest,
for a total payment of $0.2 million, which was received on October 29, 2010.
Under the terms of the indemnity agreement with The Bank of Montreal, we
forwarded the settlement payment to the bank.
This
settlement applied only to the Audit Period and did not cover any potential
liability for subsequent periods, which were not included in the audit.
Additionally, this settlement did not conclude on the taxability of our lender
revenue transactions. We have not accrued any related sales tax liability for
the period subsequent to May 31, 2003 for these lender revenue
transactions. This appeal was supported by the financial institutions whose
source revenue transactions were subject to the assessment. These financial
institutions agreed to participate in the cost of the litigation. In January
2011 we were notified by the Ministry that they will now conduct an Ontario
retail sales tax audit in March 2011 for the period March 1, 2007 through June
30, 2010.
In the
event we are obligated to charge sales tax for this type of transaction, we
believe this Canadian subsidiary’s contractual arrangements with its lender
customers obligate these customers to pay all sales taxes that are levied or
imposed by any taxing authority by reason of the transactions contemplated under
the particular contractual arrangement. In the event of any failure to pay such
amounts by our customers, we would be required to pay the obligation, which
could range from $5.0 million (CAD) to $5.5 million (CAD), including
penalties and interest.
75
Employment
Agreements
Pursuant
to employment or severance agreements with certain employees, we had a
commitment to pay severance of approximately $4.6 million as of December
31, 2010, in the event of termination without cause, as defined in the
agreements, as well as certain potential gross-up payments to the extent any
such severance payment would constitute an excess parachute payment under the
Internal Revenue Code. Additionally, if there is a change in control, we will
also have a commitment to pay additional severance of $1.9 million as of
December 31, 2010.
From time
to time, we are a party to litigation matters arising in connection with the
normal course of our business, none of which is expected to have a material
adverse effect on us. In addition to the litigation matters arising in
connection with the normal course of our business, we are party to the
litigation described below.
DealerTrack, Inc. v.
Finance Express et al., CV-06-2335; DealerTrack Inc. v. RouteOne and
Finance Express et al., CV-06-6864; and DealerTrack Inc. v. RouteOne and
Finance Express et al., CV-07-215
On
April 18, 2006, we filed a Complaint and Demand for Jury Trial against
David Huber, Finance Express LLC (Finance Express), and three of their unnamed
dealer customers in the United States District Court for the Central District of
California, Civil Action No. CV-06-2335 AG (FMOx). The complaint sought
declaratory and injunctive relief, as well as damages, against the defendants
for infringement of the U.S. Patent No. 5,878,403 (the ’403 Patent)
Patent and the 6,587,841 (the ’841 Patent). Finance Express denied infringement
and challenged the validity and enforceability of the
patents-in-suit.
On
October 27, 2006, we filed a Complaint and Demand for Jury Trial against
RouteOne, David Huber and Finance Express in the United States District Court
for the Central District of California, Civil Action No. CV-06-6864 (SJF).
The complaint sought declaratory and injunctive relief as well as damages
against the defendants for infringement of the ’403 Patent and the ’841 Patent.
On November 28, 2006 and December 4, 2006, respectively, defendants
RouteOne, David Huber and Finance Express filed their answers. The defendants
denied infringement and challenged the validity and enforceability of the
patents-in-suit.
On
February 20, 2007, we filed a Complaint and Demand for Jury Trial against
RouteOne LLC (RouteOne), David Huber and Finance Express in the United States
District Court for the Central District of California, Civil Action
No. CV-07-215 (CWx). The complaint sought declaratory and injunctive relief
as well as damages against the defendants for infringement of U.S. Patent
No. 7,181,427 (the ’427 Patent). On April 13, 2007 and April 17,
2007, respectively, defendants RouteOne, David Huber and Finance Express filed
their answers. The defendants denied infringement and challenged the validity
and enforceability of the ’427 Patent.
The
DealerTrack, Inc. v. Finance Express et al., CV-06-2335 action, the DealerTrack
Inc. v. RouteOne and Finance Express et al., CV-06-6864 action and the
DealerTrack v. RouteOne and Finance Express et al., CV-07-215 action,
described above, were consolidated by the court. A hearing on claims
construction, referred to as a “Markman ” hearing, was held
on September 25, 2007. Fact and expert discovery and motions for summary
judgment have substantially been completed.
On
July 21, 2008 and September 30, 2008, the court issued summary
judgment orders disposing of certain issues and preserving other issues for
trial.
