UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|
|
EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30,
2006 |
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
|
|
EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM _________ TO
______ |
Commission
File No. 0-25681
(Exact
name of registrant as specified in its charter)
Florida
(State
or other jurisdiction of incorporation or organization)
11760
U.S. Highway One, Suite 500
North
Palm Beach, Florida
(Address
of principal executive offices)
|
65-0423422
(I.R.S.
Employer Identification No.)
33408
(Zip
Code)
|
Registrant's
telephone number, including area code: (561) 630-2400
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer o
Accelerated filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
The
number of outstanding shares of the issuer's common stock as of July 31, 2006
was as follows: 18,112,043 shares of Common Stock, $.01 par value.
Bankrate,
Inc.
Quarterly
Report on Form 10-Q for the Quarter Ended June 30, 2006
Index
PART
I. FINANCIAL INFORMATION |
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PAGE
NO.
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Item 1. |
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Financial
Statements (Unaudited)
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Condensed
Consolidated Balance Sheets at June 30, 2006 and December 31, 2005
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3
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Condensed
Consolidated Statements of Income for the Three and Six Months Ended
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June
30, 2006 and 2005
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4
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Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June
30,
2006 and 2005
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5
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Notes
to Condensed Consolidated Financial Statements
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results
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of
Operations
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15
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Item 3. |
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Quantitative
and Qualitative Disclosures About Market Risk
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27
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Item 4. |
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Controls
and Procedures
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28
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PART
II. OTHER INFORMATION
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Item 1. |
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Legal
Proceedings
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28
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Item 1A. |
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Risk
Factors
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28
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Item 2. |
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Unregistered
Sales of Securities and Use of Proceeds
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28
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Item 3. |
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Defaults
Upon Senior Securities
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28
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Item 4. |
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Submission
of Matters to a Vote of Security Holders
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28
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Item 5. |
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Other
Information
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28
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Item 6. |
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Exhibits
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29
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Signatures
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29
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Introductory
Note
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains “forward-looking statements,” within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, among others, statements about our beliefs,
plans, objectives, goals, expectations, estimates and intentions that are
subject to significant risks and uncertainties and are subject to change based
on various factors, many of which are beyond our control. The words “may”,
“could”, “should”, “would”, “believe”, “anticipate”, “estimate”, “expect”,
“intend”, “plan”, “target”, “goal”, and similar expressions are intended to
identify forward-looking statements. All forward-looking statements, by their
nature, are subject to risks and uncertainties. Our actual future results may
differ materially from those set forth in our forward-looking statements. For
information concerning these factors and related matters, see Part I, Item
2,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Part II, Item 1A. “Risk Factors” in this Quarterly Report on
Form 10-Q, and the following sections of our Annual Report on Form 10-K, as
amended, for the year ended December 31, 2005 (the “2005 Form 10-K”): (a)
“Introductory Note” in Part I, Item 1. “Business”; (b) “Risk Factors” in Part I,
Item 1A., “Business,” and (c) “Introduction” in Part II, Item 7., “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
However, other factors besides those referenced could adversely affect our
results, and you should not consider any such list of factors to be a complete
set of all potential risks or uncertainties. Any forward-looking statements
made
by us herein speak as of the date of this Quarterly Report. We do not undertake
to update any forward-looking statement, except as required by
law.
Part
I. FINANCIAL INFORMATION
Item
1. Financial Statements
Bankrate,
Inc.
Condensed
Consolidated Balance Sheets
(Unaudited)
|
|
June
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
102,359,536
|
|
$
|
3,479,609
|
|
Accounts
and notes receivable, net of allowance for doubtful accounts
of
approximately $1,853,000 at June 30, 2006 and $1,630,000 at
December 31, 2005, respectively
|
|
|
13,709,282
|
|
|
8,838,879
|
|
Deferred
income taxes, current portion
|
|
|
4,909,942
|
|
|
6,445,636
|
|
Insurance
claim receivable
|
|
|
—
|
|
|
85,575
|
|
Prepaid
expenses and other current assets
|
|
|
708,881
|
|
|
481,677
|
|
Total
current assets
|
|
|
121,687,641
|
|
|
19,331,376
|
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and equipment, net of accumulated depreciation and amortization
of approximately $3,497,000 at June 30, 2006 and $3,160,000 at
December
31, 2005
|
|
|
1,504,489
|
|
|
1,063,307
|
|
Deferred
income taxes
|
|
|
1,223,619
|
|
|
28,769
|
|
Intangible
assets, net of accumulated amortization of approximately $1,472,000
at
June 30, 2006 and $697,000 at December 31, 2005
|
|
|
10,900,627
|
|
|
11,652,161
|
|
Goodwill
|
|
|
30,030,233
|
|
|
30,035,399
|
|
Other
assets
|
|
|
732,665
|
|
|
442,211
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
166,079,274
|
|
$
|
62,553,223
|
|
|
|
|
|
|
|
|
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Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Liabilities:
|
|
|
|
|
|
|
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Accounts
payable
|
|
$
|
2,601,551
|
|
$
|
3,215,645
|
|
Accrued
expenses
|
|
|
3,084,786
|
|
|
5,093,187
|
|
Deferred
revenue
|
|
|
1,240,324
|
|
|
1,176,119
|
|
Other
current liabilities
|
|
|
67,719
|
|
|
37,187
|
|
Total
current liabilities
|
|
|
6,994,380
|
|
|
9,522,138
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
199,617
|
|
|
178,133
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
7,193,997
|
|
|
9,700,271
|
|
|
|
|
|
|
|
|
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Stockholders'
equity:
|
|
|
|
|
|
|
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Preferred
stock, 10,000,000 shares authorized and undesignated
|
|
|
—
|
|
|
—
|
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Common
stock, par value $.01 per share-- 100,000,000 shares authorized;
18,111,766 and
15,857,877
shares issued and outstanding at June 30, 2006 and December
31, 2005,
respectively
|
|
|
181,118
|
|
|
158,579
|
|
Additional
paid in capital
|
|
|
172,123,522
|
|
|
70,981,544
|
|
Accumulated
deficit
|
|
|
(13,419,363
|
)
|
|
(18,287,171
|
)
|
Total
stockholders' equity
|
|
|
158,885,277
|
|
|
52,852,952
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
166,079,274
|
|
$
|
62,553,223
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
Bankrate,
Inc.
