The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Description and Basis of Presentation
Business Description
Dealertrack’s web-based software
solutions and services enhance efficiency and profitability for all major segments of the automotive retail industry, including
dealers, lenders, OEMs, third-party retailers, agents and aftermarket providers. Dealertrack operates the largest online credit
application networks in the United States and Canada. We believe Dealertrack delivers the industry’s most comprehensive solution
set for automotive retailers, including:
|
·
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Dealer Management solutions, which provide independent and franchised dealers with a powerful dealer management system (DMS)
featuring easy-to-use tools and real-time data access to enhance their efficiency;
|
|
·
|
Sales and F&I solutions, which allow dealers to streamline the in-store and online sales processes as they structure deals
from a single integrated platform;
|
|
·
|
Inventory solutions, which deliver vehicle inventory management and transportation offerings to help dealers accelerate used-vehicle
turn rates and assisting with the facilitation of vehicle delivery;
|
|
·
|
Processing solutions, which include online motor vehicle registration, lien and titling applications and services, and collateral
management services;
|
|
·
|
Digital Retailing solutions, which integrate advanced vehicle search, pricing and payment tools directly into a retailer’s
website; and
|
|
·
|
Interactive solutions, which deliver digital marketing and website offerings to assist dealers in achieving higher lead conversion
rates by helping optimize the maximum amount of shoppers to their websites.
|
References in this Annual Report on Form
10-K to “Dealertrack,” the “Company,” “our” or “we” are to Dealertrack Technologies,
Inc., a Delaware corporation, and/or its subsidiaries. Effective November 7, 2012, we amended our charter to change our name to
Dealertrack Technologies, Inc. This change was approved by the stockholders at our Annual Meeting of Stockholders on June 20, 2012.
Basis of Presentation
The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
The accompanying consolidated financial
statements include the accounts of Dealertrack Technologies, Inc. and its wholly-owned subsidiaries. All intercompany transactions
and balances have been eliminated.
Beginning in 2012, we are presenting our
consolidated statements of operations and our consolidated statements of comprehensive income as two separate but consecutive statements.
Certain previously reported amounts have
been reclassified on the consolidated statement of operations due to cost center changes. For the year ended December 31, 2011,
we reclassified approximately $3.0 million of salary and benefit costs from cost of revenue and product development to selling,
general and administrative. For the year ended December 31, 2010, we reclassified approximately $0.8 million of salary and benefit
costs from product development to selling, general and administrative and cost of revenue.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial
statements in conformity with GAAP 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 revenue recognition, allowance for doubtful accounts, the fair value of financial assets, acquired intangible
assets, goodwill, contingent consideration, 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
We recognize revenue when the following
fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or the services have
been rendered, (iii) the fee is fixed or determinable, and (iv) collection of the resulting receivable is reasonably assured.
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.
Transaction Services Revenue
Lender Transaction Services Revenue
Lender transaction services revenue consists
of transaction revenue earned from our lender customers for (1) each electronic receipt of credit application or contract data
that dealers submit to them through the Dealertrack credit application network; (2) for each financing contract executed via our
electronic contracting and digital contract processing solution; (3) for collateral management transactions; and (4) for any data
services performed.
Credit Application Transaction Revenue
Our web-based 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. Credit application revenue consists of revenue earned on a per transaction basis and set-up fees charged
to lenders for establishing connections. Transaction revenue is earned upon the electronic receipt of the credit application data
and set-up fees are recognized ratably over the expected customer relationship period of four years.
Electronic and Digital Contracting Transaction
Revenue
Our eContracting product allows dealers
to obtain electronic signatures and contract information electronically to lender customers that participate in the solution. Our
digital contract processing service receives paper-based contract from dealers, digitizes the contract and submits them in electronic
format to the respective lenders. Electronic and digital contracting revenue is recognized on a per transaction basis after services
have been rendered.
Collateral Management Services Transaction
Revenue
Our collateral management solution provides
vehicle title and administration services for our customers, which are comprised mainly of lenders. The solution facilitates communication
between our customers and the state department of motor vehicles by providing a solution for our customers to monitor title perfection
and expedite the processing of liens with the state department of motor vehicles. We offer both paper-based and electronic-based
title services depending on state requirements. Customer contracts for title services are principally comprised of two elements:
(1) title perfection confirmation and (2) title administration.
For paper-based titles, title perfection
confirmation occurs upon the receipt of title and lien documentation supporting title perfection from the department of motor vehicles.
For electronic-based titles, title perfection confirmation is achieved upon electronic acknowledgement that department of motor
vehicles’ records reflect the customer as the lien holder.
For paper-based titles, title administration
services require us to physically hold, store and manually release the title. For electronic-based titles, title administration
services require data storage. The release of the electronic title can be accomplished by the lien holder and does not require
manual action by us.
Deliverables for paper and electronic title
management arrangements are separated into more than one unit of accounting when (i) the delivered element(s) have value to the
customer on a stand-alone basis, (ii) delivery of the undelivered element(s) is probable and substantially in our control, and
(iii) relative selling price is determined.
Based on the above criteria, paper and
electronic-based collateral management service revenue are separated into two units of accounting. We recognize a portion of the
paper-based transaction fee upon receipt of title and lien documentation supporting title perfection from the department of motor
vehicles. For electronic-based titles, we recognize a portion of the fee upon electronic acknowledgement that the department of
motor vehicles’ records reflect the customer as the lien holder. For paper-based title services, amounts allocated to each
unit of accounting are based upon vendor-specific objective evidence. For electronic-based title services, amounts allocated to
each unit of accounting are based upon estimated selling price, which is based upon an adjustment to the selling price of our individual
paper-based title services, when sold separately. The adjustment to the selling price is due to the lower selling price of electronic-based
services compared to paper-based services.
For customers in which we bill the entire
transaction fee in advance, the title administration portion of the fee for both paper and electronic-based titles is deferred
and recognized over the title administration period, which is estimated at approximately three years. This estimate is based upon
a historical analysis of the average time period between the date of financing and the date of pay-off.
Collateral management services revenue
also includes revenue earned from converting a new customer’s title portfolio to our collateral management solution, which
may include other ancillary services. Amounts earned from converting a new customer’s portfolio are recognized over the customer’s
estimated portfolio loan life which varies depending on the customer. Amounts earned from other ancillary services are recognized
on a per transaction basis after services have been rendered.
Data Services Transaction Revenue
Data service solutions are designed to
help lenders analyze investment risk through detailed study of return rates and historic market trends. Whether a lender portfolio
consists of leases, loans, or both, our data service products will analyze lenders automotive investments for maximum return. Data
services revenue is recognized on a per record basis after services have been rendered.
Dealer and Other Service Provider
Transaction Services Revenue
Registration Transaction Revenue
Our registration and titling services solution
provides various web-based and service-bureau based automotive vehicle registration services to customers. Registration and titling
services revenue is recognized on a per transaction basis after services have been rendered.
Aftermarket Transaction Revenue
The Dealertrack Aftermarket Network streamlines
and integrates the entire aftermarket sales and submission process. Aftermarket solution providers connected to the Dealertrack
Aftermarket Network enable their dealers to have free access to real-time information needed to make aftermarket sales decisions.
Aftermarket services revenue is recognized on a per transaction basis after services have been rendered.
Credit Bureau Transaction Revenue
Our credit bureau service provides our
dealer customers the ability to access credit reports from several reporting agencies or resellers online. We offer these credit
reports on both a reseller and agency basis. We recognize credit bureau revenue on a per transaction basis after services have
been rendered. Credit bureau revenue is recognized from all but one credit bureau provider on a net basis due to the fact that
we are not considered the primary obligor, and recognized on a gross basis from one provider as we have risk of loss and are considered
the primary obligor in the transaction.
Other Transaction Revenue
Other transaction revenue includes revenue
from appraisal solutions that provide dealers the ability to complete real-time vehicle appraisals as well as revenue from compliance
solutions. This transaction revenue is recognized on a per transaction basis after services have been rendered.
Subscription Services Revenue
Subscription services revenue consists
of revenue earned from primarily our dealers and other customers (typically on a monthly basis) for use of our subscription or
licensed-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, merchandise,
advertise, and their transport inventory and execute financing contracts electronically. Revenue is recognized from such contracts
ratably over the contract period. Set-up fees, if applicable, are recognized ratably over the expected dealer customer relationship
period, which is generally 36 to 60 months. For contracts that contain two or more subscription products and services, we recognize
revenue in accordance with the above policy using relative selling price when the delivered products have stand-alone value.
Search Engine Optimization and Marketing
We record revenue for search engine optimization
(SEO) and search engine marketing (SEM) based on the assessment of multiple factors, including whether we are the primary obligor
to the arrangement and whether we maintain latitude in establishing price. In instances in which we are the primary obligor
or establish price, we record the total amounts received from customers within subscription services revenue, and online search
provider payments as cost of revenue. In instances in which we are paid by customers to recommend allocation of their budgeted
spend, we record subscription services revenue for the net amounts paid to us by our customers. In this latter instance, our
customers budgeted spend and amounts paid to the online search providers do not impact our consolidated results of operations.
Other Revenue
Other revenue consists of revenue primarily
earned through forms programming, data conversion, hardware and equipment sales from our Dealer Management solution, shipping commissions
earned from our digital contract business, and consulting and analytical revenue earned from ALG in periods prior to its disposal
in 2011.
Training fees are also included in other revenue.
Other revenue is recognized when the
service is rendered.
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.
Marketable Securities
Marketable securities consist of U.S. treasury
and agency securities, corporate bonds, municipal bonds and a tax-advantaged preferred security.
All
of our marketable securities are classified as available-for-sale securities and are recorded at fair value. Unrealized gains and
losses, net of the related tax effect, are reported as a separate component of accumulated other comprehensive income until realized.
R
ealized gains and losses are included in the consolidated statement of operations and are calculated based on the specific
identification method.
Customer Funds
Under contractual arrangements, our registration
and titling services solution collects funds from our customers and remits such amounts to the various state departments of motor
vehicle registries (registries). Customer funds receivable primarily represents transactions processed by our customers for which
we have not collected our fees or the fees payable to the various registries. In addition, payments made to the various registries
in advance of receipt from the customer, are recorded as customer funds receivable. Customer funds payable primarily includes transactions
processed by our customers for which we have not remitted the fees to the various registries. Customer funds are maintained in
separate bank accounts and are segregated from our operating cash.
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, 2012, 2011 and 2010.
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 balances 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,
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. Capitalized costs are generally amortized over two years while our platform
updates are amortized over five years and costs related to our ERP implementation are amortized over seven 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 $46.2 million and $37.3 million as of December 31, 2012 and 2011, respectively. Amortization
expense totaled $13.9 million, $12.3 million and $9.7 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Amortization expense for the year ended December 31, 2012 included $1.0 million of accelerated depreciation of certain technology
assets due to the discontinuation of those projects.
Goodwill
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 calculate and record an impairment loss to the extent that the implied fair value of the goodwill
of the reporting unit is less than the carrying value of goodwill.
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, 2012 and 2011 did not indicate any impairment of our goodwill. In each year, the fair value of our reporting unit was significantly
in excess of the carrying value, which includes goodwill. As of October 1, 2012, our market capitalization was approximately $1.2
billion compared to our book value, including goodwill, of approximately $565 million.
Intangibles and Long-lived Assets
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 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:
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·
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any sustained decline in our 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.
Equity Method
Accounting
We apply the equity method of accounting
to investments in entities in which we own more than 20% of the equity of the entity and exercise significant influence.
Senior Convertible Notes
In accordance with Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) Topic 470-20,
Debt with Conversion and Other Options
, we
separately account for the liability and equity components of our senior convertible notes. The estimated fair value of the liability
component is computed based on an assessment of the fair value of a similar debt instrument that does not include a conversion
feature. The equity component, which is recognized as a debt discount and recorded in additional paid-in capital, represents the
difference between the gross proceeds from the issuance of the notes and the estimated fair value of the liability component at
the date of issuance. The debt discount is amortized over the expected life of a similar liability without the equity component.
The effective interest rate used to amortize the debt discount was based on our estimated non-convertible borrowing rate of a similar
liability without an equity component as of the date the notes were issued.
Income Taxes
We account for income taxes in accordance
with the provisions of FASB ASC Topic 740,
Accounting for Income Taxes
(ASC Topic 740), 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. In
2010, we recorded valuation allowances relating to cumulative U.S. book losses, some of which were subsequently reversed as a result
of acquisition and disposal activity.
Uncertain tax positions are recorded in
our consolidated balance sheet in accrued liabilities – other. 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.