On
July 8, 2009, the court held Claims 1-4 of DealerTrack’s patent
7,181,427 was invalid for failure to comply with a standard required by the
recently decided case in the Court of Appeals of the Federal Circuit of In re
Bilski. On August 11, 2009, the court entered into a judgment granting
summary judgment.On September 8 , 2009, DealerTrack filed a notice of appeal in
the United States Court of Appeals for the Federal Circuit in regards to the
finding of non-infringement of patent 6,587,841, the invalidity of patent
7,181,427, and the claim construction order to the extent that it was relied
upon to find the judgments of non-infringement and invalidity. In October 2010,
the United States Court of Appeals set a briefing schedule. DealerTrack filed
its appellant’s brief in the case on October 29, 2010 and reply briefs were
filed by both RouteOne and Finance Express in early December 2010. DealerTrack
filed its reply brief on January 18, 2011.
We
believe that the potential liability from all current litigations will not have
a material effect on our financial position or results of operations when
resolved in a future period.
76
14.
Segment Information
The
segment information provided in the table below is being reported consistent
with our method of internal reporting. Operating segments are defined as
components of an enterprise for 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 chief
operating decision maker reviews information at a consolidated level, as such we
have one reportable segment. For enterprise-wide disclosure, we are organized
primarily on the basis of service lines. Revenue earned outside of the United
States for the years ended December 31, 2010, 2009 and 2008 is
approximately 12%, 11% and 11% of our revenue, respectively.
Supplemental
disclosure of revenue by service type for the years ended December 31, 2010,
2009 and 2008, is as follows (in thousands):
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Transaction
services revenue
|
$
|
102,000
|
$
|
94,406
|
$
|
132,419
|
||||||
|
Subscription
services revenue
|
123,547
|
114,931
|
94,690
|
|||||||||
|
Other
|
18,279
|
16,289
|
15,597
|
|||||||||
|
Total
net revenue
|
$
|
243,826
|
$
|
225,626
|
$
|
242,706
|
||||||
15.
Realignment of Workforce and Business
On
January 5, 2009, we announced a realignment of our workforce and business aimed
at sharpening our focus on high growth opportunities and to reflect current
market conditions. We reduced our workforce by approximately 90 people, or 8% of
our total employees, including several executive and senior-level positions. As
a result of the realignment, we incurred total restructuring costs during the
three months ended March 31, 2009 of approximately $6.7 million, including
approximately $3.9 million of net non-cash compensation expense.
The table
below sets forth the significant cash components and activity associated with
the realignment of workforce and business under the restructuring program for
the year ended December 31, 2009 (in thousands):
|
Balance as of
January 1, 2009
|
Charges
|
Cash Payments
|
Balance as of
December 31, 2009
|
|||||||||||||
|
Severance
|
$ | — | $ | 2,683 | $ | 2,683 | $ | — | ||||||||
|
Other
benefits
|
— | 156 | 156 | — | ||||||||||||
|
Total
|
$ | — | $ | 2,839 | $ | 2,839 | $ | — | ||||||||
16.
Strategic Agreement with Ally Financial (“Ally”)
On
February 10, 2010, DealerTrack entered into a strategic relationship with Ally.
Under the terms of the agreement, Ally is listed as a financing option on the
DealerTrack credit application processing network and DealerTrack agreed to make
a one-time payment to Ally of $15.0 million that was paid in May 2010. Ally is
available to General Motors and Chrysler dealers, as well as dealers of other
manufacturers that Ally elects to do business with. Ally will continue to accept
credit applications through a competitive system.
The
one-time $15.0 million payment is being recorded as a reduction in revenue over
the period of expected benefit of approximately five years. For the year ended
December 31, 2010, we recorded contra revenue related to revenue earned from the
Ally strategic relationship of $1.6 million. As of December 31, 2010, we have
classified $3.2 million in prepaid expenses and other current assets and $10.2
million in other long-term assets.
17.
Settlement with Service Provider
During
the year ended December 31, 2010, we received a settlement of approximately $0.4
million related to the cancellation of a services agreement for our eDocs
business, which has been recorded to other income in the statement of
operations.
18.
Subsequent Events
triVIN
Holdings, Inc. Acquisition
On
January 31, 2011, we acquired triVIN Holdings, Inc. (“triVIN”), now known as
DealerTrack Processing Solutions, Inc., for a purchase price of $131.0 million
in cash, net of acquired cash and a working capital adjustment. triVIN is a
leading provider of automobile title management services to lenders and vehicle
registration services to automobile dealers. This acquisition will significantly
expand our transaction business and further strengthen our relationship with
lenders and automobile dealers. We expensed approximately $0.5 million of
professional fees associated with the acquisition in 2010. We expect to expense
an additional approximately $0.2 million of professional fees in the first
quarter of 2011 We are in the process of finalizing the fair value assessment
for the acquired assets and liabilities, which is expected to be completed
during the first quarter of 2011.
