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Dealertrack Technologies, Inc 10-K 2010 Documents found in this filing:UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-K
(Mark
One)
For
the fiscal year ended December 31, 2009
or
Commission
file number 000-51653
DEALERTRACK
HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)\
1111
Marcus Ave., Suite M04
Lake
Success, NY 11042
(Address
of principal executive offices, including zip code)
(516) 734-3600
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes o No þ
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant as of June 30, 2009, the last business day
of the registrant’s most recently completed second fiscal quarter, was
approximately $679 million (based on the closing price for the registrant’s
common stock on the NASDAQ Global Market of $16.99 per share).
As of February 1, 2010, 40,070,756 shares of the registrant’s
common stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The Registrant intends to file a proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended
December 31, 2009. Portions of such proxy statement are incorporated by
reference into Part III of this Annual Report on Form 10-K.
TABLE
OF CONTENTS
2
PART
I
Item 1. Business>
Certain statements in this Annual
Report on Form
10-K are
“forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These
statements involve a number of risks, uncertainties and other factors that could
cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by
these forward-looking statements. Factors which could materially affect such
forward-looking statements can be found in the section entitled “Risk Factors”
in Part 1, Item 1A in this Annual Report on Form 10-K. Investors are urged to
consider these factors carefully in evaluating the forward-looking statements
and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements made herein are only made as of the
date hereof and we will undertake no obligation to publicly update such
forward-looking statements to reflect subsequent events or
circumstances.
References in this Annual Report
on Form 10-K
to “DealerTrack,” the
“Company,” “our” or “we” are to DealerTrack Holdings, Inc., a Delaware
corporation, and/or its subsidiaries.
Overview
DealerTrack’s
intuitive and high-value software solutions enhance efficiency and profitability
for all major segments of the automotive retail industry, including dealers,
lenders, OEMs, agents and aftermarket providers. We believe our solution set for
dealers is the industry’s most comprehensive. DealerTrack operates the
industry’s largest online credit application network, connecting approximately
17,000 dealers with over 800 lenders. Our dealer management system (DMS)
provides dealers with easy-to-use tools with real-time data access that will
streamline any automotive business. With our inventory management solution
(DealerTrack AAX), dealers get better data along with the tools to make smarter,
more profitable inventory decisions. Our sales and finance and insurance
(F&I) solution enables dealers to streamline the entire sales process,
quickly structuring all types of deals from a single integrated platform.
DealerTrack’s compliance solution helps dealers meet legal and regulatory
requirements and protect their hard-earned assets. DealerTrack’s family of
companies also includes data, accessories and consulting services
providers, Automotive Lease Guide (ALG) and Chrome Systems
(Chrome).
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 Automotive Lease Guide (alg), Inc., Chrome Systems,
Inc., DealerTrack Aftermarket Services, Inc., DealerTrack Canada, Inc.,
DealerTrack Digital Services, Inc., DealerTrack, Inc., and DealerTrack Systems,
Inc.
We
maintain a website at www.dealertrack.com. We make
available, free of charge through our website, our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits
thereto, and any amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable
after the reports are electronically filed with, or furnished to the Securities
and Exchange Commission (the “SEC”). Our reports that are filed with, or
furnished to, the SEC are also available at the SEC’s website at www.sec.gov. You may also
obtain copies of any of our reports filed with, or furnished to, the SEC, free
of charge, at the SEC’s public reference room at 100 F Street, N.E., Washington,
DC 20549.
Our
Market
Historically,
dealers had traditionally relied upon fax and mail delivery methods for
processing their financing and insurance offerings. This method produced lengthy
processing times and increased the cost of assisting the consumer to obtain
financing or insurance. For example, legacy paper systems required the consumer
to fill out a paper credit application for each of the lenders to which he or
she applied. The dealer then faxed the credit application to each lender and
awaited a series of return faxes. When a lender approved the consumer’s credit
application, the consumer manually signed a paper finance or lease contract with
the dealer, who then delivered it with ancillary documents to the lender via
mail or overnight courier. The lender then manually checked the contract for any
errors or omissions and if the contract or ancillary documents were accurate and
complete, the lender paid the dealer for the assignment of the contract. The
cumbersome nature of this process can limit the range of options available to
consumers and delay the availability of financing. In addition, the sale of
insurance and warranty products can be hindered by dealers consulting
out-of-date paper program catalogues and not being aware of all of the insurance
programs and other aftermarket sales opportunities available to offer the
consumer.
Dealers
have also employed technology to address inefficiencies in a variety of their
other traditional workflow processes. For example, dealers have made significant
investments in DMS software to streamline their back office functions, such as
accounting, inventory, communications with manufacturers, parts and service, and
have deployed customer relationship management (CRM) software to track consumer
behavior and maintain active post-sale relationships with consumers to increase
aftermarket sales and future automobile sales. However, these DMS and CRM
software systems typically reside within the physical dealership and have not
historically been fully integrated with each other, resulting in new
inefficiencies. These inefficiencies slow the sales and customer management
process, as different and sometimes contradictory information is recorded on
separate systems. In addition, key information about the consumer may not be
provided to the salesperson on the sales floor although it may exist in one of
the dealers’ systems. 3
In contrast to most dealer legacy systems, our low cost, high value
web-based solutions are generally open and flexible. Our network improves
efficiency and reduces processing time for dealers, lenders, and other
participants, and integrates the products and services of third-party service
and information providers, such as credit reporting agencies and aftermarket
providers. We primarily generate revenue on either a transaction or subscription
basis, depending on the customer and the product or service
provided.
DealerTrack
also addresses the inefficiencies in the process in which dealers manage their
used vehicles. The procedures to appraise, accept trade ins, market, source and
dispose of vehicles have generally been manual procedures not supported by
sophisticated technology. DealerTrack AAX assists a dealerships’ need to more
effectively manage its used vehicle inventory and increase profits at the
same time.
Our
Customers
We believe our suite of integrated on-demand software addresses
many of the inefficiencies in the automotive retail value chain and delivers
benefits to dealers, lenders, OEM’s, aftermarket providers, and other service
and information providers.
We offer franchised and independent dealers a suite of low-cost
on-demand DMS, inventory management, sales, F&I and compliance solutions
that significantly shorten financing processing times, increase efficiencies
across the dealership, and allow dealers to spend more time selling
automobiles.
Our automated, web-based credit application-processing product
allows automotive dealers to originate and route their consumers’ credit
application information. This product has eliminated the need to fax a paper
application to each lender to which a consumer applies for financing. Once a
dealer enters a consumer’s information into our system, the dealer can
distribute the credit application data electronically to one or multiple lenders
and obtain credit decisions quickly and efficiently. This service is free to our
dealer customers.
We offer a comprehensive DMS, allowing dealers to manage functions
across their entire business, and a complete suite of other subscription
solutions that complement our credit application processing product, allowing
dealers to integrate and better manage their business processes. We offer a
compliance solution that helps dealers comply with red flags regulations and
offers reporting functions. Additionally, DealerTrack AAX helps dealers manage
their inventory and pricing and our sales and F&I solutions streamline the
vehicle and aftermarket sales processes. Included in our sales and F&I
solutions are products that allow dealers and consumers to complete finance
contracts electronically, which a dealer can then transmit to participating
lenders for funding, further streamlining the financing process and reducing
transaction costs for both dealers and lenders. We give each dealership the
ability to select the specific tools they need to reduce costs, increase profits
and sell more vehicles.
Lenders
Our on-demand credit application processing and electronic
contracting products eliminate expensive and time-consuming inefficiencies in
legacy paper systems, and thereby decrease lenders’ costs of originating loans
or leases. We also offer a contract-processing solution, which can provide
lenders with retail automotive contracts and related documents in a digital or
electronic format. We believe our solutions significantly streamline the
financing process and improve the efficiency and/or profitability of each
financing transaction. We electronically transmit complete credit application
and contract data, reducing costs and errors and improving efficiency for both
prime and non-prime lenders. We also believe that our credit application
processing product enables our lender customers to increase credit originations.
Our network is configured to enable our lender customers to connect easily with
dealers with whom they can establish new business relations. We believe that
lenders that utilize our solutions experience a significant competitive
advantage over lenders that rely on the legacy paper and fax
processes.
OEM’s
We offer
vehicle manufacturers comprehensive technology and consulting solutions to
improve brand health, increase vehicle and accessories sales, and streamline
interactions with franchised dealerships. Our solutions help improve residual
vehicle values and consumer brand perception with automotive OEM consulting
services and tools from ALG. Our solutions boost the selling power of a
dealer website and maximize accessories sales with fully functional and
customizable build, price and competitive-comparison solutions from
Chrome. In addition, DealerTrack DMS streamlines manufacturer
interactions by integrating warranty claims, part orders and returns, and
financial statement submission.
Aftermarket Providers
The
DealerTrack Aftermarket Network™ gives dealers access to real-time contract
rating information and quote generation, and provides digital contracting for
aftermarket products and services. The aftermarket sales and contracting process
was previously executed through individual aftermarket providers’ websites or
through a cumbersome paper-based process prone to frequent delays and errors.
Our on-demand connection between dealers and aftermarket providers creates a
faster process, improves accuracy, and eliminates duplicate data entry for both
dealers and aftermarket providers. We believe this more efficient process
combined with the use of our on-demand electronic menu product makes it possible
for dealers to more effectively sell aftermarket products and
services. 4
Other Service and Information Providers
We believe that our software as a service model is a superior
method of delivering products and services to our customers. Our web-based
solutions enable third-party service and information providers to deliver their
products and services more broadly and efficiently, which increases the value of
our integrated solutions to our dealer customers. We believe we offer our
third-party service and information providers a secure and efficient means of
delivering their data to our dealer and lender customers. For example, the
credit reporting agencies can provide dealers with consumers’ credit reports
electronically and integrate the delivery of the prospective consumers’ credit
reports with our credit application processing and other products. Additionally,
our inventory management solution integrates real time pricing data and
wholesale auction data to give dealers access to available market
information.
Our
Web-based Network
Our web-based network is independent and does not give
any single lender preference over any other lender. Each dealer sees its
individualized list of available lenders listed alphabetically, based on our
proprietary matching process, and can transmit credit application information
simultaneously to multiple lenders that they select. Lenders’ responses to
requests for financing through our network are presented back to the dealer in
their order of response.
Our
Growth Strategy
Our growth strategy is to leverage our position as a leading
provider of on-demand software solutions to the U.S. and Canadian automotive
retail industries. Key elements of our growth strategy are:
Expand Our Customer Base
We intend to increase our market penetration by expanding our
automotive dealer and lender customer base through the efforts of our direct
sales force. While as of December 31, 2009 we had over 800 active lender
customers in the United States, we will focus on adding select regional banks,
credit unions, financing companies, and the captive financing affiliates of
automotive manufacturers to our network. We also intend to increase the number
of other service and information providers in our networks by adding, among
others, insurance and other aftermarket service providers. Additionally, we have
increased our installation capacity for our DMS business in order to expand our
customer base for that solution.
Sell Additional Products and Services to Our Existing Customers
We believe that a significant market opportunity exists for us to
sell additional products and services to our approximately 17,000 active dealer
customers that utilize our credit application processing product, and have
purchased one or more of our subscription-based products or services. Similarly,
the over 800 lenders that utilize our U.S. credit application processing network
represent a market opportunity for us to sell our electronic and digital
contracting solutions.
Expand Our Offerings
We expect to expand our suite of products and services to address
the evolving needs of our customers. We market our products as four integrated
solutions: DMS, Inventory Management, Sales and F&I, and Compliance. We have
identified a number of opportunities to leverage our network of relationships
and our core competencies to benefit dealers, lenders and other service and
information providers. For example, we expanded our DMS solution through the
integration of OEM dealer communication systems specifically for Audi, Hyundai,
and Kia, provided significant enhancements for Honda and General
Motors in the United States and introduced our DMS in Canada. We are committed
to being an open technology partner with our dealers and further integrating our
solutions with third parties to meet their needs. We also are continuing to add
reporting capability to our compliance solution and third-party integrations to
our inventory management solution.
Pursue Acquisitions and Strategic Alliances
We have augmented the growth of our business by completing
strategic acquisitions. In executing our acquisition strategy, we have focused
on identifying businesses that we believe will increase our market share or that
have products, services and technology that are complementary to our product and
service offerings. We believe that our success in completing these acquisitions
and integrating them into our business has allowed us to maintain our leadership
position in the industry, enhance our network of relationships and accelerate
our growth. We intend to continue to grow and advance our business through
acquisitions and strategic alliances. We believe that acquisitions and strategic
alliances will allow us to enhance our product and service offerings, sell new
products using our networks, strengthen technology offerings and/or increase our
market share.
5
Our
Solutions
DealerTrack
markets its dealer-facing solutions under the DealerTrack Performance Suite
umbrella brand. The solutions fit within four categories: DMS, Inventory, Sales
and F&I, and Compliance.
Each of
our four integrated solutions are supported by our Data Services, which include
ALG Data Services, Chrome New Vehicle Data, Chrome VIN Match, Chrome Construct,
Automotive Description Services, Chrome IQ, Chrome BookLink, Chrome Carbook
Showroom ®, PC Carbook ®, Carbook Fleet Edition, Chrome Accessories Solution and
Chrome Interactive Media. We generally charge our customers a subscription fee
to use these products.
6
We generally charge dealers a monthly subscription fee for each of
our solutions. A transaction fee is generally charged to our lender customers
for each credit application that dealers submit to them and for each financing
contract executed via our electronic contracting and digital contract processing
solution, as well as for any portfolio residual value analyses we perform for
them. We charge a transaction fee to the dealer or credit report provider for
each fee-bearing credit report accessed by dealers. We charge transaction fees
to aftermarket providers for each aftermarket contract executed and delivered to
them from our network.
