UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
2006
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934 FOR THE TRANSITION PERIOD FROM _________ TO
________
|
|
|
Commission
File No. 0-25681
(Exact
name of registrant as specified in its charter)
Florida
(State
or other jurisdiction of incorporation or organization)
11760
U.S. Highway One, Suite 200
North
Palm Beach, Florida
(Address
of principal executive offices)
|
65-0423422
(I.R.S.
Employer Identification No.)
33408
(Zip
Code)
|
Registrant’s
telephone number, including area code: (561) 630-2400
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 x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer o Accelerated
filer x
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
number of outstanding shares of the issuer’s common stock as of October 31, 2006
was as follows: 18,116,060 shares of Common Stock, $.01 par value.
Bankrate,
Inc.
Quarterly
Report on Form 10-Q for the Quarter Ended September 30,
2006
Index
PART
I.
|
FINANCIAL
INFORMATION
|
PAGE
NO.
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets at September 30, 2006 and December 31,
2005
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Income for the Three and Nine Months Ended
|
|
|
September
30, 2006 and 2005
|
5
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for Nine Months Ended
|
|
|
September
30, 2006 and 2005
|
6
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
16
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
29
|
|
|
|
Item
4.
|
Controls
and Procedures
|
30
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
30
|
|
|
|
Item
1A.
|
Risk
Factors
|
30
|
|
|
|
Item
2.
|
Unregistered
Sales of Securities and Use of Proceeds
|
31
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
31
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
31
|
|
|
|
Item
5.
|
Other
Information
|
31
|
|
|
|
Item
6.
|
Exhibits
|
31
|
|
|
|
Signatures
|
31
|
Introductory
Note
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains “forward-looking statements,” within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, among others, statements about our beliefs,
plans, objectives, goals, expectations, estimates and intentions that are
subject to significant risks and uncertainties and are subject to change
based
on various factors, many of which are beyond our control. The words “may,”
“could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,”
“intend,” “plan,” “target,” “goal,” and similar expressions are intended to
identify forward-looking statements. All forward-looking statements, by their
nature, are subject to risks and uncertainties. Our actual future results
may
differ materially from those set forth in our forward-looking statements.
Our
ability to achieve our financial objectives could be adversely affected by
the
factors discussed in detail in Part I, Item 2, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and Part II, Item 1A.
“Risk Factors” in this Quarterly Report on Form 10-Q, the following sections of
our Annual Report on Form 10-K, as amended, for the year ended December 31,
2005
(the “2005 Form 10-K”): (a) “Introductory Note” in Part I, Item 1. “Business”;
(b) “Risk Factors” in Part I, Item 1A., “Business,” and (c) “Introduction” in
Part II, Item 7., “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” as well as:
§
|
the
willingness of our advertisers to advertise on our web
sites;
|
§
|
interest
rate volatility;
|
§
|
our
ability to establish and maintain distribution
arrangements;
|
§
|
our
ability to integrate the business and operations of companies that
we have
acquired, and those we may acquire in the future;
|
§
|
our
need and our ability to incur additional debt or equity
financing;
|
§
|
the
effect of unexpected liabilities we assume from our
acquisitions;
|
§
|
the
impact of resolution of lawsuits to which we are a
party;
|
§
|
the
willingness of consumers to accept the Internet as a medium for obtaining
financial product information;
|
§
|
increased
competition and its effect on our web site traffic, advertising rates,
margins, and market share;
|
§
|
our
ability to manage traffic on our web sites and service
interruptions;
|
§
|
our
ability to protect our intellectual property;
|
§
|
the
effects of facing liability for content on our web
sites;
|
§
|
legislative
or regulatory changes;
|
§
|
the
concentration of ownership of our common stock;
|
§
|
the
fluctuations of our results of operations from period to period;
|
§
|
the
strength of the United States economy in general;
|
§
|
the
accuracy of our financial statement estimates and assumptions;
|
§
|
effect
of changes in the stock market and other capital markets;
|
§
|
technological
changes;
|
§
|
changes
in monetary and fiscal policies of the U.S. Government;
|
§
|
changes
in consumer spending and saving habits;
|
§
|
changes
in accounting principles, policies, practices or
guidelines;
|
§
|
other
risks described from time to time in our filings with the Securities
and
Exchange Commission; and
|
§
|
our
ability to manage the risks involved in the foregoing.
|
However,
other factors besides those referenced could adversely affect our results,
and
you should not consider any such list of factors to be a complete set of all
potential risks or uncertainties. Any forward-looking statements made by us
herein speak as of the date of this Quarterly Report. We do not undertake to
update any forward-looking statement, except as required by law.
Part
I. FINANCIAL INFORMATION
Item
1. FINANCIAL
STATEMENTS
Bankrate,
Inc.
|
|
Condensed
Consolidated Balance Sheets
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
Assets
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
103,218,730
|
|
$
|
3,479,609
|
|
Accounts
receivable, net of allowance for doubtful accounts of
approximately
|
|
|
|
|
|
|
|
$2,130,000
at September 30, 2006 and $1,630,000 at December 31, 2005
|
|
|
13,994,299
|
|
|
8,838,879
|
|
Deferred
income taxes, current portion
|
|
|
4,053,988
|
|
|
6,445,636
|
|
Insurance
claim receivable
|
|
|
-
|
|
|
85,575
|
|
Prepaid
expenses and other current assets
|
|
|
1,081,391
|
|
|
481,677
|
|
Total
current assets
|
|
|
122,348,408
|
|
|
19,331,376
|
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and equipment, net of accumulated depreciation and amortization
of
|
|
|
|
|
|
|
|
$3,696,000
at September 30, 2006 and $3,160,000 at December 31, 2005
|
|
|
1,505,097
|
|
|
1,063,307
|
|
Deferred
income taxes
|
|
|
1,371,851
|
|
|
28,769
|
|
Intangible
assets, net of accumulated amortization of $1,904,000 at September
30,
2006
|
|
|
|
|
|
|
|
and
$697,000 at December 31, 2005
|
|
|
14,884,993
|
|
|
11,652,161
|
|
Goodwill
|
|
|
30,084,434
|
|
|
30,035,399
|
|
Other
assets
|
|
|
783,343
|
|
|
442,211
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
170,978,126
|
|
$
|
62,553,223
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,989,833
|
|
$
|
3,215,645
|
|
Accrued
expenses
|
|
|
6,776,387
|
|
|
5,093,187
|
|
Deferred
revenue
|
|
|
294,303
|
|
|
1,176,119
|
|
Other
current liabilities
|
|
|
21,697
|
|
|
37,187
|
|
Total
current liabilities
|
|
|
9,082,220
|
|
|
9,522,138
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
209,256
|
|
|
178,133
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
9,291,476
|
|
|
9,700,271
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, 10,000,000 shares authorized and undesignated
|
|
|
-
|
|
|
-
|
|
Common
stock, par value $.01 per share-- 100,000,000 shares authorized;
18,114,848 and
|
|
|
|
|
|
|
|
15,857,877
shares issued and outstanding at September 30, 2006 and December
31, 2005,
respectively
|
|
|
181,148
|
|
|
158,579
|
|
Additional
paid in capital
|
|
|
173,684,781
|
|
|
70,981,544
|
|
Accumulated
deficit
|
|
|
(12,179,279
|
)
|
|
(18,287,171
|
)
|
Total
stockholders' equity
|
|
|
161,686,650
|
|
|
52,852,952
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
170,978,126
|
|
$
|
62,553,223
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
Bankrate,
Inc.
|
|
Condensed
Consolidated Statements of Income
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
Revenue:
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Online
publishing
|
|
$
|
15,777,141
|
|
$
|
11,214,265
|
|
$
|
46,858,127
|
|
$
|
31,684,841
|
|
Print
publishing and licensing
|
|
|
3,709,277
|
|
|
1,157,758
|
|
|
12,083,093
|
|
|
3,474,061
|
|
Total
revenue
|
|
|
19,486,418
|
|
|
12,372,023
|
|
|
58,941,220
|
|
|
35,158,902
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
publishing
|
|
|
2,648,944
|
|
|
1,902,520
|
|
|
8,356,396
|
|
|
5,365,122
|
|
Print
publishing and licensing
|
|
|
3,358,281
|
|
|
1,116,943
|
|
|
10,673,649
|
|
|
3,295,487
|
|
Total
cost of revenue
|
|
|
6,007,225
|
|
|
3,019,463
|
|
|
19,030,045
|
|
|
8,660,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
13,479,193
|
|
|
9,352,560
|
|
|
39,911,175
|
|
|
26,498,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
1,392,424
|
|
|
943,594
|
|
|
3,728,615
|
|
|
2,756,038
|
|
Marketing
|
|
|
1,397,575
|
|
|
1,376,988
|
|
|
3,437,836
|
|
|
4,609,621
|
|
Product
development
|
|
|
936,539
|
|
|
696,755
|
|
|
2,766,235
|
|
|
1,711,638
|
|
General
and administrative
|
|
|
5,300,233
|
|
|
2,160,743
|
|
|
16,734,800
|
|
|
6,296,676
|
|
Legal
settlement
|
|
|
3,000,000
|
|
|
-
|
|
|
3,000,000
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
631,573
|
|
|
180,811
|
|
|
1,753,988
|
|
|
578,385
|
|
|
|
|
12,658,344
|
|
|
5,358,891
|
|
|
31,421,474
|
|
|
15,952,358
|
|
Income
from operations
|
|
|
820,849
|
|
|
3,993,669
|
|
|
8,489,701
|
|
|
10,545,935
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,075,351
|
|
|
301,888
|
|
|
1,720,656
|
|
|
655,295
|
|
Insurance
recovery in excess of costs and expenses
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
220,705
|
|
Total
other income
|
|
|
1,075,351
|
|
|
301,888
|
|
|
1,720,656
|
|
|
876,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
1,896,200
|
|
|
4,295,557
|
|
|
10,210,357
|
|
|
11,421,935
|
|
Provision
for income taxes
|
|
|
656,116
|
|
|
1,632,312
|
|
|
4,102,465
|
|
|
4,340,336
|
|
Net
income
|
|
$
|
1,240,084
|
|
$
|
2,663,245
|
|
$
|
6,107,892
|
|
$
|
7,081,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
$
|
0.17
|
|
$
|
0.36
|
|
$
|
0.45
|
|
Diluted
|
|
$
|
0.07
|
|
$
|
0.16
|
|
$
|
0.35
|
|
$
|
0.42
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,112,909
|
|
|
15,815,057
|
|
|
17,050,167
|
|
|
15,802,409
|
|
Diluted
|
|
|
18,238,675
|
|
|
17,109,385
|
|
|
17,552,836
|
|
|
16,762,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
Bankrate,
Inc.
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
(Unaudited)
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
6,107,892
|
|
$
|
7,081,599
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,753,988
|
|
|
578,385
|
|
Provision
for doubtful accounts receivable
|
|
|
1,157,939
|
|
|
157,218
|
|
Share-based
compensation
|
|
|
6,705,452
|
|
|
-
|
|
Excess
tax benefit-stock options
|
|
|
612,205
|
|
|
-
|
|
Deferred
income taxes
|
|
|
1,048,566
|
|
|
4,340,336
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(6,123,279
|
)
|
|
(1,640,086
|
)
|
Other
assets
|
|
|
(561,539
|
)
|
|
413,032
|
|
Accounts
payable
|
|
|
(1,225,812
|
)
|
|
128,670
|
|
Accrued
expenses
|
|
|
1,683,200
|
|
|
1,073,202
|
|
Other
liabilities
|
|
|
(944,669
|
)
|
|
133,707
|
|
Net
cash provided by operating activities
|
|
|
10,213,943
|
|
|
12,266,063
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of furniture, fixtures and equipment
|
|
|
(1,083,499
|
)
|
|
(166,445
|
)
|
Cash
used related to acquisitions
|
|
|
(4,571,629
|
)
|
|
-
|
|
Proceeds
from sale of assets
|
|
|
68,000
|
|
|
12,350
|
|
Restricted
cash
|
|
|
(295,843
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(5,882,971
|
)
|
|
(154,095
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from the sale of common stock
|
|
|
90,688,008
|
|
|
-
|
|
Proceeds
from the exercise of stock options
|
|
|
2,698,955
|
|
|
194,553
|
|
Excess
tax benefit-stock options
|
|
|
2,021,186
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
95,408,149
|
|
|
194,553
|
|
Net
increase in cash and cash equivalents
|
|
|
99,739,121
|
|
|
12,306,521
|
|
Cash
and equivalents, beginning of period
|
|
|
3,479,609
|
|
|
27,735,267
|
|
Cash
and equivalents, end of period
|
|
$
|
103,218,730
|
|
$
|
40,041,788
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for taxes
|
|
$
|
1,137,415
|
|
$
|
23,000
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
BANKRATE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(Unaudited)
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
Company
Bankrate,
Inc. and subsidiaries (the “Company”) own and operate an Internet-based consumer
banking marketplace. The Company’s flagship site, Bankrate.com (the “Web site”),
is one of the web’s leading aggregators of information on more than 300
financial products and fees, including mortgages, credit cards, new and used
automobile loans, money market accounts, certificates of deposit, checking
and
ATM fees, home equity loans and online banking fees. Additionally, the Company
provides financial applications and information to a network of distribution
partners and through national and state publications. The Company is organized
under the laws of the state of Florida.