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 $0.5 million, $0.8 million and $1.0 million for the years ended December 31,
2012, 2011 and 2010, respectively.
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 marketable securities and receivables from
clients. We place our cash, cash equivalents, short-term and long-term marketable securities 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.
Our revenue is generated from customers
in the automotive retail industry. As of December 31, 2012 and 2011, no customer accounted for more than 10% of our accounts
receivable. For the three years ended December 31, 2012, no customer accounted for more than 10% of our revenue.
Net Income (Loss) per Share
We compute net income (loss) per share
in accordance with FASB ASC Topic 260,
Earnings Per Share
(ASC Topic 260). Under ASC Topic 260, basic earnings per share
is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted
earnings per share is calculated by dividing net income (loss) 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 income (loss) per share for the years ended December 31, 2012, 2011 and 2010, (in thousands, except per
share amounts):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
20,454
|
|
|
$
|
65,135
|
|
|
$
|
(27,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding (basic)
|
|
|
42,508
|
|
|
|
41,270
|
|
|
|
40,323
|
|
Common equivalent shares from options to purchase common stock, restricted common stock units and performance stock units
|
|
|
1,491
|
|
|
|
1,257
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding (diluted)
|
|
|
43,999
|
|
|
|
42,527
|
|
|
|
40,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.48
|
|
|
$
|
1.58
|
|
|
$
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.46
|
|
|
$
|
1.53
|
|
|
$
|
(0.69
|
)
|
The following is a summary of the weighted
average securities outstanding during the respective periods that have been excluded from the diluted net income (loss) per share
calculation because the effect would have been antidilutive (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Stock options
|
|
|
653
|
|
|
|
1,303
|
|
|
|
4,816
|
|
Restricted stock units
|
|
|
262
|
|
|
|
73
|
|
|
|
805
|
|
Performance stock units
|
|
|
—
|
|
|
|
79
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total antidilutive awards
|
|
|
915
|
|
|
|
1,455
|
|
|
|
5,669
|
|
In regards to our senior convertible notes,
it is our intent to settle the par value of the notes in cash, and we expect to have the liquidity to do so. As a result, there
will be no impact to diluted earnings per share unless the share price of our stock exceeds the conversion price of $37.37, with
additional dilution if our stock price exceeds the warrant strike price of $46.18. Our share price during the year did not exceed
the conversion price or warrant strike price and therefore there was no impact to diluted net income (loss) per share.
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 currently have three types of stock-based compensation awards: stock options, restricted stock units
and performance stock units. There are no longer any restricted common stock awards outstanding.
The following summarizes stock-based compensation
expense recognized for the three years ended December 31, 2012, 2011 and 2010 (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Stock options
|
|
$
|
4,608
|
|
|
$
|
4,941
|
|
|
$
|
5,732
|
|
Restricted stock units
|
|
|
7,101
|
|
|
|
5,293
|
|
|
|
3,354
|
|
Performance stock units (1)
|
|
|
1,883
|
|
|
|
1,057
|
|
|
|
477
|
|
Restricted common stock
|
|
|
—
|
|
|
|
321
|
|
|
|
1,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
13,592
|
|
|
$
|
11,612
|
|
|
$
|
11,233
|
|
|
(1)
|
The expense recorded to performance stock units includes expense related to the Adjusted Net Income (ANI) Performance Awards
and the Total Shareholder Return (TSR) Performance Awards for the years ended December 31, 2012, 2011 and 2010 is as follows (in
thousands):
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
ANI Performance Awards
|
|
$
|
832
|
|
|
$
|
452
|
|
|
$
|
157
|
|
TSR Performance Awards
|
|
|
1,051
|
|
|
|
605
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,883
|
|
|
$
|
1,057
|
|
|
$
|
477
|
|
The income tax benefit related to stock-based
compensation expense for the years ended December 31, 2012, 2011 and 2010, was $5.0 million, $4.2 million, and $4.0 million (offset
by a full valuation allowance), respectively.
A summary of the unamortized stock-based compensation
expense and associated weighted average remaining amortization periods for stock options, 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
|
|
$
|
9,096
|
|
|
|
2.82
|
|
Restricted stock units
|
|
$
|
13,785
|
|
|
|
2.63
|
|
Performance stock units
|
|
$
|
2,237
|
|
|
|
1.08
|
|
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 awards that will be forfeited prior to the completion of the
vesting requirements. We use Black-Scholes-Merton and binomial lattice-based valuation pricing models to value our stock-based
awards.
Expected Life
The expected life is determined based upon
the experience of similar entities whose shares are publicly-traded. The expected life for stock-based awards granted prior to
December 31, 2007 were determined based on the “simplified” method, due to our limited public company history, except
for options granted under the Stock Option Exchange Program (SOEP) which were determined by means of Monte-Carlo simulations.
Expected Stock Price Volatility
Beginning in 2012, we determine the expected
volatility of any stock-based awards we issue based on our historical volatility. Previously, due to our limited public company
history, the expected volatility for stock-based awards was determined using a time-weighted average of our historical volatility
and the expected volatility of similar entities whose common shares are publicly-traded.
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 our stock-based award grants as we have not paid any dividends on our common stock. We do not anticipate declaring or paying
cash dividends on our common stock, and we are currently limited in doing so pursuant to our credit facility.
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 vested 25% after six months from the new grant date, 25% after twelve months from the
new grant date, and 1/48 each month thereafter.
Restricted Stock Unit Vesting Requirements
Restricted stock units granted are generally
subject to an annual cliff vest over four years (one year for directors) from the vesting commencement date, with the exception
of performance stock unit awards.
Long Term Incentive Plan (LTIP)
The LTIP awards were earned upon the achievement
of earnings before interest, taxes, depreciation and amortization (EBITDA) and market-based targets for fiscal years 2007, 2008
and 2009 and the grantee’s continuous employment in active service until the final vest date, which was approximately three
years from the grant date.
Performance Stock Unit Vesting Requirements
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 the final vest date, which is approximately three years from the grant date.
Fair Value Inputs
The fair value of each share-based award
grant has been estimated on the date of grant using the Black-Scholes-Merton Option Pricing Model with the following assumptions:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Expected volatility
|
|
|
47.3 – 49.9
|
%
|
|
|
49.5
|
%
|
|
|
50.3
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (in years)
|
|
|
4.18
|
|
|
|
4.10
|
|
|
|
4.18
|
|
Risk-free interest rate
|
|
|
0.50 – 0.62
|
%
|
|
|
0.67 – 1.63
|
%
|
|
|
0.94 – 1.91
|
%
|
Weighted-average fair value of stock options granted
|
|
$
|
10.79
|
|
|
$
|
8.36
|
|
|
$
|
6.32
|
|
Weighted-average fair value of restricted stock units granted
|
|
$
|
28.03
|
|
|
$
|
20.30
|
|
|
$
|
15.30
|
|
The fair value of ANI Performance Awards
is estimated on the date of grant using a Black-Scholes-Merton valuation pricing model. The fair value of TSR Performance Awards
is estimated on the date of grant using a binomial lattice-based valuation pricing model. The weighted-average assumptions were
as follows:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
0.39
|
%
|
|
|
1.16
|
%
|
|
|
1.33
|
%
|
Weighted-average fair value of ANI Performance Awards granted
|
|
$
|
27.99
|
|
|
$
|
19.48
|
|
|
$
|
16.91
|
|
Weighted-average fair value of TSR Performance Awards granted
|
|
$
|
28.98
|
|
|
$
|
21.27
|
|
|
$
|
17.62
|
|
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 14.
Recent Accounting Pronouncements
In February 2013, the FASB issued Accounting
Standards Update No. 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, which requires
that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant
amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement
line items affected by the reclassification. The guidance is effective for reporting periods beginning after December 15, 2012.
We do not expect the adoption to have a material impact on our consolidated financial statements.
In July 2012, the FASB issued amended guidance
that simplifies how entities may test indefinite-lived intangible assets other than goodwill for impairment. After an assessment
of certain qualitative factors, if it is determined to be more likely than not that an indefinite-lived asset is impaired, entities
must perform the quantitative impairment test. Otherwise, the quantitative test is optional. The amended guidance is effective
for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted.
We do not expect the adoption to have a material impact on our consolidated financial statements.
3. Fair Value Measurements
Fair value is defined as 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 for identical assets or liabilities
that the reporting entity can access at the measurement date.
|
|
·
|
Level 2 –
Inputs other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly
.
|
|
·
|
Level 3 –
Unobservable inputs for the asset or liability
. 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. There were no transfers between levels of the fair
value hierarchy during the periods presented below.
The fair value of our investments in debt
securities, reported by the fund managers, are verified by management through the utilization of third party pricing services and
review of trades completed around the period end date. We consider market liquidity in determining the fair value for these securities.
After completing our validation procedures, we did not adjust any fair value measurements provided by the fund managers. These
investments in debt securities are included in Level 2 of the fair value hierarchy below.
Financial assets and liabilities measured
at fair value on a recurring basis include the following as of December 31, 2012 and 2011 (in thousands):
As of December 31, 2012
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
December 31, 2012
|
|
Cash equivalents (1)
|
|
$
|
63,774
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
63,774
|
|
Marketable securities (2)
|
|
|
—
|
|
|
|
38,459
|
|
|
|
—
|
|
|
|
38,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,774
|
|
|
$
|
38,459
|
|
|
$
|
—
|
|
|
$
|
102,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (4) (7)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,000
|
)
|
|
$
|
(1,000
|
)
|
As of December 31, 2011
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
December 31, 2011
|
|
Cash equivalents (1)
|
|
$
|
6,594
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,594
|
|
Marketable securities (2)
|
|
|
—
|
|
|
|
46
|
|
|
|
—
|
|
|
|
46
|
|
Investments – long-term (3)
|
|
|
—
|
|
|
|
—
|
|
|
|
6,500
|
|
|
|
6,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,594
|
|
|
$
|
46
|
|
|
$
|
6,500
|
|
|
$
|
13,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (4)
|
|
|
—
|
|
|
|
—
|
|
|
|
(900
|
)
|
|
|
(900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(900
|
)
|
|
$
|
(900
|
)
|
A reconciliation of the beginning and ending
balances of Level 3 investments as of December 31, 2011 and 2012 is as follows (in thousands):
Balance as of December 31, 2010
|
|
$
|
2,704
|
|
|
|
|
|
|
Sale of tax-advantaged preferred stock (5)
|
|
|
(2,485
|
)
|
Realized gain on securities included in the consolidated statement of operations (5)
|
|
|
409
|
|
Reversal of unrealized gain on securities sold recorded in other comprehensive income
|
|
|
(178
|
)
|
Redemption of auction rate security (6)
|
|
|
(450
|
)
|
Acquisition of warrant (3)
|
|
|
5,500
|
|
Change in fair value of warrant (3)
|
|
|
1,000
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
$
|
6,500
|
|
|
|
|
|
|
Change in fair value of warrant (3)
|
|
|
(6,310
|
)
|
Exercise of warrant (3)
|
|
|
(190
|
)
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
—
|
|
A reconciliation of the beginning and ending
balances of contingent consideration, a Level 3 liability, as of December 31, 2011 and 2012 is as follows (in thousands):
Balance as of December 31, 2010
|
|
$
|
—
|
|
|
|
|
|
|
Record contingent consideration at fair value – eCarList (4)
|
|
|
(2,900
|
)
|
Change in fair value of contingent consideration – eCarList (4)
|
|
|
2,000
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
$
|
(900
|
)
|
|
|
|
|
|
Change in fair value of contingent consideration – eCarList (4)
|
|
|
900
|
|
Record fair value of contingent consideration – ClickMotive (7)
|
|
|
(250
|
)
|
Change in fair value of contingent consideration – ClickMotive (7)
|
|
|
(750
|
)
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
(1,000
|
)
|
|
(1)
|
Cash equivalents consist of highly liquid investments with original maturity dates of three months or less, for which we determine
fair value through quoted market prices. As of December 31, 2012 and 2011, these investments were at least AA rated.
|
|
(2)
|
As of December 31, 2012, Level 2 marketable securities include U.S. treasury and agency securities, corporate bonds, municipal
bonds and an investment in a tax-advantaged preferred security. As of December 31, 2011, Level 2 marketable securities include
an investment in a tax-advantaged preferred security. Fair market value was determined based on the quoted market prices of the
underlying securities.
