Item 7.
Management’s Discussion and
Analysis of Financial Condition and Results of Operations
You should read the following discussion
and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and
related notes thereto. In addition, you should read the sections entitled “Cautionary Statements Relating to Forward-Looking
Statements” and “Risk Factors” in Part 1, Item 1 and Item 1A, respectively, in this Annual Report on
Form 10-K.
Overview
Dealertrack’s 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, aftermarket providers and other service 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:
|
·
|
Dealer Management solutions, which provide franchised and independent 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 and financing processes as they
structure deals from a single integrated platform;
|
|
·
|
Inventory solutions, which deliver vehicle inventory management, merchandising, and transportation offerings to help dealers
accelerate used-vehicle turn rates and assisting with the facilitation of vehicle delivery;
|
|
·
|
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;
|
|
·
|
Registration & Titling solutions, which include online motor vehicle registration and cross-state vehicle registration
services; and
|
|
·
|
Collateral Management solutions, which include electronic lien and titling applications and services, title and collateral
administration, as well as our digital contract processing services.
|
We are a Delaware corporation formed in
August 2001. We are organized as a holding company and conduct a substantial amount of our business through our subsidiaries,
including, but not limited to, Dealertrack Canada, Inc., Dealertrack Digital Services, Inc., Dealertrack, Inc., Dealertrack Processing
Solutions, Inc., Dealertrack Systems, Inc., FDI Computer Consulting, Inc., General Systems Solutions, Inc., and VINtek, Inc.
Executive Summary
Below are selected highlights of our operations for the year
ended December 31, 2013:
|
·
|
On April 1, 2013, we completed the acquisition of the net assets of Casey & Casey NPS, Inc. (doing business as "Auto
Title Express") (Casey & Casey) for $21.3 million in cash, reflective of final working capital adjustments. Casey &
Casey is Louisiana's first electronic general public license tag agency and provider of electronic vehicle registration, lien and
title services, among other related services, in the state.
|
|
·
|
On October 1, 2013, we completed the acquisition of substantially all of the assets of Customer Focused Marketing, Inc. (CFM)
for $13.2 million in cash, reflective of preliminary working capital adjustments. CFM provides customer relationship management
and marketing services to automotive dealers across the United States.
|
|
·
|
On October 1, 2013, we completed the acquisition of VINtek, Inc. (Vintek) for $49.4 million in cash and a $4.0 million promissory
note to be paid within 18 months of closing. The purchase price is reflective of preliminary working capital adjustments. Vintek
is a provider of automotive collateral management, electronic lien and title (ELT) and consumer automotive finance processing services.
|
|
·
|
On November 1, 2013 we acquired certain assets of Nexteppe Business Solutions, Inc. (Nexteppe) for $3.6 million in cash, subject
to potential purchase price adjustments. Nexteppe expands our dealer website offerings and is now part of our Interactive solutions.
|
|
·
|
In December 2013, we announced a definitive agreement to acquire Dealer.com, a leading provider of marketing and
operations software and services for the automotive industry. Under the terms of the agreement, we will acquire all the
equity of Dealer.com for approximately 8.7 million shares of our common stock and approximately $620 million in cash, subject
to customary post-closing adjustments. We expect to finance the cash portion of the purchase price through cash on hand and
with fully committed debt financing. The deal, which is no longer subject to regulatory approval, is expected to close in the
first quarter of 2014.
|
|
·
|
Revenue for the year ended December 31, 2013 was $481.5 million, an increase of $92.6 million from the year ended December
31, 2012.
|
|
·
|
Net income for the year ended December 31, 2013 was $5.9 million as compared to $20.5 million for the year ended December 31,
2012. Net income for the year ended December 31, 2012 was positively impacted by $15.9 million (net of tax) from a non-cash gain
related to the contribution of Chrome to the Chrome Data Solutions joint venture and a $3.4 million gain (net of taxes) from the
sale of certain Chrome branded assets that were not contributed to the Chrome Data Solutions joint venture, offset in 2012 by a
$3.9 million non-cash charge (net of taxes) from a fair value adjustment to a warrant.
|
Non-GAAP Financial Measures and Other Business Statistics
We monitor our business performance using
a number of measures that are not found in our consolidated financial statements. These measures include the number of active dealers
and lenders, active lender to dealership relationships in the Dealertrack network, the number of transactions processed, average
transaction price, transaction revenue per car sold, the number of subscribing dealers in the Dealertrack network, and the average
monthly subscription revenue per subscribing dealership. We believe that improvements in these metrics will result in improvements
in our financial performance over time.
We also view the acquisition and successful
integration of acquired companies as important milestones in the growth of our business as these acquired companies bring new products
to our customers and expand our technological capabilities. We believe that successful acquisitions will also lead to improvements
in our financial performance over time. In the near term, however, the purchase accounting treatment of acquisitions can have a
negative impact on our consolidated statement of operations, as the depreciation and amortization expenses associated with acquired
assets can be substantial for several years following each acquisition. As a result, we monitor our non-GAAP financial measures
and other business statistics as a measure of operating performance in addition to net income and the other measures included in
our consolidated financial statements.
The following table consists of our non-GAAP financial measures
and certain other business statistics that management continually monitors (amounts in thousands are GAAP net income, adjusted
earnings before interest, taxes, depreciation and amortization (adjusted EBITDA), adjusted net income, capital expenditure data
and transactions processed):
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
GAAP net income
|
|
$
|
5,894
|
|
|
$
|
20,454
|
|
|
$
|
65,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures and Other Business Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (non-GAAP) (1)
|
|
$
|
117,707
|
|
|
$
|
97,273
|
|
|
$
|
85,904
|
|
Adjusted net income (non-GAAP) (1)
|
|
$
|
59,095
|
|
|
$
|
49,068
|
|
|
$
|
43,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, software and website development costs
|
|
$
|
52,040
|
|
|
$
|
40,803
|
|
|
$
|
32,236
|
|
Active dealers in our U.S. network as of end of the period (2)
|
|
|
20,046
|
|
|
|
19,067
|
|
|
|
17,543
|
|
Active lenders in our U.S. network as of end of the period (3)
|
|
|
1,410
|
|
|
|
1,261
|
|
|
|
1,120
|
|
Active lender to dealer relationships as of end of the period (4)
|
|
|
191,135
|
|
|
|
174,628
|
|
|
|
164,776
|
|
Transactions processed (5)
|
|
|
101,925
|
|
|
|
87,833
|
|
|
|
74,450
|
|
Average transaction price (6)
|
|
$
|
2.76
|
|
|
$
|
2.61
|
|
|
$
|
2.53
|
|
Transaction revenue per car sold (7)
|
|
$
|
8.08
|
|
|
$
|
6.95
|
|
|
$
|
6.39
|
|
Subscribing dealers in U.S. and Canada as of end of the period (8)
|
|
|
18,464
|
|
|
|
17,619
|
|
|
|
16,003
|
|
Average monthly subscription revenue per subscribing dealership (9)
|
|
$
|
767
|
|
|
$
|
708
|
|
|
$
|
813
|
|
|
(1)
|
Adjusted EBITDA is a non-GAAP financial measure that represents GAAP net income excluding interest, taxes, depreciation and
amortization expenses, stock-based compensation, contra-revenue and certain items, as applicable, such as: impairment charges,
restructuring charges, impact of acquisition-related activity (including contingent consideration changes, compensation expense,
basis difference amortization, and professional service fees), realized gains on sales of previously impaired securities, gains
or losses on sales or disposals of subsidiaries and other assets, rebranding expenses and certain other items that we do not believe
are indicative of our ongoing operating results.
|
Adjusted net income is a non-GAAP financial measure
that represents GAAP net income excluding stock-based compensation expense, the amortization of acquired identifiable intangibles,
contra-revenue, and certain items, as applicable, such as: impairment charges, restructuring charges, impact of acquisition-related
activity (including contingent consideration changes, compensation expense, basis difference amortization, and professional service
fees), realized gains on sales of previously impaired securities, gains or losses on sales or disposals of subsidiaries and other
assets, adjustments to deferred tax asset valuation allowances, non-cash interest expense, rebranding expenses and certain other
items that we do not believe are indicative of our ongoing operating results. These adjustments to net income, which are shown
before taxes, are adjusted for their tax impact at their applicable statutory rates.
Adjusted EBITDA and adjusted net income are presented
because management believes that they provide additional information with respect to the performance of our fundamental business
activities and are also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable
companies. We rely on adjusted EBITDA and adjusted net income as primary measures to review and assess the operating performance
of our company and management team in connection with our executive compensation plan incentive payments.
Adjusted EBITDA and adjusted net income have limitations
as analytical tools and you should not consider them in isolation from, or as a substitute for, analysis of our results as reported
under GAAP. Some of these limitations are:
|
•
|
Adjusted EBITDA and adjusted net income do not reflect our cash expenditures or future requirements for capital expenditures
or contractual commitments;
|
|
|
|
|
•
|
Adjusted EBITDA and adjusted net income do not reflect changes in, or cash requirements for,
our working capital needs;
|
|
|
|
|
•
|
Although depreciation and amortization are non-cash charges, the assets being depreciated and
amortized will often have to be replaced in the future, and adjusted EBITDA and adjusted net income do not reflect any cash requirements
for such replacements;
|
|
|
|
|
•
|
Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we
exclude it from adjusted net income and adjusted EBITDA when evaluating our ongoing performance for a particular period;
|
|
|
|
|
•
|
Adjusted EBITDA and adjusted net income do not reflect the impact of certain charges or gains resulting from matters we consider
not to be indicative of our ongoing operations; and
|
|
|
|
|
•
|
Other companies may calculate adjusted EBITDA and adjusted net income differently than we do,
limiting its usefulness as a comparative measure.
|
Because of these limitations, adjusted EBITDA and
adjusted net income should not be considered as measures of discretionary cash available to us to invest in the growth of our business.
We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA and adjusted net income
only as supplements to our GAAP results. Adjusted EBITDA and adjusted net income are measures of our performance that are not required
by, or presented in accordance with, GAAP. Adjusted EBITDA and adjusted net income are not measurements of our financial performance
under GAAP and should not be considered as alternatives to net income, operating income or any other performance measures derived
in accordance with GAAP or as alternatives to cash flow from operating activities as a measure of our liquidity.
The following table sets forth the reconciliation
of adjusted EBITDA, a non-GAAP financial measure, from net income, our most directly comparable financial measure, in accordance
with GAAP (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
GAAP net income
|
|
$
|
5,894
|
|
|
$
|
20,454
|
|
|
$
|
65,135
|
|
Interest income
|
|
|
(510
|
)
|
|
|
(745
|
)
|
|
|
(331
|
)
|
Interest expense – cash
|
|
|
3,780
|
|
|
|
3,357
|
|
|
|
927
|
|
Interest expense – non-cash (10)
|
|
|
9,482
|
|
|
|
7,444
|
|
|
|
—
|
|
(Benefit from) provision for income taxes, net
|
|
|
(1,327
|
)
|
|
|
12,249
|
|
|
|
(2,403
|
)
|
Depreciation of property and equipment and amortization of capitalized software and website costs
|
|
|
30,989
|
|
|
|
23,345
|
|
|
|
20,961
|
|
Amortization of acquired identifiable intangibles
|
|
|
31,538
|
|
|
|
28,333
|
|
|
|
29,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (non-GAAP)
|
|
|
79,846
|
|
|
|
94,437
|
|
|
|
114,016
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
14,391
|
|
|
|
13,592
|
|
|
|
11,495
|
|
Contra-revenue (11)
|
|
|
4,869
|
|
|
|
4,215
|
|
|
|
4,248
|
|
Integration and other related costs
|
|
|
6,802
|
|
|
|
1,530
|
|
|
|
1,223
|
|
Acquisition-related and other professional fees
|
|
|
5,235
|
|
|
|
2,711
|
|
|
|
4,721
|
|
Acquisition-related contingent consideration changes and compensation expense, net (12)
|
|
|
2,028
|
|
|
|
1,777
|
|
|
|
(1,069
|
)
|
Amortization of equity method investment basis difference (13)
|
|
|
2,824
|
|
|
|
3,985
|
|
|
|
—
|
|
Rebranding expense
|
|
|
2,068
|
|
|
|
1,909
|
|
|
|
—
|
|
Realized gain on sale of previously impaired securities (non-taxable)
|
|
|
(356
|
)
|
|
|
—
|
|
|
|
(409
|
)
|
Gain on disposal of subsidiaries and sale of other assets
|
|
|
—
|
|
|
|
(33,193
|
)
|
|
|
(47,321
|
)
|
Change in fair value of warrant
|
|
|
—
|
|
|
|
6,310
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (non-GAAP)
|
|
$
|
117,707
|
|
|
$
|
97,273
|
|
|
$
|
85,904
|
|
The following table sets forth the reconciliation
of adjusted net income, a non-GAAP financial measure, from net income, our most directly comparable financial measure in accordance
with GAAP (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
GAAP net income
|
|
$
|
5,894
|
|
|
$
|
20,454
|
|
|
$
|
65,135
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense – non-cash (not tax-impacted) (10)
|
|
|
9,482
|
|
|
|
7,444
|
|
|
|
—
|
|
Amortization of acquired identifiable intangibles
|
|
|
31,538
|
|
|
|
28,333
|
|
|
|
29,727
|
|
Stock-based compensation
|
|
|
14,391
|
|
|
|
13,592
|
|
|
|
11,495
|
|
Contra-revenue (11)
|
|
|
4,869
|
|
|
|
4,215
|
|
|
|
4,248
|
|
Integration and other related costs
|
|
|
7,045
|
|
|
|
1,583
|
|
|
|
1,223
|
|
Acquisition-related and other professional fees
|
|
|
5,235
|
|
|
|
2,711
|
|
|
|
4,721
|
|
Acquisition-related contingent consideration changes and compensation expense, net (12)
|
|
|
2,028
|
|
|
|
1,777
|
|
|
|
(1,069
|
)
|
Amortization of equity method investment basis difference (13)
|
|
|
2,824
|
|
|
|
3,985
|
|
|
|
—
|
|
Rebranding expense
|
|
|
2,068
|
|
|
|
1,909
|
|
|
|
—
|
|
Realized gain on sale of previously impaired securities (non-taxable)
|
|
|
(356
|
)
|
|
|
—
|
|
|
|
(409
|
)
|
Amended state tax returns impact (non-taxable)
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
(239
|
)
|
Gain on disposal of subsidiaries and sale of other assets
|
|
|
—
|
|
|
|
(33,193
|
)
|
|
|
(47,321
|
)
|
Change in fair value of warrant
|
|
|
—
|
|
|
|
6,310
|
|
|
|
(1,000
|
)
|
Accelerated depreciation of certain technology assets (14)
|
|
|
—
|
|
|
|
1,004
|
|
|
|
—
|
|
Disposed deferred tax liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,221
|
)
|
Deferred tax asset valuation allowance (non-taxable)
|
|
|
—
|
|
|
|
—
|
|
|
|
(21,912
|
)
|
Tax impact of adjustments (15)
|
|
|
(25,904
|
)
|
|
|
(11,056
|
)
|
|
|
2,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (non-GAAP)
|
|
$
|
59,095
|
|
|
$
|
49,068
|
|
|
$
|
43,443
|
|
(2)
|
We consider a dealer to be active in our U.S. network as of a date if the dealer completed at least one revenue-generating credit application processing transaction using the U.S. Dealertrack network during the most recently ended calendar month. The number of active U.S. dealers is based on the number of dealer accounts as communicated by lenders on the U.S. Dealertrack network.
|
|
|
(3)
|
We consider a lender to be active in our U.S. network as of a date if it is accepting credit application data electronically from U.S. dealers in the U.S. Dealertrack network.
|
|
|
(4)
|
Each lender to dealer relationship represents a pair between an active U.S. lender and an active U.S. dealer at the end of a given period.
|
|
|
(5)
|
Represents revenue-generating transactions processed in the U.S. Dealertrack, Dealertrack Aftermarket Services, Registration and Titling Solutions, Collateral Management Solutions and Dealertrack Canada networks at the end of a given period.
|
|
|
(6)
|
Represents the average revenue earned per transaction processed in the U.S. Dealertrack, Dealertrack Aftermarket Services, Registration and Titling Solutions, Collateral Management Solutions and Dealertrack Canada networks during a given period. Revenue used in the calculation adds back (excludes) transaction related contra-revenue.
|
|
|
(7)
|
Represents transaction services revenue divided by our estimate of total new and used car sales for the period in the U.S. and Canada. Revenue used in this calculation adds back (excludes) transaction related contra-revenue.
|
|
|
(8)
|
Represents the number of dealerships in the U.S. and Canada with one or more active subscriptions at the end of a given period. Subscriptions to Dealertrack CentralDispatch have been excluded as their customers include brokers and carriers in addition to dealers
.
|
|
|
(9)
|
Represents subscription services revenue divided by average subscribing dealers for a given period in the U.S. and Canada. Revenue used in the calculation adds back (excludes) subscription related contra-revenue. In addition, subscribing dealers and subscription services revenue from Dealertrack CentralDispatch have been excluded from the calculation as a majority of these customers are not dealers.
|
|
|
(10)
|
Represents interest expense relating to the amortization of deferred financing costs and debt discount in connection with the senior convertible notes and revolving credit facility.
|
|
|
(11)
|
For further information, please refer to Note 17 and Note 18 in the accompanying notes to the consolidated financial statements included in this Annual Report on Form 10-K.
|
|
|
(12)
|
Represents the change in the acquisition-related contingent consideration from the eCarList and ClickMotive acquisitions and other additional acquisition-related compensation charges.
|
|
|
(13)
|
Represents amortization of the basis difference between the book basis of contributed Chrome assets contributed to the Chrome Data Solutions joint venture and the fair value of the investment in Chrome Data Solutions.
|
|
|
(14)
|
Represents the accelerated depreciation of certain technology assets due to the discontinuation of those projects.
|
|
|
(15)
|
The tax impact of adjustments for the year ended December 31, 2013, is based on a U.S. statutory tax rate of 37.2% applied to taxable adjustments other than amortization of acquired identifiable intangibles and stock-based compensation expense, which are based on a blended tax rate of 37.1% and 36.8%, respectively. The tax impact of adjustments for the year ended December 31, 2012, is based on a U.S. statutory tax rate of 38.2% applied to taxable adjustments other than amortization of acquired identifiable intangibles and stock-based compensation expense, which are based on a blended tax rate of 38.1% and 37.7%, respectively. The tax impact of adjustments for the year ended December 31, 2011, is based on a U.S. statutory tax rate of 37.4% applied to taxable adjustments other than amortization of acquired identifiable intangibles and stock-based compensation expense, which are based on a blended tax rate of 37.2% and 37.0%, respectively.
|
Revenue
Transaction Services Revenue.