DMS Solution:
DealerTrack DMS —DealerTrack
DMS is a dealer management system that gives dealers control of their business
across every department. It is an open platform that allows dealers to integrate
and manage all the primary functions of their store operations including:
vehicle sales, portfolio management, showroom management, service department,
general ledger, automated dispatching, parts inventory and invoicing, electronic
repair order, service price guides, vehicle inventory, contact management,
payroll and personnel management.
Inventory Management Solution:
DealerTrack AAX ® —
DealerTrack AAX is a full-featured inventory system. Dealers can identify
high-profit, fast turning vehicles, quickly and easily adjust price to be more
competitive. The robust enterprise reporting is designed for multi-store
inventory optimization. Daily performance tracking is enabled by real time
reporting and custom built inventory modeling. Consulting services
optimize inventory management and enhance product performance. The solution also
includes functionality to help a dealer appraise vehicles, source vehicles and
access vehicle pricing recommendations, vehicle performance scores, as well as
dealership transactional history.
Sales and F&I Solution:
A dealer
can choose one or more of the sales and F&I solutions
subscriptions as listed below:
DealerTrack credit application
network — Our DealerTrack credit application network facilitates the
online credit application process by enabling dealers to transmit a consumer’s
credit application information to one or multiple lenders and obtain credit
decisions quickly and efficiently as well as pull credit bureau data. Generally,
our dealer customers maintain active relationships with numerous lenders. We
offer each lender customer the option to provide other value-added services to
dealers that facilitate the financing process, including dealer reserve
statements, payoff quotes, prospect reports for consumers nearing the end of
their current loan or lease and reports of current financing rates and
programs.
SalesMaker ™ —
SalesMaker is a profit management system enabling dealers to search the hundreds
of current lender programs in our database, and, within seconds, find the
financing or lease program that is best for a consumer and the most profitable
for the dealership. SalesMaker also assists dealers in finding financing for
consumers with low credit scores, while maximizing their own profit. In
addition, dealers can quickly pre-qualify prospective consumers and then match
the best lender program against their available inventory. SalesMaker represents
the integration and enhancement of our previous DeskLink and FinanceWizard
products.
BookOut — With BookOut, a
dealer can quickly and easily look up used automobile values by year/make/model
or vehicle identification number for use in the credit application process. We
currently offer separate BookOut subscriptions for data provided by Black Book,
Kelley Blue Book and NADA. These products facilitate the financing process by
providing dealers with reliable valuation information about the relevant
automobile. BookOut is also a product offering in the inventory management
solution.
DealerTrack eMenu ™ —
DealerTrack eMenu allows dealers to consistently present consumers with the full
array of insurance and other aftermarket product options they offer in a menu
format. The product also creates an auditable record of the disclosures to
consumers during the aftermarket sales process, helping to reduce dealers’
potential legal risks. DealerTrack eMenu is also a product offering in the
compliance solution.
DealerTrack Aftermarket
Network ™ — The DealerTrack Aftermarket Network provides real-time
aftermarket contract rating and quote generation from participating providers of
aftermarket products. Categories of aftermarket products represented on the
network include extended service contracts, GAP, etch, credit life and
disability insurance, and vehicle recovery systems. Since the DealerTrack
Aftermarket Network is fully integrated into the DealerTrack network, we expect
both dealers and aftermarket providers will benefit from improved accuracy and
elimination of duplicate data entry.
DealerTrack eContracting and
eDocs — Our DealerTrack eContracting product allows dealers to obtain
electronic signatures and transmit contracts and contract information
electronically to lenders that participate in eContracting. eContracting
increases the speed of the automotive financing process by replacing the
cumbersome paper contracting process with an efficient electronic process. Our
eDocs digital contract processing service receives paper-based contracts from
dealers, digitizes the contracts and submits them electronically to the
appropriate lender. Together, eDocs and eContracting enable lenders to create a
100% digital contract workflow.
DealTransfer® —
DealTransfer permits dealers to transfer transaction information directly
between select dealer management systems and our DealerTrack credit application
network with just a few mouse clicks. This allows dealers to avoid reentering
transaction information once the information is on any of the dealer’s
systems.
Compliance Solution:
DealerTrack Compliance
Solution ™ — DealerTrack compliance solution provides automotive dealers
with a safe and reliable method to sign, store and protect customer and
financing activity at the dealership. It also provides safeguards, such as
limited access to sensitive information based on a user’s role and permission,
to help reduce compliance risk by handling every customer financing deal
consistently. 7
DealerTrack eMenu ™ —
DealerTrack eMenu allows dealers to consistently present consumers with the full
array of insurance and other aftermarket product options they offer in a menu
format. The product also creates an auditable record of the disclosures to
consumers during the aftermarket sales process, helping to reduce dealers’
potential legal risks.
Data Services:
ALG Residual Value Guides —
ALG Residual Value Guides are the industry standard for the residual value
forecasting of vehicles. New car residual values are available in a national
percentage guide, as well as regional dollar guides. Lenders and dealers use ALG
Residual Value Guides as the basis to create leasing programs for new and used
automotive leases.
ALG Data Services — ALG is
the primary provider of vehicle residual value data to automotive industry
participants, including manufacturers, banks and other lenders, desking software
companies and automotive websites.
Chrome New Vehicle Data —
Chrome New Vehicle Data identifies automobile prices, as well as the standard
and optional equipment available on particular automobiles. Dealers provide
Chrome’s data on their websites and lenders use the data in making financing
decisions.
Chrome VINMatch — Chrome
VINMatch converts a nondescript VIN, or Vehicle Identification Number, into a
rich description of a vehicle. Chrome’s vehicle descriptions allow dealers
to get an accurate vehicle description and drill down to not only the year,
make, and model, but unearthing engine type, fuel system, and even GVWR
(Gross Vehicle Weight Ranges).
Chrome Construct — Chrome
Construct combines vehicle research, configuration and comparison tools into a
single web service. The data is provided and maintained by Chrome.
Chrome Automotive Description
Service (ADS) and ChromeIQ — Chrome ADS is a web service that turns a VIN
into a rich description of a vehicle, including prices, options, colors and
standard equipment. Chrome IQ converts batches of VINs into rich vehicle
descriptions.
Chrome BookLink— Chrome
BookLink allows customers to quickly and easily map between Chrome's New Vehicle
Data and a used book provider without having to implement, host, or update
mapping tables.
Chrome Carbook Showroom ®, PC Carbook ® and Carbook Fleet Edition —
Carbook Showroom, PC Carbook and Carbook Fleet Edition provide automotive
specification and pricing information. These products enable dealers, fleet
managers, financial institutions and consumers to specify and price a new and
used automobile online, which helps promote standardized information among these
parties and facilitates the initial contact between buyer and
seller.
Chrome Interactive Media —
Chrome Interactive Media includes vehicle still photographs and full motion
vehicle video for use on dealer and auto industry portal websites. The products
are used to present an accurate, high-impact view of vehicles to facilitate
sales.
Chrome Accessories Solution —
Chrome Accessories Solution provides OEMs with a complete digital marketing
and accessories sales system for their dealer network and websites. This
includes a catalog of accessories with eCommerce capabilities for dealer
websites and an in-showroom sales and fulfillment system.
International
Our subsidiary, DealerTrack Canada Inc., is a leading provider of
on-demand credit application and contract processing services to the indirect
automotive finance industry in Canada. Historically, we have provided our
Canadian customers with only our credit application and contract processing
products. In 2007, we began offering them select subscription products. For the
year ended December 31, 2009, 2008 and 2007, our Canadian operations
generated approximately 11%, 11% and 10% of our net revenue,
respectively.
Technology
Our technology platform is robust, flexible and extendable and is
designed to be integrated with a variety of other technology platforms. We
believe our open architecture is fully scalable and designed for high
availability, reliability and security. Product development expense for the
years ended December 31, 2009, 2008, and 2007 was $14.0 million,
$11.7 million and $9.8 million, respectively. Our technology includes
the following primary components:
Web-Based Interface
Our customers access our on-demand application products and
services through an easy-to-use web-based interface. Our web-based delivery
method gives us control over our applications and permits us to make
modifications at a single central location. We can easily add new functionality
and deliver new products to our customers by centrally updating our software on
a regular basis.
8
Partner Integration
We believe that our on-demand model is a uniquely suited method of
delivering our products and services to our customers. Our customers can access
our highly specialized applications on-demand, avoiding the expense and
difficulty of installing and maintaining them independently. Our lender
integration and partner integration use XML encoded messages. We are a member of
both Standards for Technology in Automotive Retail (STAR) and American
Financial Services Association (AFSA) and are committed to supporting
published standards as they evolve.
Infrastructure
Our technology infrastructure is hosted externally and consists of
production sites and a disaster recovery site. The production site for the
DealerTrack network and the DealerTrack DMS network are fully hardware
redundant. Our customers depend on the availability and reliability of our
products and services and we employ system redundancy in order to minimize
system downtime.
Security
We maintain high security standards with a layered firewall
environment and employ an intrusion detection system. Our firewalls and
intrusion detection system are both managed and monitored continuously by an
independent security management company. Our communications are secured using
secure socket layer 128-bit encryption. We also utilize a commercial software
solution to securely manage user access to our applications. All incoming
traffic must be authenticated before it is authorized to be passed on to the
application. Once a user has been authorized, access control to specific
functions within the site is performed by the application. Our access control
system is highly granular and includes the granting and revocation of user
permissions to functions on the site.
We maintain a certification from Verizon Cybertrust Security, a
leading industry security certification body, for the DealerTrack network. This
certification program entails a comprehensive evaluation of our security
program, including extensive testing of our website’s perimeter defenses. As a
result of this process, recommendations are made and implemented. The
certification program requires continual monitoring and adherence to critical
security policies and practices.
Customer
Development and Retention
Sales
Our sales resources are focused on four primary areas: dealers,
lenders, aftermarket providers, and other industry providers. Our sales
resources strive to increase the number of products and services purchased or
used by existing customers and also to sell products and services to new
customers. Our dealer sales resources focus on selling our subscription-based
products and services to dealers through field sales and telesales efforts, and
also support the implementation of subscription-based and transaction-based
products for dealers. Lender relationships are managed by a team that also
focuses on adding more lenders to our DealerTrack credit application network and
increasing the use of our eContracting and eDocs solutions. Relationships with
our aftermarket providers are managed by a team that also focuses on adding more
aftermarket providers to the network. Relationships with other providers
(including automotive manufacturers) are managed across various areas of our
organization.
Training
We believe that training is important to enhancing the DealerTrack
brand and reputation and increasing utilization of our products and services.
Training is conducted via telephone, the Internet and in person at the
dealership. In training our dealers, we emphasize utilizing our network to help
them increase profitability and efficiencies.
Marketing
Our marketing strategy is to establish our brand as the leading
provider of on-demand software solutions for dealers, lenders, OEM’s,
aftermarket providers and other industry providers. Our marketing approach is to
employ multiple off-line and on-line channels, targeted at key executives and
other decision makers within the automotive retail industry, such
as:
9
Customer
Service
We believe superior customer support is important to retaining and
expanding our customer base. We have a comprehensive technical support program
to assist our customers in maximizing the value they get from our products and
services and solving any problems or issues. We provide telephone support,
e-mail support and online information and consulting services about our products
and services. Our customer service group handles general customer inquiries,
such as questions about resetting passwords, how to subscribe to products and
services, the status of product subscriptions and how to use our products and
services, and is available to customers by telephone, e-mail or over the web.
Our technical support specialists are extensively trained in the use of our
products and services.
Customers
Our primary customers are dealers and lenders. Our network of
lenders includes national and regional prime, near prime and non-prime lenders;
regional and local banks, captive lenders and credit unions. As of
December 31, 2009, we had approximately 17,000 active dealers and over 800
lenders active in our network. The subscription agreements with our dealers
typically run for one to three years, with one-year automatic extensions, except
for our U.S. DMS agreements, which have more flexible terms. Our initial
agreements with our lender customers typically run for two years, with one-year
automatic extensions. No customer represented more than 10% of our revenue for
the year ended December 31, 2009.
Competition
The market for our solutions in the U.S. automotive retail industry
is highly competitive, fragmented and subject to changing technology, shifting
customer needs and frequent introductions of new products and services. Our
current principal competitors include:
DealerTrack
also competes with warranty and insurance providers, as well as software
providers, among others, in the market for menu-selling products and services.
Some of our competitors may be able to devote greater resources to the
development, promotion and sale of their products and services than we can to
ours, which could allow them to respond more quickly than we can to new
technologies and changes in customer needs. In particular, RouteOne, a joint
venture formed and controlled by Chrysler Financial Corporation (CFC), Ford
Motor Credit Corporation (FMCC), General Motors Acceptance Corporation (GMAC)
and Toyota Financial Services (TFS). RouteOne has relationships with CFC, FMCC
and TFS and other affiliated captive lenders that are not part of our network
and had an exclusive relationship with GMAC until February 10, 2010, when we
entered into a strategic relationship with GMAC. Under the terms of the
agreement, GMAC will be listed as a financing option on the DealerTrack credit
application processing network. GMAC will be available to General Motors and
Chrysler dealers, as well as dealers of other manufacturers that GMAC elects to
do business with. GMAC will continue to accept credit applications through
the RouteOne system. Additionally, on January 21, 2009, ADP, Inc. and Reynolds,
announced a joint venture, Open Dealer Exchange, who may have the ability to
build on its joint venture partner’s relationships in providing DMS software to
over 80% of U.S. franchised dealers. Our ability to remain competitive will
depend to a great extent upon our ability to execute our growth strategy, as
well as our ongoing performance in the areas of product development and customer
support.
