Unassociated Document
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-K
x
ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
The Fiscal Year Ended December 31, 2006
or
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 specified in its charter)
Florida
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65-0423422
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or
organization)
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11760
U.S. Highway One, Suite 200
North
Palm Beach, Florida 33408
(Address
of principal executive offices) (zip code)
Registrant's
telephone number, including area code: (561) 630-2400
Securities
registered pursuant to Section
12(b) of the Act:
Title
of Each Class
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Name
of Each Exchange on Which
Registered
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Common
Stock, $0.01 par Value
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o
No x
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large
accelerated filer o Accelerated
filer x Non-accelerated filer o
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act) oYes x
No
The
aggregate market value of the voting common equity
held by non-affiliates of the registrant, based on the average of the closing
bid and ask quotations for the Common Stock on June 30, 2006 as reported by
the
Nasdaq National Market was approximately $311,862,000. As
of
February 28, 2007, the registrant had outstanding 18,269,924 shares of Common
Stock.
Documents
Incorporated By Reference
Portions
of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be
held on June 20, 2007, are incorporated by reference in Part III.
TABLE
OF CONTENTS
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PAGE
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Part
I
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Item
1.
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Business
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5
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Item
1A.
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Risk
Factors
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11
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Item
1B.
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Unresolved
Staff Comments
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15
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Item
2.
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Properties
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15
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Item
3.
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Legal
Proceedings
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16
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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16
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Part
II
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Item
5.
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Market
for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchase
of
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Equity
Securities
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16
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Item
6.
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Selected
Financial Data
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17
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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34
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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35
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Item
8.
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Financial
Statements and Supplementary Data
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57
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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57
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Item
9A.
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Controls
and Procedures
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57
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Item
9B.
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Other
Information
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59
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Part
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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59
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Item
11.
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Executive
Compensation
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59
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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59
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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59
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Item
14.
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Principal
Accounting Fees and Services
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59
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Part
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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59
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Signatures
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62
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Exhibits
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63
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Introductory
Note
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K 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 1A. “Risk Factors” and Part II, Item
7, “Management's Discussion and Analysis of Financial Condition and Results of
Operations” in this Annual Report on Form 10-K, as well as:
·
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the
willingness of our advertisers to advertise on our web
sites;
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interest
rate volatility;
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·
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our
ability to establish and maintain distribution
arrangements;
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·
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our
ability to integrate the business and operations of companies that
we have
acquired, and those we may acquire in the future;
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·
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our
ability to realize expected benefits, including synergies, of companies
that we have acquired, and those that we may acquire in the
future; |
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our
ability to maintain the confidence of our advertisers by detecting
click-through fraud and unscrupulous advertisers; |
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our
need and our ability to incur additional debt or equity
financing;
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the
effect of unexpected liabilities we assume from our
acquisitions;
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the
impact of resolution of lawsuits to which we are a
party;
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the
willingness of consumers to accept the Internet as a medium for obtaining
financial product information;
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the
ability of consumers to access our websites through non-PC
devices; |
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increased
competition and its effect on our web site traffic, advertising rates,
margins, and market share;
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our
ability to manage traffic on our web sites and service
interruptions;
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our
ability to protect our intellectual property;
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the
effects of facing liability for content on our web
sites;
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legislative
or regulatory changes;
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the
concentration of ownership of our common stock;
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the
fluctuations of our results of operations from period to
period;
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the
strength of the United States economy in general;
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the
accuracy of our financial statement estimates and
assumptions;
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effect
of changes in the stock market and other capital
markets;
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technological
changes;
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changes
in monetary and fiscal policies of the U.S. Government;
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changes
in consumer spending and saving habits;
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changes
in accounting principles, policies, practices or
guidelines;
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the
effect of provisions in our Articles of Incorporation, Bylaws, and
certain
laws on change-in-control transactions; |
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other
risks described from time to time in our filings with the Securities
and
Exchange Commission; and
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our
ability to manage the risks involved in the
foregoing.
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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 Annual Report. We do not undertake to update
any forward-looking statement, except as required by law.
PART
I
Item
1. Business
Overview
Bankrate,
Inc. and subsidiaries (the "Company", "Bankrate", "we", "us", "our") own
and
operate an Internet-based consumer banking marketplace. Our flagship web
site,
Bankrate.com, is one of the web's leading aggregators of information on more
than 300 financial products and fees, including mortgages, credit cards,
automobile loans, money market accounts, certificates of deposit, checking
and
ATM fees, home equity loans and online banking fees. We also own and operate
Interest.com, a smaller, yet similar site, FastFind.com, an Internet-based
lead
aggregation firm, and Bankrate Print, which produces newspaper-based advertising
and editorial products. Additionally, we provide financial applications and
information to a network of distribution partners and national, regional,
and
local publications. We provide the tools and information that can help consumers
make better financial decisions. We regularly survey more than 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 their trusted source for financial rates
and information.
Bankrate
was founded approximately 30 years ago as a print publisher of the newsletter
Bank
Rate Monitor. From
1976
through 1996, our principal business was the publication of print newsletters,
the syndication of unbiased editorial bank and credit product research to
newspapers and magazines and advertising sales of the Mortgage
and Deposit Guide,
a
newspaper-advertising table consisting of product and rate information from
local mortgage companies and financial institutions. The company that we
operate
today was incorporated in the State of Florida in 1993.
In
1996,
we began our online operations by placing our editorially unbiased research
on
our web site, Bankrate.com. By offering our information online, we created
new
revenue opportunities through the sale of graphical and hyperlink advertising
associated with our rate and yield tables. In fiscal 1997, we implemented
a
strategy to concentrate on building these online operations.
Today,
we
operate in two reportable business segments: online publishing and print
publishing and licensing. The online publishing segment generally includes
the
online operations of the Bankrate Network, which includes Bankrate.com,
Interest.com, Mortgage-calc.com, and Bankrate Select,
the
new
partnership involving our FastFind operations and Lending Tree. Our rate
tables
provide, at no cost to the consumer, a detailed list of lenders by market
and
include relevant details to help consumers compare loan products. We continue
to
enhance our offerings in order to provide Bankrate.com users with the most
complete experience. Features such as financial calculators and e-mail
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. In addition, our offerings include channels on investing, taxes,
college finances, financial advice and insurance. Each channel offers a unique
look at its particular topic. For example. Bankrate.com users can read 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
operate a traditional media business on the Internet. We have a high quality,
poised-to-transact audience that we educate and is ready to do business with
our
advertisers. Bankrate.com is one of the leading web sites for financial
information and advice according to comScore Media Metrix.
Our
print
publishing and licensing segment includes our traditional print publications
and
syndicated editorial content in more than 150 newspapers and three national
magazines. Today, the Mortgage
and Deposit Guide. The
Mortgage
and Deposit Guide
is a
weekly newspaper-advertising table consisting of product and rate information
from local mortgage companies and financial institutions. The Mortgage
and Deposit Guide
appears
weekly in approximately 500 U.S. metropolitan newspapers with combined single
day circulation in excess of 40 million copies, and a television version.
In
addition to serving as a revenue source, our print publications also increase
our exposure, serve as branding opportunities for our web site, and absorb
part
of the costs of producing our research and original editorial
content.
For
further discussion of our two reportable business segments, see Management's
Discussion and Analysis of Financial Condition and Results of Operations
-
Results of Operations and Critical Accounting Policies, and Note 8 to the
Financial Statements elsewhere in this Form 10-K.
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.
Our
efforts during the past several years have been focused on developing
Bankrate.com into the leading destination site for consumer banking and personal
finance information. The key drivers of our business are the number of
advertisers on our online network, the number of "page views," and the number
of
consumers visiting our web sites. Since 2001 the number of advertisers on
our
web sites has grown from approximately 320 to over 390 and annual page views
have grown from 237 million to 487 million.
Additionally,
we have broadened the focus of our financial products research from 100
financial products in 155 markets in 2001 to more than 300 financial products
in
approximately 575 markets today. Our marketing efforts to generate traffic
have
evolved from primarily non-cash intensive programs such as sweepstakes and
promotions into today's key word search engine advertising campaigns. In
2001 we
syndicated our editorial content and research to 97 newspapers compared to
today's 153 newspapers.
As
a
result of these efforts we were able to take advantage of several acquisition
opportunities in 2005 and 2006. On November 30, 2005, we acquired Wescoco,
LLC
(“FastFind”)
and on December 1, 2005, we acquired Mortgage Market Information Services,
Inc.
and Interest.com (collectively, “MMIS/Interest.com”). FastFind, an Internet lead
aggregator based in San Francisco, California was purchased for $10.1 million
in
cash. MMIS/Interest.com, which publishes Mortgage and Deposit Guides in over
300
newspapers and operates Interest.com, a web site which publishes financial
rates
and information connecting consumers with lenders, was acquired for $30 million
in cash, subject to post-closing adjustments.
In
August
2006, we completed the acquisition of a group of assets that consists of
three
web sites (Mortgage-calc.com, Mortgagecalc.com, and Mortgagemath.com) owned
and
operated by East West Mortgage, Inc. for $4.4 million in cash. The operations
of
the three web sites were integrated into our online publishing
segment.
In
2007,
we are focusing on:
· |
Optimizing
our cost per thousand impressions (“CPMs”) and cost per clicks (“CPCs”) on
the Bankrate Network - Bankrate.com, Interest.com, Mortgage-calc.com,
and
FastFind.
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Enhancing
search engine marketing and keyword buying to drive targeted impressions
into the Bankrate Network.
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Re-launching
FastFind with the new name “Bankrate Select” through a partnership with
Lending Tree to gain access to a well-established lender network,
which we
anticipate will better monetize the leads we
generate.
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Expanding
our co-brand and affiliate footprint.
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Selling
advertising for our Deposit rate tables to be placed in our 500+
newspaper
network.
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Our
Opportunity
We
believe many
financial services customers are relatively uninformed with respect to financial
products and services and often rely upon personal relationships when choosing
such products and services. It is our belief that many
of
these products and services are not well explained, and viable, equivalent
alternatives typically are not presented when marketed to consumers through
traditional media. As the sale of many of these products and services moves
to
the Internet, consumers seek new sources of independent objective information
such as Bankrate.com to facilitate and support their buying decisions. The
interactive nature of the Internet allows us to display extensive research
on
financial products and services that was previously unavailable to consumers.
According
to a 2004 survey conducted by the Board of Governors of the U.S. Federal
Reserve, the percentage of U.S. families that own certain financial instruments
was as follows:
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Transaction
Accounts
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CDs
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Stocks
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Loan
secured by primary residence
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Installment
loans
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Credit
card balances
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Any
debt
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91.3
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12.7
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20.7
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47.9
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46.0
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46.2
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76.4
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We
believe the majority of financial information available on the Internet is
oriented toward investment advice and providing business news and stock market
information, rather than personal and consumer finance information, advice
and
interest rate data. Our efforts are targeted to fulfill the slightly less
competitive, but equally important niches of consumer banking and personal
finance information. As a result, we believe we can maintain a loyal base of
users comprised of targeted audiences that are attractive to advertisers.
We
have
seen steady interest in our primary niches - mortgages, automobile loans, home
equity loans and CD/savings products. Our ability
to
provide a platform for frictionless communication between consumers and
businesses has not changed. We believe that
we
are well-positioned to benefit from growth in the Internet personal finance
advertising market.
Strategy
We
believe that the consumer banking and personal finance sectors hold significant
opportunities for growth and expansion. As we grow, we are seeking to
consolidate our position as the industry leader in the gathering of rate data
and to expand our brand recognition with consumers and partners. Elements of
our
strategy include:
· |
Continuing
to provide advertisers with high-quality, ready-to-transact
consumers:
By advertising on our online
network,
either through purchasing graphic ads or hyperlinks banks, brokers
and
other advertisers are tapping into our strongest resource, consumers
on
the verge of engaging in a high-value transaction. By allowing advertisers
to efficiently access these “in-market” consumers, we are helping
advertisers lower their own costs of acquiring new customers, and
ultimately creating a transaction that is beneficial for the advertiser,
the consumer and us.
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· |
Remaining
the dominant brand in consumer personal finance data and
content:
We are continuing our strong push to remain the dominant player in
our
market. We believe that
we
are the leader
in
our market using
based
on a
number of metrics, including revenue, the number of financial
institutions surveyed,
the number of pages viewed by consumers and the number of unique
visitors
each month.
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· |
Continuing
growth through partnering with top web sites:
Our partner network provides our
online network
with a steady stream of visitors, with little to no up-front payment
risk
to us.
As the
bulksubstantially
all
of
these agreements are revenue-sharing, we only pay our
partners a
percentage of the
revenue earned.
We will also explore initiatives to expand the breadth and depth
of our
product offerings and services by partnering in the real estate,
insurance,
auto
finance, sub-prime lending and college lending
areas.
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Distribution
Arrangements
Our
distribution (or syndication) arrangements with other web site operators fall
into two categories: (1) co-branding, in which we establish a "co-branded"
site
with another web site operator, and (2) licensing, in which we provide content
to the other operator's web site together with a hyperlink to Bankrate.com.
Historically,
co-branding has
been
more effective in driving traffic to our online network than
licensing
Co-branded
sites are created pursuant to agreements with other web site operators.
Generally, agreements relating to co-branded sites provide for us to host the
co-branded web pages, sell and serve the graphic advertising, and collect
advertising revenues, which are shared with the third party web site.
Under
licensing arrangements, we provide limited content to other web sites in
exchange for a fee. The content identifies Bankrate.com as its source and
typically includes a hyperlink to the Bankrate.com web site.
Our
largest partners in terms of driving traffic to our online
network, as
of
December 31, 2006, included America Online, Yahoo!, CNN, MSN, Internet
Broadcasting System, Dollar Stretcher and USA Today. During 2006, approximately
12% of the traffic to Bankrate.com was attributable to the distribution partners
compared to 14% in 2005 and 20% in 2004. The decline results primarily
from
the
heightened consumer awareness of our site, resulting in more traffic coming
directly to Bankrate.com. We expect traffic from distribution partners to
continue to be approximately 10% to 15% of total site traffic in
2007.
Financial
Product Research
Our
research staff tracks comparative information on more than 300 financial
products and services, including checking accounts, consumer loans, lines of
credit, mortgages, certificates of deposit, savings accounts, credit cards,
money market accounts and online accounts. We estimate that over 3,000,000
items
of data are gathered each week for approximately 575 markets across the United
States from over 4,800 financial institutions. The information obtained includes
not only interest rates and yields, but also related data such as lock periods,
fees, points, and loan sizes for mortgages, and grace periods, late penalties,
cash advance fees, cash advance annual percentage rates, annual percentage
yields, minimum payments, and terms and conditions of credit cards.
We
adhere
to a strict methodology in developing our markets and our institutional survey
group. The market survey includes the 100
largest
U.S. markets, as defined by the U.S. Census Bureau's Metropolitan Statistical
Area categories and FDIC Market Report. Along with the largest markets, the
surveys include secondary markets
and other selected communities that represent areas of high
growth.
In
most
instances, institutions in the survey group include the largest banks and
thrifts within each market area based on total deposits. The number of
institutions tracked within a given market is based on the types of financial
products available and number of institutions in the market area. In each of
the
largest 25 markets, we track at least 10 institutions. In each of the smaller
markets, we track three or more institutions. We verify and adjust, if
necessary, the institutions included in the survey group on an annual basis
using FDIC deposit data from year-end call reports. We do not include credit
unions in the market survey group because product availability is based upon
membership. However, we track the 50 largest U.S. credit unions as a separate
survey group for comparison purposes.
All
products included in our database have narrowly defined criteria so that
information provided by institutions is comparable. The quality control process
then includes several visual checks and proofing by different staff members
to
ensure
that the data inputs are accurate. Our quality control staff reviews each
listing in relation to regional and national trends and for overall accuracy
and
consistency fees and related information prior to disclosure of the information
to consumers. The staff also reviews the comparability of products,
institutional accuracy and survey accuracy. In addition, the quality control
team performs anonymous shopping on a daily basis, whereby we place calls to
institutions in order to validate the data in a consumer setting. Institutions
providing invalid data are contacted by our quality control staff to ensure
that
future information will be accurate.
The
criteria for product listings consist of specific attributes, such as loan
size
and term that are used to define each type of financial instrument in order
to
ensure uniformity in the products that are compared. Institutions listed in
our
Bankrate.com online tables that purchase hyperlinks to their own sites or
purchase other advertising must comply with the same criteria for product
listings that apply to other institutions or the
advertisements
will be
removed.
We
are
aware of the potential conflict of interest resulting from the sale of
advertising to financial institutions while providing independent and objective
research. However, we believe that no potential conflicts of interest have
ever
compromised our ability to provide independent and objective research, and
we
are committed to continue to provide such research in the future.
Editorial
Content
In
addition to our research department,
as of December 31, 2006,
we
maintained
an editorial staff of 19
editors,
writers, researchers, technical producers and designers who create original
content,
research studies and decision tools for our online
network.
We also
have relationships with more than 30 freelance journalists. The reporters and
editors of our
online network have extensive combined media experience in newspaper, magazine,
new media and or broadcast with a combined average of 18 years' experience
in
journalism. We believe the quality of our original content plays a critical
role
in attracting visitors to our Web
siteonline
network and to our
co-branded partners’ web
sites.
Most
of
the content within our online
network is original and produced internally. There is a very limited amount
of
third-party content, acquired under advertising revenue-sharing agreements
or
licenses, which allows us to incorporate relevant information on our Bankrate
Network that would otherwise require additional resources to produce. An example
of this type of arrangement is the incorporation in Bankrate.com of currency
conversion functionality from OANDA.com, a comprehensive provider of foreign
exchange and currency trading information services.
Print
Publications
We
continue to produce traditional print publications to absorb part of the cost
of
producing research and original editorial content. Additionally, we believe
that
print publishing activities contribute to greater exposure and branding
opportunities for our web site. Our print publications activities include the
following:
· |
Mortgage
Guide:
We generate revenue through the sale of mortgage rate and product
listings
in over
500
newspapers across the United States with combined daily
circulation
of more than 40 million copies. We enter into agreements with the
newspapers for blocks of print space, which is in turn sold to
mortgage
lenders and we share the revenue with the newspapers on a percentage
basis.
|
· |
Deposit
Guide:
We generate revenue through the sale of Deposit rate and product
listings
in 13 newspapers across the United States with combined daily
circulation
of more than 2 million copies. We enter into agreements with the
newspapers for blocks of print space, which is in turn sold to
financial
institutions and we share the revenue with the newspapers on a percentage
basis.
|
· |
Syndication
of Editorial Content and Research:
We syndicate editorial research to 153 newspapers, which have a combined
Sunday circulation of more than 29 million copies, and three national
magazines with combined monthly circulation in excess of 3 million
copies.
|
· |
Newsletters:
We publish three newsletters: 100
Highest Yields
and Jumbo
Flash Report,
which target individual consumers, and Bank
Rate Monitor,
which targets an institutional audience. These newsletters provide
bank
deposit, loan and mortgage interest rate information with minimal
editorial content.
|
In
2006,
we launched a new product, our Free Standing Insert program. We create a
free
standing publication with our original editorial content that is inserted
into a
newspaper. We then sell sponsorship of the free standing publication to an
advertiser. Although this product is expensive to produce, we expect this
product to increase net income slightly. We believe our Free Standing Insert
program is beneficial to us because it further increases our visibility in
the
marketplace.
For
the
fiscal years ended December 31, 2006, 2005 and 2004, the percentage of total
revenue generated by Mortgage
and Deposit Guide
advertising was 18%, 10% and 11%, respectively.
Consumer
Marketing
Our
primary
marketing expenditures are for key word cost-per-click advertising campaigns
on
Internet search engines. Through the end of 2005, we also entered into barter
transactions (our
exchange
of
advertising space on our
online network
for
reciprocal advertising space on other web sites) to promote our brand and
generate traffic to our online
network.
We
actively conduct earned media public relations campaigns to promote our
editorial content and personnel to the consumer and trade media. Bankrate
spokespersons are routinely featured in newspapers, magazines and in broadcast
media, and are promoted to and are featured as expert commentators on,
major broadcast and cable news programs and talk radio. In
2006,
Bankrate experts were quoted or we
were
referenced in over 1,100 media exposures. Our spokespersons were featured in
112
television interviews, including The Today Show, CBS’ The Early Show, The Fox
Cable Network, MSNBC, CNBC, and CNN; 772 print articles, including The
New York Times,
The
Wall Street Journal
and
USA Today;
and
about 225 interviews on numerous talk radio broadcasts. Finally,
we produce “The
Bankrate.com Personal Finance Minute” which is distributed to XM radio and
selected terrestrial radio stations throughout the U.S.
Bankrate.com’s
home page and other key pages
of our
online network
routinely rank at or near the top of major search engines' natural (unpaid)
listings for highly coveted key words and phrases related to banking products,
and we generate significant traffic and revenue from such placements. The high
rankings are largely a result of our success at creating highly relevant, widely
read content, and because our personnel stay abreast of and use various search
engine optimization techniques.
Bankrate
Select
In
early
2007 we will re-launch the FastFind lead generation business as Bankrate
Select
through
a
partnership with Lending Tree. We will gain access to a well established
lender
network, which we believe will better and more fully monetize the leads we
generate. We believe visitors to our online network value and trust the Bankrate
brand and we expect that the click and conversion rates should improve
with the implementation of Bankrate
Select.
Advertising
Sales
The
sales
team focuses on selling online and offline advertising to national, regional
and
local advertisers. The sales staff focuses on three segments of the financial
industry: lending (mortgage, home equity and auto loans), banking (CDs, MMAs
and
credit cards) and general personal finance (college loans, taxes and IRAs).