77
Automotive
Information Center (“AIC”) Acquisition
On
February 1, 2011, we acquired the AIC price and specifications business from
R.L. Polk & Co. for a purchase price of approximately $3.2 million in cash.
This acquisition will allow our Data Services business to expand its customer
base. We are in the process of finalizing the fair value assessment for the
acquired assets and liabilities, which is expected to be completed during the
first quarter of 2011.
78
VALUATION
AND QUALIFYING ACCOUNTS
|
Balance at
|
Additions
|
Balance at
|
||||||||||||||||||
|
Beginning of
|
Charged to
|
Other
|
End of
|
|||||||||||||||||
|
Description
|
Period
|
Expenses
|
Deductions
|
Adjustments
|
Period
|
|||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
As
of December 31, 2010:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
756
|
$
|
1,176
|
$
|
(1,280
|
)
|
$
|
—
|
$
|
652
|
|||||||||
|
Allowance
for sales credits
|
1,921
|
4,312
|
(3,627
|
)
|
—
|
2,606
|
||||||||||||||
|
Deferred
tax valuation allowance
|
3,862
|
28,415
|
(209
|
)
|
569
|
32,637
|
(1)
|
|||||||||||||
|
As
of December 31, 2009:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
948
|
|
$
|
2,127
|
$
|
(2,319
|
)
|
$
|
—
|
$
|
756
|
||||||||
|
Allowance
for sales credits
|
900
|
|
5,571
|
(4,550
|
)
|
—
|
1,921
|
|||||||||||||
|
Deferred
tax valuation allowance
|
3,322
|
|
1,246
|
(488
|
)
|
(218
|
)
|
3,862
|
(2)
|
|||||||||||
|
As
of December 31, 2008:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
1,730
|
|
$
|
4,225
|
$
|
(5,007
|
)
|
$
|
—
|
$
|
948
|
||||||||
|
Allowance
for sales credits
|
885
|
|
5,414
|
(5,399
|
)
|
—
|
900
|
|||||||||||||
|
Deferred
tax valuation allowance
|
954
|
|
141
|
—
|
2,227
|
3,322
|
(3)
|
|||||||||||||
|
(1)
|
For
the year ended December 31, 2010, the deferred tax valuation allowance was
increased by $28.8 million consisting of an increase of $28.4 million due
to the company being in a cumulative U.S. book loss position and posting a
full valuation allowance on the net U.S. deferred tax assets excluding
deferred tax liabilities related to indefinite-lived assets and an
increase of $0.6 million due to an increase in unrealizable foreign tax
credit carryovers, offset by a decrease of $0.2 million in deferred tax
assets related to capital loss carryforwards. For further information,
please refer to Note 10 in the accompanying notes to the consolidated
financial statements included in this Annual Report on Form
10-K.
|
|
(2)
|
For
the year ended December 31, 2009, the deferred tax valuation allowance was
increased by $0.5 million consisting of an increase of $1.2 million due to
an increase in unrealizable foreign tax credit carryovers, offset by a
decrease of $0.5 million due to a decrease in deferred tax assets related
to auction rate securities and $0.2 million decrease related to state and
local net operating loss carryovers. For further information, please refer
to Note 10 in the accompanying notes to the consolidated financial
statements included in this Annual Report on Form
10-K.
|
|
(3)
|
For
the year ended December 31, 2008, the deferred tax valuation allowance was
increased by $2.2 million primarily due to realized loss on auction rate
securities and was further increased by expenses in various states. For
further information, please refer to Note 10 in the accompanying notes to
the consolidated financial statements included in this Annual Report on
Form 10-K.
|
Disclosure
Controls and Procedures
We
carried out an evaluation under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, as such term is defined in Rules 13a- 15(e) and
15d- 15(e) under the Exchange Act. In designing and evaluating our disclosure
controls and procedures, we and our management recognize that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. Based upon that evaluation, our
chief executive officer and chief financial officer have concluded that, as of
the end of the period covered by this Annual Report on Form 10-K, our disclosure
controls and procedures were effective at the reasonable assurance
level.
79
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2010, which were identified in connection with
management’s evaluation required by paragraph (d) of Rule 13a-15 and 15d-15
under the Exchange Act, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions and that the degree of compliance
with the policies or procedures may deteriorate. Management assessed the
effectiveness of our internal control over financial reporting as of
December 31, 2010. In making this assessment, management used the criteria
set forth in the Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Management’s
assessment was reviewed with the Audit Committee of our Board of
Directors.