Transaction
services revenue consists of revenue earned from our lender customers for each credit application or contract that dealers submit
to them. In addition, we earn transaction services revenue from lender customers for each financing contract executed via our electronic
contracting and digital contract processing solutions, as well as for any ALG portfolio residual value analyses performed prior
to its disposal in 2011. In addition, we earn transaction service revenue from lender customers for collateral management transactions.
We also earn transaction
services revenue from dealers or other service and information providers, such as aftermarket providers and credit report providers,
for each fee-bearing product accessed by dealers. This includes transaction services revenue for completion of on-line registrations
with department of motor vehicles, completion of inventory appraisals, and accessing of credit reports.
Subscription
Services Revenue.
Subscription services revenue consists of revenue earned from our dealers and other customers (typically
on a monthly basis) for use of our subscription products and services. Our subscription services enable dealers and other customers
to manage their dealership data and operations, compare various financing and leasing options and programs, sell insurance and
other aftermarket products, analyze, merchandise, and transport inventory and execute financing contracts electronically.
Other Revenue.
Other revenue
consists of revenue primarily earned through forms programming, data conversion, hardware and equipment sales from our Dealer Management
solution, shipping fees and 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.
See “Critical Accounting Policies
and Estimates” for further discussion of revenue recognition.
Operating Expenses
Cost of Revenue.
Cost of revenue
primarily consists of expenses related to running our network infrastructure (including Internet connectivity, hosting expenses,
and data storage), amortization expense on acquired intangible assets, capitalized software and website development costs, compensation
and related benefits for network and technology development personnel, amounts paid to third parties pursuant to contracts under
which (i) a portion of certain revenue is owed to those third parties (revenue share) or, (ii) fees are due on the number of transactions
processed and direct costs for data licenses. Cost of revenue also includes hardware costs associated with our DMS product offering,
and compensation, related benefits and travel expenses associated with DMS installation personnel, compensation and related benefits
associated with strategic inventory consulting personnel, compensation and related benefits, and temporary labor associated with
personnel who process transactions for our digital contract, collateral management, and registration and titling solutions, and
advertising expenses associated with certain of our search and media product offerings. For those periods prior to the disposal
of ALG in 2011, cost of revenue also included direct costs (printing, binding and delivery) associated with residual value guides.
Product Development Expenses.
Product
development expenses consist primarily of compensation and related benefits, consulting fees and other operating expenses associated
with our product development departments. The product development departments perform research and development, in addition to
enhancing and maintaining existing products.
Selling, General and Administrative
Expenses.
Selling, general and administrative expenses consist primarily of compensation and related benefits, facility costs,
professional services fees for our sales, marketing, customer service and administrative functions, and public company costs.
We allocate overhead such as occupancy
charges, telecommunications charges, and depreciation expense, based on headcount, as we believe this to be the most accurate measure.
As a result, a portion of general overhead expenses are reflected in each operating expense category.
Acquisitions
We have grown our business since inception
through a combination of organic growth and acquisitions. The operating results of each business acquired have been included in
our consolidated financial statements from the respective dates of acquisition. Our acquisitions have been recorded under the acquisition
method of accounting, pursuant to which the total purchase price is allocated to the net assets acquired based upon estimates of
the fair value of those net assets. Any excess purchase price is allocated to goodwill. Amortization expense relating to definite-lived
intangible assets is recorded as a cost of revenue.
On April 1, 2013, we completed the acquisition
of the net assets of Casey & Casey for $21.3 million in cash, reflective of final working capital adjustments. Casey &
Casey is Louisiana’s first electronic general public license tag agency and provider of electronic vehicle registration,
lien and title services, among other related services, in the state. This acquisition expands our transaction business and further
strengthens our relationships with dealers and lenders. Casey & Casey is now part of our Registration & Titling solutions.
On October 1, 2013, we completed the acquisition
of substantially all of the assets of CFM for $13.2 million in cash, reflective of preliminary working capital adjustments. CFM
provides customer CRM and marketing services to automotive dealers across the United States. CFM is now part of our Sales and F&I
solutions.
On October 1, 2013, we completed the acquisition
of Vintek for $49.4 million in cash and a $4.0 million promissory note to be paid within 18 months of closing. The purchase price
is reflective of preliminary working capital adjustments. Vintek, which is now part of our Collateral Management solutions, is
a provider of automotive collateral management, ELT and consumer automotive finance processing services.
On November 1, 2013 we acquired certain
assets of Nexteppe for $3.6 million in cash, subject to potential purchase price adjustments. Nexteppe expands our dealer website
offerings and is now part of our Interactive solutions.
In December 2013, we announced a definitive
agreement to acquire Dealer.com, a leading provider of marketing and operations software and services for the automotive industry.
The deal is expected to close in the first quarter of 2014.
For further information regarding these
acquisitions, please refer to Note 9 and Note 20 in the accompanying notes to the consolidated financial statements included in
this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis
of our financial condition and results of our operations is based on our consolidated financial statements, which have been prepared
in accordance with generally accepted accounting principles (GAAP). The preparation of these consolidated financial statements
requires management to make estimates and judgments that affect the amounts reported for assets, liabilities, revenue, expenses
and the disclosure of contingent liabilities.
Our critical accounting policies are those
that we believe are both important to the portrayal of our financial condition and results of operations and that involve difficult,
subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently
uncertain. The estimates are based on historical experience and on various assumptions about the ultimate outcome of future events.
Our actual results may differ from these estimates if unforeseen events occur or should the assumptions used in the estimation
process differ from actual results.
We believe the following critical accounting
policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Revenue Recognition
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 more 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 provide contract information electronically to lender customers that participate in the solution.
Our digital contract processing service receives paper-based contracts 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 for use (typically on a monthly basis) of our
subscription 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 transport their inventory, execute financing contracts electronically, and
manage customer relationships. Subscription services are typically provided and billed on a monthly basis. 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.
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
with discretion regarding 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 the 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.
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.
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.
Software and Website Development Costs
and Amortization
We capitalize costs of
materials, consultants, and payroll and payroll-related costs incurred by team members 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 except platform updates which are amortized over five years and costs related to our
SAP ERP implementation and salesforce.com implementation which 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 $62.5 million and $46.2 million as of December 31, 2013 and 2012, respectively. Amortization
expense totaled $19.1 million, $13.9 million and $12.3 million for the years ended December 31, 2013, 2012 and 2011,
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, 2013 and 2012 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, 2013, our market capitalization was approximately $1.9
billion compared to our book value, including goodwill, of approximately $602 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:
|
·
|
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;
|
|
·
|
the impact of acquisitions on the use of pre-existing long-lived assets;
|
|
·
|
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.
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
, 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.
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.
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, 2013, 2012 and 2011 (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Stock options
|
|
$
|
4,020
|
|
|
$
|
4,608
|
|
|
$
|
4,941
|
|
Restricted stock units
|
|
|
8,223
|
|
|
|
7,101
|
|
|
|
5,293
|
|
Performance stock units
|
|
|
2,148
|
|
|
|
1,883
|
|
|
|
1,057
|
|
Restricted common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
14,391
|
|
|
$
|
13,592
|
|
|
$
|
11,612
|
|
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:
|
|
Unamortized
|
|
|
Weighted
|
|
|
|
Stock-Based
|
|
|
Average
|
|
|
|
Compensation
|
|
|
Amortization
|
|
|
|
Expense
|
|
|
Period
|
|
|
|
(in thousands)
|
|
|
(in years)
|
|
Stock options
|
|
|
7,155
|
|
|
|
2.40
|
|
Restricted stock units
|
|
|
15,936
|
|
|
|
2.29
|
|
Performance stock units
|
|
|
2,573
|
|
|
|
1.74
|
|
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
Beginning in 2013, the expected life of any
issued stock-based awards is based upon our historical exercise patterns and the period of time that the awards are expected to
be outstanding. Previously, due to our limited public company history, the expected life was 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.
Expected Stock Price Volatility
The expected volatility of any stock-based
awards we issue is 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. 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.
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.
Performance Stock Unit Vesting Requirements
The performance stock unit awards for
2013 are earned upon the achievement of revenue targets (Revenue Performance Awards) and total shareholder return targets
(TSR Performance Awards) and the grantee’s continuous employment in active service until the final vest date, which is
approximately three years from the grant date. The performance stock unit awards for 2012 and 2011 are earned upon the
achievement of adjusted net income (ANI Performance Awards) and total shareholder return targets (TSR Performance Awards) and
the grantee’s continuous employment in active service until the final vest date, which is approximately three years
from the grant date.
Long Term Incentive Plan (LTIP)
The LTIP awards were earned upon the achievement
of 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.
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,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected volatility
|
|
|
44
|
%
|
|
|
47.3 – 49.9
|
%
|
|
|
49.5
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (in years)
|
|
|
4.60
|
|
|
|
4.18
|
|
|
|
4.10
|
|
Risk-free interest rate
|
|
|
0.65 – 1.31
|
%
|
|
|
0.50 – 0.62
|
%
|
|
|
0.67 – 1.63
|
%
|
Weighted-average fair value of stock options granted
|
|
$
|
10.86
|
|
|
$
|
10.79
|
|
|
$
|
8.36
|
|
Weighted-average fair value of restricted stock units granted
|
|
$
|
30.00
|
|
|
$
|
28.03
|
|
|
$
|
20.30
|
|
The fair value of TSR Performance Awards
is estimated on the date of grant using a binomial lattice-based valuation pricing model. The fair value of Revenue Performance
Awards and ANI Performance Awards are estimated on the date of grant using a Black-Scholes-Merton valuation pricing model. The
weighted-average assumptions were as follows:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
0.34
|
%
|
|
|
0.39
|
%
|
|
|
1.16
|
%
|
Weighted-average fair value of TSR Performance Awards granted
|
|
$
|
30.42
|
|
|
$
|
28.98
|
|
|
$
|
21.27
|
|
Weighted-average fair value of Revenue Performance Awards granted
|
|
$
|
28.87
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Weighted-average fair value of ANI Performance Awards granted
|
|
$
|
N/A
|
|
|
$
|
27.99
|
|
|
$
|
19.48
|
|
Application of alternative assumptions could produce significantly different estimates of the fair value
of stock-based compensation and consequently, the related amounts recognized in our consolidated statements of operations.
Fair Value Measurements
We have segregated all financial assets and liabilities 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 fair value at the measurement date.
A reconciliation of the beginning and ending balances of contingent
consideration, a Level 3 liability, as of December 31, 2012 and 2013 is as follows (in thousands):
Balance as of December 31, 2011
|
|
$
|
(900
|
)
|
|
|
|
|
|
Change in fair value of contingent consideration – eCarList (1)
|
|
|
900
|
|
Record fair value of contingent consideration – ClickMotive (2)
|
|
|
(250
|
)
|
Change in fair value of contingent consideration – ClickMotive (2)
|
|
|
(750
|
)
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
(1,000
|
)
|
|
|
|
|
|
Change in fair value of contingent consideration – ClickMotive (2)
|
|
|
500
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
$
|
(500
|
)
|
|
(1)
|
A portion of the purchase price of eCarList included
contingent consideration that was to be 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 were 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.
|
|
(2)
|
In connection with our October 1, 2012 acquisition of
ClickMotive, a portion of the purchase price included contingent consideration that is payable in 2014 based
upon the achievement of certain revenue performance targets in 2013. The fair value of the revenue contingent consideration was
determined based upon probability-weighted revenue forecasts for the underlying period. The total contingent consideration was
revalued each reporting period, with the resulting gains and losses recorded in the consolidated statements of operations. The
fair value of the total contingent consideration as of the acquisition date was estimated at $0.3 million. We estimated the fair
value of the total contingent consideration as of December 31, 2012 to be $1.0 million. The increase included the impact of an
adjustment to the performance targets made subsequent to the close of the acquisition. We estimated the fair value of the total
contingent consideration as of December 31, 2013 to be $0.5 million. We recorded income of $0.5 million in the three months ended
June 30, 2013 as a result of a decrease in revenue forecasts.
|
Results of Operations
The following table sets forth the selected consolidated statements
of operations for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
$ Amount
|
|
|
% of Net
Revenue
|
|
|
$ Amount
|
|
|
% of Net
Revenue
|
|
|
$ Amount
|
|
|
% of Net
Revenue
|
|
|
|
(In thousands, except percentages)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
481,534
|
|
|
|
100
|
%
|
|
$
|
388,872
|
|
|
|
100
|
%
|
|
$
|
353,294
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
277,580
|
|
|
|
58
|
%
|
|
|
220,695
|
|
|
|
57
|
%
|
|
|
197,152
|
|
|
|
56
|
%
|
Product development
|
|
|
15,201
|
|
|
|
3
|
%
|
|
|
11,732
|
|
|
|
3
|
%
|
|
|
13,012
|
|
|
|
4
|
%
|
Selling, general and administrative
|
|
|
177,699
|
|
|
|
37
|
%
|
|
|
142,518
|
|
|
|
37
|
%
|
|
|
128,892
|
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
470,480
|
|
|
|
98
|
%
|
|
|
374,945
|
|
|
|
96
|
%
|
|
|
339,056
|
|
|
|
96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11,054
|
|
|
|
2
|
%
|
|
|
13,927
|
|
|
|
4
|
%
|
|
|
14,238
|
|
|
|
4
|
%
|
Interest income
|
|
|
510
|
|
|
|
0
|
%
|
|
|
745
|
|
|
|
0
|
%
|
|
|
331
|
|
|
|
0
|
%
|
Interest expense
|
|
|
(13,262
|
)
|
|
|
(3
|
)%
|
|
|
(10,801
|
)
|
|
|
(3
|
)%
|
|
|
(927
|
)
|
|
|
(0
|
)%
|
Other income (expense), net
|
|
|
614
|
|
|
|
0
|
%
|
|
|
(5,528
|
)
|
|
|
(1
|
)%
|
|
|
1,769
|
|
|
|
1
|
%
|
Earnings from equity method investment, net
|
|
|
5,651
|
|
|
|
1
|
%
|
|
|
1,167
|
|
|
|
0
|
%
|
|
|
—
|
|
|
|
—
|
%
|
Gain on disposal of subsidiaries and sale of other assets
|
|
|
—
|
|
|
|
0
|
%
|
|
|
33,193
|
|
|
|
9
|
%
|
|
|
47,321
|
|
|
|
13
|
%
|
Income before benefit from (provision for) income taxes, net
|
|
|
4,567
|
|
|
|
1
|
%
|
|
|
32,703
|
|
|
|
8
|
%
|
|
|
62,732
|
|
|
|
18
|
%
|
Benefit from (provision for) income taxes, net
|
|
|
1,327
|
|
|
|
0
|
%
|
|
|
(12,249
|
)
|
|
|
(3
|
)%
|
|
|
2,403
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,894
|
|
|
|
1
|
%
|
|
$
|
20,454
|
|
|
|
5
|
%
|
|
$
|
65,135
|
|
|
|
18
|
%
|
Years Ended December 31, 2013 and 2012
Revenue
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Transaction services revenue
|
|
$
|
276,861
|
|
|
$
|
225,011
|
|
|
$
|
51,850
|
|
|
|
23
|
%
|
Subscription services revenue
|
|
|
181,731
|
|
|
|
145,148
|
|
|
|
36,583
|
|
|
|
25
|
%
|
Other
|
|
|
22,942
|
|
|
|
18,713
|
|
|
|
4,229
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
481,534
|
|
|
$
|
388,872
|
|
|
$
|
92,662
|
|
|
|
24
|
%
|
Transaction Services Revenue.
The increase in transaction
services revenue is primarily due to an increase in automobile sales, increased application activity, and improving credit availability.
Transaction services revenue also increased as a result of the acquisitions of Casey & Casey on April 1, 2013 and Vintek on
October 1, 2013. These industry trends had a positive impact on the following changes in our key business metrics.
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
Amount
|
|
|
Percent
|
|
Average transaction price (1)
|
|
$
|
2.76
|
|
|
$
|
2.61
|
|
|
$
|
0.15
|
|
|
|
6
|
%
|
Transaction revenue per car sold
|
|
$
|
8.08
|
|
|
$
|
6.95
|
|
|
$
|
1.13
|
|
|
|
16
|
%
|
Active lenders in our U.S. network as of end of the period
|
|
|
1,410
|
|
|
|
1,261
|
|
|
|
149
|
|
|
|
12
|
%
|
Active lender to dealer relationships as of end of the period
|
|
|
191,135
|
|
|
|
174,628
|
|
|
|
16,507
|
|
|
|
9
|
%
|
Transactions processed (in thousands, except percentages)
|
|
|
101,925
|
|
|
|
87,833
|
|
|
|
14,092
|
|
|
|
16
|
%
|
(1) - Revenue
used in the calculation adds back (excludes) contra revenue.
Our average transaction
price and the total number of transactions processed increased 6% and 16%, respectively, which resulted in an increase in revenue
of $15.8 million and $36.7 million, respectively, offset by additional contra-revenue of $0.6 million. Contributing factors to
the increase in average transaction price and the total number of transactions processed included increases of 12% in active lender
customers in our U.S. Dealertrack network and a 9% increase in our active lender to dealer relationships, as well as an increase
in car sales volumes. While new lender customers are generally lower transaction volume customers, they have higher average prices
per transaction. Additional transaction volumes of Registration & Titling solutions and Collateral Management solutions, which
are at a higher average price than our other transactions, also contributed to the increase. The increase in our number of lender
to dealer relationships was attributable to more active dealers, more active lenders on our U.S. network, and an increase in the
average number of lenders that dealers use. In addition, expanded use across our range of transaction products increased our transaction
revenue per car sold. The Casey & Casey and Vintek acquisitions also contributed $6.2 million and $3.7 million of transaction
services revenue in 2013, respectively.
Subscription
Services Revenue.
The increase in subscription services revenue is primarily a result of organic growth, as well as additional
subscription services revenue from the 2012 acquisitions of Dealertrack CentralDispatch and ClickMotive, and the 2013 acquisitions
of CFM and certain assets of Nexteppe. The net increase in subscription services revenue was a result of the following changes
in our key business metrics.
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
Amount
|
|
|
Percent
|
|
Average monthly subscription revenue per subscribing dealership (1)(2)
|
|
$
|
767
|
|
|
$
|
708
|
|
|
$
|
59
|
|
|
|
8
|
%
|
Subscribing dealers in U.S. and Canada as of end of the period (2)
|
|
|
18,464
|
|
|
|
17,619
|
|
|
|
845
|
|
|
|
5
|
%
|
(1) - Revenue used in the calculation adds back (excludes)
contra revenue.