10
Government
Regulation
The indirect automotive financing and automotive retail industries
are subject to extensive and complex federal and state regulations. Our
customers, such as banks, finance companies, savings associations, credit unions
and other lenders, and automotive dealers, operate in markets that are subject
to rigorous regulatory oversight and supervision. Our customers must ensure that
our products and services work within the extensive and evolving regulatory
requirements applicable to them, including those under the Consumer Credit
Protection Act, the Gramm-Leach-Bliley Act (the “GLB Act”), the FACT Act of
2003, the Federal Reserve Board’s regulations relating to consumer protection
and privacy, the Interagency Guidelines Establishing Information Security
Standards, the Interagency Guidance on Response Programs for Unauthorized Access
to Customer Information and Customer Notice, the Federal Trade Commission’s
(“FTC”) Privacy Rule, Safeguards Rule, and Consumer Report Information Disposal
Rule, Regulation AB, the regulations of the Federal Reserve Board, the Fair
Credit Reporting Act (“FCRA”) and other state and local laws and regulations. In
addition, entities such as the Federal Deposit Insurance Corporation, the Office
of the Comptroller of the Currency, the Office of Thrift Supervision, the
National Credit Union Administration and the FTC have the authority to
promulgate rules and regulations that may impact our customers, which could
place additional demands on us.
The role of our products and services in assisting our customers’
compliance with these requirements depends on a variety of factors, including
the particular functionality, interactive design, and classification of the
customer. We are not a party to the actual transactions that occur in our
network. Our lender, aftermarket provider and automotive dealer customers must
assess and determine what applicable laws and regulations require of them and
are responsible for ensuring that their use of our product and services conform
to their regulatory needs.
Consumer Privacy and Data Security Laws
Consumer privacy and data security laws on the federal and state
levels govern the privacy and security of consumer information generally and may
apply to our business in our capacity as a service provider for regulated
financial institutions and automotive dealers that are subject to the GLB Act
and applicable regulations, including the FTC’s Privacy Rule, Safeguards Rule
and Consumer Report Information Disposal Rule.
These laws and regulations restrict our customers’ ability to share
nonpublic personal consumer information with non-affiliated companies, as well
as with affiliates under certain circumstances. They also require certain
standards for information security plans and operations, including standards for
consumer information protection and disposal, and notices to consumers in the
event of certain security breaches. If we, a lender, an aftermarket provider or
a dealer experience a security breach resulting in unauthorized access to
consumer information provided through our network, we may be subject to claims
from such consumers or enforcement actions by state or federal regulatory
authorities.
Legislation is pending on the federal level and in most states that
could impose additional duties on us relating to the collection, use or
disclosure of consumer information, as well as obligations to secure that
information. Currently, 46 states have laws mandating notices to affected
consumers in the event of an actual or suspected unauthorized access to or use
of information contained within our system. In December 2009, the U.S. House of
Representatives passed a bill that would provide for a uniform national notice
policy for security breaches. The FTC and federal banking regulators have also
issued regulations requiring regulated financial institutions to obtain certain
assurances and contractual protections relating to the security and disposal of
information maintained by service providers such as us.
While we believe our current business model is consistent with
existing laws and regulations, emerging case law and regulatory enforcement
initiatives, as well as the passage of new laws and regulations, may limit our
ability to use information to develop additional revenue streams in the
future.
Fair Credit Reporting Act
The FCRA imposes limitations on the collection, distribution and
use of consumer report information and imposes various requirements on providers
and users of consumer reports and any information contained in such reports.
Among other things, the FCRA limits the use and transfer of information that
qualifies as a consumer report, and imposes requirements on providers of
information to credit reporting agencies and resellers of consumer reports with
respect to ensuring the accuracy and completeness of the information and
assisting consumers who dispute information in their consumer reports or seek to
obtain information involving theft of their identity. The communication or use
of consumer report information in violation of the FCRA could, among other
things, result in a provider of information or reseller of consumer reports
being deemed a consumer reporting agency, which would subject the provider or
reseller to all of the compliance requirements applicable to consumer reporting
agencies contained in the FCRA and applicable regulations. Willful violations of
the FCRA can result in statutory and punitive damages. A new regulation
requiring creditors to give risk-based pricing notices to certain consumers
whose credit score precluded them from getting the best terms for credit will
take effect on January 1, 2011.
State Laws and Regulations
The GLB Act and the FCRA contain provisions that preempt some state
laws to the extent the state laws seek to regulate the distribution and use of
consumer information. The GLB Act does not limit states’ rights to enact privacy
legislation that provides greater protections to consumers than those provided
by the GLB Act. The FCRA generally prohibits states from imposing any
requirements with respect only to certain specified matters and it is possible
that some state legislatures or agencies may limit the ability of businesses to
disclose consumer information beyond the limitations provided for in the GLB Act
or the FCRA. For example, almost all states permit consumers to “freeze” their
credit bureau files under certain circumstances and the three national credit
bureaus (Equifax, Experian and TransUnion) now give this right to all customers.
Our automotive dealer customers remain subject to the laws of their respective
states in such matters as consumer protection and unfair and deceptive trade
practices. Recently, certain states have passed laws requiring specific security
protections for maintaining or transmitting the personal information of state
residents.
11
Revised Uniform Commercial Code Section 9-105, E-SIGN and UETA
In the United States, the enforceability of electronic transactions
is primarily governed by the Electronic Signatures in Global and National
Commerce Act, a federal law enacted in 2000 that largely preempts inconsistent
state law, and the Uniform Electronic Transactions Act, a uniform state law that
was finalized by the National Conference of Commissioners on Uniform State Laws
in 1999 and has been adopted by almost every state. Case law has generally
upheld the use of electronic signatures in commercial transactions and in
consumer transactions where proper notice is provided and the consumer consents
to transact business electronically are obtained. The Revised Uniform Commercial
Code Section 9-105 (“UCC 9-105”) provides requirements to perfect security
interests in electronic chattel paper. These laws impact the degree to which the
lenders in our network use our electronic contracting (eContracting) product. We
believe that our eContracting product enables the perfection of a security
interest in electronic chattel paper by meeting the transfer of “control”
requirements of UCC 9-105. Certain of our financial institution clients have
received third-party legal opinions to this effect. However, this issue has not
been challenged in any legal proceeding. If a court were to find that our
eContracting product is not sufficient to perfect a security interest in
electronic chattel paper, or if existing laws were to change, our business,
prospects, financial condition and results of operations could be materially
adversely affected. Federal and state regulatory requirements imposed on our
lender customers, such as the SEC’s Regulation AB relating to servicers of
asset backed securities, may also result in our incurring additional expenses to
facilitate lender compliance regarding the use of our eContracting
product.
Internet Regulation
We are subject to federal, state and local laws applicable to
companies conducting business on the Internet. Today, there are relatively few
laws specifically directed towards online services. However, due to the
increasing popularity and use of the Internet and online services, laws and
regulations may be adopted with respect to the Internet or online services
covering issues such as online contracts, user privacy, freedom of expression,
pricing, fraud liability, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
Proposals currently under consideration with respect to Internet regulation by
federal, state, local and foreign governmental organizations include, but are
not limited to, the following matters: on-line content, user privacy,
restrictions on email and wireless device communications, data security
requirements, taxation, access charges and so-called “net neutrality”, liability
for third-party activities such as unauthorized database access, and
jurisdiction. Moreover, we do not know how existing laws relating to these
issues will be applied to the Internet and whether federal preemption of state
laws will apply.
Intellectual
Property
Our success depends, in large part, on our intellectual property
and other proprietary rights. We rely on a combination of patent, copyright,
trademark and trade secret laws, employee and third-party non-disclosure
agreements and other methods to protect our intellectual property and other
proprietary rights. In addition, we license technology from third
parties.
We have been issued a number of utility patents in the United
States and have patent applications pending in the United States, Canada and
Europe, including patents that relate to a system and method for credit
application processing and routing. We have both registered and unregistered
copyrights on aspects of our technology. We have a U.S. federal registration for
the mark “DealerTrack.” We also have U.S. federal registrations and pending
registrations for several additional marks we use and claim common law rights in
other marks we use. We also have filed some of these marks in foreign
jurisdictions. The duration of our various trademark registrations varies by
mark and jurisdiction of registration. In addition, we rely, in some
circumstances, on trade secrets law to protect our technology, in part by
requiring confidentiality agreements from our vendors, corporate partners,
employees, consultants, advisors and others.
Industry
Trends
We are
impacted by trends in both the automotive industry and the credit finance
markets. Our financial results are impacted by trends in the number
of dealers serviced and the level of indirect financing and leasing by our
participating lender customers, special promotions by automobile manufacturers
and the level of indirect financing and leasing by captive finance companies not
available in our network. The United States and global economies are currently
undergoing a period of economic uncertainty, and the financing environment,
automobile industry and stock markets are experiencing high levels of
volatility. The tightening of the credit markets has caused a significant
decline in the number of lending relationships between the various lenders and
dealers available through our network as dealers and financing sources have
exited the market, as well as reduced the total number of vehicles financed.
Purchases of new automobiles are typically discretionary for consumers and have
been, and may continue to be, affected by negative trends in the economy,
including the cost of energy and gasoline, the availability and cost of credit,
the declining residential and commercial real estate markets, reductions in
business and consumer confidence, stock market volatility and increased
unemployment. 2008 and 2009 have been the worst years for selling vehicles since
1982 and while automobile sales are expected to increase in 2010, they will
remain low as compared to historical levels. As a result of reduced car sales
and the general economic environment, two major automobile manufacturers,
Chrysler and General Motors have filed and emerged from bankruptcy in the past
year. This has had a significant impact on their franchised dealers both in
terms of dealer closing and the financial viability of their remaining dealers.
Toyota has suffered significant recalls that have limited its ability to sell
new vehicles for a period of time and potentially decreased the value of Toyota
used vehicles, whose impact on its dealer base remains to be seen. Additionally,
the impact of the
federal government’s Cash for Clunkers program, which occurred during the third
quarter of 2009, continued to be felt by us during the fourth quarter with
respect to both new and used car sales. The approximately 700,000 in
auto sales from the program resulted in a slight pull forward of new car
demand from the fourth quarter into the third quarter and a sharp decline in
used car sales during the fourth quarter due in large part to the fact that cars
traded in for the Cash for Clunkers program had to be destroyed, not resold, and
therefore supply of used cars was reduced. In addition, the supply of used
cars was negatively affected as some dealers faced cash flow issues due to the
difficulty in collecting the $3 billion in Cash for Clunker
program reimbursements from the government in a timely fashion, and were
therefore unable to buy as many used cars at auction. Together, these
factors have meaningfully impacted our transaction volume and subscription
cancellations compared to historical levels. We expect to continue to experience
challenges due to the ongoing adverse outlook for the credit markets and
automobile sales. In addition, volatility in our stock price and declines in our
market capitalization could impair the carrying value of our goodwill and other
long-lived assets. As a result, we may be required to write-off some of our
goodwill or long-lived assets if these conditions worsen for a period of
time. 12
Due to
the economic downturn, there has been continued automotive dealer consolidation
and the number of franchised automotive dealers declined in 2008 and further
declined in 2009. General Motors (GM), which filed for bankruptcy on June 1,
2009, has stated that it notified approximately 1,124 dealers prior to their
bankruptcy filing that one or more of their franchise licenses would be
terminated by October 2010 and there are industry reports that approximately an
additional 450 dealers may be terminated. In addition, GM announced on September
30, 2009 that it would shut down its Saturn division by next year after efforts
to sell the brand failed. There are approximately 350 Saturn dealerships in the
United States. Chrysler, which filed for bankruptcy on May 1, 2009, had
announced dealer reduction as a major aim, and 789 of its dealerships’ franchise
agreements were terminated on June 9, 2009. We cannot predict if the reduction
of GM’s and Chrysler franchises will be limited to the dealers that have
received notice to date. In addition, while Chrysler closures were made public,
GM has yet to publicly release the specific dealers impacted. While recent
federal legislation allowing for terminated GM and Chrysler dealers to seek
reinstatement may reduce the impact of the bankruptcies on the GM and Chrysler
franchised dealers on our business, it is unknown what, if any, effect such
legislation will have. As a result of these factors, we cannot predict the
timing and impact these dealership reductions will have on our subscription
products. As of December 31, 2009, approximately 1,522 Chrysler dealers and
2,905 GM dealers, which include 181 Saturn dealers, had subscriptions for one or
more of our products. The elimination by GM and Chrysler of dealers with
subscription products has led to an increase in cancellations and will most
likely result in additional cancellations of those subscriptions and
corresponding loss of revenue. Further, a reduction in the number of automotive
dealers reduces the number of opportunities we have to sell our subscription
products. Additionally, dealers who close their businesses may not pay the
amounts owed to us, resulting in an increase in our bad debt
expense.
Employees
As of December 31, 2009, we had approximately 1,200 employees.
None of our employees is represented by a labor union. We have not experienced
any work stoppages and believe that our relations with our employees are
good.
Item 1A. Risk
Factors>
You should
carefully consider the following risk factors, as well as the more detailed
descriptions of our business elsewhere in this Annual Report on Form 10-K . The risks described below are not
the only ones we face. Additional risks not presently known to us or that we
currently deem immaterial may also materially adversely affect our business,
prospects, financial condition or results of operations. Our business,
prospects, financial condition or results of operations could be materially and
adversely affected by the following:
Economic trends that affect the automotive retail industry or the indirect
automotive financing industry may have a negative effect on our
business.