|
|
(3)
|
In connection with our October 1, 2011 disposal of ALG, we acquired a warrant to purchase 6.3 million additional shares of
TrueCar common stock and recorded the warrant as a long-term investment. As a result of a net settlement feature, the warrant was
revalued each reporting period through its expiration date of October 1, 2012, with the change in fair value recorded in the consolidated
statements of operations. Prior to its exercise, the fair value of the warrant was estimated using a Black-Scholes-Merton option
pricing model. In September 2012, we exercised the warrant at a value of $0.2 million based on an independent valuation approved
by the board of directors of TrueCar. For 2012, the value of the warrant decreased by $6.3 million as a result of a decrease in
the remaining expected term and estimated share price. The value of the shares received upon net exercise is now part of our existing
cost method investment in TrueCar.
|
|
(4)
|
A portion of the purchase price of eCarList included contingent consideration that was payable in the first quarter of 2013
based upon the achievement of certain revenue targets in 2012. The fair value of the contingent consideration was determined based
upon probability-weighted revenue forecasts for the underlying period. The contingent consideration was revalued each reporting
period, until settled, with the resulting gains and losses recorded in the consolidated statements of operations. The revenue targets
for 2012 were not met, and therefore no contingent consideration payments will be made. We recorded a fair value adjustment in
the amount of $0.9 million of income for the year ended December 31, 2012 as a result of the decrease in the estimated settlement
of the contingent consideration from the estimated amount as of December 31, 2011.
|
|
(5)
|
Level 3 long-term marketable securities as of December 31, 2010 included a tax-advantaged preferred stock of a financial institution
with a fair value of $2.3 million. As of December 31, 2010, it was uncertain whether we would be able to liquidate these securities
within the next twelve months; as such we classified them as long-term on our consolidated balance sheets. Due to the lack of observable
market quotes, we utilized valuation models that relied 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. In June 2011, we sold this security for approximately $2.5 million and recorded a gain of approximately
$0.4 million in our consolidated statement of operations.
|
|
(6)
|
Level 3 short-term marketable securities as of December 31, 2010 included an auction rate security invested in a tax-exempt
state government obligation that was valued at par of $0.4 million. Our intent was not to hold the auction rate security invested
in a tax-exempt state government obligation to maturity, but rather to use the interest reset feature to provide liquidity. In
October 2010, $1.1 million of this security was redeemed by the issuer at par. Due to continued failures in the marketplace auctions,
we held the remaining $0.4 million auction rate security until the maturity date in September 2011, when it was redeemed by the
issuer at par.
|
|
(7)
|
In connection with our October 1, 2012 acquisition of ClickMotive, a portion of the purchase price included contingent consideration
that is payable in the first quarter of 2014 based upon the achievement of certain performance targets in 2013. The fair value
of the contingent consideration is determined based upon probability-weighted revenue forecasts for the underlying period. The
contingent consideration is revalued each reporting period, until settled, with the resulting gains and losses recorded in the
consolidated statements of operations. The fair value of the contingent consideration as of the acquisition date was estimated
at approximately $0.3 million. We estimated the fair value of the contingent consideration as of December 31, 2012 to be $1.0 million
and recorded expense of approximately $0.8 million for the three months ended December 31, 2012 as a result of the increase in
the contingent consideration liability. The increase in contingent consideration includes the impact of an adjustment to the performance
targets made subsequent to the close of the acquisition.
|
Senior convertible notes
Our senior convertible notes are shown
in the accompanying consolidated balance sheets at their original issuance value, net of unamortized discount, and are not marked
to market. The approximate aggregate fair value of our senior convertible notes as of December 31, 2012 was $211.5 million.
The
fair value of the senior convertible notes was estimated on the basis of quoted market prices of similar securities, which, due
to limited trading activity, are considered Level 2 in the fair value hierarchy.
4. Property and Equipment
Property and equipment are recorded at
cost and consist of the following (dollars in thousands):
|
|
Estimated
|
|
|
|
|
|
Useful
|
|
|
|
|
|
Life
|
|
December 31,
|
|
|
|
(in years)
|
|
2012
|
|
|
2011
|
|
Computer equipment
|
|
3 - 5
|
|
$
|
47,052
|
|
|
$
|
40,456
|
|
Office equipment
|
|
5
|
|
|
5,245
|
|
|
|
4,789
|
|
Furniture and fixtures
|
|
5
|
|
|
5,171
|
|
|
|
3,693
|
|
Leasehold improvements
|
|
3 -13
|
|
|
4,575
|
|
|
|
3,545
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, gross
|
|
|
|
|
62,043
|
|
|
|
52,483
|
|
Less: Accumulated depreciation and amortization
|
|
|
|
|
(34,636
|
)
|
|
|
(30,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
|
$
|
27,407
|
|
|
$
|
21,637
|
|
Depreciation and amortization expense for
the years ended December 31, 2012, 2011 and 2010 was $9.4 million, $8.7 million and $7.6 million, respectively.
5. Marketable Securities
Our investments in marketable securities
are made within the guidelines of our investment policy, which has established guidelines relative to the diversification of our
investments and their maturities, with the principle objective of capital preservation, maintaining liquidity, and avoiding concentrations.
The following is a summary of available-for-sale securities as of December 31, 2012 (in thousands):
As of December 31, 2012
|
|
Aggregate
Cost Basis
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Aggregate
Fair Value
|
|
U.S. Treasury and agency securities
|
|
$
|
17,706
|
|
|
$
|
20
|
|
|
$
|
(0
|
)
|
|
$
|
17,726
|
|
Corporate debt securities
|
|
|
20,545
|
|
|
|
20
|
|
|
|
(2
|
)
|
|
|
20,563
|
|
Municipal securities
|
|
|
170
|
|
|
|
—
|
|
|
|
0
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,421
|
|
|
$
|
40
|
|
|
$
|
(2
|
)
|
|
$
|
38,459
|
|
Available-for-sale securities as of December
31, 2011 consisted of a tax-advantaged preferred security with a fair value of $46 thousand.
As of December 31, 2012, $34.0 million
of marketable securities had scheduled maturities of less than one year, and approximately $4.4 million had scheduled maturities
of greater than one year but less than two years. In addition, more than half of our marketable securities were AA rated, and all
securities had at least an A rating.
Investments in money market and similar
short-term investments are recorded on our consolidated balance sheets as cash and cash equivalents.
As of December 31 2012 and 2011, we did
not have any marketable securities that were in an unrealized loss position for greater than 12 months.
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, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Amortization
|
|
|
Book
|
|
|
Accumulated
|
|
|
Book
|
|
|
Accumulated
|
|
|
Period
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Amortization
|
|
|
(in years)
|
Customer contracts
|
|
$
|
99,673
|
|
|
$
|
(43,229
|
)
|
|
$
|
76,191
|
|
|
$
|
(31,745
|
)
|
|
4-10
|
Technology
|
|
|
69,620
|
|
|
|
(22,369
|
)
|
|
|
63,900
|
|
|
|
(25,057
|
)
|
|
2-8
|
Trade names
|
|
|
9,100
|
|
|
|
(2,480
|
)
|
|
|
4,889
|
|
|
|
(1,484
|
)
|
|
2-8
|
Non-compete agreements
|
|
|
7,540
|
|
|
|
(4,469
|
)
|
|
|
7,299
|
|
|
|
(2,796
|
)
|
|
4-5
|
State DMV relationships
|
|
|
6,190
|
|
|
|
(1,977
|
)
|
|
|
6,190
|
|
|
|
(946
|
)
|
|
6
|
Database
|
|
|
—
|
|
|
|
—
|
|
|
|
492
|
|
|
|
(492
|
)
|
|
3-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
192,123
|
|
|
$
|
(74,524
|
)
|
|
$
|
158,961
|
|
|
$
|
(62,520
|
)
|
|
|
Amortization expense related to intangibles
for the years ended December 31, 2012, 2011 and 2010 were $28.3 million, $29.7 million and $19.4 million.
Amortization expense that will be charged
to income for the subsequent five years and thereafter is as follows (in thousands):
2013
|
|
$
|
29,565
|
|
2014
|
|
|
26,644
|
|
2015
|
|
|
23,872
|
|
2016
|
|
|
14,902
|
|
2017
|
|
|
8,904
|
|
Thereafter
|
|
|
13,712
|
|
|
|
|
|
|
Total
|
|
$
|
117,599
|
|
7. Goodwill
The changes in the carrying amount of goodwill
for the years ended December 31, 2012 and 2011 is as follows (in thousands):
Goodwill, gross, as of December 31, 2010
|
|
$
|
136,408
|
|
Accumulated impairment losses as of December 31, 2010
|
|
|
—
|
|
Goodwill, net, as of December 31, 2010
|
|
$
|
136,408
|
|
|
|
|
|
|
Acquisition of Dealertrack Processing Solutions
|
|
|
74,217
|
|
Acquisition of Automotive Information Center
|
|
|
490
|
|
Acquisition of eCarList
|
|
|
23,427
|
|
Disposal of ALG
|
|
|
(33,127
|
)
|
Impact of change in Canadian dollar exchange rate
|
|
|
(575
|
)
|
Goodwill, gross, as of December 31, 2011
|
|
$
|
200,840
|
|
|
|
|
|
|
Accumulated impairment losses as of December 31, 2011
|
|
|
—
|
|
Goodwill, net, as of December 31, 2011
|
|
$
|
200,840
|
|
|
|
|
|
|
Impact of change in Canadian dollar exchange rate
|
|
|
561
|
|
Contribution of Chrome to joint venture
|
|
|
(7,874
|
)
|
Acquisition of Dealertrack CentralDispatch
|
|
|
48,350
|
|
Acquisition of ClickMotive
|
|
|
26,241
|
|
Acquisition of Ford’s i
CONNECT DMS
|
|
|
2,528
|
|
Goodwill, gross, as of December 31, 2012
|
|
$
|
270,646
|
|
|
|
|
|
|
Accumulated impairment losses as of December 31, 2012
|
|
|
—
|
|
Goodwill, net, as of December 31, 2012
|
|
$
|
270,646
|
|
The result of our most recent annual assessment
performed on October 1, 2012 did not indicate any impairment of goodwill.
8. Business Combinations
iCONNECT DMS Business Acquisition
On November 1, 2012, Dealertrack Canada,
Inc. acquired
the assets of Ford Motor Company of Canada, Limited's (Ford) iCONNECT Direct DMS business
for CAD $6.9 million (USD $6.9 million) in cash.
As part of the
agreement, we will assume control and own the administrative, sales, and support operations of Ford's iCONNECT
Direct DMS in the Canadian provinces.
In conjunction with the acquisition, we recorded a gain of $0.6 million in other
income relating to previously deferred revenue and costs.
We expensed approximately $0.1 million
of professional fees associated with the acquisition in the year ended December 31, 2012.
This business combination was accounted
for under the acquisition 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
|
|
$
|
91
|
|
Customer relationships (10 year economic life)
|
|
|
4,328
|
|
Goodwill
|
|
|
2,528
|
|
|
|
|
|
|
Total assets acquired
|
|
|
6,947
|
|
Total liabilities assumed
|
|
|
—
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
6,947
|
|
The allocated value of goodwill primarily
relates to the anticipated synergies resulting from combining iCONNECT with our current processes. Both the acquired goodwill and
intangible assets are deductible for tax purposes.
The results of iCONNECT DMS were included
in our consolidated statement of operations from the date of acquisition. The incremental subscription services revenue from iCONNECT
DMS was $0.1 million from the date of acquisition through December 31, 2012. We are unable to provide iCONNECT DMS earnings since
the date of acquisition as we do not have stand-alone earnings reporting for that business.
ClickMotive Acquisition
On October 1, 2012, Dealertrack, Inc. purchased
all of the equity interests of ClickMotive LLC, a leading provider of interactive marketing solutions for the automotive retailing
industry. The total consideration, which consisted of $48.7 million, net of cash acquired, and $0.3 million in contingent consideration,
is reflective of final working capital adjustments.
The sellers will be eligible to receive
additional consideration of up to $4.5 million upon achievement of certain performance targets in 2013, which are primarily related
to total Interactive solution revenue. The fair value of the contingent consideration will be measured on a quarterly basis until
the contingency is resolved. Any subsequent changes to the fair value of the contingent consideration will be recorded in our consolidated
statement of operations. The fair value of the contingent consideration as of October 1, 2012 was estimated at $0.3 million. We
estimated the fair value of the contingent consideration as of December 31, 2012 to be $1.0 million. We recorded expense of $0.8
million for the three months ended December 31, 2012 as a result of the increase in the contingent consideration liability. The
increase in contingent consideration includes the impact of an adjustment to the performance targets made subsequent to the close
of the acquisition. Any consideration based upon 2013 revenue would be paid in the first quarter of 2014.