Condensed
Consolidated Statememts
of Income
(Unaudited)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
Revenue:
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Online
publishing
|
|
$
|
15,464,987
|
|
$
|
11,204,023
|
|
$
|
31,080,986
|
|
$
|
20,470,576
|
|
Print
publishing and licensing
|
|
|
4,201,383
|
|
|
1,161,007
|
|
|
8,373,816
|
|
|
2,316,303
|
|
Total
revenue
|
|
|
19,666,370
|
|
|
12,365,030
|
|
|
39,454,802
|
|
|
22,786,879
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
publishing
|
|
|
2,806,868
|
|
|
1,823,127
|
|
|
5,707,452
|
|
|
3,462,602
|
|
Print
publishing and licensing
|
|
|
3,773,258
|
|
|
1,075,375
|
|
|
7,315,368
|
|
|
2,178,544
|
|
Total
cost of revenue
|
|
|
6,580,126
|
|
|
2,898,502
|
|
|
13,022,820
|
|
|
5,641,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
13,086,244
|
|
|
9,466,528
|
|
|
26,431,982
|
|
|
17,145,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
1,247,916
|
|
|
970,597
|
|
|
2,336,191
|
|
|
1,812,444
|
|
Marketing
|
|
|
1,188,918
|
|
|
1,713,010
|
|
|
2,040,261
|
|
|
3,232,633
|
|
Product
development
|
|
|
805,193
|
|
|
510,777
|
|
|
1,829,696
|
|
|
1,014,883
|
|
General
and administrative
|
|
|
5,896,743
|
|
|
2,221,655
|
|
|
11,434,567
|
|
|
4,135,933
|
|
Depreciation
and amortization
|
|
|
564,653
|
|
|
208,335
|
|
|
1,122,415
|
|
|
397,574
|
|
|
|
|
9,703,423
|
|
|
5,624,374
|
|
|
18,763,130
|
|
|
10,593,467
|
|
Income
from operations
|
|
|
3,382,821
|
|
|
3,842,154
|
|
|
7,668,852
|
|
|
6,552,266
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
624,975
|
|
|
212,144
|
|
|
645,305
|
|
|
353,407
|
|
Insurance
recovery in excess of costs and expenses
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
220,705
|
|
Total
other income
|
|
|
624,975
|
|
|
212,144
|
|
|
645,305
|
|
|
574,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
4,007,796
|
|
|
4,054,298
|
|
|
8,314,157
|
|
|
7,126,378
|
|
Provision
for income taxes
|
|
|
1,481,815
|
|
|
1,540,634
|
|
|
3,446,349
|
|
|
2,708,024
|
|
Net
income
|
|
$
|
2,525,981
|
|
$
|
2,513,664
|
|
$
|
4,867,808
|
|
$
|
4,418,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
$
|
0.16
|
|
$
|
0.29
|
|
$
|
0.28
|
|
Diluted
|
|
$
|
0.14
|
|
$
|
0.15
|
|
$
|
0.28
|
|
$
|
0.27
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,138,053
|
|
|
15,804,045
|
|
|
16,509,989
|
|
|
15,795,981
|
|
Diluted
|
|
|
17,876,380
|
|
|
16,590,763
|
|
|
17,183,295
|
|
|
16,578,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
Bankrate,
Inc.