Based on
its assessment of internal control over financial reporting, our management has
concluded that, as of December 31, 2010, our internal control over
financial reporting was effective.
The
effectiveness of our internal control over financial reporting as of
December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an
independent registered accounting firm, as stated in their report which appears
herein.
PART
III
Anything
herein to the contrary notwithstanding, in no event whatsoever are the sections
entitled “Nominating and Compensation Committee Report on Executive
Compensation” and “Audit Committee Report” to be incorporated by reference
herein from our proxy statement in connection with our annual meeting of
stockholders expected to be held in the second quarter of 2011.
The
information required to be furnished pursuant to this item will be set forth
under the captions “Proposal One: Election of Directors,” “Executive Officers”
and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
Statement to be filed with the SEC no later than 120 days after the close
of our fiscal year ended December 31, 2010. If the Proxy Statement is not
filed with the SEC by such time, such information will be included in an
amendment to this Annual Report by such time.
The
information required to be furnished pursuant to this item will be set forth
under the caption “Executive Compensation” in the Proxy Statement to be filed
with the SEC no later than 120 days after the close of our fiscal year
ended December 31, 2010. If the Proxy Statement is not filed with the SEC
by such time, such information will be included in an amendment to this Annual
Report on Form 10-K by such time.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The
information required to be furnished pursuant to this item will be set forth
under the caption “Security Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement to be filed with the SEC no later than
120 days after the close of our fiscal year ended December 31, 2010.
If the Proxy Statement is not filed with the SEC by such time, such information
will be included in an amendment to this Annual Report on Form 10-K by such
time.
The
information required to be furnished pursuant to this item will be set forth
under the caption “Certain Relationships and Transactions” in the Proxy
Statement to be filed with the SEC no later than 120 days after the close
of our fiscal year ended December 31, 2010. If the Proxy Statement is not
filed with the SEC by such time, such information will be included in an
amendment to this Annual Report on Form 10-K by such time.
80
Item 14. Principal
Accountant Fees and Services
The
information required to be furnished pursuant to this item will be set forth
under the caption “Principal Accountant Fees and Services” in the Proxy
Statement to be filed with the SEC no later than 120 days after the close
of our fiscal year ended December 31, 2010. If the Proxy Statement is not
filed with the SEC by such time, such information will be included in an
amendment to this Annual Report on Form 10-K by such time.
PART
IV
(a) The
following documents are included in “Financial Statements and Supplementary
Data” in Part II, Item 8 of this Annual Report on Form
10-K:
(1) Financial
Statements:
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2010 and 2009
Consolidated
Statements of Operations for the three years ended December 31,
2010
Consolidated
Statements of Cash Flows for the three years ended December 31,
2010
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income for each of the
three years ended December 31, 2010
Notes to
Consolidated Financial Statements
(2) Financial
Statement Schedule — Schedule II
|
Number
|
Description
|
|
|
3.1
(4)
|
Form
of Fifth Amended and Restated Certificate of Incorporation of DealerTrack
Holdings, Inc.
|
|
|
3.2 (4)
|
Form
of Amended and Restated By-laws of DealerTrack Holdings,
Inc.
|
|
|
4.1
(1)
|
Fourth
Amended and Restated Registration Rights Agreement, dated as of
March 19, 2003, among DealerTrack Holdings, Inc. and the stockholders
of DealerTrack Holdings, Inc. party thereto.
|
|
|
4.2
(3)
|
Form
of Certificate of Common Stock.
|
|
|
10.1
(3)
|
License
Agreement, made and entered into as of February 1, 2001, by and
between The Chase Manhattan Bank and J.P. Morgan Partners (23A SBIC
Manager), Inc.
|
|
|
10.2
(9)
|
Amended
and Restated Senior Executive Employment Agreement, dated as of
August 8, 2007, by and between Mark F. O’Neil and DealerTrack
Holdings, Inc.
|
|
|
10.3
(10)
|
Amendment
No. 1 To Amended and Restated Senior Executive Employment Agreement,
dated December 31, 2008, by and between Mark F. O’Neil and
DealerTrack Holdings, Inc.
|
|
|
10.4
(11)
|
Amendment
No. 2 to Amended and Restated Executive Employment Agreement dated
November 3, 2009 between DealerTrack Holdings, Inc. and Mark F.