We
have three sales regions with offices in each region: East (New York City),
Midwest (Chicago), and West (San Francisco and Orange County). Each salesperson
is responsible for a designated geographic region of the United States. They
are
paid based on their individual performance within their territory.
The
sales
team is responsible for selling all of our products including graphic
advertising on Bankrate.com, Mortgage-calc.com and Interest.com, hyperlink
listings on the Bankrate rate tables, rate table listings in the Mortgage
and Deposit Guides
and
mortgage leads from Bankrate Select. We believe this approach enhances
the value for advertisers
and direct marketers by (1) alleviating the need to purchase advertising from
numerous vendors,
(2)
providing advertisers and direct marketers the opportunity to optimize their
marketing dollars between four different products, (3) offering integrated
marketing packages that meet the strategic needs of our customers, and (4)
providing access to in-market consumers who are ready to act. Advertisers and
direct marketers can enhance the effectiveness of their campaigns by customizing
advertising delivery on our networks within a particular content channel,
geographically or across an entire network.
For
the
fiscal years ended December 31, 2006, 2005 and 2004, the percentage of total
revenue generated by graphic advertising was 47%, 56% and 50%, respectively.
For
the fiscal years ended December 31, 2006, 2005 and 2004, the percentage of
total
revenue generated by hyperlink advertising was 34%, 32% and 37%, respectively.
Our
advertisers can target prospective customers using several different approaches:
· |
Focusing
on consumers in specific situations, such as those who are first-time
home
buyers, or those actively shopping for home equity
loans.
|
· |
Targeting
specific geographic and product areas; for example, CD shoppers in
Georgia; or just one of these - all consumers interested in CDs,
or all
consumers from Georgia.
|
· |
General
rotation throughout our network.
|
Graphic
Advertising
Our
most
common graphic advertisement sizes are leader boards (728 x 90 pixels) and
banners (486 x 60 pixels), which are prominently displayed at the top or bottom
of a page, skyscrapers (160x600 or 120x600 pixels) posters (330 x 275 pixels),
and islands (250 x 250 pixels). We offer these advertisements which can be
targeted to specific areas of our network, or on a general rotation basis.
Advertising rates may vary depending upon the product areas targeted (home
equity has a higher CPM than auto), geo-targeting (a 15% premium for targeting
advertisements to a specific state), the quantity of advertisements purchased
by
an advertiser, and the length of time an advertiser runs an advertisement on
our
network. Discounts may be available based upon the volume of advertisements
purchased.
Posters
are oversized advertisements that contain more information than traditional
banner advertisements. We position posters on certain pages so that they
dominate the page. In addition, we offer product special issues that are
available for single sponsorships. Rates for product special issues are based
on
expected impression levels and additional content requirements.
Providing
effective tools for managing advertising campaigns is essential to maintaining
advertising relationships. We use a state-of-the-art program under license
from
a third-party that allows our advertisers to monitor their spending on our
web
sites in real-time for impressions received and click-through ratios generated.
We also allow third-parties to serve our customers’ advertisements, such as
DoubleClick.
Hyperlinks
Financial
institutions that are listed in our rate tables have the opportunity to
hyperlink their listings. By clicking on the hyperlink, users are taken to
the
institution's web site. Prior to October 1, 2005, hyperlinks were sold under
a
flat dollar fee per month contracts that ranged primarily between three and
twelve months.
Our
hyperlinks were converted to a “cost-per-click” or CPC pricing model on October
1, 2005. Under this arrangement, advertisers pay Bankrate a specific,
pre-determined cost each time a consumer clicks on that advertiser’s hyperlink
or phone icon (usually found under the advertiser’s name in the rate table
listings). All clicks are screened for fraudulent characteristics by an
independent thirdparty vendor and then charged to the advertiser’s account.
We
also
sell text links on our rate pages to advertisers on a CPC
basis.
Advertisers enter an auction bidding process on a thirdparty web site for
placement of their text link based on the amount they are willing to pay for
each click through 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.
Behavioral
Targeting
In
the
fourth quarter of 2006, we launched a behavioral targeting initiative with
two
partners who manage two distinct advertising networks. Behavioral targeting
allows us to identify consumers who come to the Bankrate Network, track them
on
an anonymous basis, and then serve them targeted ads when they are on websites
on one of the two partner’s networks. We believe that this initiative can
increase the number of advertisements that we serve, however, this initiative
is
too new to determine its impact on our operations.
Advertisers
We
market
to local advertisers targeting a specific audience in a city or state and also
to national advertisers targeting the entire country. As of December 31, 2006,
we had 61 graphic advertisers and 349 hyperlink advertisers, some of which
are
both graphic and hyperlink advertisers. Among our larger advertisers are E-Loan,
Inc., Citibank, Amerisave Mortgage, ING Direct, Bank of America and HSBC. No
sales to any one customer in
either
our online publishing or print publishing and licensing segment exceeded
10% of total revenue for the periods presented.
Competition
We
compete for advertising revenues across the broad category of personal finance
information, both in traditional media such as newspapers, magazines, radio,
and
television, and in the developing market for online financial information.
There
are many competitors that have substantially greater resources than we do.
Our
online and print competition includes the following:
· |
Personal
finance sections of general interest web sites such as Yahoo! Finance,
AOL
Money & 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;
|
· |
Lead
aggregators such as LowerMyBills, iHomeowners and
NexTag;
|
· |
Print
mortgage table sellers like National Financial News Service;
|
· |
Rate
listing web sites, such as Realtor.com/Move.com, Informa Research
Services
and Loans.com/CarsDirect; and
|
· |
Key
word CPC advertising
sites/networks such as Google, Yahoo! Search Marketing, and
Ask.com.
|
Competition
in the online publishing segment is generally directed at growing users and
revenue using marketing and promotion to increase traffic to web sites. We
believe that our original content, focus and objective product information
differentiate us from our competitors. We
believe that the market for our print publishing and licensing segment is
highly concentrated, and following our acquisition of MMIS, we believe that
we
are the dominant player in this market.
Seasonality
We
believe our online publishing
segment in terms of page views is not generally susceptible to
seasonality. As brand awareness continues to strengthen for the Bankrate
Network, we believe our quarterly page views will become more consistent
with a
possible decline in the fourth quarter due to the holiday season. However,
in
2006, page views in the fourth quarter were 120.6 million, 17.3 million,
or 17%,
higher than the third quarter in 2006, and 22.9 million, or 24%, higher than
the
fourth quarter of 2005. See Item 7 Management’s Discussion and Analysis of
Financial Condition and Results of Operations for a further discussion of
our
traffic and page views.
Operations
We
currently operate our online network and supporting systems on
servers at a secure third-party co-location facility in Atlanta, Georgia.
This third-party facility is manned, and our infrastructure and
network connectivity are monitored continuously, on a 24 hours a day,
365 days a year basis. In March 2006, we also added a presence at a similar
data center in Denver, Colorado. The additional data center primarily operates
systems related to our web sites other than Bankrate.com. The additional data
center is also key to our business continuity strategy, providing additional
recovery options if either data center should suffer a major outage. These
facilities are powered continuously from multiple sources, including
uninterruptible power supplies and emergency power generators. The
facilities are connected to the Internet with redundant high-speed data
lines. The systems at each data center are protected by a
multi-layered security system including multiple firewalls at each data center.
To provide maximum scalability, many of our high-traffic web pages are
served from an independent content distribution network. Multi-node clusters
or
multiple load shared systems are used for most key functions, including web
serving, ad serving, and SQL databases. The vast majority of the
information presented on our web sites, including backend databases that provide
the raw information, is stored and delivered via such
multi-node or multi-system configurations from one of the co-location
facilities.
All
of
our systems are controlled and updated remotely via encrypted virtual
private network (“VPN”) links to our operating locations. The technical
services team, based in North Palm Beach, Florida has established extensive
monitoring of all key systems, originating from multiple locations and
methodologies, to provide continuous real-time response capability should key
systems or network connections fail. Much of the content on our various web
sites is prepared on systems located in the secure server room in our
North Palm Beach location, then transferred at scheduled intervals via the
VPN
to the systems at the co-location facilities. The North Palm Beach facility
systems are also powered redundantly by uninterruptible power supply units.
In
the event that North Palm Beach or any other location is temporarily
unavailable, temporary access is established from alternative locations to
provide continuity for key operations and content updates.
Proprietary
Rights
Our
proprietary intellectual property includes our unique research and editorial
content, our web sites, our URL’s, and our print publications. We rely
primarily on a combination of copyrights, trademarks, trade secret laws, our
user policy and restrictions on disclosure to protect this content. In
addition, we license some of our data and content from other parties. Our
copyrights, trademarks and licenses expire at various dates, and none is
individually significant. Because of the nature of our business, we believe
that
both of our operating segments rely equally on our proprietary intellectual
property.
Employees
As
of
December 31, 2006, we had 163 full-time employees. We have never had a work
stoppage and none of our employees are represented under collective bargaining
agreements. We consider our employee relations to be favorable.
Financial
Information About Geographic Areas
The
advertising customers that we contract with to generate our revenue are located
within the United States.
Available
Information
For
further discussion concerning our business, see the information included in
Items 7 (Management’s Discussion and Analysis of Financial Condition and results
of Operations) and 8 (Financial Statements and Supplementary Data) of this
report.
We
make
available, free of charge through our web site at www.bankrate.com,
our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K and all amendments to those reports, if applicable, filed or furnished
pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934,
as
amended, as soon as reasonably practicable after the material is electronically
filed with or furnished to the Securities and Exchange Commission (“SEC”). The
information posted on our web site is not incorporated into this Annual Report
on Form 10-K.
Item
1A. Risk Factors
You
should consider carefully the following risk factors before deciding whether
to
invest in our common stock. Our business, including our operating results and
financial condition, could be harmed by any of these risks. Additional risks
and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially and adversely affect our business. The trading
price of our common stock could decline due to any of these risks, and you
may
lose all or part of your investment. In assessing these risks you should also
refer to the other information contained in our filings with the SEC, including
our financial statements and related notes.
Risks
Related to Our Business
Our
Success Depends on Internet Advertising Revenue
We
expect
to derive approximately 83% of our revenue in the foreseeable future through
the
sale of advertising space and hyperlinks on our Internet web pages. Any factors
that limit the amount advertisers are willing to spend on advertising on our
web
sites could have a material adverse effect on our business. These factors may
include:
· |
a
lack of standards for measuring web site traffic or effectiveness
of web
site advertising;
|
· |
a
lack of established pricing models for Internet
advertising;
|
· |
the
failure of traditional media advertisers to adopt Internet
advertising;
|
· |
the
introduction of alternative advertising sources; and
|
· |
a
lack of significant growth in web site traffic.
|
Continuing
to demonstrate the effectiveness of advertising on our web sites is critical
to
our ability to generate advertising revenue. Currently, there are no widely
accepted standards to measure the effectiveness of Internet advertising, and
we
cannot be certain that such standards will develop sufficiently to support
our
growth through Internet advertising.
A
number
of different pricing models are used to sell advertising on the Internet.
Pricing models are typically either CPM-based (cost per thousand impressions)
or
performance-based. We utilize the CPM-based model, which is based upon the
number of advertisement impressions, and the performance-based, or
cost-per-click (“CPC”), model, which generates revenue based on each individual
click on a particular advertisement. We cannot predict which pricing model,
if
any, will emerge as the industry standard. Therefore, it is difficult for us
to
project our future advertising rates and revenues. For instance, banner
advertising, which is one of our primary sources of online revenue, may not
be
an effective advertising method in the future. If we are unable to adapt to
new
forms of Internet advertising and pricing models, our business could be
adversely affected.
Financial
services companies account for a majority of our advertising revenues. We will
need to sell advertising to customers outside of the financial services industry
in order to significantly increase our revenues. If we do not attract
advertisers from other industries, revenue growth could be adversely
affected.
Our
Success Depends on Interest Rate Volatility
We
provide interest rate information for mortgages and other loans, credit cards
and savings accounts. Visitor traffic to our web sites tends to increase with
interest rate movements and decrease with interest rate stability. Factors
that
have caused significant visitor fluctuations in the past have been Federal
Reserve Board actions and general market conditions affecting home mortgage
interest rates. Additionally, the level of traffic to our web sites can be
dependent on interest rate levels as well as mortgage re-financing activity.
Accordingly, a slowdown in mortgage production volumes could have a material
adverse effect on our business.
We
believe that as we continue to develop our web sites with broader personal
finance topics, the percentage of overall traffic seeking mortgage information
will remain stabilized at current levels. To accelerate the growth of traffic
to
our web sites, we are working with our syndication partners to program more
intensively, and we are aggressively promoting products not related to mortgage
activity. If we are otherwise unable to increase or maintain traffic to areas
of
our web sites other than mortgage information, we will be more dependant on
interest rate levels and mortgage refinancing activity.
We
May Expand our Operations Through Acquisitions, Which Could Divert Management’s
Attention and Expose Us to Unanticipated Costs and Liabilities and We May
Experience Difficulties Integrating the Acquired Operations, and We May Incur
Costs Relating to Potential Acquisitions that are Never
Consummated
Our
business plan could include growth through future acquisitions. For example,
in
late 2005, we acquired FastFind and MMIS/Interest.com, and in 2006 we acquired
Mortgagecalc.com. However, our ability to consummate any future acquisitions
on
terms that are favorable to us may be limited by the number of attractive
acquisition targets, internal demands on our resources and our ability to obtain
financing. Our success in integrating newly acquired businesses will depend
upon
our ability to retain key personnel, avoid diversion of management’s attention
from operational matters, and integrate the technical operations and personnel
of the acquired company. In addition, future acquisitions could result in the
incurrence of additional debt, costs and contingent liabilities or the dilution
of our stockholders’ ownership through issuance of additional stock. Integration
of acquired operations may take longer, or be more costly or disruptive to
our
business, than originally anticipated. It is also possible that expected
synergies from future acquisitions may not materialize. We may also incur costs
and divert management attention as regards potential acquisitions that are
never
consummated.
Although
we undertake a due diligence investigation of each business that we acquire,
there may be liabilities of the acquired companies that we fail to or are unable
to discover during the due diligence investigation and for which we, as a
successor owner, may be responsible. In connection with acquisitions, we
generally seek to minimize the impact of these types of potential liabilities
through indemnities and warranties from the seller, which may in some instances
be supported by deferring payment of a portion of the purchase price. However,
these indemnities and warranties, if obtained, may not fully cover the
liabilities due to limitations in scope, amount or duration, financial
limitations of the indemnitor or warrantor or other reasons.
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 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.
If
We Fail to Detect Click-through Fraud or Unscrupulous Advertisers, We Could
Lose
the Confidence of our Advertisers, Thereby Causing our Business to
Suffer
We
are
exposed to the risk of fraudulent clicks on our ads by persons seeking to
increase the advertising fees paid to us. Clickthrough fraud occurs when a
person clicks on an ad displayed on our Web site in order to generate revenue
to
us and to increase the cost for the advertiser. If we were unable to detect
this
fraudulent activity and find new evidence of past fraudulent clicks, we may
have
to issue refunds retroactively of amounts previously paid to us. In addition,
if
fraudulent clicks are not detected, the affected advertisers may experience
a
reduced return on their investment in our advertising programs because the
fraudulent clicks would not lead to potential revenue for the
advertisers.
We
are
also exposed to the risk that advertisers who advertise on our Web site will
advertise interest rates on a variety of financial products that they do not
intend to honor. Such “bait and switch” activity encourages consumers to contact
fraudulent advertisers over legitimate advertisers because the fraudulent
advertisers claim to offer a better interest rate.
Both
“bait and switch” and click-through fraud would negatively affect our
profitability, and could hurt our reputation and our brand. This could lead
the
advertisers to become dissatisfied with our advertising programs, which could
lead to loss of advertisers and revenue.
More
Individuals are Utilizing Non-PC Devices to Access the Internet, and our
Online
Network May Not be Accepted by Such Users.
The
number of individuals who access the Internet through devices other than
a
personal computer, such as personal digital assistants and mobile telephones,
has increased dramatically. Our online network was designed for rich, graphic
environments such as those available on desktop and laptop computers. The
lower
resolution, functionality and memory associated with alternative devices
currently available may make access of our online network through such devices
difficult. If consumers find our online network difficult to access through
alternative devices, we may fail to capture a sufficient share of an
increasingly important portion of the market for online services and may
fail to
attract both advertisers and web traffic.
Adverse
Resolution of Litigation May Harm Our Operating Results or Financial
Condition
We
are
party to lawsuits in the normal course of business. Litigation can be expensive,
lengthy and disruptive to normal business operations. Moreover, the results
of
complex legal proceedings are difficult to predict. An unfavorable resolution
of
a particular lawsuit could have a material adverse effect on our business,
operating results, or financial condition. For additional information regarding
certain of the lawsuits in which we are involved, see Item 3, "Legal
Proceedings."
Our
Success Depends on Establishing and Maintaining Distribution Arrangements
Our
business strategy includes the distribution of our content through the
establishment of co-branded web pages with hightraffic business and personal
finance sections of online services and web sites. A co-branded site is
typically a custom version of our web site with the graphical look, feel, and
navigation, of the co-branded partner’s web site. Providing access to these
co-branded web pages is a significant part of the value we offer to our
advertisers. We compete with other Internet content providers to maintain our
current relationships with other web site operators and establish new
relationships. In addition, as we expand our personal finance content, some
of
these web site operators may perceive us as a competitor. As a result, they
may
be unwilling to promote distribution of our banking and credit content. If
our
distribution arrangements do not attract a sufficient number of users to support
our current advertising model, or if we do not establish and maintain
distribution arrangements on favorable economic terms, our business could be
adversely affected.
Risks
Related to Our Industry, the Internet and Our Technology
Infrastructure
Our
Future Success is Dependent Upon Increased Acceptance of the Internet by
Consumers as a Medium for Obtaining Financial Product Information
Our
success will depend in large part on continued and expanded widespread consumer
acceptance of obtaining rate information regarding financial products such
as
mortgages, credit cards, money market accounts, certificates of deposit,
checking and ATM fees, home equity loans, online banking fees and new and used
auto loans online. The level of consumer use of the Internet to provide for
their personal finance needs is subject to uncertainty. The development of
an
online market for obtaining rate information regarding the above listed
financial products is rapidly evolving and likely will be characterized by
an
increasing number of market entrants. If consumer acceptance of the Internet
as
a source for such information does not increase, we may not be able to compete
effectively with traditional methods of obtaining such rate information and
our
business, results of operations and financial condition will be adversely
affected.
Our
Markets Are Highly Competitive
We
compete for Internet advertising revenues with the personal finance sections
of
general interest sites such as Yahoo! Finance, AOL Money & 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; lead aggregators such
as LowerMyBills, iHomeowners and NexTag; print mortgage table sellers like
National Financial News Service; rate listing sites such as
Realtor.com/Move.com, Informa Research Services and Loan.com/CarsDirect; and
key
word cost-per-click advertising sites/networks such as Google, Yahoo! Search
Marketing and Ask.com. In
addition, new competitors may enter this market as there are few barriers to
entry. Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than us. Many competitors have complementary products or services
that
drive traffic to their web sites. Increased competition could result in lower
web site traffic, advertising rate reductions, reduced margins or loss of market
share, any of which would adversely affect our business. We cannot be certain
that we will be able to compete successfully against current or future
competitors.
Our
Web Sites May Encounter Technical Problems and Service Interruptions
In
the
past, our web sites have experienced significant increases in traffic in
response to interest rate movements and other business or financial news events.
The number of our users has continued to increase over time, and we are seeking
to further increase our user base. As a result, our Internet servers must
accommodate spikes in demand for our web pages in addition to potential
significant growth in traffic.
Our
web
sites have in the past, and may in the future, experience slower response times
or interruptions as a result of increased traffic or other reasons. These delays
and interruptions resulting from failure to maintain Internet service
connections to our site could frustrate users and reduce our future web site
traffic, which could have a material adverse effect on our business.
All
of
our communications and network equipment is located at our corporate
headquarters in North Palm Beach, Florida and/or at secure third-party
co-locations facilities in Atlanta, Georgia and Denver, Colorado. Multiple
system failures involving these locations could lead to interruptions or
delays in service for our web sites, which could have a material adverse effect
on our business. Our operations are dependent upon our ability to protect our
systems against damage from fires, hurricanes, earthquakes, power losses,
telecommunications failures, break-ins, computer viruses, hacker attacks and
other events beyond our control.
We
Rely on the Protection of Our Intellectual Property
Our
intellectual property includes our unique research and editorial content of
our
web sites, our URL's, and print publications. We rely on a combination of
copyrights, trademarks, trade secret laws and our user policy and restrictions
on disclosure to protect our intellectual property. We also enter into
confidentiality agreements with our employees and consultants and seek to
control access to and distribution of our proprietary information. Despite
these
precautions, it may be possible for other parties to copy or otherwise obtain
and use the content of our web sites or print publications without
authorization. A failure to protect our intellectual property in a meaningful
manner could have a material adverse effect on our business.
Because
we license some of our data and content from other parties, we may be exposed
to
infringement actions, if such parties do not possess the necessary proprietary
rights. Generally, we obtain representations as to the origin and ownership
of
licensed content and obtain indemnification to cover any breach of any these
representations. However, these representations may not be accurate and the
indemnification may not be sufficient to provide adequate compensation for
any
breach of these representations.
Any
future infringement or other claims or prosecutions related to our intellectual
property could have a material adverse effect on our business. Defending against
any of these claims, with or without merit, could be time-consuming, result
in
costly litigation and diversion of technical and management personnel or require
us to introduce new content or trademarks, develop new technology or enter
into
royalty or licensing agreements. These royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all.