Condensed
Consolidated Statements
of Cash Flows
(Unaudited)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,867,808
|
|
$
|
4,418,354
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,122,415
|
|
|
397,574
|
|
Provision
for doubtful accounts
|
|
|
666,000
|
|
|
127,218
|
|
Share
based compensation
|
|
|
4,962,495
|
|
|
—
|
|
Tax
benefit-stock options
|
|
|
574,954
|
|
|
—
|
|
Deferred
income taxes
|
|
|
340,844
|
|
|
2,708,025
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(5,382,100
|
)
|
|
(1,834,565
|
)
|
Other
assets
|
|
|
(141,007
|
)
|
|
297,210
|
|
Accounts
payable
|
|
|
(614,094
|
)
|
|
(22,345
|
)
|
Accrued
expenses
|
|
|
(2,008,401
|
)
|
|
1,136,869
|
|
Other
liabilities
|
|
|
116,221
|
|
|
(79,633
|
)
|
Net
cash provided by operating activities
|
|
|
4,505,135
|
|
|
7,148,707
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of furniture, fixtures and equipment
|
|
|
(877,060
|
)
|
|
(152,102
|
)
|
Cash
used in business acquisitions
|
|
|
(149,140
|
)
|
|
—
|
|
Proceeds
from the sale of assets
|
|
|
67,500
|
|
|
12,350
|
|
Restricted
cash
|
|
|
(293,576
|
)
|
|
—
|
|
Net
cash used in investing activities
|
|
|
(1,252,276
|
)
|
|
(139,752
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from the sale of common stock
|
|
|
90,693,760
|
|
|
—
|
|
Proceeds
from the exercise of stock options
|
|
|
2,647,811
|
|
|
85,742
|
|
Execss
tax benefit-stock options
|
|
|
2,285,497
|
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
95,627,068
|
|
|
85,742
|
|
Net
increase in cash and cash equivalents
|
|
|
98,879,927
|
|
|
7,094,697
|
|
Cash
and equivalents, beginning of period
|
|
|
3,479,609
|
|
|
27,735,267
|
|
Cash
and equivalents, end of period
|
|
$
|
102,359,536
|
|
$
|
34,829,964
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for taxes
|
|
$
|
437,993
|
|
$
|
18,000
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
BANKRATE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2006
(Unaudited)
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
Company
Bankrate,
Inc. and subsidiaries (the "Company") owns and operates an Internet-based
consumer banking marketplace. The Company’s flagship Web site, Bankrate.com (the
“Web site”), is 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, subject to final Closing Date Net Working Capital adjustments under
section 3.03 of 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, 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
unaudited financial information in the table below summarizes the combined
results of operations of the Company, FastFind and MMIS, on a pro forma basis,
as though the companies had been combined as of the beginning of the period
presented. The pro forma financial information is presented for informational
purposes only and is not indicative of the results of operations that would
have
been achieved if the acquisitions had taken place on January 1, 2005 or of
the
results that may occur in the future.
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
March
31, 2005
|
|
June
30, 2005
|
|
June
30, 2005
|
|
Total
revenue
|
|
$
|
16,665,141
|
|
$
|
17,992,580
|
|
$
|
34,657,721
|
|
Income
from operations
|
|
|
2,209,954
|
|
|
3,547,682
|
|
|
5,757,636
|
|
Net
income
|
|
|
1,505,729
|
|
|
2,198,021
|
|
|
3,703,750
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
0.14
|
|
$
|
0.23
|
|
Diluted
|
|
$
|
0.09
|
|
$
|
0.13
|
|
$
|
0.22
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,787,264
|
|
|
15,804,045
|
|
|
15,795,981
|
|
Diluted
|
|
|
16,561,802
|
|
|
16,590,763
|
|
|
16,578,483
|
|
Stock Offering
In
May
2006, the Company closed a public offering of 2,697,776 shares of its common
stock, of which 2,005,991 shares were sold by the Company and 691,785 shares
were sold by certain of the Company’s existing shareholders, at a price of
$48.25 per share resulting in net proceeds to the Company of approximately
$92.4
million, which includes $1.7 million in proceeds from the exercise of stock
options by existing shareholders.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements include
those
of the Company and its wholly-owned subsidiaries, FastFind and MMIS, after
elimination of all intercompany accounts and transactions. The Company has
prepared the accompanying interim condensed consolidated financial statements
in
conformity with accounting principles generally accepted in the United States
of
America, consistent in all material respects with those applied in the Company’s
2005 Form 10-K, as amended. The interim financial information is unaudited
but
reflects all adjustments which are, in the opinion of management, necessary
to
provide fair condensed consolidated balance sheets, condensed consolidated
statements of income and cash flows for the interim periods presented. Such
adjustments are normal and recurring except as otherwise noted.
The
unaudited condensed consolidated financial statements included herein should
be
read in conjunction with the financial statements and related footnotes included
in the Company’s 2005 Form 10-K, as amended.
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.
Basic
and Diluted Net Income Per Share
The
Company computes basic net income per share by dividing net income for the
period by the weighted average number of shares outstanding for the period,
excluding unvested stock options. Diluted net income per share includes the
effect of common stock equivalents, consisting of unvested outstanding stock
options and unrecognized compensation expense and tax benefits in accordance
with SFAS No. 123R to the extent the effect is not anti-dilutive, using the
treasury stock method.
The
weighted average number of common shares outstanding used in computing diluted
net income per share for the three and six months ended June 30, 2006 and 2005
includes the shares resulting from the dilutive effect of outstanding stock
options. For the three and six months ended June 30, 2006, 4,000 and 154,000
shares, respectively, attributable to the assumed exercise of outstanding stock
options were excluded from the calculation of diluted net income per share
because the effect was anti-dilutive. For the three and six months ended June
30, 2005, 401,500 shares attributable to the assumed exercise of outstanding
stock options were excluded from the calculation of diluted net income per
share
because the effect was anti-dilutive.
Goodwill
Statement
of Financial Accounting Standards (“SFAS”) No. 142,
Goodwill and Other Intangible Assets,
requires the Company to test goodwill for impairment at least annually at the
reporting unit level in lieu of amortization. The Company has determined that
it
has two reporting units, online publishing and print publishing and licensing,
under SFAS No. 142, as these are the components of the business for which
discrete financial information is available and for which segment management
regularly reviews the operating results.