Acquisitions
On
November 30, 2005, the Company completed the acquisition of Wescoco LLC, a
Delaware limited liability company d/b/a “FastFind” (“FastFind”) for $10 million
in cash, plus a net working capital adjustment of $149,000 in the quarter ended
June 30, 2006, in accordance with the Agreement and Plan of Merger dated
November 20, 2005.
On
December 1, 2005, the Company completed the acquisition of Mortgage Market
Information Services, Inc., an Illinois corporation (“MMIS”), and Interest.com,
Inc., an Illinois corporation (“Interest.com”) for $30 million in
cash,
subject
to final Closing Date Equity adjustments under section 3.03 of the Agreement
and
Plan of Merger dated November 20, 2005.
The
unaudited financial information in the table below summarizes the combined
results of operations of the Company, FastFind, MMIS and Interest.com, on a
pro
forma basis, as though the companies had been combined as of the beginning
of
the period presented. The pro forma financial information is presented for
informational purposes only and is not indicative of the results of operations
that would have been achieved if the acquisitions had taken place on January
1,
2005 or of the results that may occur in the future.
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2005
|
|
2005
|
|
Total
revenue
|
|
$
|
17,702,959
|
|
$
|
52,360,680
|
|
Income
from operations
|
|
|
3,514,850
|
|
|
9,272,486
|
|
Net
income
|
|
|
2,183,873
|
|
|
5,887,623
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
$
|
0.37
|
|
Diluted
|
|
$
|
0.13
|
|
$
|
0.35
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
15,815,057
|
|
|
15,802,409
|
|
Diluted
|
|
|
17,109,385
|
|
|
16,762,149
|
|
On
August
4, 2006, the Company completed the acquisition of a group of assets that
consists of three web sites (Mortgage-calc.com, Mortgagecalc.com and
Mortgagemath.com, collectively “Mortgage-calc.com”) owned and operated by East
West Mortgage, Inc. for $4.4 million in cash. The operations of these web sites
were integrated into the online publishing segment.
Stock
Offering
In
May
2006, the Company closed a public offering of 2,697,776 shares of its common
stock, of which 2,005,991 shares were sold by the Company and 691,785 shares
were sold by certain of the Company’s existing stockholders and employees, at a
price of $48.25 per share, resulting in net proceeds to the Company of
approximately $92.7 million, which includes $1.7 million in proceeds from the
exercise of stock options by existing stockholders and employees.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements include
those
of the Company and its wholly-owned subsidiaries, FastFind, MMIS and
Interest.com, after elimination of all intercompany accounts and transactions.
The Company has prepared the accompanying financial statements in conformity
with accounting principles generally accepted in the United States of America
(“United States”) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all
of the information and notes required by accounting principles generally
accepted in the United States for complete financial statements. The interim
financial information is unaudited but reflects all adjustments that are, in
the
opinion of management, necessary to provide a fair statement of the results
of the Company for the interim periods presented. Such adjustments are normal
and recurring except as otherwise noted. Operating results for the three and
nine months ended September 30, 2006 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2006
(“fiscal 2006”).
The
unaudited condensed consolidated financial statements included herein should
be
read in conjunction with the financial statements and related footnotes included
in the Company’s 2005 Form 10-K.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent gains and losses at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Basic
and Diluted Net Income Per Share
The
Company computes basic net income per share by dividing net income for the
period by the weighted average number of shares outstanding for the period,
excluding unvested stock options. Diluted net income per share includes the
effect of common stock equivalents, consisting of unvested outstanding stock
options and unrecognized compensation expense and tax benefits in accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based
Payment,
to the
extent the effect is not anti-dilutive, using the treasury stock
method.
The
weighted average number of common shares outstanding used in computing diluted
net income per share for the three and nine months ended September 30, 2006
and
2005 includes the shares resulting from the dilutive effect of outstanding
stock
options. For the three and nine months ended September 30, 2006, 580,500 and
176,000 shares, respectively, attributable to the assumed exercise of
outstanding stock options were excluded from the calculation of diluted net
income per share because the effect was anti-dilutive. For the three and nine
months ended September 30, 2005, 7,500 shares attributable to the assumed
exercise of outstanding stock options were excluded from the calculation of
diluted net income per share because the effect was anti-dilutive.
Goodwill
SFAS
No.
142,
Goodwill and Other Intangible Assets,
requires the Company to test goodwill for impairment at least annually at the
reporting unit level in lieu of amortization. The Company has determined that
it
has two reporting units, online publishing and print publishing and licensing,
under SFAS No. 142, as these are the components of the business for which
discrete financial information is available and for which segment management
regularly reviews the operating results.
The
goodwill impairment test is a two-step test. Under the first step, the fair
value of the reporting unit is compared with its carrying value, including
goodwill. If the fair value of the reporting unit is less than its carrying
value, an indication of goodwill impairment exists for the reporting unit and,
accordingly, the enterprise must perform step two of the impairment test
(measurement).
The
Company performs an annual impairment review of goodwill for both reporting
units during the fourth quarter of each year, or more frequently, if facts
and
circumstances warrant a review.
SFAS
No.
142 also requires that intangible assets with definite lives be amortized over
their estimated useful life and reviewed for impairment in accordance with
SFAS
No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
In
connection with the acquisition of FastFind on November 30, 2005, the Company
made a final payment of approximately $149,000 based on an adjustment to Closing
Date Net Working Capital as defined under Section 3.03 of the Agreement and
Plan
of Merger dated November 20, 2005. Accordingly, goodwill was increased by this
amount during the quarter ended June 30, 2006.
The
Agreement and Plan of Merger for the acquisition of MMIS and Interest.com dated
December 1, 2005 contains a provision in Section 3.03 for the potential
adjustment to Closing Date Equity, as defined. To date, no such adjustment
has
been agreed upon.
Goodwill was adjusted however, for approximately $190,000 related to accounts
receivable and $78,000 related to deferred revenue.
Allowance
for Doubtful Accounts
We
maintain an allowance for doubtful accounts for estimated losses resulting
from
the inability or unwillingness of our customers to make required payments.
We
look at historical write-offs and sales growth when determining the adequacy
of
the allowance. Should the financial condition of our customers deteriorate,
resulting in an impairment of their ability to make payments, or if the level
of
accounts receivable increases, the need for possible additional allowances
may
be necessary. Any additions to the allowance for doubtful accounts are recorded
as bad debt expense and included in general and administrative expenses. During
the nine months ended September 30, 2006 and 2005, the Company charged
approximately $1,158,000 and $157,000, respectively, to bad debt expense, and
wrote off approximately $658,000 and $104,000, respectively, of accounts deemed
uncollectible.
Share-Based
Compensation
During
the first quarter of fiscal 2006, the Company adopted the provisions of, and
accounts for stock-based compensation in accordance with, SFAS No. 123R,
which
replaced
SFAS No. 123, Accounting
for Stock-Based Compensation
and
supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting
for Stock Issued to Employees.
Under
the fair value recognition provisions of SFAS No. 123R, stock-based compensation
cost is measured at the grant date based on the fair value of the award and
is
recognized as an expense on a straight-line basis over the requisite service
period, which is generally the vesting period. The Company elected the modified
prospective method, pursuant to which prior periods are not revised for
comparative purposes. The valuation provisions of SFAS No. 123R apply to new
grants and to grants that were outstanding as of the effective date of SFAS
No.
123R and are subsequently modified. Estimated compensation for grants that
were
outstanding as of the effective date will be recognized over the remaining
service period using the compensation cost estimated for the SFAS No. 123 pro
forma disclosures. The adoption of SFAS No. 123R had a material impact on our
consolidated financial position, results of operations and cash flows. See
Note
3 for further information regarding the Company’s stock-based compensation
assumptions and expense, including pro forma disclosures for prior periods,
as
if the Company had recorded stock-based compensation expense.
Stockholders’
Equity
The
activity in stockholders’ equity for the nine months ended September 30, 2006 is
shown below.
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
|
Balances,
December 31, 2005
|
|
|
15,857,877
|
|
$
|
158,579
|
|
$
|
70,981,544
|
|
$
|
(18,287,171
|
)
|
$
|
52,852,952
|
|
Proceeds
from sale of common stock, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
offering costs of $6,101,000
|
|
|
2,005,991
|
|
|
20,060
|
|
|
90,667,948
|
|
|
-
|
|
|
90,688,008
|
|
Stock
options exercised
|
|
|
250,980
|
|
|
2,509
|
|
|
2,696,446
|
|
|
-
|
|
|
2,698,955
|
|
Tax
benefit-stock options
|
|
|
-
|
|
|
-
|
|
|
2,633,391
|
|
|
-
|
|
|
2,633,391
|
|
Share-based
compensation
|
|
|
-
|
|
|
-
|
|
|
6,705,452
|
|
|
-
|
|
|
6,705,452
|
|
Net
income for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,107,892
|
|
|
6,107,892
|
|
Balances,
September 30, 2006
|
|
|
18,114,848
|
|
$
|
181,148
|
|
$
|
173,684,781
|
|
$
|
(12,179,279
|
)
|
$
|
161,686,650
|
|
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing 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 recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
If
it is more likely than not that some portion or all of a deferred tax asset
will
not be realized, a valuation allowance is recorded. The valuation allowance
is
based on management’s judgment as to future taxable income in light of
historical results, the current environment, forecasted performance and other
factors.
Comprehensive
Income
Comprehensive
income is the same as net income for the three and nine months ended September
30, 2006 and 2005.
Reclassification
Certain
prior year amounts have been reclassified to conform with the current year
presentation.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair
value Measurements,
which
defines fair value, establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurements. SFAS No. 157 does not require
any
new fair value measurements but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements. SFAS No. 157 is effective
for
fiscal years beginning after November 15, 2007. Management is currently
evaluating the impact of SFAS No. 157 but does not expect the adoption of SFAS
No. 157 to have a material impact on the Company’s consolidated financial
position, results of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement
Plans
(an
amendment of FASB Statements No. 87, 88, 106, and 132R). SFAS
No.
158 requires an employer to recognize the funded status of its defined benefit
pension and postretirement plans on its balance sheet and to recognize as a
component of other comprehensive income, net of taxes, the gains or losses
and
prior service credits that arise during the period but are not recognized as
components of net periodic benefit costs. Upon initial adoption, SFAS
No.
158 requires the recognition of previously unrecognized actuarial gains and
losses, prior service costs or credits and net transition amounts within
accumulated other comprehensive income, net of tax. The provisions of
SFAS
No.
158 are effective as of the end of fiscal year 2006. Management does not expect
the adoption of SFAS No. 158 to have a material impact on the Company’s
consolidated financial position, results of operations or cash flows, as the
Company currently has no plans within the scope of SFAS No.
158.
In
September 2006, the Securities and Exchange Commission (“SEC”) staff issued
Staff Accounting Bulletin (“SAB”) No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”
(“SAB
108”). The SEC staff is providing guidance on how prior year misstatements
should be taken into consideration when quantifying misstatements in current
year financial statements for purposes of determining whether the current year’s
financial statements are materially misstated. SAB 108 provides that once a
current year misstatement has been quantified, the guidance in SAB No. 99,
“Materiality”
(“SAB
99”) should be applied to determine whether the misstatement is material and
should result in an adjustment to the financial statements. If correcting a
misstatement in the current year would materially misstate the current year’s
income statement, the SEC staff indicates that the prior year financial
statements should be adjusted. In making these adjustments, previously filed
reports do not need to be amended. Instead, the adjustments should be reflected
the next time the registrant would otherwise be filing those prior year
financial statements. If in the current year, however, the registrant identifies
a misstatement that is material to those prior year financial statements, the
registrant would be required to restate for the material misstatement in
accordance with FASB Statement No. 154, “Accounting
Changes and Error Corrections”.
This
guidance is effective for an interim period of the first fiscal year ending
after November 15, 2006. The Company is currently evaluating the impact of
adopting SAB 108, but does not expect it to have a material impact on its
consolidated financial position, results of operations, or cash flow.
In
June
2006, the FASB issued FASB Interpretation No. (“FIN”) 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
Accounting for Income Taxes.
FIN 48
prescribes a recognition and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
recognition. The evaluation of a tax position in accordance with FIN 48 is
a
two-step process. The first step is recognition: management must determine
whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. The second step is
measurement: A tax position that meets the more-likely-than-not recognition
threshold is measured at the largest amount of benefit that has a greater than
50 percent likelihood of being realized upon settlement. FIN 48 is effective
for
fiscal years beginning after December 15, 2006. The provisions of FIN 48 must
be
applied to all tax positions upon initial adoption. The cumulative effect of
applying the provisions of FIN 48 must be reported as an adjustment to the
opening balance of retained earnings for that fiscal year. Management has not
yet determined what impact, if any, the adoption of FIN 48 will have on the
Company’s financial statements.
In
February 2006, the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments,
which
amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities,
and
SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
SFAS
No. 155 simplifies the accounting for certain derivatives embedded in other
financial instruments by allowing them to be accounted for as a whole if the
holder elects to account for the whole instrument on a fair value basis. SFAS
No. 155 also clarifies and amends certain other provisions of SFAS No. 133
and
SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired,
issued or subject to a remeasurement event occurring in fiscal years beginning
after September 15, 2006. The Company does not expect the adoption of SFAS
No.