We
May Face Liability for Information on Our Web Sites
Much
of
the information published on our web sites relates to the competitiveness of
financial institutions’ rates, products and services. We may be subjected to
claims for defamation, negligence, copyright or trademark infringement or other
theories relating to the information we publish on our web sites. These types
of
claims have been brought, sometimes successfully, against providers of online
services as well as print publications. Our insurance may not adequately protect
us against these types of claims.
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 sites 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. We are exposed
to
the risk that some advertisers may provide us, or directly post on our web
sites, (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 sites, cause certain advertisers to become dissatisfied
with our web sites, and result in lawsuits being filed against us. Our insurance
may not adequately protect us against these types of lawsuits.
Future
Government Regulation of the Internet is Uncertain and Subject to Change
As
Internet commerce continues to evolve, increasing regulation by federal or
state
agencies or foreign governments may occur. Such regulation is likely in the
areas of user privacy, pricing, content and quality of products and services.
Additionally, taxation of Internet use or electronic commerce transactions
may
be imposed. Any regulation imposing fees for Internet use or electronic commerce
transactions could result in a decline in the use of the Internet and the
viability of Internet commerce, which could have a material adverse effect
on
our business.
We
May Be Limited or Restricted in the Way We Establish and Maintain Our Online
Relationships by Laws Generally Applicable to Our Business, or We may be
Required to Obtain Certain Licenses
State
and
federal lending laws and regulations generally require the accurate disclosure
of the critical components of credit costs so that consumers can readily
compare
credit terms from various lenders. In addition, these laws and regulations
impose certain restrictions on the advertisement of these credit terms.
Because
we are an aggregator of rate and other information regarding many financial
products online, we may be subject to some of these laws and regulations.
We
believe that we have structured our web sites to comply with these laws
and
regulations. However, if these laws and regulations are changed, or if
new laws
or regulations are enacted, these events could prohibit or substantially
alter
the content we provide on our web sites. Moreover, such events could materially
and adversely affect our business, results of operations and financial
condition.
We
are
also required to obtain licenses from various states to conduct parts of
our
business. In the case of FastFind, many states require licenses to solicit,
broker or make loans secured by residential mortgages and other consumer
loans
to residents of those states. No assurances can be given that any of the
licenses or rights currently held by us will not be revoked prior to, or
will be
renewed upon, their expiration. In addition, no assurances can be given
that we
will be granted new licenses or rights for which we may be required to
apply
from time to time in the future. Furthermore, because the licensing laws
of each
state change frequently and are difficult to determine their applicability,
we
may unknowingly operate FastFind without a required license.
Risks
Related to Corporate Control and Our Stock Price
Our
Ownership is Heavily Concentrated
At
December 31, 2006, approximately 30% of our outstanding common stock was
beneficially owned by our officers and directors, including Peter C. Morse,
a
director and our largest shareholder, who beneficially owned approximately
26%
of our outstanding common stock. As a result, our officers and directors, if
acting together, may be able to exercise significant influence over matters
requiring shareholder approval, including the election of our directors
significant corporate transactions. This influence could be used to prevent
or
significantly delay another company or person from acquiring or merging with
us,
and could inhibit our liquidity and affect trading in our common stock.
Our
Articles Of Incorporation, Bylaws, and Certain Laws And Regulations May Prevent
or Delay Transactions You Might Favor, Including a Sale or Merger of
Us.
Provisions
of our Articles of Incorporation, Bylaws, certain laws and regulations and
various other factors may make it more difficult and expensive for companies
or
persons to acquire control of us without the consent of our Board of Directors.
It is possible, however, that you would want a takeover attempt to succeed
because, for example, a potential buyer could offer a premium over the then
prevailing price of our common stock.
For
example, our Articles of Incorporation permit our Board of Directors to issue
preferred stock without stockholder action. The ability to issue preferred
stock
could discourage a company from attempting to obtain control of us by means
of a
tender offer, merger, proxy contest or otherwise. Additionally, our Articles
of
Incorporation and Bylaws divide our Board of Directors into three classes,
as
nearly equal in size as possible, with staggered three-year terms. One class
is
elected each year. The classification of our Board of Directors could make
it
more difficult for a company to acquire control of us. We are also subject
to
certain provisions of the Florida Business Corporation Act and our Articles
of
Incorporation that relate to business combinations with interested stockholders.
Other provisions in our Articles of Incorporation or Bylaws that may discourage
takeover attempts or make them more difficult include:
§ |
Supermajority
voting requirements to remove a director from
office;
|
§ |
Provisions
regarding the timing and content of stockholder proposals and
nominations;
|
§ |
Supermajority
voting requirements to amend Articles of Incorporation;
and
|
§ |
Absence
of cumulative voting.
|
Our
Results of Operations May Fluctuate Significantly
Our
results of operations are difficult to predict and may fluctuate significantly
in the future as a result of several factors, many of which are beyond our
control. These factors include:
· |
changes
in fees paid by advertisers;
|
· |
traffic
levels on our web sites, which can fluctuate
significantly;
|
· |
changes
in the demand for Internet products and
services;
|
· |
changes
in fee or revenue-sharing arrangements with our distribution
partners;
|
· |
our
ability to enter into or renew key distribution
agreements;
|
· |
the
introduction of new Internet advertising services by us or our
competitors;
|
· |
changes
in our capital or operating
expenses;
|
· |
changes
in interest rates;
|
· |
general
economic conditions; and
|
· |
changes
in banking or other laws that could limit or eliminate content on
our web
sites.
|
Our
future revenue and results of operations are difficult to forecast due to these
factors. As a result, we believe that period-to-period comparisons of our
results of operations may not be meaningful, and you should not rely on past
periods as indicators of future performance.
In
future
periods, our results of operations may fall below the expectations of securities
analysts and investors, which could adversely affect the trading price of our
common stock.
Our
Stock Price May Continue to be Volatile
Our
common stock has experienced substantial price volatility, particularly as
a
result of variations between our actual financial results and the published
expectations of analysts. Furthermore, speculation in the press or investment
community about our strategic position, financial condition, results of
operations, business, or significant transactions can cause changes in our
stock
price. These factors, as well as general economic and political conditions,
may
materially adversely affect the market price of our common stock in the future.
Item
1B.
Unresolved Staff Comments
We
have
received no written comments regarding our periodic or current reports from
the
staff of the Securities and Exchange Commission that were issued 180 days or
more preceding the end of our 2006 fiscal year and that remain
unresolved.
Item
2. Properties
Our
principal administrative, sales, web operations, marketing and research
functions are located in one leased facility in North Palm Beach, Florida.
The
lease is for approximately 20,935 square feet of office and expires on December
31, 2016. We entered into this lease on November 3, 2005. The initial lease
term
is for 10 years with an option to renew for one additional 5-year term.
We
lease
approximately 8,800 square feet in New York, New York, that is principally
used
for administration, sales and business development. The New York office lease
expires on September 30, 2016. We also lease approximately 6,000 square feet
in
San Francisco, California, that is also used for administration, sales and
business development. The San Francisco lease expires on February 28, 2009.
We
also lease approximately 4,872 square feet in Chicago, Illinois that is used
for
sales and business development, and a small facility
in Sherman Oaks, California that is used as a sales office. The Chicago lease
expires on November 30, 2008 and the Sherman Oaks lease is on a month-to month
basis.
We
believe that all of our facilities are adequate and suitable for operations
in
the foreseeable future. However, we may undertake the expansion of certain
facilities from time to time in the ordinary course of business.
See
Note
7 to the financial statements in Item 8 below for more information about our
leased facilities.
Item
3. Legal
Proceedings
On
October 9, 2006, we entered into a Confidential Final Settlement Agreement
and
Mutual Release 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 Bankrate.com 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 Bankrate.com while prohibiting AI to advertise on Bankrate.com.
AI sought damages of at least $16.5 million, to have those damages tripled,
and
“reasonable attorneys fees pursuant to 15 U.S.C. Section 1117(b) and California
Business and Professional Code Section 16750(a),” and costs.
Under
the
terms of the Settlement 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. We 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 consolidated statement of income as legal
settlement.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
PART
II
Item
5. Market
For Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Our
common stock is traded on the NASDAQ Global Select Market under the stock symbol
“RATE”.
The
prices per share reflected in the table below represent, for the periods
indicated, the range of highest and lowest closing prices for our common stock
on the NASDAQ Global Select Market.
|
|
HIGH
|
|
LOW
|
|
Year
ended December 31, 2005 |
|
|
|
|
|
|
|
First
quarter
|
|
$
|
20.16
|
|
$
|
13.10
|
|
Second
quarter
|
|
|
20.14
|
|
|
12.41
|
|
Third
quarter
|
|
|
28.56
|
|
|
20.17
|
|
Fourth
quarter
|
|
|
34.01
|
|
|
23.95
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
43.56
|
|
$
|
28.91
|
|
Second
quarter
|
|
|
51.87
|
|
|
31.82
|
|
Third
quarter
|
|
|
38.39
|
|
|
26.45
|
|
Fourth
quarter
|
|
|
41.36
|
|
|
25.60
|
|
The
closing sale price of our common stock as reported by the NASDAQ Global Select
Market on February 28, 2007 was $40.59 per share.
The
number of shareholders of record of our common stock as of February 28, 2007,
was 4,801.
We
have
never paid cash dividends on our capital stock. We currently intend to retain
any earnings for use in our business and do not anticipate paying any cash
dividends in the foreseeable future.
Stock
Performance Graph
The
following graph provides a comparison of the cumulative total stockholder return
on our Common Stock for the period from December 31, 2001 through December
31,
2006, against the cumulative stockholder return during such period achieved
by
the NASDAQ Global Select Market Index for U.S. Companies (“Nasdaq Market Index”)
and the Hemscott Internet Information Providers Index (“Hemscott Group Index”).
The graph assumes that $100 was invested on December 31, 2001 in our Common
Stock and in each of the comparison indices, and assumes reinvestment of
dividends.
|
December
31,
|
|
Bankrate,
Inc.
|
|
NASDAQ
Market Index
|
|
Hemscott
Group Index
|
|
|
2001
|
|
$
|
100
|
|
$
|
100
|
|
$
|
100
|
|
|
2002
|
|
|
592
|
|
|
70
|
|
|
84
|
|
|
2003
|
|
|
1,905
|
|
|
105
|
|
|
233
|
|
|
2004
|
|
|
2,131
|
|
|
114
|
|
|
340
|
|
|
2005
|
|
|
4,542
|
|
|
116
|
|
|
517
|
|
|
2006
|
|
|
5,838
|
|
|
128
|
|
|
505
|
|
Item
6. Selected Financial Data
The
selected financial data set forth below should be read in conjunction with
the
financial statements and notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in
this Form 10-K. The statement of income data for the years ended December 31,
2006, 2005 and 2004, and the balance sheet data as of December 31, 2006 and
2005, are derived from, and are qualified by reference to, the financial
statements of Bankrate, Inc. included elsewhere in this Form 10-K, which
financial statements have been audited by KPMG LLP, independent registered
public accounting firm. The audit report is included elsewhere in this Form
10-K. The statement of income data for years ended December 31, 2003 and 2002,
and the balance sheet data as of December 31, 2004, 2003 and 2002, have been
derived from audited financial statements not included in this Form 10-K.
Historical results are not necessarily indicative of results to be expected
in
the future.
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
(A)
|
|
2004
|
|
2003
|
|
2002
|
|
Statement
of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
publishing
|
|
$
|
63,971
|
|
$
|
43,296
|
|
$
|
33,942
|
|
$
|
31,368
|
|
$
|
22,651
|
|
Print
publishing and licensing
|
|
|
15,679
|
|
|
5,753
|
|
|
5,262
|
|
|
5,253
|
|
|
3,920
|
|
Total
revenue
|
|
|
79,650
|
|
|
49,049
|
|
|
39,204
|
|
|
36,621
|
|
|
26,571
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
publishing
|
|
|
11,101
|
|
|
7,389
|
|
|
5,535
|
|
|
4,514
|
|
|
3,813
|
|
Print
publishing and licensing
|
|
|
13,846
|
|
|
5,346
|
|
|
4,359
|
|
|
4,044
|
|
|
2,862
|
|
Total
cost of revenue
|
|
|
24,947
|
|
|
12,735
|
|
|
9,894
|
|
|
8,558
|
|
|
6,675
|
|
Gross
margin
|
|
|
54,703
|
|
|
36,314
|
|
|
29,310
|
|
|
28,063
|
|
|
19,896
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
5,055
|
|
|
3,683
|
|
|
4,187
|
|
|
5,040
|
|
|
4,276
|
|
Marketing
|
|
|
4,836
|
|
|
5,923
|
|
|
6,357
|
|
|
5,496
|
|
|
3,477
|
|
Product
development
|
|
|
3,621
|
|
|
2,457
|
|
|
2,406
|
|
|
2,271
|
|
|
1,422
|
|
General
and administrative
|
|
|
21,835
|
(B) |
|
9,035
|
|
|
6,667
|
|
|
5,813
|
|
|
5,537
|
|
Legal
settlements
|
|
|
3,000
|
|
|
-
|
|
|
510
|
|
|
-
|
|
|
-
|
|
Severance
charge
|
|
|
-
|
|
|
-
|
|
|
260
|
|
|
-
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
2,402
|
|
|
895
|
|
|
743
|
|
|
681
|
|
|
622
|
|
|
|
|
40,749
|
|
|
21,993
|
|
|
21,130
|
|
|
19,301
|
|
|
15,334
|
|
Income
from operations
|
|
|
13,954
|
|
|
14,321
|
|
|
8,180
|
|
|
8,762
|
|
|
4,562
|
|
Other
income (expense), net
|
|
|
2,961
|
|
|
933
|
|
|
410
|
|
|
243
|
|
|
83
|
|
Gain
on insurance proceeds
|
|
|
-
|
|
|
220
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gain
on early extinguishment of debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,022
|
|
Income
before income taxes
|
|
|
16,915
|
|
|
15,474
|
|
|
8,590
|
|
|
9,005
|
|
|
6,667
|
|
Income
tax (provision) benefit
|
|
|
(6,911
|
)
|
|
(5,800
|
)
|
|
4,766
|
|
|
3,100
|
|
|
-
|
|
Net
income
|
|
$
|
10,004
|
|
$
|
9,674
|
|
$
|
13,356
|
|
$
|
12,105
|
|
$
|
6,667
|
|
Basic
and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.58
|
|
$
|
0.61
|
|
$
|
0.87
|
|
$
|
0.84
|
|
$
|
0.48
|
|
Diluted
|
|
$
|
0.56
|
|
$
|
0.57
|
|
$
|
0.84
|
|
$
|
0.79
|
|
$
|
0.46
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,332,632
|
|
|
15,809,259
|
|
|
15,438,097
|
|
|
14,473,151
|
|
|
13,997,168
|
|
Diluted
|
|
|
17,845,754
|
|
|
16,922,218
|
|
|
15,975,382
|
|
|
15,299,734
|
|
|
14,609,359
|
|
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
(A)
|
|
2004
|
|
2003
|
|
2002
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
109,925
|
|
$
|
3,480
|
|
$
|
27,735
|
|
$
|
20,874
|
|
$
|
11,001
|
|
Working
capital
|
|
|
122,157
|
|
|
9,809
|
|
|
33,628
|
|
|
23,898
|
|
|
9,369
|
|
Intangible
assets, net
|
|
|
14,441
|
|
|
11,652
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Goodwill
|
|
|
30,039
|
|
|
30,035
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
assets
|
|
|
176,684
|
|
|
62,553
|
|
|
46,007
|
|
|
28,983
|
|
|
15,173
|
|
Total
stockholders' equity
|
|
|
170,155
|
|
|
52,853
|
|
|
42,334
|
|
|
24,925
|
|
|
10,650
|
|
(A)
Includes the acquired operations of Wescoco LLC, and Mortgage Market Information
Services, Inc. and Interest.com as of and for the period from December
1, 2005
to December 31, 2005.
(B)
Includes $6,363 of stock compensation expence in
accordance with SFAS No. 123R.
Items
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
Management's
discussion and analysis (“MD&A”) provides supplemental information, which
sets forth the major factors that have affected our financial condition and
results of operation and should be read in conjunction with our consolidated
financial statements and notes thereto included in this Annual Report. The
MD&A is divided into subsections entitled "Overview," "Critical Accounting
Estimates," "Significant Developments," "Results of Operations," "Liquidity
and
Capital Resources," and "Recent Accounting Pronouncements."
This
Annual Report, including this MD&A section, 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 of this Annual Report for a discussion of factors that
could cause our actual results to differ materially from those in the
forward-looking statements. However, other factors besides those listed in
Item
1A Risk Factors or discussed in this Annual Report also 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 or on our behalf speak only as of the date they are made.
We do not undertake to update any forward-looking statement, except as required
by applicable law.
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, 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 online
distribution partners and
national, regional and local publications. Through our online network
which includes Bankrate.com, Interest.com, Mortgage-calc.com and Bankrate
Select,
we
provide the tools and information that can help consumers make better financial
decisions.
We
also
produce traditional print publications, including the Mortgage Guide
and the Deposit Guide, as well as three newsletters. We also
syndicate our original editorial content.
We
have a
high quality, poised-to-transact audience that is ready to do business with
our
advertisers. Bankrate.com is one of the top sites 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
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.
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.
Bankrate.com had over 53 million unique visitors in 2006, according to Omniture,
a web analytics tool.
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.
The
key
drivers of our business are the number of advertisers on our online network,
the
number of page views, and the number of consumers visiting our web sites.
We added over 60 new graphic advertisers and over 180 new hyperlink advertisers
in 2006. The number of advertisers has grown from approximately 320 in 2001
to
over 390 in 2006. Annual page views have grown from 237 million in 2001 to
487
million in 2006.
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 years ended December 31, 2006 and
2005.
Our
gross
margin has averaged 75% from 2002 to 2005. Our gross margin for the year ended
December 31, 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 foreseeable future.
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
2007. We
have
reduced operating expenses as a percentage of total revenue from 58% in 2002
to
51% in 2006. Operating
expenses in 2006 includes a legal settlement charge and related fees of
$3,675,000, and share-based compensation expense of $7,502,000. Our
cash
and cash equivalents have increased approximately $100.2 million since December
31, 2001 after spending approximately $39.0 million on two acquisitions in
2005,
and closing a public offering of our common stock with net proceeds of
approximately $92.4 million in May 2006.
Operating
Expenses as a Percentage of Total Revenue
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Total
revenue
|
|
$
|
79,650
|
|
$
|
49,049
|
|
$
|
39,204
|
|
$
|
36,621
|
|
$
|
26,571
|
|
Other
operating expenses
|
|
|
40,749
|
|
|
21,993
|
|
|
21,130
|
|
|
19,301
|
|
|
15,334
|
|
Other
operating expenses as a percentage of total revenue
|
|
|
51
|
%
|
|
45
|
%
|
|
54
|
%
|
|
53
|
%
|
|
58
|
%
|
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 2 of our Notes to Consolidated Financial Statements.
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. Tax laws are complex and subject to different
interpretations by the taxpayer and the respective governmental taxing
authorities. Significant judgment is required in determining our tax expense.
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 relative
to
the value of recoverable 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. This estimate is inherently subjective because our estimates
may
be revised as more information becomes available. 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 years ended December 31, 2006, 2005
and
2004, we charged approximately $1,226,000, $200,000 and $555,000, respectively,
to bad debt expense, and wrote off approximately $702,000, $241,000 and
$396,000, respectively, of accounts deemed uncollectible.
Share-Based
Compensation
We
adopted the provisions of, and account for stock-based compensation in
accordance with, SFAS 123R effective January 1, 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. As discussed in the notes to our consolidated financial
statements, 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.
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 share-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 share-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.
Goodwill
Impairment
We
perform goodwill impairment tests on an annual basis during the fourth quarter
of our fiscal year, or more frequently, if facts and circumstances warrant
a
review. We make judgments about goodwill whenever events or changes in
circumstances indicate that an impairment in the value of goodwill recorded
on
our balance sheet may exist. The timing of an impairment test may result in
charges to our statement of income in our current reporting period that could
not have reasonably been foreseen in prior periods. In order to estimate the
fair value of goodwill, we typically make various assumptions about the future
prospects the asset relates to, consider market factors and estimate our future
cash flows. Based on these assumptions and estimates, we determine whether
we
need to record an impairment charge to reduce the value of the asset carried
on
our balance sheet to its estimated fair value. Assumptions and estimates about
future values are complex and often subjective. They can be affected by a
variety of factors, including external factors such as industry and economic
trends, and internal factors such as changes in our business strategy and our
internal forecasts. Although we believe the assumptions and estimates we have
made in the past have been reasonable and appropriate, different assumptions
and
estimates could materially affect our reported financial results. More
conservative assumptions of the anticipated future benefits could result in
impairment charges, which would decrease net income and result in lower asset
values on our balance sheet. Conversely, less conservative assumptions could
result in smaller or no impairment charges, higher net income and higher asset
values.
Significant
Developments
The
following significant developments and
transactions have affected our results of operations and our financial condition
during the periods covered by the financial statements in Item 8 of this Annual
Report.
On
October 9, 2006, we entered into a Confidential Final Settlement Agreement
and
Mutual Release 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 Bankrate.com 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 Bankrate.com while prohibiting AI to advertise on Bankrate.com.
AI sought damages of at least $16.5 million, to have those damages tripled,
and
“reasonable attorneys fees pursuant to 15 U.S.C. Section 1117(b) and California
Business and Professional Code Section 16750(a),” and costs.
Under
the
terms of the Settlement 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. We 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 consolidated statement of income as legal
settlement.