The
goodwill impairment test is a two-step test. Under the first step, the fair
value of the reporting unit is compared with its carrying value, including
goodwill. If the fair value of the reporting unit is less than its carrying
value, an indication of goodwill impairment exists for the reporting unit,
accordingly, the enterprise must perform step two of the impairment test
(measurement).
The
Company performs an annual impairment review of goodwill for both reporting
units during the fourth quarter of each year, or more frequently, if facts
and
circumstances warrant a review.
SFAS
No.
142 also requires that intangible assets with definite lives be amortized over
their estimated useful life and reviewed for impairment in accordance with
SFAS
No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
In
connection with the acquisition of FastFind on November 30, 2005, the Company
made a final payment of approximately $149,000 based on an adjustment to
Closing Date Net Working Capital as defined under Section 3.03 of the Agreement
and Plan of Merger dated November 20, 2005. Accordingly, goodwill was increased
by this amount during the quarter ended June 30, 2006.
The
Agreement and Plan of Merger for the acquisition of MMIS 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.
Share
Based Compensation
During
the first quarter of fiscal 2006, the Company adopted the provisions of, and
account for stock-based compensation in accordance with, SFAS No. 123 — revised
2004 (“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, stock-based compensation
cost 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. The Company elected the modified
prospective method, under 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 and are subsequently
modified. Estimated compensation for grants that were outstanding as of the
effective date will be recognized over the remaining service period using the
compensation cost estimated for the SFAS No. 123 pro forma disclosures. The
adoption of SFAS No. 123R had a material impact on our consolidated financial
position, results of operations and cash flows. See Note 3 for further
information regarding the Company’s share based compensation assumptions and
expenses, including pro forma disclosures for prior periods, as if the Company
had recorded stock-based compensation expense.
Stockholders’
Equity
The
activity in stockholders’ equity for the three months ended June 30, 2006 is
shown below.
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
|
Balances,
December 31, 2005
|
|
|
15,857,877
|
|
$
|
158,579
|
|
$
|
70,981,544
|
|
$
|
(18,287,171
|
)
|
$
|
52,852,952
|
|
Stock
options exercised
|
|
|
32,591
|
|
|
326
|
|
|
497,258
|
|
|
-
|
|
|
497,584
|
|
Tax
benefit-stock options
|
|
|
—
|
|
|
—
|
|
|
245,760
|
|
|
—
|
|
|
245,760
|
|
Share
based compensation
|
|
|
—
|
|
|
—
|
|
|
1,777,623
|
|
|
—
|
|
|
1,777,623
|
|
Net
income for the period
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,341,827
|
|
|
2,341,827
|
|
Balances,
March 31, 2006
|
|
|
15,890,468
|
|
|
158,905
|
|
|
73,502,185
|
|
|
(15,945,344
|
)
|
|
57,715,746
|
|
Proceeds
from sale of common stock, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
offering costs of $6,095,000
|
|
|
2,005,991
|
|
|
20,060
|
|
|
90,673,700
|
|
|
—
|
|
|
90,693,760
|
|
Stock
options exercised
|
|
|
215,307
|
|
|
2,153
|
|
|
2,148,074
|
|
|
—
|
|
|
2,150,227
|
|
Tax
benefit—stock options
|
|
|
—
|
|
|
—
|
|
|
2,614,691
|
|
|
—
|
|
|
2,614,691
|
|
Share
based compensation
|
|
|
—
|
|
|
—
|
|
|
3,184,872
|
|
|
—
|
|
|
3,184,872
|
|
Net
income for the period
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,525,981
|
|
|
2,525,981
|
|
Balances,
June 30, 2006
|
|
|
18,111,766
|
|
$
|
181,118
|
|
$
|
172,123,522
|
|
$
|
(13,419,363
|
)
|
$
|
158,885,277
|
|
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
If
it is more likely than not that some portion or all of a deferred tax asset
will
not be realized, a valuation allowance is recorded. The valuation allowance
is
based on management's judgment as to future taxable income in light of
historical results, the current environment, forecasted performance and other
factors.
Comprehensive
Income
Comprehensive
income is the same as net income for the three and six months ended June 30,
2006 and 2005.
Reclassification
Certain
prior year amounts have been reclassified to conform with the current year
presentation.
Recent
Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes”, an interpretation of FASB Statement No. 109
“Accounting for Income Taxes”
(the
“Interpretation”). This Interpretation 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. This
Interpretation 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 this Interpretation 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 is greater than
50
percent likely of being realized upon settlement. The Interpretation is
effective for fiscal years beginning after December 15, 2006. The provisions
of
this Interpretation must be applied to all tax positions upon initial adoption
of this Interpretation. The cumulative effect of applying the provisions of
this
Interpretation must be reported as an adjustment to the opening balance of
retained earnings for that fiscal year. Management has not yet determined what
impact, if any, the adoption of this Interpretation will have on our financial
statements.
In
February 2006, the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments,
which
amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities (“SFAS
No. 155”), 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. Earlier adoption is permitted, provided the Company
has not yet issued financial statements, including for interim periods, for
that
fiscal year. The Company does not expect the adoption of SFAS No. 155 to have
a
material impact on its consolidated financial position, results of operations
or
cash flows as the Company currently has no financial instruments within the
scope of SFAS No. 155.