(2) - Subscribing dealers and subscription revenue
from Dealertrack CentralDispatch have been excluded from the calculation as a majority of these customers are not dealers.
Our average monthly subscription revenue per subscribing
dealer and the number of subscribing dealers increased 8% and 5%, respectively. In 2013, the subscription services revenue for
CentralDispatch and ClickMotive contributed a combined $35.3 million to subscription services revenue, compared to $8.9 million
subsequent to their respective acquisition dates in 2012. The 2013 acquisitions of CFM and certain assets of Nexteppe contributed
$2.0 million of total subscription services revenue in 2013 subsequent to their respective acquisition dates. In addition, we had
continued success in selling DMS and Sales and F&I products, including our ability to cross sell those solutions to existing
customers, which increased the average monthly spend per subscribing dealer.
Other Revenue.
The increase in other revenue
is primarily from our Dealer Management solution.
Operating Expenses
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Cost of revenue
|
|
$
|
277,580
|
|
|
$
|
220,695
|
|
|
$
|
56,885
|
|
|
|
26
|
%
|
Product development
|
|
|
15,201
|
|
|
|
11,732
|
|
|
|
3,469
|
|
|
|
30
|
%
|
Selling, general and administrative
|
|
|
177,699
|
|
|
|
142,518
|
|
|
|
35,181
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
470,480
|
|
|
$
|
374,945
|
|
|
$
|
95,535
|
|
|
|
25
|
%
|
Cost of Revenue.
The increase was primarily the result
of $16.0 million of additional compensation and related benefit costs primarily due to additional team members from the 2013 acquisitions
of Casey & Casey, CFM and Vintek, as well as the 2012 acquisitions of Dealertrack CentralDispatch and ClickMotive. In addition,
we incurred $14.0 million in additional technology expenses, including technology consulting and other related expenses.
There were also increases of $3.2 million
of direct cost of revenue for our Registration & Titling solutions and Collateral Management solutions (volume related), $3.4
million of direct cost of revenue for ClickMotive (acquired in October 2012), $1.9 million of direct cost of revenue for CFM and
Vintek (acquired in October 2013), and $1.6 million of direct cost of revenue for DMS. Other increases included $5.8 million of
amortization of software development costs, $3.4 million of intangible amortization expense, $2.1 million in occupancy and telecom
costs, and $1.4 million in depreciation expense. The increase in intangible amortization expense is primarily a result of additional
acquired intangibles from acquisitions. The additional occupancy and telecom costs are a result of incremental team members and
facilities, including those from acquisitions, as well as $0.3 million of rent acceleration as a result of vacating the former
ClickMotive office space.
Product Development Expenses.
The increase was primarily
the result of an increase of $3.1 million in compensation and related benefit costs primarily due to additional team members, including
those from acquisitions.
Selling, General and Administrative Expenses.
The increase
was primarily the result of an increase of $20.4 million in compensation and related benefit costs primarily due to additional
team members, including those from acquisitions.
There were additional increases of $0.9 million in marketing
and related expenses, $2.2 million in travel and related costs, $4.0 million in professional fees (including acquisition and integration
costs), $1.4 million in occupancy and telecom costs (primarily acquisition-related), $1.3 million of general and administrative
costs of acquired entities including Casey & Casey, ClickMotive, and Vintek, $0.9 million in recruiting and relocation, and
$0.9 million in depreciation. These increases were offset by the $1.0 million in accelerated depreciation for discontinued technology
which occurred in 2012.
Interest Expense
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Interest expense
|
|
$
|
(13,262
|
)
|
|
$
|
(10,801
|
)
|
|
$
|
(2,461
|
)
|
|
|
23
|
%
|
Interest expense
related to the convertible notes for 2013 consisted of coupon interest of $3.0 million, amortization of debt discount of $8.0 million,
and amortization of debt issuance costs of $1.0 million. Interest expense related to our revolving credit facility for 2013 consisted
of commitment fees of $0.4 million and amortization of debt issuance costs of $0.4 million.
Other Income (Expense), Net
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Other income (expense), net
|
|
$
|
614
|
|
|
$
|
(5,528
|
)
|
|
$
|
6,142
|
|
|
|
(111
|
)%
|
The increase in other income (expense), net is primarily
due to a $6.3 million decrease in the value of our warrant in TrueCar during 2012. Included in 2013 is $0.4 million of realized
gains on the sale of marketable securities.
Earnings from Equity Method Investment, Net
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Earnings from equity method investment, net
|
|
$
|
5,651
|
|
|
$
|
1,167
|
|
|
$
|
4,484
|
|
|
|
384
|
%
|
The net earnings from the Chrome Data Solutions joint venture
for 2013 consisted of our 50% share of the joint venture net income of $8.5 million, which was reduced by approximately $2.8 million
of basis difference amortization. The net earnings for 2012 consisted of our 50% share of the joint venture net income of $5.2
million, which was reduced by approximately $4.0 million of basis difference amortization.
Gain on Disposal of Subsidiaries and Sale of Other Assets
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Gain on disposal of subsidiaries and sale of other assets
|
|
$
|
—
|
|
|
$
|
33,193
|
|
|
$
|
(33,193
|
)
|
|
|
(100
|
)%
|
During 2012, we recorded a gain on the contribution
of the net assets of Chrome to the Chrome Data Solutions joint venture in the amount of $27.7 million and a gain of $5.5 million
related to the sale of a Chrome-branded asset, which was not contributed to the joint venture.
Benefit from (Provision for) Income Taxes, Net
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Benefit from (provision for) income taxes, net
|
|
$
|
1,327
|
|
|
$
|
(12,249
|
)
|
|
$
|
13,576
|
|
|
|
(111
|
)%
|
The net benefit for income taxes
for 2013 of $1.3 million consisted of $3.9 million of federal income tax benefit, $0.9 million of state income tax benefit
and $3.5 million of tax expense for our Canadian subsidiary. The state income tax benefit includes $0.2 million of deferred
tax expense which resulted from a change in state apportionment primarily due to 2013 acquisitions. The federal income
tax benefit includes a $1.3 million benefit from general business credits and a $0.8 million benefit from a decrease in
valuation allowance, including the impact of approved federal filing adjustments.
Included in our tax provision for 2012 was $1.5 million
of income tax benefit in the U.S., $3.2 million of provision for Canadian subsidiaries and $10.5 million of income tax provision
for discrete items. Provision for discrete items included $10.5 million on the gain recorded in conjunction with the contribution
of the net assets of Chrome for the investment in Chrome Data Solutions, $1.3 million of provision from the elimination of the
Chrome deferred tax assets and goodwill, income tax provision of $1.8 million on the gain recorded from the sale of a Chrome-branded
asset net of a reduction in valuation allowance resulting from the asset sale, $2.4 million of benefit on the change in value of
our warrant in TrueCar, $0.5 million of benefit from a change in state income tax rates and $0.2 million of benefit from tax return
filings.
Our effective tax rate for 2013 was a benefit of
29.1% compared with a provision of 37.5% for 2012.
Years Ended December 31, 2012 and 2011
Revenue
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2012
|
|
|
2011
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Transaction services revenue
|
|
$
|
225,011
|
|
|
$
|
184,892
|
|
|
$
|
40,119
|
|
|
|
22
|
%
|
Subscription services revenue
|
|
|
145,148
|
|
|
|
146,621
|
|
|
|
(1,473
|
)
|
|
|
(1
|
)%
|
Other
|
|
|
18,713
|
|
|
|
21,781
|
|
|
|
(3,068
|
)
|
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
388,872
|
|
|
$
|
353,294
|
|
|
$
|
35,578
|
|
|
|
10
|
%
|
Transaction Services Revenue.
The increase in transaction
services revenue was a result of an increase in automobile sales and improving credit availability, application and other financing-related
activity. These and other industry trends had a positive impact on the following changes in our key transaction-related business
metrics.
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2012
|
|
|
2011
|
|
|
Amount
|
|
|
Percent
|
|
Average transaction price (1)
|
|
$
|
2.61
|
|
|
$
|
2.53
|
|
|
$
|
0.08
|
|
|
|
3
|
%
|
Transaction revenue per car sold
|
|
$
|
6.95
|
|
|
$
|
6.39
|
|
|
$
|
0.56
|
|
|
|
9
|
%
|
Active lenders in our U.S. network as of end of the period
|
|
|
1,261
|
|
|
|
1,120
|
|
|
|
141
|
|
|
|
13
|
%
|
Active lender to dealer relationships as of end of the period
|
|
|
174,628
|
|
|
|
164,776
|
|
|
|
9,852
|
|
|
|
6
|
%
|
Transactions processed (in thousands, except percentages)
|
|
|
87,833
|
|
|
|
74,450
|
|
|
|
13,383
|
|
|
|
18
|
%
|
(1) - Revenue used in the calculation adds back (excludes) contra revenue.
Our average transaction
price and the total number of transactions processed increased 3% and 18%, respectively, which resulted in an increase in transaction
services revenue of $6.2 million and $33.8 million, respectively. In addition, there was a decrease
in
contra-revenue of $0.1 million.
Contributing factors to the increase in average transaction price and the total number of
transactions processed included $15.4 million of additional revenue from our Registration & Titling solutions and Collateral
Management solutions (whose transactions are generally at a higher average price than our other transactions); a 13% increase in
lender customers active in our U.S. Dealertrack network (new lender customers are generally lower transaction volume customers
with higher prices per transaction); and a 6% increase in our number of lender to dealer relationships. The increase in our number
of lender to dealer relationships was attributable to more active dealers, more active lenders on our U.S. network, and an increase
in the average number of lenders that dealers use.
Subscription
Services Revenue.
The decrease in subscription services revenue is primarily a result of the sale of ALG and the contribution
of the net assets of Chrome to the Chrome Data Solutions joint venture. The decrease was partially offset by additional subscription
services revenue from the acquisitions of eCarList on July 1, 2011, Dealertrack CentralDispatch on August 1, 2012, and ClickMotive
on October 1, 2012 and an increase in subscribing dealers. The net decrease in subscription services revenue was a result of the
following changes in our key subscription-related business metrics.
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2012
|
|
|
2011
|
|
|
Amount
|
|
|
Percent
|
|
Average monthly subscription revenue per subscribing dealership (1)(2)
|
|
$
|
708
|
|
|
$
|
813
|
|
|
$
|
(105
|
)
|
|
|
(13
|
)%
|
Subscribing dealers in U.S. and Canada as of end of the period (2)
|
|
|
17,619
|
|
|
|
16,003
|
|
|
|
1,616
|
|
|
|
10
|
%
|
(1) - Revenue used in the calculation adds back (excludes)
contra revenue.
(2) - Subscribing dealers and subscription revenue
from Dealertrack CentralDispatch have been excluded from the calculation as a majority of these customers are not dealers.
The elimination of ALG and Chrome revenue, which
did not impact the subscribing dealers metric, contributed $26.5 million to the decrease in subscription services revenue. This
decrease was offset by incremental revenue from entities acquired during 2012 of $8.9 million, as well as an increase in the average
number of subscribing dealers in our network, including additional subscription services revenue of $9.8 million from eCarList,
and the continued selling of our DMS, Inventory and Compliance solutions, including cross selling those solutions to existing customers.
Other Revenue.
The decrease in other revenue
of $3.1 million was primarily due to the elimination of $2.4 million of other revenue from the ALG and Chrome businesses.
Operating Expenses
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2012
|
|
|
2011
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Cost of revenue
|
|
$
|
220,695
|
|
|
$
|
197,152
|
|
|
$
|
23,543
|
|
|
|
12
|
%
|
Product development
|
|
|
11,732
|
|
|
|
13,012
|
|
|
|
(1,280
|
)
|
|
|
(10
|
)%
|
Selling, general and administrative
|
|
|
142,518
|
|
|
|
128,892
|
|
|
|
13,626
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
374,945
|
|
|
$
|
339,056
|
|
|
$
|
35,889
|
|
|
|
11
|
%
|
Cost of Revenue.
The increase in
cost of revenue was the result of a net increase of $6.3 million in compensation and related benefit costs, primarily due to an
incremental six months of compensation and related benefit costs related to the acquisition of eCarList, one month related to the
acquisition of Dealertrack Processing Solutions, five months related to the acquisition of Dealertrack CentralDispatch and three
months related to the acquisition of ClickMotive. These were partially offset by the elimination of compensation and related benefit
costs from the disposal of ALG and contribution of Chrome.
There were additional increases in technology
expenses of $10.0 million, which includes technology support and other consulting expenses, an increase in Registration & Titling
solutions and Collateral Management solutions costs of $4.3 million relating to additional revenue, an increase in acquired intangible
amortization expense of $2.5 million related to 2012 acquisitions and $1.9 million related to 2011 acquisitions, an increase in
Inventory solution costs of $1.7 million relating to additional revenue, an increase in costs associated with our Canadian operations
of $1.3 million as a result of expanding our product offerings in Canada, an increase in Interactive solution costs of $1.4 million
including search optimization and marketing costs associated with our product offerings related to eCarList, and an increase in
stock-based compensation of $0.6 million.
These costs were partially offset by the
elimination of $1.4 million of operating costs and $2.5 million of amortization expense from the disposal of ALG and contribution
of Chrome and a $3.2 million decrease in amortization expense for fully amortized intangibles.
Product Development Expenses.
The
decrease in product development expenses was primarily the result of an overall decrease in salary and related benefit costs from
the elimination of former ALG and Chrome team members, offset by product development expenses related to acquired businesses.
Selling, General and Administrative Expenses.
The increase in selling, general and administrative expenses was the result of a net increase of $5.2 million in compensation and
related benefit costs, primarily due to an additional six months of compensation and related benefit costs related to the acquisition
of eCarList and the additional month of compensation and related benefit costs related to the acquisition of Dealertrack Processing
Solutions. These were partially offset by the elimination of compensation and related costs from the disposal of ALG and contribution
of Chrome. Additionally, there were increases of $1.0 million of expense related to accelerated depreciation for discontinued technology
projects, $1.9 million of costs related to rebranding, $1.3 million in stock-based compensation, $0.9 million in travel and related
costs, $0.8 million of expense recorded for an increase in ClickMotive contingent consideration, $0.7 million in temporary labor
costs, and $0.4 million in bad debt expense. The impact of changes in eCarList contingent consideration was $0.9 million of income
during 2012 and $2.0 million of income during 2011, contributing a $1.1 million net increase in expense during 2012. The increases
to selling, general and administrative expenses were partially offset by a net decrease in professional services and deal related
costs of $0.9 million.
Interest Income
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2012
|
|
|
2011
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Interest income
|
|
$
|
745
|
|
|
$
|
331
|
|
|
$
|
414
|
|
|
|
125
|
%
|
The increase is related to interest income
recorded from our cash balances and investments in marketable securities from the cash proceeds received from the issuance of the
senior convertible notes in March 2012.
Interest Expense
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2012
|
|
|
2011
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Interest expense
|
|
$
|
(10,801
|
)
|
|
$
|
(927
|
)
|
|
$
|
(9,874
|
)
|
|
|
1,065
|
%
|
The increase is due to interest expense
from the senior convertible notes issued in March 2012, including coupon interest of $2.5 million, amortization of debt discount
of $6.2 million, and amortization of debt issuance costs of $0.8 million. Interest expense related to our revolving credit facility
for 2012 consisted of commitment fees of $0.5 million and amortization of debt issuance costs of $0.5 million.
Other (Expense) Income, Net
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2012
|
|
|
2011
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Other (expense) income, net
|
|
$
|
(5,528
|
)
|
|
$
|
1,769
|
|
|
$
|
(7,297
|
)
|
|
|
(412
|
)%
|
The decrease is primarily due to the $6.3 million decrease in
the value of our warrant in TrueCar in 2012 prior to exercise. Offsetting a portion of this expense was $0.6 million of gain during
2012 relating to previously deferred revenue and costs which were recorded in conjunction with our acquisition of Ford of Canada’s
iCONNECT DMS.
Earnings from Equity Method Investment, Net
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2012
|
|
|
2011
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Earnings from equity method investment, net
|
|
$
|
1,167
|
|
|
$
|
—
|
|
|
$
|
1,167
|
|
|
|
100
|
%
|
During 2012, we recorded net earnings from
the Chrome joint venture of $1.2 million. This consisted of $5.2 million for our 50% share of the joint venture’s net income,
which was reduced by approximately $4.0 million of amortization relating to the basis difference between the book basis of the
contributed assets and the fair value of the investment recorded.
Gain on Disposal of Subsidiaries and
Sale of Other Assets
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2012
|
|
|
2011
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
Gain on disposal of subsidiaries and sale of other assets
|
|
$
|
33,193
|
|
|
$
|
47,321
|
|
|
$
|
(14,128
|
)
|
|
|
(30
|
)%
|
During 2012, we recorded a gain on the contribution
of the net assets of Chrome to the Chrome Data Solutions joint venture in the amount of $27.7 million and a gain of $5.5 million
related to the sale of a Chrome-branded asset, which was not contributed to the joint venture. During 2011, we recorded a gain
on the sale of ALG in the amount of $47.3 million.
(Provision for) Benefit from Income Taxes, Net
|
|
Year Ended December 31,
|
|
|
Variance
|
|
|
|
2012
|
|
|
2011
|
|
|
$ Amount
|
|
|
Percent
|
|
|
|
(In thousands, except percentages)
|
|
(Provision for) benefit from income taxes, net
|
|
$
|
(12,249
|
)
|
|
$
|
2,403
|
|
|
$
|
(14,652
|
)
|
|
|
(610
|
)%
|
The net provision for income taxes for 2012 of $12.2 million
primarily consisted of $8.0 million of federal income tax expense, $1.0 million of state income tax expense and $3.2 million
of tax expense for our Canadian subsidiary.
Included in our tax provision for 2012 was $1.5 million of income
tax benefit in the U.S., $3.2 million of provision for Canadian subsidiaries and $10.5 million of income tax provision for discrete
items. Provision for discrete items included $10.5 million on the gain recorded in conjunction with the contribution of the net
assets of Chrome for the investment in Chrome Data Solutions, $1.3 million of provision from the elimination of the Chrome deferred
tax assets and goodwill, income tax provision of $1.8 million on the gain recorded from the sale of a Chrome-branded asset net
of a reduction in valuation allowance resulting from the asset sale, $2.4 million of benefit on the change in value of our warrant
in TrueCar, $0.5 million of benefit from a change in state income tax rates and $0.2 million of benefit from tax return filings.