On
August 4, 2006, the Company completed the
acquisition of a group of assets that consists of three web sites
(Mortgagecalc.com, Mortgagecalc.com and Mortgagemath.com, collectively
“Mortgagecalc.com”) owned and operated by East West Mortgage, Inc. for $4.4
million in cash. The Company paid $4,350,000 on August 7, 2006, and $50,000
was
placed in escrow to satisfy certain indemnification obligations of the seller.
The acquisition was made using cash on hand. As a result of the acquisition,
approximately $4,411,000 in intangible
assets was
recorded by the Company, which reflects the adjustments necessary to allocate
the purchase price to the fair value of the assets acquired. The operations
of
these web sites were integrated into the online publishing
segment.
On
December 1, 2005, we completed the acquisition of
Mortgage Market Information Services, Inc., an Illinois corporation, and
Interest.com, Inc., an Illinois corporation (“Interest.com” and collectively
with Mortgage Market Information Services, Inc., “MMIS”), 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. We
paid
$26 million on December 8, 2005, $1 million on January 5, 2006, and $3 million
was placed in escrow to satisfy certain indemnification obligations of MMIS's
shareholder. The acquisition was made utilizing cash on hand. The acquisition
was accounted for as a purchase and the results of operations of MMIS are
included in our consolidated results from the acquisition date. As a result
of
the acquisition, approximately $23.3 million in goodwill was recorded, which
reflects the adjustments necessary to allocate the purchase price to the fair
value of assets acquired, liabilities assumed and additional purchase
liabilities recorded.
On
November 30, 2005, we 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. We
paid
$7 million in cash to the FastFind members and $3 million was placed in escrow
to satisfy certain indemnification obligations of the FastFind members. The
acquisition was made utilizing cash on hand. The acquisition was accounted
for
as a purchase and the results of operations of FastFind are included in our
consolidated results from the acquisition date. As a result of the acquisition,
approximately $6.7 million in goodwill was recorded, which reflects the
adjustments necessary to allocate the purchase price to the fair value of assets
acquired and liabilities assumed.
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 cost-per-click (“CPC”) model whereby advertisers will now 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. Beginning in the
quarter ending December 31, 2005, we saw an increase in hyperlink revenue of
35%
from the same quarter in 2004.
On
April
20, 2005, we added 174 new local markets. The expanded research offerings
increased our market position in terms of the number of local markets covered
and financial products researched for the benefit of consumers.
On
April
1, 2005, we previewed a redesigned web site and added two channels. The new
web
site included a new user interface and navigation architecture intended to
provide a better experience for consumers and advertisers and an enhanced rate
search process with the ability to sort and compare mortgage lenders and rates.
The redesigned web site also increased the number of Internet Advertising Bureau
(IAB) compliant ad formats, which allowed us greater flexibility and opportunity
of advertisers. In connection with the redesigned web site, we added two new
channels: a College Finance editorial channel and a Debt Management
(sub-prime/problem credit). On May 2, 2005, we fully launched the redesigned
web
site.
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, including a discussion of the accounting policies
and
practices (revenue recognition, allowance for doubtful accounts and valuation
of
deferred tax assets) 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
financial statements, including the related notes to the financial statements.
Other accounting policies are contained in Note 2 to the financial statements
in
Item 8. A detailed discussion of our accounting policies and procedures is
set
forth in the applicable sections of this analysis.
The
following table displays our results for the respective periods expressed as
a
percentage of total revenue.
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Statement
of Income Data
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Online
publishing
|
|
|
80
|
%
|
|
88
|
%
|
|
87
|
%
|
Print
publishing and licensing
|
|
|
20
|
|
|
12
|
|
|
13
|
|
Total
revenue
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
|
Online
publishing
|
|
|
14
|
|
|
15
|
|
|
14
|
|
Print
publishing and licensing
|
|
|
17
|
|
|
11
|
|
|
11
|
|
Total
cost of revenue
|
|
|
31
|
|
|
26
|
|
|
25
|
|
Gross
margin
|
|
|
69
|
|
|
74
|
|
|
75
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
6
|
|
|
8
|
|
|
11
|
|
Marketing
|
|
|
6
|
|
|
12
|
|
|
16
|
|
Product
development
|
|
|
5
|
|
|
5
|
|
|
6
|
|
General
and administrative
|
|
|
27
|
|
|
18
|
|
|
17
|
|
Legal
settlements
|
|
|
4
|
|
|
-
|
|
|
1
|
|
Severance
charge
|
|
|
-
|
|
|
-
|
|
|
1
|
|
Depreciation
and amortization
|
|
|
3
|
|
|
2
|
|
|
2
|
|
|
|
|
51
|
|
|
45
|
|
|
54
|
|
Income
from operations
|
|
|
18
|
|
|
29
|
|
|
21
|
|
Other
income (expense), net
|
|
|
4
|
|
|
2
|
|
|
1
|
|
Gain
on insurance proceeds
|
|
|
-
|
|
|
1
|
|
|
-
|
|
Income
before income taxes
|
|
|
22
|
|
|
32
|
|
|
22
|
|
Income
tax (expense) benefit
|
|
|
(9
|
)
|
|
(12
|
)
|
|
12
|
|
Net
income
|
|
|
13
|
%
|
|
20
|
%
|
|
34
|
%
|
Revenue
|
|
Total
Revenue
|
|
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Online
publishing
|
|
$
|
63,970,860
|
|
$
|
43,296,384
|
|
$
|
33,942,241
|
|
Print
publishing and licensing
|
|
|
15,679,115
|
|
|
5,752,647
|
|
|
5,262,020
|
|
|
|
$
|
79,649,975
|
|
$
|
49,049,031
|
|
$
|
39,204,261
|
|
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 underdelivery 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 on a CPC basis. Advertisers
pay us each time a visitor to our web sites clicks on a rate table listing.
Prior to October 1, 2005, advertisers paid a flat monthly fee for their
hyperlink. We also sell text links on its 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.
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. If
the
advertising impressions were received from the customer prior to our delivering
the advertising impressions, a liability was recorded. If we delivered
advertising impressions to the other companies' web sites prior to receiving
the
advertising impressions, a prepaid expense was recorded. No prepaid expense
or
liability was recorded at December 31, 2005. Barter revenue was approximately
$2,254,000 and $3,088,000, and represented approximately 5% and 8% of total
revenue, respectively, for the years ended December 31, 2005 and 2004. Barter
revenue was intentionally eliminated as of January 1, 2006, as we focused more
on monetizing our available views through paid advertising.
|
|
Online
Publishing Revenue
|
|
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
|
|
YTY
|
|
|
|
YTY
|
|
|
|
|
|
|
|
Change
|
|
|
|
Change
|
|
|
|
Graphic
ads
|
|
$
|
37,256,169
|
|
|
48%
|
|
$
|
25,177,728
|
|
|
54%
|
|
$
|
16,368,024
|
|
Hyperlinks
|
|
|
26,714,691
|
|
|
68%
|
|
|
15,864,968
|
|
|
10%
|
|
|
14,486,226
|
|
Barter
|
|
|
-
|
|
|
-
|
|
|
2,253,688
|
|
|
-27%
|
|
|
3,087,991
|
|
|
|
$
|
63,970,860
|
|
|
48%
|
|
$
|
43,296,384
|
|
|
28%
|
|
$
|
33,942,241
|
|
Online
publishing revenue was $63,971,000, $43,296,000 and $33,942,000 in 2006, 2005
and 2004, respectively, representing annual growth rates of 48% and 28% for
2006
and 2005, respectively. Excluding barter revenue, online publishing revenue
was
$63,971,000, $41,043,000 and $30,854,000 in 2006, 2005 and 2004, respectively,
representing annual growth rates of 56% and 33% for 2006 and 2005, respectively.
Graphic
ad revenue for the year ended December 31, 2006 of $37,256,000 was $12,078,000,
or 48%, higher than the $25,178,000 reported in the same period of 2005. Page
views were 487.4 million, up 57.2 million, or 13%, from the 430.2 million
reported in the same period in 2005. Approximately $6,268,000 of the increase
in
graphic ad 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 and our sell-through rate were relatively
flat in 2006 compared to 2005, we sold 415.1 million, or 28%, more
advertisements in 2006. During 2006, graphic advertisements were purchased
by an
average of 51 monthly graphic advertisers compared to 48 in 2005.
Graphic
ad revenue was $8,810,000, or 54%, higher in 2005 due to higher CPM’s and an
increase in page views of 37.1 million, or 9%, compared to 2004. We also sold
48.3 million, or 3%, more ads during 2005 compared to 2004. During 2005, graphic
advertisements were purchased by an average of 48 monthly graphic advertisers
compared to 73 in 2004.
Hyperlink
revenue was up $ 10,850,000, or 68%, in the year ended December 31, 2006
compared to 2005. Approximately $2,000,000 of this increase was due to revenue
from Interest.com which was acquired in the fourth quarter of 2005. We primarily
benefited from favorable product pricing as the number of hyperlink advertisers
remained relatively constant between the periods.
Hyperlink
revenue was $1,379,000, or 10%, higher in 2005 than in 2004 due to higher
pricing during the first nine months 2005 and a conversion to a new
pay-for-performance pricing structure during the last three months of 2005
even
though the average number of monthly advertisers dropped by approximately 130
during 2005. During 2005, there were approximately 355 advertisers on average
each month compared to 485 during 2004.
A
majority of our advertising customers purchase advertising under short-term
contracts. Customers have the ability to stop, and have on occasion 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 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 CPM’s.
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
|
|
|
126.6
|
|
|
107.8
|
|
|
92.0
|
|
|
100.3
|
|
|
82.1
|
|
|
Q4
|
|
|
120.6
|
|
|
97.6
|
|
|
91.3
|
|
|
75.8
|
|
|
79.3
|
|
|
Year
|
|
|
487.4
|
|
|
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
and Deposit Guides
(formerly called Consumer
Mortgage Guide)
rate
tables, newsletter subscriptions, and licensing of research information. We
charge a commission for placement of the Mortgage
and Deposit Guide
in a
print publication. Advertising revenue and commission income is recognized
when
the Mortgage
and Deposit Guides 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.
|
|
Print
Publishing & Licensing Revenue
|
|
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
|
|
YTY
|
|
|
|
YTY
|
|
|
|
|
|
|
|
Change
|
|
|
|
Change
|
|
|
|
Mortgage
and Deposit Guide
|
|
$
|
14,713,245
|
|
|
201%
|
|
$ |
4,882,574
|
|
|
11%
|
|
$
|
4,405,629
|
|
Editorial
|
|
|
965,870
|
|
|
11%
|
|
|
870,073
|
|
|
2%
|
|
|
856,391
|
|
|
|
$
|
15,679,115
|
|
|
173%
|
|
$ |
5,752,647
|
|
|
9%
|
|
$
|
5,262,020
|
|
Print
publishing and licensing revenue for the year ended December 31, 2006 was up
$9,926,000, or 173%, compared to the comparable period in 2005 primarily due
to
an increase in Mortgage
and Deposit Guide
revenue
related to the contracts acquired in the MMIS acquisition in the fourth quarter
of 2005. Editorial sales were up $96,000, or 11%, due to the third quarter
2006
launch of our first editorial free-standing insert in USA
Today
which
contributed approximately $200,000 to revenue.
Print
publishing and licensing revenue for the year ended December 31, 2005 increased
$477,000, or 11%, from 2004. We ended 2005 with 163 Mortgage
and Deposit Guide
contracts, an increase of 135 from 2004, 107 of the contracts were the direct
result of the acquisition of MMIS. Editorial sales were up 2% over 2004
reflecting the newspapers continuing efforts to cut costs and reduce their
editorial advertising content spending.
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, market analysis and research costs, and allocated
overhead. Distribution payments are made to web site operators for visitors
directed to our online network; these costs increase proportionately with gains
in traffic to our online network. 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 Bankrate.com 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
|
|
2006
|
|
2005
|
|
2004
|
|
Online
publishing revenue
|
|
$
|
63,970,860
|
|
$
|
43,296,384
|
|
$
|
33,942,241
|
|
Cost
of online publishing revenue
|
|
|
11,101,425
|
|
|
7,389,089
|
|
|
5,534,456
|
|
Gross
margin
|
|
$
|
52,869,435
|
|
$
|
35,907,295
|
|
$
|
28,407,785
|
|
Gross
margin as a percentage of revenue
|
|
|
83
|
%
|
|
83
|
%
|
|
84
|
%
|
Online
publishing costs for the year ended December 31, 2006 were $3,712,000, or 50%,
higher than the same period in 2005. The
increase is due primarily to share-based compensation expense in 2006 of
$1,077,000; higher human resource costs of $290,000; higher revenue sharing
payments of $840,000; higher freelance writer’s expense of $75,000; and
approximately $1,449,000
of
costs associated with the acquisitions in the fourth quarter of
2005.
Online
publishing costs for the year ended December 31, 2005 increased $1,855,000,
or
34%, over 2004. The increase in direct costs was due primarily to higher revenue
sharing payments ($988,000, or 43%) to our distribution partners reflecting
higher associated revenue and traffic; and higher human resource costs
($637,000, or 48%) due to the addition of seven full-time equivalent employees
during 2005 and merit increases.
Print
Publishing and Licensing Costs
Print
publishing and licensing costs
represent expenses associated with print publishing 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 & Licensing Gross Margin
|
|
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Print
publishing & licensing revenue
|
|
$
|
15,679,115
|
|
$
|
5,752,647
|
|
$
|
5,262,020
|
|
Cost
of print publishing & licensing revenue
|
|
|
13,845,594 |
|
|
5,346,017 |
|
|
4,359,444 |
|
Gross
margin
|
|
$
|
1,833,521
|
|
$
|
406,630
|
|
$
|
902,576
|
|
|
|
|
12 |
% |
|
7 |
% |
|
17 |
% |
For
the
year ended December 31, 2006, print publishing and licensing costs increased
$8,500,000, or 159%, from the same period in 2005 due to the acquisition of
the
newspaper rate table business of MMIS in the fourth quarter of 2005. Revenue
sharing payments in 2006 were up $897,000, or 27% over the comparable period
in
2005, and we incurred $177,000 in advertising and printing costs related to
the
third quarter 2006 launch of our first editorial free-standing insert in
USA
Today.
Print
publishing and licensing costs increased $987,000, or 23%, in 2005 due primarily
to revenue sharing payments which were $578,000, or 16%, higher 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 year ended December 31, 2006 were $1,372,000, or 37%, higher
than
the same period in 2005. The increase is due primarily to share-based
compensation expense of $662,000; higher human resource costs of $344,000;
higher training and travel costs of $172,000; and higher commission expense
of
$119,000.
Sales
costs for the year ended December 31, 2005 decreased $503,000, or 12%, from
2004
due to $258,000, or 19%, as a result of lower sales commissions following our
restructuring of the online sales compensation plans and $185,000, or 9%, as
a
result of lower human resource costs due to the restructuring of the advertising
sales team.
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. Prior
to
January 1, 2006, marketing costs also included barter expense, which represented
the cost of our advertisements that were run on other companies’ web sites in
our barter transactions. Barter expense was $2,254,000 and $3,088,000 for the
years ended December 31, 2005 and 2004, respectively. Excluding
barter expense, marketing expenses would have been $3,669,000 and $3,269,000
for
the years ended December 31, 2005 and 2004, respectively. Excluding barter
expense, marketing costs for the periods presented increased as traffic
acquisition continues to become more competitive. We believe that we will
continue to spend at comparable levels in the foreseeable future to maintain
traffic levels.
|
|
Marketing
Expenses
|
|
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
|
|
YTY
|
|
|
|
YTY
|
|
|
|
|
|
|
|
Change
|
|
|
|
Change
|
|
|
|
Marketing
expenses
|
|
$
|
4,835,941
|
|
|
32%
|
|
$
|
3,669,276
|
|
|
12%
|
|
$
|
3,269,433
|
|
Barter
|
|
|
-
|
|
|
-100%
|
|
|
2,253,688
|
|
|
-27%
|
|
|
3,087,991
|
|
|
|
$
|
4,835,941
|
|
|
-18%
|
|
$
|
5,922,964
|
|
|
-7%
|
|
$
|
6,357,424
|
|
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 year ended December 31, 2006 were $1,164,000,
or 47%, higher than the same period in 2005, due primarily to share-based
compensation expense of $474,000; $593,000 higher human resource and contract
labor costs supporting growth of our business; and $98,000 higher
hardware/software-related
infrastructure support costs. Product development expense for 2005 were $51,000,
or 2%, higher than 2004.
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. General and administrative expenses for
the year ended December 31, 2006 increased $12,800,000, or 142%, over the
comparable period in 2005. This increase is primarily due to $6,363,000 in
share-based compensation expense; approximately $2,298,000
related to general and administrative costs for FastFind, MMIS and Interest.com
acquired in the fourth quarter of 2005; $1,640,000 higher legal and accounting
fees; $837,000
higher human resource costs; $847,000 higher bad debt expense; $403,000 higher
rent; and $199,000 higher travel expenses.
For
the
year ended December 31, 2005, general and administrative expenses were
$2,368,000, or 36%, higher than the same period in 2004 due primarily to the
following: $809,000 higher consulting and outside professional service fees,
$105,000 higher rent costs and $1,704,000 higher incentive plan accruals based
on measurements to plan.
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. As of December 31, 2006, our allowance increased as the customer
base associated with the acquisitions made during 2005 are different than our
traditional customers. 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.
Severance
and Legal Settlement Charges
On
August
10, 2004, we entered into a Separation and General Release Agreement (the
“Agreement”) with our former President and CEO (“former CEO”) pursuant to the
terms of an Executive Employment Agreement dated April 27, 2002 (the “Executive
Employment Agreement”). The Agreement provided, among other things, that the
former CEO (i) resign as a director of the Company as of August 10, 2004; (ii)
release and forever discharge the Company from any and all claims the former
CEO
had or may have against the Company; (iii) the former CEO’s last day as an
employee of the Company was extended until October 21, 2004; (iv) on August
19,
2004, the Company paid the former CEO $125,000, subject to standard withholdings
and deductions for the payment of certain of the former CEO’s legal fees; (v) on
August 19, 2004, the Company paid $54,207, subject to standard withholdings,
for
accrued vacation pay; (vi) on August 19, 2004, the Company paid $10,000 to
a
third party for outplacement and transitional counseling services; (vii) on
August 19, 2004, the Company paid for the former CEO’s unpaid and reasonably
approved business expenses; (viii) the Company will provide the former CEO
with
certain health insurance benefits through June 21, 2005 in accordance with
the
terms of the Executive Employment Agreement, and (ix) on October 21, 2004,
the
Company paid the former CEO $125,000, subject to standard withholdings. The
Company recorded $260,000 as a severance charge in the quarter ended June 30,
2004.
In
July
2000, we sold our former wholly owned subsidiary, Pivot, for $4,350,000 in
cash.
In connection with the sale, we agreed to indemnify the buyer for liability
of
up to $1,000,000 in connection with a litigation matter between Pivot and its
co-founders and former owner. In March 2001, the case was dismissed based on
a
technical deficiency. In August 2001, the plaintiff re-filed the complaint.
On
October 8, 2004, we were notified that the buyer settled the litigation matter,
effective October 1, 2004, and we reimbursed the buyer $390,000 under the
indemnity. The $390,000 was recorded in the quarter ended September 30, 2004
as
a legal settlement charge.
In
February 2005, we settled a contractual dispute with a former Internet and
co-location facility provider for $120,000. This amount is included in legal
settlements in the accompanying statement of operations for the year ended
December 31, 2004.
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. We 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
consolidated statement of income as legal settlement.
Depreciation
and Amortization
Depreciation
and amortization represents the cost of capital asset acquisitions spread over
their expected useful lives. These expenses are spread over three to seven
years
and are calculated on a straight-line basis. Depreciation
and amortization also includes the amortization of intangible
assets, consisting
primarily of trademarks and URLs, software licenses, customer relationships,
developed technologies and non-compete agreements. Intangible assets are being
amortized over their estimated useful lives ranging from 2 years to 20 years,
on
a straight-line basis.
Depreciation
and amortization increased $1,506,000, or 168%, for the year ended December
31,
2006 compared to the same period in 2005. Intangibles amortization accounted
for
$1,413,000 of the increase since 2006 included a full year of amortization
related to the fourth quarter 2005 acquisitions, and included $93,000 related
to
the August 2006 Mortgage-calc.com asset acquisition. Depreciation expense was
$94,000 higher in 2006 due to infrastructure and facilities-related assets
acquired during 2006.
During
2005, we purchased approximately $244,000 of depreciable assets and depreciation
and amortization increased $153,000, or 21%, over 2004, of which, $122,000
related to the amortization expense incurred from the fourth quarter
acquisitions.
Other
Income
Other
income consists primarily of interest income on invested cash and cash
equivalents and a gain from insurance proceeds. Other income for the year ended
December 31, 2006 was $1,808,000 higher than the same period in 2005 due to
the
interest earned on the $92.4 million in net proceeds received in May 2006 from
our secondary offering of common stock.
Other
income for the year ended December 31, 2005 was $743,000, or 181%, higher than
the comparable amount in 2004, due to higher cash balances and a gain on
insurance proceeds.