NOTE
2 - SEGMENT INFORMATION
The
Company currently operates in two reportable business segments: online
publishing, and print publishing and licensing. The online publishing division
is primarily engaged in the sale of advertising, sponsorships, and hyperlinks
in
connection with the Company’s Web site, Bankrate.com. The print publishing and
licensing division is primarily engaged in the sale of advertising in the
Mortgage Guide rate tables, newsletter subscriptions, and licensing of
research information. The acquired operations of FastFind and Interest.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 three and six
months ended June 30, 2006. The Company had two online customers that accounted
for approximately 12% and 10%, respectively, of total revenue for the three
months ended June 30, 2005. Those same customers accounted for 11% and 9%,
respectively, of total revenue for the six months ended June 30, 2005. No
material revenues were generated outside of the United States.
Summarized
segment information as of, and for, the three and six months ended June 30,
2006
and 2005 is presented below.
|
|
|
|
Print
|
|
|
|
|
|
|
|
Online
|
|
Publishing
|
|
|
|
|
|
|
|
Publishing
|
|
and
Licensing
|
|
Other
|
|
Total
|
|
Three
Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
15,464,987
|
|
$
|
4,201,383
|
|
$
|
—
|
|
$
|
19,666,370
|
|
Cost
of revenue
|
|
|
2,806,868
|
|
|
3,773,258
|
|
|
—
|
|
|
6,580,126
|
|
Gross
margin
|
|
|
12,658,119
|
|
|
428,125
|
|
|
—
|
|
|
13,086,244
|
|
Sales
|
|
|
1,247,916
|
|
|
—
|
|
|
—
|
|
|
1,247,916
|
|
Marketing
|
|
|
1,188,918
|
|
|
—
|
|
|
—
|
|
|
1,188,918
|
|
Product
development
|
|
|
633,177
|
|
|
172,016
|
|
|
—
|
|
|
805,193
|
|
General
and administrative expenses
|
|
|
4,650,217
|
|
|
1,246,526
|
|
|
—
|
|
|
5,896,743
|
|
Depreciation
and amortization
|
|
|
491,533
|
|
|
73,120
|
|
|
—
|
|
|
564,653
|
|
Other
income, net
|
|
|
—
|
|
|
—
|
|
|
624,975
|
|
|
624,975
|
|
Provision
for income taxes
|
|
|
—
|
|
|
—
|
|
|
(1,481,815
|
)
|
|
(1,481,815
|
)
|
Segment
profit (loss)
|
|
$
|
4,446,358
|
|
$
|
(1,063,537
|
)
|
$
|
(856,840
|
)
|
$
|
2,525,981
|
|
Goodwill
|
|
$
|
26,088,711
|
|
$
|
3,941,522
|
|
$
|
—
|
|
$
|
30,030,233
|
|
Total
assets
|
|
$
|
47,507,665
|
|
$
|
8,636,965
|
|
$
|
109,934,644
|
|
$
|
166,079,274
|
|
|
|
|
|
Print
|
|
|
|
|
|
|
|
Online
|
|
Publishing
|
|
|
|
|
|
|
|
Publishing
|
|
and
Licensing
|
|
Other
|
|
Total
|
|
Three
Months Ended June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
11,204,023
|
|
$
|
1,161,007
|
|
$
|
—
|
|
$
|
12,365,030
|
|
Cost
of revenue
|
|
|
1,823,127
|
|
|
1,075,375
|
|
|
—
|
|
|
2,898,502
|
|
Gross
margin
|
|
|
9,380,896
|
|
|
85,632
|
|
|
—
|
|
|
9,466,528
|
|
Sales
|
|
|
970,597
|
|
|
—
|
|
|
—
|
|
|
970,597
|
|
Marketing
|
|
|
1,713,010
|
|
|
—
|
|
|
—
|
|
|
1,713,010
|
|
Product
development
|
|
|
462,818
|
|
|
47,959
|
|
|
—
|
|
|
510,777
|
|
General
and administrative
|
|
|
2,013,054
|
|
|
208,601
|
|
|
—
|
|
|
2,221,655
|
|
Depreciation
and amortization
|
|
|
188,774
|
|
|
19,561
|
|
|
—
|
|
|
208,335
|
|
Other
income
|
|
|
—
|
|
|
—
|
|
|
212,144
|
|
|
212,144
|
|
Provision
for income taxes
|
|
|
—
|
|
|
—
|
|
|
(1,540,634
|
)
|
|
(1,540,634
|
)
|
Segment
profit (loss)
|
|
$
|
4,032,644
|
|
$
|
(190,490
|
)
|
$
|
(1,328,490
|
)
|
$
|
2,513,664
|
|
Total
assets
|
|
$
|
7,437,084
|
|
$
|
561,076
|
|
$
|
43,547,347
|
|
$
|
51,545,507
|
|
|
|
|
|
Print
|
|
|
|
|
|
|
|
Online
|
|
Publishing
|
|
|
|
|
|
|
|
Publishing
|
|
and
Licensing
|
|
Other
|
|
Total
|
|
Six
Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
31,080,986
|
|
$
|
8,373,816
|
|
$
|
—
|
|
$
|
39,454,802
|
|
Cost
of revenue
|
|
|
5,707,452
|
|
|
7,315,368
|
|
|
—
|
|
|
13,022,820
|
|
Gross
margin
|
|
|
25,373,534
|
|
|
1,058,448
|
|
|
—
|
|
|
26,431,982
|
|
Sales
|
|
|
2,336,191
|
|
|
—
|
|
|
—
|
|
|
2,336,191
|
|
Marketing
|
|
|
2,040,261
|
|
|
—
|
|
|
—
|
|
|
2,040,261
|
|
Product
development
|
|
|
1,441,365
|
|
|
388,331
|
|
|
—
|
|
|
1,829,696
|
|
General
and administrative
|
|
|
9,187,129
|
|
|
2,247,438
|
|
|
—
|
|
|
11,434,567
|
|
Depreciation