O’Neil
|
|
|
10.5
*
|
Amended
and Restated Senior Executive Employment Agreement, dated as of
August 8, 2007, by and between Richard McLeer and DealerTrack
Holdings, Inc.
|
|
|
10.6
*
|
Amendment
No. 1 To Amended and Restated Senior Executive Employment Agreement,
dated December 31, 2008, by and between Richard McLeer and
DealerTrack Holdings, Inc.
|
|
|
10.7
*
|
Amendment
No. 2 to Amended and Restated Executive Employment Agreement dated
November 3, 2009 between DealerTrack Holdings, Inc. and Richard
McLeer
|
|
|
10.8
*
|
Amended
and Restated Senior Executive Employment Agreement, dated as of
August 8, 2007, by and between Rick G. Von Pusch and DealerTrack
Holdings, Inc.
|
|
10.9*
|
Amendment
No. 1 To Amended and Restated Senior Executive Employment Agreement,
dated December 31, 2008, by and between Rick G. Von Pusch and
DealerTrack Holdings, Inc.
|
81
|
Number
|
Description
|
|
|
10.10
*
|
Amendment
No. 2 to Amended and Restated Executive Employment Agreement dated
November 3, 2009 between DealerTrack Holdings, Inc. and Rick G. Von
Pusch
|
|
|
10.11
(9)
|
Amended
and Restated Senior Executive Employment Agreement, dated as of
August 8, 2007, by and between Eric D. Jacobs and DealerTrack
Holdings, Inc.
|
|
|
10.12
(10)
|
Amendment
No. 1 To Amended and Restated Senior Executive Employment Agreement,
dated December 31, 2008, by and between Eric D. Jacobs and
DealerTrack Holdings, Inc.
|
|
|
10.13
(11)
|
Amendment
No. 2 to Amended and Restated Executive Employment Agreement dated
November 3, 2009 between DealerTrack Holdings, Inc. and Eric D.
Jacobs.
|
|
|
10.14
(9)
|
Amended
and Restated Senior Executive Employment Agreement, dated as of
August 8, 2007, by and between Raj Sundaram and DealerTrack Holdings,
Inc.
|
|
|
10.15
(10)
|
Amendment
No. 1 To Amended and Restated Senior Executive Employment Agreement,
dated December 31, 2008, by and between Raj Sundaram and DealerTrack
Holdings, Inc.
|
|
|
10.16
(11)
|
Amendment
No. 2 to Amended and Restated Executive Employment Agreement dated
November 4, 2009 between DealerTrack Holdings, Inc. and Rajesh
Sundaram
|
|
|
10.17
(8)
|
Unfair
Competition and Nonsolicitation Agreement, dated as of May 25, 2005,
by and between Raj Sundaram and Automotive Lease Guide (alg),
Inc.
|
|
|
10.18
(8)
|
Amendment
No. 1 to Unfair Competition and Nonsoliciation Agreement, made as of
August 21, 2006, by and between Automotive Lease Guide (alg), Inc.
and Raj Sundaram.
|
|
|
10.19
(1)
|
2001
Stock Option Plan of DealerTrack Holdings, Inc., effective as of
August 10, 2001.
|
|
|
10.20
(1)
|
First
Amendment to 2001 Stock Option Plan of DealerTrack Holdings, Inc.,
effective as of December 28, 2001.
|
|
|
10.21
(1)
|
Second
Amendment to 2001 Stock Option Plan of DealerTrack Holdings, Inc.,
effective as of March 19, 2003.
|
|
|
10.22
(1)
|
Third
Amendment to 2001 Stock Option Plan of DealerTrack Holdings, Inc.,
effective as of January 30, 2004.
|
|
|
10.23
(6)
|
Fourth
Amendment to 2001 Stock Option Plan of DealerTrack Holdings, Inc.
effective as of February 10, 2006.
|
|
|
10.24
(12)
|
Third
Amended and Restated 2005 Incentive Award Plan, effective as of
June 17, 2009.
|
|
|
10.25
(5)
|
Form
of Stock Option Agreement.
|
|
|
10.26
(5)
|
Form
of Restricted Stock Agreement.
|
|
|
10.27
(10)
|
Form
of Restricted Stock Unit Agreement.
|
|
|
10.28
(1)
|
Senior
Executive Incentive Bonus Plan, effective as of May 26,
2005.
|
82
|
Number
|
Description
|
|
|
10.29
(8)
|
Stock
Ownership and Retention Program, adopted May 26,
2005.
|
|
|
10.30
(1)
|
Employee
Stock Purchase Plan, adopted May 26, 2005.
|
|
|
10.31
(1)
|
Directors’
Deferred Compensation Plan, effective as of June 30,
2005.
|
|
10.32
(9)
|
First
Amendment to DealerTrack Holdings, Inc. Directors’ Deferred Compensation
Plan effective as of January 1, 2007.