Income
Taxes
The
change in our effective tax rate in year ended December 31, 2006 compared to
2005 was primarily due to the net effect of the adoption of SFAS 123R as of
January 1, 2006, given that we generally grant incentive stock options for
which
a benefit is not realized until there is a disqualifing disposition, and
expansion of our operations into certain higher state tax
jurisdictions.
|
|
|
|
Year
Ended
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
2006
|
|
Change
|
|
2005
|
|
Provision
for income taxes
|
|
$
|
6,911,383
|
|
|
19%
|
|
$
|
5,800,153
|
|
Effective
tax rate
|
|
|
41
|
%
|
|
-
|
|
|
37
|
%
|
As
required by Statement of Financial Accounting Standards (“SFAS”) No. 109, we
recognize tax assets on the balance sheet if it is more likely than not that
they will be realized on future tax returns. Up to the third quarter of 2003,
we
had provided a full valuation allowance against accumulated deferred tax assets,
reflecting the uncertainty associated with our future profitability. In the
fourth quarter of 2003, we reassessed the valuation allowance previously
established against deferred tax assets. Factors considered included: historical
results of operations, volatility of the economic and interest rate environment
and projected earnings based on current operations. Based on this evidence,
we
concluded that it was more likely than not that a portion of the deferred tax
assets would be realized and, accordingly, released $3,400,000 of the valuation
allowance, which resulted in an income tax benefit of approximately
$3,100,000.
During
the quarters ended March 31, June 30, and Sept 30, 2004, we continued to
evaluate the need for a valuation allowance against the deferred tax asset.
We
completed our business planning process during the fourth quarter of 2004,
which
included the following strategic initiatives for 2005: the enhancement of its
quality control process and procedures; the re-design of its web site; the
execution of exclusive advertising contracts with two mortgage lead aggregators;
broadening the breadth and depth of its products and services; a reorganization
of its advertising sales force; and the migration to a cost-per-click revenue
model on its rate tables. Considering these strategic initiatives and their
impact on future earnings potential, we concluded that it was more likely than
not that we would generate sufficient taxable income in future periods to
realize the entire deferred tax asset. At December 31, 2004, we reversed the
remaining $9,400,000 valuation allowance resulting in an income tax benefit
of
$4,800,000 and a net deferred tax asset of $11,400,000. If we determine that
we
will not be able to realize all or a portion of the deferred tax asset in the
future, an adjustment to the deferred tax asset will be charged against earnings
in the period such determination is made. Approximately $1,200,000 million
of
the valuation allowance was attributable to the tax benefit of stock options
exercised in a prior year. The income tax benefit relating to stock option
exercised during 2004 was approximately $2,000,000, for a total 2004 benefit
of
approximately $3,200,000 which was allocated to stockholders’
equity.
At
December 31, 2006, we had fully utilized our net operating loss carryforwards
for federal income tax purposes.
Goodwill
and Other Intangibles
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No.
142,
Goodwill and Other Intangible Assets,
we
reviews our goodwill for impairment annually, or more frequently, if facts
and
circumstances warrant a review, at the reporting unit level. We have 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 provisions of SFAS
No.
142 require that a two-step test be performed to assess goodwill for impairment.
First, the fair value of the reporting unit is compared to its carrying value.
If the fair value exceeds the carrying value, goodwill is not impaired and
no
further testing is performed. The second step is performed if the carrying
value
exceeds the fair value. The implied fair value of the reporting unit’s goodwill
must be determined and compared to the carrying value of the goodwill. If the
carrying value of a reporting unit’s goodwill exceeds its implied value, an
impairment loss equal to the difference will be recorded. In determining the
fair value of our reporting units, we relied on the Income Approach and the
Market Approach. Under the Income Approach, the fair value of a business unit
is
based on the cash flows it can be expected to generate over its remaining life.
The estimated cash flows are converted to their present value equivalent using
an appropriate rate of return. The Market Approach utilizes a market comparable
method whereby similar publicly traded companies are valued using Market Values
of Invested Capital (“MVIC”) multiples (i.e., MVIC to revenue, MVIC to earnings
before interest and taxes, MVIC to cash flow, etc.) and then these MVIC
multiples are applied to a companies operating results to arrive at an estimate
of value.
We
completed our annual goodwill impairment test during the fourth quarter of
2006
and determined that the carrying amount of goodwill was not impaired, nor did
we
recognize any goodwill impairment charges in 2005 and 2004.
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.
We
continually monitor events and changes in circumstances that could indicate
carrying amounts of its intangible assets may not be recoverable. When such
events or changes in circumstances occur, we assess the recoverability of
intangible assets by determining whether the carrying value of such assets
will
be recovered through the undiscounted expected future cash flows. If the future
undiscounted cash flows are less than the carrying amount of the intangible
assets, we recognize an impairment loss based on the excess of the carrying
amount over the fair value of the assets. We did not recognize intangible asset
impairment charges in 2006, 2005 or 2004.
Related
Party Transactions
We
leased
office space in North Palm Beach, Florida from Bombay Holdings, Inc., which
is
wholly-owned by Peter C. Morse, a director and 26% stockholder. Total rent
paid
to Bombay for the year ended December 31, 2004 was approximately $244,000.
That
lease was terminated effective December 31, 2004.
During
2004, we paid an outside director consulting fees of approximately $17,000.
There were no such fees in 2006 and 2005 as the consulting arrangement was
terminated in 2004.
Quarterly
Results of Operations
The
following table presents certain unaudited quarterly statement of income data
for each of the last 8 quarters through the year ended December 31, 2006. The
information has been derived from our unaudited condensed consolidated financial
statements. In the opinion of our management, the unaudited condensed
consolidated financial statements have been prepared on a basis consistent
with
the financial statements which appear elsewhere in this Form 10-K and include
all adjustments, consisting only of normal recurring adjustments, necessary
for
a fair statement of the financial position and results of operations for such
unaudited periods. Historical results are not necessarily indicative of results
to be expected in the future.
|
|
Year
Ended December 31, 2006(A)
|
|
(B)
|
|
Year
Ended December 31, 2005
|
|
(In
thousands, except share and per share data) Revenue: |
|
December
31
|
|
September
30
|
|
June
30
|
|
March
31
|
|
December
31
|
|
September
30
|
|
June
30
|
|
March
31
|
|
Online
publishing
|
|
$
|
17,113
|
|
$
|
15,777
|
|
$
|
15,465
|
|
$
|
15,616
|
|
$
|
11,611
|
|
$
|
11,214
|
|
$
|
11,204
|
|
$
|
9,267
|
|
Print
publishing and licensing
|
|
|
3,596
|
|
|
3,709
|
|
|
4,201
|
|
|
4,172
|
|
|
2,279
|
|
|
1,158
|
|
|
1,161
|
|
|
1,155
|
|
Total
revenue
|
|
|
20,709
|
|
|
19,486
|
|
|
19,666
|
|
|
19,788
|
|
|
13,890
|
|
|
12,372
|
|
|
12,365
|
|
|
10,422
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
publishing
|
|
|
2,745
|
|
|
2,649
|
|
|
2,807
|
|
|
2,900
|
|
|
2,024
|
|
|
1,902
|
|
|
1,823
|
|
|
1,640
|
|
Print
publishing and licensing
|
|
|
3,172
|
|
|
3,358
|
|
|
3,773
|
|
|
3,542
|
|
|
2,051
|
|
|
1,117
|
|
|
1,075
|
|
|
1,103
|
|
Total
cost of revenue
|
|
|
5,917
|
|
|
6,007
|
|
|
6,580
|
|
|
6,442
|
|
|
4,075
|
|
|
3,019
|
|
|
2,898
|
|
|
2,743
|
|
Gross
margin
|
|
|
14,792
|
|
|
13,479
|
|
|
13,086
|
|
|
13,346
|
|
|
9,815
|
|
|
9,353
|
|
|
9,467
|
|
|
7,679
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
1,326
|
|
|
1,392
|
|
|
1,248
|
|
|
1,088
|
|
|
926
|
|
|
944
|
|
|
971
|
|
|
842
|
|
Marketing
|
|
|
1,398
|
|
|
1,397
|
|
|
1,189
|
|
|
851
|
|
|
1,313
|
|
|
1,377
|
|
|
1,713
|
|
|
1,520
|
|
Product
development
|
|
|
855
|
|
|
937
|
|
|
805
|
|
|
1,025
|
|
|
745
|
|
|
697
|
|
|
511
|
|
|
504
|
|
General
and administrative
|
|
|
5,100
|
|
|
5,300
|
|
|
5,897
|
|
|
5,538
|
|
|
2,738
|
|
|
2,161
|
|
|
2,222
|
|
|
1,914
|
|
Legal
settlements
|
|
|
-
|
|
|
3,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
648
|
|
|
632
|
|
|
564
|
|
|
558
|
|
|
317
|
|
|
181
|
|
|
208
|
|
|
189
|
|
|
|
|
9,327
|
|
|
12,658
|
|
|
9,703
|
|
|
9,060
|
|
|
6,039
|
|
|
5,360
|
|
|
5,625
|
|
|
4,969
|
|
Income
from operations
|
|
|
5,465
|
|
|
821
|
|
|
3,383
|
|
|
4,286
|
|
|
3,776
|
|
|
3,993
|
|
|
3,842
|
|
|
2,710
|
|
Other
income, net
|
|
|
1,240
|
|
|
1,075
|
|
|
625
|
|
|
20
|
|
|
277
|
|
|
302
|
|
|
212
|
|
|
362
|
|
Income
before income taxes
|
|
|
6,705
|
|
|
1,896
|
|
|
4,008
|
|
|
4,306
|
|
|
4,053
|
|
|
4,295
|
|
|
4,054
|
|
|
3,072
|
|
Income
tax expense
|
|
|
(2,809
|
)
|
|
(656
|
)
|
|
(1,482
|
)
|
|
(1,964
|
)
|
|
(1,461
|
)
|
|
(1,632
|
)
|
|
(1,540
|
)
|
|
(1,167
|
)
|
Net
income
|
|
$
|
3,896
|
|
$
|
1,240
|
|
$
|
2,526
|
|
$
|
2,342
|
|
$
|
2,592
|
|
$
|
2,663
|
|
$
|
2,514
|
|
$
|
1,905
|
|
Basic
and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
$
|
0.07
|
|
$
|
0.15
|
|
$
|
0.15
|
|
$
|
0.16
|
|
$
|
0.17
|
|
$
|
0.16
|
|
$
|
0.12
|
|
Diluted
|
|
|
0.21
|
|
|
0.07
|
|
|
0.14
|
|
|
0.14
|
|
|
0.15
|
|
|
0.16
|
|
|
0.15
|
|
|
0.12
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,170,816
|
|
|
18,112,909
|
|
|
17,138,053
|
|
|
15,874,946
|
|
|
15,829,601
|
|
|
15,815,057
|
|
|
15,804,045
|
|
|
15,787,264
|
|
Diluted
|
|
|
18,498,656
|
|
|
18,238,675
|
|
|
17,876,380
|
|
|
16,771,044
|
|
|
17,262,632
|
|
|
17,109,385
|
|
|
16,590,763
|
|
|
16,561,802
|
|
(A)
Includes stock compensation expense of $1,778 in the first quarter; $3,185
in
the second quarter; $1,743 in the third quarter; and $2,018 in the fourth
quarter.
(B)
Includes the acquired operations of Wescoco LLC and Mortgage Market Information
Services, Inc. and Interest.com as of and
for
the period from December 1, to December 31, 2005.
Liquidity
and Capital Resources
|
|
|
December
31,
|
|
December
31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
|
Cash
and cash equivalents
|
|
$
|
109,925,360
|
|
$
|
3,479,609
|
|
$
|
106,445,751
|
|
|
Working
capital
|
|
|
122,156,776
|
|
|
9,809,238 |
|
|
112,347,538
|
|
|
Stockholders'
equity
|
|
|
170,154,519
|
|
|
52,852,952 |
|
|
117,301,567
|
|
Our
principal source of liquidity is the cash generated by our product revenue.
Another source of cash is the proceeds from the exercise of director and
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 $92.4 million.
We
assess
acquisition opportunities as they arise. Financing in excess of the $92.4
million proceeds from our May 2006 offering may be required if we decide
to make
additional acquisitions. There can be no assurance, however, that any such
opportunities will arise, that any such acquisitions will be consummated,
or
that any needed additional financing will be available on satisfactory terms
when required.
As
of
December 31, 2006, we had working capital of $122,157,000, and our primary
commitments were approximately $10,065,000
in operating lease payments over the next ten years, and capital expenditures
and recurring payables and accruals arising during the course of operating
our
business, estimated at approximately $6,563,000 through December 31, 2007.
We
generally establish payment terms with our vendors that extend beyond the
amount
of time required to collect from our customers.
Contractual
Obligations
The
following table represents the amounts due under the specified types of
contractual obligations as of December 31, 2006.
|
|
Total
|
|
Payments
Due
Less
than
One
Year
|
|
One
to Three
Years
|
|
Three
to Five Years
|
|
More
than Five Years
|
|
Long-term
debt obligations
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Capital
lease obligations
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Operating
lease obligations (1)
|
|
|
10,065,476 |
|
|
1,215,857 |
|
|
2,171,864 |
|
|
1,920,910 |
|
|
4,756,845 |
|
Purchase
obligations (2)
|
|
|
596,743 |
|
|
546,262 |
|
|
50,481 |
|
|
- |
|
|
- |
|
Other
long-term obligations
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
$
|
10,662,219
|
|
$
|
1,762,119
|
|
$
|
2,222,345
|
|
$
|
1,920,910
|
|
$
|
4,756,845
|
|
(1)
Includes our obligations under existing operating leases. See Note 7 to
our
consolidated financial statements in Item 8 for further
details related to our lease obligations.
(2)
Represents base contract amounts for Internet hosting, co-location, content
distribution and other infrastructure costs.
During
the year ended December 31, 2006, we generated $14,216,000
of
net cash from operating activities. Our net income of $10,004,000 was adjusted
for the impact of share-based
compensation expense of
$8,724,000;
the
deferred income tax provision of $3,508,000; depreciation and amortization
of
$2,402,000; bad debt expense of $1,226,000; and a net negative change in the
components of operating assets and liabilities of $11,648,000. Of this negative
change, $7,954,000 resulted from an increase in accounts receivable; $2,903,000
resulted from a decrease in accounts payable; $444,000 resulted from an increase
in prepaid expenses and other assets; and $347,000 resulted from a net decrease
in accrued expenses and other liabilities. Accounts
receivable balances were higher at December 31, 2006 supporting higher sales
levels, larger customers buying advertising through agencies that typically
extend payments beyond 60 days, and slower collections from the acquired MMIS
newspaper rate table business. Our average monthly collections on accounts
were
$5,449,000, or 37%, and $3,604,000, or 57%, of the average monthly account
balances, for the years ended December 31, 2006 and 2005, respectively. The
monthly average accounts receivable balance grew from $6.4 million in 2005
to
$14.9 million in 2006 due to our sales growth and the addition of the MMIS
newspaper rate table business. Our accounts receivable turnover and days sales
outstanding also declined slightly to 5.35 and 68 in 2006 compared to 7.13
and
51, respectively, in 2005. The decrease in accounts payable was due to scheduled
payments to trade vendors. We also paid $3,000,000 in the fourth quarter of
2006
to settle the American Interbanc, LLC legal matter.
During
the year ended December 31, 2006, net cash of $1,543,000 was used to purchase
furniture, fixtures & equipment; $297,000 was used for lease security
deposits for the new Chicago and New York offices; $4,423,000
was
used to purchase Mortgage-calc.com on August 4, 2006 and an additional $149,000
was paid as a 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 acquired upon exercise
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 exercise of the selling
stockholders’ and other stock options of $4,852,000, and $3,033,000
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.
During
the year ended December 31, 2005, we generated $14,548,000 of net cash from
operating activities. Our net income of $9,674,000 was adjusted for depreciation
and amortization of $895,000; and bad debt expense of $200,000; the tax benefit
of incentive stock options exercised during 2005 of $446,000; a deferred tax
benefit of $4,932,000; and a net negative change in the components of operating
assets and liabilities of $1,599,000. Of
this
negative change, $3,337,000 resulted from an increase in accounts receivable
and
$125,000 resulted from a decrease in prepaid expenses and other assets.
Exclusive of the acquisitions, accounts receivable balances were higher at
December 31, 2005 as a result of higher sales levels. Our
average monthly collections on accounts were $3,604,000, or 57%, of the average
monthly account balances, down on a percentage basis from 63% in 2004. Our
accounts receivable turnover declined and days sales outstanding increased
to
7.13 and 51, respectively, compared to 7.86 and 46, respectively, in 2004.
Exclusive
of the acquisitions, the decrease in other assets was primarily due to a
decrease in our insurance claim receivable from damages sustained during
Hurricane Wilma in October 2005 compared to the two hurricanes in September
2004. During 2005, net cash of $39,203,000 was used for investing activities,
of
which $38,970,000 was related to our two acquisitions and related costs and
$244,000 was to purchase equipment and other fixed assets. Net cash provided
by
financing activities consisted of the proceeds from 77,066 stock options
exercised at strike prices between $0.85 and $13.00.
Off-Balance
Sheet Arrangements
Off-balance
sheet arrangements include the following four categories: obligations under
certain guarantees or contracts; retained or contingent interests in assets
transferred to an unconsolidated entity or similar arrangements; obligations
under certain derivative arrangements; and obligations under material variable
interests.
We
have
not entered into any material arrangements which would fall under any of
these
four categories and which would be reasonably likely to have a current or
future
material effect on our results of operations, liquidity or financial
condition.
Recent
Accounting Pronouncements
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 we currently have no financial instruments within
the scope of SFAS No. 155.
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 our 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. The adoption of SFAS No. 158 did not have
a
material impact on our consolidated financial position, results of operations
or
cash flows, as we currently have 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.
SAB No.
108 is effective for our fiscal year ended December 31, 2006. The adoption
of
SAB No. 108 did not have an impact on our consolidated financial position,
results of operations or cash flows.
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
determined that the adoption of FIN 48 will not have a material impact on our
financial statements.
Item
7A. 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 that are not subject
to market risk, as the interest paid on such investments fluctuates with the
prevailing interest rates. As of December 31, 2006, all of our cash equivalents
mature 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
8. Financial Statements and Supplementary Data
INDEX
TO FINANCIAL STATEMENTS
|
|
PAGE
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
36
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
|
37
|
|
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2006, 2005
and
2004
|
|
38
|
|
|
|
Consolidated
Statements of Stockholders' Equity for the Years Ended December
31, 2006,
2005 and 2004
|
|
39
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2006,
2005 and
2004
|
|
40
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
41
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
Bankrate,
Inc.:
We
have
audited the consolidated balance sheets of Bankrate, Inc. and subsidiaries
(the
Company or Bankrate) as listed in the Index at Item 8. These consolidated
financial statements and the financial statement schedule are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements and the financial statement schedule
based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Bankrate, Inc. and
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule,
when
considered in relation to the basic consolidated financial statements taken
as a
whole, present fairly, in all material respects, the information set forth
therein.
As
discussed in Note 2 to the consolidated financial statements, effective January
1, 2006, the Company changed its method of accounting for share-based
compensation by adopting Statement of Financial Accounting Standards No. 123
(R), Share-Based
Payment.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Bankrate, Inc.’s internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and
our report dated March 16, 2007 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control over financial
reporting.
/s/
KPMG
LLP
March
16,
2007
Ft.
Lauderdale, Florida
Certified
Public Accountants
Bankrate,
Inc.
Consolidated
Balance Sheets
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
109,925,360
|
|
$
|
3,479,609
|
|
Accounts
receivable, net of allowance for doubtful accounts of
approximately
|
|
|
|
|
|
|
|
$2,155,000
and $1,630,000 at December 31, 2006 and 2005, respectively
|
|
|
15,801,403
|
|
|
8,838,879
|
|
Deferred
income taxes, current portion
|
|
|
1,703,747
|
|
|
6,445,636
|
|
Insurance
claim receivable
|
|
|
-
|
|
|
85,575
|
|
Prepaid
expenses and other current assets
|
|
|
1,032,423
|
|
|
481,677
|
|
Total
current assets
|
|
|
128,462,933
|
|
|
19,331,376
|
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and equipment, net of accumulated depreciation and amortization
of
|
|
|
|
|
|
|
|
$3,826,000
and $3,160,000 at December 31, 2006 and 2005, respectively
|
|
|
1,703,680
|
|
|
1,063,307
|
|
Deferred
income taxes
|
|
|
1,262,279
|
|
|
28,769
|
|
Intangible
assets, net of accumulated amortization of $2,355,000 and
|
|
|
|
|
|
|
|
$697,000
at December 31, 2006 and 2005, respectively
|
|
|
14,441,162
|
|
|
11,652,161
|
|
Goodwill
|
|
|
30,039,425
|
|
|
30,035,399
|
|
Other
assets
|
|
|
774,117
|
|
|
442,211
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
176,683,596
|
|
$
|
62,553,223
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
312,489
|
|
$
|
3,215,645
|
|
Accrued
expenses
|
|
|
5,237,222
|
|
|
5,093,187
|
|
Deferred
revenue
|
|
|
729,019
|
|
|
1,176,119
|
|
Other
current liabilities
|
|
|
27,427
|
|
|
37,187
|
|
Total
current liabilities
|
|
|
6,306,157
|
|
|
9,522,138
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
222,920
|
|
|
178,133
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
6,529,077
|
|
|
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;
18,224,620 and
|
|
|
|
|
|
|
|
15,857,877
shares issued and outstanding at December 31, 2006 and 2005,
respectively
|
|
|
182,246
|
|
|
158,579
|
|
Additional
paid in capital
|
|
|
178,255,314
|
|
|
70,981,544
|
|
Accumulated
deficit
|
|
|
(8,283,041
|
)
|
|
(18,287,171
|
)
|
Total
stockholders' equity
|
|
|
170,154,519
|
|
|
52,852,952
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
176,683,596
|
|
$
|
62,553,223
|
|
See
accompanying notes to consolidated financial statements.
Bankrate, Inc.