and amortization
|
|
|
961,452
|
|
|
160,963
|
|
|
—
|
|
|
1,122,415
|
|
Other
income
|
|
|
—
|
|
|
—
|
|
|
645,305
|
|
|
645,305
|
|
Provision
for income taxes
|
|
|
—
|
|
|
—
|
|
|
(3,446,349
|
)
|
|
(3,446,349
|
)
|
Segment
profit (loss)
|
|
$
|
9,407,136
|
|
$
|
(1,738,284
|
)
|
$
|
(2,801,044
|
)
|
$
|
4,867,808
|
|
Goodwill
|
|
$
|
26,088,711
|
|
$
|
3,941,522
|
|
$
|
—
|
|
$
|
30,030,233
|
|
Total
assets
|
|
$
|
47,507,665
|
|
$
|
8,636,965
|
|
$
|
109,934,644
|
|
$
|
166,079,274
|
|
|
|
|
|
Print
|
|
|
|
|
|
|
|
Online
|
|
Publishing
|
|
|
|
|
|
|
|
Publishing
|
|
and
Licensing
|
|
Other
|
|
Total
|
|
Six
Months Ended June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
20,470,576
|
|
$
|
2,316,303
|
|
$
|
—
|
|
$
|
22,786,879
|
|
Cost
of revenue
|
|
|
3,462,602
|
|
|
2,178,544
|
|
|
—
|
|
|
5,641,146
|
|
Gross
margin
|
|
|
17,007,974
|
|
|
137,759
|
|
|
—
|
|
|
17,145,733
|
|
Sales
|
|
|
1,812,444
|
|
|
—
|
|
|
—
|
|
|
1,812,444
|
|
Marketing
|
|
|
3,232,633
|
|
|
—
|
|
|
—
|
|
|
3,232,633
|
|
Product
development
|
|
|
911,719
|
|
|
103,164
|
|
|
—
|
|
|
1,014,883
|
|
General
and administrative
|
|
|
3,715,512
|
|
|
420,421
|
|
|
—
|
|
|
4,135,933
|
|
Depreciation
and amortization
|
|
|
357,160
|
|
|
40,414
|
|
|
—
|
|
|
397,574
|
|
Other
income
|
|
|
—
|
|
|
—
|
|
|
574,112
|
|
|
574,112
|
|
Provision
for income taxes
|
|
|
—
|
|
|
—
|
|
|
(2,708,024
|
)
|
|
(2,708,024
|
)
|
Segment
profit (loss)
|
|
$
|
6,978,505
|
|
$
|
(426,239
|
)
|
$
|
(2,133,912
|
)
|
$
|
4,418,354
|
|
Total
assets
|
|
$
|
7,437,084
|
|
$
|
561,076
|
|
$
|
43,547,347
|
|
$
|
51,545,507
|
|
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
non-employee members of the Board of Directors in the form of incentive and
non-qualified stock options and restricted stock. Currently, the Company grants
stock options from the 1997 Equity Compensation Plan, as amended, and the 1999
Equity Compensation Plan, as amended. The Board of Directors has the sole
authority to determine who receives such grants, the type, size and timing
of
such grants, and to specify the terms of any non-competition agreements relating
to the grants.
Beginning
with the first quarter of fiscal 2006, the Company adopted SFAS No. 123R. See
Note 1 for a description of our adoption of SFAS No. 123R. The Company currently
uses the Black-Scholes option pricing model to determine the fair value of
its
stock options. The determination of the fair value of the awards on the date
of
grant using an option-pricing model is affected by the Company’s stock price, as
well as assumptions regarding a number of complex and subjective variables.
These variables include expected stock price volatility over the term of the
awards, actual and projected employee stock option exercise behaviors, risk-free
interest rates and expected dividends.
The
Company estimated the expected term of options granted 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 with remaining terms similar
to
the expected term 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 share
based compensation expense only for those awards that are expected to vest.
All
share based payment awards are amortized on a straight-line basis over the
requisite service periods of the awards, which are generally the vesting
periods.
If
factors change and the Company employs different assumptions for estimating
share 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 FASB Interpretation No. 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, Accounting
for Stock-Based Compensation,
as
amended by SFAS No. 148, 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 options granted during the three
and six-month periods ended June 30, 2006 and 2005 using the Black-Scholes
option pricing model together with a description of the assumptions used to
calculate the fair value. Options for 174,000 and 133,000 shares, respectively,
were granted during the three-month periods ended June 30, 2006 and 2005.
Options for 467,000 and 462,500 shares, respectively, were granted during the
six-month periods ended June 30, 2006 and 2005.