|
|
|
10.33
(1)
|
Employees’
Deferred Compensation Plan, effective as of June 30,
2005.
|
|
|
10.34
(9)
|
First
Amendment to DealerTrack Holdings, Inc. Employees’ Deferred Compensation
Plan effective as of January 1, 2007.
|
|
|
10.35
(1)
|
401(k)
Plan, effective as of January 1, 2001, as amended.
|
|
|
10.36
(2)
|
Lease
Agreement, dated as of August 5, 2004, between iPark Lake Success,
LLC and DealerTrack, Inc.
|
|
|
14.1
(6)
|
Code
of Business Conduct and Ethics.
|
|
|
21.1
*
|
List
of Subsidiaries.
|
|
|
23.1
*
|
Consent
of PricewaterhouseCoopers LLP.
|
|
|
31.1
*
|
Certification
of Mark F. O’Neil pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
*
|
Certification
of Eric D. Jacobs pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
*
|
Certification
of Mark F. O’Neil and Eric D. Jacobs pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
*
|
Filed
herewith.
|
||
|
(1)
|
Incorporated
by reference to our Registration Statement on Form S-1 (File
No. 333-126944) filed July 28, 2005.
|
||
|
(2)
|
Incorporated
by reference to Amendment No. 1 to our Registration Statement on Form
S-1 (File No. 333-126944) filed September 22, 2005.
|
||
|
(3)
|
Incorporated
by reference to Amendment No. 2 to our Registration Statement on Form
S-1 (File No. 333-126944) filed October 12, 2005.
|
||
|
(4)
|
Incorporated
by reference to Amendment No. 3 to our Registration Statement on Form
S-1 (File No. 333-126944) filed October 24, 2005.
|
||
|
(5)
|
Incorporated
by reference to our Quarterly Report on Form 10-Q filed May 12,
2006.
|
||
|
(6)
|
Incorporated
by reference to our Annual Report on Form 10-K filed March 30,
2006.
|
||
|
(7)
|
Incorporated
by reference to our Quarterly Report on Form 10-Q filed November 14,
2006.
|
||
|
(8)
|
Incorporated
by reference to our Annual Report on Form 10-K filed March 16,
2007.
|
||
|
(9)
|
Incorporated
by reference to our Quarterly Report on Form 10-Q filed August 9,
2007.
|
||
|
(10)
|
Incorporated
by reference to our Annual Report on Form 10-K filed on February 24,
2009.
|
||
|
(11)
|
Incorporated
by reference to our Quarterly Report on Form 10-Q filed November 5,
2009.
|
||
|
(12)
|
Incorporated
by reference to our Annual Report on Form 10-K filed on February 24,
2010.
|
||
DealerTrack
hereby files as part of this Form 10-K the exhibits listed in Item 15(a)
(3) above. Exhibits which are incorporated herein by reference can be
inspected and copied at the public reference rooms maintained by the SEC in
Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. SEC
filings are also available to the public from commercial document retrieval
services and at the Website maintained by the SEC at http://www.sec.gov.
83
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: February 17,
2011
|
DealerTrack
Holdings, Inc.
(Registrant)
|
||||
|
By:
|
/s/
Eric D. Jacobs
|
|||
|
Eric
D. Jacobs
|
||||
|
Senior
Vice President, Chief Financial and Administrative Officer (Duly
Authorized Officer and Principal Financial Officer)
|
||||
SIGNATURES
Pursuant to the requirements of
the Securities Exchange Act of 1934, as amended, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Mark F. O’Neil
Mark
F. O’Neil
|
Chairman
of the Board, President and Chief Executive Officer (principal
executive officer)
|
February
17, 2011
|
||
|
/s/
Eric D. Jacobs
Eric D. Jacobs |
Senior
Vice President, Chief Financial and Administrative Officer (principal
financial and accounting officer)
|
February
17, 2011
|
||
|
/s/
Mary Cirillo-Goldberg
Mary
Cirillo-Goldberg
|
Director
|
February
17, 2011
|
||
|
/s/ Ann B.
Lane
Ann
B. Lane
|
Director
|
February
17, 2011
|
||
|
/s/
John J. McDonnell, Jr.