ClickMotive provides SaaS solutions to
the automotive industry by offering a leading comprehensive digital marketing platform that combines the power of the web, mobile,
social, search and video into one online marketing platform. Currently, more than 3,000 U.S. automotive dealerships leverage ClickMotive’s
platform.
We expensed approximately $1.0 million
of professional fees associated with the acquisition in the year ended December 31, 2012. Additionally, we expect to make payments
to certain former employees of ClickMotive related to continued employment and certain performance targets that will result in
acquisition-related compensation expense of between $0.4 million and $1.7 million to be recorded in our consolidated statement
of operations through the end of 2013.
This business combination was accounted
for under the acquisition 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
|
|
$
|
3,862
|
|
Property and equipment
|
|
|
810
|
|
Intangible assets
|
|
|
21,840
|
|
Goodwill
|
|
|
26,241
|
|
|
|
|
|
|
Total assets acquired
|
|
|
52,753
|
|
Total liabilities assumed
|
|
|
(2,897
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
49,856
|
|
The allocated value of goodwill primarily
relates to the acquired workforce, as well as the anticipated synergies resulting from combining ClickMotive with our current products
and processes. Both the acquired goodwill and intangible assets are deductible for tax purposes.
The amounts allocated to acquired intangible
assets, and their associated weighted-average useful lives which were determined based on the period which the assets are expected
to contribute directly or indirectly to our future cash flows, consist of the following:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
Amount
|
|
|
Useful Life
|
|
|
(In thousands)
|
|
|
(Years)
|
Customer relationships
|
|
$
|
12,500
|
|
|
10.0
|
Technology
|
|
|
7,600
|
|
|
8.0
|
Trade names
|
|
|
1,500
|
|
|
8.0
|
Non-compete agreement
|
|
|
240
|
|
|
5.0
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
21,840
|
|
|
|
The results of ClickMotive were included
in our consolidated statement of operations from the date of acquisition. ClickMotive revenue, which is subscription-based, was
$4.4 million from the date of acquisition through December 31, 2012. We are unable to provide ClickMotive earnings since the date
of acquisition as we do not have stand-alone earnings reporting for that business.
1st
Auto
Transport Directory Acquisition
On August 1,
2012, Dealertrack, Inc. purchased all of the issued and outstanding shares of capital stock of 1st
Auto
Transport Directory, Inc., now known as Dealertrack CentralDispatch, Inc. for a cash purchase price of $73.8 million, reflective
of final working capital adjustments.
Dealertrack CentralDispatch
delivers a comprehensive suite of vehicle transportation related solutions for auto dealers, brokers, shippers, and carriers
within the U.S. and Canadian automotive retail markets. Dealertrack CentralDispatch’s offerings include CentralDispatch.com,
a leading business-to-business, subscription-based network for facilitating vehicle transportation, with more than 13,000 network
subscribers; jTracker.com, a CRM and lead management tool for automotive transportation brokers; and MoveCars.com, one of the premier
online advertising directories for the vehicle transportation industry. Dealertrack CentralDispatch is now part of our Inventory
solution. We expect this acquisition to increase subscription services revenue from dealerships while helping dealers improve their
overall efficiency and profitability.
We expect to make payments to certain former
employees of Dealertrack CentralDispatch related to continued employment that will result in compensation expense of approximately
$0.1 million to be recorded in our consolidated statement of operations through May 2013.
We expensed approximately $0.9 million
of professional fees associated with the acquisition for the year ended December 31, 2012, respectively.
This business combination was accounted
for under the acquisition 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
|
|
$
|
224
|
|
Property and equipment
|
|
|
101
|
|
Intangible assets
|
|
|
25,340
|
|
Goodwill
|
|
|
48,350
|
|
|
|
|
|
|
Total assets acquired
|
|
|
74,015
|
|
Total liabilities assumed
|
|
|
(215
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
73,800
|
|
The allocated value of goodwill primarily
relates to the acquired workforce, as well as the anticipated synergies resulting from combining Dealertrack CentralDispatch with
our current products and processes.
We plan to make a 338(h)(10) election for tax purposes in connection
with the transaction.
As a result, both the acquired goodwill and intangible assets are expected to be deductible for tax
purposes.
The amounts allocated to acquired intangible
assets, and their associated weighted-average useful lives which were determined based on the period which the assets are expected
to contribute directly or indirectly to our future cash flows, consist of the following:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
Amount
|
|
|
Useful Life
|
|
|
(In thousands)
|
|
|
(Years)
|
Technology
|
|
$
|
14,200
|
|
|
7.0
|
Customer relationships
|
|
|
7,930
|
|
|
4.0
|
Trade names
|
|
|
2,800
|
|
|
7.0
|
Non-compete agreement
|
|
|
410
|
|
|
4.0
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
25,340
|
|
|
|
The results of Dealertrack CentralDispatch
were included in our consolidated statement of operations from the date of acquisition. Dealertrack CentralDispatch revenue, which
is subscription-based, was $4.5 million from the date of acquisition through December 31, 2012. We are unable to provide Dealertrack
CentralDispatch earnings since the date of acquisition as we do not have stand-alone earnings reporting for that business.
eCarList Acquisition
On July 1, 2011, we acquired substantially
all of the assets of eCarList, LLC. eCarList provides a suite of inventory management and online marketing tools for the retail
automotive industry, enabling dealers to appraise, price, and merchandise vehicle inventory online in real-time. eCarList’s
solutions and services are now a part of Dealertrack Inventory solutions, which now includes inventory management, inventory distribution,
vehicle appraisal and pricing tools, mobile software, dealership health reporting, CRM, custom web design, and digital marketing
solutions via an integrated Software as a Service (SaaS) platform. We expect this acquisition will expand our subscription services
revenue and further strengthen our relationships with automobile dealers.
The initial purchase price of eCarList
was $36.4 million, consisting of the following components (in thousands):
Cash consideration
|
|
$
|
23,451
|
|
Fair value of note payable
|
|
|
10,179
|
|
Discount on note payable
|
|
|
(123
|
)
|
Fair value of contingent consideration
|
|
|
2,900
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
36,407
|
|
The note payable has a face value of approximately
$11.4 million and has a term of either two years or six years, based on certain factors related to the retention of key individuals.
As a result, the note has a compensatory element that will result in compensation expense of approximately $1.3 million to be recorded
in our consolidated statement of operations over two years from the date of acquisition. The factors impacting the term are now
known and the note is due July 1, 2013 (2 year term). Additionally, we expect to make payments to certain former employees of eCarList
related to continued employment that will result in compensation expense of approximately $2.2 million to be recorded in our consolidated
statement of operations over two years from the date of acquisition.
The sellers may earn contingent consideration
of up to $10.0 million, consisting of up to $5.0 million payable in each of 2012 and 2013 based upon the achievement of certain
performance targets in 2011 and 2012, respectively. The fair value of the contingent consideration will be measured on a quarterly
basis until the contingency is resolved. Any subsequent changes to the fair value of the contingent consideration will be recorded
in our consolidated statement of operations. The fair value of the contingent consideration as of the July 1, 2011 was estimated
at $2.9 million.
We estimated the fair value of the
contingent
consideration as of December 31, 2011 to be $0.9 million using similar methodology. We recorded income of $2.0 million for the
three months ended December 31, 2011 as a result of the decrease in the
contingent
consideration liability.
We recorded a fair value adjustment in the amount of $0.9 million of income for the year ended
December 31, 2012 as a result of the decrease in the estimated settlement of the contingent consideration from the estimated amount
as of December 31, 2011.
No amounts were earned, and no amounts will be
paid, based upon 2011 or 2012 revenue.
We expensed approximately
$1.2 million of professional fees associated with the acquisition for the year ended December 31, 2011. These fees were recorded
in selling, general and administrative expenses.
This business combination was accounted
for under the acquisition 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
|
|
$
|
414
|
|
Property and equipment
|
|
|
72
|
|
Intangible assets
|
|
|
13,530
|
|
Goodwill
|
|
|
23,427
|
|
|
|
|
|
|
Total assets acquired
|
|
|
37,443
|
|
Total liabilities assumed
|
|
|
(1,036
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
36,407
|
|
The allocated value of goodwill of $23.4
million primarily relates to the anticipated synergies resulting from combining eCarList with our current products and processes
and the acquired workforce. Both the acquired goodwill and intangible assets are deductible for tax purposes.
The amounts allocated to acquired intangible
assets, and their associated weighted-average useful lives which were determined based on the period which the assets are expected
to contribute directly or indirectly to our future cash flows, consist of the following:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
Amount
|
|
|
Useful Life
|
|
|
(In thousands)
|
|
|
(Years)
|
Customer relationships
|
|
$
|
4,500
|
|
|
7.0
|
Technology
|
|
|
6,500
|
|
|
4.0
|
Non-compete agreements
|
|
|
730
|
|
|
5.0
|
Trade names
|
|
|
1,800
|
|
|
7.0
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
13,530
|
|
|
|
The results of eCarList were included in
our consolidated statement of operations from the date of acquisition. eCarList’s revenue from the date of acquisition through
December 31, 2011, was $7.0 million. We are unable to provide eCarList’s earnings since the date of acquisition as we do
not have stand-alone earnings reporting for that business.
triVIN Holdings, Inc. Acquisition
On January 31,
2011, we acquired all of the outstanding shares of triVIN Holdings, Inc., now known as Dealertrack Processing Solutions, Inc.,
for a purchase price of $125.5 million, net of acquired cash, reflective of final working capital adjustments. Dealertrack Processing
Solutions is a leading provider of automobile title management services to lenders and vehicle registration services to automobile
dealers. We expect 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 the fourth quarter of 2010 and $0.3 million for the year ended December 31, 2011. These fees were recorded in selling, general
and administrative expenses.
This business combination was accounted
for under the acquisition 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
|
|
$
|
33,442
|
|
Property and equipment
|
|
|
825
|
|
Non-current assets
|
|
|
6,526
|
|
Intangible assets
|
|
|
83,760
|
|
Goodwill
|
|
|
74,217
|
|
|
|
|
|
|
Total assets acquired
|
|
|
198,770
|
|
Total liabilities assumed
|
|
|
(58,406
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
140,364
|
|
Included in current assets was approximately
$14.9 million of cash acquired. The liabilities assumed includes a $33.5 million deferred tax liability that relates to the future
amortization of certain acquired intangibles.
The allocated value of goodwill of $74.2
million primarily relates to the anticipated synergies resulting from combining Dealertrack Processing Solutions with our current
products and processes and the acquired workforce. Neither the acquired goodwill nor intangible assets are deductible for tax purposes.
The amounts allocated to acquired intangible
assets, and their associated weighted-average useful lives which were determined based on the period which the assets are expected
to contribute directly or indirectly to our future cash flows, consist of the following:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
Amount
|
|
|
Useful Life
|
|
|
(In thousands)
|
|
|
(Years)
|
Customer relationships
|
|
$
|
43,900
|
|
|
6.4
|
Technology
|
|
|
27,500
|
|
|
5.0
|
State DMV contractual relationships
|
|
|
6,190
|
|
|
6.0
|
Non-compete agreements
|
|
|
5,180
|
|
|
3.0
|
Trade names
|
|
|
990
|
|
|
3.0
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
83,760
|
|
|
|
The results of Dealertrack Processing Solutions,
Inc. were included in our consolidated statement of operations from the date of acquisition. Dealertrack Processing Solutions,
Inc. revenue from the date of acquisition through December 31, 2011, was $57.7 million. We are unable to provide Dealertrack Processing
Solutions, Inc. earnings since the date of acquisition as we do not have stand-alone earnings reporting for that business.
Unaudited Pro Forma Summary of Operations
The accompanying unaudited pro forma summary
represents our consolidated results of operations as if the acquisitions of Dealertrack Processing Solutions and eCarList, as
well as the divestiture of ALG had been completed as of January 1, 2010 and the contribution of the net assets of Chrome to the
Chrome Data Solutions joint venture and the acquisitions of Dealertrack CentralDispatch and ClickMotive, had been completed as
of January 1, 2011. The unaudited pro forma financial results for 2012 reflect the results for the year ended December 31,
2012, as well as the effects of the pro forma adjustments for the stated transactions in 2012. The unaudited pro forma financial
results for 2011 reflect the results for the year ended December 31, 2011, as well as the effects of the pro forma adjustments
for the stated transactions in both 2012 and 2011. Pro forma results of operations for the acquisition of Ford’s iCONNECT
DMS has not been presented because it is not material to the consolidated statement of operations. The unaudited pro forma financial
information includes the accounting effects of the business combinations, including adjustments to the amortization of intangible
assets, professional fees associated with the transactions, interest expense on short-term and long-term debt which was not acquired,
compensation expense related to amounts to be paid for continued employment, compensation expense and interest expense related
to the eCarList note payable, revenue and costs from commercial arrangements, and data license costs and related amortization.