The primary components of our $2.4 million tax benefit for 2011
consisted of $22.2 million of tax provision on our pre-tax results, offset by a favorable release of valuation allowance of $23.1
million, inclusive of state tax valuation allowance releases. Our provision on pre-tax results includes $19.4 million for federal,
$0.9 million for state (net of federal benefit) and $1.9 million for Canada. The provision was also impacted by a benefit
related to the completion of our 2010 U.S. tax return of $1.2 million, a net benefit on reversal of tax exposures and tax return
filings of $0.2 million, and other items amounting to a $0.4 million aggregate benefit, including the reversal of contingent consideration. These
additional benefits were offset by the deferred tax liability impact related to the ALG disposal of $0.3 million. For 2011, the
permanent item relating to intangible amortization for our Canadian subsidiary did not have a significant impact on tax expense.
Our effective tax rate for 2012 was a provision of 37.5% compared
with a benefit of 3.8% for 2011.
At December 31, 2010, 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 and recorded a full
valuation allowance of $28.4 million against our net U.S. deferred tax assets. As a result of the acquisition of Dealertrack Processing
Solutions in 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 Dealertrack’s deferred tax assets and thereby we reduced
the valuation allowance by approximately $24.5 million. In addition, as a result of the sale of ALG in 2011, and the establishment
of deferred tax liabilities on the transaction along with the expected future reversal of deferred tax liabilities, we evaluated
the need for a full valuation allowance on our remaining net deferred tax assets and determined that the ultimate realization of
deferred tax assets for U.S. federal and state income tax purposes was considered more likely than not and we reversed a portion
of the remaining valuation allowance on our net U.S. deferred tax assets.
Quarterly Results of Operations
The following table presents our unaudited quarterly consolidated
results of operations for each of the eight quarters in the period ended December 31, 2013. The unaudited quarterly consolidated
information has been prepared substantially on the same basis as our audited consolidated financial statements. You should read
the following tables presenting our quarterly consolidated results of operations in conjunction with our audited consolidated financial
statements for our full years and the related notes. This table includes all adjustments, consisting only of normal recurring adjustments,
that we consider necessary for the fair statement of our consolidated financial position and operating results for the quarters
presented. The operating results for any quarters are not necessarily indicative of the operating results for any future period.
|
|
(Unaudited)
|
|
|
|
(in thousands, except for per share data)
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter (4)
|
|
|
Quarter (4)
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
109,059
|
|
|
$
|
121,782
|
|
|
$
|
124,582
|
|
|
$
|
126,111
|
|
Gross profit (1)
|
|
|
45,871
|
|
|
|
54,195
|
|
|
|
54,383
|
|
|
|
49,505
|
|
Income (loss) from operations
|
|
|
751
|
|
|
|
7,629
|
|
|
|
6,912
|
|
|
|
(4,238
|
)
|
Net (loss) income
|
|
|
(34
|
)
|
|
|
3,839
|
|
|
|
5,795
|
|
|
|
(3,706
|
)
|
Basic net (loss) income per share (2)
|
|
$
|
(0.00
|
)
|
|
$
|
0.09
|
|
|
$
|
0.13
|
|
|
$
|
(0.08
|
)
|
Diluted net (loss) income per share (2)
|
|
$
|
(0.00
|
)
|
|
$
|
0.09
|
|
|
$
|
0.13
|
|
|
$
|
(0.08
|
)
|
Weighted average common stock outstanding (basic)
|
|
|
43,173
|
|
|
|
43,545
|
|
|
|
43,796
|
|
|
|
43,931
|
|
Weighted average common stock outstanding (diluted)
|
|
|
43,173
|
|
|
|
44,881
|
|
|
|
45,757
|
|
|
|
43,931
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter (3)
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
91,617
|
|
|
$
|
96,396
|
|
|
$
|
99,084
|
|
|
$
|
101,775
|
|
Gross profit (1)
|
|
|
38,467
|
|
|
|
42,684
|
|
|
|
43,609
|
|
|
|
43,417
|
|
Income from operations
|
|
|
1,345
|
|
|
|
5,673
|
|
|
|
5,428
|
|
|
|
1,481
|
|
Net income (loss)
|
|
|
16,961
|
|
|
|
5,925
|
|
|
|
(2,931
|
)
|
|
|
499
|
|
Basic net income (loss) per share (2)
|
|
$
|
0.40
|
|
|
$
|
0.14
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
Diluted net income (loss) per share (2)
|
|
$
|
0.39
|
|
|
$
|
0.13
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
Weighted average common stock outstanding (basic)
|
|
|
42,091
|
|
|
|
42,470
|
|
|
|
42,661
|
|
|
|
42,765
|
|
Weighted average common stock outstanding (diluted)
|
|
|
43,720
|
|
|
|
43,957
|
|
|
|
42,661
|
|
|
|
44,221
|
|
|
(1)
|
Gross profit is calculated as net revenue less cost of
revenue.
|
|
(2)
|
The addition of earnings
per share by quarter may not equal total earnings per share for the year, as a result of the weighted average shares outstanding
calculation.
|
|
(3)
|
Net income for the three months ended March 31, 2012
includes a gain of $27.7 million on the contribution of the net assets of Chrome to the Chrome Data Solutions joint venture.
|
|
(4)
|
Weighted average common stock outstanding (diluted) for
the third quarter and fourth quarter of 2013 included 288 thousand and 546 thousand shares, respectively, of diluted shares as
the average share price of our common stock exceeded the conversion price of $37.37 of our Senior Convertible Notes.
|
Liquidity and Capital Resources
We expect that our liquidity requirements
will continue to be for working capital, acquisitions, capital expenditures, scheduled debt service payments with respect to our
1.50% convertible senior notes due March 15, 2017, and general corporate purposes. Our capital expenditures, software and website
development costs for the year ended December 31, 2013 were $52.0 million, of which $48.4 million was paid in cash.
As of December
31, 2013, we had $122.4 million of cash and cash equivalents, $10.6 million in short-term marketable securities and $135.9 million
in working capital, as compared to $143.8 million of cash and cash equivalents, $34.0 million in short-term marketable securities,
$4.4 million in long-term marketable securities and $172.1 million in working capital as of December 31, 2012.
We
also had $125.0 million available for borrowings under our credit facility as of December 31, 2013.
On April 1, 2013, we completed the acquisition
of the net assets of Casey & Casey NPS, Inc. for $21.3 million in cash, reflective of final working capital adjustments. On
October 1, 2013, we completed the acquisition of substantially all of the assets of Customer Focused Marketing, Inc. for $13.2
million in cash, reflective of preliminary working capital adjustments. On October 1, 2013, we completed the acquisition of VINtek,
Inc. for $49.4 million in cash and a $4.0 million promissory note to be paid within 18 months of closing. The purchase price is
reflective of preliminary working capital adjustments. On November 1, 2013, we completed the acquisition of certain assets of Nexteppe
Business Solutions, Inc. for $3.6 million in cash, subject to potential purchase price adjustments. For further information regarding
these acquisitions, please refer to Note 9 in the accompanying notes to the consolidated financial statements included in this
Annual Report on Form 10-K.
In December 2013, we announced a definitive
agreement to acquire Dealer.com, a leading provider of marketing and operations software and services for the automotive industry.
The deal is expected to close in the first quarter of 2014. Under the terms of the agreement, Dealertrack will acquire all the
equity of Dealer.com for approximately 8.7 million shares of Dealertrack’s common stock and $620 million in cash, subject
to customary post-closing adjustments. Dealertrack expects to finance the cash portion of the purchase price through cash on hand
and with fully committed debt financing. For further information regarding these acquisitions, please refer to Note 20 in the accompanying
notes to the consolidated financial statements included in this Annual Report on Form 10-K.
In February 2014, we entered into agreements
to sell all of our shares in TrueCar, Inc. We expect to receive proceeds of $92.5 million from the sale of the shares. We intend
to use a portion of the net after-tax proceeds from the sale as part of the purchase consideration for the acquisition of Dealer.com.
See Note 21 to our consolidated financial statements.
We expect to have sufficient liquidity to
meet our short-term liquidity requirements (including capital expenditures and acquisitions) through working capital and net cash
flows from operations, cash on hand, investments in marketable securities and our credit facility.
The following table sets forth the cash
flow components for the following periods (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net cash provided by operating activities
|
|
$
|
82,385
|
|
|
$
|
70,723
|
|
|
$
|
64,926
|
|
Net cash used in investing activities
|
|
$
|
(105,855
|
)
|
|
$
|
(198,164
|
)
|
|
$
|
(186,168
|
)
|
Net cash provided by financing activities
|
|
$
|
3,610
|
|
|
$
|
192,074
|
|
|
$
|
7,906
|
|
Operating Activities
Years ended December 31, 2013 and 2012
The increase in net cash provided by
operations of $11.7 million is primarily due to non-cash items including a $33.2 million gain recorded from the contribution
of net assets of Chrome for our investment in Chrome Data Solutions during 2012, an increase in depreciation and amortization
of $10.8 million, additional amortization of debt issuances costs and debt discount of $1.9 million, and an increase in our
provision for doubtful accounts and sales credits of $2.7 million. These increases were offset by a reduction in net
income of $14.6 million, a decrease in the deferred tax provision of $12.1 million, the prior year change in warrant fair
value of $6.3 million, additional earnings from our equity method investment of $4.5 million, and net changes in operating
assets and liabilities of $1.1 million.
Years ended December 31, 2012 and 2011
The increase in net cash provided by operations
of $5.8 million included an increase of $4.1 million in our deferred tax provision, an increase of $7.3 million from the change
in the adjustments to the fair value of a warrant, an increase of $7.2 million of debt issuance costs and debt discount amortization,
and an increase of $14.1 million from the gains on disposal of subsidiaries and sale of other assets. Gains on disposal of subsidiaries
and sale of other assets for 2012 included a $27.7 million gain from the contribution of the net assets of Chrome to the Chrome
Data Solutions joint venture and a $5.5 million gain from the sale of a Chrome-branded asset as compared to 2011 which included
a $47.3 million gain on the sale of ALG. In addition, there was a decrease of $44.7 million from the reduction in net income and
an increase of $6.7 million in windfall tax benefits.
The operating cash flow increase as a result
of changes in operating assets and liabilities includes the following 2012 activity: increase of $5.1 million from cash distributions
from equity method investments, increase of $5.0 million in net deferred financing costs relating to the senior convertible notes
and the amended credit facility, and $5.0 million of non-recurring payments to customers.
Investing Activities
Years ended December 31, 2013 and 2012
The decrease in net cash used in investing
activities of $92.3 million is primarily the result of a decrease in purchases of marketable securities of $43.2 million, a decrease
in the payments for acquisitions of $44.5 million, an increase in the proceeds from sales and maturities of marketable securities
of $23.3 million, and the $1.8 million of cash which was included in the contribution of the net assets of Chrome to the Chrome
Data Solutions joint venture in 2012. These decreases were offset by an increase in capital expenditures, software and website
development costs of $15.7 million and $5.5 million of proceeds from the sale of a Chrome branded asset in 2012.
The decrease in cash used for acquisitions
relates to the $129.9 million during 2012 for the acquisitions of Dealertrack CentralDispatch, ClickMotive and the Ford iCONNECT
DMS business, net of acquired cash, as compared to $85.4 million during 2013 for the acquisitions of Casey & Casey, CFM, Vintek
and Nexteppe, net of acquired cash.
The increase in capital expenditures reflects
our continued investment in development of our products as well as our SAP ERP and salesforce.com CRM systems. The use of marketable
securities is related to our 2013 acquisitions.
Years ended December 31, 2012 and 2011
The increase in net cash used in investing
activities of $12.0 million is primarily due to a net increase of purchases in marketable securities of $42.3 million and an increase
in capital expenditures, software and website development costs of $3.1 million, offset by a decrease of $22.1 million related
to acquisitions. Increases in cash provided by investing activities during 2012 also include $5.5 million received from the sale
of a Chrome-branded, while net cash used in investing activities in 2011 also includes a $7.5 million cash investment in TrueCar.
The decrease in cash used for acquisitions
relates to the $152.0 million for the acquisitions of Dealertrack Processing Solutions, Automotive Information Center and eCarList,
net of acquired cash, in 2011, as compared to $129.9 million during 2012 for the acquisitions of Dealertrack CentralDispatch, ClickMotive
and the Ford iCONNECT DMS business, net of acquired cash.
The increase in capital expenditures reflects
our continued investment in development of products, as well as our ERP system, while the increase in marketable securities reflects
the investment of proceeds from our convertible debt offering.
Financing Activities
Years ended December 31, 2013 and 2012
The decrease in net cash provided by financing
activities of $188.5 million is due to the March 2012 issuance of our senior convertible notes of $200.0 million and the repayment
of a note payable in 2013 of $11.4 million. These decreases were offset by the 2012 net payment for a call spread overlay of $14.2
million related to the senior convertible notes.
Years ended December 31, 2012 and 2011
The increase in net cash provided by financing
activities of $184.2 million is primarily due to the issuance of senior convertible notes in the amount of $200.0 million and an
increase of $6.7 million in windfall tax benefits, offset by the net payment for a call spread overlay of $14.2 million related
to the senior convertible notes, $5.8 million of additional debt issuance costs resulting from the senior convertible notes and
the amended credit facility, and a $2.3 million decrease in proceeds from the exercise of employee stock options.
Contractual Obligations
The following table summarizes our contractual
obligations as of December 31, 2013 (in thousands):
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
Senior convertible notes (1)
|
|
$
|
210,500
|
|
|
$
|
3,000
|
|
|
$
|
6,000
|
|
|
$
|
201,500
|
|
|
$
|
—
|
|
Operating lease obligations
|
|
|
52,327
|
|
|
|
10,863
|
|
|
|
17,279
|
|
|
|
12,242
|
|
|
|
11,943
|
|
Capital lease obligations
|
|
|
304
|
|
|
|
100
|
|
|
|
172
|
|
|
|
32
|
|
|
|
—
|
|
Note payable (2)
|
|
|
4,092
|
|
|
|
2,073
|
|
|
|
2,019
|
|
|
|
—
|
|
|
|
—
|
|
Continuing employment compensation (2)
|
|
|
5,856
|
|
|
|
3,356
|
|
|
|
2,500
|
|
|
|
—
|
|
|
|
—
|
|
Earn out contingent consideration (2)
|
|
|
500
|
|
|
|
500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
273,579
|
|
|
$
|
19,892
|
|
|
$
|
27,970
|
|
|
$
|
213,774
|
|
|
$
|
11,943
|
|
(1) Consists of $200.0 million aggregate principal amount
of 1.50% convertible senior notes that mature on March 15, 2017, unless repurchased or converted prior to maturity. The amounts
in the table assume the payment of interest on our senior convertible notes through their maturity date and the payment of the
principal amount of the notes at their maturity date. Interest on the notes is payable semi-annually. The senior convertible notes
will be convertible, subject to certain conditions, into cash, shares of our common stock, or a combination of cash and shares
of common stock, at our option. It is our intent to settle the par value of the notes in cash, and we expect to have the liquidity
to do so.
(2) For further information please refer to Note 9, in
the accompanying notes to the consolidated financial statements included in this Annual Report on Form 10-K.
Pursuant to employment or severance agreements
with certain team members, we have a commitment to pay severance of approximately $6.3 million as of December 31, 2013, 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 $2.4 million
as of December 31, 2013.
The total liability for the uncertain tax
positions as of December 31, 2013 and 2012 was $0.9 million and $0.9 million, respectively, which may be reduced by a federal tax
benefit, if paid. As of December 31, 2013 and 2012, we have accrued interest and penalties related to tax positions taken on our
tax returns of approximately $0.1 million and $0.1 million, respectively.
We have a $125.0 million credit facility
which is available subject to certain conditions. The credit facility matures on March 1, 2017. As of December 31, 2013, we had
no amounts outstanding under this credit facility and we were in compliance with all restrictive covenants and financial ratios.
For further information, please refer to Note 12 in the accompanying notes to the consolidated financial statements included in
this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We do not
have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating
off-balance sheet arrangements or for other contractually narrow or limited purposes.
Effects of Inflation
Our monetary
assets, consisting primarily of cash and cash equivalents, marketable securities, receivables, long-term investments, and our non-monetary
assets, consisting primarily of intangible assets and goodwill, are not affected significantly by inflation. We believe that replacement
costs of equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation
affects our expenses, which may not be readily recoverable in the prices of products and services we offer.
Recent Accounting Pronouncements
In February 2013, the FASB issued Accounting
Standards Update 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
. We adopted this
update in the first quarter of 2013. For the amounts reclassified out of accumulated other comprehensive income (AOCI)
,
please refer to Note 4 in the accompanying notes to the consolidated financial statements included in this Annual Report
on Form 10-K
.
In July 2013, the FASB issued Accounting
Standards Update 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax
Loss, or a Tax Credit Carryforward Exists
. The guidance is effective for interim and annual periods beginning after December
15, 2013, with early adoption permitted. This standard will be effective for us beginning with the quarter ending March 31, 2014.
We do not expect the adoption to have a material impact on our consolidated financial statements
.
Item 8.
Financial Statements and Supplementary
Data
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
|
Page
|
DEALERTRACK TECHNOLOGIES, INC.:
|
|
Report of Independent Registered Public Accounting Firm
|
52
|
Consolidated Balance Sheets as of December 31, 2013 and 2012
|
53
|
Consolidated Statements of Operations for the three years ended December 31, 2013
|
54
|
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2013
|
55
|
Consolidated Statements of Cash Flows for the three years ended December 31, 2013
|
56
|
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2013
|
57
|
Notes to Consolidated Financial Statements
|
58
|
Schedule II — Valuation and Qualifying Accounts
|
92
|
Report of Independent Registered Public
Accounting Firm
To the Board of Directors and Shareholders of Dealertrack Technologies,
Inc.
In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in all material respects, the financial position of
Dealertrack Technologies, Inc. and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in
Internal
Control — Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for these financial statements and the financial statement
schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to express
opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over
financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
As described in Management’s Report on
Internal Control Over Financial Reporting, management has excluded Casey & Casey NPS, Inc. and VINtek, Inc., both
wholly-owned subsidiaries, as well as the acquired assets of Customer Focused Marketing, Inc. and Nexteppe Business
Solutions, Inc., from its assessment of internal control over financial reporting as December 31, 2013, because they were
acquired in business combinations during the year ended December 31, 2013. We have also excluded them from our audit of
internal control over financial reporting. Casey & Casey NPS, Inc. represents 3% and 1% of the consolidated financial
statement amounts of total assets and total revenues as of and for the year ended December 31, 2013. Customer Focused
Marketing, Inc. represents 1% and less than 1% of the consolidated financial statement amounts of total assets and total
revenues as of and for the year ended December 31, 2013. VINtek, Inc. represents 7% and 1% of the consolidated financial
statement amounts of total assets and total revenues as of and for the year ended December 31, 2013. Nexteppe Business
Solutions, Inc represents less than 1% of the consolidated financial statements amounts of each of total assets and total
revenues as of and for the year ended December 31, 2013.