Economic trends that negatively affect the automotive retail
industry or the indirect automotive financing industry may adversely affect our
business by further reducing the amount of indirect automobile financing
transactions that we earn revenue on, the number of lender or automotive dealer
customers that subscribe to our products and services or money that our
customers spend on our products and services. Purchases of new automobiles are
typically discretionary for consumers and have been, and may continue to be,
affected by negative trends in the economy, including the cost of energy and
gasoline, the availability and cost of credit, the declining residential and
commercial real estate markets, reductions in business and consumer confidence,
stock market volatility and increased unemployment. A reduction in the number of
automobiles purchased by consumers could continue to adversely affect our lender
and dealer customers and lead to a reduction in transaction volumes and in
spending by these customers on our subscription products and services. New car
sales declined significantly in 2009 and are projected to only increase slightly
in 2010. Additionally, a certain number of our lender customers are
dependent on continued access to the capital markets, which have contracted as
of late, in order to fund their lending activities. These negative trends may
result in our lenders further reducing the number of automobile dealers that
they service or the number of contracts that they make which could result in a
reduction in the number of credit applications that are processed through our
network. Additionally, due to the economic downturn, there has been
continued automotive dealer consolidation and the number of franchised
automotive dealers declined in 2009 and is projected to further decline in 2010.
A bankruptcy filing by a major automobile manufacturer would further accelerate
this consolidation trend. To the extent that these dealers have subscription
products, the consolidation will result in cancellation of those products.
Further, a reduction in the number of automotive dealers reduces the number of
opportunities we have to sell our subscription products. Additionally, dealers
who close their businesses may choose to not pay those amounts owed to us,
resulting in an increase in our bad debt.
Any such
reductions in transactions or subscriptions or an increase in our bad debt could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
13
We
may be unable to continue to compete effectively in our industry.
Competition in the automotive retail technology industry is
intense. The indirect automotive retail finance industry is highly fragmented
and is served by a variety of entities, including DMS providers, web-based
automotive finance credit application processors, the proprietary credit
application processing systems of the lender affiliates of automobile
manufacturers, automotive retail sales desking providers and vehicle
configuration providers. DealerTrack also competes with warranty and insurance
providers, as well as software providers, among others, in the market for DMS,
menu-selling products and services, compliance products and inventory analytics.
Some of our competitors have longer operating histories, greater name
recognition and significantly greater financial, technical, marketing and other
resources than we do. Many of these competitors also have longstanding
relationships with dealers and may offer dealers other products and services
that we do not provide. As a result, these companies may be able to respond more
quickly to new or emerging technologies and changes in customer demands or to
devote greater resources to the development, promotion and sale of their
products and services than we can to ours. We expect the market to continue to
attract new competitors and new technologies, possibly involving alternative
technologies that are more sophisticated and cost-effective than our technology.
There can be no assurance that we will be able to compete successfully against
current or future competitors or that competitive pressures we face will not
materially adversely affect our business, prospects, financial condition and
results of operations.
We
may face increased competition from AppOne, CUDL, Finance Express, Open Dealer
Exchange and RouteOne.
ADP, Inc. and Reynolds and Reynolds, the two largest providers of
DMS systems, have recently formed Open Dealer Exchange as a joint venture to
compete with our online portal application business. Open Dealer Exchange
plans to leverage its owners’ penetration of the DMS space to better integrate
the loan origination process into the dealer's transactional, point-of-sale
system, thereby giving them a competitive advantage. Additionally, our network
of lenders does not include the captive lenders affiliated with Chrysler LLC,
Ford Motor Company, General Motors Corporation or Toyota Motor Corporation,
which have formed RouteOne to operate as a direct competitor of ours to serve
their respective franchised dealers. RouteOne has the ability to offer its
dealers access to captive or other lenders that are not in our network. RouteOne
was launched in November 2003, and officially re-launched in
July 2004. A significant number of independent lenders, including many of
the independent lenders in our network, are participating on the RouteOne credit
application processing and routing portal. If either Open Dealer Exchange or
RouteOne increases the number of independent lenders on its credit application
processing and routing portal and/or offers products and services that better
address the needs of our customers or offer our customers a lower-cost
alternative, and/or our dealer customers faster portals, our business,
prospects, financial condition and results of operations could be materially
adversely affected. In addition, if a substantial amount of our current
customers migrate from our network to Open Dealer Exchange or RouteOne, our
ability to sell additional products and services to, or earn transaction
services revenue from, these customers could diminish. We believe that both Open
Dealer Exchange and RouteOne have repeatedly approached certain of our largest
lender customers seeking to have them join their credit application processing
and routing portal. In addition, CU Direct Corporation, through its CUDL portal,
has directly targeted credit unions, which comprise a large number of our lender
customers. Finance Express and AppOne have targeted the independent dealer
channel.
Some
vendors of software products used by automotive dealers, including certain of
our competitors, are designing their software and using financial or other
incentives to make it more difficult for our customers to use our products and
services.
Currently,
some software vendors, including some of our competitors, have designed their
software systems in order to make it difficult to integrate with third-party
products and services such as ours and others have announced their intention to
do so. Some software vendors also use financial or other incentives to encourage
their customers to purchase such vendors’ products and services. These obstacles
could make it more difficult for us to compete with these vendors and could have
a material adverse effect on our business, prospects, financial condition and
results of operations. Further, we have agreements in place with various
third-party software providers to facilitate integration between their software
and our network, and we cannot assure you that each of these agreements will
remain in place or that during the terms of these agreements these third parties
will not increase the cost or level of difficulty in maintaining integration
with their software. Certain of these agreements are currently in a wind-down
period and while we continue to negotiate with these providers, there is no
guarantee that we will be able to enter into a new agreement once the wind-down
period ends. Additionally, we integrate certain of our solutions and
services with other third parties’ software programs. These third parties may
design or utilize their software in a manner that makes it more difficult for us
to continue to integrate our solutions and services in the same manner, or at
all. These developments could have a material adverse effect on our business,
prospects, financial condition and results of operations.
14
Our
systems and network may be subject to security breaches, interruptions, failures
and/or other errors or may be harmed by other events beyond our
control.
Our
systems may be subject to security breaches.
Our success depends on the confidence of dealers, lenders,
the major credit reporting agencies and our other network participants in our
ability to transmit confidential information securely over the Internet and
operate our computer systems and operations without significant disruption or
failure. We transmit substantial amounts of confidential information, including
non-public personal information, over the Internet. Moreover, even if our
security measures are adequate, concerns over the security of transactions
conducted on the Internet and commercial online services, which may be
heightened by any well-publicized compromise of security, may deter customers
from using our products and services. If our security measures are breached and
unauthorized access is obtained to confidential information, our network may be
perceived as not being secure and our customers may curtail or stop using our
network or other systems. Any failure by, or lack of confidence in, our secure
online products and services could have a material adverse effect on our
business, prospects, financial condition and results of operations.
Despite our focus on Internet security, we may not be able to stop
unauthorized attempts to gain access to or disrupt the transmission of
communications among our network participants. Advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments could result in a compromise or breach of the algorithms used by
our products and services to protect certain data contained in our databases and
the information being transferred.
Although we generally limit warranties and liabilities relating to
security in our customer contracts, third parties may seek to hold us liable for
any losses suffered as a result of unauthorized access to their confidential
information or non-public personal information. We may not have limited our
warranties and liabilities sufficiently or have adequate insurance to cover
these losses. We may be required to expend significant capital and other
resources to protect against security breaches or to alleviate the problems
caused. Our security measures may not be sufficient to prevent security
breaches, and failure to prevent security breaches could have a material adverse
effect on our business, prospects, financial condition and results of
operations.
Our
network may be vulnerable to interruptions or failures.
From time to time, we have experienced, and may experience in the
future, network slowdowns and interruptions. These network slowdowns and
interruptions may interfere with our ability to do business. Although we
regularly back up data and take other measures to protect against data loss and
system failures, there is still risk that we may lose critical data or
experience network failures. Such failures or disruptions may result in lost
revenue opportunities for our customers, which could result in litigation
against us or a loss of customers. This could have a material adverse effect on
our business, prospects, financial condition and results of
operations.
Undetected errors
in our software may harm our operations.
Our software may contain undetected errors, defects or bugs. Although we have
not suffered significant harm from any errors, defects or bugs to date, we may
discover significant errors, defects or bugs in the future that we may not be
able to correct or correct in a timely manner. Our products and services are
integrated with products and systems developed by third parties. Complex
third-party software programs may contain undetected errors, defects or bugs
when they are first introduced or as new versions are released. It is possible
that errors, defects or bugs will be found in our existing or future products
and services or third-party products upon which our products and services are
dependent, with the possible results of delays in, or loss of market acceptance
of, our products and services, diversion of our resources, injury to our
reputation, increased service and warranty expenses and payment of
damages.
Our
systems may be harmed by events beyond our control.
Our computer systems and operations are vulnerable to damage or
interruption from natural disasters, such as fires, floods and hurricanes, power
outages, telecommunications failures, terrorist attacks, network service outages
and disruptions, “denial of service” attacks, computer viruses, break-ins,
sabotage and other similar events beyond our control. The occurrence of a
natural disaster or unanticipated problems at our facilities in the New York
metropolitan area or at any third-party facility we utilize, such as our
disaster recovery center in Waltham, Massachusetts, could cause interruptions or
delays in our business, loss of data or could render us unable to provide our
products and services. In addition, the failure of a third-party facility to
provide the data communications capacity required by us, as a result of human
error, bankruptcy, natural disaster or other operational disruption, could cause
interruptions to our computer systems and operations. The occurrence of any or
all of these events could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Our
failure or inability to execute any element of our business strategy could
adversely affect our operations.
Our business, prospects, financial condition and results of operations depend on
our ability to execute our business strategy, which includes the following key
elements:
15
We may not succeed in implementing a portion or all of our business
strategy and, even if we do succeed, our strategy may not have the favorable
impact on operations that we anticipate. Our success depends on our ability to
leverage our distribution channel and value proposition for dealers, lenders and
other service and information providers, offer a broad array of solutions,
provide convenient, high-quality products and services, maintain our
technological position and implement other elements of our business
strategy.
We may not be able to effectively manage the expansion of our
operations or achieve the rapid execution necessary to fully avail ourselves of
the market opportunity for our products and services. If we are unable to
adequately implement our business strategy, our business, prospects, financial
condition and results of operations could be materially adversely
affected.
Our revenue, operating results and profitability will vary from quarter to
quarter, which may result in volatility in our stock price.
Our revenue, operating results and profitability have varied in the
past and are likely to continue to vary significantly from quarter to quarter.
This may lead to volatility in our stock price. These variations are due to
several factors related to the number of transactions we process and to the
number of subscriptions to our products and services, including:
As a result of these fluctuations, we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful. We
cannot assure you that future revenue and results of operations will not vary
substantially from quarter to quarter. It is also possible that in future
quarters, our results of operations will be below the expectations of equity
research analysts, investors or our announced guidance. In any of these cases,
the price of our stock could be materially adversely affected.
We
may be unable to develop and bring products and services in development and new
products and services to market in a timely manner.
Our
success depends in part upon our ability to bring to market the products and
services that we have in development and offer new products and services that
meet changing customer needs. The time, expense and effort associated with
developing and offering these new products and services may be greater than
anticipated. The length of the development cycle varies depending on the nature
and complexity of the product, the availability of development, product
management and other internal resources, and the role, if any, of strategic
partners. If we are unable to develop and bring additional products and services
to market in a timely manner, we could lose market share to competitors who are
able to offer these additional products and services, which could also
materially adversely affect our business, prospects, financial condition and
results of operations.
16
We
are subject, directly and indirectly, to extensive and complex federal and state
regulation and new regulations and/or changes to existing regulations may
adversely affect our business.
The indirect automotive financing
and automotive retail industries are subject to extensive and complex federal
and state regulation.
We are directly and indirectly subject to various laws and
regulations. Federal laws and regulations governing privacy and security of
consumer information generally apply in the context of our business to our
clients and to us as a service provider that certain regulations obligate our
clients to monitor. These include the Gramm-Leach-Bliley Act (“GLB Act”) and
regulations implementing its information safeguarding requirements, the
Interagency Guidelines Establishing Information Security Standards, the
Interagency Guidance on Response Programs for Unauthorized Access to Customer
Information and Customer Notice, the Junk Fax Prevention Act of 2005, the
CAN-SPAM Act of 2003, and the Federal Trade Commission’s Privacy Rule,
Safeguards Rule, Consumer Report Information Disposal Rule, and “Red Flags
Rule,” as well as the Fair Credit Reporting Act (“FCRA”). If we, or a lender or
dealer discloses or uses consumer information provided through our system in
violation of these or other laws, or engage in other prohibited conduct, we may
be subject to claims or enforcement actions by state or federal regulators. We
cannot predict whether such claims or enforcement actions will arise or the
extent to which, if at all, we may be held liable. Such claims or enforcement
actions could have a material adverse effect on our business prospects,
financial condition and results of operations.
A
majority of states have passed, or are currently contemplating, consumer
protection, privacy, and data security laws or regulations that may relate to
our business. The FCRA contains certain provisions that explicitly preempt some
state laws to the extent the state laws seek to regulate certain specified
areas, including the responsibilities of persons furnishing information to
consumer reporting agencies. Unlike the FCRA, however, the GLB Act does not
limit the ability of the states to enact privacy legislation that provides
greater protections to consumers than those provided by the GLB Act. Some state
legislatures or regulatory agencies have imposed, and others may impose, greater
restrictions on the disclosure of consumer information than are already
contained in the GLB Act and its implementing regulations, the Interagency
Guidelines or the FTC’s rules. Any such legislation or regulation could
adversely impact our ability to provide our customers with the products and
services they require and that are necessary to make our products and services
attractive to them.