155 to have a material impact on its consolidated financial position, results
of
operations or cash flows, as the Company currently has no financial instruments
within the scope of SFAS No. 155.
NOTE
2 - SEGMENT INFORMATION
The
Company currently operates in two reportable business segments: online
publishing and print publishing and licensing. The online publishing segment
is
primarily engaged in the sale of advertising, sponsorships, and hyperlinks
in
connection with the Company’s web sites, Bankrate.com, Interest.com,
FastFind.com and Mortgage-calc.com. The print publishing and licensing segment
is primarily engaged in the sale of advertising in the Mortgage Guide rate
tables, newsletter subscriptions, and licensing of research information. The
acquired operations of FastFind, Interest.com, and Mortgage-calc.com are
included in the online publishing segment. The acquired operations of Mortgage
Market Information Services, Inc. are included in the print publishing and
licensing segment. The Company evaluates the performance of its operating
segments based on segment profit and loss.
No
single
customer accounted for more than 10% of total revenue for the three and nine
months ended September 30, 2006. The Company had two online customers that
accounted for approximately 11% and 9%, respectively, of total revenue for
the
three months ended September 30, 2005. Those same customers each accounted
for
10% of total revenue for the nine months ended September 30, 2005. No material
revenues were generated outside of the United States.
Summarized
segment information as of, and for, the three and nine months ended September
30, 2006 and 2005 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
|
|
|
|
|
|
|
|
Online
|
|
Publishing
|
|
|
|
|
|
|
|
Publishing
|
|
and
Licensing
|
|
Other
|
|
Total
|
|
Three
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
15,777,141
|
|
$
|
3,709,277
|
|
$
|
-
|
|
$
|
19,486,418
|
|
Cost
of revenue
|
|
|
2,648,944
|
|
|
3,358,281
|
|
|
-
|
|
|
6,007,225
|
|
Gross
margin
|
|
|
13,128,197
|
|
|
350,996
|
|
|
-
|
|
|
13,479,193
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
1,392,424
|
|
|
-
|
|
|
-
|
|
|
1,392,424
|
|
Marketing
|
|
|
1,397,575
|
|
|
-
|
|
|
-
|
|
|
1,397,575
|
|
Product
development
|
|
|
758,267
|
|
|
178,272
|
|
|
-
|
|
|
936,539
|
|
General
and administrative
|
|
|
4,346,570
|
|
|
953,663
|
|
|
-
|
|
|
5,300,233
|
|
Legal
settlement
|
|
|
3,000,000
|
|
|
-
|
|
|
-
|
|
|
3,000,000
|
|
Depreciation
and amortization
|
|
|
530,416
|
|
|
101,157
|
|
|
-
|
|
|
631,573
|
|
Other
income
|
|
|
-
|
|
|
-
|
|
|
1,075,351
|
|
|
1,075,351
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
(656,116
|
)
|
|
(656,116
|
)
|
Segment
profit (loss)
|
|
$
|
1,702,945
|
|
$
|
(882,096
|
)
|
$
|
419,235
|
|
$
|
1,240,084
|
|
Goodwill
|
|
$
|
26,129,688
|
|
$
|
3,954,746
|
|
$
|
-
|
|
$
|
30,084,434
|
|
Total
assets
|
|
$
|
51,949,903
|
|
$
|
8,518,920
|
|
$
|
110,509,303
|
|
$
|
170,978,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
|
|
|
|
|
|
|
|
Online
|
|
Publishing
|
|
|
|
|
|
|
|
Publishing
|
|
and
Licensing
|
|
Other
|
|
Total
|
|
Three
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
11,214,265
|
|
$
|
1,157,758
|
|
$
|
-
|
|
$
|
12,372,023
|
|
Cost
of revenue
|
|
|
1,902,520
|
|
|
1,116,943
|
|
|
-
|
|
|
3,019,463
|
|
Gross
margin
|
|
|
9,311,745
|
|
|
40,815
|
|
|
-
|
|
|
9,352,560
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
943,594
|
|
|
-
|
|
|
-
|
|
|
943,594
|
|
Marketing
|
|
|
1,376,988
|
|
|
-
|
|
|
-
|
|
|
1,376,988
|
|
Product
development
|
|
|
631,554
|
|
|
65,201
|
|
|
-
|
|
|
696,755
|
|
General
and administrative
|
|
|
1,958,543
|
|
|
202,200
|
|
|
-
|
|
|
2,160,743
|
|
Depreciation
and amortization
|
|
|
163,891
|
|
|
16,920
|
|
|
-
|
|
|
180,811
|
|
Other
income
|
|
|
-
|
|
|
-
|
|
|
301,888
|
|
|
301,888
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
(1,632,312
|
)
|
|
(1,632,312
|
)
|
Segment
profit (loss)
|
|
$
|
4,237,175
|
|
$
|
(243,506
|
)
|
$
|
(1,330,424
|
)
|
$
|
2,663,245
|
|
Total
assets
|
|
$
|
4,154,330
|
|
$
|
25,890
|
|
$
|
50,438,031
|
|
$
|
54,618,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
|
|
|
|
|
|
|
|
Online
|
|
Publishing
|
|
|
|
|
|
|
|
Publishing
|
|
and
Licensing
|
|
Other
|
|
Total
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
46,858,127
|
|
$
|
12,083,093
|
|
$
|
-
|
|
$
|
58,941,220
|
|
Cost
of revenue
|
|
|
8,356,396
|
|
|
10,673,649
|
|
|
-
|
|
|
19,030,045
|
|
Gross
margin
|
|
|
38,501,731
|
|
|
1,409,444
|
|
|
-
|
|
|
39,911,175
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
3,728,615
|
|
|
-
|
|
|
-
|
|
|
3,728,615
|
|
Marketing
|
|
|
3,437,836
|
|
|
-
|
|
|
-
|
|
|
3,437,836
|
|
Product
development
|
|
|
2,199,150
|
|
|
567,085
|
|
|
-
|
|
|
2,766,235
|
|
General
and administrative
|
|
|
13,310,600
|
|
|
3,424,200
|
|
|
-
|
|
|
16,734,800
|
|
Legal
settlement
|
|
|
3,000,000
|
|
|
-
|
|
|
-
|
|
|
3,000,000
|
|
Depreciation
and amortization
|
|
|
1,504,422
|
|
|
249,566
|
|
|
-
|
|
|
1,753,988
|
|
Other
income
|
|
|
-
|
|
|
-
|
|
|
1,720,656
|
|
|
1,720,656
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
(4,102,465
|
)
|
|
(4,102,465
|
)
|
Segment
profit (loss)
|
|
$
|
11,321,108
|
|
$
|
(2,831,407
|
)
|
$
|
(2,381,809
|
)
|
$
|
6,107,892
|
|
Goodwill
|
|
$
|
26,129,688
|
|
$
|
3,954,746
|
|
$
|
-
|
|
$
|
30,084,434
|
|
Total
assets
|
|
$
|
51,949,903
|
|
$
|
8,518,920
|
|
$
|
110,509,303
|
|
$
|
170,978,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
|
|
|
|
|
|
|
|
Online
|
|
Publishing
|
|
|
|
|
|
|
|
Publishing
|
|
and
Licensing
|
|
Other
|
|
Total
|
|
Nine
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
31,684,841
|
|
$
|
3,474,061
|
|
$
|
-
|
|
$
|
35,158,902
|
|
Cost
of revenue
|
|
|
5,365,122
|
|
|
3,295,487
|
|
|
-
|
|
|
8,660,609
|
|
Gross
margin
|
|
|
26,319,719
|
|
|
178,574
|
|
|
-
|
|
|
26,498,293
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
2,756,038
|
|
|
-
|
|
|
-
|
|
|
2,756,038
|
|
Marketing
|
|
|
4,609,621
|
|
|
-
|
|
|
-
|
|
|
4,609,621
|
|
Product
development
|
|
|
1,542,511
|
|
|
169,127
|
|
|
-
|
|
|
1,711,638
|
|
General
and administrative
|
|
|
5,674,500
|
|
|
622,176
|
|
|
-
|
|
|
6,296,676
|
|
Depreciation
and amortization
|
|
|
521,235
|
|
|
57,150
|
|
|
-
|
|
|
578,385
|
|
Other
income
|
|
|
-
|
|
|
-
|
|
|
876,000
|
|
|
876,000
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
(4,340,336
|
)
|
|
(4,340,336
|
)
|
Segment
profit (loss)
|
|
$
|
11,215,814
|
|
$
|
(669,879
|
)
|
$
|
(3,464,336
|
)
|
$
|
7,081,599
|
|
Total
assets
|
|
$
|
4,154,330
|
|
$
|
25,890
|
|
$
|
50,438,031
|
|
$
|
54,618,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
3 - SHARE-BASED COMPENSATION
Stock
Options
The
Company’s stock option program is a long-term retention program that is intended
to attract, retain and provide incentives for directors, officers and employees
in the form of incentive and non-qualified stock options and restricted stock.
Currently, the Company grants stock options from the 1999 Equity Compensation
Plan, as amended, contingent on stockholder approval of the Board of Director’s
recommendation to increase the number of shares authorized to be issued pursuant
to such plan. The Board of Directors has the sole authority to determine who
receives such grants, the type, size and timing of such grants, and to specify
the terms of any non-competition agreements relating to the grants.
Beginning
with the first quarter of fiscal 2006, the Company adopted SFAS No. 123R. See
Note 1 for a description of our adoption of SFAS No. 123R. The Company currently
uses the Black-Scholes option pricing model to determine the fair value of
its
stock options. The determination of the fair value of the awards on the date
of
grant using an option-pricing model is affected by the price of the Company’s
common stock, as well as assumptions regarding a number of complex and
subjective variables. These variables include expected stock price volatility
over the term of the awards, actual and projected employee stock option exercise
behaviors, risk-free interest rates and expected dividends.
The
Company estimates the expected term of outstanding stock options by taking
the
average of the vesting term and the contractual term of the option, as
illustrated in the Staff Accounting Bulletin (“SAB”) 107. The Company estimated
the volatility of its common stock by using a weighted average of historical
stock price volatility and implied volatility in market traded options in
accordance with SAB 107. The decision to use a weighted average volatility
factor was based upon the relatively short period of availability of data on
actively traded options on its common stock, and its assessment that implied
volatility is more representative of future stock price trends than historical
volatility. The Company based the risk-free interest rate that it uses in the
option pricing model on U.S. Treasury constant maturity issues having remaining
terms similar to the expected terms on the options. The Company does not
anticipate paying any cash dividends in the foreseeable future and therefore
used an expected dividend yield of zero in the option pricing model. The Company
is required to estimate forfeitures at the time of grant and revise those
estimates in subsequent periods if actual forfeitures differ from those
estimates. The Company uses historical data to estimate pre-vesting option
forfeitures and records stock-based compensation expense only for those awards
that are expected to vest. All share-based payment awards are amortized on
a
straight-line basis over the requisite service periods, which is generally
the
vesting period.
If
factors change and the Company employs different assumptions for estimating
stock-based compensation expense in future periods or if it decides to use
a
different valuation model, the future periods may differ significantly from
what
it has recorded in the current period and could materially affect its operating
income, net income and net income per share.
Prior
to
the adoption of SFAS No. 123R on January 1, 2006, the Company applied the
intrinsic value-based method of accounting prescribed by APB Opinion No. 25,
Accounting
for Stock Issued to Employees,
and
related interpretations including FIN 44, Accounting
for Certain Transactions involving Stock Compensation, an interpretation of
APB
Opinion No. 25,
issued
in March 2000, to account for its fixed plan options. Under this method,
compensation was recognized over the grant’s vesting period only if the current
market price of the underlying stock on the date of grant exceeds the exercise
price. SFAS No. 123, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment to
FASB
Statement No. 123,
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. The Company
had elected to apply the intrinsic value-based method of accounting described
above, and adopted the disclosure requirements of SFAS No. 148.
The
following table provides the fair value of the stock options granted during
the
three and nine-month periods ended September 30, 2006 and 2005 using the
Black-Scholes option pricing model together with a description of the
assumptions used to calculate the fair value. Options exercisable into 265,000
and 7,500 shares, respectively, were granted during the three month periods
ended September 30, 2006 and 2005. Options exercisable into 732,000 and 470,000
shares, respectively, were granted during the nine month periods ended September
30, 2006 and 2005.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Weighted
average exercise price
|
|
$
|
30.20
|
|
$
|
26.98
|
|
$
|
34.66
|
|
$
|
17.77
|
|
Expected
volatility
|
|
|
66.1
|
%
|
|
112
|
%
|
|
69.7
|
%
|
|
120
|
%
|
Weighted
average risk free rate
|
|
|
4.8
|
%
|
|
3.3
|
%
|
|
4.7
|
%
|
|
3.6
|
%
|
Expected
lives
|
|
|
4.75
years
|
|
|
5
years
|
|
|
4.75
years
|
|
|
5
years
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
The
stock-based compensation expense recognized on our consolidated statements
of
income for the three and nine months ended September 30, 2006 is as
follows:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
Income
Statement Classifications
|
|
2006
|
|
2006
|
|
Cost
of revenue - online publishing
|
|
$
|
289,546
|
|
$
|
786,542
|
|
Cost
of revenue - print publishing and licensing
|
|
|
39,984
|
|
|
107,806
|
|
Sales
|
|
|
215,980
|
|
|
543,017
|
|
Product
development
|
|
|
111,644
|
|
|
358,276
|
|
General
and administrative
|
|
|
1,085,803
|
|
|
4,909,811
|
|
Total
|
|
$
|
1,742,957
|
|
$
|
6,705,452
|
|
The
following table sets forth the pro forma net income and net income per share
for
the three and nine months ended September 30, 2005 that would have resulted
if
the Company had accounted for its stock options under the fair value recognition
provisions of SFAS No. 123R.