/s/ PricewaterhouseCoopers
LLP
New York, New York
February 21, 2014
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(In thousands, except share
|
|
|
|
and per share amounts)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
122,373
|
|
|
$
|
143,811
|
|
Marketable securities
|
|
|
10,589
|
|
|
|
34,031
|
|
Customer funds and customer funds receivable
|
|
|
25,901
|
|
|
|
16,076
|
|
Accounts receivable, net of allowances of $6,924 and $4,558 as of December 31, 2013 and December 31, 2012, respectively
|
|
|
48,212
|
|
|
|
43,679
|
|
Deferred tax assets, net
|
|
|
6,331
|
|
|
|
4,412
|
|
Prepaid expenses and other current assets
|
|
|
21,533
|
|
|
|
19,142
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
234,939
|
|
|
|
261,151
|
|
|
|
|
|
|
|
|
|
|
Marketable securities – long-term
|
|
|
—
|
|
|
|
4,428
|
|
Property and equipment, net
|
|
|
31,866
|
|
|
|
27,407
|
|
Software and website development costs, net
|
|
|
62,513
|
|
|
|
46,182
|
|
Investments
|
|
|
119,318
|
|
|
|
122,808
|
|
Intangible assets, net
|
|
|
135,554
|
|
|
|
117,599
|
|
Goodwill
|
|
|
317,248
|
|
|
|
270,646
|
|
Deferred tax assets, net
|
|
|
40,421
|
|
|
|
43,611
|
|
Other assets — long-term
|
|
|
14,616
|
|
|
|
16,684
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
956,475
|
|
|
$
|
910,516
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
15,013
|
|
|
$
|
18,834
|
|
Accrued compensation and benefits
|
|
|
20,645
|
|
|
|
15,148
|
|
Accrued liabilities — other
|
|
|
21,284
|
|
|
|
16,870
|
|
Customer funds payable
|
|
|
25,901
|
|
|
|
16,076
|
|
Deferred revenue
|
|
|
9,958
|
|
|
|
7,959
|
|
Deferred tax liabilities
|
|
|
4,278
|
|
|
|
3,031
|
|
Due to acquirees
|
|
|
2,000
|
|
|
|
11,124
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
99,079
|
|
|
|
89,042
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
73,193
|
|
|
|
77,368
|
|
Deferred revenue
|
|
|
6,482
|
|
|
|
5,525
|
|
Due to acquirees
|
|
|
2,000
|
|
|
|
—
|
|
Senior convertible notes, net
|
|
|
170,317
|
|
|
|
162,279
|
|
Other liabilities
|
|
|
4,180
|
|
|
|
4,985
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
256,172
|
|
|
|
250,157
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
355,251
|
|
|
|
339,199
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value: 10,000,000 shares authorized and no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.01 par value: 175,000,000 shares authorized; 47,154,300 shares issued and 43,995,893 shares outstanding as of December 31, 2013; and 45,998,679 shares issued and 42,870,061 shares outstanding as of December 31, 2012
|
|
|
472
|
|
|
|
460
|
|
Treasury stock, at cost; 3,158,407 shares and 3,128,618 shares as of December 31, 2013 and December 31, 2012, respectively
|
|
|
(53,408
|
)
|
|
|
(52,398
|
)
|
Additional paid-in capital
|
|
|
571,550
|
|
|
|
541,948
|
|
Accumulated other comprehensive income
|
|
|
3,036
|
|
|
|
7,627
|
|
Retained earnings
|
|
|
79,574
|
|
|
|
73,680
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
601,224
|
|
|
|
571,317
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
956,475
|
|
|
$
|
910,516
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands, except per share amounts)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
481,534
|
|
|
$
|
388,872
|
|
|
$
|
353,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
277,580
|
|
|
|
220,695
|
|
|
|
197,152
|
|
Product development
|
|
|
15,201
|
|
|
|
11,732
|
|
|
|
13,012
|
|
Selling, general and administrative
|
|
|
177,699
|
|
|
|
142,518
|
|
|
|
128,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
470,480
|
|
|
|
374,945
|
|
|
|
339,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11,054
|
|
|
|
13,927
|
|
|
|
14,238
|
|
Interest income
|
|
|
510
|
|
|
|
745
|
|
|
|
331
|
|
Interest expense
|
|
|
(13,262
|
)
|
|
|
(10,801
|
)
|
|
|
(927
|
)
|
Other income (expense), net
|
|
|
614
|
|
|
|
(5,528
|
)
|
|
|
1,769
|
|
Earnings from equity method investment, net
|
|
|
5,651
|
|
|
|
1,167
|
|
|
|
—
|
|
Gain on disposal of subsidiaries and sale of other assets
|
|
|
—
|
|
|
|
33,193
|
|
|
|
47,321
|
|
Income before benefit from (provision for) income taxes, net
|
|
|
4,567
|
|
|
|
32,703
|
|
|
|
62,732
|
|
Benefit from (provision for) income taxes, net
|
|
|
1,327
|
|
|
|
(12,249
|
)
|
|
|
2,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,894
|
|
|
$
|
20,454
|
|
|
$
|
65,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.14
|
|
|
$
|
0.48
|
|
|
$
|
1.58
|
|
Diluted net income per share
|
|
$
|
0.13
|
|
|
$
|
0.46
|
|
|
$
|
1.53
|
|
Weighted average common stock outstanding (basic)
|
|
|
43,616
|
|
|
|
42,508
|
|
|
|
41,270
|
|
Weighted average common stock outstanding (diluted)
|
|
|
45,325
|
|
|
|
43,999
|
|
|
|
42,527
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Net income
|
|
$
|
5,894
|
|
|
$
|
20,454
|
|
|
$
|
65,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(4,443
|
)
|
|
|
1,269
|
|
|
|
(1,324
|
)
|
Net change in unrealized losses on securities
|
|
|
(148
|
)
|
|
|
(5
|
)
|
|
|
(171
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
(4,591
|
)
|
|
|
1,264
|
|
|
|
(1,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
1,303
|
|
|
$
|
21,718
|
|
|
$
|
63,640
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,894
|
|
|
$
|
20,454
|
|
|
$
|
65,135
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
62,527
|
|
|
|
51,678
|
|
|
|
50,688
|
|
Deferred tax (benefit) provision
|
|
|
(11,339
|
)
|
|
|
751
|
|
|
|
(3,370
|
)
|
Stock-based compensation expense
|
|
|
14,391
|
|
|
|
13,592
|
|
|
|
11,612
|
|
Provision for doubtful accounts and sales credits
|
|
|
10,012
|
|
|
|
7,306
|
|
|
|
7,008
|
|
Earnings from equity method investment, net
|
|
|
(5,651
|
)
|
|
|
(1,167
|
)
|
|
|
—
|
|
Deferred compensation
|
|
|
184
|
|
|
|
150
|
|
|
|
200
|
|
Stock-based compensation windfall tax benefit
|
|
|
(6,140
|
)
|
|
|
(6,716
|
)
|
|
|
—
|
|
Gain on disposal of subsidiaries and sale of other assets
|
|
|
—
|
|
|
|
(33,193
|
)
|
|
|
(47,321
|
)
|
Realized gain on sale of securities
|
|
|
(362
|
)
|
|
|
(4
|
)
|
|
|
(409
|
)
|
Amortization of debt issuance costs and debt discount
|
|
|
9,482
|
|
|
|
7,566
|
|
|
|
333
|
|
Change in contingent consideration
|
|
|
(500
|
)
|
|
|
(900
|
)
|
|
|
(2,000
|
)
|
Change in fair value of warrant
|
|
|
—
|
|
|
|
6,310
|
|
|
|
(1,000
|
)
|
Amortization of deferred interest
|
|
|
1,045
|
|
|
|
927
|
|
|
|
31
|
|
Changes in operating assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(10,882
|
)
|
|
|
(13,321
|
)
|
|
|
(17,157
|
)
|
Prepaid expenses and other current assets
|
|
|
2,686
|
|
|
|
10,985
|
|
|
|
(3,983
|
)
|
Other assets — long-term
|
|
|
10,314
|
|
|
|
6,202
|
|
|
|
922
|
|
Accounts payable and accrued expenses
|
|
|
(1,274
|
)
|
|
|
1,075
|
|
|
|
(609
|
)
|
Deferred rent
|
|
|
171
|
|
|
|
397
|
|
|
|
30
|
|
Deferred revenue
|
|
|
1,889
|
|
|
|
(188
|
)
|
|
|
2,850
|
|
Other liabilities — long-term
|
|
|
(62
|
)
|
|
|
(1,181
|
)
|
|
|
1,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
82,385
|
|
|
|
70,723
|
|
|
|
64,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(14,289
|
)
|
|
|
(9,951
|
)
|
|
|
(9,555
|
)
|
Capitalized software and website development costs
|
|
|
(34,116
|
)
|
|
|
(22,762
|
)
|
|
|
(20,086
|
)
|
Proceeds from sale of Chrome-branded asset
|
|
|
—
|
|
|
|
5,500
|
|
|
|
—
|
|
Purchases of marketable securities
|
|
|
(26,952
|
)
|
|
|
(70,175
|
)
|
|
|
—
|
|
Proceeds from sales and maturities of marketable securities
|
|
|
54,170
|
|
|
|
30,856
|
|
|
|
2,935
|
|
Cash contributed for equity method investment
|
|
|
—
|
|
|
|
(1,750
|
)
|
|
|
—
|
|
Return of equity method investment
|
|
|
714
|
|
|
|
—
|
|
|
|
—
|
|
Payment for cost method investment
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,500
|
)
|
Payment for acquisition of businesses, net of acquired cash
|
|
|
(85,382
|
)
|
|
|
(129,882
|
)
|
|
|
(151,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(105,855
|
)
|
|
|
(198,164
|
)
|
|
|
(186,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on capital lease obligations and financing arrangements
|
|
|
(125
|
)
|
|
|
(538
|
)
|
|
|
(472
|
)
|
Proceeds from stock purchase plan and exercise of stock options
|
|
|
10,044
|
|
|
|
8,650
|
|
|
|
10,770
|
|
Purchases of treasury stock
|
|
|
(1,010
|
)
|
|
|
(831
|
)
|
|
|
(484
|
)
|
Stock-based compensation windfall tax benefit
|
|
|
6,140
|
|
|
|
6,716
|
|
|
|
—
|
|
Payment of a note payable
|
|
|
(11,439
|
)
|
|
|
—
|
|
|
|
—
|
|
Proceeds from issuance of senior convertible notes
|
|
|
—
|
|
|
|
200,000
|
|
|
|
—
|
|
Payments for debt issuance costs
|
|
|
—
|
|
|
|
(7,723
|
)
|
|
|
(1,908
|
)
|
Payments for convertible note hedges
|
|
|
—
|
|
|
|
(43,940
|
)
|
|
|
—
|
|
Proceeds from issuance of warrants
|
|
|
—
|
|
|
|
29,740
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,610
|
|
|
|
192,074
|
|
|
|
7,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(19,860
|
)
|
|
|
64,633
|
|
|
|
(113,336
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,578
|
)
|
|
|
469
|
|
|
|
(518
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
143,811
|
|
|
|
78,709
|
|
|
|
192,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
122,373
|
|
|
$
|
143,811
|
|
|
$
|
78,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
5,029
|
|
|
$
|
3,275
|
|
|
$
|
6,100
|
|
Interest
|
|
|
4,222
|
|
|
|
2,072
|
|
|
|
279
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued capitalized hardware, software and fixed assets
|
|
|
3,412
|
|
|
|
7,316
|
|
|
|
2,456
|
|
Assets acquired under capital leases and financing arrangements
|
|
|
223
|
|
|
|
774
|
|
|
|
39
|
|
Non-cash consideration issued for investment in Vintek (Note 9)
|
|
|
4,000
|
|
|
|
—
|
|
|
|
—
|
|
Non-cash consideration issued for investment in Chrome Data Solutions (Note 19)
|
|
|
—
|
|
|
|
42,301
|
|
|
|
—
|
|
Non-cash consideration issued for acquisition of ClickMotive (Note 9)
|
|
|
—
|
|
|
|
250
|
|
|
|
—
|
|
Non-cash consideration issued for acquisition of eCarList (Note 9)
|
|
|
—
|
|
|
|
—
|
|
|
|
12,956
|
|
Non-cash consideration issued for investment in TrueCar and license (Note 19)
|
|
|
—
|
|
|
|
—
|
|
|
|
86,100
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
DEALERTRACK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Other
|
|
|
Earnings
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
In Treasury
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit)
|
|
|
Equity
|
|
Balance as of December 31, 2010
|
|
|
43,748,237
|
|
|
$
|
437
|
|
|
|
3,075,195
|
|
|
$
|
(51,083
|
)
|
|
$
|
463,614
|
|
|
$
|
7,858
|
|
|
$
|
(11,909
|
)
|
|
$
|
408,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
860,513
|
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,092
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,101
|
|
Directors’ deferred compensation stock units
|
|
|
9,384
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
200
|
|
Directors’ deferred restricted stock unit vest
|
|
|
34,440
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuances of common stock under ESPP
|
|
|
33,127
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
669
|
|
|
|
—
|
|
|
|
—
|
|
|
|
669
|
|
Vesting of restricted stock units
|
|
|
272,189
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,712
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,712
|
|
Treasury stock
|
|
|
—
|
|
|
|
—
|
|
|
|
23,998
|
|
|
|
(484
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(484
|
)
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,324
|
)
|
|
|
—
|
|
|
|
(1,324
|
)
|
Net change in unrealized (losses) gains on securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(171
|
)
|
|
|
—
|
|
|
|
(171
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
65,135
|
|
|
|
65,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
44,957,890
|
|
|
$
|
450
|
|
|
|
3,099,193
|
|
|
$
|
(51,567
|
)
|
|
$
|
486,284
|
|
|
$
|
6,363
|
|
|
$
|
53,226
|
|
|
$
|
494,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
655,223
|
|
|
|
7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,822
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,829
|
|
Expired stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(43
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(43
|
)
|
Directors’ deferred compensation stock units
|
|
|
5,138
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150
|
|
Directors’ deferred restricted stock unit vest
|
|
|
24,556
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuances of common stock under ESPP
|
|
|
29,661
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
821
|
|
|
|
—
|
|
|
|
—
|
|
|
|
821
|
|
Tax benefit from the exercise of share based awards
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,116
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,116
|
|
Vesting of restricted stock units
|
|
|
326,211
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,592
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,592
|
|
Treasury stock
|
|
|
—
|
|
|
|
—
|
|
|
|
29,425
|
|
|
|
(831
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(831
|
)
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,269
|
|
|
|
—
|
|
|
|
1,269
|
|
Net change in unrealized (losses) gains on securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
Equity component of senior convertible notes, net of issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
42,409
|
|
|
|
—
|
|
|
|
—
|
|
|
|
42,409
|
|
Convertible note hedges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,940
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(43,940
|
)
|
Issuance of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,740
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,740
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,454
|
|
|
|
20,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
|
45,998,679
|
|
|
$
|
460
|
|
|
|
3,128,618
|
|
|
$
|
(52,398
|
)
|
|
$
|
541,948
|
|
|
$
|
7,627
|
|
|
$
|
73,680
|
|
|
$
|
571,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
623,852
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,155
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,161
|
|
Expired stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(19
|
)
|
Directors’ deferred compensation stock units
|
|
|
4,800
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
184
|
|
|
|
—
|
|
|
|
—
|
|
|
|
184
|
|
Directors’ deferred restricted stock unit vest
|
|
|
18,328
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
|
Issuances of common stock under ESPP
|
|
|
24,759
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
883
|
|
|
|
—
|
|
|
|
—
|
|
|
|
883
|
|
Tax benefit from the exercise of share based awards
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,013
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,013
|
|
Vesting of restricted stock units
|
|
|
483,882
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,391
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,391
|
|
Treasury stock
|
|
|
—
|
|
|
|
—
|
|
|
|
29,789
|
|
|
|
(1,010
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,010
|
)
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,443
|
)
|
|
|
—
|
|
|
|
(4,443
|
)
|
Net change in unrealized (losses) gains on securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(148
|
)
|
|
|
—
|
|
|
|
(148
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,894
|
|
|
|
5,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
|
47,154,300
|
|
|
$
|
472
|
|
|
|
3,158,407
|
|
|
$
|
(53,408
|
)
|
|
$
|
571,550
|
|
|
$
|
3,036
|
|
|
$
|
79,574
|
|
|
$
|
601,224
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
DEALERTRACK TECHNOLOGIES, INC.
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, aftermarket providers and other service procedures.
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:
|
·
|
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 and financing 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;
|
|
·
|
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;
|
|
·
|
Registration & Titling solutions, which include online motor vehicle registration and cross-state vehicle registration
services; and
|
|
·
|
Collateral Management solutions, which include electronic lien and titling applications and service, title and collateral administration,
as well as our digital contracting processing service.
|
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.
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.
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 more 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 provide contract information electronically to lender customers that participate in the solution.
Our digital contract processing service receives paper-based contracts 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 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 transport their 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.
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 with discretion regarding 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. Realized gains and losses
are included as a component of other income, net, 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, 2013, 2012 and 2011.
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. Depreciation expense for the year ended December
31, 2013 included $0.2 million of accelerated depreciation of certain property and equipment due to the discontinuation of their
use.
Software and Website Development Costs
and Amortization
We capitalize costs of materials,
consultants, payroll and payroll-related costs incurred by team members 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 except platform updates which are amortized over five years and costs related to our SAP ERP
implementation and salesforce.com implementation which 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 $62.5 million and $46.2 million as of December 31, 2013 and 2012, respectively.
Amortization expense totaled $19.1 million, $13.9 million and $12.3 million for the years ended December 31, 2013, 2012
and 2011, 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, 2013 and 2012 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, 2013, our market capitalization was approximately $1.9
billion compared to our book value, including goodwill, of approximately $602 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:
|
·
|
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;
|
|
·
|
the impact of acquisitions on the use of pre-existing long-lived assets;
|
|
·
|
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.
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 $0.6 million, $0.5 million and $0.8 million for the
years ended December 31, 2013, 2012 and 2011, 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, 2013 and 2012, no customer accounted for more
than 10% of our accounts receivable. For the three years ended December 31, 2013, no customer accounted for more than 10% of our
revenue.
Net Income Per Share
Basic
earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding,
assuming dilution, during the period. The diluted earnings per share calculation assumes (i) all stock options which are in the
money are exercised at the beginning of the period, (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, and (iii) if applicable, potential common shares which may be issued to satisfy the
conversion spread value of our senior convertible notes.