In 2009,
the Obama Administration supported the establishment of a federal Consumer
Financial Protection Agency (“CFPA”) as part of its financial regulatory reform
package. As proposed, the CFPA could have jurisdictional authority over
the Company as a service provider for regulated financial institutions. At
present, the CFPA has been passed by the U.S. House of Representatives but not
the U.S. Senate.
If a
federal or state government or agency imposes additional legislative and/or
regulatory requirements on us or our customers, or prohibits or limits our
activities as currently conducted, we may be required to modify or terminate our
products and services in that jurisdiction in a manner which could undermine our
attractiveness or availability to dealers and/or lenders doing business in that
jurisdiction.
The
use of our electronic contracting product by lenders is governed by relatively
new laws.
In the United States, the enforceability of electronic transactions
is primarily governed by the Electronic Signatures in Global and National
Commerce Act, a federal law enacted in 2000 that largely preempts inconsistent
state law, and the Uniform Electronic Transactions Act, a uniform state law that
was finalized by the National Conference of Commissioners on Uniform State Laws
in 1999 and has now been adopted by every state. Case law has generally upheld
the use of electronic signatures in commercial transactions and in consumer
transactions where proper notice is provided and consumer consent to conducting
business electronically is obtained. UCC 9-105 provides requirements to perfect
security interests in electronic chattel paper. These laws impact the degree to
which the lenders in our network use our electronic contracting product. We
believe that our electronic contracting product enables the perfection of a
security interest in electronic chattel paper by meeting the transfer of
“control” requirements of UCC 9-105. Certain of our financial institution
clients have received third-party legal opinions to that effect. However, this
issue has not been challenged in any legal proceeding. If a court were to find
that our electronic contracting product is not sufficient to perfect a security
interest in electronic chattel paper, or if existing laws were to change, our
business, prospects, financial condition and results of operations could be
materially adversely affected. Federal and state regulatory requirements imposed
on our lender customers, such as the SEC’s Regulation AB relating to
servicers of asset backed securities, may also result in our incurring
additional expenses to facilitate lender compliance regarding the use of our
electronic contracting product.
New
legislation or changes in existing legislation may adversely affect our
business.
Our ability to conduct, and our cost of conducting, business may be
adversely affected by a number of legislative and regulatory proposals
concerning aspects of the Internet, which are currently under consideration by
federal, state, local and foreign governments and various courts. These
proposals include, but are not limited to, the following matters: on-line
content, user privacy, taxation, access charges, and so-called “net-neutrality”
liability of third-party activities and jurisdiction. Moreover, we do not know
how existing laws relating to these or other issues will be applied to the
Internet. The adoption of new laws or the application of existing laws could
decrease the growth in the use of the Internet, which could in turn decrease the
demand for our products and services, increase our cost of doing business or
otherwise have a material adverse effect on our business, prospects, financial
condition and results of operations. Furthermore, government restrictions on
Internet content or anti-“net neutrality” legislation could slow the growth of
Internet use and decrease acceptance of the Internet as a communications and
commercial medium and thereby have a material adverse effect on our business,
prospects, financial condition and results of operations.
17
We
utilize certain key technologies from, and integrate our network with, third
parties and may be unable to replace those technologies if they become obsolete,
unavailable or incompatible with our products or services.
Our proprietary software is designed to work in conjunction with
certain software and hardware from third-party vendors, including Microsoft,
IBM, Oracle and eOriginal. Any significant interruption in the supply of such
third-party software or hardware could have a material adverse effect on our
ability to offer our products unless and until we can replace the functionality
provided by these products and services. In addition, we are dependent upon
these third parties’ ability to enhance their current products, develop new
products on a timely and cost-effective basis and respond to emerging industry
standards and other technological changes. There can be no assurance that we
would be able to replace the functionality provided by the third-party software
currently incorporated into our products or services in the event that such
technologies becomes obsolete or incompatible with future versions of our
products or services or is otherwise not adequately maintained or updated. Any
delay in or inability to replace any such functionality could have a material
adverse effect on our business, prospects, financial condition and results of
operations. Furthermore, delays in the release of new and upgraded versions of
third-party software products could have a material adverse effect on our
business, prospects, financial condition and results of operations.
Our
business operations may be disrupted if our planned Enterprise Resource Planning
system (ERP) implementation is not successful
We are contemplating the conversion of our various business
information systems to a single ERP. We plan to commit significant
resources to this conversion and it is expected to be phased in over multiple
years. The conversion process is extremely complex, in part, because of
the wide range of processes and the multiple legacy systems that must be
integrated. We will be using a controlled project plan that we believe
will provide an adequate allocation of resources. However, such a plan, or
a divergence from it, may result in cost overruns, project delays, or business
interruptions. During the conversion process, we may be limited in our
ability to integrate any business that we may want to acquire. Failure to
properly or adequately address these issues could result in significant costs or
impact our ability to perform necessary business operations which could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
We
may be unable to adequately protect, and we may incur significant costs in
defending, our intellectual property and other proprietary rights.
Our success depends, in large part, on our ability to protect our
intellectual property and other proprietary rights. We rely upon a combination
of trademark, trade secret, copyright, patent and unfair competition laws, as
well as license agreements and other contractual provisions, to protect our
intellectual property and other proprietary rights. In addition, we attempt to
protect our intellectual property and proprietary information by requiring
certain of our employees and consultants to enter into confidentiality,
non-competition and assignment of inventions agreements. To the extent that our
intellectual property and other proprietary rights are not adequately protected,
third parties might gain access to our proprietary information, develop and
market products and services similar to ours, or use trademarks similar to ours.
Existing U.S. federal and state intellectual property laws offer only limited
protection. Moreover, the laws of Canada, and any other foreign countries in
which we may market our products and services in the future, may afford little
or no effective protection of our intellectual property. If we resort to legal
proceedings to enforce our intellectual property rights or to determine the
validity and scope of the intellectual property or other proprietary rights of
others, the proceedings could be burdensome and expensive, and we may not
prevail. The failure to adequately protect our intellectual property and other
proprietary rights, or manage costs associated with enforcing those rights,
could have a material adverse effect on our business, prospects, financial
condition and results of operations.
We own the Internet domain names “dealertrack.com,” “alg.com,”
“chrome.com,” “dealeraccess.com” and certain other domain names. The regulation
of domain names in the United States and foreign countries may change.
Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names, any or all of which may dilute the strength of our domain names. We may
not acquire or maintain our domain names in all of the countries in which our
websites may be accessed or for any or all of the top-level domain names that
may be introduced. The relationship between regulations governing domain names
and laws protecting intellectual property rights is unclear. Therefore, we may
not be able to prevent third parties from acquiring domain names that infringe
or otherwise decrease the value of our trademarks and other intellectual
property rights.
A
license agreement we have with a lender customer restricts our ability to
utilize the technology licensed under this agreement beyond the automotive
finance industry.
An affiliate of JPMorgan claims certain proprietary rights with
respect to certain technology developed as of February 1, 2001. We have an
exclusive, perpetual, irrevocable, royalty-free license throughout the world to
use this technology in connection with the sale, leasing and financing of
automobiles only, and the right to market, distribute and sub-license this
technology solely to automotive dealerships, consumers and lenders in connection
with the sale, leasing and financing of automobiles only. The license agreement
defines “automobile” as a passenger vehicle or light truck, snowmobiles,
recreational vehicles, motorcycles, boats and other watercraft and commercial
vehicles and excludes manufactured homes. We may be limited in our ability to
utilize the licensed technology beyond the automotive finance
industry.
Claims
that we or our technologies infringe upon the intellectual property or other
proprietary rights of a third party may require us to incur significant costs,
enter into royalty or licensing agreements or develop or license substitute
technology.
We may in the future be subject to claims that our technologies in
our products and services infringe upon the intellectual property or other
proprietary rights of a third party. In addition, the vendors providing us with
technology that we use in our own technology could become subject to similar
infringement claims. Although we believe that our products and services do not
infringe any intellectual property or other proprietary rights, we cannot assure
you that our products and services do not, or that they will not in the future,
infringe intellectual property or other proprietary rights held by others. Any
claims of infringement could cause us to incur substantial costs defending
against the claim, even if the claim is without merit, and could distract our
management from our business. Moreover, any settlement or adverse judgment
resulting from the claim could require us to pay substantial amounts, or obtain
a license to continue to use the products and services that is the subject of
the claim, and/or otherwise restrict or prohibit our use of the technology.
There can be no assurance that we would be able to obtain a license on
commercially reasonable terms from the third party asserting any particular
claim, if at all, that we would be able to successfully develop alternative
technology on a timely basis, if at all, or that we would be able to obtain a
license from another provider of suitable alternative technology to permit us to
continue offering, and our customers to continue using, the products and
services. In addition, we generally provide in our customer agreements for
certain products and services that we will indemnify our customers against
third-party infringement claims relating to technology we provide to those
customers, which could obligate us to pay damages if the products and services
were found to be infringing. Infringement claims asserted against us, our
vendors or our customers may have a material adverse effect on our business,
prospects, financial condition and results of operations.
18
We
could be sued for contract or product liability claims, and such lawsuits may
disrupt our business, divert management’s attention or have an adverse effect on
our financial results.
We provide guarantees to subscribers of certain of our products and
services that the data they receive through these products and services will be
accurate. Additionally, general errors, defects or other performance problems in
our products and services could result in financial or other damages to our
customers or consumers. There can be no assurance that any limitations of
liability set forth in our contracts would be enforceable or would otherwise
protect us from liability for damages. We maintain general liability insurance
coverage, including coverage for errors and omissions in excess of the
applicable deductible amount. There can be no assurance that this coverage will
continue to be available on acceptable terms or in sufficient amounts to cover
one or more large claims, or that the insurer will not deny coverage for any
future claim. The successful assertion of one or more large claims against us
that exceeds available insurance coverage, or the occurrence of changes in our
insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, could have a material adverse effect on
our business, prospects, financial condition and results of operations.
Furthermore, litigation, regardless of its outcome, could result in substantial
cost to us and divert management’s attention from our operations. Any contract
liability claim or litigation against us could, therefore, have a material
adverse effect on our business, prospects, financial condition and results of
operations. In addition, some of our products and services are business-critical
for our dealer and lender customers and a failure or inability to meet a
customer’s expectations could seriously damage our reputation and affect our
ability to retain existing business or attract new business.
We
have made strategic acquisitions in the past and intend to do so in the future.
If we are unable to find suitable acquisitions or partners or to achieve
expected benefits from such acquisitions or partnerships, there could be a
material adverse effect on our business, prospects, financial condition and
results of operations.
Since
2001, we have acquired numerous businesses, including, most recently, our
acquisition of certain assets from JM Dealer Services, Inc., including AAX, in
January 2009. As part of our ongoing business strategy to expand product
offerings and acquire new technology, we frequently engage in discussions with
third parties regarding, and enter into agreements relating to, possible
acquisitions, strategic alliances and joint ventures. There may be significant
competition for acquisition targets in our industry, or we may not be able to
identify suitable acquisition candidates or negotiate attractive terms for
acquisitions. If we are unable to identify future acquisition opportunities,
reach agreement with such third parties or obtain the financing necessary to
make such acquisitions, we could lose market share to competitors who are able
to make such acquisitions, which could have a material adverse effect on our
business, prospects, financial condition and results of operations.
Even if
we are able to complete acquisitions or enter into alliances and joint ventures
that we believe will be successful, such transactions are inherently risky.
Significant risks to these transactions include the following:
If we are
not successful in completing acquisitions in the future, we may be required to
reevaluate our acquisition strategy. We also may incur substantial expenses and
devote significant management time and resources in seeking to complete
acquisitions. In addition, we could use substantial portions of our available
cash to pay all or a portion of the purchase prices of future acquisitions. If
we do not achieve the anticipated benefits of our acquisitions as rapidly to the
extent anticipated by our management and financial or industry analysts, and
others may not perceive the same benefits of the acquisition as we do. If these
risks materialize, our stock price could be materially adversely
affected.
Any
acquisitions that we complete may dilute your ownership interest in us, may have
adverse effects on our business, prospects, financial condition and results of
operations and may cause unanticipated liabilities.
Future
acquisitions may involve the issuance of our equity securities as payment, in
part or in full, for the businesses or assets acquired. Any future issuances of
equity securities would dilute our existing stockholders’ ownership interests.
Future acquisitions may also decrease our earnings or earnings per share and the
benefits derived by us from an acquisition might not outweigh or might not
exceed the dilutive effect of the acquisition. We also may incur additional
indebtedness, have future impairment of assets, or suffer adverse tax and
accounting consequences in connection with any future acquisitions.
19
We
may not successfully integrate recent or future acquisitions.
The
integration of acquisitions involves a number of risks and presents financial,
managerial and operational challenges. We may have difficulty, and may incur
unanticipated expenses related to, integrating management and personnel from
these acquired entities with our management and personnel. Failure to
successfully integrate recent acquisitions or future acquisitions could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
We
are dependent on our key management, direct sales force and technical personnel
for continued success.
Our company has grown significantly in size and scope in recent
years, and our management remains concentrated in a small number of key
employees. Our future success depends to a meaningful extent on our executive
officers and other key employees, including members of our direct sales force
and technology staff, such as our software developers and other senior technical
personnel. We rely primarily on our direct sales force to sell subscription
products and services to automotive dealers. We may need to hire additional
sales, customer service, integration and training personnel in the near-term and
beyond if we are to achieve revenue growth in the future. The loss of the
services of any of these individuals or group of individuals could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Competition for qualified personnel in the technology industry is
intense and we compete for these personnel with other technology companies that
have greater financial and other resources than we do. Our future success will
depend in large part on our ability to attract, retain and motivate highly
qualified personnel, and there can be no assurance that we will be able to do
so. Any difficulty in hiring or retaining needed personnel, or increased costs
related thereto could have a material adverse effect on our business, prospects,
financial condition and results of operations.