John
J. McDonnell, Jr.
|
Director
|
February
17, 2011
|
||
|
/s/
James David Power III
James
David Power III
|
Director
|
February
17, 2011
|
||
|
/s/
Howard L. Tischler
Howard
L. Tischler
|
Director
|
February
17, 2011
|
||
|
/s/
Barry Zwarenstein
Barry
Zwarenstein
|
Director
|
February
17, 2011
|
||
|
/s/
James Foy
James
Foy
|
Director
|
February
17, 2011
|
84
EXHIBIT
INDEX TO ANNUAL REPORT ON FORM 10-K
|
Number
|
Description
|
|
|
3.1
(4)
|
Form
of Fifth Amended and Restated Certificate of Incorporation of DealerTrack
Holdings, Inc.
|
|
|
3.2 (4)
|
Form
of Amended and Restated By-laws of DealerTrack Holdings,
Inc.
|
|
|
4.1
(1)
|
Fourth
Amended and Restated Registration Rights Agreement, dated as of
March 19, 2003, among DealerTrack Holdings, Inc. and the stockholders
of DealerTrack Holdings, Inc. party thereto.
|
|
|
4.2
(3)
|
Form
of Certificate of Common Stock.
|
|
|
10.1
(3)
|
License
Agreement, made and entered into as of February 1, 2001, by and
between The Chase Manhattan Bank and J.P. Morgan Partners (23A SBIC
Manager), Inc.
|
|
|
10.2
(9)
|
Amended
and Restated Senior Executive Employment Agreement, dated as of
August 8, 2007, by and between Mark F. O’Neil and DealerTrack
Holdings, Inc.
|
|
|
10.3
(10)
|
Amendment
No. 1 To Amended and Restated Senior Executive Employment Agreement,
dated December 31, 2008, by and between Mark F. O’Neil and
DealerTrack Holdings, Inc.
|
|
|
10.4
(11)
|
Amendment
No. 2 to Amended and Restated Executive Employment Agreement dated
November 3, 2009 between DealerTrack Holdings, Inc. and Mark F.
O’Neil
|
|
|
10.5
*
|
Amended
and Restated Senior Executive Employment Agreement, dated as of
August 8, 2007, by and between Richard McLeer and DealerTrack
Holdings, Inc.
|
|
|
10.6
*
|
Amendment
No. 1 To Amended and Restated Senior Executive Employment Agreement,
dated December 31, 2008, by and between Richard McLeer and
DealerTrack Holdings, Inc.
|
|
|
10.7
*
|
Amendment
No. 2 to Amended and Restated Executive Employment Agreement dated
November 3, 2009 between DealerTrack Holdings, Inc. and Richard
McLeer
|
|
|
10.8
*
|
Amended
and Restated Senior Executive Employment Agreement, dated as of
August 8, 2007, by and between Rick G. Von Pusch and DealerTrack
Holdings, Inc.
|
|
|
10.9*
|
Amendment
No. 1 To Amended and Restated Senior Executive Employment Agreement,
dated December 31, 2008, by and between Rick G. Von Pusch and
DealerTrack Holdings, Inc.
|
|
|
10.10
*
|
Amendment
No. 2 to Amended and Restated Executive Employment Agreement dated
November 3, 2009 between DealerTrack Holdings, Inc. and Rick G. Von
Pusch
|
|
|
10.11
(9)
|
Amended
and Restated Senior Executive Employment Agreement, dated as of
August 8, 2007, by and between Eric D. Jacobs and DealerTrack
Holdings, Inc.
|
|
|
10.12
(10)
|
Amendment
No. 1 To Amended and Restated Senior Executive Employment Agreement,
dated December 31, 2008, by and between Eric D. Jacobs and
DealerTrack Holdings, Inc.
|
|
|
10.13
(11)
|
Amendment
No. 2 to Amended and Restated Executive Employment Agreement dated
November 3, 2009 between DealerTrack Holdings, Inc. and Eric D.
Jacobs.
|
85
|
Number
|
Description
|
|
|
10.14
(9)
|
Amended
and Restated Senior Executive Employment Agreement, dated as of
August 8, 2007, by and between Raj Sundaram and DealerTrack Holdings,
Inc.
|
|
|
10.15
(10)
|
Amendment
No. 1 To Amended and Restated Senior Executive Employment Agreement,
dated December 31, 2008, by and between Raj Sundaram and DealerTrack
Holdings, Inc.
|
|
10.16
(11)
|
Amendment
No. 2 to Amended and Restated Executive Employment Agreement dated
November 4, 2009 between DealerTrack Holdings, Inc. and Rajesh
Sundaram
|
|
|
10.17
(8)
|
Unfair
Competition and Nonsolicitation Agreement, dated as of May 25, 2005,
by and between Raj Sundaram and Automotive Lease Guide (alg),
Inc.
|
|
|
10.18
(8)
|
Amendment
No. 1 to Unfair Competition and Nonsoliciation Agreement, made as of
August 21, 2006, by and between Automotive Lease Guide (alg), Inc.