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2005
|
|
2005
|
|
Net
income:
|
|
|
|
|
|
As
reported
|
|
$
|
2,663,245
|
|
$
|
7,081,599
|
|
Less
total share-based employee compensation
|
|
|
|
|
|
|
|
determined
under fair value-based method for all
|
|
|
|
|
|
|
|
awards,
net of related tax effect
|
|
|
(856,008
|
)
|
|
(2,406,892
|
)
|
Pro
forma
|
|
$
|
1,807,237
|
|
$
|
4,674,707
|
|
Basic
and diluted net income per common share-reported:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
$
|
0.45
|
|
Diluted
|
|
|
0.16
|
|
|
0.42
|
|
Basic
and diluted net income per common share-pro forma:
|
|
|
|
|
|
|
|
Basic
|
|
|
0.11
|
|
|
0.30
|
|
Diluted
|
|
|
0.11
|
|
|
0.29
|
|
Weighted
average common shares outstanding-reported:
|
|
|
|
|
|
|
|
Basic
|
|
|
15,815,057
|
|
|
15,802,409
|
|
Diluted
|
|
|
17,109,385
|
|
|
16,762,149
|
|
Weighted
average common shares outstanding-pro forma:
|
|
|
|
|
|
|
|
Basic
|
|
|
15,815,057
|
|
|
15,802,409
|
|
Diluted
|
|
|
16,758,956
|
|
|
15,905,881
|
|
Prior
to
the adoption of SFAS No. 123R, the Company presented all tax benefits for
deductions resulting from the exercise of stock options and disqualifying
dispositions as operating cash flows on its consolidated statement of cash
flows. SFAS No. 123R requires the benefits of tax deductions in excess of
recognized compensation expense to be reported as a financing cash flow, rather
than as an operating cash flow. This requirement reduces net operating cash
flow
and increases net financing cash flow in periods after adoption on January
1,
2006. Total cash flow remains unchanged from what would have been reported
under
prior accounting rules.
As
of
September 30, 2006, there was approximately $20.2 million of unrecognized
compensation costs, adjusted for estimated forfeitures, related to non-vested
stock options, which will be recognized over a weighted average period of
approximately 3.10 years. Total
unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures.
General
Stock Option Information
The
following table sets forth the summary of option activity under the Company’s
stock option plans for the nine months ended September 30, 2006:
|
|
Number
of
|
|
Price
Per
|
|
Weighted
Average
|
|
|
|
Shares
|
|
Share
|
|
Exercise
Price
|
|
Balance,
December 31, 2005
|
|
|
2,631,955
|
|
$
|
0.85
to $32.25
|
|
$
|
12.69
|
|
Granted
|
|
|
732,000
|
|
$
|
28.91
to $47.47
|
|
$
|
34.66
|
|
Exercised
|
|
|
(250,480
|
)
|
$
|
0.85
to $18.44
|
|
$
|
10.75
|
|
Forfeited
|
|
|
(214,406
|
)
|
$
|
0.85
to $35.75
|
|
$
|
21.20
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance,
September 30, 2006
|
|
|
2,899,069
|
|
$
|
0.85
to $47.47
|
|
$
|
16.35
|
|
Information
regarding stock options outstanding at September 30, 2006 is summarized
below:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
Weighted
Average
|
|
|
|
Average
|
|
|
|
Number
|
|
Remaining
Contractual
|
|
Number
|
|
Exercise
|
|
Prices
|
|
of
Shares
|
|
Life
(Years)
|
|
of
Shares
|
|
Price
|
|
$0.85
|
|
|
42,134
|
|
|
3.17
|
|
|
42,134
|
|
$
|
0.85
|
|
$1.75
to $8.46
|
|
|
830,604
|
|
|
4.92
|
|
|
595,187
|
|
|
7.40
|
|
$10.01
to $12.63
|
|
|
704,684
|
|
|
4.93
|
|
|
519,059
|
|
|
10.37
|
|
$13.00
to $18.44
|
|
|
493,647
|
|
|
5.00
|
|
|
268,741
|
|
|
15.61
|
|
$26.98
to $32.75
|
|
|
462,500
|
|
|
6.64
|
|
|
1,875
|
|
|
26.98
|
|
$35.75
to $47.47
|
|
|
365,500
|
|
|
6.43
|
|
|
-
|
|
|
-
|
|
|
|
|
2,899,069
|
|
|
5.24
|
|
|
1,426,996
|
|
$
|
9.87
|
|
NOTE
4 - INCOME TAXES
The
change in the Company’s effective tax rate in the three and nine-month periods
ended September 30, 2006 compared to 2005 was due primarily to the net effect
of
the adoption of SFAS 123R as of January 1, 2006, and expansion of operations
into certain higher state tax jurisdictions.
NOTE
5 - COMMITMENTS AND CONTINGENCIES
On
October 9, 2006, the Company entered into a Confidential Final Settlement
Agreement and Mutual Release (the “Agreement”) with American Interbanc Mortgage,
LLC ("AI") in settlement of the claims pending against the Company in the
lawsuit filed in the Superior Court of California in March 2002. AI had
originally filed suit against several of its competitors (but not the Company)
who advertised on the web site alleging false advertising under the Lanham
Act,
common law unfair competition, and violations of certain sections of the
California Business and Professional Code. AI later amended its complaint
to
include the Company as a defendant, alleging, in short, that the Company
conspired with the co-defendants to allow the co-defendants to engage in
false
advertising on the web site while prohibiting AI to advertise on the web
site.
AI sought damages of no less than $16.5 million, to have those damages
trebled,
and “reasonable attorney’s fees pursuant to 15 U.S.C. Section 1117(b) and
California Business and Professions Code Section 16750(a),” and
costs.
Under
the
terms of the Agreement, the Company agreed to make a one-time cash payment
of
$3.0 million to AI and AI agreed to dismiss the lawsuit with no ability
to
reassert its claims against the Company. The Company and AI have also agreed
to
certain terms and conditions that permit AI to advertise on Bankrate.com.
The
Company believes that all of AI’s claims against it were factually and legally
without merit and did not admit to any wrongdoing as part of the settlement.
The
$3.0 million cash payment is included in the accompanying condensed consolidated
statement of income as legal settlement.
.
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in this Quarterly
Report on Form 10-Q.
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
In
addition to historical information, this Quarterly Report on Form 10-Q contains
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, among
others, statements about our beliefs, plans, objectives, goals, expectations,
estimates and intentions that are subject to significant risks and uncertainties
and are subject to change based on various factors, many of which are beyond
our
control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,”
“estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar
expressions are intended to identify forward-looking statements.
All
forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from those set
forth in our forward-looking statements. Please see the “Introductory Note” and
Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2005, as amended, and as updated in the Company’s subsequent
quarterly reports filed on Form 10-Q, and Part II Item A. “Risk Factors” in this
Quarterly Report on Form 10-Q, and in our other filings made from time to time
with the SEC after the date of this Quarterly Report.
Non-GAAP
Financial Measures
In
addition to disclosing financial results calculated in accordance with
accounting principles generally accepted in the United States ("GAAP"), this
MD&A contains "non-GAAP financial measures" as such term is defined in Item
10(e)(2) of Regulation S-K. These non-GAAP financial measures should not
be
considered a substitute for, or superior to, the GAAP financial measures.
The
non-GAAP financial measures may be calculated differently from, and thus
are not
comparable to, similarly titled GAAP financial measures used by other companies.
We have provided reconciliations of the non-GAAP financial measures to the
most
directly comparable GAAP financial measures. Non-GAAP financial measures
simply
provide an alternate way of viewing our results of operations that, when
viewed
together with the GAAP results and the accompanying reconciliations, provide
a
more complete understanding of the factors that affect our business.
Specifically,
we use the non-GAAP financial measures (a) Adjusted total revenue, (b) Adjusted
other operating expenses, (c) Online publishing revenue, excluding barter,
(d)
Cost of online publishing revenue, excluding stock compensation expense,
(e)
Online publishing gross margin, excluding barter and stock compensation expense,
(f) Cost of print publishing and licensing revenue, excluding stock compensation
expense, and (g) Print publishing and licensing gross margin, excluding stock
compensation expense.
Adjusted
other operating expenses; Online publishing costs, excluding stock compensation
expense; Print publishing and licensing costs, excluding stock compensation
expense; Online
publishing gross margin, excluding barter and stock compensation expense;
and
Print publishing and licensing gross margin, excluding stock compensation
expense. These
non-GAAP financial measures are reconciled to their most comparable GAAP
equivalents by excluding the effect of the adoption of SFAS 123R. Management
uses these non-GAAP financial measures as comparisons to our historical
operating results and for internal planning and forecasting purposes. As
recorded, our historical results excluded the impact of SFAS 123R. Further,
management believes that stock compensation expense and barter expense are
not
reflective of our day-to-day operational results and that the investment
community may find it helpful when reviewing our performance to evaluate
the
impact of the excluded items separately. The limitations associated with
using
these non-GAAP financial measures is that they exclude items that impact
our
current period operating results and do not include the accounting costs
of
employee stock options. These limitations are best addressed by using these
non-GAAP measures in conjunction with their respective most comparable GAAP
measures.
Adjusted
total revenue; Online publishing revenue, excluding barter; Online publishing
gross margin, excluding barter and stock compensation expense; and Adjusted
other operating expenses. These
non-GAAP financial measures are reconciled to their most comparable GAAP
equivalents by excluding barter revenue and, in the case of Adjusted other
operating expenses, barter expense, which were included in our results prior
to
the first quarter of 2006. Barter represents the exchange of advertising
space
on our web site for reciprocal advertising space or traffic on other web
sites.
Barter revenues and expenses were recorded at the fair market value of the
advertisements delivered or received, whichever is more determinable in the
circumstances. Since January 1, 2006, there has been no barter revenue.
Management uses these non-GAAP financial measures as comparisons to our current
operating results excluding barter revenue. Management believes that the
investment community may find it helpful when reviewing our current performance
to exclude the impact of barter revenue on our historical operating
results.
Adjusted
other operating expenses.
In
addition to excluding stock compensation expense and the expenses related
to
barter revenue, this non-GAAP financial measure excludes certain non-recurring
charges (severance charges and legal settlement charges). Management uses
this
non-GAAP financial measure as a comparative measure between our historical
and
current period other operating expenses. Further, management believes that
these
non-recurring items are not reflective of our day-to-day operational results
and
that the investment community may find it helpful when reviewing our performance
to evaluate the impact of the excluded items separately.
Business
Overview
Bankrate,
Inc. and subsidiaries (the “Company,” “Bankrate,” “we,” “us,” or “our”) own and
operate an Internet-based consumer banking marketplace. Our flagship site,
Bankrate.com (“our web site”), is one of the web’s leading aggregators of
information on more than 300 financial products and fees, including mortgages,
credit cards, new and used automobile loans, money market accounts, certificates
of deposit, checking and ATM fees, home equity loans and online banking fees.
Additionally, we provide financial applications and information to a network
of
distribution partners and through national and state publications. We provide
the tools and information that can help consumers make better financial
decisions.
We
regularly survey approximately 4,800 financial institutions in more than 575
markets in all 50 states in order to provide the most current objective,
unbiased information. Hundreds of print and online partner publications depend
on us as the trusted source for financial rates and information.
Approximately
30 years ago, we began as a print publisher of the newsletter
Bank
Rate Monitor.
Our
rate tables provide, at no cost to the consumer, a detailed list of institutions
by market and include relevant details to help consumers compare
products.
We
continue to enhance our offerings in order to provide our users with the most
complete experience. Features such as financial calculators and email
newsletters allow users to interact with our site. Our
Rate
Trend Index
is a
weekly poll of industry insiders designed to help consumers forecast interest
rate trends. Our offerings also include channels on investing, taxes, small
business and financial advice. Each channel offers a unique look at its
particular topic. Our users can find advice and tips from the Tax channel,
obtain business ideas from the Small Business channel and ask a financial expert
a question in the Advice channel.
We
believe that the recognition of our research as a leading source of independent,
objective information on banking and credit products is essential to our
success. As a result, we have sought to maximize distribution of our research
to
gain brand recognition as a research authority. We are seeking to build greater
brand awareness of our web site and to reach a greater number of online users.
We had over 46 million unique visitors in 2005, according to Omniture, a web
analytics tool.