The unaudited pro forma information does not necessarily reflect the actual results that would have been achieved, nor is necessarily
indicative of our future consolidated results.
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
406,365
|
|
|
$
|
353,905
|
|
Net income
|
|
|
23,124
|
|
|
|
39,231
|
|
Basic net income per share
|
|
|
0.54
|
|
|
|
0.95
|
|
Diluted net income per share
|
|
|
0.53
|
|
|
|
0.92
|
|
9. Contribution to Chrome Data Solutions and Disposal of
ALG
Contribution to Chrome Data Solutions
On January 1, 2012, we completed the series
of transactions provided for in the Omnibus Agreement dated December 20, 2011 by and among Chrome Systems, Inc., our wholly-owned
subsidiary (Chrome),
Autodata Solutions, Inc. (Autodata) and Autodata Solutions Company, subsidiaries
of Internet Brands Inc., and AutoChrome Company (the Omnibus Agreement). The Omnibus Agreement provided for the formation
of a 50%/50% joint venture named “Chrome Data Solutions” through the organization of (i) a Delaware limited liability
company, (ii) a Delaware limited partnership that is a subsidiary of such limited liability company and (iii) a Nova Scotia unlimited
liability company (collectively, the Joint Venture), pursuant to which the parties would collaboratively develop, market and sell
automotive content products and services. Pursuant to the Omnibus Agreement, the Joint Venture was formed by the following
steps, among others: (a) Chrome contributed substantially all of its assets and liabilities to the Joint Venture; (b)
Autodata contributed substantially all of the assets and liabilities of its content division (other than assets to be exclusively
licensed to the Joint Venture, as described in the following clause (c)) to the Joint Venture; (c) Autodata exclusively licensed
certain of its intellectual property to the Joint Venture; (d) Dealertrack received a perpetual, irrevocable license to use certain
Joint Venture intellectual property and data in its products and services; and (e) the parties entered into agreements to form
and govern the Joint Venture and provide for certain other matters concerning the Joint Venture. The board of the Joint Venture
consists of two members from each contributing party, one of which serves as the chair on a rotating basis. As a result of the
ownership level and governance, we have significant influence over the operations of the entity, and therefore we account for the
investment under the equity method of accounting.
As a result of the contribution, we recognized
a pre-tax gain of approximately $27.7 million, calculated as follows (in thousands):
Cash
|
|
$
|
1,750
|
|
Property and equipment
|
|
|
3,947
|
|
Goodwill
|
|
|
7,874
|
|
Intangible assets
|
|
|
2,017
|
|
Other assets and liabilities, net
|
|
|
769
|
|
Carrying value of contributed net assets of Chrome
|
|
|
16,357
|
|
|
|
|
|
|
Total consideration received (50% of the fair value of shares received)
|
|
|
44,050
|
|
|
|
|
|
|
Pre-tax gain
|
|
$
|
27,693
|
|
For further information on the investment
in Chrome Data Solutions, see Note 10.
Disposal of
ALG
On October 1, 2011, we sold our wholly-owned
subsidiary, ALG, to TrueCar in a transaction structured as a tax-free reorganization. In consideration for the sale of ALG, we
were to receive a 15.0% equity interest in TrueCar and a warrant to increase our ownership interest to up to 19.9%. The warrant
was subsequently exercised during 2012. In a separate series of transactions, TrueCar completed a new equity financing raise with
other investors. To maintain our 15.0% ownership upon the closing of the transaction on October 1, 2011, we made an additional
investment in TrueCar in the amount of $7.5 million through cash remaining on the balance sheet of ALG on the date of sale.
The investment in TrueCar was recorded
in the amount of $88.0 million, consisting of $82.5 million representing the fair value of the shares received for ALG (including
the additional $7.5 million cash investment) and $5.5 million representing the fair value of the warrant received. The investment
is accounted for as a cost method investment and the warrant was marked to market through its exercise date. For further information
on this investment, see Note 10.
We also recorded an intangible asset in
the amount of $5.6 million, representing the fair value of a perpetual, royalty-free license received from TrueCar for the future
use of certain ALG intellectual property and data in our products and services. The data license is being treated as additional
consideration received and is being amortized on a straight-line basis, which reflects its economic benefit, over its estimated
useful life of five years.
As a result of the sale, we recognized
a pre-tax gain of approximately $47.3 million, calculated as follows (in thousands):
Fair value of the shares received
|
|
$
|
75,000
|
|
Additional cash investment
|
|
|
7,500
|
|
Fair value of the warrant received
|
|
|
5,500
|
|
Fair value of the data license
|
|
|
5,600
|
|
Consideration received
|
|
|
93,600
|
|
|
|
|
|
|
Cash
|
|
|
7,500
|
|
Property and equipment
|
|
|
1,753
|
|
Goodwill
|
|
|
33,127
|
|
Intangible assets
|
|
|
2,531
|
|
Other assets and liabilities, net
|
|
|
1,368
|
|
Less: Carrying value of net assets
|
|
|
46,279
|
|
|
|
|
|
|
Pre-tax gain
|
|
$
|
47,321
|
|
We also entered into additional commercial
arrangements with TrueCar for its use of certain Dealertrack and Chrome intellectual property and data in its products and services.
In connection with the sale of ALG to TrueCar,
we agreed that if we sell our TrueCar shares (including TrueCar shares purchased through the warrant) within three years after
the closing for gross cash proceeds of more than $125.0 million, we will pay to TrueCar the excess over that amount up to a maximum
of $7.0 million, subject to certain other limitations.
Revenue from the ALG business amounted
to approximately $7.6 million through the disposal date of October 1, 2011, and approximately $8.6 million for the year ended December
31, 2010.
We expensed approximately $2.4 million
of professional fees associated with the transaction in the year ended December 31, 2011.
10. Investments
Investments as of December 31, 2012 and
2011 consist of the following (in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Cost method investment - TrueCar
|
|
$
|
82,690
|
|
|
$
|
82,500
|
|
|
|
|
|
|
|
|
|
|
Warrant - TrueCar
|
|
|
—
|
|
|
|
6,500
|
|
|
|
|
|
|
|
|
|
|
Equity method investment
|
|
|
40,118
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
122,808
|
|
|
$
|
89,000
|
|
Cost method investment – TrueCar
In consideration for the sale of ALG in
2011, we received an equity interest in TrueCar with a value of $82.5 million. In September 2012, upon the net exercise of our
warrant in TrueCar, additional shares with a value of $0.2 million were included within our cost method investment. For further
information, see Note 9.
TrueCar’s business simplifies and
clarifies the car buying process for consumers by providing accurate market information which helps buyers make better, more informed
decisions. TrueCar saves consumers time and money by providing price clarity and transparency, while delivering the benefits of
higher close rates and vehicle sales to dealers. TrueCar reaches consumers via two channels – direct and indirect. The direct
channel is a website that provides vehicle pricing transparency to consumers and dealers and the indirect channel is a private-label
affinity buying program for major brands.
We are not aware of factors requiring further
assessment of the recoverability of the investment and we do not believe this investment was impaired as of December 31, 2012.
Warrant – TrueCar
In connection with the sale of ALG to TrueCar
in 2011, we acquired a warrant to purchase 6.3 million additional shares of TrueCar common stock. In September 2012, we exercised
our warrant in TrueCar at a value of $0.2 million based on an independent valuation approved by the board of directors of TrueCar.
During the year ended December 31, 2012, the value decreased by $6.3 million, due to a decrease in the remaining expected term
and estimated share price. The value of the shares received upon net exercise is now included within our cost method investment
in TrueCar as of December 31, 2012.
Equity method investment
Commencing on January 1, 2012, we began
recording in our consolidated statement of operations fifty percent (50%) of the net income of Chrome Data Solutions. Cash distributions,
which are recorded as a reduction of our investment upon receipt, are based on a calculation considering results of operations
and cash on hand. Distributions are expected to be received quarterly.
Our earnings from the equity method investment
are reduced by amortization expense relating to the basis difference between the book basis of the contributed assets and the fair
value of the investment recorded. This basis difference, based upon a valuation of the fair value of contributed assets, was
$15.5 million and is being recorded over the lives of the underlying assets which gave rise to the basis difference, which range
from 3 to 10 years. The unrecorded basis difference as of December 31, 2012 is $11.5 million, of which $2.8 million will be recorded
in fiscal year 2013.
The change in our equity method investment
for the year ended December 31, 2012 was as follows (in thousands):
|
|
December 31,
2012
|
|
Beginning balance
|
|
$
|
—
|
|
Investment, January 1, 2012
|
|
|
44,050
|
|
Share of net income
|
|
|
5,152
|
|
Amortization of basis difference
|
|
|
(3,985
|
)
|
Cash distributions received
|
|
|
(5,099
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
40,118
|
|
In connection with the contribution of
the net assets of Chrome to Chrome Data Solutions on January 1, 2012, certain Chrome employees remained employed by Dealertrack
through January 31, 2012. Their salary and related benefits were recorded in cost of revenue, product development and selling,
general and administrative expenses. The reimbursement for these costs, in the amount of $0.8 million, was recorded as a reduction
of selling, general and administrative expenses for the year ended December 31, 2012.
In connection with a transitional services
agreement with Chrome Data Solutions, we incurred expenses of approximately $0.3 million for services received during the year
ended December 31, 2012, and earned income of approximately $0.1 million for services performed. The amounts were generally recorded
as selling, general and administrative expenses and other income, respectively.
We incur an annual data license fee payable
to Chrome Data Solutions of $0.5 million, which is recorded as cost of revenue.
The summarized audited financial information
of Chrome Data Solutions is presented below (in thousands):
Condensed Balance Sheet
|
|
December 31,
|
|
|
|
2012
|
|
Current assets
|
|
$
|
10,577
|
|
Non-current assets
|
|
|
34,053
|
|
Total assets
|
|
$
|
44,630
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
5,525
|
|
Non-current liabilities
|
|
|
226
|
|
Total liabilities
|
|
$
|
5,751
|
|
Condensed Results of Operations
|
|
Year ended
|
|
|
|
December 31, 2012
|
|
Revenue
|
|
$
|
44,846
|
|
Gross profit
|
|
|
30,809
|
|
Net income
|
|
|
10,303
|
|
11. Accrued Liabilities - Other
A summary of the components of accrued
liabilities – other as of December 31, 2012 and 2011 is as follows (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Professional fees
|
|
$
|
2,564
|
|
|
$
|
2,634
|
|
Customer deposits
|
|
|
2,360
|
|
|
|
2,390
|
|
Acquisition-related compensation
|
|
|
1,667
|
|
|
|
—
|
|
Interest payable
|
|
|
1,439
|
|
|
|
275
|
|
Revenue share
|
|
|
1,096
|
|
|
|
1,651
|
|
Software licenses and maintenance contracts
|
|
|
1,071
|
|
|
|
976
|
|
Computer and office equipment, furniture and fixtures
|
|
|
968
|
|
|
|
373
|
|
Sales taxes
|
|
|
779
|
|
|
|
1,093
|
|
State DMV transaction fees
|
|
|
620
|
|
|
|
480
|
|
Service credits and customer rebates
|
|
|
140
|
|
|
|
747
|
|
Other
|
|
|
4,066
|
|
|
|
4,868
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities - other
|
|
$
|
16,770
|
|
|
$
|
15,487
|
|
12. Retirement Plans
As of December 31, 2012, 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 non-elective
contribution.
As of December 31, 2012, 2011 and 2010,
we elected to make additional matching contributions covering all employees who were active participants on the last day of the
plan year in the amount of $0.8 million, $1.2 million and $0.5 million, respectively, or approximately 52%, 127% and 70% of matching
contributions made during the year, respectively.
Total contributions under the plan for
the years ended December 31, 2012, 2011 and 2010 were $2.3 million, $2.1 million and $1.3 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 each of
the years ended December 31, 2012, 2011 and 2010 was $0.5 million.