Consolidated
Statements of Income
|
|
Year
Ended December 31,
|
|
Revenue:
|
|
2006
|
|
2005
|
|
2004
|
|
Online
publishing
|
|
$
|
63,970,860
|
|
$
|
43,296,384
|
|
$
|
33,942,241
|
|
Print
publishing and licensing
|
|
|
15,679,115
|
|
|
5,752,647
|
|
|
5,262,020
|
|
Total
revenue
|
|
|
79,649,975
|
|
|
49,049,031
|
|
|
39,204,261
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
|
Online
publishing
|
|
|
11,101,425
|
|
|
7,389,089
|
|
|
5,534,456
|
|
Print
publishing and licensing
|
|
|
13,845,594
|
|
|
5,346,017
|
|
|
4,359,444
|
|
Total
cost of revenue
|
|
|
24,947,019
|
|
|
12,735,106
|
|
|
9,893,900
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
54,702,956
|
|
|
36,313,925
|
|
|
29,310,361
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
5,055,076
|
|
|
3,683,482
|
|
|
4,186,799
|
|
Marketing
|
|
|
4,835,941
|
|
|
5,922,964
|
|
|
6,357,424
|
|
Product
development
|
|
|
3,620,750
|
|
|
2,456,628
|
|
|
2,405,676
|
|
General
and administrative
|
|
|
21,835,046
|
|
|
9,034,964
|
|
|
6,667,448
|
|
Legal
settlements
|
|
|
3,000,000
|
|
|
-
|
|
|
510,000
|
|
Severance
charge
|
|
|
-
|
|
|
-
|
|
|
260,000
|
|
Depreciation
and amortization
|
|
|
2,401,710
|
|
|
895,369
|
|
|
742,659
|
|
|
|
|
40,748,523
|
|
|
21,993,407
|
|
|
21,130,006
|
|
Income
from operations
|
|
|
13,954,433
|
|
|
14,320,518
|
|
|
8,180,355
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,961,080
|
|
|
932,831
|
|
|
410,107
|
|
Gain
on insurance proceeds
|
|
|
-
|
|
|
220,705
|
|
|
-
|
|
Total
other income
|
|
|
2,961,080
|
|
|
1,153,536
|
|
|
410,107
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
16,915,513
|
|
|
15,474,054
|
|
|
8,590,462
|
|
Income
tax (expense) benefit
|
|
|
(6,911,383
|
)
|
|
(5,800,153
|
)
|
|
4,765,660
|
|
Net
income
|
|
$
|
10,004,130
|
|
$
|
9,673,901
|
|
$
|
13,356,122
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.58
|
|
$
|
0.61
|
|
$
|
0.87
|
|
Diluted
|
|
$
|
0.56
|
|
$
|
0.57
|
|
$
|
0.84
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,332,632
|
|
|
15,809,259
|
|
|
15,438,097
|
|
Diluted
|
|
|
17,845,754
|
|
|
16,922,218
|
|
|
15,975,382
|
|
See
accompanying notes to consolidated financial statements.
Bankrate,
Inc.
Consolidated
Statements of Stockholders' Equity
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
|
Balances,
December 31, 2003
|
|
|
15,114,371
|
|
$
|
151,144
|
|
$
|
66,091,014
|
|
$
|
(41,317,194
|
)
|
$
|
24,924,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options exercised
|
|
|
666,440
|
|
|
6,664
|
|
|
875,949
|
|
|
-
|
|
|
882,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit-stock options
|
|
|
-
|
|
|
-
|
|
|
3,170,499
|
|
|
-
|
|
|
3,170,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
13,356,122
|
|
|
13,356,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2004
|
|
|
15,780,811
|
|
|
157,808
|
|
|
70,137,462
|
|
|
(27,961,072
|
)
|
|
42,334,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options exercised
|
|
|
77,066
|
|
|
771
|
|
|
398,266
|
|
|
-
|
|
|
399,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit-stock options
|
|
|
-
|
|
|
-
|
|
|
445,816
|
|
|
-
|
|
|
445,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,673,901
|
|
|
9,673,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
360,752
|
|
|
3,607
|
|
|
4,848,791
|
|
|
-
|
|
|
4,852,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit-stock options
|
|
|
-
|
|
|
-
|
|
|
3,033,498
|
|
|
-
|
|
|
3,033,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
-
|
|
|
-
|
|
|
8,723,533
|
|
|
-
|
|
|
8,723,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,004,130
|
|
|
10,004,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2006
|
|
|
18,224,620
|
|
$
|
182,246
|
|
$
|
178,255,314
|
|
$
|
(8,283,041
|
)
|
$
|
170,154,519
|
|
See
accompanying notes to consolidated financial statements.
Bankrate,
Inc.
Consolidated
Statements of Cash Flows
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
10,004,130
|
|
$
|
9,673,901
|
|
$
|
13,356,122
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,401,710
|
|
|
895,369
|
|
|
742,659
|
|
Provision
for doubtful accounts receivable
|
|
|
1,226,231
|
|
|
199,883
|
|
|
554,935
|
|
Share-based
compensation
|
|
|
8,723,533
|
|
|
-
|
|
|
-
|
|
Excess
tax benefit - stock options
|
|
|
-
|
|
|
445,816
|
|
|
3,170,499
|
|
Deferred
income taxes
|
|
|
3,508,379
|
|
|
4,932,174
|
|
|
(8,006,579
|
)
|
Changes
in operating assets and liabilities, net of effects from
|
|
|
|
|
|
|
|
|
|
|
business
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Increase
in accounts receivable
|
|
|
(7,953,666
|
)
|
|
(3,336,795
|
)
|
|
(1,866,800
|
)
|
Decrease
(increase) in prepaid expenses and other assets
|
|
|
(444,304
|
)
|
|
125,498
|
|
|
(521,161
|
)
|
(Decrease)
increase in accounts payable
|
|
|
(2,903,156
|
)
|
|
(394,337
|
)
|
|
158,701
|
|
Increase
(decrease) in accrued expenses
|
|
|
144,035
|
|
|
1,821,796
|
|
|
(477,847
|
)
|
(Decrease)
increase in other liabilities
|
|
|
35,027
|
|
|
(779,196
|
)
|
|
(78,082
|
)
|
Increase
(decrease) in deferred revenue
|
|
|
(525,586
|
)
|
|
983,762
|
|
|
11,247
|
|
Net
cash provided by operating activities
|
|
|
14,216,333
|
|
|
14,547,871
|
|
|
7,043,694
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases
of furniture, fixtures and equipment
|
|
|
(1,543,368
|
)
|
|
(244,434
|
)
|
|
(1,065,522
|
)
|
Cash
used in business acquisitions, net of cash acquired
|
|
|
(4,571,629
|
)
|
|
(38,970,481
|
)
|
|
-
|
|
Proceeds
from sale of assets
|
|
|
68,000
|
|
|
12,349
|
|
|
-
|
|
Restricted
cash
|
|
|
(297,489
|
)
|
|
-
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(6,344,486
|
)
|
|
(39,202,566
|
)
|
|
(1,065,522
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from the sale of common stock
|
|
|
90,688,008
|
|
|
-
|
|
|
-
|
|
Proceeds
from the exercise of stock options
|
|
|
4,852,398
|
|
|
399,037
|
|
|
882,613
|
|
Excess
tax benefit-stock options
|
|
|
3,033,498
|
|
|
-
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
98,573,904
|
|
|
399,037
|
|
|
882,613
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
106,445,751
|
|
|
(24,255,658
|
)
|
|
6,860,785
|
|
Cash
and equivalents, beginning of period
|
|
|
3,479,609
|
|
|
27,735,267
|
|
|
20,874,482
|
|
Cash
and equivalents, end of period
|
|
$
|
109,925,360
|
|
$
|
3,479,609
|
|
$
|
27,735,267
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for taxes
|
|
$
|
1,285,672
|
|
$
|
33,870
|
|
$
|
128,500
|
|
See
accompanying notes to consolidated financial statements.
BANKRATE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Organization and Basis of Presentation
The
Company
Bankrate,
Inc. and subsidiaries (the "Company") owns and operates an Internet-based
consumer banking marketplace. The Company’s flagship site, Bankrate.com (the
“web site”), is the one of the web’s leading aggregators of information on more
than 300 financial products 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.
On
August
4, 2006, the Company completed the acquisition of a group of assets that
consists of three web sites (Mortgagecalc.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 were
sold
by certain of the Company’s existing stockholders and employees, at a price of
$48.25 per share. The resulting $92.4 million in net proceeds included
$1.7 million in proceeds from the exercise of stock options by existing
stockholders and employees.
Note
2 - Summary of Significant Accounting Policies
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Wescoco LLC, Mortgage Market Information Services,
Inc., and Interest.com. All material intercompany accounts and transactions
have
been eliminated. See
Note
9.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts 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.
Cash
Equivalents
The
Company considers all highly liquid debt investments purchased with an original
maturity of less than three months to be cash equivalents. The carrying value
of
these investments approximates fair value.
Allowance
for Doubtful Accounts Receivable
The
Company maintains an allowance for doubtful accounts receivable for estimated
losses resulting from the inability or unwillingness of its customers to make
required payments. The
Company looks at historical write-offs and sales growth when determining the
adequacy of the allowance. Should the financial condition of the Company’s
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
are recorded as bad debt expense and included in general and administrative
expenses.
Furniture,
Fixtures and Equipment
Furniture,
fixtures and equipment are stated at cost less accumulated depreciation and
amortization, and are depreciated on a straight-line basis over the estimated
useful lives of the assets which range from three to seven years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful lives of the improvements.
Intangible
Assets
Intangible
assets consist primarily of trademarks and URLs, software licenses, customer
relationships, developed technologies and non-compete agreements. Intangible
assets are being amortized over their estimated useful lives on a straight-line
basis. The asset categories and their estimated useful lives are as follows:
|
|
Years
|
|
Trademarks
and URLs
|
|
|
5-20
|
|
Software
licenses
|
|
|
2-3
|
|
Customer
relationships
|
|
|
7-14
|
|
Developed
technologies
|
|
|
5
|
|
Non-compete
agreements
|
|
|
3-5
|
|
The
Company reviews its intangible assets for impairment whenever events or changes
in circumstances indicate the carrying amount of the assets may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to future undiscounted net
cash
flows expected to be generated by the assets. If such assets are considered
to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value
less costs to sell.
Goodwill
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No.
142,
Goodwill and Other Intangible Assets,
the
Company reviews its goodwill for impairment annually, or more frequently, if
facts and circumstances warrant a review, at the reporting unit level. 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 provisions
of SFAS No. 142 require that a two-step test be performed to assess goodwill
for
impairment. First, the fair value of the reporting unit is compared to its
carrying value. If the fair value exceeds the carrying value, goodwill is not
impaired and no further testing is performed. The second step is performed
if
the carrying value exceeds the fair value. The implied fair value of the
reporting unit’s goodwill must be determined and compared to the carrying value
of the goodwill. If the carrying value of a reporting unit’s goodwill exceeds
its implied value, an impairment loss equal to the difference will be recorded.
In determining the fair value of our reporting units, we relied on the Income
Approach and the Market Approach. Under the Income Approach, the fair value
of a
business unit is based on the cash flows it can be expected to generate over
its
remaining life. The estimated cash flows are converted to their present value
equivalent using an appropriate rate of return. The Market Approach utilizes
a
market comparable method whereby similar publicly traded companies are valued
using Market Values of Invested Capital (“MVIC”) multiples (i.e., MVIC to
revenue, MVIC to earnings before interest and taxes, MVIC to cash flow, etc.)
and then these MVIC multiples are applied to a companies operating results
to
arrive at an estimate of value.
The
Company completed its annual goodwill impairment test during the fourth quarter
of 2006 and determined that the carrying amount of goodwill was not impaired,
nor did it recognize any goodwill impairment charges in 2005 and
2004.
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.
Impairment
of Long-Lived Assets
The
Company evaluates long-lived assets and intangible assets subject to
amortization for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability
of
assets to be held and used is measured by a comparison of the carrying amount
of
the asset to future cash flows expected to be generated by the asset. If the
carrying amount of the asset exceeds its estimated future cash flows, an
impairment charge is recorded in the amount by which the carrying amount of
the
asset exceeds the fair value of the asset.
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.
The
Company continually monitors events and changes in circumstances that could
indicate carrying amounts of its intangible assets may not be recoverable.
When
such events or changes in circumstances occur, the Company assesses the
recoverability of intangible assets by determining whether the carrying value
of
such assets will be recovered through the undiscounted expected future cash
flows. If the future undiscounted cash flows are less than the carrying amount
of the intangible assets, the Company recognizes an impairment loss based
on the
excess of the carrying amount over the fair value of the assets. The Company
did
not recognize intangible asset impairment charges in 2006, 2005 or
2004.
Basic
and Diluted Earnings Per Share
The
Company computes basic earnings per share by dividing net income for the year
by
the weighted average number of shares outstanding for the year, excluding
outstanding stock options. Diluted earnings per share includes the effects
of
common stock equivalents, consisting of outstanding stock options and
unrecognized compensation expense and tax benefits in accordance with SFAS
No.
123R, Share-Based
Payment,
to the
extent the effect is not antidilutive, using the treasury stock
method.
The
following table presents the computation of basic and diluted earnings per
share:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
income
|
|
$
|
10,004,130
|
|
$
|
9,673,901
|
|
$
|
13,356,122
|
|
Weighted
average common shares outstandings
|
|
|
17,332,632
|
|
|
15,809,259
|
|
|
15,438,097
|
|
Additional
dilutive shares related to stock options
|
|
|
513,122
|
|
|
1,112,959
|
|
|
537,284
|
|
Total
weighted average common shares and equivalents
|
|
|
|
|
|
|
|
|
|
|
outstanding
for diluted earnings per share calculation
|
|
|
17,845,754
|
|
|
16,922,218
|
|
|
15,975,382
|
|
Basic
and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.58
|
|
$
|
0.61
|
|
$
|
0.87
|
|
Diluted
|
|
$
|
0.56
|
|
$
|
0.57
|
|
$
|
0.84
|
|
The
weighted average number of common shares outstanding used in computing diluted
net income per share for the years ended December 31, 2006, 2005 and 2004
includes the shares resulting from the dilutive effect of outstanding stock
options. For the years ended December 31, 2006, 2005 and 2004, 176,000, 227,500
and 389,775 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.
Share-Based
Compensation
During
the first quarter of fiscal 2006, the Company adopted the provisions of, and
accounts for share-based compensation in accordance with, SFAS No. 123R,
Share-Based
Payment,
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, share-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 the Company’s consolidated financial position, results of operations
and cash flows. See Note 3 for further information regarding the Company’s
share-based compensation assumptions and expense, including pro forma
disclosures for prior periods, as if the Company had recorded share-based
compensation expense.
Deferred
Compensation Plan
During
2002, the Company established a non-qualified deferred compensation plan that
permits eligible employees to defer a portion of their compensation. The
deferred compensation liability (other non-current liabilities) was $222,920
and
$178,133 at December 31, 2006 and 2005, respectively. The Company has
established a grantor trust (Rabbi Trust) to provide funding for benefits
payable under its non-qualified deferred compensation plan. The assets held
in
the trust at December 31, 2006 and 2005 amounted to $222,920 and $178,133,
respectively. The Rabbi Trust’s assets consist of short-term cash investments
and a managed portfolio of equity securities. These assets are included in
other
assets in the accompanying balance sheets.
Fair
Value of Financial Instruments
The
Company does not currently use derivative financial instruments in the normal
course of its business. The carrying values of cash and cash equivalents,
accounts receivable and accounts payable and accrued liabilities approximate
fair value due to the short-term maturities of these assets and liabilities.
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.
Revenue
Recognition
The
Company generates revenue from two primary sources: online publishing and print
publishing and licensing.
Online
Publishing Revenue
The
Company sells graphic advertisements on its web site (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 the Company sells is a function of (1) the number of
visitors to its web sites, (2) the number of ad pages the Company serves to
those visitors, (3) the number of advertisements per page, and (4) the capacity
of the Company’s 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,
the Company generates revenue on a “per action” basis (i.e., a purchase or
completion of an application) when a visitor to the Company’s web site transacts
with one of its advertisers after viewing an advertisement. Revenue is
recognized monthly based on the number of actions reported by the advertiser,
subject to the Company’s verification. The Company is also involved in revenue
sharing arrangements with its online partners where the consumer uses co-branded
sites hosted by the Company. 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.
The
Company also sells hyperlinks (interest rate table listings) to various
third-party Internet sites on a CPC basis. Advertisers
pay the Company each time a visitor to its web sites clicks on a rate table
listing. Prior to October 1, 2005, advertisers paid a flat monthly fee for
their
hyperlink. The Company also sells text links on its rate pages to advertisers
on
a 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. The Company recognizes revenue
monthly for each text link based on the number of clicks at the CPC contracted
for during the auction bidding process.
Online
publishing revenue, prior to the first quarter of 2006, included barter revenue,
which represents the exchange of advertising space on the Company’s 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. The Company
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 the Company’s web site. Barter expense was
recognized when the Company’s advertisements ran on the other companies’ web
sites, which was typically in the same period barter revenue was
recognized. If
the
advertising impressions were received from the customer prior to the Company
delivering the advertising impressions, a liability was recorded. If the Company
delivered advertising impressions to the other companies' web sites prior to
receiving the advertising impressions, a prepaid expense was recorded. No
prepaid expense or liability was recorded at December 31, 2005. Barter revenue
was approximately $2,254,000 and $3,088,000, and represented approximately
5%
and 8% of total revenue, respectively, for the years ended December 31, 2005
and
2004.
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)
and
Deposit
and CD Guide
rate
tables, newsletter subscriptions, and licensing of research information. The
Company charges a commission for placement of the Mortgage
Guide
and
Deposit
and CD Guide
in a
print publication. Advertising revenue and commission income is recognized
when
the Mortgage
Guide
and
Deposit
and CD Guide
runs in
the publication. Revenue from the Company’s 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.
The
Company also earns 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, the Company licenses research
data under agreements that permit the use of rate information it develops 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.
Marketing
Expenses
Marketing
costs represent expenses associated with expanding brand awareness of the
Company’s 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 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 the Company’s barter transactions. Barter expense of approximately
$2,254,000 and $3,088,000 was recorded for the years ended December 31, 2005
and
2004, respectively.
Comprehensive
Income
Comprehensive
income is the same as net income for the years ended December 31, 2006, 2005
and
2004.
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 noncompetition agreements relating to the grants.
1997
Equity Compensation Plan
During
1997, the Company adopted the 1997 Equity Compensation Plan (the "1997 Plan")
to
provide directors, officers, nonemployee members of the Board of Directors
of
the Company and certain consultants and advisors with the opportunity to receive
grants of incentive stock options, non-qualified stock options and restricted
stock. 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 or other agreements relating to the grants. The aggregate
number of common shares that may be issued under the 1997 Plan was initially
900,000. In January 1999, the Company amended the 1997 Plan to increase the
number of shares authorized to 1,500,000 shares. As
of
December 31, 2006, 76,349 shares were available for grant under the 1997 Plan.
The
exercise price of any option grant shall be determined by the Board of Directors
and may be equal to, greater than, or less than the fair market value of the
stock on the grant date. An incentive stock option may not be granted to an
employee who at the time of the grant owns more than 10% of the total combined
voting power of all classes of stock of the Company, unless the exercise price
is not less than 110% of the fair market value of the stock on the date of
the
grant. Options granted vest over various periods ranging from 1 to 5 years
and
expire between 7 and 10 years after the date of grant.
Stock
options exercisable into 820,500 shares were granted to directors and employees
during 2004. No stock options were granted under the 1997 Plan during the years
ended December 31, 2006 and 2005.
1999
Equity Compensation Plan
In
March
1999, the Company's stockholders approved the 1999 Equity Compensation Plan
(the
"1999 Plan"), to provide designated employees of the Company, certain
consultants and non-employee members of the Board of Directors with the
opportunity to receive grants of incentive stock options, nonqualified stock
options and restricted stock. The 1999 Plan was originally authorized to grant
options for up to 1,500,000 shares. In April 2000, the Company amended the
1999
Plan to increase the number of shares authorized to 3,500,000. This amendment
was approved by the Company’s stockholders. Options granted generally vest over
four years, 25% after the first year and monthly thereafter over the remaining
three years, and expire between 5 and 10 years after the date of
grant. As
of
December 31, 2006, no shares were available for grant under the 1999 Plan.
Stock
options exercisable into 732,000, 690,000 and 977,500 shares, respectively,
were
granted under the 1999 Plan to outside directors and employees during 2006,
2005
and 2004.
Beginning
with the first quarter of fiscal 2006, the Company adopted SFAS No. 123R. See
Note 2 for a description of the Company’s 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, riskfree 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 stockbased compensation expense only for those awards
that are expected to vest. All share-based payment awards are amortized on
a
straightline 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
years ended December 31, 2006, 2005 and 2004 using the Black-Scholes option
pricing model together with a description of the assumptions used to calculate
the fair value.
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Weighted
average fair value
|
|
|
$34.66
|
|
|
$22.39
|
|
|
$7.70
|
|
Expected
volatility
|
|
|
70%
|
|
|
116%
|
|
|
100%
|
|
Risk
free rate
|
|
|
4.7%
|
|
|
3.5%
|
|
|
3.7%
|
|
Expected
lives
|
|
|
4.75
years
|
|
|
5
years
|
|
|
5
years
|
|
Expected
dividend yield
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
The
stock-based compensation expense recognized on the Company’s consolidated
statements of income for the year ended December 31, 2006 is as
follows:
Income
Statement Classifications
|
|
|
|
|
Cost
of revenue:
|
|
|
|
|
Online
publishing
|
|
$
|
1,076,828
|
|
Print
publishing and licensing
|
|
|
147,453
|
|
Other
expenses:
|
|
|
|
|
Sales
|
|
|
662,089
|
|
Product
development
|
|
|
473,956
|
|
General
and administrative
|
|
|
6,363,207
|
|
Total
|
|
$
|
8,723,533
|
|
The
following table sets forth the pro forma net income
and net income per share for the years ended December 31, 2005 and 2004 that
would have resulted if the Company had accounted for its stock options under
the
fair value recognition provisions of SFAS No. 123R.