We
may need additional capital in the future, which may not be available to us, and
if we raise additional capital, it may dilute our stockholders’ ownership in
us.
We may need to raise additional funds through public or private
debt or equity financings in order to meet various objectives, such
as:
Any debt
incurred by us could impair our ability to obtain additional financing for
working capital, capital expenditures or further acquisitions. Covenants
governing any debt we incur would likely restrict our ability to take specific
actions, including our ability to pay dividends or distributions on, or redeem
or repurchase our capital stock, enter into transactions with affiliates, merge,
consolidate or sell our assets or make capital expenditure investments. In
addition, the use of a substantial portion of the cash generated by our
operations to cover debt service obligations and any security interests we grant
on our assets could limit our financial and business flexibility.
Any
additional capital raised through the sale of equity, or convertible debt
securities may dilute our stockholders’ respective ownership percentages in us.
Furthermore, any additional debt or equity financing we may need may not be
available on terms favorable to us, or at all. If future financing is not
available or is not available on acceptable terms, we may not be able to raise
additional capital, which could significantly limit our ability to implement our
business plan. In addition, we may issue securities, including debt securities
that may have rights, preferences and privileges senior to our common
stock.
Our
lender customers may elect to use competing third-party services, either in
addition to or instead of our network.
Our lender customers continue to receive credit applications and
purchase retail installment sales and lease contracts directly from their dealer
customers through traditional indirect financing methods, including via
facsimile and other electronic means of communication, in addition to using our
network. Many of our lender customers are involved in other ventures as
participants and/or as equity holders, and such ventures or newly created
ventures may compete with us and our network now and in the future. Continued
use of alternative methods to ours by these lender customers may have a material
adverse effect on our business, prospects, financial condition and results of
operations.
20
Some
provisions in our certificate of incorporation and by-laws may deter third
parties from acquiring us.
Our fifth
amended and restated certificate of incorporation and our amended and restated
by-laws contain provisions that may make the acquisition of our company more
difficult without the approval of our board of directors, including, but not
limited to, the following:
These
anti-takeover defenses could discourage, delay or prevent a transaction
involving a change in control of our company. These provisions could also
discourage proxy contests and make it more difficult for you and other
stockholders to elect directors of your choosing and cause us to take other
corporate actions you desire. In addition, because our board of directors is
responsible for appointing the members of our management team, these provisions
could in turn affect any attempt by our stockholders to replace current members
of our management team.
In
addition, we are subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits “business combinations”
between a publicly-held Delaware corporation and an “interested stockholder,”
which is generally defined as a stockholder who becomes a beneficial owner of
15% or more of a Delaware corporation’s voting stock, for a three-year period
following the date that such stockholder became an interested stockholder.
Section 203 could have the effect of delaying, deferring or preventing a
change in control of our company that our stockholders might consider to be in
their best interests.
If
our intangible assets, such as trademarks and goodwill, become impaired we may
be required to record a significant non-cash charge to earnings which would
negatively impact our results of operations.
Under
accounting principles generally accepted in the United States, we review our
intangible assets, including our trademarks licenses and goodwill, for
impairment annually in the fourth quarter of each fiscal year, or more
frequently if events or changes in circumstances indicate the carrying value of
our intangible assets may not be fully recoverable. The carrying value of our
intangible assets may not be recoverable due to factors such as a decline in our
stock price and market capitalization, reduced estimates of future cash flows,
including those associated with the specific brands to which intangibles relate,
or slower growth rates in our industry. Estimates of future cash flows are based
on a long-term financial outlook of our operations and the specific brands to
which the intangible assets relate. However, actual performance in the near-term
or long-term could be materially different from these forecasts, which could
impact future estimates and the recorded value of the intangibles. For example,
a significant, sustained decline in our stock price and market capitalization
may result in impairment of certain of our intangible assets, including
goodwill, and a significant charge to earnings in our financial statements
during the period in which an impairment is determined to exist. For ten
days between October 24, 2008 and November 21, 2008, the day of January 21, 2009
and for six trading days between March 3, 2009 and March 10, 2009, our market
capitalization dropped below the carrying value of our consolidated net
assets. Despite the fact that our market capitalization was below our book
value for twelve days we do not believe that there has been an impairment based
on the duration and depth of the market decline as well as an implied control
premium. A control premium is the amount that a buyer is willing to pay
over the current market price of a company as indicated by the market
capitalization, in order to acquire a controlling interest. The premium is
justified by the expected synergies, such as the expected increase in cash flow
resulting from the cost savings and revenue enhancements .However, due to
the ongoing uncertainty in market conditions, which may continue to negatively
impact our market capitalization, we will continue to monitor and evaluate the
carrying value of our goodwill. In the event we had to reduce the carrying
value of our goodwill, any such impairment charge could materially reduce our
results of operations.
The
price of our common stock may be volatile, particularly given the economic
downturn and volatility in domestic and international stock
markets.
The
trading price of our common stock may fluctuate substantially. Factors that
could cause fluctuations in the trading price of our common stock include, but
are not limited to:
21
The stock
market in general, the NASDAQ Global Market, and the market for technology
companies in particular, have experienced extreme price and volume fluctuations.
These fluctuations have often been unrelated or disproportionate to operating
performance. These forces reached unprecedented levels in the second half
of 2008 through the first quarter of 2009, resulting in the bankruptcy or
acquisition of, or government assistance to, several major domestic and
international financial institutions and a material decline in economic
conditions. In particular, the U.S. equity markets experienced significant price
and volume fluctuations that have affected the market prices of equity
securities of many technology companies. These broad market and industry factors
could materially and adversely affect the market price of our stock, regardless
of our actual operating performance.
In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been brought against
that company. Due to the potential volatility of our stock price, we may
therefore be the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert management’s attention
and resources from our business.
Item 1B. Unresolved Staff
Comments
None.
Item 2. Properties>
Our
corporate headquarters are located in Lake Success, New York, where we lease
approximately 75,000 square feet of office space. Our principal offices are
located in Santa Barbara, California; Portland, Oregon; Wilmington, Ohio;
Mississauga, Ontario; Dallas, Texas; Memphis, Tennessee; and South Jordan, Utah.
We lease all of the office space for our principle offices.
We
believe our existing facilities are adequate to meet our current
requirements.
Item 3. Legal
Proceedings>
From time
to time, we are a party to litigation matters arising in connection with the
normal course of our business, none of which is expected to have a material
adverse effect on us. In addition to the litigation matters arising in
connection with the normal course of our business, we are party to the
litigation described below.
DealerTrack, Inc. v.
Finance Express et al., CV-06-2335; DealerTrack Inc. v. RouteOne and
Finance Express et al., CV-06-6864; and DealerTrack Inc. v. RouteOne and
Finance Express et al., CV-07-215
On
April 18, 2006, we filed a Complaint and Demand for Jury Trial against
David Huber, Finance Express LLC (Finance Express), and three of their unnamed
dealer customers in the United States District Court for the Central District of
California, Civil Action No. CV-06-2335 AG (FMOx). The complaint sought
declaratory and injunctive relief, as well as damages, against the defendants
for infringement of the U.S. Patent No. 5,878,403 (the ’403 Patent)
Patent and the 6,587,841 (the ’841 Patent). Finance Express denied infringement
and challenged the validity and enforceability of the
patents-in-suit.
On
October 27, 2006, we filed a Complaint and Demand for Jury Trial against
RouteOne, David Huber and Finance Express in the United States District Court
for the Central District of California, Civil Action No. CV-06-6864 (SJF).
The complaint sought declaratory and injunctive relief as well as damages
against the defendants for infringement of the ’403 Patent and the ’841 Patent.
On November 28, 2006 and December 4, 2006, respectively, defendants
RouteOne, David Huber and Finance Express filed their answers. The defendants
denied infringement and challenged the validity and enforceability of the
patents-in-suit.
On
February 20, 2007, we filed a Complaint and Demand for Jury Trial against
RouteOne LLC (RouteOne), David Huber and Finance Express in the United States
District Court for the Central District of California, Civil Action
No. CV-07-215 (CWx). The complaint sought declaratory and injunctive relief
as well as damages against the defendants for infringement of U.S. Patent
No. 7,181,427 (the ’427 Patent). On April 13, 2007 and April 17,
2007, respectively, defendants RouteOne, David Huber and Finance Express filed
their answers. The defendants denied infringement and challenged the validity
and enforceability of the ’427 Patent.
22
The
DealerTrack, Inc. v. Finance Express et al., CV-06-2335 action, the DealerTrack
Inc. v. RouteOne and Finance Express et al., CV-06-6864 action and the
DealerTrack v. RouteOne and Finance Express et al., CV-07-215 action,
described above, were consolidated by the court. A hearing on claims
construction, referred to as a “Markman ” hearing, was held
on September 25, 2007. Fact and expert discovery and motions for summary
judgment have substantially been completed.
On
July 21, 2008 and September 30, 2008, the court issued summary
judgment orders disposing of certain issues and preserving other issues for
trial.
On
July 8, 2009, the court held Claims 1-4 of DealerTrack’s patent
7,181,427 was invalid for failure to comply with a standard required by the
recently decided case in the Court of Appeals of the Federal Circuit of In re
Bilski. On August 11, 2009, the court entered into a judgment granting
summary judgment. On September 8 , 2009, DealerTrack filed a notice of
appeal in the United States Court of Appeals for the Federal Circuit in regards
to the finding of non-infringement of patent 6,587,841, the invalidity of patent
7,181,427, and the claim construction order to the extent that it was relied
upon to find the judgments of non-infringement and invalidity. On October 29,
2009, the Federal Circuit granted a motion to stay briefing until the
disposition of In re Bilski.
We
believe that the potential liability from all current litigations will not have
a material effect on our financial position or results of operations when
resolved in a future period.
Item 4. Submission of
Matters to a Vote of Security Holders>
No
matters were submitted to a vote of our security holders during the fourth
quarter of the year covered by this Annual Report on Form 10-K.
PART
II
Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities>
Market
Information
As of
January 31, 2010, there were 28 holders of record of our common stock. Our
common stock is listed and traded on the NASDAQ Global Market under the symbol
“TRAK”. The following table sets forth the range of high and low sales prices
for the common stock in each quarter of 2009 and 2008, as reported by the NASDAQ
Global Market.
Dividend
Policy
We have
not paid any cash dividends on our common stock and currently intend to retain
any future earnings for use in our business. 23
Repurchases
From
time to time, in connection with the vesting of restricted common stock under
our incentive award plans, we may receive shares of our common stock from
certain restricted common stockholders in consideration of the tax withholdings
due upon the vesting of restricted common stock.
The
selected consolidated financial data as of December 31, 2009 and 2008 and
for each of the three years in the period ended December 31, 2009 have been
derived from our consolidated financial statements and related notes thereto
included elsewhere herein, which have been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm. The selected historical
consolidated financial data as of December 31, 2007, 2006 and
December 31, 2005 and for each of the two years in the period ended
December 31, 2006 have been derived from our audited consolidated financial
statements and related notes thereto, which are not included in this filing, and
which have also been audited by PricewaterhouseCoopers LLP.
We
completed acquisitions during the periods presented below, the operating results
of which have been included in our historical results of operations from the
respective acquisition dates. These acquisitions have significantly affected our
revenue, results of operations and financial condition. Accordingly, the results
of operations for the periods presented may not be comparable due to these
acquisitions.
The
following selected consolidated financial data should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in Part II, Item 7 in this Annual Report on Form 10-K and
“Financial Statements and Supplementary Data” in Part II, Item 8 in
this Annual Report on Form 10-K.”
24
You should read the following
discussion and analysis of our financial condition and results of operations in
conjunction with our consolidated financial statements and related notes
thereto. In addition, you should read the sections entitled “Cautionary
Statements Relating to Forward-Looking Statements” and “Risk Factors” in
Part 1, Item 1 and Item 1A, respectively, in this Annual Report
on Form 10-K
.
Overview
DealerTrack’s
intuitive and high-value software solutions enhance efficiency and profitability
for all major segments of the automotive retail industry, including dealers,
lenders, OEMs, agents and aftermarket providers. We believe our solution set for
dealers is the industry’s most comprehensive. DealerTrack operates the
industry’s largest online credit application network, connecting approximately
17,000 dealers with over 800 lenders. Our DMS provides dealers with
easy-to-use tools with real-time data access that will streamline any automotive
business. With our inventory management solution (DealerTrack AAX), dealers get
better data along with the tools to make smarter, more profitable inventory
decisions. Our sales and F&I solution enables dealers to streamline the
entire sales process, quickly structuring all types of deals from a single
integrated platform. DealerTrack’s compliance solution helps dealers meet legal
and regulatory requirements and protect their hard-earned assets. DealerTrack’s
family of companies also includes data, accessories and consulting services
providers, ALG and Chrome.
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 Automotive Lease Guide (alg), Inc., Chrome Systems, Inc.,
DealerTrack Aftermarket Services, Inc., DealerTrack Canada, Inc., DealerTrack
Digital Services, Inc., DealerTrack, Inc., and DealerTrack Systems,
Inc.