The number of shares
included in the denominator of diluted earnings per share relating to our senior convertible notes is calculated by dividing the
conversion spread value by the average share price of our common stock during the period. The conversion spread value is the value
that would be delivered to investors based on the terms of the notes, at the assumed conversion date.
The following
table sets forth the computation of basic and diluted net income per share for the years ended December 31, 2013, 2012 and 2011
(in thousands, except per share amounts):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,894
|
|
|
$
|
20,454
|
|
|
$
|
65,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding (basic)
|
|
|
43,616
|
|
|
|
42,508
|
|
|
|
41,270
|
|
Common equivalent shares from options to purchase common stock and restricted common stock units
|
|
|
1,709
|
|
|
|
1,491
|
|
|
|
1,257
|
|
Potential common shares related to convertible senior notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding (diluted)
|
|
|
45,325
|
|
|
|
43,999
|
|
|
|
42,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.14
|
|
|
$
|
0.48
|
|
|
$
|
1.58
|
|
Diluted net income per share
|
|
$
|
0.13
|
|
|
$
|
0.46
|
|
|
$
|
1.53
|
|
The following
is a summary of the weighted average securities outstanding during the respective periods that have been excluded from the diluted
net income per share calculation because the effect would have been antidilutive (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
155
|
|
|
|
653
|
|
|
|
1,303
|
|
Restricted stock units
|
|
|
11
|
|
|
|
262
|
|
|
|
73
|
|
Performance stock units
|
|
|
8
|
|
|
|
—
|
|
|
|
79
|
|
Senior convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total antidilutive awards
|
|
|
174
|
|
|
|
915
|
|
|
|
1,455
|
|
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
would be no potential impact to diluted earnings per share unless the average share price of our common stock for the respective
periods exceeds the conversion price of $37.37, with additional dilution if the average share price exceeds the warrant strike
price of $46.18.
For the years ended December 31, 2013 and
2012, the average share price of our common stock did not exceed the conversion price of $37.37; therefore, there was no impact
to diluted earnings per share. The average share price of our common stock did exceed the conversion price of $37.37 for the third
and fourth quarter of 2013, in which the impact was 288 thousand and 546 thousand diluted shares, respectively.
For the years ended December 31, 2013 and
2012, the average share price of our common stock did not exceed the warrant strike price of $46.18; therefore, there was no additional
impact to our diluted earnings per share calculations.
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, 2013, 2012 and 2011 (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Stock options
|
|
$
|
4,020
|
|
|
$
|
4,608
|
|
|
$
|
4,941
|
|
Restricted stock units
|
|
|
8,223
|
|
|
|
7,101
|
|
|
|
5,293
|
|
Performance stock units
|
|
|
2,148
|
|
|
|
1,883
|
|
|
|
1,057
|
|
Restricted common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
14,391
|
|
|
$
|
13,592
|
|
|
$
|
11,612
|
|
The expense recorded to performance stock units includes expense
related to the Revenue Performance Awards, the Adjusted Net Income (ANI) Performance Awards and the Total Shareholder Return (TSR)
Performance Awards for the years ended December 31, 2013, 2012 and 2011 is as follows (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
TSR Performance Awards
|
|
|
1,013
|
|
|
|
1,051
|
|
|
|
605
|
|
Revenue Performance Awards
|
|
|
395
|
|
|
|
—
|
|
|
|
—
|
|
ANI Performance Awards
|
|
|
740
|
|
|
|
832
|
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,148
|
|
|
|
1,883
|
|
|
|
1,057
|
|
The income tax benefit related to stock-based
compensation expense for the years ended December 31, 2013, 2012 and 2011, was $5.2 million, $5.0 million, and $4.2 million, 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:
|
|
Unamortized
|
|
|
Weighted
|
|
|
|
Stock-Based
|
|
|
Average
|
|
|
|
Compensation
|
|
|
Amortization
|
|
|
|
Expense
|
|
|
Period
|
|
|
|
(in thousands)
|
|
|
(in years)
|
|
Stock options
|
|
|
7,155
|
|
|
|
2.40
|
|
Restricted stock units
|
|
|
15,936
|
|
|
|
2.29
|
|
Performance stock units
|
|
|
2,573
|
|
|
|
0.96
|
|
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
Beginning in 2013, the expected life of any
issued stock-based awards is based upon our historical exercise patterns and the period of time that the awards are expected to
be outstanding. Previously, due to our limited public company history, the expected life was 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
was determined based on the “simplified” method, due to our limited public company history.
Expected Stock Price Volatility
The expected volatility of any stock-based
awards we issue is 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. 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.
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.
Performance Stock Unit Vesting Requirements
The performance stock unit awards for 2013
are earned upon the achievement of revenue 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. The performance stock unit awards
for 2012 and 2011 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.
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.
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,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected volatility
|
|
|
44
|
%
|
|
|
47.3 – 49.9
|
%
|
|
|
49.5
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (in years)
|
|
|
4.60
|
|
|
|
4.18
|
|
|
|
4.10
|
|
Risk-free interest rate
|
|
|
0.65 – 1.31
|
%
|
|
|
0.50 – 0.62
|
%
|
|
|
0.67 – 1.63
|
%
|
Weighted-average fair value of stock options granted
|
|
$
|
10.86
|
|
|
$
|
10.79
|
|
|
$
|
8.36
|
|
Weighted-average fair value of restricted stock units granted
|
|
$
|
30.00
|
|
|
$
|
28.03
|
|
|
$
|
20.30
|
|
The fair value of TSR Performance Awards
is estimated on the date of grant using a binomial lattice-based valuation pricing model. The fair value of Revenue Performance
Awards and ANI Performance Awards are estimated on the date of grant using a Black-Scholes-Merton valuation pricing model. The
weighted-average assumptions were as follows:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
0.34
|
%
|
|
|
0.39
|
%
|
|
|
1.16
|
%
|
Weighted-average fair value of TSR Performance Awards granted
|
|
$
|
30.42
|
|
|
$
|
28.98
|
|
|
$
|
21.27
|
|
Weighted-average fair value of Revenue Performance Awards granted
|
|
$
|
28.87
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Weighted-average fair value of ANI Performance Awards granted
|
|
$
|
N/A
|
|
|
$
|
27.99
|
|
|
$
|
19.48
|
|
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 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
. We adopted this
update in the first quarter of 2013. For the amounts reclassified out of accumulated other comprehensive income (AOCI)
,
please refer to Note 4
.
In July 2013, the FASB issued Accounting
Standards Update 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax
Loss, or a Tax Credit Carryforward Exists
. The guidance is effective for interim and annual periods beginning after December
15, 2013, with early adoption permitted. This standard will be effective for us beginning with the quarter ending March 31, 2014.
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 and liabilities 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, 2013 and 2012 (in thousands):
As of December 31, 2013
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
December 31, 2013
|
|
Cash equivalents (1)
|
|
$
|
13,692
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,692
|
|
Marketable securities (2)
|
|
|
—
|
|
|
|
10,589
|
|
|
|
—
|
|
|
|
10,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,692
|
|
|
$
|
10,589
|
|
|
$
|
—
|
|
|
$
|
24,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (3)
|
|
|
—
|
|
|
|
—
|
|
|
|
(500
|
)
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(500
|
)
|
|
$
|
(500
|
)
|
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 (3) (4)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,000
|
)
|
|
$
|
(1,000
|
)
|
A reconciliation of the beginning and ending
balances of contingent consideration, a Level 3 liability, as of December 31, 2012 and 2013 is as follows (in thousands):
Balance as of December 31, 2011
|
|
$
|
(900
|
)
|
|
|
|
|
|
Change in fair value of contingent consideration – eCarList (4)
|
|
|
900
|
|
Record fair value of contingent consideration – ClickMotive (3)
|
|
|
(250
|
)
|
Change in fair value of contingent consideration – ClickMotive (3)
|
|
|
(750
|
)
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
(1,000
|
)
|
|
|
|
|
|
Change in fair value of contingent consideration – ClickMotive (3)
|
|
|
500
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
$
|
(500
|
)
|
|
(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, 2013 and 2012, a majority of these investments were at
least AA rated.
|
|
(2)
|
As of December 31, 2013, Level 2 marketable securities include corporate bonds, certificates of deposit, and non-U.S. government
securities. 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. Fair market value was determined based on the quoted
market prices of the underlying securities.
|
|
(3)
|
In connection with our October 1, 2012 acquisition of ClickMotive, a portion of the purchase price included contingent consideration
that is payable in 2014 based upon the achievement of certain revenue performance targets in 2013.
|
The fair value of the revenue contingent consideration
was determined based upon probability-weighted revenue forecasts for the underlying period. The total contingent consideration
was revalued each reporting period, with the resulting gains and losses recorded in the consolidated statements of operations.
The fair value of the total contingent consideration as of the acquisition date was estimated at $0.3 million. We estimated the
fair value of the total contingent consideration as of December 31, 2012 to be $1.0 million. The increase included the impact of
an adjustment to the performance targets made subsequent to the close of the acquisition. We estimated the fair value of the total
contingent consideration as of December 31, 2013 to be $0.5 million. We recorded income of $0.5 million in the three months ended
June 30, 2013 as a result of a decrease in revenue forecasts.
|
(4)
|
A portion of the purchase price of eCarList included contingent consideration that was to be 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 were 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.
|
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, 2013 and 2012 was $277.5 million
and $211.5 million, respectively. 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. 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, 2013 and 2012 (in thousands):
As of December 31, 2013
|
|
Aggregate
Cost Basis
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Aggregate
Fair Value
|
|
Non-U.S. government securities
|
|
|
2,090
|
|
|
|
—
|
|
|
|
(32
|
)
|
|
|
2,058
|
|
Certificates of deposit
|
|
|
3,011
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
3,000
|
|
Corporate debt securities
|
|
|
5,627
|
|
|
|
—
|
|
|
|
(96
|
)
|
|
|
5,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,728
|
|
|
$
|
—
|
|
|
$
|
(139
|
)
|
|
$
|
10,589
|
|
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
|
|
As of December 31, 2013, all of our marketable
securities had scheduled maturities of less than one year. A majority of our marketable securities were at least AA rated, and
all securities were at least A rated.
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, 2013 and 2012, we did
not have any marketable securities that were in an unrealized loss position for greater than 12 months.
Realized gains and losses are included
as a component of other income, net, in our consolidated statement of operations. For the years ended December 31, 2013, 2012 and
2011, realized gains on available-for-sale securities of $0.4 million, $0.0 million, and $0.4 million, respectively, have been
reclassified out of accumulated other comprehensive income (AOCI) to other income, net. For the years ended December 31, 2013,
2012 and 2011, realized losses on available-for-sale securities were not material.
5. Property and Equipment
Property and
equipment are recorded at cost and consist of the following (dollars in thousands):
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful Life
|
|
December 31,
|
|
|
|
(Years)
|
|
2013
|
|
|
2012
|
|
Computer equipment
|
|
3 – 5
|
|
$
|
53,085
|
|
|
$
|
47,052
|
|
Office equipment
|
|
5
|
|
|
4,946
|
|
|
|
5,245
|
|
Furniture and fixtures
|
|
5
|
|
|
6,038
|
|
|
|
5,171
|
|
Leasehold improvements
|
|
3 – 9
|
|
|
8,723
|
|
|
|
4,575
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, gross
|
|
|
|
|
72,792
|
|
|
|
62,043
|
|
Less: Accumulated depreciation and amortization
|
|
|
|
|
(40,926
|
)
|
|
|
(34,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
|
$
|
31,866
|
|
|
$
|
27,407
|
|
Depreciation
and amortization expense for the years ended December 31, 2013, 2012 and 2011 was $11.9 million, $9.4 million and $8.7 million,
respectively.
6. Intangible Assets
Intangible assets are recorded at
estimated fair value and are amortized either ratably over their estimated useful lives, or based upon the underlying cash
flows. The gross book value, accumulated amortization and amortization periods of the intangible assets were as follows
(dollars in thousands):
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
Estimated
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Useful Life
|
|
|
Book Value
|
|
|
Amortization
|
|
|
Book Value
|
|
|
Amortization
|
|
|
(Years)
|
Customer relationships
|
|
$
|
114,193
|
|
|
$
|
(37,099
|
)
|
|
$
|
99,673
|
|
|
$
|
(43,229
|
)
|
|
4 - 12
|
Technology
|
|
|
78,620
|
|
|
|
(35,793
|
)
|
|
|
69,620
|
|
|
|
(22,369
|
)
|
|
4 - 8
|
Trade names
|
|
|
12,560
|
|
|
|
(4,087
|
)
|
|
|
9,100
|
|
|
|
(2,480
|
)
|
|
3 - 10
|
Non-compete agreements
|
|
|
8,200
|
|
|
|
(5,671
|
)
|
|
|
7,540
|
|
|
|
(4,469
|
)
|
|
3 - 6
|
State DMV relationships
|
|
|
7,790
|
|
|
|
(3,159
|
)
|
|
|
6,190
|
|
|
|
(1,977
|
)
|
|
6 - 8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
221,363
|
|
|
$
|
(85,809
|
)
|
|
$
|
192,123
|
|
|
$
|
(74,524
|
)
|
|
|
Amortization
expense related to intangibles for the years ended December 31, 2013, 2012 and 2011 were $31.5 million, $28.3 million and $29.7
million.
Amortization
expense that will be charged to income for the subsequent five years and thereafter is as follows (in thousands):
2014
|
|
$
|
32,056
|
|
2015
|
|
|
30,969
|
|
2016
|
|
|
22,394
|
|
2017
|
|
|
15,936
|
|
2018
|
|
|
11,401
|
|
Thereafter
|
|
|
22,798
|
|
|
|
|
|
|
Total
|
|
$
|
135,554
|
|
7. Goodwill
The changes in the carrying amount of goodwill
for the years ended December 31, 2013 and 2012 is as follows (in thousands):
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 CentralDispatch
|
|
|
48,350
|
|
Acquisition of ClickMotive
|
|
|
26,241
|
|
Acquisition of Ford’s iCONNECT 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
|
|
|
|
|
|
|
Impact of change in Canadian dollar exchange rate
|
|
|
(1,850
|
)
|
Acquisition of Casey & Casey
|
|
|
9,029
|
|
Acquisition of Customer Focused Marketing
|
|
|
7,296
|
|
Acquisition of VINtek
|
|
|
29,930
|
|
Acquisition of certain assets of Nexteppe
|
|
|
2,197
|
|
Goodwill, gross, as of December 31, 2013
|
|
$
|
317,248
|
|
|
|
|
|
|
Accumulated impairment losses as of December 31, 2013
|
|
|
—
|
|
Goodwill, net, as of December 31, 2013
|
|
$
|
317,248
|
|
For further information on these acquisitions,
see Note 9. The result of our most recent annual assessment performed on October 1, 2013 did not indicate any impairment of goodwill.
8. Investments
Investments as of December 31, 2013 and
2012 consist of the following (in thousands):
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Cost method investment
|
|
$
|
82,690
|
|
|
$
|
82,690
|
|
|
|
|
|
|
|
|
|
|
Equity method investment
|
|
|
36,628
|
|
|
|
40,118
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
119,318
|
|
|
$
|
122,808
|
|
Cost method investment
In consideration for the sale of ALG in
2011, we received an equity interest in TrueCar with a value of $82.5 million and 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. For further information, see Note 19.
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, 2013.
In February 2014, we signed agreements
to sell all of our shares in TrueCar for cash proceeds in excess of carrying value. See Note 21 for additional details.
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, 2013 is $8.7 million, of which $2.2 million will be recorded
in fiscal year 2014.
The change in our equity method investment
for the years ended December 31, 2013 and 2012 was as follows (in thousands):
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Beginning balance
|
|
$
|
40,118
|
|
|
$
|
—
|
|
Investment, January 1, 2012
|
|
|
—
|
|
|
|
44,050
|
|
Share of net income
|
|
|
8,475
|
|
|
|
5,152
|
|
Amortization of basis difference
|
|
|
(2,824
|
)
|
|
|
(3,985
|
)
|
Payable to partner
|
|
|
100
|
|
|
|
—
|
|
Cash distributions received
|
|
|
(9,241
|
)
|
|
|
(5,099
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
36,628
|
|
|
$
|
40,118
|
|
In connection with the contribution of
the net assets of Chrome to Chrome Data Solutions on January 1, 2012, certain Chrome team members 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, during the years ended December 31, 2013 and 2012, we incurred expenses of approximately
$0.3 million and $0.3 million, respectively, for services received and earned income of approximately $0.2 million and $0.1 million,
respectively, for services performed. The amounts were generally recorded as selling, general and administrative expenses and revenue,
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, 2013
|
|
|
December 31, 2012
|
|
Current assets
|
|
$
|
12,875
|
|
|
$
|
10,577
|
|
Non-current assets
|
|
|
31,871
|
|
|
|
34,053
|
|
Total assets
|
|
$
|
44,746
|
|
|
$
|
44,630
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
6,257
|
|
|
$
|
5,525
|
|
Non-current liabilities
|
|
|
1,401
|
|
|
|
226
|
|
Total liabilities
|
|
$
|
7,658
|
|
|
$
|
5,751
|
|
Condensed Results of Operations
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Revenue
|
|
$
|
47,900
|
|
|
$
|
44,846
|
|
Gross profit
|
|
|
33,853
|
|
|
|
30,809
|
|
Net income
|
|
|
16,951
|
|
|
|
10,303
|
|
9. Business Combinations
Nexteppe Business Solutions, Inc.
Acquisition
On November 1, 2013, we acquired certain
assets of Nexteppe Business Solutions, Inc. (Nexteppe) for approximately $3.6 million in cash, subject to purchase price adjustments
subsequent to closing. Nexteppe expands our dealer website offerings and is now part of our Interactive solutions.
We expensed approximately $0.3 million
of professional fees associated with the acquisition in the year ended December 31, 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 fair values at the date of acquisition. The purchase price was allocated $1.3 million to
customer relationships (with an estimated live of 5 years) and $2.2 million to goodwill.
The allocated value of goodwill primarily
relates to the anticipated synergies resulting from combining Nexteppe with our current products and processes. Both the acquired
goodwill and intangible assets are deductible for tax purposes.
The results of Nexteppe were included in
our consolidated statement of operations from the date of acquisition. Nexteppe revenue, which is primarily subscription-based,
was $0.3 million from the date of acquisition through December 31, 2013. We are unable to provide Nexteppe earnings since the date
of acquisition as we do not have stand-alone earnings reporting for that business.