We
operate a traditional media business on the Internet. We have a high quality,
educated, poised-to-transact audience that is ready to do business with our
advertisers. We are the number one site for financial information and advice
according to comScore Media Metrix. We sell graphic advertisements and
hyperlinks on our web site, we publish rates and sell advertisements in
metropolitan newspapers, and we license our rates and editorial
content.
We
believe our potential market is enormous and is still in the early growth stages
of consumer awareness of the Internet as a personal finance tool. Financial
institutions are still in the early stages of adopting the Internet for
advertising products and customer acquisition. Their online advertising spending
is still a very small percentage of their overall advertising
budgets.
We
compete for Internet advertising revenues with the personal finance sections
of
general interest sites, such as Yahoo! Finance, AOL Personal Finance and MSN
Money; personal finance destination sites, such as The Motley Fool, MarketWatch,
SmartMoney.com, Kiplinger.com and CNNMoney.com; e-commerce oriented sites that
include banking and credit products, such as LendingTree and Pricegrabber;
lead
aggregators, such as LowerMyBills, iHomeowners and NexTag; Print mortgage table
sellers, such as National Financial News Service; rate listing sites, such
as
Realtor.com/Move.com, Informa Research Services and
Checkinterestrates.com/CarsDirect; and key word cost-per-click advertising
sites/networks, such as Google, Yahoo! Search Marketing and Ask.com. Our traffic
has grown from 700,000 unique visitors per month in early 2000 to approximately
5 million unique visitors per month in 2006 according to Omniture.
On
November 30, 2005, we completed the acquisition of Wescoco LLC, a Delaware
limited liability company d/b/a FastFind (“FastFind”). On December 1, 2005, we
completed the acquisition of Mortgage Market Information Services, Inc., an
Illinois corporation (“MMIS”) and Interest.com, an Illinois corporation
(“Interest.com”). These two acquisitions affect the comparability of our results
of operations for the three and nine month periods ended September 30, 2005
and
2006.
The
key
drivers of our business are the number of advertisers on our web site and the
number of consumers visiting our web site or page views. We added over 60 new
graphic advertisers and over 180 new hyperlink advertisers in 2005. The number
of advertisers has grown from approximately 320 in 2001 to just under 400 in
2006. Page views have grown from 237 million in 2001 to 430 million in 2005,
and
were 367 million for the nine months ended September 30, 2006.
We
have
improved our gross margin from 71% in 2001 to 74% in 2005. Our gross margin
for
the nine months ended September 30, 2006 was 69% due to the inclusion of the
results of FastFind, MMIS and Interest.com, which we acquired in the fourth
quarter of 2005. We expect our gross margin to remain at approximately this
level for the remainder of 2006. MMIS contributes to our print publishing
business where our margins have historically been lower than our online
publishing margins. The newspaper rate table business has typically generated
margins in the 12% to 16% range and we expect margins for this business to
remain within that range for fiscal 2006. Other operating expenses as a
percentage of total revenue have decreased from 75% in 2001 to 65% for the
third
quarter of 2006. Other operating expenses (adjusted to exclude stock-based
compensation expense, barter expense, legal settlement charges and severance
charges) as a percentage of total revenue (excluding barter revenue) decreased
from 70% in 2001 to 37% in the third quarter of 2006. Our other operating
expenses as a percentage of total revenue has decreased from 75% in 2001 to
65%
in the third quarter of 2006 and excluding barter revenue, stock-based
compensation expense and legal settlement charges, has decreased to 37% in
the third quarter of 2006.
Adjusted
Total Revenue, Excluding Barter and
|
|
Adjusted
Other Operating Expenses, Excluding Barter, Severance, Legal Settlement
Charges and Share-Based Compensation
|
|
($
000's)
|
|
|
|
|
|
|
|
|
|
|
|
Q3
06
|
|
Q2
06
|
|
Q1
06
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Total
revenue
|
|
$
|
19,486
|
|
$
|
19,667
|
|
$
|
19,788
|
|
$
|
49,049
|
|
$
|
39,204
|
|
$
|
36,621
|
|
$
|
26,571
|
|
$
|
18,257
|
|
Barter
revenue
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,254
|
)
|
|
(3,088
|
)
|
|
(3,164
|
)
|
|
(2,912
|
)
|
|
(2,558
|
)
|
Adjusted
total revenue (1)
|
|
|
19,486
|
|
|
19,667
|
|
|
19,788
|
|
|
46,795
|
|
|
36,116
|
|
|
33,457
|
|
|
23,659
|
|
|
15,699
|
|
Other
operating expenses
|
|
|
12,658
|
|
|
9,703
|
|
|
9,060
|
|
|
21,993
|
|
|
21,130
|
|
|
19,301
|
|
|
15,334
|
|
|
13,724
|
|
Barter
expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,254
|
)
|
|
(3,088
|
)
|
|
(3,164
|
)
|
|
(2,920
|
)
|
|
(2,750
|
)
|
Severance
charge
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(260
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Legal
settlement charges
|
|
|
(3,675
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(510
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Share-based
compensation expense
|
|
|
(1,743
|
)
|
|
(3,185
|
)
|
|
(1,777
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Adjusted
other operating expenses (1)
|
|
$
|
7,240
|
|
$
|
6,518
|
|
$
|
7,283
|
|
$
|
19,739
|
|
$
|
17,272
|
|
$
|
16,137
|
|
$
|
12,414
|
|
$
|
10,974
|
|
Adjusted
other operating expenses as a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
percentage
of total revenue (1)
|
|
|
37
|
%
|
|
33
|
%
|
|
37
|
%
|
|
42
|
%
|
|
48
|
%
|
|
48
|
%
|
|
52
|
%
|
|
70
|
%
|
Other
operating expenses as a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
percentage
of total revenue
|
|
|
65
|
%
|
|
49
|
%
|
|
46
|
%
|
|
45
|
%
|
|
54
|
%
|
|
53
|
%
|
|
58
|
%
|
|
75
|
%
|
(1)
|
Adjusted
total revenue, adjusted other operating expenses, and adjusted other
operating expenses as a percentage of total revenue are non-GAAP
financial
measures. See Non-GAAP Financial Measures at the beginning of
this MD&A for a discussion of these
measures.
|
Critical
Accounting Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make
judgments, estimates and assumptions that affect the reported amounts of assets
and liabilities, and disclosure of contingent gains and losses at the date
of
the financial statements and the reported amounts of revenue and expenses during
the period. We base our judgments, estimates and assumptions on historical
experience and various other factors that we believe to be reasonable under
the
circumstances. Actual results could differ materially from these estimates
under
different assumptions or conditions. We evaluate our judgments, estimates and
assumptions on a regular basis and make changes accordingly. We believe that
the
judgments, estimates and assumptions involved in the accounting for income
taxes, the allowance for doubtful accounts receivable, stock-based compensation
and legal contingencies have the greatest potential impact on our financial
statements, so we consider these to be our critical accounting policies. Below
we discuss the critical accounting estimates associated with these policies.
For
further information on our critical accounting policies, see the discussion
in
the section titled “Results of Operations and Critical Accounting Policies”
below, and Note 1 in Notes to Financial Statements in our 2005 Form 10-K.
Income
Taxes
As
required by SFAS No. 109, Accounting
for Income Taxes,
we use
the asset and liability method of accounting for income taxes. Under this
method, income tax expense is recognized for the amount of taxes payable or
refundable for the current year. Deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the financial reporting and the tax bases of assets and liabilities,
and
for operating losses and tax credit carryforwards. Management must make
assumptions, judgments and estimates to determine our current provision for
income taxes and our deferred tax assets and liabilities, and any valuation
allowance to be recorded against a deferred tax asset. Our assumptions,
judgments and estimates relative to the current provision for income taxes
take
into account current tax laws and our interpretation of current tax laws.
Although we believe our assumptions, judgments and estimates are reasonable,
changes in tax laws or our interpretation of tax laws could significantly impact
the amounts provided for income taxes in our consolidated financial statements.
Our assumptions, judgments and estimates relative to the value of deferred
tax
assets take into account predictions of the amount and category of future
taxable income. Actual operating results and the underlying amount and category
of income in future years could render our current assumptions, judgments and
estimates of recoverable net deferred tax assets inaccurate. Any of the
assumptions, judgments and estimates could cause our actual income tax
obligations to differ from our estimates and could materially impact our
financial position and results of operations.
Allowance
for Doubtful Accounts Receivable
We
maintain an allowance for doubtful accounts for estimated losses resulting
from
the inability or unwillingness of our customers to make required payments.
We
look at historical write-offs and sales growth when determining the adequacy
of
the allowance. Should the financial condition of our customers deteriorate,
resulting in an impairment of their ability to make payments, or if the level
of
accounts receivable increases, the need for possible additional allowances
may
be necessary. Any additions to the allowance for doubtful accounts are recorded
as bad debt expense and included in general and administrative expenses. During
the nine months ended September 30, 2006 and 2005, we charged approximately
$1,158,000 and $157,000, respectively, to bad debt expense, and wrote off
approximately $306,000 and $104,000, respectively, of accounts deemed
uncollectible.
Share-Based
Compensation
We
adopted the provisions of, and account for stock-based compensation in
accordance with, SFAS 123R during the quarter ended March 31, 2006. We elected
the modified-prospective method, pursuant to which prior periods are not revised
for comparative purposes. Under the fair value recognition provisions of this
statement, stock-based compensation is measured at the grant date based on
the
fair value of the award and is recognized as expense on a straight-line basis
over the requisite service period, which is the vesting period.
We
currently use the Black-Scholes option pricing model to determine the fair
value
of our stock options. The determination of the fair value of the awards on
the
date of grant using an option-pricing model is affected by the price of our
common stock as well as assumptions regarding a number of complex and subjective
variables. These variables include our expected stock price volatility over
the
term of the awards, actual and projected employee stock option exercise
behaviors, risk-free interest rate and expected dividends.
We
estimate the expected term of outstanding options by taking the average of
the
vesting term and the contractual term of the option, as illustrated in SAB
107.
We estimate the volatility of our common stock by using a weighted average
of
historical stock price volatility and implied volatility in market traded
options in accordance with SAB 107. Our decision to use a weighted average
volatility factor was based upon the relatively short period of availability
of
data on actively traded options on our common stock, and our assessment that
implied volatility is more representative of future stock price trends than
historical volatility. We base the risk-free interest rate that we use in the
option pricing model on U.S. Treasury constant maturity issues having remaining
terms similar to the expected terms on the options. We do not anticipate paying
any cash dividends in the foreseeable future and therefore use an expected
dividend yield of zero in the option pricing model. We are required to estimate
forfeitures at the time of grant and revise those estimates in subsequent
periods if actual forfeitures differ from those estimates. We use historical
data to estimate pre-vesting option forfeitures and record stock-based
compensation expense only for those awards that are expected to vest. All
share-based payment awards are amortized on a straight-line basis over the
requisite service period, which is generally the vesting period.
If
factors change and we employ different assumptions for estimating stock-based
compensation expense in future periods or if we decide to use a different
valuation model, the future periods may differ significantly from what we have
recorded in the current period and could materially affect our operating income,
net income and net income per share.
The
Black-Scholes option-pricing model was developed for use in estimating the
fair
value of traded options that have no vesting restrictions and are fully
transferable; characteristics not present in our option grants. Existing
valuation models, including the Black-Scholes and lattice binomial models,
may
not provide reliable measures of the fair values of our stock-based
compensation. Consequently, there is a risk that our estimates of the fair
values of our stock-based compensation awards on the grant dates may bear little
resemblance to the actual values realized upon the exercise, expiration, early
termination or forfeiture of those stock-based payments in the future. Certain
stock-based payments, such as employee stock options, may expire worthless
or
otherwise result in zero intrinsic value as compared to the fair values
originally estimated on the grant date and reported in our financial statements.
Alternatively, value may be realized from these instruments that are
significantly higher than the fair values originally estimated on the grant
date
and reported in our financial statements. There currently is no market-based
mechanism or other practical application to verify the reliability and accuracy
of the estimates stemming from these valuation models, nor is there a means
to
compare and adjust the estimates to actual values.
The
guidance in SFAS No. 123R and SAB 107 is relatively new. The application of
these principles may be subject to further interpretation and refinement over
time. There are significant differences among valuation models, and there is
a
possibility that we will adopt different valuation models in the future. This
may result in a lack of consistency in future periods and materially affect
the
fair value estimate of share-based payments. It may also result in a lack of
comparability with other companies that use different models, methods and
assumptions.
Stock-based
compensation expense recognized in our condensed consolidated statement of
income for the three and nine months ended September 30, 2006 is as
follows:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
Income
Statement Classifications
|
|
2006
|
|
2006
|
|
Cost
of revenue - online publishing
|
|
$
|
289,546
|
|
$
|
786,542
|
|
Cost
of revenue - print publishing and licensing
|
|
|
39,984
|
|
|
107,806
|
|
Sales
|
|
|
215,980
|
|
|
543,017
|
|
Product
development
|
|
|
111,644
|
|
|
358,276
|
|
General
and administrative
|
|
|
1,085,803
|
|
|
4,909,811
|
|
Total
|
|
$
|
1,742,957
|
|
$
|
6,705,452
|
|
Legal
Contingencies
On
October 9, 2006, we entered into a Confidential Final Settlement Agreement
and
Mutual Release (the “Agreement”) with American Interbanc Mortgage, LLC ("AI") in
settlement of the claims pending against us in the lawsuit filed in the
Superior
Court of California in March 2002. AI had originally filed suit against
several
of its competitors (but not us) who advertised on the web site alleging
false
advertising under the Lanham Act, common law unfair competition, and violations
of certain sections of the California Business and Professional Code. AI
later
amended its complaint to include us as a defendant, alleging, in short,
that we
conspired with the co-defendants to allow the co-defendants to engage in
false
advertising on the web site while prohibiting AI to advertise on the web
site.