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Weighted
average exercise price
|
|
$
|
41.34
|
|
$
|
17.81
|
|
$
|
37.19
|
|
$
|
17.62
|
|
Expected
volatility
|
|
|
74.7
|
%
|
|
115
|
%
|
|
71.7
|
%
|
|
119
|
%
|
Weighted
average risk free rate
|
|
|
4.9
|
%
|
|
2.8
|
%
|
|
4.6
|
%
|
|
3.6
|
%
|
Expected
lives
|
|
|
4.75
years
|
|
|
5
years
|
|
|
4.75
years
|
|
|
5
years
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
The
share
based compensation recognized on our consolidated statement of income for the
three and six months ended June 30, 2006 is as follows:
|
|
Three
Months
|
|
Six
Months
|
|
|
|
Ended
June 30,
|
|
Ended
June 30,
|
|
Income
Statement Classifications
|
|
|
2006
|
|
|
2006
|
|
Cost
of revenue - online publishing
|
|
$
|
288,500
|
|
$
|
496,996
|
|
Cost
of revenue - print publishing and licensing
|
|
|
57,691
|
|
|
67,822
|
|
Sales
|
|
|
170,152
|
|
|
327,038
|
|
Product
development
|
|
|
133,101
|
|
|
246,632
|
|
General
and administrative
|
|
|
2,535,428
|
|
|
3,824,007
|
|
Total
|
|
$
|
3,184,872
|
|
$
|
4,962,495
|
|
The
following table sets forth the pro forma amounts of net income and net income
per share, for the three and six months ended June 30, 2005, that would have
resulted if the Company had accounted for its stock options under the fair
value
recognition provisions of SFAS No. 123R.
|
|
Three
Months
|
|
Six
Months
|
|
|
|
Ended
June 30,
|
|
Ended
June 30,
|
|
|
|
2005
|
|
2005
|
|
Net
income:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
2,513,664
|
|
$
|
4,418,354
|
|
Less
total share based employee compensation
|
|
|
|
|
|
|
|
determined
under fair value-based method for all
|
|
|
|
|
|
|
|
awards,
net of related tax effect
|
|
|
(816,218
|
)
|
|
(1,550,884
|
)
|
Pro
forma
|
|
$
|
1,697,446
|
|
$
|
2,867,470
|
|
Basic
and diluted net income per common share-reported:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
$
|
0.28
|
|
Diluted
|
|
|
0.15
|
|
|
0.27
|
|
Basic
and diluted net income per common share-pro forma:
|
|
|
|
|
|
|
|
Basic
|
|
|
0.11
|
|
|
0.18
|
|
Diluted
|
|
|
0.11
|
|
|
0.18
|
|
Weighted
average common shares outstanding-reported:
|
|
|
|
|
|
|
|
Basic
|
|
|
15,804,045
|
|
|
15,795,981
|
|
Diluted
|
|
|
16,590,763
|
|
|
16,578,483
|
|
Weighted
average common shares outstanding-pro forma:
|
|
|
|
|
|
|
|
Basic
|
|
|
15,804,045
|
|
|
15,795,981
|
|
Diluted
|
|
|
15,921,064
|
|
|
15,905,050
|
|
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
flows and increases net financing cash flows in periods after adoption on
January 1, 2006. Total cash flow will remain unchanged from what would have
been
reported under prior accounting rules.
As
of
June 30, 2006, there was approximately $22.7 million of unrecognized
compensation costs, adjusted for estimated forfeitures, related to non-vested
stock options. Total unrecognized compensation cost will be adjusted for future
changes in estimated forfeitures.
General
Stock Option Information
The
following table sets forth the summary of option activity under the Company’s
stock option plans for the six months ended June 30, 2006:
|
|
Number
of
|
|
Price Per
|
|
Weighted
Average
|
|
|
|
Shares
|
|
Share
|
|
Exercise
Price
|
|
Balance,
December 31, 2005
|
|
|
2,631,955
|
|
$
|
0.85
to $32.25
|
|
$
|
12.69
|
|
Granted
|
|
|
467,000
|
|
$
|
28.91
to $47.47
|
|
$
|
37.19
|
|
Exercised
|
|
|
(247,898
|
)
|
$
|
0.85
to $18.44
|
|
$
|
10.69
|
|
Forfeited
|
|
|
(68,322
|
)
|
$
|
0.85
to $35.75
|
|
$
|
23.54
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance,
June 30, 2006
|
|
|
2,782,735
|
|
$
|
0.85
to $47.47
|
|
$
|
16.70
|
|
Information
regarding stock options outstanding at June 30, 2006 is summarized
below:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
Number
|
|
Remaining Contractual
Life
|
|
Number
|
|
|
|
Prices
|
|
|
of
Shares
|
|
|
(Years)
|
|
|
of
Shares
|
|
|
Price
|
|
$0.85
|
|
|
42,134
|
|
|
3.42
|
|
|
42,134
|
|
$
|
0.85
|
|
$1.75
to $6.75
|
|
|
105,604
|
|
|
6.35
|
|
|
105,604
|
|
|
2.69
|
|
$8.11
to $10.01
|
|
|
1,230,000
|
|
|
5.13
|
|
|
860,208
|
|
|
9.22
|
|
$10.30
to $17.13
|
|
|
453,810
|
|
|
4.75
|
|
|
238,664
|
|
|
13.49
|
|
$18.26
to $28.91
|
|
|
345,187
|
|
|
5.81
|
|
|
75,354
|
|
|
18.39
|
|
$32.25
to $47.47
|
|
|
606,000
|
|
|
6.60
|
|
|
—
|
|
|
—
|
|
|
|
|
2,782,735
|
|
|
5.49
|
|
|
1,321,964
|
|
$
|
9.73
|
|
NOTE
4 - INCOME TAXES
The
Company’s effective tax rate decreased by 4% in the second quarter of 2006,
primarily the result of adopting SFAS 123R as of January 1, 2006. Overall,
the
Company’s effective tax rate increased in the six months ended June 30, 2006
compared to 2005 due to adopting SFAS 123R as of January 1, 2006, as well as
expansion of its operations into certain higher state tax
jurisdictions.