VINtek, Inc. Acquisition
On October 1, 2013, we acquired all the
equity interests of VINtek, Inc. (Vintek) for $49.4 million in cash and a $4.0 million promissory note to be paid 18 months after
closing. The purchase price is reflective of preliminary working capital adjustments. Vintek is a provider of automotive collateral
management, electronic lien and title (ELT) and consumer automotive finance processing services. The company offers a number of
industry-leading services and solutions, including electronic vehicle title, tag and tax processing services, and eSignature/eContracting
solutions supporting the on-line closing of automotive loans. Vintek is now part of our Collateral Management solutions.
We expect to make payments to current team
members and certain former employees of Vintek related to continued employment that may result in compensation expense of approximately
$3.3 million to be recorded in our consolidated statement of operations through December 2014.
We expensed approximately $1.5 million
of professional fees associated with the acquisition in the year ended December 31, 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 fair values at the date of acquisition as follows (in thousands):
Current assets
|
|
$
|
5,038
|
|
Property and equipment
|
|
|
429
|
|
Intangible assets
|
|
|
31,520
|
|
Goodwill
|
|
|
29,930
|
|
|
|
|
|
|
Total assets acquired
|
|
|
66,917
|
|
Total liabilities assumed
|
|
|
(13,548
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
53,369
|
|
Included in current assets was approximately
$1.7 million of cash acquired. The liabilities assumed includes a $9.8 million deferred tax liability that relates to the future
amortization of certain acquired intangibles.
The allocated value of goodwill primarily
relates to the acquired workforce, as well as the anticipated synergies resulting from combining Vintek with our current products
and processes. Neither the acquired goodwill nor the 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
|
|
$
|
25,600
|
|
|
|
12
|
|
Technology
|
|
|
4,400
|
|
|
|
5
|
|
Non-compete agreement
|
|
|
920
|
|
|
|
5
|
|
Trade names
|
|
|
600
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
31,520
|
|
|
|
|
|
The $4.0 million promissory note bears
interest at a rate of 1.83%. Half of the note is payable twelve months from the acquisition date, with the remainder payable eighteen
months from the acquisition date.
The results of Vintek were included in
our consolidated statement of operations from the date of acquisition. Vintek revenue, which is transaction-based, was $4.0 million
from the date of acquisition through December 31, 2013. We are unable to provide Vintek earnings since the date of acquisition
as we do not have stand-alone earnings reporting for that business.
Customer Focused Marketing, Inc. Acquisition
On October 1, 2013, we acquired substantially
all of the assets of Customer Focused Marketing, Inc. (CFM) for $13.2 million in cash, reflective of preliminary working capital
adjustments. CFM provides customer relationship management (CRM) and marketing services to automotive dealers across the United
States. Its offerings include a number of services and technology tools that help automotive dealerships better manage database
marketing and customer communications, including prospects, sales, and service. In addition, CFM has a mobile platform featuring
innovative capabilities for the iPad, iPhone and Android-based devices, in addition to a desktop, browser-based version of the
solution. CFM is now part of our Sales and F&I solutions.
We expect to make payments to seller and
certain former employees of CFM related to continued employment that may result in compensation expense of approximately $2.5 million
to be recorded in our consolidated statement of operations through March 2015.
We expensed approximately $0.5 million
of professional fees associated with the acquisition in the year ended December 31, 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 fair values at the date of acquisition as follows (in thousands):
Current assets
|
|
$
|
990
|
|
Intangible assets
|
|
|
4,960
|
|
Goodwill
|
|
|
7,296
|
|
|
|
|
|
|
Total assets acquired
|
|
|
13,246
|
|
Total liabilities assumed
|
|
|
(48
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
13,198
|
|
The allocated value of goodwill primarily
relates to the acquired workforce, as well as the anticipated synergies resulting from combining CFM 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)
|
Technology
|
|
$
|
2,700
|
|
|
6
|
Customer relationships
|
|
|
1,170
|
|
|
8
|
Trade names
|
|
|
960
|
|
|
5
|
Non-compete agreement
|
|
|
130
|
|
|
5
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
4,960
|
|
|
|
The results of CFM were included in our
consolidated statement of operations from the date of acquisition. CFM revenue, which is subscription-based, was $1.7 million from
the date of acquisition through December 31, 2013. We are unable to provide CFM earnings since the date of acquisition as we do
not have stand-alone earnings reporting for that business.
Casey & Casey NPS Inc. Acquisition
On April 1, 2013, we acquired substantially
all the assets of Casey & Casey NPS, Inc. (doing business as “Auto Title Express”) (Casey & Casey) for $21.3
million in cash, reflective of final working capital adjustments.
Casey & Casey is Louisiana’s first
electronic general public license tag agency and provider of electronic vehicle registration, lien and title services, among other
related services, in the state. This acquisition expands our transaction business and further strengthens our relationships with
dealers and lenders. Casey & Casey is now part of our Registration & Titling solutions.
We expensed approximately $0.4 million of
professional fees associated with the acquisition in the year ended December 31, 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 fair values at the date of acquisition as follows (in thousands):
Current assets
|
|
$
|
5,633
|
|
Property and equipment
|
|
|
32
|
|
Non-current assets
|
|
|
15
|
|
Intangible assets
|
|
|
11,990
|
|
Goodwill
|
|
|
9,029
|
|
|
|
|
|
|
Total assets acquired
|
|
|
26,699
|
|
Total liabilities assumed
|
|
|
(5,387
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
21,312
|
|
The allocated value of goodwill primarily
relates to the acquired workforce, as well as the anticipated synergies resulting from combining Casey & Casey 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
|
|
$
|
6,000
|
|
|
9
|
Technology
|
|
|
1,900
|
|
|
4
|
Trade names
|
|
|
1,900
|
|
|
10
|
State DMV relationships
|
|
|
1,600
|
|
|
8
|
Non-compete agreement
|
|
|
590
|
|
|
6
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
11,990
|
|
|
|
The results of Casey & Casey were included
in our consolidated statement of operations from the date of acquisition. Casey & Casey revenue, which is primarily transaction-based,
was $6.5 million from the date of acquisition through December 31, 2013. We are unable to provide Casey & Casey earnings since
the date of acquisition as we do not have stand-alone earnings reporting for that business.
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
related 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 were eligible to receive additional
consideration of up to $4.5 million, a portion of which was based upon the achievement of certain revenue performance targets in
2013. The fair value of the revenue contingent consideration was determined based upon probability-weighted revenue forecasts for
the underlying period. The total contingent consideration was revalued each reporting period, with the resulting gains and losses
recorded in the consolidated statements of operations. The fair value of the total contingent consideration as of the acquisition
date was estimated at $0.3 million. We estimated the fair value of the total contingent consideration as of December 31, 2012 to
be $1.0 million. The increase included the impact of an adjustment to the performance targets made subsequent to the close of the
acquisition. We estimated the fair value of the total contingent consideration as of December 31, 2013 to be $0.5 million. We recorded
income of $0.5 million in the three months ended June 30, 2013 as a result of a decrease in revenue forecasts.
ClickMotive provides SaaS solutions to
the automotive industry by offering a comprehensive digital marketing platform that combines the power of the web, mobile, social,
search and video into one online marketing platform.
We expensed approximately $1.0 million
of professional fees associated with the acquisition in the year ended December 31, 2012.
Additionally, we made payments to certain
former employees of ClickMotive related to continued employment through June 2013 that resulted in compensation expense of approximately
$0.2 million and $0.1 million in our consolidated statement of operations in 2013 and 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
|
|
$
|
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
related 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, an 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 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
related to the acquired workforce, as well as the anticipated synergies resulting from combining Dealertrack CentralDispatch with
our current products and processes. We made 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 for a purchase price of $36.4 million, reflective of final working capital adjustments. 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, exclusive of website offerings
which are included in the Interactive Solutions, are now part of Dealertrack Inventory solutions. 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 had a face value of approximately
$11.4 million and 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 had a compensatory element that resulted in compensation expense of approximately $1.3 million in our consolidated
statement of operations over the two year period from the date of acquisition. The note payable was paid on July 1, 2013. Additionally,
we made payments to certain former employees of eCarList related to continuing employment that resulted in compensation expense
of approximately $2.2 million being recorded in our consolidated statement of operations over the two year period from the date
of acquisition.
The sellers could 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 was measured on a quarterly
basis until the contingency was resolved. Any subsequent changes to the fair value of the contingent consideration was 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 were 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 primarily
related 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 primarily
related 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 contribution of the net assets of Chrome to the Chrome
Data Solutions joint venture and the acquisitions of CentralDispatch and ClickMotive had been completed as of January 1,
2011, and the acquisitions of Casey & Casey, CFM and Vintek had been completed as of January 1, 2012. The unaudited pro
forma financial results for 2013 reflect the results for the year ended December 31, 2013, as well as the effects of the pro
forma adjustments for the stated transactions in 2013. 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 both
2013 and 2012. Pro forma results of operations for the acquisitions of Nexteppe and Ford’s iCONNECT DMS have not been
presented because they are 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 and compensation expense related to amounts to be paid
for continued employment. 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,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands, except per share data)
|
|
Net revenue
|
|
$
|
502,547
|
|
|
$
|
433,746
|
|
Net income
|
|
|
7,817
|
|
|
|
25,705
|
|
Basic net income per share
|
|
|
0.18
|
|
|
|
0.60
|
|
Diluted net income per share
|
|
|
0.17
|
|
|
|
0.58
|
|
10. Accrued Liabilities - Other
A summary of the components of accrued liabilities
– other as of December 31, 2013 and 2012 is as follows (in thousands):
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Professional fees
|
|
$
|
5,295
|
|
|
$
|
2,564
|
|
Customer deposits
|
|
|
2,368
|
|
|
|
2,360
|
|
Computer and office equipment, furniture and fixtures
|
|
|
1,495
|
|
|
|
968
|
|
Revenue share
|
|
|
1,510
|
|
|
|
1,096
|
|
Acquisition-related compensation
|
|
|
647
|
|
|
|
1,667
|
|
Sales taxes
|
|
|
2,087
|
|
|
|
779
|
|
Interest payable
|
|
|
981
|
|
|
|
1,439
|
|
State DMV transaction fees
|
|
|
695
|
|
|
|
620
|
|
Software licenses and maintenance contracts
|
|
|
278
|
|
|
|
1,071
|
|
Utilities and occupancy
|
|
|
589
|
|
|
|
455
|
|
Marketing
|
|
|
370
|
|
|
|
351
|
|
Other
|
|
|
4,969
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities – other
|
|
$
|
21,284
|
|
|
$
|
16,870
|
|
11. 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, 2013, the "if-converted
value" of the notes exceeded the principal amount by $57.3 million.
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, 2013, total capitalized debt issuance costs remaining to be amortized
to interest expense were $3.7 million.
The net carrying amount of the liability
component of the notes as of December 31, 2013 and 2012 consists of the following (in thousands):
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Principal amount
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
Unamortized discount
|
|
|
29,683
|
|
|
|
37,721
|
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
170,317
|
|
|
$
|
162,279
|
|
Total interest expense associated with the
notes consisted of the following for the year ended December 31, 2013 and 2012 (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Cash interest expense (1.50% coupon rate)
|
|
$
|
3,000
|
|
|
$
|
2,458
|
|
Amortization of debt issuance costs and debt discount
|
|
|
9,032
|
|
|
|
6,989
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
12,032
|
|
|
$
|
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 would be no potential impact to diluted earnings per share unless the average share price
of our common stock for the respective periods exceeds the conversion price of $37.37, with additional dilution if the average
share price exceeds the warrant strike price of $46.18.
For the years ended December 31, 2013 and
2012, the average share price of our common stock did not exceed the conversion price of $37.37, therefore there was no impact
to diluted earnings per share. The average share price of our common stock did exceed the conversion price of $37.37 for the third
and fourth quarter of 2013, in which the impact was 288 thousand and 546 thousand diluted shares, respectively.
For the years ended December 31, 2013 and
2012, the average share price did not exceed the warrant strike price of $46.18, therefore there was no additional impact to our
diluted earnings per share calculations.
12. 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;
|
|
|
|
|
|
•
|
|
sell assets;
|
|
|
|
|
|
•
|
|
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 capitalized approximately $2.7 million
of total debt issuance costs associated with the credit facility, of which $1.4 million was remaining to be amortized to interest
expense as of December 31, 2013. Debt issuance costs associated with the credit facility amortized to interest expense for the
years ended December 31, 2013, 2012 and 2011 were $0.4 million, $0.5 million and $0.3 million, respectively. Interest expense related
to the commitment fee for the years ended December 31, 2013, 2012 and 2011 were $0.4 million, $0.5 million and $0.3 million, respectively.
As of December 31, 2013, we had no amounts
outstanding under our credit facility and were in compliance with all restrictive covenants and financial ratios.
13. Retirement Plans
As of December 31, 2013, we maintained
two retirement plans in which team members are eligible to participate.
U.S. team members are eligible to participate
in a 401(k) plan which covers substantially all team members 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, 2013, 2012 and 2011,
we elected to make additional matching contributions covering all team members who were active participants on the last day of
the plan year in the amount of $0.8 million, $0.8 million and $1.2 million, respectively, or approximately 36%, 52% and 127% of
matching contributions made during the year, respectively.
Total contributions under the plan for
the years ended December 31, 2013, 2012 and 2011 were $3.1 million, $2.3 million and $2.1 million, respectively.
Canadian team members are eligible to participate
in a registered retirement savings plan (RRSP) which covers all full time team members. Under the provisions of the RRSP, we are
required to match 100% of employee contributions to the plan up to 6% of eligible earnings. Our contributions under the RRSP for
the years ended December 31, 2013, 2012 and 2011 were $0.6 million, $0.5 million and $0.5 million, respectively.
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, 2013, there are 3,258,913 shares available for future issuance.
The following summarizes stock-based compensation
expense by expense category for the three years ended December 31, 2013, 2012 and 2011 (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Cost of revenue
|
|
$
|
2,828
|
|
|
$
|
2,429
|
|
|
$
|
1,791
|
|
Product development
|
|
|
727
|
|
|
|
749
|
|
|
|
735
|
|
Selling, general and administrative
|
|
|
10,836
|
|
|
|
10,414
|
|
|
|
9,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
14,391
|
|
|
$
|
13,592
|
|
|
$
|
11,612
|
|
Stock Options
The following table summarizes the activity
under our stock option plans as of December 31, 2013:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Weighted Average
|
|
|
Contractual Life
|
|
|
Intrinsic Value
|
|
|
|
(in thousands)
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Outstanding as of January 1, 2013
|
|
|
3,817
|
|
|
$
|
18.73
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
421
|
|
|
|
29.10
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(624
|
)
|
|
|
14.68
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(98
|
)
|
|
|
25.46
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(3
|
)
|
|
|
29.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2013
|
|
|
3,513
|
|
|
$
|
20.50
|
|
|
|
3.10
|
|
|
$
|
96,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of December 31, 2013
|
|
|
3,486
|
|
|
$
|
20.44
|
|
|
|
3.08
|
|
|
$
|
96,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of December 31, 2013
|
|
|
2,653
|
|
|
$
|
18.59
|
|
|
|
2.34
|
|
|
$
|
78,245
|
|
The exercise prices range from $2.80 to
$47.98 for stock options outstanding and exercisable for the year ended December 31, 2013. 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, 2013, 2012 and 2011 was approximately $12.8 million, $11.3 million and
$10.3 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, 2013:
|
|
Restricted Common Stock Units
|
|
|
Performance Stock Units
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Awards
|
|
|
Average Grant
|
|
|
Awards
|
|
|
Average Grant
|
|
|
|
(in thousands)
|
|
|
Date Fair Value
|
|
|
(in thousands)
|
|
|
Date Fair Value
|
|
Non-vested awards as of January 1, 2013
|
|
|
959
|
|
|
$
|
21.21
|
|
|
|
269
|
|
|
$
|
21.41
|
|
Awards granted
|
|
|
466
|
|
|
|
30.00
|
|
|
|
72
|
|
|
|
29.62
|
|
Awards vested
|
|
|
(385
|
)
|
|
|
18.47
|
|
|
|
(99
|
)
|
|
|
17.40
|
|
Awards cancelled/expired/forfeited
|
|
|
(77
|
)
|
|
|
26.98
|
|
|
|
—
|
|
|
|
—
|
|
Adjustment for performance achieved
|
|
|
—
|
|
|
|
—
|
|
|
|
28
|
|
|
|
23.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested awards as of December 31, 2013
|
|
|
963
|
|
|
$
|
26.09
|
|
|
|
270
|
|
|
$
|
25.25
|
|
The total fair value for restricted common
stock units, performance stock units, and restricted common stock awards that vested during the years ended December 31, 2013,
2012 and 2011, are as follows (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Restricted common stock units
|
|
$
|
7,104
|
|
|
$
|
9,285
|
|
|
$
|
5,470
|
|
Performance stock units
|
|
$
|
1,727
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted common stock awards
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
701
|
|
Employee Stock Purchase Plan (ESPP)
For team members 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, 2013, there are 1,500,000
shares of common stock reserved, 416,166 shares issued and 1,083,834 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, 2013, 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, 2013, 75,000
shares of common stock are reserved, with 62,503 deferred stock units recorded under a memo account and 12,497 deferred stock units
distributed under the Director’s Deferred Compensation Plan. Deferred stock units, as permitted under the plan, are now reserved
out of the Stock Option Plan with 3,107 deferred stock units recorded under a memo account to date.
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 150% (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.
The following table summarizes, by performance
award type, the potential threshold and maximum stock units:
|
|
Threshold
|
|
|
Maximum
|
|
|
Threshold
|
|
|
Maximum
|
|
|
Threshold
|
|
|
Maximum
|
|
|
|
ANI
|
|
|
ANI
|
|
|
Revenue
|
|
|
Revenue
|
|
|
TSR
|
|
|
TSR
|
|
2010 Plan
|
|
|
25
|
%
|
|
|
125
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
%
|
|
|
150
|
%
|
2011 Plan
|
|
|
25
|
%
|
|
|
125
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
%
|
|
|
150
|
%
|
2012 Plan
|
|
|
25
|
%
|
|
|
125
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
%
|
|
|
150
|
%
|
2013 Plan
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
%
|
|
|
150
|
%
|
|
|
25
|
%
|
|
|
150
|
%
|
For 2013, each individual’s award
was allocated 50% to achieving revenue targets for the year in which the award was granted (Revenue Performance Award), and 50%
to the total stockholder 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 the award was granted, as well as the two subsequent fiscal years
(TSR Performance Award).