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Net
income:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
9,673,901
|
|
$
|
13,356,122
|
|
Less
total stock-based employee compensation
|
|
|
|
|
|
|
|
determined
under fair value-based method for all
|
|
|
|
|
|
|
|
awards,
net of related tax effect
|
|
|
(3,336,648
|
)
|
|
(2,206,033
|
)
|
Pro
forma
|
|
$
|
6,337,253
|
|
$
|
11,150,089
|
|
Basic
and diluted earnings per common share as reported:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.61
|
|
$
|
0.87
|
|
Diluted
|
|
|
0.57
|
|
|
0.84
|
|
Basic
and diluted earnings per common share pro forma:
|
|
|
|
|
|
|
|
Basic
|
|
|
0.40
|
|
|
0.72
|
|
Diluted
|
|
|
0.40
|
|
|
0.72
|
|
Weighted
average common shares outstanding-reported:
|
|
|
|
|
|
|
|
Basic
|
|
|
15,809,259
|
|
|
15,438,097
|
|
Diluted
|
|
|
16,922,218
|
|
|
15,975,382
|
|
Weighted
average common shares outstanding-pro forma:
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
15,809,259
|
|
|
15,438,097
|
|
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.
Pursuant
to the income tax provisions of SFAS 123R, the Company follows the “long-haul
method” of computing its hypothetical additional paid-in capital, or APIC pool.
As of December 31, 2006, there was approximately $18.1 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 2.92
years. Total
unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures.
Stock
option activity during the years ended December 31, 2006, 2005, and 2004 was
as
follows:
|
|
Number
of
|
|
Price
Per
|
|
Weighted
Average
|
|
|
|
Shares
|
|
Share
|
|
Exercise
Price
|
|
Balance,
December 31, 2003
|
|
|
970,263
|
|
$
|
0.85
to $13.00
|
|
$
|
1.20
|
|
Granted
|
|
|
1,798,000
|
|
$
|
8.11
to $15.40
|
|
$
|
10.14
|
|
Exercised
|
|
|
(666,440
|
)
|
$
|
0.85
to $13.00
|
|
$
|
1.32
|
|
Forfeited
|
|
|
(63,579
|
)
|
$
|
12.43
to $12.63
|
|
$
|
12.61
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance,
December 31, 2004
|
|
|
2,038,244
|
|
$
|
0.85
to $15.40
|
|
$
|
9.15
|
|
Granted
|
|
|
690,000
|
|
$
|
13.32
to $32.25
|
|
$
|
22.39
|
|
Exercised
|
|
|
(77,066
|
)
|
$
|
0.85
to $13.00
|
|
$
|
5.18
|
|
Forfeited
|
|
|
(19,223
|
)
|
$
|
0.85
to $18.44
|
|
$
|
12.94
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance,
December 31, 2005
|
|
|
2,631,955
|
|
$
|
0.85
to $32.25
|
|
$
|
12.69
|
|
Granted
|
|
|
732,000
|
|
$
|
28.91
- $47.47
|
|
$
|
34.66
|
|
Exercised
|
|
|
(360,668
|
)
|
$
|
0.85
- $32.25
|
|
$
|
13.45
|
|
Forfeited
|
|
|
(253,697
|
)
|
$
|
0.85
- $35.75
|
|
$
|
39.98
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance,
December 31, 2006
|
|
|
2,749,590
|
|
$
|
0.85
- $47.47
|
|
$
|
17.08
|
|
The
total
intrinsic value of options exercised during 2006 was approximately $11.1
million. The intrinsic value is calculated as the difference between the market
value on the date of exercise and the exercise price of the stock
options.
Additional
information with respect to outstanding options as of December 31, 2006 was
as
follows:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
Weighted
Average
Remaining
|
|
|
|
Average
|
|
|
|
Number
|
|
Contractual
|
|
Number
|
|
Exercise
|
|
Prices
|
|
of
Shares
|
|
Life
(Years)
|
|
of
Shares
|
|
Price
|
|
$
|
0.85
|
|
|
42,084
|
|
|
2.92
|
|
|
42,084
|
|
$
|
0.85
|
|
$
|
1.75
to $8.46
|
|
|
830,584
|
|
|
4.66
|
|
|
654,543
|
|
|
7.49
|
|
$
|
10.01
to $12.63
|
|
|
703,975
|
|
|
4.68
|
|
|
535,225
|
|
|
10.41
|
|
$
|
13.00
to $18.44
|
|
|
406,290
|
|
|
4.75
|
|
|
204,061
|
|
|
15.47
|
|
$
|
26.98
to $32.75
|
|
|
405,157
|
|
|
6.45
|
|
|
56,667
|
|
|
29.30
|
|
$
|
35.75
to $47.47
|
|
|
361,500
|
|
|
6.17
|
|
|
-
|
|
|
-
|
|
|
|
|
|
2,749,590
|
|
|
6.65
|
|
|
1,492,580
|
|
$
|
10.27
|
|
The
aggregate intrinsic value of options outstanding and options exercisable as
of
December 31, 2006 was $58.1 million and $41.3 million, respectively. The
intrinsic value is calculated as the difference between the market value as
of
December 31, 2006 and the exercise price of the stock options. The market value
as of December 31, 2006 was $37.95 as reported by the NASDAQ Global Select
Market.
Note
4 - Financial Statement Details
Allowance
for doubtful accounts-
|
|
For
year ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Balance,
beginning of year
|
|
$
|
1,630,349
|
|
$
|
400,000
|
|
$
|
230,000
|
|
Provision
|
|
|
1,226,231
|
|
|
199,883
|
|
|
554,935
|
|
Write-offs
|
|
|
(701,504
|
)
|
|
(240,836
|
)
|
|
(395,677
|
)
|
Recoveries
|
|
|
-
|
|
|
19,967
|
|
|
10,742
|
|
Acquisitions
|
|
|
-
|
|
|
1,251,335
|
|
|
-
|
|
Balance,
end of year
|
|
$
|
2,155,076
|
|
$
|
1,630,349
|
|
$
|
400,000
|
|
Fixed
Assets-
Fixed
assets consisted of the following:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Furniture
and fixtures
|
|
$
|
639,236
|
|
$
|
288,494
|
|
Computers
and software
|
|
|
4,208,646
|
|
|
3,448,690
|
|
Equipment
|
|
|
139,671
|
|
|
82,158
|
|
Leasehold
improvements
|
|
|
541,813
|
|
|
403,837
|
|
|
|
|
5,529,366
|
|
|
4,223,179
|
|
Less
accumulated depreciation and amortization
|
|
|
(3,825,686
|
)
|
|
(3,159,872
|
)
|
|
|
$
|
1,703,680
|
|
$
|
1,063,307
|
|
Depreciation
expense was $743,824, $650,163 and $613,866 for the years ended December
31,
2006, 2005 and 2004, respectively.
Intangible
Assets-
Intangible
assets consisted of the following at December 31, 2006:
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Trademarks
and URL's
|
|
$
|
5,146,366
|
|
$
|
(265,029
|
)
|
$
|
4,881,337
|
|
Software
licenses
|
|
|
569,067
|
|
|
(539,134
|
)
|
|
29,933
|
|
Customer
relationships
|
|
|
10,000,000
|
|
|
(1,279,362
|
)
|
|
8,720,638
|
|
Developed
technology
|
|
|
800,000
|
|
|
(173,329
|
)
|
|
626,671
|
|
Non-compete
agreements
|
|
|
281,000
|
|
|
(98,417
|
)
|
|
182,583
|
|
|
|
$
|
16,796,433
|
|
$
|
(2,355,271
|
)
|
$
|
14,441,162
|
|
Intangible
assets consisted of the following at December 31, 2005:
|
|
Cost
|
|
|
|
Net
|
|
Trademarks
and URL's
|
|
$
|
746,366
|
|
$
|
(154,049
|
)
|
$
|
592,317
|
|
Software
licenses
|
|
|
533,180
|
|
|
(424,090
|
)
|
|
109,090
|
|
Customer
relationships
|
|
|
10,000,000
|
|
|
(98,413
|
)
|
|
9,901,587
|
|
Developed
technology
|
|
|
800,000
|
|
|
(13,333
|
)
|
|
786,667
|
|
Non-compete
agreements
|
|
|
270,000
|
|
|
(7,500
|
)
|
|
262,500
|
|
|
|
$
|
12,349,546
|
|
$
|
(697,385
|
)
|
$
|
11,652,161
|
|
Amortization
expense was $1,657,886, $245,206 and $128,793 for the years ended December
31,
2006, 2005 and 2004, respectively. Amortization expense as of December 31,
2006
is expected to be:
Year
Ending December 31,
|
|
|
|
2007
|
|
$
|
1,705,569
|
|
2008
|
|
|
1,686,257
|
|
2009
|
|
|
1,595,532
|
|
2010
|
|
|
1,579,809
|
|
2011
|
|
|
1,432,229
|
|
Thereafter
|
|
|
6,441,766
|
|
|
|
|
|
|
Total
expected amortization expense of intangible assets
|
|
$
|
14,441,162
|
|
|
|
|
|
|
|
Other
assets consisted of the following:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Computer
and software deposits
|
|
$
|
26,804
|
|
$
|
48,146
|
|
Deferred
compensation plan assets
|
|
|
222,920
|
|
|
178,133
|
|
Other
|
|
|
524,393
|
|
|
215,932
|
|
|
|
$
|
774,117
|
|
$
|
442,211
|
|
Accrued
expenses consisted of the following:
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
Accrued
payroll and related benefits
|
|
$
|
1,963,297
|
|
$
|
1,896,997
|
|
Vacation
|
|
|
381,063
|
|
|
424,228
|
|
Sales
commissions
|
|
|
405,334
|
|
|
333,805
|
|
Marketing
|
|
|
394,905
|
|
|
263,433
|
|
Due
to distribution partners
|
|
|
1,348,786
|
|
|
333,751
|
|
Purchase
obligations
|
|
|
-
|
|
|
1,185,616
|
|
Professional
fees
|
|
|
266,745
|
|
|
143,181
|
|
Income
taxes
|
|
|
-
|
|
|
380,754
|
|
Legal
fees and other
|
|
|
185,347
|
|
|
65,176
|
|
Other
|
|
|
291,745
|
|
|
66,246
|
|
|
|
$
|
5,237,222
|
|
$
|
5,093,187
|
|
Note
5 - Income Taxes
The
components of the income tax expense (benefit) are as follows:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,849,927
|
|
$
|
476,307
|
|
$
|
2,761,525
|
|
State
|
|
|
553,077
|
|
|
391,672
|
|
|
479,394
|
|
Total
current
|
|
|
3,403,004
|
|
|
867,979
|
|
|
3,240,919
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,757,586
|
|
|
4,498,356
|
|
|
(6,692,153
|
)
|
State
|
|
|
750,793
|
|
|
433,818
|
|
|
(1,314,426
|
)
|
Total
deferred
|
|
|
3,508,379
|
|
|
4,932,174
|
|
|
(8,006,579
|
)
|
Total
income tax expense (benefit)
|
|
$
|
6,911,383
|
|
$
|
5,800,153
|
|
$
|
(4,765,660
|
)
|
The
difference between income tax expense (benefit) computed at the statutory rate
and the reported income tax benefit is as follows:
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Income
taxes at statutory rate
|
|
$
|
5,751,274
|
|
$
|
5,261,178
|
|
$
|
2,920,757
|
|
State
income taxes, net of federal benefit
|
|
|
860,555
|
|
|
544,823
|
|
|
332,200
|
|
Nondeductible
items and other
|
|
|
39,384
|
|
|
17,816
|
|
|
138,370
|
|
Change
in deferred asset effective rate and other
|
|
|
260,170
|
|
|
(23,664
|
)
|
|
-
|
|
Stock
option benefit included in prior year valuation
allowance
|
|
|
-
|
|
|
-
|
|
|
1,212,198
|
|
Change
in valuation allowance
|
|
|
-
|
|
|
-
|
|
|
(9,369,185
|
)
|
Total
income tax expense (benefit)
|
|
$
|
6,911,383
|
|
$
|
5,800,153
|
|
$
|
(4,765,660
|
)
|
The
Company’s effective rate in 2006 and 2005 differs from the statutory federal
income tax rate, primarily due to state income taxes. The Company’s effective
rate in 2004 differs from the statutory Federal income tax rate, primarily
as a
result of the changes in the valuation allowance on deferred tax assets.
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets and liabilities consisted of the following:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
345,911
|
|
$
|
5,631,037
|
|
Tax
credit carryforwards
|
|
|
603,896
|
|
|
462,091
|
|
Share-based
compensation
|
|
|
2,108,524
|
|
|
-
|
|
Accrued
expenses
|
|
|
123,428
|
|
|
157,852
|
|
Allowance
for doubtful accounts
|
|
|
630,512
|
|
|
194,656
|
|
Total
gross deferred tax assets
|
|
|
3,812,271
|
|
|
6,445,636
|
|
Deferred
Tax Liabilities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(846,245
|
)
|
|
28,769
|
|
Net
deferred tax assets
|
|
$
|
2,966,026
|
|
$
|
6,474,405
|
|
As
required by Statement of Financial Accounting Standards (“SFAS”) No. 109, the
Company recognizes tax assets on the balance sheet if it is more likely than
not
that they will be realized on future tax returns. Up to the third quarter of
2003, the Company had provided a full valuation allowance against accumulated
deferred tax assets, reflecting the uncertainty associated with its future
profitability. In the fourth quarter of 2003, the Company reassessed the
valuation allowance previously established against deferred tax assets. Factors
considered included: historical results of operations, volatility of the
economic and interest rate environment and projected earnings based on current
operations. Based on this evidence, the Company concluded that it was more
likely than not that a portion of the deferred tax assets would be realized
and,
accordingly, released $3,400,000 of the valuation allowance, which resulted
in
an income tax benefit of approximately $3,100,000.
During
the quarters ended March 31, June 30, and Sept 30, 2004, the Company evaluated
the need for a valuation allowance against the deferred tax asset. The Company
completed its business planning process during the fourth quarter of 2004,
which
included the following strategic initiatives for 2005: the enhancement of its
quality control process and procedures; the re-design of its Web site; the
execution of exclusive advertising contracts with two mortgage lead aggregators;
broadening the breadth and depth of its products and services; a reorganization
of its advertising sales force; and the migration to a cost-per-click revenue
model on its rate tables. Considering these strategic initiatives and their
impact on future earnings potential, the Company concluded that it is more
likely than not that it will generate sufficient taxable income in future
periods to realize the entire deferred tax asset. At December 31, 2004, the
Company reversed the remaining $9,400,000 valuation allowance resulting in
an
income tax benefit of $4,800,000. The income tax benefit relating to stock
option exercised during 2004 was approximately $2,000,000, for a total 2004
benefit of approximately $3,200,000 which was allocated to stockholders’
equity.
At
December 31, 2006, the Company had fully utilized its net operating loss
carryforwards for federal income tax purposes.
Note
6 - Related Party Transactions
The
Company leased office space in North Palm Beach, Florida from Bombay Holdings,
Inc. ("Bombay"), which at the time was wholly-owned by Peter C. Morse ("Morse"),
a director and 26% stockholder. Total rent paid to Bombay for the year ended
December 31, 2004 was approximately $244,000. In November 2004, the Company
entered into a sublease for new space and the Bombay lease was terminated
effective December 31, 2004.
During
2004, the Company paid an outside director consulting fees of approximately
$17,000. No such fees were paid during 2006 or 2005.
Note
7 - Commitments and Contingencies
Leases
On
November 3, 2005, the Company entered into a lease for approximately 21,000
square feet of office space in North Palm Beach. The initial lease term is
for
10 years with an option to renew for one additional 5-year term.
On
January 20, 2006, the Company entered into a lease for approximately 8,800
square feet of office space on Madison Avenue, New York, New York. The initial
lease term is for 10 years and six months. The Company initially paid a $210,000
refundable security deposit which was replaced with an irrevocable letter of
credit secured by the cash deposit.
On
February 15, 2006, the Company entered into a lease for approximately 4,900
square feet of office space in Chicago, Illinois. The initial lease term expires
on November 30, 2008. The Company initially paid a $79,000 refundable security
deposit which was replaced with an irrevocable letter of credit secured by
the
cash deposit.
In
connection with the acquisition of FastFind, the Company assumed an office
space
lease in San Francisco, California, expiring February 28, 2009. The Company
also
leases office space in Sherman Oaks, California on a month-to-month
basis.
Total
rent expense for the years ended December 31, 2006, 2005 and 2004 amounted
to
approximately $1,101,000, $620,000 and $498,000, respectively. During
2004, the Company also recorded sublease rental income of approximately $28,000
under the terms of a sublease agreement that expired on June 21,
2004.
The
Company recognizes rent expense for operating leases with periods of free rent
(including construction periods), step rent provisions and escalation clauses
on
a straight-line basis over the applicable lease term. The Company considers
lease renewals in the useful life of its leasehold improvements when such
renewals are reasonably assured. The Company takes these provisions into account
when calculating minimum aggregate rental commitments under non-cancelable
operating leases. Future minimum lease payments under non-cancelable operating
leases having lease terms in excess of one year as of December 31, 2006 were:
|
|
Operating
|
|
|
|
Leases
|
|
2007
|
|
$
|
1,215,857
|
|
2008
|
|
|
1,186,372
|
|
2009
|
|
|
985,492
|
|
2010
|
|
|
951,627
|
|
2011
|
|
|
969,283
|
|
Thereafter
|
|
|
4,756,845
|
|
Total
minimum lease payments
|
|
$
|
10,065,476
|
|
Distribution
Agreements
The
Company has various agreements with advertisers, content providers and other
web
sites that require it to feature such parties exclusively in certain sections
of
its web site.
Legal
Proceedings
In
July
2000, the Company sold its former wholly owned subsidiary, Pivot, for $4,350,000
in cash. In connection with the sale, the Company agreed to indemnify the buyer
for liability of up to $1,000,000 in connection with a litigation matter between
Pivot and its co-founders
and former owner. In March 2001, the case was dismissed based on a technical
deficiency. In August 2001, the plaintiff refiled the complaint. On October
8,
2004, the Company was notified that the buyer settled the litigation matter,
effective October 1, 2004, and the Company reimbursed the buyer $390,000 under
the indemnity. The $390,000 was recorded in the quarter ended September 30,
2004
as a legal settlement charge.
In
February 2005, the Company settled a contractual dispute with a former Internet
and co-location facility provider for $120,000. This amount is included in
legal
settlements in the accompanying statement of operations for the year ended
December 31, 2004.
On
October 9, 2006, the Company entered into a Confidential Final Settlement
Agreement and Mutual Release with American Interbanc Mortgage, LLC (“AI”) in
settlement of the claims pending against it 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 Bankrate.com 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 Bankrate.com while prohibiting
AI to advertise on Bankrate.com. AI sought damages of at least $16.5 million,
to
have those damages tripled, and “reasonable attorneys fees pursuant to 15 U.S.C.
Section 1117(b) and California Business and Professional Code Section 16750(a),”
and costs.
Under
the
terms of the Settlement 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 has 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 consolidated statement
of income as legal settlement.
From
time to time, in addition to those identified above, the Company is subject
to
legal proceedings, claims, investigations and proceedings in the ordinary course
of business. In accordance with U.S. generally accepted accounting principles,
the Company makes a provision for a liability when it is both probable that
a
liability has been incurred and the amount of the loss can be reasonably
estimated. These provisions are reviewed at least quarterly and adjusted to
reflect the impacts of negotiations, settlements, rulings, advice of legal
counsel, and other information and events pertaining to a particular case.
Litigation is inherently unpredictable. However, the Company believes that
it
has valid defenses with respect to the legal matters pending against it. It
is
possible, nevertheless, that the Company’s consolidated financial position, cash
flows or results of operations could be affected by the resolution of one or
more of such contingencies.
Other
Commitments
The
Company has executed employment agreements with nine key executives, including
the Company’s President and Chief Executive Officer, between January 2004 and
September 2006. Each employment agreement provides for a minimum annual base
salary, an annual bonus contingent on the Company achieving certain performance
criteria, and severance provisions ranging from six months to one year’s annual
base salary. Under the terms of the employment agreements, the executives are
entitled to receive minimum annual base salaries of $2.3 million in the
aggregate.
Other
Contingencies
On
October 24, 2005, a major hurricane passed through the North Palm Beach, Florida
area resulting in a power outage and minor damage to the Company’s office
facility. The Company’s contingency and disaster recovers plans were activated
which allowed for the continued, uninterrupted operation of Bankrate.com during
the recovery period. A portion of the losses and additional expenses incurred
were covered by insurance for which a claim was filed and, as a result, a
$86,000 insurance claim receivable was recorded as of December 31, 2005.
In
September 2004, the Company’s North Palm Beach, Florida corporate office
building sustained severe damage from the two major hurricanes that hit the
South Florida coast. The Company submitted insurance claims for the furniture
and equipment lost, and the replacement cost reimbursement was greater than
the
book value of the assets destroyed. Accordingly, in the first quarter of 2005,
a
$221,000 gain was recorded in other income in the accompanying consolidated
statement of income.
Note
8 - 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
and
Deposit
and CD 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 (loss).
No
single
customer accounted for more than 10% of total revenue for the periods presented.
No material revenues were generated outside of the United States.