AI sought damages of no less than $16.5 million, to have those damages
trebled,
and “reasonable attorney’s fees pursuant to 15 U.S.C. Section 1117(b) and
California Business and Professions Code Section 16750(a),” and
costs.
Under
the
terms of the Agreement, we agreed to make a one-time cash payment of $3.0
million to AI and AI agreed to dismiss the lawsuit with no ability to reassert
its claims against us. The Company and AI have also agreed to certain terms
and
conditions that permit AI to advertise on Bankrate.com. We believe that
all of
AI’s claims against us were factually and legally without merit and did not
admit to any wrongdoing as part of the settlement. The $3.0 million cash
payment
is included in the accompanying condensed consolidated statement of income
as
legal settlement.
Significant
Developments
On
September 11, 2006, subsequent to the resignation of our former Senior Vice
President - Chief Revenue Officer, Donaldson M. Ross was appointed Senior Vice
President-Chief Revenue Officer and entered into an employment agreement with
us. Under the terms of the employment agreement, Mr. Ross is entitled to receive
an annual base salary as stipulated in the employment agreement and an annual
bonus contingent on achieving certain performance criteria. Under the terms
of
the employment agreement, Mr. Ross agrees to assign to us all of his copyrights,
trade secrets and patent rights that relate to our business. Additionally,
during the term of his employment and for a period of twelve months thereafter,
Mr. Ross agrees not to compete with us and not to recruit any of our employees.
Upon Mr. Ross’s termination of employment for certain reasons (i.e., without
cause or resignation for good reason), we agree to pay a separation payment
equal to twelve months’ base salary at the then-current rate payable in three
equal installments; one-third payable 15 days after the termination date;
one-third payable six months after the termination date; and one-third payable
twelve months from the termination date. Mr. Ross was also granted options
to
purchase 100,000 shares of our common stock at $29.31, the fair market value
on
the date of grant. The options have a seven-year term and vest as follows:
25,000 shares on September 11, 2007; and 2,083.33 shares on the first day of
each month beginning October 1, 2007 and ending September 11, 2010.
Results
of Operations and Critical Accounting Policies
The
following is
our
analysis
of the
results
of operations for the periods
covered by our financial statements that we believe are critical
to an
understanding of our results of operations and to making the estimates and
judgments underlying our financial statements. This analysis should be read
in
conjunction with our interim condensed consolidated financial statements,
including the related notes. See “Results of Operations and Critical Accounting
Policies” in Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” in our 2005 Form 10-K for additional
information concerning the revenue and expense components of our online and
print publishing and licensing operations.
Results
of Operations
Three
and Nine Months Ended September 30, 2006 Compared to the Three and Nine Months
Ended September 30, 2005
Total
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3
06
|
|
Q2
06
|
|
Q1
06
|
|
Q4
05
|
|
Q3
05
|
|
Q2
05
|
|
Q1
05
|
|
Online
publishing
|
|
$
|
15,777,141
|
|
$
|
15,464,987
|
|
$
|
15,615,999
|
|
$
|
11,611,543
|
|
$
|
11,214,265
|
|
$
|
11,204,023
|
|
$
|
9,266,553
|
|
Print
publishing and licensing
|
|
|
3,709,277
|
|
|
4,201,383
|
|
|
4,172,433
|
|
|
2,278,586
|
|
|
1,157,758
|
|
|
1,161,007
|
|
|
1,155,296
|
|
|
|
$
|
19,486,418
|
|
$
|
19,666,370
|
|
$
|
19,788,432
|
|
$
|
13,890,129
|
|
$
|
12,372,023
|
|
$
|
12,365,030
|
|
$
|
10,421,849
|
|
Revenue
Online
Publishing Revenue
We
sell
graphic advertisements on our web sites (including co-branded sites) consisting
of banner, badge, billboard, poster and skyscraper advertisements. These
advertisements are sold to advertisers according to the cost-per-thousand
impressions (“CPM”) the advertiser receives. The amount of advertising we sell
is a function of (1) the number of visitors to our web site, (2) the number
of
ad pages we serve to those visitors, (3) the number of advertisements per page,
and (4) the capacity of our sales force. Advertising sales are invoiced monthly
at amounts based on specific contract terms. When the number of impressions
over
the contract term is guaranteed, the monthly invoiced amount is based on the
monthly contractual number of impressions to be delivered at the contractual
price or CPM. Revenue is recognized monthly based on the actual number of
impressions delivered, and the revenue corresponding to any under-delivery
is
deferred as unearned income on the balance sheet and is recognized later when
the under-delivery is served. When the number of impressions over the contract
term is not guaranteed, the monthly invoiced amount is determined and revenue
is
recognized based on the actual number of impressions delivered at the
contractual price or CPM. Additionally, we generate revenue on a “per action”
basis (i.e., a purchase or completion of an application) when a visitor to
our
web site transacts with one of our advertisers after viewing an advertisement.
Revenue is recognized monthly based on the number of actions reported by the
advertiser, subject to our verification. We are also involved in revenue sharing
arrangements with our online partners where the consumer uses co-branded sites
hosted by us. Revenue is effectively allocated to each partner based on the
percentage of advertisement views at each site. The allocated revenue is shared
according to distribution agreements. Revenue is recorded at gross amounts
and
partnership payments are recorded in cost of revenue, pursuant to the provisions
of Emerging Issues Task Force (“EITF”) 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent.
We also
sell hyperlinks (interest rate table listings) to various third-party Internet
sites that generate a fixed monthly fee, which is recognized in the month
earned. We also sell text links on our rate pages to advertisers on a
cost-per-click (“CPC”) basis. Advertisers enter an auction bidding process on a
third-party web site for placement of their text link based on the amount they
are willing to pay for each click though to their web site. We recognize revenue
monthly for each text link based on the number of clicks at the CPC contracted
for during the auction bidding process. On October 1, 2005, we launched a new
pay-for-performance pricing structure for our interest rate table (hyperlink)
advertising business. The new pricing structure is a CPC model whereby
advertisers will pay us each time a visitor to our web site clicks on a
rate table listing. Prior to this launch, advertisers paid a flat monthly fee
for their hyperlink.
Online
publishing revenue, prior to the first quarter of 2006, included barter revenue,
which represents the exchange of advertising space on our web site for
reciprocal advertising space or traffic on other web sites. Barter revenues
and
expenses were recorded at the fair market value of the advertisements delivered
or received, whichever is more determinable in the circumstances. We followed
the accounting literature provided by EITF 99-17,
Accounting for Advertising Barter Transactions.
In
accordance with EITF 99-17, barter transactions were valued based on similar
cash transactions which occurred within six months prior to the date of the
barter transaction. Revenue from barter transactions was recognized as income
when advertisements were delivered on our web site. Barter expense was
recognized when our advertisements ran on the other companies’ web sites, which
was typically in the same period barter revenue was recognized. Barter revenue
was approximately $438,000, $1,780,000, and $2,254,000 for the quarter ended
September 30, 2005, the nine months ended September 30, 2005 and the year ended
December 31, 2005, respectively. Barter revenue was intentionally eliminated
for
2006 as of January 1, 2006, as we focus more on monetizing our available views
through paid advertising.
Quarterly
Online Publishing Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3
06
|
|
Q2
06
|
|
Q1
06
|
|
Q4
05
|
|
Q3
05
|
|
Q2
05
|
|
Q1
05
|
|
Graphic
ads
|
|
$
|
9,184,412
|
|
$
|
9,216,914
|
|
$
|
9,159,104
|
|
$
|
6,565,494
|
|
$
|
6,595,789
|
|
$
|
6,665,380
|
|
$
|
5,351,065
|
|
Hyperlinks
|
|
|
6,592,729
|
|
|
6,248,073
|
|
|
6,456,895
|
|
|
4,572,049
|
|
|
4,180,521
|
|
|
3,817,716
|
|
|
3,294,682
|
|
Barter
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
474,000
|
|
|
437,955
|
|
|
720,927
|
|
|
620,806
|
|
|
|
$
|
15,777,141
|
|
$
|
15,464,987
|
|
$
|
15,615,999
|
|
$
|
11,611,543
|
|
$
|
11,214,265
|
|
$
|
11,204,023
|
|
$
|
9,266,553
|
|
Online
publishing revenue of $15,777,000 for the three months ended September 30,
2006
was approximately $4,563,000, or 41%, higher than the $11,214,000 reported
for
the same period in 2005, and excluding barter revenue, was approximately
$5,001,000, or 46%, higher than the $10,776,000 reported for the same period
in
2005. This increase was due to a $2,589,000, or 39%, increase in graphic ad
sales, and a $2,412,000, or 58%, increase in hyperlink sales. Approximately
$1,475,000 of the increase in graphic ad revenue and $477,000 of the increase
in
hyperlink revenue was due to the revenue contributed by FastFind and
Interest.com, both of which were acquired in the fourth quarter of 2005, and
Mortgage-calc.com, acquired in August 2006.
Page
views for the quarter ended September 30, 2006 were 126.7 million and were
18.8
million, or 17%, higher than the 107.8 million reported in the same period
in
2005. CPMs on graphic ad sales were slightly more than $2.00, or 14%, higher
than the third quarter of 2005. We sold approximately 63 million, or 15%,
more graphic ads in the third quarter of 2006 compared to the third quarter
of
2005.
The
increase in hyperlink sales for the quarter ended September 30, 2006 was due
to
favorable product pricing, despite the number of hyperlink advertisers remaining
relatively constant compared to the quarter ended September 30, 2005. Our new
CPC pricing structure, launched on our rate tables on October 1, 2005, does
not
rely on the quantity of advertisers as did our flat fee-based model, but rather
on page view traffic. Sequentially, hyperlink revenue was up 6% from the second
quarter of 2006 as page views increased by 10.6 million, or
9%.
For
the
first nine months of 2006, graphic ad revenue of $27,560,000 was $8,948,000,
or
48%, higher than the $18,612,000 reported in the first nine months of 2005.
Page
views were 366.9 million, up 34.2 million, or 10%, from the 332.6 million
reported in the same period in 2005. Approximately $5,602,000 of the increase
in
graphic ad revenue and $1,367,000 of the increase in hyperlink revenue was
due
to the revenue from FastFind and Interest.com, both of which were acquired
in
the fourth quarter of 2005, and Mortgage-calc.com, acquired in August 2006.
While CPMs were relatively flat for the first nine months of 2006 compared
to
2005, we sold 252.9 million, or 24%, more advertisements in 2006. Hyperlink
revenue was up $ 8,004,000, or 71%, in the nine months ended September 30,
2006
compared to 2005. In addition to the revenue derived from Interest.com described
above, we benefited from favorable product pricing as the number of hyperlink
advertisers remained relatively constant between the periods.
A
majority of our advertising customers purchase advertising under short-term
contracts. Customers have the ability to stop, and on occasion have stopped,
advertising on relatively short notice. Online publishing revenue would be
adversely impacted if we experienced contract terminations, or if we were not
able to renew contracts with existing customers or obtain new customers. The
market for Internet advertising is intensely competitive and has, in the past,
experienced significant downturns in demand that could adversely impact
advertising rates. Future revenue could be adversely affected if we were forced
to reduce our advertising rates or if we were to experience lower
CPMs.
Historically,
in terms of page views, we have typically experienced a slowdown in traffic
during our fourth quarter. During 2002, certain traffic initiatives and expanded
commitments from our distribution partners, as well as the activity in mortgage
lending caused increases in traffic inconsistent with our historical trends
that
continued through the third quarter of 2004. As brand awareness continues to
strengthen for Bankrate.com, we believe our quarterly page views will become
more consistent with a possible decline in the fourth quarter due to the holiday
season.
Page
Views
|
|
(Millions)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Q1
|
|
|
124.2
|
|
|
111.0
|
|
|
117.2
|
|
|
106.7
|
|
|
58.4
|
|
Q2
|
|
|
116.0
|
|
|
113.8
|
|
|
92.6
|
|
|
121.8
|
|
|
48.0
|
|
Q3
|
|
|
126.7
|
|
|
107.8
|
|
|
92.0
|
|
|
100.3
|
|
|
82.1
|
|
Q4
|
|
|
-
|
|
|
97.6
|
|
|
91.3
|
|
|
75.8
|
|
|
79.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
-
|
|
|
430.2
|
|
|
393.1
|
|
|
404.6
|
|
|
267.8
|
|
Print
Publishing and Licensing Revenue
Print
publishing and licensing revenue represents advertising revenue from the sale
of
advertising in the Mortgage Guide
(formerly called Consumer
Mortgage Guide)
rate
tables, newsletter subscriptions, and licensing of research information. We
charge a commission for placement of the Mortgage
Guide
in a
print publication. Advertising revenue and commission income is recognized
when
the Mortgage
Guide
runs in
the publication. Revenue from our newsletters is recognized ratably over the
period of the subscription, which is generally up to one year. Revenue from
the
sale of research information is recognized ratably over the contract period.