For 2012 and 2011, each individual’s
award was allocated 50% to achieving ANI targets for the year in which the award was granted (ANI Performance Award), and 50% to
the total stockholder 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 the award was granted, as well as the two subsequent fiscal years
(TSR Performance Award). The TSR awards granted in 2010 and 2011 were measured against the NASDAQ Internet Index and the
TSR awards granted in 2012 and 2013 were measured against the NASDAQ Software Index.
The awards will be earned based upon our
achievement of revenue, ANI and TSR targets, but will not vest unless the grantee remains continuously employed in active service
through the end of February of the third year following the grant date (approximately 36 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 Revenue Performance
Awards, the ANI Performance Awards and the TSR Performance Awards using the Black-Scholes-Merton and Monte Carlo valuation pricing
models, respectively. Revenue awards are expensed starting in the month of grant, as it is deemed probable that we will achieve
a portion of the Revenue targets for the respective grant. 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, 2013, 2012 and 2011:
Revenue Performance Awards
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
Target
|
|
|
|
|
|
Percent of
|
|
|
PSUs Based on
|
|
|
End of
|
|
|
|
|
Number
|
|
|
Cancelled
|
|
|
Goal
|
|
|
Goal
|
|
|
Measurement
|
|
|
Grant Date
|
|
of PSUs
|
|
|
PSUs
|
|
|
Achieved
|
|
|
Achievement
|
|
|
Period
|
|
Vest Date
|
3/4/2013
|
|
|
36,948
|
|
|
|
—
|
|
|
|
118
|
%
|
|
|
43,596
|
|
|
12/31/2013
|
|
2/28/2016
|
ANI Performance Awards
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
Target
|
|
|
|
|
|
Percent of
|
|
|
PSUs Based on
|
|
|
End of
|
|
|
|
|
Number
|
|
|
Cancelled
|
|
|
Goal
|
|
|
Goal
|
|
|
Measurement
|
|
|
Grant Date
|
|
of PSUs
|
|
|
PSUs
|
|
|
Achieved
|
|
|
Achievement
|
|
|
Period
|
|
Vest Date
|
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
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
Target
|
|
|
|
|
|
Percent of
|
|
|
PSUs Based on
|
|
|
End of
|
|
|
|
|
Number
|
|
|
Cancelled
|
|
|
Goal
|
|
|
Goal
|
|
|
Measurement
|
|
|
Grant Date
|
|
of PSUs
|
|
|
PSUs
|
|
|
Achieved
|
|
|
Achievement
|
|
|
Period
|
|
Vest Date
|
2/24/2011
|
|
|
43,290
|
|
|
|
**
|
|
|
|
150
|
%
|
|
|
64,934
|
|
|
12/31/2013
|
|
1/31/2014
|
2/28/2012
|
|
|
35,495
|
|
|
|
—
|
|
|
|
N/A
|
|
|
|
—
|
|
|
12/31/2014
|
|
1/31/2015
|
3/4/2013
|
|
|
35,065
|
|
|
|
—
|
|
|
|
N/A
|
|
|
|
—
|
|
|
12/31/2015
|
|
2/28/2016
|
** - In 2011, 4,630 of 2011 TSR Performance Awards were cancelled and subsequently reissued.
|
The total grant date fair value of the
Revenue Performance Awards granted during the year ended December 31, 2013 was $1.1 million. The total grant date fair value of
the ANI Performance Awards granted during the years ended December 31, 2012 and 2011 was $1.0 million and $0.9 million, respectively.
The total grant date fair value of the TSR Performance Awards granted during the years ended December 31, 2013, 2012 and 2011 was
$1.1 million, $1.0 million and $1.0 million, respectively.
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. 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. The expected life was determined by means of Monte-Carlo
simulations. 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. Income Taxes
The components of our income before provision
for income taxes for the years ended December 31, 2013, 2012 and 2011, is as follows (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
United States
|
|
$
|
(8,694
|
)
|
|
$
|
21,091
|
|
|
$
|
55,376
|
|
Canada
|
|
|
13,261
|
|
|
|
11,612
|
|
|
|
7,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before provision for income taxes
|
|
$
|
4,567
|
|
|
$
|
32,703
|
|
|
$
|
62,732
|
|
The components of our (provision for) benefit
from income taxes for the years ended December 31, 2013, 2012 and 2011, is as follows (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(4,993
|
)
|
|
$
|
(6,859
|
)
|
|
$
|
1,108
|
|
State and local
|
|
|
(1,155
|
)
|
|
|
(1,767
|
)
|
|
|
(454
|
)
|
Canada
|
|
|
(3,864
|
)
|
|
|
(2,872
|
)
|
|
|
(1,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax
|
|
|
(10,012
|
)
|
|
|
(11,498
|
)
|
|
|
(967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
8,892
|
|
|
|
(1,131
|
)
|
|
|
1,412
|
|
State and local
|
|
|
2,069
|
|
|
|
729
|
|
|
|
2,232
|
|
Canada
|
|
|
378
|
|
|
|
(349
|
)
|
|
|
(274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax
|
|
|
11,339
|
|
|
|
(751
|
)
|
|
|
3,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision for) benefit from income taxes, net
|
|
$
|
1,327
|
|
|
$
|
(12,249
|
)
|
|
$
|
2,403
|
|
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, 2013 and 2012 consisted of the amounts shown below (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
8,877
|
|
|
$
|
10,266
|
|
Stock-based compensation
|
|
|
17,525
|
|
|
|
17,416
|
|
Acquired intangibles
|
|
|
8,010
|
|
|
|
13,809
|
|
Tax credits
|
|
|
4,433
|
|
|
|
3,516
|
|
Capital loss
|
|
|
673
|
|
|
|
887
|
|
Deferred revenue
|
|
|
3,495
|
|
|
|
2,736
|
|
Sales and receivables allowances
|
|
|
2,469
|
|
|
|
1,697
|
|
Other
|
|
|
4,540
|
|
|
|
1,790
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
50,022
|
|
|
|
52,117
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Acquired Intangibles
|
|
|
(24,362
|
)
|
|
|
(28,194
|
)
|
Capitalized software and website development
|
|
|
(10,532
|
)
|
|
|
(7,600
|
)
|
Depreciation and amortization
|
|
|
(8,640
|
)
|
|
|
(9,993
|
)
|
Investments in disposed subsidiaries
|
|
|
(28,595
|
)
|
|
|
(31,565
|
)
|
Other
|
|
|
(5,342
|
)
|
|
|
(3,047
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax (liabilities)
|
|
|
(77,471
|
)
|
|
|
(80,399
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax (liabilities), net
|
|
|
(27,449
|
)
|
|
|
(28,282
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation allowance
|
|
|
(3,270
|
)
|
|
|
(4,094
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax (liabilities), net
|
|
$
|
(30,719
|
)
|
|
$
|
(32,376
|
)
|
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 and $1.3 million as of December 31, 2013 and 2012, respectively, and net operating losses of $7.2 million as of
December 31, 2013 and $4.7 million as December 31, 2012, 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 $4.0 million
as of December 31, 2013 and approximately $3.1 million as of December 31, 2012, if and when the carryovers and net operating losses
are utilized.
As of December 31, 2013, our remaining
deferred tax valuation allowance of $3.3 million consisted of $1.2 million for foreign tax credits, $1.4 million for separate state
net operating losses and $0.7 million for capital loss carry forward and other adjustments. 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, 2013 and 2012, we
had U.S. federal net operating loss carryforwards of $25.6 million and $29.5 million, respectively, of which $4.2 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, 2013 and 2012, we had
U.S. federal foreign tax credit carryovers of $1.2 million and $2.0 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, 2013, 2012 and 2011, is as follows:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Pre-tax book income
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes
|
|
|
(7.5
|
)
|
|
|
2.5
|
|
|
|
1.5
|
|
Foreign rate differential
|
|
|
(25.3
|
)
|
|
|
(2.6
|
)
|
|
|
(1.1
|
)
|
Non-deductible expenses
|
|
|
7.3
|
|
|
|
0.5
|
|
|
|
0.2
|
|
Valuation allowance
|
|
|
(19.0
|
)
|
|
|
(0.5
|
)
|
|
|
(36.9
|
)
|
Deferred tax liability impact of disposals and contributions
|
|
|
—
|
|
|
|
3.7
|
|
|
|
0.6
|
|
Adjust tax balances for filed returns
|
|
|
(2.2
|
)
|
|
|
(0.6
|
)
|
|
|
(1.9
|
)
|
Transaction costs
|
|
|
9.9
|
|
|
|
—
|
|
|
|
—
|
|
General business credits
|
|
|
(33.9
|
)
|
|
|
—
|
|
|
|
(0.6
|
)
|
Executive compensation
|
|
|
7.8
|
|
|
|
0.8
|
|
|
|
0.2
|
|
State rate change
|
|
|
—
|
|
|
|
(1.5
|
)
|
|
|
—
|
|
Other
|
|
|
(1.2
|
)
|
|
|
0.2
|
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(29.1
|
)%
|
|
|
37.5
|
%
|
|
|
(3.8
|
)%
|
The change in effective tax rate for
2013 from 2012 is primarily due to the benefit from general business credits, changes in earnings mix, and the decrease in
valuation allowance, including the impact of approved federal filing adjustments. 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 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 $31.5 million of foreign subsidiaries’ undistributed earnings as of December 31, 2013
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.
Other
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.
We file a consolidated U.S. income tax return
and tax returns in various state and local jurisdictions. The Internal Revenue Service 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. We have agreed to various adjustments which are included in the
current year provision for income taxes, and are awaiting a final report. New York has concluded their review of our 2006 (amended)
and 2007 state tax returns and is currently reviewing our 2008 and 2009 state returns. California has concluded their review of
our amended returns filed for 2004, 2005 and 2006. In addition, we are appealing Pennsylvania’s assessment to our 2007, 2008
and 2009 tax return filings. Certain of our subsidiaries also file income tax returns in Canada. The Canadian Revenue Agency has
completed their review of our 2009 and 2010 tax return filings with no significant adjustments. 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 December 31, 2013 and 2012, accrued interest and penalties related to tax positions
taken on our tax returns is approximately $0.1 million and $0.1 million, respectively.
A year-over-year reconciliation of our liability
for uncertain tax positions is as follows (in thousands):
Balance as of January 1, 2011
|
|
$
|
1,031
|
|
Additions
|
|
|
244
|
|
Settlements
|
|
|
(482
|
)
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
$
|
793
|
|
|
|
|
|
|
Balance as of January 1, 2012
|
|
$
|
793
|
|
Additions
|
|
|
226
|
|
Expired statute of limitations / settlements
|
|
|
(136
|
)
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
883
|
|
|
|
|
|
|
Balance as of January 1, 2013
|
|
$
|
883
|
|
Additions
|
|
|
292
|
|
Expired statute of limitations / settlements
|
|
|
(249
|
)
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
$
|
926
|
|
As of December 31, 2013, 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.
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, 2013, 2012 and 2011 is approximately 9%, 10% and 9% of our revenue, respectively. Long-lived assets in Canada
were $39.7 million, $44.8 million and $35.5 million as of December 31, 2013, 2012 and 2011, respectively.
Supplemental disclosure of revenue by service
type for the years ended December 31, 2013, 2012 and 2011, is as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Transaction services revenue
|
|
$
|
276,861
|
|
|
$
|
225,011
|
|
|
$
|
184,892
|
|
Subscription services revenue
|
|
|
181,731
|
|
|
|
145,148
|
|
|
|
146,621
|
|
Other
|
|
|
22,942
|
|
|
|
18,713
|
|
|
|
21,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
481,534
|
|
|
$
|
388,872
|
|
|
$
|
353,294
|
|
17. 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, 2013, 2012 and 2011, was $7.9 million, $7.4 million and $7.3 million, respectively.
Future minimum rental payments under the
non-cancelable operating leases are as follows (in thousands):
Years Ending December 31,
|
|
|
|
2014
|
|
$
|
10,863
|
|
2015
|
|
|
9,327
|
|
2016
|
|
|
7,952
|
|
2017
|
|
|
6,299
|
|
2018
|
|
|
5,943
|
|
Thereafter
|
|
|
11,943
|
|
|
|
|
|
|
Total
|
|
$
|
52,327
|
|
We are in the process of negotiating a lease
to move our corporate headquarters in Lake Success, New York, to a nearby property due to our expansion and growth. We are expecting
to buy-out our existing lease for approximately $4 million. The annual rental payments for the headquarters included above are
approximately $2.8 million per year through 2018.
Capital Leases
The following is an analysis of the leased
property under capital leases by major property class as of December 31, 2013 and 2012 (in thousands):
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Computer and office equipment
|
|
$
|
407
|
|
|
$
|
351
|
|
Furniture and fixtures
|
|
|
—
|
|
|
|
107
|
|
|
|
|
407
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(83
|
)
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
Total capital leases, net
|
|
$
|
324
|
|
|
$
|
279
|
|
Future minimum rental payments under the
capital leases are as follows (in thousands):
Years Ending December 31,
|
|
|
|
2014
|
|
$
|
100
|
|
2015
|
|
|
98
|
|
2016
|
|
|
74
|
|
2017
|
|
|
32
|
|
2018
|
|
|
—
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
304
|
|
Less: Amount representing taxes, included in total minimum lease payments
|
|
|
(24
|
)
|
|
|
|
|
|
Net minimum lease payments
|
|
|
280
|
|
Less: Amount representing interest
|
|
|
—
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
280
|
|
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 were to be applied against fees that were charged in connection with their purchase of certain future products or services
of Dealertrack. These service credits were to expire on December 31, 2015. The service credits were recorded as a reduction in
revenue as they were utilized. For the years ended December 31, 2013, 2012 and 2011, we recorded contra revenue related to the
service credits of $0.6 million, $0.8 million and $0.9 million, respectively. As of December 31, 2013, none of the service credits
remain.
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 9 for additional contingencies
resulting from our completed business combinations.
Refer to Note 20 in regards to certain
commitment and contingencies related to our definitive agreement to acquire Dealer.com.
Retail Sales Tax
On
an
ongoing basis, various tax jurisdictions in the United States and Canada 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. In June 2013, an administrative hearing was held on this matter and a decision upholding the original
assessment was issued in August 2013. This decision is not considered a final ruling. In September 2013, we filed a complaint with
the state tax court requesting that the decision be vacated. As of December 31, 2013, we have not accrued any amounts related to
this assessment as we believe that our position on this matter is correct. We have estimated that potential additional assessments
of $0.7 million may exist for periods subsequent to the assessment period based upon a calculation consistent with the pending
assessment. We are not able to estimate an amount for penalties due, if any.
Employment Agreements
Pursuant to employment or severance agreements
with certain team members, we have a commitment to pay severance of approximately $6.3 million as of December 31, 2013, 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
$2.4 million as of December 31, 2013.
Legal Proceedings
From time to time,
we are a party to litigation matters arising in connection with the ordinary course of business, none of which is expected to have
a material adverse effect on our financial position, results of operations or cash flows. There are no litigation matters exclusive
of those arising in connection with the ordinary course of our business.
18. 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, 2013, 2012 and 2011, we recorded contra-revenue related to revenue earned from the
Ally strategic relationship of $3.1 million, $3.1 million and $3.2 million, respectively.
In February 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. The workflow solution is expected to rollout in multiple phases with the first phase to
launch in 2014. As part of the agreement, Dealertrack has agreed to reimburse AHFC up to $11.0 million of qualified expenses on
an as incurred basis, in connection with development, implementation, and integration of the solution over the first three years
of the agreement. These payments will be recorded as deferred costs and will be recognized as a reduction of revenue (contra-revenue)
over the term of the agreement commencing with the launch. As of December 31, 2013, $0.3 million of qualified expenses were paid.
An additional $5.0 million of qualified expenses were paid in January 2014.
As of December 31, 2013, $8.6 million of
the payments to Ally, Honda and other customers remain to be amortized as contra-revenue, of which, $4.9 million are recorded in
prepaid expenses and other current assets and $3.7 million are recorded in other long-term assets. As of December 31, 2012, $12.6
million of payments remained to be amortized as contra-revenue, of which, $4.4 million was classified in prepaid expenses and other
current assets and $8.2 million in other long-term assets.
19. 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 our equity method
investment in Chrome Data Solutions, see Note 8.
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 8.
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. In February 2014, we signed agreements to sell all of shares in TrueCar.
The sale of our shares in TrueCar, Inc. did not give rise to any obligations to pay TrueCar any portion of the consideration received
from the sale.
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.
20. Acquisition of Dealer.com
In December 2013, we announced a definitive
agreement to acquire Dealer Dot Com, Inc. (Dealer.com), a leading provider of marketing and operations software and services for
the automotive industry. Established in 1998, Dealer.com is a pioneer in bringing automotive dealerships online. The company has
grown to 830 employees across its Burlington, Vermont, headquarters and Manhattan Beach, California, office, and serves approximately
7,000 U.S. dealers with its integrated suite of products.
Under the terms of the agreement, we will
acquire all the equity of Dealer.com for approximately 8.7 million shares of our common stock and approximately $620 million in
cash, subject to customary post-closing adjustments. We expect to finance the cash portion of the purchase price through cash on
hand and with fully committed debt financing. The acquisition, which is no longer subject to regulatory approval, is expected to
close in the first quarter of 2014.
Upon termination of the definitive agreement,
under specified circumstances involving a failure by the debt financing sources to fund the debt financing, we will be required
to pay a termination fee equal to $25.0 million.
We expect to finance the cash portion of
the merger consideration through a combination of new senior secured facilities and cash on hand and have received a commitment
letter from JPMorgan Chase Bank, N.A., Bank of America, N.A., Barclays Bank PLC, and Wells Fargo Bank, National Association to
provide up $825 million in senior secured debt financing, including up to $575 million under a senior first priority term loan
facility and up to $200 million under a senior first priority secured revolving credit facility. The commitment letter is subject
to customary conditions to consummation. We have agreed to pay the financing banks certain fees in connection with the commitment
letter and have agreed to indemnify the financing banks against certain liabilities.
We expensed approximately $2.4 million of
professional fees associated with the acquisition in the three and twelve months ended December 31, 2013. Exclusive of financing
banks fees, we expect additional professional fees of $6.0 million to be incurred.
21. Subsequent Events
In February 2014, we signed agreements to
sell all of our shares in TrueCar. We expect to receive proceeds of $92.5 million from the sale of the shares, which have a carrying
value of $82.7 million. We expect this to result in an estimated pre-tax gain of $9.8 million. We expect to pay approximately $22
million of cash taxes on the sale on a taxable gain of $58.8 million. The closing of the transaction is subject to customary closing
conditions and is expected to be completed in the first quarter of 2014. We intend to use the net after-tax proceeds from the sale
as part of the purchase consideration for the acquisition of Dealer.com.