Summarized
segment information as of December 31, 2006, 2005 and 2004, and for the years
ended December 31, 2006, 2005 and 2004, respectively, is presented below.
|
|
|
|
Print
|
|
|
|
|
|
|
|
Online
|
|
Publishing
|
|
|
|
|
|
|
|
Publishing
|
|
and
Licensing
|
|
Other
|
|
Total
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
63,970,860
|
|
$
|
15,679,115
|
|
$ |
- |
|
$
|
79,649,975
|
|
Cost
of revenue
|
|
|
11,101,425
|
|
|
13,845,594
|
|
|
- |
|
|
24,947,019
|
|
Gross
margin
|
|
|
52,869,435
|
|
|
1,833,521
|
|
|
- |
|
|
54,702,956
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
5,055,076
|
|
|
-
|
|
|
- |
|
|
5,055,076
|
|
Marketing
|
|
|
4,835,941
|
|
|
-
|
|
|
- |
|
|
4,835,941
|
|
Product
development
|
|
|
2,908,005
|
|
|
712,745
|
|
|
- |
|
|
3,620,750
|
|
General
and administrative
|
|
|
17,515,475
|
|
|
4,319,570
|
|
|
- |
|
|
21,835,406
|
|
Legal
settlement
|
|
|
3,000,000
|
|
|
-
|
|
|
- |
|
|
3,000,000
|
|
Depreciation
and amortization
|
|
|
2,019,365
|
|
|
382,345
|
|
|
- |
|
|
2,401,710
|
|
Other
income
|
|
|
-
|
|
|
-
|
|
|
2,961,080
|
|
|
2,961,080
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
(6,911,383
|
)
|
|
(6,911,383
|
)
|
Segment
profit (loss)
|
|
$
|
17,535,572
|
|
$
|
(3,581,139
|
)
|
$
|
(3,950,303
|
)
|
$
|
10,003,770
|
|
Goodwill
|
|
$
|
26,129,688
|
|
$
|
3,909,737
|
|
$ |
- |
|
$
|
30,039,425
|
|
Total
assets
|
|
$
|
52,876,678
|
|
$
|
9,108,992
|
|
$
|
114,697,926
|
|
$
|
176,683,596
|
|
|
|
|
|
|
|
Print
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
|
Publishing
|
|
|
|
|
|
|
|
|
|
|
Publishing
|
|
|
and
Licensing
|
|
|
Other
|
|
|
Total
|
|
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
43,296,384
|
|
$
|
5,752,647
|
|
$ |
- |
|
$
|
49,049,031
|
|
Cost
of revenue
|
|
|
7,389,089
|
|
|
5,346,017
|
|
|
- |
|
|
12,735,106
|
|
Gross
margin
|
|
|
35,907,295
|
|
|
406,630
|
|
|
- |
|
|
36,313,925
|
|
Sales
|
|
|
3,683,482
|
|
|
-
|
|
|
- |
|
|
3,683,482
|
|
Marketing
|
|
|
5,922,964
|
|
|
-
|
|
|
- |
|
|
5,922,964
|
|
Product
development
|
|
|
2,168,506
|
|
|
288,122
|
|
|
- |
|
|
2,456,628
|
|
General
and administrative expenses
|
|
|
7,975,314
|
|
|
1,059,653
|
|
|
- |
|
|
9,034,967
|
|
Depreciation
and amortization
|
|
|
790,354
|
|
|
105,012
|
|
|
- |
|
|
895,366
|
|
Other
income, net
|
|
|
-
|
|
|
-
|
|
|
1,153,536
|
|
|
1,153,536
|
|
Income
tax expense
|
|
|
-
|
|
|
-
|
|
|
(5,800,153
|
)
|
|
(5,800,153
|
)
|
Segment
profit (loss)
|
|
$
|
15,366,675
|
|
$
|
(1,046,157
|
)
|
$
|
(4,646,617
|
)
|
$
|
9,673,901
|
|
Goodwill
|
|
$
|
26,093,877
|
|
$
|
3,941,522
|
|
$ |
- |
|
$
|
30,035,399
|
|
Total
assets
|
|
$
|
43,108,491
|
|
$
|
8,481,255
|
|
$
|
10,963,477
|
|
$
|
62,553,223
|
|
|
|
|
|
|
|
Print
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
|
Publishing
|
|
|
|
|
|
|
|
|
|
|
Publishing
|
|
|
and
Licensing
|
|
|
Other
|
|
|
Total
|
|
Year
Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
33,942,241
|
|
$
|
5,262,020
|
|
$ |
- |
|
$
|
39,204,261
|
|
Cost
of revenue
|
|
|
5,534,456
|
|
|
4,359,444
|
|
|
- |
|
|
9,893,900
|
|
Gross
margin
|
|
|
28,407,785
|
|
|
902,576
|
|
|
- |
|
|
29,310,361
|
|
Sales
|
|
|
4,186,799
|
|
|
-
|
|
|
- |
|
|
4,186,799
|
|
Marketing
|
|
|
6,357,424
|
|
|
-
|
|
|
- |
|
|
6,357,424
|
|
Product
development
|
|
|
2,082,785
|
|
|
322,891
|
|
|
- |
|
|
2,405,676
|
|
General
and administrative expenses
|
|
|
5,772,539
|
|
|
894,909
|
|
|
- |
|
|
6,667,448
|
|
Legal
settlements
|
|
|
-
|
|
|
-
|
|
|
510,000
|
|
|
510,000
|
|
Severance
charge
|
|
|
-
|
|
|
-
|
|
|
260,000
|
|
|
260,000
|
|
Depreciation
and amortization
|
|
|
642,979
|
|
|
99,680
|
|
|
- |
|
|
742,659
|
|
Other
income, net
|
|
|
-
|
|
|
-
|
|
|
410,107
|
|
|
410,107
|
|
Income
tax benefit
|
|
|
-
|
|
|
-
|
|
|
4,765,660
|
|
|
4,765,660
|
|
Segment
profit (loss)
|
|
$
|
9,365,259
|
|
$
|
(414,904
|
)
|
$
|
4,405,767
|
|
$
|
13,356,122
|
|
Total
assets
|
|
$
|
16,153,152
|
|
$
|
2,118,101
|
|
$
|
27,735,267
|
|
$
|
46,006,520
|
|
Note
9 - 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. The
acquisition was made utilizing cash on hand. The acquisition was accounted
for
as a purchase and the results of operations of FastFind are included in the
consolidated results of the Company from the acquisition date. As a result
of
the acquisition, approximately $6.7 million in goodwill was recorded by the
Company, which reflects the adjustments necessary to allocate the purchase
price
to the fair value of assets acquired and liabilities assumed.
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.
On
December 1, 2005, the Company completed the acquisition of Mortgage Market
Information Services, Inc., an Illinois corporation, and Interest.com, Inc.,
an
Illinois corporation (“Interest.com” and collectively with Mortgage Market
Information Services, Inc., “MMIS”), 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
Company paid $26 million on December 8, 2005, $1 million on January 5, 2006,
and
$3 million was placed in escrow to satisfy certain indemnification obligations
of MMIS's shareholder. The acquisition was made utilizing cash on hand. The
acquisition was accounted for as a purchase and the results of operations of
MMIS are included in the consolidated results of the Company from the
acquisition date. As a result of the acquisition, approximately $23.3 million
in
goodwill was recorded by the Company, which reflects the adjustments necessary
to allocate the purchase price to the fair value of assets acquired, liabilities
assumed and additional purchase liabilities recorded.
The
following unaudited pro forma data summarize the results of operations for
the
periods indicated as if these acquisitions had been completed on January 1,
2004. The pro forma data give effect to the actual operating results prior
to
the acquisitions and adjustments to interest expense, goodwill amortization
and
income taxes. These pro forma amounts do not purport to be indicative of the
results that would have been actually obtained if the acquisitions had occurred
on January 1, 2004 or that may be obtained in the future.
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Total
revenue
|
|
$
|
69,816,030
|
|
$
|
58,133,515
|
|
Income
from operations
|
|
$
|
12,638,785
|
|
$
|
5,702,295
|
|
Net
income
|
|
$
|
8,052,959
|
|
$
|
11,612,982
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.51
|
|
$
|
0.75
|
|
Diluted
|
|
$
|
0.48
|
|
$
|
0.73
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
15,809,259
|
|
|
15,438,097
|
|
Diluted
|
|
|
16,922,218
|
|
|
15,975,382
|
|
The
Company determined the fair value of the intangibles and the resulting goodwill
in our purchase price allocations for our acquisitions. These valuations
principally use the discounted cash flow methodology and were made concurrent
with the effective acquisition. Purchase
price allocations for business combinations accounted for under the purchase
method of accounting related to 2005 were as follows:
Property
and equipment
|
|
$
|
227,491
|
|
Goodwill
|
|
|
30,035,399
|
|
Working
capital
|
|
|
(2,015,794
|
)
|
Customer
relationships
|
|
|
10,000,000
|
|
Developed
technology
|
|
|
800,000
|
|
Internet
domain names
|
|
|
600,000
|
|
Non-compete
agreement
|
|
|
270,000
|
|
Other
assets
|
|
|
53,385
|
|
Other
liabilities
|
|
|
(1,000,000
|
)
|
Cash
used in business acquisitions, net of cash acquired
|
|
$
|
38,970,481
|
|
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 “Mortgagecalc.com”) owned and operated by East
West Mortgage, Inc. for $4.4 million in cash. The Company paid $4,350,000 on
August 7, 2006, and $50,000 was placed in escrow to satisfy certain
indemnification obligations of the seller. The acquisition was made using cash
on hand. As a result of the acquisition, approximately $4,411,000 in intangible
assets was recorded by the Company. The operations of these web sites were
integrated into the online publishing segment.
Note
10. Employee Benefit Plans
The
Company sponsors a 401(k) plan for certain employees over the age of 21 who
have
completed a minimum of 12 months of employment. The Company makes safe-harbor
contributions of 3.0% of an employee’s salary. Company contributions
totaled approximately
$400,000, $215,000
and $227,000 in 2006, 2005 and 2004, respectively.
Item
9. Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item
9A. Controls and Procedures
Disclosure
Controls and Procedures
As
of
December 31, 2006, the Company’s management, including its Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934). Based on that evaluation, the Company’s
management, including its Chief Executive Officer and Chief Financial Officer,
have concluded that the Company’s disclosure controls and procedures were
effective.
Management,
including the Company’s Chief Executive Officer and Chief Financial Officer,
does not expect that the Company’s disclosure controls and procedures will
prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of
the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if
any, within the Company have been detected.
Management’s
Report on Internal Control over Financial Reporting
The
Company’s management (“management”) is responsible for establishing and
maintaining effective internal control over financial reporting (as defined
in
Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended).
Management assessed the effectiveness of its internal control over financial
reporting as of December 31, 2006. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal
Control-Integrated Framework.
Management has concluded that, as of December 31, 2006, the Company maintained
effective internal control over financial reporting, as such term is defined
in
Securities Exchange Act of 1934 Rule 13a-15(f), as amended. The Company’s
independent registered public accounting firm, KPMG LLP, has issued an audit
report on the Company’s assessment of its internal control over financial
reporting, which is included herein.
Changes
in Internal Control over Financial Reporting
The
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, has reviewed our internal control. There has been no significant
changes in the Company’s internal control over financial reporting during the
quarter ended December 31, 2006, nor subsequent to the date of their evaluation,
that have materially affected, or are reasonably likely to materially affect
its
internal control over financial reporting.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Bankrate,
Inc.:
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control over Financial Reporting appearing under Item 9A,
that Bankrate, Inc. and subsidiaries (the Company or Bankrate) maintained
effective internal control over financial reporting as of December 31,
2006, based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s Management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting. Our responsibility is to express
an
opinion on management’s assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated,
in
all material respects, based on criteria established in Internal
Control—Integrated Framework
issued
by the COSO. Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December
31,
2006, based on criteria established in Internal
Control—Integrated Framework
issued
by the COSO.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2006 and 2005, and the related consolidated statements of
operations, stockholder’s equity and comprehensive income (loss) cash flows for
each of the years in the three-year period ended December 31, 2006, and our
report dated March 16, 2007 expressed an unqualified opinion on those
consolidated financial statements.
/s/
KPMG
LLP
March
16,
2007
Ft.
Lauderdale, Florida
Certified
Public Accountants
Item
9B. Other Information
None.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance
The
information required by this Item is incorporated by reference to the
registrant’s proxy Statement for its 2007 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days after the
end
of the fiscal year ended December 31, 2006.
Item
11. Executive Compensation
The
information required by this Item is incorporated by reference to the
registrant’s proxy Statement for its 2007 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days after the
end
of the fiscal year ended December 31, 2006.
Item
12. Security Ownership of Certain Beneficial Owners and management and Related
Stockholder Matters
The
information required by this Item is incorporated by reference to the
registrant’s proxy Statement for its 2007 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days after the
end
of the fiscal year ended December 31, 2006.
Item
13. Certain Relationships and Related Transactions, and Director
Independence
The
information required by this Item is incorporated by reference to the
registrant’s proxy Statement for its 2007 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days after the
end
of the fiscal year ended December 31, 2006.
Item
14. Principal Accounting Fees and Services
The
information required by this Item is incorporated by reference to the
registrant’s proxy Statement for its 2007 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days after the
end
of the fiscal year ended December 31, 2006.
Item
15. Exhibits, Financial Statement Schedules
Documents
Filed as Part of This Report:
(1)
|
Financial
Statements.
|
See
Index
to Financial Statements under Item 8.
(2) |
Financial
Statement Schedule.
|
All
financial statement schedules have been omitted since the required information
is not material or is included in the consolidated financial statements or
notes
thereto.
The
exhibits to this report are listed below. Other than exhibits that are filed
herewith, all exhibits listed below are incorporated by reference. Exhibits
indicated by an asterisk (*) are the management contracts and compensatory
plans, contracts or arrangements required to be filed as exhibits to this
Report.
2.1 |
Agreement
and Plan of Reorganization dated November 20, 2005, by and among
Bankrate,
Inc., FastFind, LLC, and Wescoco LLC - incorporated herein by reference
to
Exhibit 2.1 of the Registrant's Form 8-K (filed 12/6/05) (No.
0-25681).
|
2.2 |
Agreement
and Plan of Merger dated November 20, 2005, by and among Bankrate,
Inc.,
Sub 1, Sub 2, Mortgage Market Information Services, Inc. and Interest.com,
Inc., Scarlett Enterprises, Ltd., and James R. De Both - incorporated
herein by reference to Exhibit 2.2 of the Registrant's Form 8-K (filed
12/6/05) (No. 0-25681).
|
2.3
|
Asset
Purchase Agreement by and among Bankrate, Inc., East West Mortgage,
Inc.,
The Doug Bui Family Trust (2006), and Doug Bui, dated August 4, 2006
(the
schedules and exhibits were omitted pursuant to Item 601(b)(2) of
regulation S-K). - incorporated herein by reference to Exhibit 2.1
of the
Registrant's Form 10-Q (filed 8/9/06) (No.
0-25681).
|
3.1
|
Amended
and Restated Articles of Incorporation - incorporated herein by reference
to Exhibit 3.1 of the Registrant's Form S-1/A (filed 4/16/99) (No.
333-74291).
|
3.2
|
Articles
of Amendment to Amended and Restated Articles of Incorporation -
incorporated herein by reference to Exhibit 2.2 of the Registrant's
Form
10-Q (filed 11/13/00) (No.
0-25681).
|
3.3
|
Amended
and Restated Bylaws- incorporated herein by reference to Exhibit
3.2 of
the Registrant's Form S-1/A (filed 4/16/99) (No.
333-74291).
|
10.1
|
Executive
Employment Agreement effective June 21, 2004, between Thomas R. Evans
and
the Company - incorporated herein by reference to Exhibit 10.1 of
the
Registrant's Form 10-Q (filed 6/30/04) (No. 0-25681).
*
|
10.2
|
Executive
Employment Agreement effective July 15, 2004, between Bruce J. Zanca
and
the Company - incorporated herein by reference to Exhibit 10.2 of
the
Registrant's Form 10-K (filed 3/16/05) (No. 0-25681).
*
|
10.3
|
Executive
Employment Agreement effective October 4, 2004, between Steve Horowitz
and
the Company - incorporated herein by reference to Exhibit 10.3 of
the
Registrant's Form 10-K (filed 3/16/05) (No. 0-25681).
*
|
10.4
|
Sublease
Agreement dated November 18, 2004, between the Company and New Cingular
Wireless Services, Inc. f/k/a AT&T Wireless Services, Inc. -
incorporated herein by reference to Exhibit 10.4 of the Registrant's
Form
10-K (filed 3/16/05) (No. 0-25681).
|
10.5
|
Aggregator
Agreement effective January 1, 2005 between the Company and iHomeowners,
Inc. - incorporated herein by reference to Exhibit 10.5 of the
Registrant's Form 10-K (filed 3/16/05) (No. 0-25681).
#
|
10.6
|
Marketing
Agreement effective January 21, 2005 between the Company and LowerMyBills,
Inc. - incorporated herein by reference to Exhibit 10.6 of the
Registrant's Form 10-K (filed 3/16/05) (No. 0-25681).
#
|
10.7
|
Bankrate,
Inc. 1997 Equity Compensation Plan - incorporated herein by reference
to
Exhibit 10.5 of the Registrant's Form S-1 (filed 2/11/99) (No. 333-74291).
*
|
10.8
|
Bankrate,
Inc. Amended and Restated 1999 Equity Compensation Plan. *
+
|
10.9
|
Form
of Stock Option Agreement under the 1997 Equity Compensation Plan
and 1999
Compensation Plan - incorporated herein by reference to Exhibit 10.7
of
the Registrant's Form S-1 (filed 2/11/99) (No. 333-74291).
*
|
10.10
|
Executive
Employment Agreement dated January 1, 2004 between G. Cotter Cunningham
and Bankrate, Inc. - incorporated herein by reference to Exhibit
10.14 on
Registrant's Form 10-K (filed 3/15/04) (No. 0-25681).
*
|
10.11 |
Executive
Employment Agreement dated January 1, 2004 between Robert J. DeFranco
and
Bankrate, Inc. - incorporated herein by reference to Exhibit 10.15
on
Registrant's Form 10-K (filed 3/15/04) (No. 0-25681). *
|
10.12
|
Executive
Employment Agreement effective May 23, 2005 between Lynn E. Varsell
and
Bankrate, Inc. - incorporated herein by reference to Exhibit 10.12
on
Registrant's Form 10-K (filed 3/16/06) (No. 0-25681). *
|
10.13
|
Executive
Employment Agreement dated May 31, 2005 between Daniel P. Hoogterp
and
Bankrate, Inc. - incorporated herein by reference to Exhibit 10.1
on
Registrant's Form 10-Q (filed 8/9/05) (No. 0-25681).
*
|
10.14
|
Lease
Agreement dated November 3, 2005 between Gardens Plaza Investors,
LLC and
Bankrate, Inc. - incorporated herein by reference to Exhibit 10.14
on
Registrant's Form 10-K (filed 3/16/06) (No.
0-25681).
|
10.15
|
Lease
Agreement dated January 20, 2006 between J.A.B. Madison Holdings, LLC
and
Bankrate, Inc. + |
10.16
|
Executive
Agreement effective April 3, 2006 between Edward J. DiMaria and Bankrate,
Inc. - incorporated herein by reference to Exhibit 10.1 on Registrant's
Form 10-Q (filed 5/2/06) (No. 0-25681).
*
|
10.17 |
Executive
Agreement effective September 11, 2006 between Donaldson Ross and
Bankrate, Inc. - incorporated herein by reference to Exhibit 10.1
on
Registrant's Form 10-Q (filed 11/9/06) (No. 0-25681).
*
|
10.18 |
Confidential
Final Settlement Agreement dated October 9, 2006, between American
Interbanc Mortgage, LLC and Bankrate, Inc.
+
|
11.1
|
Statement
re: Computation of Per Share Earnings
**
|
21.1 |
Subsidiaries
of the Registrant +
|
23.1
|
Consent
of KPMG LLP. +
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Securities Exchange Act Rules
13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 +
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Securities Exchange Act Rules
13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 +
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
+
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
+
|
#
|
Confidential
treatment has been granted with respect to certain information in
this
exhibit pursuant to a confidential treatment
request.
|
**
|
Information
required to be presented in Exhibit 11 is provided in Note 2 to the
consolidated financial statements under Part II, Item 8 of this Form
10-K
in accordance with the provisions of FASB Statement of Financial
Accounting Standards No. 128, Earnings
Per Share.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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 as of the 16th
day
of March, 2007.
|
|
|
|
By: |
/s/ Thomas
R. Evans |
|
Thomas
R. Evans
President
and Chief
Executive
Officer
(Principal
Executive Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
By:
/s/ Thomas R. Evans
|
|
President
|
|
March
16, 2007
|
Thomas
R. Evans
|
|
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
/s/ Edward J. DiMaria
|
|
Senior
Vice President
|
|
March
16, 2007
|
Edward
J. DiMaria
|
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
/s/ G. Cotter Cunningham
|
|
Senior
Vice President
|
|
March
16, 2007
|
G.
Cotter Cunningham
|
|
Chief
Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
/s/ William C. Martin
|
|
Director
|
|
March
16, 2007
|
William
C. Martin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
/s/ Peter C. Morse
|
|
Director
|
|
March
16, 2007
|
Peter
C. Morse
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
/s/ Robert P. O’Block
|
|
Director
|
|
March
16, 2007
|
Robert
P. O'Block
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
/s/ Richard J. Pinola
|
|
Director
|
|
March
16, 2007
|
Richard
J. Pinola
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
/s/ Randall E. Poliner
|
|
Director
|
|
March
16, 2007
|
Randall
E. Poliner
|
|
|
|
|