13. Income Taxes
The components of our income before income
taxes for the years ended December 31, 2012, 2011 and 2010, is as follows (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
United States
|
|
$
|
21,091
|
|
|
$
|
55,376
|
|
|
$
|
(2,375
|
)
|
Canada
|
|
|
11,612
|
|
|
|
7,356
|
|
|
|
5,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before income taxes
|
|
$
|
32,703
|
|
|
$
|
62,732
|
|
|
$
|
2,764
|
|
The components of our (provision for) benefit
from income taxes for the years ended December 31, 2012, 2011 and 2010, is as follows (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(6,859
|
)
|
|
$
|
1,108
|
|
|
$
|
1,476
|
|
State and local
|
|
|
(1,767
|
)
|
|
|
(454
|
)
|
|
|
(810
|
)
|
Canada
|
|
|
(2,872
|
)
|
|
|
(1,621
|
)
|
|
|
(2,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax
|
|
|
(11,498
|
)
|
|
|
(967
|
)
|
|
|
(1,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,131
|
)
|
|
|
1,412
|
|
|
|
(27,759
|
)
|
State and local
|
|
|
729
|
|
|
|
2,232
|
|
|
|
(1,306
|
)
|
Canada
|
|
|
(349
|
)
|
|
|
(274
|
)
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax
|
|
|
(751
|
)
|
|
|
3,370
|
|
|
|
(29,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision for) benefit from income taxes, net
|
|
$
|
(12,249
|
)
|
|
$
|
2,403
|
|
|
$
|
(30,597
|
)
|
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.
Deferred tax assets and liabilities as
of December 31, 2012 and 2011 consisted of the amounts shown below (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
10,266
|
|
|
$
|
12,126
|
|
Stock-based compensation
|
|
|
17,416
|
|
|
|
10,860
|
|
Acquired intangibles
|
|
|
13,809
|
|
|
|
14,092
|
|
Tax credits
|
|
|
3,516
|
|
|
|
2,894
|
|
Capital loss
|
|
|
887
|
|
|
|
1,105
|
|
Other
|
|
|
6,223
|
|
|
|
6,713
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
52,117
|
|
|
|
47,790
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Acquired Intangibles
|
|
|
(28,194
|
)
|
|
|
(33,702
|
)
|
Capitalized software and website development
|
|
|
(7,600
|
)
|
|
|
(6,256
|
)
|
Depreciation and amortization
|
|
|
(9,993
|
)
|
|
|
(9,632
|
)
|
Investments in disposed subsidiaries
|
|
|
(31,565
|
)
|
|
|
(20,456
|
)
|
Other
|
|
|
(3,047
|
)
|
|
|
(3,484
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax (liabilities)
|
|
|
(80,399
|
)
|
|
|
(73,530
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax (liabilities), net
|
|
|
(28,282
|
)
|
|
|
(25,740
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation allowance
|
|
|
(4,094
|
)
|
|
|
(4,198
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax (liabilities), net
|
|
$
|
(32,376
|
)
|
|
$
|
(29,938
|
)
|
Our net deferred tax liability was the
result of temporary differences between book and tax accounting. 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.
Valuation Allowance
While we had been forecasting sufficient
U.S. book taxable income in future periods, at December 31, 2010 we were in a three-year cumulative pretax book loss position in
the United States. In connection with the acquisition of Dealertrack Processing Solutions, Inc. we expected that amortization
expense associated with the acquired intangibles would also negatively impact our future U.S. income streams. Due to the negative
impact from the amortization expense associated with the acquired Dealertrack Processing Solutions, Inc. 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, during the three
months 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 planned
to maintain a full valuation allowance on our net U.S. deferred tax assets until sufficient positive evidence existed to support
reversal of the valuation allowance.
As a result of the acquisition of Dealertrack
Processing Solutions, Inc., on January 31, 2011, we evaluated the combined enterprises past and expected future results, including
the impact of the future reversal of the acquired deferred tax liabilities, and determined that the future reversal of the acquired
deferred tax liabilities would provide sufficient taxable income to support realization of certain of our deferred tax assets,
and thereby we reduced the valuation allowance by approximately $24.5 million during the three months ended March 31, 2011.
As a result of the sale of ALG on October
1, 2011, and the establishment of deferred tax liabilities on the transaction along with the expected future reversal of deferred
tax liabilities, we reevaluated the need for a full valuation allowance on our net deferred tax assets for the three months ended
December 31, 2011. We determined that the ultimate realization of deferred tax assets for U.S. federal and state income tax purposes
is considered more likely than not, primarily due to taxable income in the federal carry back period, anticipated sufficient taxable
income and cumulative U.S. book income earned in recent years. During the three months ended December 31, 2011, we reversed a portion
of the remaining valuation allowance on our net U.S. deferred tax assets that had been established during the three months ended
December 31, 2010.
Our deferred tax assets have been reduced
in accordance with FASB ASC Topic 718, Compensation – Stock Compensation. As such, foreign tax credit carryforwards of $1.3
million as of December 31, 2012 and 2011 and net operating losses of $4.7 million as of December 31, 2012 and $4.2 million as December
31, 2011, which were increased due to excess tax benefits from the exercise of stock options and restricted stocks for 2012 and
2011, were not recorded as deferred tax assets. Instead, such amounts will be recorded as an addition to stockholders’ equity
and will reduce current taxes payable, in the amounts of approximately $3.1 million as of December 31, 2012 and approximately $2.9
million as of December 31, 2011, if and when the carryovers and net operating losses are utilized.
As of December 31, 2012, our remaining
deferred tax valuation allowance of $4.1 million consisted of $2.0 million for foreign tax credits, $1.3 million for separate state
net operating losses and $0.8 million for capital loss carry forward and other adjustments. As of December 31, 2011, our remaining
deferred tax valuation allowance of $4.2 million consisted of $1.9 million for foreign tax credits, $1.2 million for separate state
net operating losses and $1.1 million for capital loss carry forward and other adjustments.
As of December 31, 2012 and 2011,
we had U.S. federal net operating loss carryforwards of $29.5 million and $29.2 million, respectively, of which $24.0 million
of the current 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 at various times and amounts through 2032. We maintain a portion of the valuation allowance on the state net operating losses.
As of December 31, 2012 and 2011, we had
U.S. federal foreign tax credit carryovers of $2.0 million and $1.9 million, respectively. These credits are available to offset
future federal income tax subject to limitation and expire in varying amounts beginning in 2018. All Canadian net operating loss
carryforwards from prior periods were fully utilized.
Effective Tax Rate
The analysis of the effective tax rate
for the years ended December 31, 2012, 2011 and 2010, is as follows:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Pre-tax book income
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes
|
|
|
2.5
|
|
|
|
1.5
|
|
|
|
5.1
|
|
Foreign rate differential
|
|
|
(2.6
|
)
|
|
|
(1.1
|
)
|
|
|
14.5
|
|
Deferred tax rate adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
(5.4
|
)
|
Valuation allowance
|
|
|
(0.5
|
)
|
|
|
(36.9
|
)
|
|
|
1,020.5
|
|
Deferred tax liability impact of disposals and contributions
|
|
|
3.7
|
|
|
|
0.6
|
|
|
|
—
|
|
Adjust tax balances for filed returns
|
|
|
(0.6
|
)
|
|
|
(1.9
|
)
|
|
|
25.7
|
|
Amended tax returns
|
|
|
—
|
|
|
|
—
|
|
|
|
2.7
|
|
State rate change
|
|
|
(1.5
|
)
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
1.5
|
|
|
|
(1.0
|
)
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
37.5
|
%
|
|
|
(3.8
|
)%
|
|
|
1,107.0
|
%
|
The change in effective tax rate for 2012
from 2011 is primarily due to the valuation allowance activity on our net deferred tax assets, the deferred tax impact of disposals,
changes in earnings mix, and the impact of filed and amended tax returns. The change in effective tax rate for 2011 from 2010 is
primarily due to the valuation allowance activity on our net deferred tax assets, the deferred tax impact of the ALG disposal,
changes in earnings mix, and the impact of filed amended tax returns. The impact of amounts included in “other” does
not include any additional significant activity impacting the effective tax rate.
Foreign Taxes
We have not provided for U.S. federal income
taxes and foreign withholding taxes on $19.9 million of foreign subsidiaries’ undistributed earnings as of December 31, 2012
because such earnings are intended to be indefinitely reinvested.
The amount
of deferred taxes on the temporary differences related to investments in foreign subsidiaries is not practicable to determine at
this time.
Permanently reinvested earnings will be used to support our personnel costs as well as costs of our Canadian
product offerings, including future development and acquisitions. We believe our current U.S. cash balances and our credit facility
provide appropriate liquidity for U.S. operations.
We do not expect any significant increase
or decrease in our unrecognized tax benefits within the next 12 months. We account for provisions for uncertain tax positions in
accordance with FASB ASC Topic 740, which 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 FASB 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.
Other
We file a consolidated U.S. income tax return
and tax returns in various state and local jurisdictions. Certain of our subsidiaries also file income tax returns in Canada. The
Canadian Revenue Agency is reviewing our 2009 and 2010 tax return filings. The Internal Revenue Service (IRS) has concluded a review
of our consolidated federal income tax returns through December 31, 2007 and is currently reviewing our consolidated federal income
tax returns for 2009, 2010 and 2011. Our amended return filings in California, Pennsylvania and New York are under review by each
of the respective states. In addition, we are appealing Pennsylvania’s assessment to our 2007, 2008 and 2009 tax return filings.
All of our other significant taxing jurisdictions are closed for years prior to 2008.
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 both December 31, 2012 and 2011, accrued interest and penalties related to tax
positions taken on our tax returns is approximately $0.1 million.
A year-over-year reconciliation of our
liability for uncertain tax positions is as follows (in millions):
Balance as of January 1, 2010
|
|
$
|
0.8
|
|
Additions
|
|
|
0.2
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
1.0
|
|
|
|
|
|
|
Balance as of January 1, 2011
|
|
$
|
1.0
|
|
Additions
|
|
|
0.4
|
|
Settlements
|
|
|
(0.6
|
)
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
$
|
0.8
|
|
|
|
|
|
|
Balance as of January 1, 2012
|
|
$
|
0.8
|
|
Additions
|
|
|
0.2
|
|
Expired statute of limitations
|
|
|
(0.1
|
)
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
0.9
|
|
As of December 31, 2012, approximately
$0.5 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.
14. Stock Option and Deferred Compensation Plans
Fourth Amended and Restated 2005 Incentive Award Plan
Currently, we grant stock options, performance
stock units, and restricted stock units, under the 2005 Incentive Award Plan. There is an aggregate of 16,405,847 shares authorized
for issuance under the 2005 Plan. As of December 31, 2012, there are 4,004,422 shares available for future issuance.
The following summarizes stock-based compensation
expense by expense category for the three years ended December 31, 2012, 2011 and 2010 (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Cost of revenue
|
|
$
|
2,429
|
|
|
$
|
1,791
|
|
|
$
|
1,640
|
|
Product development
|
|
|
749
|
|
|
|
735
|
|
|
|
614
|
|
Selling, general and administrative
|
|
|
10,414
|
|
|
|
9,086
|
|
|
|
8,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
13,592
|
|
|
$
|
11,612
|
|
|
$
|
11,233
|
|
Stock Options
The following table summarizes the activity
under our stock option plans as of December 31, 2012:
|
|
Number of
|
|
|
|
|
|
Weighted Average
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
(in thousands)
|
|
|
Weighted Average
Exercise Price
|
|
|
Contractual Life
(in years)
|
|
|
Intrinsic Value
(in thousands)
|
|
Outstanding as of January 1, 2012
|
|
|
4,178
|
|
|
$
|
16.77
|
|
|
|
|
|
|
|
|
|
Options Granted
|
|
|
580
|
|
|
|
27.71
|
|
|
|
|
|
|
|
|
|
Options Exercised
|
|
|
(655
|
)
|
|
|
11.95
|
|
|
|
|
|
|
|
|
|
Options Forfeited
|
|
|
(273
|
)
|
|
|
23.93
|
|
|
|
|
|
|
|
|
|
Options Expired
|
|
|
(13
|
)
|
|
|
19.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2012
|
|
|
3,817
|
|
|
$
|
18.73
|
|
|
|
3.68
|
|
|
$
|
39,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of December 31, 2012
|
|
|
3,769
|
|
|
$
|
18.68
|
|
|
|
3.65
|
|
|
$
|
39,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of December 31, 2012
|
|
|
2,804
|
|
|
$
|
17.27
|
|
|
|
2.99
|
|
|
$
|
33,520
|
|
The exercise prices range from $2.80 to
$47.98 for stock options outstanding and exercisable for the year ended December 31, 2012. 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.