and Raj Sundaram.
|
|
|
10.19
(1)
|
2001
Stock Option Plan of DealerTrack Holdings, Inc., effective as of
August 10, 2001.
|
|
|
10.20
(1)
|
First
Amendment to 2001 Stock Option Plan of DealerTrack Holdings, Inc.,
effective as of December 28, 2001.
|
|
|
10.21
(1)
|
Second
Amendment to 2001 Stock Option Plan of DealerTrack Holdings, Inc.,
effective as of March 19, 2003.
|
|
|
10.22
(1)
|
Third
Amendment to 2001 Stock Option Plan of DealerTrack Holdings, Inc.,
effective as of January 30, 2004.
|
|
|
10.23
(6)
|
Fourth
Amendment to 2001 Stock Option Plan of DealerTrack Holdings, Inc.
effective as of February 10, 2006.
|
|
|
10.24
(12)
|
Third
Amended and Restated 2005 Incentive Award Plan, effective as of
June 17, 2009.
|
|
|
10.25
(5)
|
Form
of Stock Option Agreement.
|
|
|
10.26
(5)
|
Form
of Restricted Stock Agreement.
|
|
|
10.27
(10)
|
Form
of Restricted Stock Unit Agreement.
|
|
|
10.28
(1)
|
Senior
Executive Incentive Bonus Plan, effective as of May 26,
2005.
|
|
|
10.29
(8)
|
Stock
Ownership and Retention Program, adopted May 26,
2005.
|
|
|
10.30
(1)
|
Employee
Stock Purchase Plan, adopted May 26, 2005.
|
|
|
10.31
(1)
|
Directors’
Deferred Compensation Plan, effective as of June 30,
2005.
|
|
|
10.32
(9)
|
First
Amendment to DealerTrack Holdings, Inc. Directors’ Deferred Compensation
Plan effective as of January 1, 2007.
|
|
|
10.33
(1)
|
Employees’
Deferred Compensation Plan, effective as of June 30,
2005.
|
86
|
Number
|
Description
|
|
|
10.34
(9)
|
First
Amendment to DealerTrack Holdings, Inc. Employees’ Deferred Compensation
Plan effective as of January 1, 2007.
|
|
|
10.35
(1)
|
401(k)
Plan, effective as of January 1, 2001, as amended.
|
|
|
10.36
(2)
|
Lease
Agreement, dated as of August 5, 2004, between iPark Lake Success,
LLC and DealerTrack, Inc.
|
|
|
14.1
(6)
|
Code
of Business Conduct and Ethics.
|
|
|
21.1
*
|
List
of Subsidiaries.
|
|
|
23.1
*
|
Consent
of PricewaterhouseCoopers LLP.
|
|
|
31.1
*
|
Certification
of Mark F. O’Neil pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
*
|
Certification
of Eric D. Jacobs pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
*
|
Certification
of Mark F. O’Neil and Eric D. Jacobs pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
*
|
Filed
herewith.
|
||
|
(1)
|
Incorporated
by reference to our Registration Statement on Form S-1 (File
No. 333-126944) filed July 28, 2005.
|
||
|
(2)
|
Incorporated
by reference to Amendment No. 1 to our Registration Statement on Form
S-1 (File No. 333-126944) filed September 22, 2005.
|
||
|
(3)
|
Incorporated
by reference to Amendment No. 2 to our Registration Statement on Form
S-1 (File No. 333-126944) filed October 12, 2005.
|
||
|
(4)
|
Incorporated
by reference to Amendment No. 3 to our Registration Statement on Form
S-1 (File No. 333-126944) filed October 24, 2005.
|
||
|
(5)
|
Incorporated
by reference to our Quarterly Report on Form 10-Q filed May 12,
2006.
|
||
|
(6)
|
Incorporated
by reference to our Annual Report on Form 10-K filed March 30,
2006.
|
||
|
(7)
|
Incorporated
by reference to our Quarterly Report on Form 10-Q filed November 14,
2006.
|
||
|
(8)
|
Incorporated
by reference to our Annual Report on Form 10-K filed March 16,
2007.
|
||
|
(9)
|
Incorporated
by reference to our Quarterly Report on Form 10-Q filed August 9,
2007.
|
||
|
(10)
|
Incorporated
by reference to our Annual Report on Form 10-K filed on February 24,
2009.
|
||
|
(11)
|
Incorporated
by reference to our Quarterly Report on Form 10-Q filed November 5,
2009.
|
||
|
(12)
|
Incorporated
by reference to our Annual Report on Form 10-K filed on February 24,
2010.
|
||
87