We
monitor our performance as a business using a number of measures that are not
found in our consolidated financial statements. These measures include the
number of active dealers, lenders, and active lender to dealership relationships
in the DealerTrack network, the number of subscribing dealers in the DealerTrack
network, the number of transactions processed, average transaction price and the
average monthly subscription revenue per subscribing dealership. We believe that
improvements in these metrics will result in improvements in our financial
performance over time. We also view the acquisition and successful integration
of acquired companies as important milestones in the growth of our business as
these acquired companies bring new products to our customers and expand our
technological capabilities. We believe that successful acquisitions will also
lead to improvements in our financial performance over time. In the near term,
however, the purchase accounting treatment of acquisitions can have a negative
impact on our statement of operations as the depreciation and amortization
expenses associated with acquired assets, as well as particular intangibles
(which tend to have a relatively short useful life), can be substantial in the
first several years following an acquisition. As a result, we monitor our EBITDA
and other business statistics as a measure of operating performance in addition
to net income (loss) and the other measures included in our consolidated
financial statements. 25
The
following is a table consisting of non-GAAP financial measures and certain other
business statistics that management is continually monitoring (only amounts in
thousands, are adjusted EBITDA, adjusted net income, capital expenditure data
and transactions processed):
Adjusted
EBITDA and adjusted net income have limitations as an analytical tool and you
should not consider it in isolation, or as a substitute for analysis of our
results as reported under Generally Accepted Accounting Principles (GAAP). Some
of these limitations are:
Because
of these limitations, adjusted EBITDA and adjusted net income should not be
considered as a measure of discretionary cash available to us to invest in the
growth of our business. We compensate for these limitations by relying primarily
on our GAAP results and using adjusted EBITDA and adjusted net income only as a
supplement to our GAAP results. Adjusted EBITDA and adjusted net income are a
measure of our performance that is not required by, or presented in accordance
with, GAAP. Adjusted EBITDA and adjusted net income are not a measurement of our
financial performance under GAAP and should not be considered as an alternative
to net income, operating income or any other performance measures derived in
accordance with GAAP or as an alternative to cash flow from operating activities
as a measure of our liquidity.
The
following table sets forth the reconciliation of adjusted EBITDA, a non-GAAP
financial measure, to net (loss) income, our most directly comparable financial
measure in accordance with GAAP (in thousands):
26
The
following table sets forth the reconciliation of adjusted net income, a non-GAAP
financial measure, to net (loss) income, our most directly comparable financial
measure in accordance with GAAP (in thousands):
Revenue
Transaction Services
Revenue. Transaction services revenue consists of revenue earned from our
lender customers for each credit application or contract that dealers submit to
them. We also earn transaction services revenue from lender customers for each
financing contract executed via our electronic contracting and digital contract
processing solutions, as well as for any portfolio residual value analyses we
perform for them. We also earn transaction services revenue from dealers or
other service and information providers, such as aftermarket providers,
accessory providers, and credit report providers, for each fee-bearing product
accessed by dealers.
Subscription Services
Revenue. Subscription services revenue consists of revenue earned from
our customers (typically on a monthly basis) for use of our subscription or
license-based products and services. Our subscription services enable dealer
customers to manage their dealership data and operations, compare various
financing and leasing options and programs, sell insurance and other aftermarket
products, analyze inventory, and execute financing contracts
electronically.
Other Revenue. Other revenue
consists of revenue primarily earned through forms programming, data conversion
and training and start up fees from our DMS solution, shipping commissions
earned from our digital contract business and consulting and analytical revenue
earned from ALG.
Operating
Expenses
Cost of Revenue. Cost
of revenue primarily consists of expenses related to running our network
infrastructure (including Internet connectivity, hosting expenses, and data
storage), amortization expense on acquired intangible assets, capitalized
software and website development costs, compensation and related benefits for
network and technology development personnel, amounts paid to third parties
pursuant to contracts under which a portion of certain revenue is owed to those
third parties (revenue share) and direct costs for data licenses and direct
costs (printing, binding, and delivery) associated with our residual value
guides. Cost of revenue also includes hardware costs associated with our DMS
product offering, and compensation, related benefits and travel expenses
associated with DMS installation personnel.
Product Development
Expenses. Product development expenses consist primarily of compensation
and related benefits, consulting fees and other operating expenses associated
with our product development departments. The product development departments
perform research and development, as well as enhance and maintain existing
products.
Selling, General and
Administrative Expenses. Selling, general and administrative expenses
consist primarily of compensation and related benefits, facility costs and
professional services fees for our sales, marketing, customer service and
administrative functions.
We
allocate overhead such as occupancy and telecommunications charges, and
depreciation expense based on headcount, as we believe this to be the most
accurate measure. As a result, a portion of general overhead expenses is
reflected in our cost of revenue and each operating expense
category. 27
We
allocated the restructuring costs related to our January 5, 2009 realignment of
our workforce and business to the appropriate cost of revenue and operating
expense categories based on each of the terminated employees respective
functions. For further information, please refer to Note 16 in the accompanying
notes to the consolidated financial statements included in this Annual Report on
Form 10-K.
Acquisitions
and Related Amortization Expense
We
have grown our business since inception through a combination of organic growth
and acquisitions. The operating results of each business acquired have been
included in our consolidated financial statements from the respective dates of
acquisition.
On
January 23, 2009, we acquired the AAX suite of inventory management solutions
and other assets from JM Dealer Services, Inc., a subsidiary of JM Family
Enterprises, Inc., for a purchase price of $30.9 million in cash, net of a $1.7
million purchase price adjustment. We expensed approximately $0.5 million of
professional fees associated with the acquisition. For further information,
please refer to Note 4 in the accompanying notes to the consolidated financial
statements included in this Annual Report on Form 10-K.
On
August 1, 2007, we completed the purchase of all of the outstanding shares
of AutoStyleMart, Inc. (ASM), for a purchase price of $4.0 million in cash
(including direct acquisition costs of $0.2 million). ASM is a provider of
accessories-related solutions to automotive dealerships. Under the terms of the
merger agreement, we have future contingent payment obligations of up to
$11.0 million based upon the achievement of certain operational targets
from February 2008 through February 2011. As of December
31, 2009, we determined that certain operational conditions were probable of
being achieved and recorded a liability of $1.0 million. The additional
consideration of $1.0 million was deemed compensation for services, as payment
was contingent on certain former stockholders remaining employees or consultants
of DealerTrack for a certain period. The $1.0 million was recorded as a selling,
general and administrative expense for the year ended December 31, 2009. As of
December 31, 2009, it has been determined that the operational targets related
to the remaining $10.0 million in contingent payment obligations are not yet
probable of being achieved. Any amounts deemed probable in the future will also
be recorded as a selling, general and administrative expense.
On
June 6, 2007, we completed the purchase of all of the outstanding shares of
Arkona, Inc. (Arkona), for a cash purchase price of approximately
$60.0 million (including direct acquisition costs of approximately
$1.0 million). Arkona is a provider of on-demand dealer management systems
for automotive dealerships.
On
February 1, 2007, we completed the purchase of all of the outstanding
shares of Curomax Corporation and its subsidiaries (Curomax) pursuant to a
shares purchase agreement, dated as of January 16, 2007, for an adjusted cash
purchase price of approximately $40.7 million (including direct acquisition
and restructuring costs of approximately $1.6 million). Curomax is a
provider of an Internet-based credit application and contract processing network
in Canada. Under the terms of merger agreement, we had future contingent payment
obligations of up to $1.8 million in cash based upon the achievement of
certain operational targets over the subsequent twenty-four months. As of
December 31, 2008, we determined that certain operational conditions had been
met and as such, recorded a liability and additional goodwill of approximately
$1.8 million. The additional consideration of $1.8 million was paid in the first
quarter of 2009.
Our
acquisitions have been recorded under the purchase method of accounting,
pursuant to which the total purchase price, is allocated to the net assets
acquired based upon estimates of the fair value of those assets. Any excess
purchase price is allocated to goodwill. Amortization expense relating to
intangible assets is recorded as a cost of revenue.
Critical
Accounting Policies and Estimates
Our
management’s discussion and analysis of our financial condition and results of
our operations is based on our consolidated financial statements, which have
been prepared in accordance with GAAP. The preparation of these consolidated
financial statements requires management to make estimates and judgments that
affect the amounts reported for assets, liabilities, revenue, expenses and the
disclosure of contingent liabilities.
Our
critical accounting policies are those that we believe are both important to the
portrayal of our financial condition and results of operations and that involve
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. The
estimates are based on historical experience and on various assumptions about
the ultimate outcome of future events. Our actual results may differ from these
estimates if unforeseen events occur or should the assumptions used in the
estimation process differ from actual results.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements: 28
Revenue
Recognition
Transaction Services
Revenue. Transaction services revenue consists of revenue earned from our
lender customers for each credit application or contract that dealers submit to
them. We also earn transaction services revenue from lender customers for each
financing contract executed via our electronic contracting and digital contract
processing solutions, as well as for any portfolio residual value analyses we
perform for them. We also earn transaction services revenue from dealers or
other service and information providers, such as aftermarket providers,
accessory providers, and credit report providers, for each fee-bearing product
accessed by dealers.
We
offer our web-based service to lenders for the electronic receipt of credit
application data and contract data for automobile financing transactions in
consideration for a transaction fee. This service is sold based upon contracts
that include fixed or determinable prices and that do not include the right of
return or other similar provisions or significant post service obligations.
Credit application and digital and electronic contracting processing revenue is
recognized on a per transaction basis, after customer receipt and when
collectability is reasonably assured. Set-up fees charged to the lenders for
establishing connections, if any, are recognized ratably over the expected
customer relationship period of four years.
Our
credit report service provides our dealer customers the ability to access credit
reports from several major credit reporting agencies or resellers online. We
sell this service based upon contracts with the customer or credit report
provider, as applicable, that include fixed or determinable prices and that do
not include the right of return or other similar provisions or other significant
post-service obligations. We recognize credit report revenue on a per
transaction basis, when services are rendered and when collectability is
reasonably assured. We offer these credit reports on both a reseller and an
agency basis. We recognize revenue from all but one provider of credit reports
on a net basis due to the fact that we are not considered the primary obligor,
and recognize revenue on a gross basis with respect to one of the providers as
we have the risk of loss and are considered the primary obligor in the
transaction.
Subscription Services
Revenue. Subscription services revenue consists of revenue earned from
our customers (typically on a monthly basis) for use of our subscription or
license-based products and services. Our subscription services enable dealer
customers to manage their dealership data and operations, compare various
financing and leasing options and programs, sell insurance and other aftermarket
products, analyze inventory, and execute financing contracts electronically.
These subscription services are typically sold based upon contracts that include
fixed or determinable prices and that do not include the right of return or
other similar provisions or significant post service obligations. We recognize
revenue from such contracts ratably over the contract period. We recognize
set-up fees, if any, ratably over the expected customer relationship of three
years. For contracts that contain two or more products or services, we recognize
revenue in accordance with the above policy using relative fair
value.
Other
Revenue. Other revenue consists of revenue primarily earned
through training and start up fees from our DMS solution, shipping commissions
earned from our digital contract business and consulting and analytical revenue
earned from ALG.
Our
revenue is presented net of a provision for sales credits, which are estimated
based on historical results, and established in the period in which services are
provided.
Allowance
for Doubtful Accounts
We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. The amount of the
allowance account is based on historical experience and our analysis of the
accounts receivable balance outstanding. While credit losses have historically
been within our expectations when the provisions are established, we cannot
guarantee that we will continue to experience the same credit loss rates that we
have in the past. If the financial condition of our customers were to
deteriorate, resulting in their inability to make payments, additional
allowances may be required which would result in an additional expense in the
period that this determination was made.
Software
and Website Development Costs and Amortization
We
capitalize costs of materials, consultants and payroll and payroll-related costs
incurred by employees involved in developing internal use computer software.
Costs incurred during the preliminary project and post-implementation stages are
charged to expense. Software and website development costs are amortized on a
straight-line basis over estimated useful lives ranging from two to four 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 $21.2 million and $12.7 million as of
December 31, 2009 and 2008, respectively. Amortization expense totaled
$7.6 million, $7.4 million and $6.2 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Goodwill,
Other Intangibles and Long-lived Assets
We
record as goodwill the excess of purchase price over the fair value of the
tangible and identifiable intangible assets acquired. Goodwill is tested
annually for impairment as well as whenever events or circumstances change that
would make it more likely than not that an impairment may have occurred.
Goodwill is tested for impairment using a two-step approach. The first step
tests for potential goodwill impairment by comparing the fair value of our one
reporting unit to our carrying. If the fair value of the reporting unit is less
than its carrying value the second step is to record an impairment loss to the
extent that the implied fair value of the goodwill of the reporting unit is less
than its carrying value.
29
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 or 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, 2009 and
2008 did not indicate any impairment of our goodwill.
Subsequent
to our October 1, 2008 goodwill impairment test, our market capitalization was
impacted by the volatility in the U.S. equity markets. For ten days
between October 24, 2008 and November 21, 2008, the day of January 21, 2009 and
for six trading days between March 3, 2009 and March 10, 2009, our market
capitalization was on average approximately 5% below the approximately $405
million carrying value of our consolidated net assets, as of October 1,
2008. The periods between October 24, 2008 and November 21, 2008 and
March 3, 2009 to March 10, 2009 coincided with the overall stock market’s low
periods for 2008, and 2009, respectively.
Despite
the fact that our market capitalization traded below our book value for a brief
period of time, we believed that there had not been an impairment anytime during
2009 or 2008, based on the limited duration and depth of the market decline. In
addition, there was no factoring of an implied control premium. A
control premium is the amount that a buyer is willing to pay over the current
market price of a company as indicated by the market capitalization, in order to
acquire a controlling interest. The premium is justified by the
expected synergies, such as the expected increase in cash flow resulting from
the cost savings and revenue enhancements. As of December 31, 2008, our
market capitalization was approximately $475 million compared to our book value,
including goodwill, of approximately $396 million. As of October 1, 2009, our
market capitalization was approximately $750 million compared to our book value,
including goodwill, of approximately $418 million.