The intrinsic value of the stock options
exercised during the years ended December 31, 2012, 2011 and 2010 was approximately $11.3 million, $10.3 million and
$4.2 million, respectively.
Restricted Stock Units, Performance
Stock Units and Restricted Stock Awards
The following table summarizes the status
of the non-vested shares of restricted common stock units and performance stock units as of December 31, 2012:
|
|
Restricted Common Stock Units
|
|
|
Performance Stock Units
|
|
|
|
Number of
Awards
(in thousands)
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
Number of
Awards
(in thousands)
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Non-vested awards as of January 1, 2012
|
|
|
969
|
|
|
$
|
16.69
|
|
|
|
193
|
|
|
$
|
18.85
|
|
Awards granted
|
|
|
382
|
|
|
|
28.03
|
|
|
|
71
|
|
|
|
28.49
|
|
Awards vested
|
|
|
(326
|
)
|
|
|
15.74
|
|
|
|
—
|
|
|
|
—
|
|
Awards cancelled/expired/forfeited
|
|
|
(66
|
)
|
|
|
21.46
|
|
|
|
—
|
|
|
|
—
|
|
Adjustment for performance achieved
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
19.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested awards as of December 31, 2012
|
|
|
959
|
|
|
$
|
21.21
|
|
|
|
269
|
|
|
$
|
21.41
|
|
The total fair value for restricted common
stock units and restricted common stock awards that vested during the years ended December 31, 2012, 2011 and 2010, are as follows
(in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Restricted common stock units
|
|
$
|
9,285
|
|
|
$
|
5,470
|
|
|
$
|
3,064
|
|
Restricted common stock awards
|
|
$
|
—
|
|
|
$
|
701
|
|
|
$
|
4,856
|
|
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 is 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, 2012, there are 1,500,000
shares of common stock reserved, 391,407 shares issued and 1,108,593 shares available for future issuance under the ESPP.
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, 2012, 150,000 shares of common stock are reserved, 2,177 deferred stock units were recorded under
a memo account and have since been distributed and 147,823 shares of common stock are 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, 2012,
75,000 shares of common stock are reserved, 60,810 deferred stock units are recorded under a memo account, 12,497 deferred stock
units were recorded under a memo account and have since been distributed, and 1,693 units are available for distribution under
the Director’s Deferred Compensation Plan.
Performance Stock Units (PSUs)
PSUs are granted annually
to certain executive officers of the company. 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. One performance stock award is the equivalent of one share of common stock. Each individual’s award is allocated
50% to achieving ANI targets for the year in which the award was granted (ANI Performance Award), and 50% to the total shareholder
return (TSR) of our common stock as compared to other companies in a specific NASDAQ Index in the aggregate for a three year period
including the fiscal year in which is the award was granted as well as the two subsequent fiscal years
(TSR Performance Award). The TSR awards granted in 2010 and 2011 are measured against the NASDAQ Internet Index and the
TSR awards granted in 2012 are measured against the NASDAQ Software Index.
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 through
January 31
st
of the third year following the grant date (approximately 34 months after date of grant). 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 Awards
and the TSR Performance Awards using the Black-Scholes-Merton and Monte Carlo valuation pricing models, respectively. Historically,
ANI awards have been expensed starting in the month of grant for each grant year, as it was deemed probable that we would achieve
a portion of the ANI targets for the respective grant. TSR awards are expensed on a straight-line basis, starting at 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 following table summarizes, by performance
award type, the status of PSUs for grants during the years ended December 31, 2012, 2011 and 2010:
ANI Performance Awards
Grant Date
|
|
Target
Number
of PSUs
|
|
|
Cancelled
PSUs
|
|
|
Percent of
Goal
Achieved
|
|
|
Adjusted
Number of
PSUs Based on
Goal
Achievement
|
|
|
End of
Measurement
Period
|
|
Vest Date
|
3/9/2010
|
|
|
64,930
|
|
|
|
(5,325
|
)
|
|
|
51
|
%
|
|
|
30,395
|
|
|
12/31/2010
|
|
1/31/2013
|
2/24/2011
|
|
|
43,290
|
|
|
|
*
|
|
|
|
125
|
%
|
|
|
54,111
|
|
|
12/31/2011
|
|
1/31/2014
|
2/28/2012
|
|
|
35,495
|
|
|
|
—
|
|
|
|
103
|
%
|
|
|
36,556
|
|
|
12/31/2012
|
|
1/31/2015
|
* - In 2011, 4,630 of 2011 ANI Performance Awards were cancelled
and subsequently reissued.
TSR Performance Awards
Grant Date
|
|
Target
Number of
PSUs
|
|
|
Cancelled
PSUs
|
|
|
Percent of
Goal
Achieved
|
|
|
Adjusted
Number of
PSUs Based on
Goal
Achievement
|
|
|
End of
Measurement
Period
|
|
Vest Date
|
3/9/2010
|
|
|
64,930
|
|
|
|
*
|
|
|
|
106
|
%
|
|
|
68,822
|
|
|
12/31/2012
|
|
1/31/2013
|
2/24/2011
|
|
|
43,290
|
|
|
|
**
|
|
|
|
N/A
|
|
|
|
—
|
|
|
12/31/2013
|
|
1/31/2014
|
2/28/2012
|
|
|
35,495
|
|
|
|
—
|
|
|
|
N/A
|
|
|
|
—
|
|
|
12/31/2014
|
|
1/31/2015
|
* - In 2011, 5,325 of 2010 TSR Performance
Awards were cancelled and subsequently reissued.
** - In 2011, 4,630 of 2011 TSR Performance Awards were cancelled
and subsequently reissued.
The total grant date fair value of the
ANI Performance Awards granted during the years ended December 31, 2012, 2011 and 2010 was $1.0 million, $1.1 million and $0.6
million, respectively. The total grant date fair value of the TSR Performance Awards granted during the years ended December 31,
2012, 2011 and 2010 was $1.0 million, $0.9 million and $1.1 million, respectively.
Long Term
Incentive Plan (LTIP)
Awards granted under the 2007,
2008 and 2009 LTIP, consisted of 455,000 shares of restricted common stock. 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). 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.
SOEP
On August 7, 2009, we commenced a tender
offer to exchange outstanding options to purchase shares of our common stock granted prior to August 7, 2008, that had an exercise
price per share greater than $22.82 (Eligible Options) for a lesser number of new options to purchase shares of our common stock
with an exercise price equal to the closing price of our common stock on the date of grant, subject to certain conditions. Pursuant
to the exchange offer, 571,763 Eligible Options were tendered, and we granted an aggregate of 435,247 stock options in exchange
for the Eligible Options surrendered. The incremental fair value stock-based compensation expense of $54 thousand was amortized
over the new vesting schedule, which ended during the year ended December 31, 2012.
15. Commitments and Contingencies
Operating Leases
We lease our office space and certain office
equipment under cancelable and non-cancelable operating leases, which expire on various dates through May 2023. 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.
Operating lease expense for the years ended
December 31, 2012, 2011 and 2010, was $7.4 million, $7.3 million and $5.4 million, respectively.
Future minimum rental payments under the
non-cancelable operating leases are as follows (in thousands):
Years Ending December 31,
|
|
|
|
2013
|
|
$
|
7,716
|
|
2014
|
|
|
6,092
|
|
2015
|
|
|
5,512
|
|
2016
|
|
|
4,965
|
|
2017
|
|
|
4,409
|
|
Thereafter
|
|
|
10,303
|
|
|
|
|
|
|
Total
|
|
$
|
38,997
|
|
Capital Leases
The following is an analysis of the leased
property under capital leases by major property class as of December 31, 2012 and 2011 (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Computer and office equipment
|
|
$
|
351
|
|
|
$
|
753
|
|
Furniture and fixtures
|
|
|
107
|
|
|
|
108
|
|
|
|
|
458
|
|
|
|
861
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(179
|
)
|
|
|
(455
|
)
|
|
|
|
|
|
|
|
|
|
Total capital leases, net
|
|
$
|
279
|
|
|
$
|
406
|
|
Future minimum rental payments under the
capital leases are as follows (in thousands):
Years Ending December 31,
|
|
|
|
2013
|
|
$
|
99
|
|
2014
|
|
|
54
|
|
2015
|
|
|
39
|
|
2016
|
|
|
13
|
|
2017
|
|
|
—
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
205
|
|
Less: Amount representing taxes, included in total minimum lease payments
|
|
|
(16
|
)
|
|
|
|
|
|
Net minimum lease payments
|
|
|
189
|
|
Less: Amount representing interest
|
|
|
(1
|
)
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
188
|
|
Service Credits
Under the terms of the purchase agreement
with the seller of the AAX business, the parent company of 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 certain future products or services of
Dealertrack. These service credits expire on December 31, 2015. The service credits are being recorded as a reduction in revenue
as they are utilized. For the year ended December 31, 2012, we recorded contra-revenue related to the service credits of $0.8 million.
For the year ended December 31, 2011, we recorded contra-revenue related to the service credits of $0.9 million. For the year ended
December 30, 2010, approximately $0.2 million of the service credits were utilized. As of December 31, 2012, approximately $0.6
million of the service credit remains.
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 8 for additional contingencies
resulting from our business combinations.
Retail Sales Tax
On
an ongoing basis, various tax jurisdictions in the United States conduct reviews or audits regarding the sales taxability of our
products. Historically, we have been able to respond to their inquiries without significant additional sales tax liability imposed.
However, in the event we are unsuccessful in responding to future inquiries, additional sales tax liabilities may be incurred.
If we are obligated to charge sales tax for certain products, we believe our contractual arrangements with our customers obligate
them to pay all sales taxes that are levied or imposed by any taxing authority.
We currently have $0.9 million of
pending assessments in one state. The current matter has been moved to an administrative hearing. We have not accrued for any amounts
relating to this assessment or periods subsequent to the assessment period.
Employment Agreements
Pursuant to employment or severance agreements
with certain employees, we have a commitment to pay severance of approximately $6.2 million as of December 31, 2012, 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, in the event of termination
without cause due to a change in control, we would also have a commitment to pay additional severance of approximately $2.2 million
as of December 31, 2012.
Legal Proceedings
From time to time,
we are a party to litigation matters arising in connection with the normal course of 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) and 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 LLC (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, 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 on the ‘427 Patent were 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
for the defendants.
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 the ‘841 Patent, the invalidity of the ‘427 Patent, and the claim construction order to the extent that it was relied
upon to find the judgments of non-infringement and invalidity. The defendants also appealed certain findings of the District
Court. On May 5, 2011, oral arguments on the appeal were held. On January 20, 2012, the Court of Appeals released its decision. The
decision reinstated Dealertrack's infringement action against RouteOne and Finance Express on four claims of the '841 patent, found
that claims 14, 16 and 17 of the ‘841 Patent were invalid for indefiniteness and upheld the District Court’s decision
regarding the invalidity of certain claims of the ‘427 patent. The case was remanded to the district court for further proceedings.
On October 1, 2012, we entered into to
a Settlement Agreement with RouteOne which resulted in the dismissal of RouteOne from the case. The case against Finance Express
remains.
We believe that the potential liability
from this litigation will not have a material effect on our financial position, results of operations or cash flows when resolved
in a future period.
16. 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 in Canada for the years
ended December 31, 2012, 2011 and 2010 is approximately 10%, 9% and 12% of our revenue, respectively. Long-lived assets in
Canada were $44.8 million and $35.5 million as of December 31, 2012 and 2011, respectively.
Supplemental disclosure of revenue by service
type for the years ended December 31, 2012, 2011 and 2010, is as follows (in thousands):
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Transaction services revenue
|
|
$
|
225,011
|
|
|
$
|
184,892
|
|
|
$
|
102,000
|
|
Subscription services revenue
|
|
|
145,148
|
|
|
|
146,621
|
|
|
|
123,547
|
|
Other
|
|
|
18,713
|
|
|
|
21,781
|
|
|
|
18,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
388,872
|
|
|
$
|
353,294
|
|
|
$
|
243,826
|
|
17. Agreements Impacting Contra-Revenue
In February 2010, Dealertrack entered into
a strategic relationship with Ally Financial (Ally). Under the terms of the agreement, Ally became 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, which was paid
in May 2010. Ally continues to accept credit applications through a competitive system, of which it owns a portion. The one-time
$15.0 million payment is recorded as a reduction in transaction services revenue over the period of expected benefit of approximately
five years. For the years ended December 31, 2012, 2011 and 2010, we recorded contra-revenue related to revenue earned from the
Ally strategic relationship of $3.1 million, $3.2 million and $1.6 million, respectively.