We
also
earn fees from distributing editorial rate tables that are published in
newspapers and magazines across the United States, from paid subscriptions
to
three newsletters, and from providing rate surveys to institutions and
government agencies. In addition, we license research data under agreements
that
permit the use of rate information we develop to advertise the licensee’s
products in print, radio, television and web site promotions. Revenue for these
products is recognized ratably over the contract/subscription
periods.
Quarterly
Print Publishing and Licensing Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3
06
|
|
Q2
06
|
|
Q1
06
|
|
Q4
05
|
|
Q3
05
|
|
Q2
05
|
|
Q1
05
|
|
Mortgage
Guide
|
|
$
|
3,336,562
|
|
$
|
4,011,368
|
|
$
|
3,927,385
|
|
$
|
2,064,044
|
|
$
|
944,943
|
|
$
|
928,504
|
|
$
|
945,083
|
|
Editorial
|
|
|
372,715
|
|
|
190,015
|
|
|
245,048
|
|
|
214,542
|
|
|
212,815
|
|
|
232,503
|
|
|
210,213
|
|
|
|
$
|
3,709,277
|
|
$
|
4,201,383
|
|
$
|
4,172,433
|
|
$
|
2,278,586
|
|
$
|
1,157,758
|
|
$
|
1,161,007
|
|
$
|
1,155,296
|
|
Print
publishing and licensing revenue for the quarter ended September 30, 2006 was
up
$2,552,000, or 220%, compared to the same period in 2005, primarily due to
an
increase in Mortgage
Guide
revenue.
We ended the third quarter of 2006 with 185 Mortgage
Guide
contracts, having acquired 107 of the contracts in the MMIS acquisition in
the
fourth quarter of 2005. Editorial sales were up $160,000, or 75%, due to the
launch of our first editorial free-standing insert in USA
Today.
A
free-standing insert, or FSI, is a preprinted advertising booklet that is
loosely inserted between the pages of a newspaper or magazine. In our case,
we
develop FSI’s with our editorial content, and then sell the sponsorship of the
FSI to one or more advertisers. We anticipate selling approximately two FSI’s
each quarter.
Print
publishing and licensing revenue for the first nine months of 2006 was up
$8,609,000, or 248%, compared to the comparable period in 2005 primarily due
to
an increase in Mortgage
Guide
revenue
related to the contracts acquired in the MMIS acquisition in the fourth quarter
of 2005. Editorial sales were up $152,000, or 23%, due to the launch of our
first editorial free-standing insert in USA
Today.
Cost
of Revenue
Online
Publishing Costs
Online
publishing costs represent expenses directly associated with the creation of
online publishing revenue. These costs include contractual revenue sharing
obligations resulting from our distribution arrangements (distribution
payments), editorial costs, research costs and allocated overhead. Distribution
payments are made to web site operators for visitors directed to our web site;
these costs increase proportionately with gains in traffic to our site.
Editorial costs relate to writers and editors who create original content for
our online publications and associates who build web pages; these costs have
increased as we have added online publications and co-branded versions of our
site under distribution arrangements. These sites must be maintained on a daily
basis. Research costs include expenses related to gathering data on banking
and
credit products and consist primarily of compensation and benefits and allocated
overhead.
Online
Publishing Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3
06
|
|
Q2
06
|
|
Q1
06
|
|
Q4
05
|
|
Q3
05
|
|
Q2
05
|
|
Q1
05
|
|
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
publishing revenue
|
|
$
|
15,777,141
|
|
$
|
15,464,987
|
|
$
|
15,615,999
|
|
$
|
11,611,543
|
|
$
|
11,214,265
|
|
$
|
11,204,023
|
|
$
|
9,266,553
|
|
Cost
of online publishing revenue
|
|
|
2,648,944
|
|
|
2,806,868
|
|
|
2,900,584
|
|
|
2,023,967
|
|
|
1,902,520
|
|
|
1,823,127
|
|
|
1,639,475
|
|
Gross
margin
|
|
$
|
13,128,197
|
|
$
|
12,658,119
|
|
$
|
12,715,415
|
|
$
|
9,587,576
|
|
$
|
9,311,745
|
|
$
|
9,380,896
|
|
$
|
7,627,078
|
|
Gross
margin as a percentage of revenue
|
|
|
83
|
%
|
|
82
|
%
|
|
81
|
%
|
|
83
|
%
|
|
83
|
%
|
|
84
|
%
|
|
82
|
%
|
Non-GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
publishing revenue, excluding barter
|
|
$
|
15,777,141
|
|
$
|
15,464,987
|
|
$
|
15,615,999
|
|
$
|
11,137,543
|
|
$
|
10,776,310
|
|
$
|
10,483,096
|
|
$
|
8,645,747
|
|
Cost
of online publishing revenue,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding
stock compensation expense
|
|
|
2,359,398
|
|
|
2,518,368
|
|
|
2,692,088
|
|
|
2,023,967
|
|
|
1,902,520
|
|
|
1,823,127
|
|
|
1,639,475
|
|
Gross
margin, excluding barter and stock compensation expense
|
|
$
|
13,417,743
|
|
$
|
12,946,619
|
|
$
|
12,923,911
|
|
$
|
9,113,576
|
|
$
|
8,873,790
|
|
$
|
8,659,969
|
|
$
|
7,006,272
|
|
Gross
margin, excluding barter and stock compensation expense as a percentage
of
revenue
|
|
|
85
|
%
|
|
84
|
%
|
|
83
|
%
|
|
82
|
%
|
|
82
|
%
|
|
83
|
%
|
|
81
|
%
|
Online
publishing costs for the three months ended September 30, 2006 were $746,000,
or
39%, higher than in the same period in 2005. Excluding stock-based compensation
expense of $290,000, these costs were $456,000, or 24%, higher than the
comparable amount reported in the third quarter of 2005. This increase was
due
primarily to higher revenue sharing payments of $70,000 due to higher associated
revenue; higher allocated infrastructure costs of a $95,000; and $319,000
of costs associated with the acquisitions in the fourth quarter of 2005.
For
the
first nine months of 2006, online publishing costs were $2,991,000, or 56%,
higher than the same period in 2005. Excluding stock-based compensation expense
of $787,000, these costs were $2,204,000, or 41%, higher than the first nine
months of 2005. The increase is due primarily to higher human resource costs
of
$194,000; higher revenue sharing payments of $682,000; higher freelance writer’s
expense of $60,000; and approximately $1,225,000 of costs associated with the
acquisitions in the fourth quarter of 2005.
Print
Publishing and Licensing Costs
Print
publishing and licensing costs
represent expenses associated with print publishing and licensing revenue.
These
costs include contractual revenue sharing obligations with newspapers related
to
the
Mortgage Guide,
compensation and benefits, printing and allocated overhead. These costs
typically vary proportionately with the related revenues.
Print
Publishing and Licensing Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3
06
|
|
Q2
06
|
|
Q1
06
|
|
Q4
05
|
|
Q3
05
|
|
Q2
05
|
|
Q1
05
|
|
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
publishing & licensing revenue
|
|
$
|
3,709,277
|
|
$
|
4,201,383
|
|
$
|
4,172,433
|
|
$
|
2,278,586
|
|
$
|
1,157,758
|
|
$
|
1,161,007
|
|
$
|
1,155,296
|
|
Cost
of print publishing & licensing revenue
|
|
|
3,358,281
|
|
|
3,773,258
|
|
|
3,542,110
|
|
|
2,050,530
|
|
|
1,116,943
|
|
|
1,075,375
|
|
|
1,103,169
|
|
Gross
margin
|
|
$
|
350,996
|
|
$
|
428,125
|
|
$
|
630,323
|
|
$
|
228,056
|
|
$
|
40,815
|
|
$
|
85,632
|
|
$
|
52,127
|
|
Gross
margin as a percentage of revenue
|
|
|
9
|
%
|
|
10
|
%
|
|
15
|
%
|
|
10
|
%
|
|
4
|
%
|
|
7
|
%
|
|
5
|
%
|
Non-GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
publishing & licensing revenue
|
|
$
|
3,709,277
|
|
$
|
4,201,383
|
|
$
|
4,172,433
|
|
$
|
2,278,586
|
|
$
|
1,157,758
|
|
$
|
1,161,007
|
|
$
|
1,155,296
|
|
Cost
of print publishing & licensing revenue,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
excluding
stock compensation expense
|
|
|
3,318,297
|
|
|
3,715,567
|
|
|
3,531,979
|
|
|
2,050,530
|
|
|
1,116,943
|
|
|
1,075,375
|
|
|
1,103,169
|
|
Gross
margin
|
|
$
|
390,980
|
|
$
|
485,816
|
|
$
|
640,454
|
|
$
|
228,056
|
|
$
|
40,815
|
|
$
|
85,632
|
|
$
|
52,127
|
|
Gross
margin as a percentage of revenue
|
|
|
11
|
%
|
|
12
|
%
|
|
15
|
%
|
|
10
|
%
|
|
4
|
%
|
|
7
|
%
|
|
5
|
%
|
Print
publishing and licensing costs for the quarter ended September 30, 2006 of
$3,358,000 increased by approximately $2,241,000, or 201%, from the
comparable amount reported in the third quarter of 2005 due to the acquisition
of the newspaper rate table business of MMIS in the fourth quarter of 2005.
Excluding stock-based compensation expense of $40,000, these costs increased
by
approximately $2,201,000 compared to the same period in 2005. Our gross margin
as a percentage of revenue dropped to approximately 9% due to an increase in
revenue sharing payments.
For
the
first nine months of 2006, print publishing and licensing costs of $10,674,000
increased $7,378,000 from the first nine months of 2005 due to the acquisition
of the newspaper rate table business of MMIS in the fourth quarter of 2005.
Excluding stock-based compensation expense of $108,000, these costs increased
$7,270,000 compared to the same period in 2005. Revenue sharing payments in
2006
were up $584,000, or 24% over the comparable period in 2005.
Operating
Expenses
Sales
Sales
costs represent direct selling expenses, principally for online advertising,
and
include compensation and benefits, sales commissions, and allocated overhead.
Sales costs for the three months ended September 30, 2006 were $1,392,000,
and
were approximately $449,000, or 48%, higher than the comparable amount reported
in the third quarter of 2005. The increase is due primarily to stock
compensation expense of $216,000, higher human resource costs from
additional hires, and higher training and travel expenses. For the first nine
months of 2006, sales costs were $3,729,000, up $973,000, or 35%, over the
comparable period in 2005. The increase is due to stock compensation expense
of
$543,000, higher human resource costs of $223,000; higher commission expense
of
approximately $48,000 due to higher revenue; and $98,000 in training and travel
costs.
Marketing
Marketing
costs represent expenses associated with expanding brand awareness of our
products and services to consumers and include key word (pay-per-performance)
campaigns on Internet search engines, print and Internet advertising, marketing
and promotion costs. Marketing costs for the three and nine months ended
September 30, 2006 were $1,398,000 and $3,438,000, respectively, representing
an
increase of 1% and decrease of 25% over the marketing costs in
the comparable periods of 2005. Marketing costs also included barter
expense prior to January 1, 2006, which represented the non-cash cost of our
advertisements that were run on other companies’ web sites in our barter
transactions. Barter expense was $438,000 and $1,780,000 for the three and
nine
months ended September 30, 2005, respectively. We spent approximately $459,000
more this quarter to drive traffic to our web sites. During the third quarter
of
2006, approximately 90% of traffic to our web sites came directly to the sites.
Product
Development
Product
development costs represent compensation and benefits related to site
development, network systems and telecommunications infrastructure support,
programming, new product design and development and other technology costs.
Product development costs for the three months ended September 30, 2006 were
$937,000, and were $240,000, or 34%, higher than the comparable amount reported
in the third quarter of 2005 due primarily to an increase in human resource
costs of $161,000.
For
the
first nine months of 2006, product development costs of $2,766,000 were
$1,054,000, or 62%, higher than the comparable amount in the first nine months
of 2005. The increase is due primarily to the addition of our Chief Technology
Officer in May 2005, additional infrastructure costs associated with the
FastFind acquisition, and expenses associated with the design and development
of
new products and higher human resources costs supporting our expanded
infrastructure.
General
and Administrative
General
and administrative expenses represent compensation and benefits for executive,
finance and administrative personnel, professional fees, non-allocated overhead
and other general corporate expenses. In the third quarter of 2006, these costs
were $5,300,000 and were $3,140,000, or 145% higher than the comparable amount
reported in the third quarter of 2005. Approximately $584,000 of these costs
were general and administrative costs related to the operations of FastFind,
MMIS and Interest.com. Other cost increases included stock compensation expenses
of $1,086,000, human resource costs of $235,000, legal and accounting fees
of $628,000, bad debt expense of $463,000, bank service and merchant charges
of
$62,000 and rent of $94,000.
In
the
first nine months of 2006, general and administrative expenses of $16,735,000
were $10,438,000, or 166%, higher than the first nine months of 2005. Excluding
stock-based compensation expense of $4,910,000 in the first nine months of
2006,
these costs increased by $5,528,000, or 88% over the first nine months of 2005.