We
evaluate our long-lived assets, including property and equipment and
finite-lived intangible assets for potential impairment on an individual asset
basis or at the lowest level asset grouping for which cash flows can be
separately identified. Intangible asset impairments are assessed whenever
changes in circumstances could indicate that the carrying amounts of those
productive assets exceed their projected undiscounted cash flows. When it is
determined that impairment exists, the related asset group is written down to
its estimated fair market value. The determination of future cash flows and the estimated
fair value of long-lived assets, involve significant estimates on the part of
management. In order to estimate the fair value of a long-lived asset, we may
engage a third party to assist with the valuation.
Our
process for assessing potential triggering events may include, but is not
limited to, analysis of the following:
We expect
to continue to experience challenges due to the ongoing adverse outlook for the
credit markets and automobile sales. If events and circumstances were to
continue we may be required to write-off some of our goodwill or long-lived
intangible assets and we could incur a significant non-cash charge to our income
statement.
We also
evaluate the remaining useful life of our long-lived assets on a periodic basis
to determine whether events or circumstances warrant a revision to the remaining
estimated amortization period.
As
discussed in Note 6 of our consolidated financial statements included in this
Annual Report on Form 10-K, during the fourth quarter of 2008, as a result of a
specific event, we recorded an impairment of an intangible asset of
approximately $1.9 million to cost of revenue.
Business
Combinations
In
December 2007, the FASB issued principles and standards which retained the
previous fundamentals of accounting for business combinations, but revised
certain principles, including the definition of a business, the recognition and
measurement of assets acquired and liabilities assumed in a business
combination, the accounting for goodwill, and financial statement disclosure. We
have adopted the revised business combination standards as of January 1, 2009.
The recently adopted business combination standards were applied to our 2009
acquisition of AAX. For further information on the AAX acquisition, please refer
to Note 4 in the accompanying notes to the consolidated financial statements
included in this Annual Report on Form 10-K
Income
Taxes
We
account for income taxes in accordance with the provisions of ASC Topic 740,
Accounting for Income
Taxes, which requires deferred tax assets and liabilities to be
recognized for the future tax consequences attributable to differences between
the consolidated financial statement carrying amounts of assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be reversed. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. 30
The
total liability for the uncertain tax positions recorded in our balance sheet in
accrued other liabilities as of December 31, 2009 and December 31, 2008, was
$0.8 million and $0.5 million, respectively. Interest and penalties, if
any, related to tax positions taken in our tax returns are recorded in interest
expense and general and administrative expenses, respectively, in our
consolidated statement of operations. As of December 31, 2009 and December 31,
2008, we have accrued interest and penalties related to tax positions taken on
our tax returns of approximately $47,000 and $28,000, respectively.
Retail
Sales Tax
The
Ontario Ministry of Revenue (the Ministry) has conducted a retail sales tax
field audit on the financial records of our Canadian subsidiary, DealerTrack
Canada, Inc. (formerly known as DealerAccess Canada, Inc.), for the period from
March 1, 2001 through May 31, 2003. We received a formal assessment
from the Ministry indicating unpaid Ontario retail sales tax totaling
approximately $0.2 million, plus interest. Although we are disputing the
Ministry’s findings, the assessment, including interest, has been paid in order
to avoid potential future interest and penalties.
As part
of the purchase agreement dated December 31, 2003 between us and Bank of
Montreal for the purchase of 100% of the issued and outstanding capital stock of
DealerAccess, Inc., Bank of Montreal agreed to indemnify us specifically for
this potential liability for all sales tax periods prior to January 1,
2004. The potential sales tax liability for the period covered by this
indemnification is now closed due to the statutory expiration of the periods
open for audit by the Ministry. To date, all amounts paid to the Ministry by us
for this assessment have been reimbursed by the Bank of Montreal under this
indemnity.
We
undertook a comprehensive review of the audit findings of the Ministry using
external tax experts. Our position has been that our lender revenue transactions
are not subject to Ontario retail sales tax. We filed a formal Notice of
Objection with the Ministry on December 12, 2005. We received a letter
dated November 2, 2007 from an appeals officer of the Ministry stating that
the assessment was, in his opinion, properly raised and his intention was to
recommend his confirmation to senior management of the Ministry. The officer
agreed, however, to defer his recommendation for a period of thirty business
days to enable us to submit any additional information not yet provided. We
submitted additional information to the Ministry to support our position that
the services are not subject to sales tax.
We
received a letter dated December 21, 2007 from the Ministry stating that no
change should be made to the appeals officer’s opinion. The letter further
stated that we had ninety days from the date of the letter to file a Notice of
Appeal with the Superior Court of Justice. A Notice of Appeal was filed on our
behalf on March 18, 2008 to challenge the assessment because we did not
believe these services are subject to sales tax. On December 15, 2008, the
Ministry filed its response to our Notice of Appeal. The response reiterates the
Ministry’s position that the transactions are subject to Ontario retail sales
tax. The parties have completed the discovery process and we expect this matter
will be heard by the Superior Court in 2010. We have not accrued any related
sales tax liability for the period subsequent to May 31, 2003 for these
lender revenue transactions. This appeal is supported by the financial
institutions whose source revenue transactions were subject to the assessment.
These financial institutions have agreed to participate in the cost of the
litigation.
In the
event we are obligated to charge sales tax for this type of transaction, we
believe this Canadian subsidiary’s contractual arrangements with its lender
customers obligate these customers to pay all sales taxes that are levied or
imposed by any taxing authority by reason of the transactions contemplated under
the particular contractual arrangement. In the event of any failure to pay such
amounts by our customers, we would be required to pay the obligation, which
could range from $5.2 million (CAD) to $5.8 million (CAD), including
penalties and interest.
Stock-Based
Compensation
We have
four types of stock-based compensation programs: stock options, restricted stock
units, restricted common stock, and an employee stock purchase plan
(ESPP).
The
following summarizes stock-based compensation expense recognized for the three
years ended December 31, 2009, 2008 and 2007 (in thousands):
31
Stock-based
compensation cost is measured at the grant date based on the fair value of the
award, and recognized as an expense over the requisite service period net of an
estimated forfeiture rate. Determining the appropriate fair value model and
calculating the fair value of the share-based payment awards require the input
of highly subjective assumptions, including the expected life, expected stock
price volatility, and the number of expected options, restricted stock units, or
restricted common stock that will be forfeited prior to the completion of the
vesting requirements. We use the Black-Scholes and binomial lattice-based
valuation pricing models to value our stock-based awards.
Due to
our limited public company history, for the years ended December 31, 2009,
2008 and 2007, the expected volatility and for the year ended December 31,
2009, the expected life of an option grants were determined based on the
expected volatility and expected lives of similar entities whose shares are
publicly traded, except for the expected volatility and expected life
assumptions utilized for awards granted in September 2009 under the Stock Option
Exchange Program (SOEP) and the Long-Term Incentive Plan (LTIP). For the years
ended December 31, 2008 and 2007, the expected lives of options were determined
based on the “simplified” method under the provisions of ASC Topic 718-10, Compensation – Stock
Compensation.
For
options granted in September 2009 under the SOEP, we began estimating our
expected volatility using a time-weighted average of our historical volatility
in combination with the historical volatility of similar entities whose common
shares are publicly traded. We expect to apply this volatility
methodology to future option grants. The expected life under the SOEP
was determined by an independent third party by means of Monte-Carlo simulations
of future stock price based upon “in-the-money”, vesting schedule, contractual
term, current life to date and applied an annual termination rate (after
vesting) to the outstanding options in the simulation to reflect the probability
of exercise behavior. Stock-based compensation expenses related to
the SOEP will be amortized over the new vesting schedule of 25% six months from
the grant date, 25% twelve months from the grant date and 1/48 each month
thereafter.
Awards
granted under the LTIP consisted of 455,000 shares of restricted common stock
(net of cancellations). Each individual’s total award was allocated 50% to
achieving earnings before interest, taxes, depreciation and amortization, as
adjusted to reflect any future acquisitions (EBITDA Performance Award) and 50%
to the market value of our common stock (Market Value Award). The awards were to
be earned upon our achievement of EBITDA and market-based targets for the fiscal
years 2007, 2008 and 2009, but would not vest unless the grantee remains
continuously employed in active service until January 31, 2010. If an
EBITDA Performance Award or Market Value Award was not earned in an earlier
year, it could have been earned upon achievement of that target in a subsequent
year. The awards were subject to acceleration in full upon a change in control.
We valued the EBITDA Performance Award and the Market Value Award using the
Black-Scholes and binomial lattice-based valuation pricing models, respectively.
The total fair value of the entire EBITDA Performance Award was
$6.0 million (prior to estimated forfeitures), of which, in 2007, we began
expensing the amount associated with the 2007 award as it was deemed probable
that the threshold for the year ending December 31, 2007 would be met. The
EBITDA target for 2007 was achieved. As of December 31, 2009, no amounts were
expensed related to the EBITDA Performance Awards for 2008 and 2009 as the
targets were not achieved. The total value of the entire Market Value Award was
$2.5 million (including estimated forfeitures), which was expensed on a
straight-line basis from the date of grant over the applicable service period.
As long as the service condition was satisfied, the expense was not reverseable,
even if the market conditions were not satisfied. During the year ended December
31, 2009, 96,667 shares of long-term performance equity awards were cancelled
and the vesting of 38,333 shares of long-term performance equity awards were
accelerated due to the departure of certain executive officers, most of which
were in connection with the realignment of our workforce and business as
discussed in Note 16. On January 31, 2010, 151,697 shares of long-term
performance equity awards vested relating to the 2007 EBITDA Performance Award
and the 2007 Market Value Award and the remaining 303,303 shares of long-term
performance equity awards were cancelled as the 2008 and 2009 EBITDA and Market
Value targets were not achieved.
Other
assumptions required for estimating fair value with Black-Scholes model are the
expected risk-free interest rate and the expected dividend yield. The
risk-free interests used 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 as we have not
paid any dividends and current intend to retain any future earnings for use in
our business.
Options
granted generally (SOEP and LTIP exceptions noted above) vest over a period of
four years from the vesting commencement date (three years for directors), and
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 and
terminate, to the extent unvested, on the date of termination of employment, and
to the extent vested, generally 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.
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.
As
of December 31, 2009, there was $9.3 million, $5.9 million, and
$5.1 million of unamortized stock-based compensation expense related to
stock options, restricted common stock units, and restricted common stock
awards, respectively. The unamortized stock-based compensation expense related
to stock options and restricted common stock units is expected to be recognized
on a straight line basis over a weighted average remaining period of
1.8076 years and 3.1215 years, respectively. Of the $5.1 million of
unamortized stock-based compensation expense related to restricted common stock
awards, $2.1 million is expected to be recognized on a straight-line basis
over a weighted average remaining period of 0.5384 years. The remaining
$3.0 million of unamortized stock-based compensation expense related to
restricted common stock awards relates to the long-term incentive equity awards,
of which $0.1 million relates to the Market Value Awards and $2.9 million
relates to the EBITDA Performance Awards. Of the $3.0 million of unamortized
stock-based compensation expense related to the long-term incentive equity
awards, $2.9 million will not be expensed due to the cancellation of 303,303
awards on January 31, 2010.
32
Fair
Value Measurements
Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Inputs used to measure fair value
are prioritized into a three-level fair value hierarchy. This hierarchy requires
entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair values are
as follows:
We have
segregated all financial assets that are measured at fair value on a recurring
basis into the most appropriate level within the fair value hierarchy based on
the inputs used to determine the fair value at the measurement date in the table
below.
Financial
assets measured at fair value on a recurring basis include the following as of
December 31, 2009 and 2008 (in thousands):
Level 3
long-term investments as of December 31, 2009 also include $2.4 million, or 0.5%
of total assets, of tax-advantaged preferred stock of a financial institution.
It is uncertain whether we will be able to liquidate these securities within the
next twelve months; as such we have classified them as long-term on our
consolidated balance sheets. Due to the lack of observable market quotes we
utilized valuation models that rely exclusively on Level 3 inputs including
those that are based on expected cash flow streams, including assessments of
counterparty credit quality, default risk underlying the security, discount
rates and overall capital market liquidity. 33
The
change in the carrying amount of Level 3 investments for the years ended
December 31, 2008 and 2009 is as follows (in thousands):
We review
the fair value of our short-term and long-tem investments for impairment in
accordance with ASC Topic 320, Investments – Debt and Equity
Securities. A temporary impairment charge results in an
unrealized loss being recorded in the other comprehensive income component of
stockholders’ equity. It occurs if a loss in an investment is determined to be
temporary in nature and we have the ability and intent to hold the investment
until a recovery in market value takes place. Such an unrealized loss does not
reduce our net income for the applicable accounting period because the loss is
not viewed as other-than-temporary. An impairment charge is recorded against
earnings to the extent we determine that there is a loss of fair value that is
other-than-temporary. For the year end December 31, 2008, we determined that the
significant reduction in fair value related to our preferred stock trusts ARS
was other-than-temporary and we recorded an impairment charge in our
consolidated statements of operations based on a variety of factors, including
the significant decline in fair value indicated for the individual investments
and the adverse market conditions impacting ARS.
Realignment
of Workforce and Business
On
January 5, 2009, we announced a realignment of our workforce and business aimed
at sharpening our focus on high growth opportunities and to reflect current
market conditions. We reduced our workforce by approximately 90 people, or 8% of
our total employees, including several executive and senior-level positions. As
a result of the realignment, we incurred total restructuring costs during the
three months ended March 31, 2009 of approximately $6.7 million, including
approximately $3.9 million of net non-cash compensation expense.
The table
below sets forth the significant cash components and activity associated with
the realignment of workforce and business under the restructuring program for
the year ended December 31, 2009 (in thousands):
34
Results
of Operations
The
following table sets forth, for the periods indicated, the selected consolidated
statements of operations:
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