As of December 31, 2012, $12.6 million
of the payments to Ally and other customers remain to be amortized to contra-revenue, of which, $4.4 million are recorded in prepaid
expenses and other current assets and $8.2 million are recorded in other long-term assets. As of December 31, 2011, $10.9 million
of the payments remained to be amortized to contra-revenue, of which, $3.3 million was classified in prepaid expenses and other
current assets and $7.6 million in other long-term assets.
18. Revolving Credit Facility
On April 20, 2011, we entered into a $125.0
million revolving credit facility (including a $25.0 million Canadian sublimit), which is available for general corporate purposes
(including capital expenditures and investments), subject to certain conditions. The agreement permitted us to borrow an additional
$100.0 million of funds. Our obligations under the credit facility are guaranteed by certain of our existing and future subsidiaries
and secured by substantially all of the assets of the company and such subsidiaries.
Our credit facility contains restrictive
covenants that limit our ability and our existing or future subsidiaries’ abilities, among other things, to:
|
•
|
incur additional indebtedness;
|
|
•
|
pay dividends or make distributions in respect of our, or our existing or future subsidiaries’,
capital stock or to make certain other restricted payments or investments;
|
|
•
|
make certain investments, loans, advances, guarantees or acquisitions;
|
|
•
|
enter into sale and leaseback transactions;
|
|
•
|
agree to payment restrictions;
|
|
•
|
incur additional liens;
|
|
•
|
consolidate, merge, sell or otherwise dispose of all or substantially all of our or the applicable
subsidiary’s assets;
|
|
•
|
enter into transactions with our or the applicable subsidiary’s affiliates;
|
|
•
|
make capital expenditures;
|
|
•
|
make optional payments in respect of and amendments to certain other types of debt;
|
|
•
|
enter into swap agreements;
|
|
•
|
change certain fiscal periods; and
|
|
•
|
enter into new lines of business.
|
In addition, our credit facility requires
us and our subsidiaries to maintain compliance with specified financial ratios on a consolidated basis. Our and our subsidiaries’
ability to comply with these ratios may be affected by events beyond our control.
Our credit facility contains the following
affirmative covenants, among others: delivery of financial statements, reports, accountants’ letters, budgets, officers’
certificates and other information requested by the lenders; payment of other obligations; maintenance of existence and rights
and privileges; maintenance of property and insurance; right of the lenders to inspect property and books and records; compliance
with environmental laws; and covenants regarding additional collateral.
On February 27, 2012, we entered into a
first amendment to the credit agreement, which, among other things: (i) permits us to make mandatory interest and principal payments
and settle conversions in respect of the senior convertible notes in cash, shares of our common stock, or a combination thereof;
and (ii) permits us to enter into the hedge transactions and warrants in connection with the private offering of the notes (as
described above).
On February 29, 2012, we entered into a
second amendment to the amended credit agreement, which, among other things: (i) reduces the commitment fee payable under and the
interest rate margins applicable to extensions of credit pursuant to the amended credit agreement; (ii) extends the termination
date of the revolving commitments under the amended credit agreement to March 1, 2017; (iii) increases to $200.0 million (from
$100.0 million) the maximum aggregate incremental term loans and revolving commitments that may be made available to us under the
amended credit agreement; and (iv) revises the financial maintenance covenants in the amended credit agreement to increase the
maximum leverage ratio and decrease the minimum interest coverage ratio, and to add a maximum secured leverage ratio.
The interest rate on the amended credit
facility is determined quarterly and is equal to LIBOR or Prime, as applicable, plus a margin of (a) between 150 basis points and
225 basis points in the case of Eurodollar/CDOR loans and (b) between 50 basis points and 125 basis points in the case of ABR loans.
The rate, in each case, is based on a consolidated leverage ratio for us and our restricted subsidiaries (the ratio of consolidated
total debt of us and our restricted subsidiaries to consolidated EBITDA of us and our restricted subsidiaries). Additionally, under
the credit facility we are required to make quarterly commitment fee payments on any available unused revolving amounts at a rate
between 25 basis points and 40 basis points based on our consolidated leverage ratio.
We have capitalized approximately $2.7
million of total debt issuance costs associated with the credit facility, of which $1.9 million was remaining to be amortized as
interest expense as of December 31, 2012. Debt issuance costs associated with the credit facility amortized to interest expense
for the years ended December 31, 2012 and 2011 were $0.5 million and $0.3 million, respectively. Interest expense related to the
commitment fee for the years ended December 31, 2012 and 2011 were $0.5 million and $0.3 million, respectively.
As of December 31, 2012, we had no amounts
outstanding under our credit facility and were in compliance with all restrictive covenants and financial ratios.
19. Senior Convertible Notes
On March 5, 2012, we issued $200.0 million
aggregate principal amount of 1.50% senior convertible notes in a private placement. In connection with the offering of the notes,
we entered into privately negotiated convertible note hedge transactions with initial purchasers of the notes or their respective
affiliates. The net proceeds from the offering were $178.8 million after deducting the initial purchaser’s fees and offering
expenses, as well as the cost of the hedge transactions and warrant proceeds.
The notes are senior unsecured obligations,
subordinated in right of payment to existing and future secured senior indebtedness. The notes bear interest at a coupon rate of
1.50% per year, payable semi-annually in cash on March 15 and September 15 of each year, beginning on September 15, 2012. We do
not have the right to redeem the notes prior to maturity. The notes will mature on March 15, 2017, unless earlier repurchased or
converted.
In the event of a fundamental change, including
but not limited to delisting, liquidation, dissolution and other defined events, prior to maturity, the holders of the notes will
have the ability to require us to repurchase all or any portion of their notes for cash at a repurchase price equal to 100% of
the principal amount of the notes being repurchased plus any accrued and unpaid interest. If and only to the extent holders elect
to convert the notes in connection with a make-whole fundamental change, there will be an increase in the conversion rate of a
number of additional shares, which is based upon on the effective date of, and the price paid (or deemed paid) per share of our
common stock in, such make-whole fundamental change. If holders of our common stock receive only cash in connection with certain
make-whole fundamental changes, the price paid (or deemed paid) per share will be the cash amount paid per share. Otherwise, the
price paid (or deemed paid) per share will be equal to the average of the closing sale prices of our common stock on the ten consecutive
trading days prior to, but excluding, the effective date of such make-whole fundamental change.
Prior to October 15, 2016, the notes will
be convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time until the second
scheduled trading day immediately preceding the maturity date. Upon conversion, holders will receive, at our discretion, cash,
shares of our common stock or a combination thereof. The initial conversion rate will be 26.7618 shares of our common stock (subject
to customary adjustments) per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately
$37.37 per share of our common stock, which represents a conversion premium of approximately 33.50% to the closing sale price of
$27.99 per share of our common stock on February 28, 2012. In addition, following certain corporate transactions that occur prior
to the maturity date, in certain circumstances, we will increase the conversion rate for a holder that elects to convert its notes
in connection with such a corporate transaction.
A holder of the notes may convert the notes
under the following circumstances: (i) prior to October 15, 2016, on any date during any calendar quarter beginning after June
30, 2012 (and only during such calendar quarter) if the closing sale price of our common stock was more than 130% of the then current
conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of
the previous calendar quarter; (ii) prior to October 15, 2016, if we distribute rights, options or warrants to all or substantially
all holders of our common stock entitling them to purchase, for a period of 45 calendar days or less from the declaration date
for such distribution, shares of our common stock at a price per share less than the average closing sale price of our common stock
for the ten consecutive trading days immediately preceding, but excluding, the declaration date for such distribution; (iii) prior
to October 15, 2016, if we distribute to all or substantially all holders of our common stock cash, other assets, securities or
rights to purchase our securities (other than upon implementation of a rights plan) which distribution has a per share value exceeding
10% of the closing sale price of our common stock on the trading day immediately preceding the declaration date for such distribution,
or if we engage in certain corporate transactions as described in the indenture for the notes; (iv) prior to October 15, 2016,
during the five consecutive business-day period following any ten consecutive trading-day period in which the trading price per
$1,000 principal amount of notes for each trading day during such ten trading-day period was less than 98% of the closing sale
price of our common stock for each trading day during such ten trading-day period multiplied by the then current conversion rate;
or (v) on or after October 15, 2016, and on or prior to the second scheduled trading day immediately preceding the maturity date,
without regard to the foregoing conditions.
In accordance with accounting guidance
for debt with conversion and other options, we separately accounted for the liability and equity components of the notes. The estimated
fair value of the liability component at the date of issuance was $156.1 million, and was computed based on the fair value of similar
debt instruments that did not include a conversion feature. The equity component of $43.9 million was recognized as a debt discount
and recorded as additional paid-in capital. The debt discount represents the difference between the $200.0 million principal amount
of the notes and the $156.1 million estimated fair value of the liability component at the date of issuance. The debt discount
will be amortized over the expected life of a similar liability without the equity component. We determined this expected life
to be equal to the term of the notes, resulting in an amortization period for 5 years, ending March 15, 2017. The effective interest
rate used to amortize the debt discount is approximately 6.75%, which was based on our estimated non-convertible borrowing rate
of a similar liability without an equity component as of the date the notes were issued.
As of December 31, 2012, the "if-converted
value" did not exceed the principal amount of the notes since the closing sales price of our common stock was less than the
initial conversion price of the notes.
Issuance costs of $7.0 million related
to the issuance of the notes were allocated to the liability and equity components in proportion to the allocation of the proceeds
and accounted for as capitalized debt issuance costs and equity issuance costs, respectively. The amount allocated to capitalized
debt issuance costs was $5.4 million. As of December 31, 2012, total capitalized debt issuance costs remaining to be amortized
to interest expense were $4.7 million.
The net carrying amount of the liability
component of the notes as of December 31, 2012 consists of the following (in thousands):
|
|
December 31,
2012
|
|
Principal amount
|
|
$
|
200,000
|
|
Unamortized discount
|
|
|
37,721
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
162,279
|
|
Total interest expense associated with
the notes consisted of the following for the year ended December 31, 2012 (in thousands):
|
|
December 31,
2012
|
|
Cash interest expense (1.50% coupon rate)
|
|
$
|
2,458
|
|
Amortization of debt issuance costs and debt discount
|
|
|
6,989
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
9,447
|
|
In connection with the offering of the
notes, we entered into privately negotiated convertible note hedge transactions with initial purchasers of the notes or their respective
affiliates (the hedge counterparties). The convertible note hedge transactions will cover, subject to customary anti-dilution adjustments,
the number of shares of our common stock that will initially underlie the notes and are intended to reduce the potential dilutive
impact of the conversion feature of the notes. We have also entered into separate privately negotiated warrant transactions with
the hedge counterparties.
The convertible note hedge will terminate
upon the earlier of the maturity date of the notes or the first day the notes are no longer outstanding. We paid $43.9 million
for the convertible note hedges, which were recorded as a reduction to additional paid-in capital.
The warrant transactions have an initial
strike price of approximately $46.18 per share, and may be settled in cash or shares of our common stock, at our option. The warrant
transactions will have a dilutive effect to the extent that the market price per share of our common stock exceeds the applicable
strike price of the warrants. Proceeds received from the warrant transactions totaled $29.7 million and were recorded as additional
paid-in capital. The warrants expire at various dates during 2017.
The convertible note hedge and warrants
are both considered indexed to our common stock and classified as equity; therefore, the convertible note hedge and warrants are
not accounted for as derivative instruments.
It is our intent to settle the par value
of the notes in cash and we expect to have the liquidity to do so based upon cash on hand, net cash flows from operations, and
our credit facility. As a result, there will be no impact to diluted earnings per share unless the share price of our stock exceeds
the conversion price of $37.37, with additional dilution if our stock price exceeds the warrant strike price of $46.18.
20. Subsequent Events
On February 8, 2013, we announced an exclusive,
long-term partnership agreement with American Honda Finance Corporation (AHFC). As part of this agreement, Dealertrack and AHFC
will design and develop a solution with a strategic focus on streamlining the vehicle sales and finance process while improving
the overall customer buying experience.
On
February 25, 2012, we entered into an Asset Purchase Agreement by and among General Systems Solutions, Inc., Casey & Casey
NPS, Inc., a Louisiana corporation doing business as Auto Title Express, Daniel G. Casey, and DGC 2012 Family Trust No. 1 to acquire
substantially all of the assets of Casey & Casey NPS, Inc. for an initial cash purchase price of $21.2 million, subject to
working capital and other customary adjustments. The transaction is expected to close in the second quarter of 2013.