Approximately $2,356,000 of these costs were general and administrative costs
for FastFind, MMIS and Interest.com, acquired in the fourth quarter of 2005.
Other cost increases included legal and accounting fess of $1,426,000, human
resource costs of $374,000, bad debt expense of $843,000, bank service and
merchant charges of $170,000, rent of $188,000 and increases in various other
infrastructure costs.
Depreciation
and Amortization
Depreciation
and amortization expense for the three and nine months ended September 30,
2006
was $451,000, or 249%, and $1,176,000, or 203%, respectively, higher than the
amounts reported in the same periods in 2005 due primarily to intangibles
amortization related to the fourth quarter 2005 acquisitions.
Other
Income
Other
income consists of interest income generated from invested cash and cash
equivalents. Interest income for the three and nine months ended September
30,
2006 was higher than the amounts reported in the same periods in 2005 due to
the
$ 92.4 million net proceeds received in May 2006 from our secondary offering.
Additionally, the quarter ended March 31, 2005 included a $221,000 gain from
insurance proceeds.
Income
Taxes
The
change in our effective tax rate in the three and nine-months ended September
30, 2006 compared to 2005 was primarily due to the net effect of the adoption
of
SFAS 123R as of January 1, 2006, and the expansion of our operations into
certain higher state tax jurisdictions.
|
|
Three
Months Ended
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
Provision
for income taxes
|
|
$
|
656,116
|
|
$
|
1,632,312
|
|
|
-60
|
%
|
$
|
4,102,465
|
|
$
|
4,340,336
|
|
|
-5
|
%
|
Effective
tax rate
|
|
|
35
|
%
|
|
38
|
%
|
|
-
|
|
|
40
|
%
|
|
38
|
%
|
|
-
|
|
Goodwill
and Intangible Assets
In
accordance with SFAS No. 142, we test goodwill for impairment at least annually
at the reporting unit level in lieu of amortization. We have determined that
we
have two reporting units, online publishing and print publishing and licensing,
under SFAS No. 142 as these are the components of the business for which
discrete financial information is available and for which management regularly
reviews the operating results.
The
goodwill impairment test is a two-step test. Under the first step, the fair
value of the reporting unit is compared with its carrying value, including
goodwill. If the fair value of the reporting unit is less than its carrying
value, an indication of goodwill impairment exists for the reporting unit,
accordingly, the enterprise must perform step two of the impairment test
(measurement).
We
will
perform an annual impairment review of goodwill for both reporting units during
the fourth quarter of each year.
SFAS
No.
142 also requires that intangible assets with definite lives be amortized over
their estimated useful life and reviewed for impairment in accordance with
SFAS
No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
In
connection with the acquisition of Wescoco LLC, d/b/a “FastFind” on November 30,
2005, we made a final payment of approximately $149,000 based on an adjustment
to Closing Date Net Working Capital as defined under Section 3.03 of the
Agreement and Plan of Merger dated November 20, 2005. Accordingly, goodwill
was
increased by this amount during the quarter ended June 30, 2006.
The
Agreement and Plan of Merger for the acquisition of Mortgage Market Information
Services, Inc. and Interest.com dated December 1, 2005 contains a provision
in
Section 3.03 for the potential adjustment to Closing Date Equity, as defined.
To
date, no such adjustment has been agreed upon. Goodwill was adjusted however,
for approximately $190,000 related to accounts receivable and $78,000 related
to
deferred revenue.
Liquidity
and Capital Resources
|
|
September
30,
|
|
December
31,
|
|
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
Cash
and cash equivalents
|
|
$
|
103,218,730
|
|
$
|
3,479,609
|
|
$
|
99,739,121
|
|
Working
capital
|
|
|
113,266,188
|
|
|
9,809,238
|
|
|
103,456,950
|
|
Stockholders'
equity
|
|
|
161,686,650
|
|
|
52,852,952
|
|
|
108,833,698
|
|
Our
principal source of liquidity is the cash generated by our product revenue.
Another source of cash is proceeds from the exercise of employee stock
options.
In
May
2006, we closed a public offering of 2,697,776 shares of our common stock,
of
which 2,005,991 shares were sold by the Company and 691,785 shares were sold
by
certain of our existing stockholders, at a price of $48.25 per share resulting
in net proceeds to us of approximately $92.7 million.
As
of
September 30, 2006, our primary commitments were approximately $10,367,000
in
operating lease payments over the next 10 years, as well as capital expenditures
and recurring payables and accruals arising during the course of operating
our
business, estimated at approximately $6,366,000 through September 30, 2007.
We
generally establish payment terms with our vendors that extend beyond the amount
of time required to collect from our customers. There are no other significant
commitments or any off-balance sheet arrangements.
Contractual
Obligations
The
following table represents the amounts due under the specified types of
contractual obligations as of September 30, 2006.
|
|
Payments
Due
|
|
|
|
|
|
|
Less
than
|
|
One
to
|
|
Three
to
|
|
More
than
|
|
|
|
Total
|
|
one
year
|
|
three
years
|
|
five
years
|
|
five
years
|
|
Long-term
debt obligations
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Capital
lease obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating
lease obligations (1)
|
|
|
10,366,534
|
|
|
1,211,443
|
|
|
2,243,042
|
|
|
1,912,186
|
|
|
4,999,863
|
|
Purchase
obligations (2)
|
|
|
661,752
|
|
|
543,443
|
|
|
115,224
|
|
|
3,085
|
|
|
-
|
|
Other
long-term obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$
|
11,028,286
|
|
$
|
1,754,886
|
|
$
|
2,358,266
|
|
$
|
1,915,271
|
|
$
|
4,999,863
|
|
(1) |
Includes
our obligations under existing operating leases.
|
(2) |
Represents
base contract amounts for Internet hosting, co-location content
distribution and other infrastructure
costs.
|
During
the nine months ended September 30, 2006, we generated $10,214,000 of net cash
from operating activities. Our net income of $6,108,000 was adjusted for the
impact of stock-based compensation expense and the tax benefit from exercised
stock options of $7,318,000; the deferred income tax provision of $1,049,000;
depreciation and amortization of $1,754,000; bad debt expense of $1,158,000;
and
a net negative change in the components of operating assets and liabilities
of
$7,172,000. Of this negative change, $6,123,000 resulted from an increase in
accounts receivable; $1,226,000 resulted from a decrease in accounts payable;
$1,683,000 resulted from an increase in accrued expenses; and $945,000 resulted
from a decrease in other liabilities. Accounts receivable balances were higher
at September 30, 2006 supporting higher sales levels, larger customers buying
advertising through agencies that typically extend payments beyond 60 days,
and
slower collections from the recently acquired MMIS newspaper rate table
business. The decrease in accounts payable was due to scheduled payments to
trade vendors, and payments made in the nine months of 2006 for 2005 sales
commission and the management incentive plan. The increase in accrued expenses
relates to the $3,000,000 American Interbanc, LLC legal settlement.
During
the nine months ended September 30, 2006, net cash of $1,083,000 was used to
purchase furniture & equipment; $291,000 was used for lease security
deposits for the new Chicago and New York offices; $4,400,000 was used to
purchase Mortgage-calc.com on August 4, 2006 and an additional $149,000 was
paid
as working capital adjustment to the sellers of FastFind under the terms of
Agreement and Plan of Merger dated November 30, 2005. In May 2006, we closed
a
public offering of 2,697,776 shares of our common stock, of which 2,005,991
shares were sold by the Company and 691,785 shares were sold by certain of
our
existing stockholders, including those aquired upon excecise of stock
options, at a price of $48.25 per share resulting in net proceeds to us of
approximately $92.4 million.
Cash
flows from financing activities include the net proceeds from the sale of common
stock of $90,688,000, the proceeds from the excercise of the selling
stockholders’ and other stock options of $2,699,000, and $2,021,000 of tax
benefits related to the adoption of FAS 123R as of January 1, 2006.
Our
existing cash and cash equivalents may decline in the event of weakening of
the
economy or changes in our planned cash outlay. However, based on our current
business plan and revenue prospects, we believe that our existing balances
together with our anticipated cash flows from operations will be sufficient
to
meet our working capital and operating resource expenditure requirements for
the
next twelve months. Also, while we currently have no committed lines of credit,
we believe that our banking relationships and good credit should afford us
the
opportunity to raise sufficient debt in the banking or public markets, if
required.
Item
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
The
primary objective of our investment strategy is to preserve principal while
maximizing the income we receive from investments without significantly
increasing risk. To minimize this risk, to date we have maintained our portfolio
of cash equivalents in short-term and overnight investments which are not
subject to market risk, as the interest paid on such investments fluctuates
with
the prevailing interest rates. As of September 30, 2006, all of our cash
equivalents matured in less than three months.
Exchange
Rate Sensitivity
Our
exposure to foreign currency exchange rate fluctuations is minimal to none
as we
do not have any revenues denominated in foreign currencies. Additionally, we
have not engaged in any derivative or hedging transactions to date.
Item
4. CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Based
on
their evaluations as of September 30, 2006, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of
1934, as amended) were sufficiently effective to ensure that the information
required to be disclosed by us in this Quarterly Report on Form 10-Q was
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and instructions for Form 10-Q.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal controls over financial reporting during the
quarter ended September 30, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Part
II - OTHER INFORMATION
Item
1. LEGAL
PROCEEDINGS
On
October 9, 2006, we entered into a Confidential Final Settlement Agreement
and
Mutual Release (the “Agreement”) with AI. Under the terms of the Agreement, we
agreed to make a one-time cash payment of $3,000,000 to AI and AI agreed to
dismiss the lawsuit with no ability to reassert its claims against us. The
Company and AI have also agreed to certain terms and conditions that permit
AI
to advertise on Bankrate.com. We believe that all of AI’s claims against us were
factually and legally without merit and did not admit to any wrongdoing as
part
of the settlement. As the $3,000,000 cash payment was probable and reasonably
estimable as of September 30, 2006, we included the $3,000,000 legal settlement
in the accompanying condensed consolidated statement of income. For more
information on the AI lawsuit, see Note 5 “Commitments and Contingencies” of
Notes to Condensed Consolidated Financial Statements included in Part I, Item
1
of this Quarterly Report for a discussion of legal proceedings pending against
us.
Item
1A. Risk Factors
In
addition to the other information set forth in this Quarterly Report, you should
carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in
our 2005 Annual Report, as updated in our subsequent quarterly reports. There
have been no material changes in our risk factors from those disclosed in our
2005 Annual Report other than as follows:
The
expected benefits of our recent acquisition of FastFind, including expected
synergies, may not be realized
Our
FastFind operations, which we acquired in November 2005, have not performed
as
originally expected and we have been unable to monetize the FastFind assets
as we had planned. Although we have developed a strategy to develop FastFind
into a successful lead generation of business, there is no assurance that we
will be able to realize the revenue opportunities available in the lead
aggregator business. Furthermore, our strategy for FastFind requires us to
continue to incur costs and expenses to, among other things, increase traffic
for FastFind and develop more significant relationships with key financial
institutions. However, there can be no assurance that sufficient revenue will
ever be derived from FastFind to substantiate these costs or that we will ever
receive an acceptable return on our investment in FastFind.
We
may Face Liability for, and may be Subject to Claims Related to, Inaccurate
Advertising Content Provided to Us
Much
of
the information on our web site that is provided by advertisers and collected
from third parties relates to the rates, costs and features for various loan,
depositary, personal credit and investment products offered by financial
institutions, mortgage companies, investment companies, insurance companies
and
others participating in the consumer financial marketplace. While we maintain
an
aggressive quality control program, we are exposed to the risk that some
advertisers may provide us, or directly post on our web site, (i) inaccurate
information about their product rates, costs and features, or (ii) rates, costs
and features that are not available to all consumers. This could cause consumers
to lose confidence in the information provided by advertisers on our web site,
cause certain advertisers to become dissatisfied with our web site, and result
in lawsuits being filed against us. Our insurance may not adequately protect
us
against these types of lawsuits.
Item
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item
3. DEFAULTS
UPON SENIOR SECURITIES
None.
Item
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item
5. OTHER
INFORMATION
None.
Item
6. EXHIBITS
10.1
|
Executive
Agreement effective September 11, 2006 between Donaldson Ross and
Bankrate, Inc.
|
|
|
31.1
|
Certification
of Thomas R. Evans, Chief Executive Officer and President of Bankrate,
Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
|
|
|
31.2
|
Certification
of Edward J. DiMaria, Senior Vice President and Chief Financial Officer
of
Bankrate, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange
Act
of 1934.
|
|
|
32.1
|
Certification
of Thomas R. Evans, Chief Executive Officer and President of Bankrate,
Inc., Pursuant to 18 U.S.C. Section 1350.
|
|
|
32.2
|
Certification
of Edward J. DiMaria, Senior Vice President and Chief Financial Officer
of
Bankrate, Inc., Pursuant to 18 U.S.C. Section
1350.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Bankrate,
Inc.
|
|
|
|
|
Dated: November 9, 2006 |
By:
/s/
EDWARD J. DIMARIA
|
|
Edward
J. DiMaria
|
|
Senior
Vice President and Chief Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|