NOTE
5
- COMMITMENTS AND CONTINGENCIES
In
March
2002, American Interbanc Mortgage, LLC (“AI”), a mortgage lender that advertised
on the Web site, filed suit in the Superior Court of California against several
of AI's competitors (not including the Company) who also advertised on the
Web
site for:
(i)
false
advertising under the federal Lanham Act:
(ii)
common law unfair competition: and
(iii)
violations of certain sections of the California Business and Professions
Code.
In
August
2002, the Company declined to renew AI's advertising contract. In December
2002,
AI filed a First Amended Complaint (the “Amended Complaint”), adding the Company
as a defendant, and asserting an additional claim for an alleged violation
of
the Cartwright Act, California's antitrust law, alleging that the Company
conspired with all of the co-defendants (various mortgage lenders and mortgage
brokers) to allow them to engage in allegedly false advertising on the Web
site
while also precluding AI from advertising on the Web site. The Amended Complaint
sought an undisclosed sum of monetary damages, restitution of profits,
compensation acquired as a result of the allegedly wrongful conduct, attorney's
fees, costs, and injunctive relief. The Company filed a special motion to strike
the Amended Complaint under California's anti-SLAPP (Strategic Lawsuits Against
Public Participation) statute, contending that:
(i)
AI's
claims against the Company were all based on publishing decisions protected
by
the First Amendment of the United States Constitution and its counterpart in
the
California Constitution; and
(ii)
AI
could not establish a probability of success on the merits of its
claims.
The
Company also filed a demurrer to the Amended Complaint, contending that AI
failed to state facts constituting a valid cause of action against the Company.
AI filed motions:
(i)
for a
preliminary injunction against the Company, seeking an order requiring the
Company to publish AI's advertisements and to cease publishing the alleged
false
advertisements of AI's competitors, and
(ii)
seeking sanctions against the Company for having filed an allegedly “frivolous”
anti-SLAPP motion.
By
Orders
dated April 24, and May 22, 2003, the trial court:
(i)
denied the Company’s anti-SLAPP motion,
(ii)
granted the Company’s demurrer as to AI's common law unfair competition claim,
but otherwise overruled the demurrer,
(iii)
denied AI's motion for a preliminary injunction, and
(iv)
denied AI's motion for sanctions.
On
May
22, 2003, the Company appealed the order denying its anti-SLAPP claim, and
AI,
among other things, appealed the order denying its motion for preliminary
injunction. The Court of Appeal of the State of California, Fourth Appellate
District, affirmed the various appeals and denied all relief requested. On
January 15, 2004, AI filed its Second Amended Complaint asserting five counts,
including claims for:
(i)
false
advertising under the Lanham Act, against all defendants,
(ii)
restraint of trade under the Cartwright Act, against all
defendants,
(iii)
intentional interference with economic relations, against defendants other
than
the Company,
(iv)
intentional interference with prospective economic advantage, against some
defendants but no longer against the Company, and
(v)
false
advertising and unfair trade practices, against all defendants.
The
Second Amended Complaint seeks unspecified damages, including treble damages,
interest, attorney's fees, and costs, disgorgement of property and profits
allegedly wrongfully acquired, restitution, an accounting, and injunctive
relief.
On
December 20, 2004, the Company received a Statement of Damages (the “Statement”)
by which AI, for the first time, indicated the amount of damages it allegedly
seeks. In the Statement AI states, without factual explanation, that it “is
informed and believes that its damages are not less than $16.5 million,”
allegedly “incurred as a proximate result of [all] defendants' wrongful
conduct.” AI seeks to have those damages trebled and also seeks “reasonable
attorney's fees pursuant to 15 U.S.C. Section 1117(b) and California Business
and Professions Code Section 16750(a),” and costs. The Company believes that all
of AI's claims against it are factually and legally without merit.
The
Company will continue to vigorously defend itself against all of AI's claims.
The Company has filed two motions for summary adjudication. The first, seeking
summary adjudication of AI's false advertising causes of action, was
denied. The second, seeking summary adjudication of AI's conspiracy in
restraint of trade causes of action, is pending and the parties are awaiting
the
Court's ruling. Trial of the matter is currently scheduled to begin on November
6, 2006. Currently, the outcome of this matter is uncertain. The Company cannot
estimate at this time the amount of loss, if any, which could result from an
adverse resolution of this litigation.
NOTE
6 - SUBSEQUENT EVENT
On
August
2, 2006, the Company announced that it signed an agreement to acquire three
Web
sites owned and operated by East West Mortgage, Inc. for $4,400,000 in cash.
The
Web sites to be purchased include Mortgage-calc.com, Mortgagecalc.com and
Mortgagemath.com. The asset purchase closed on August 4, 2006.
Item
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The
following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in this Quarterly
Report on Form 10-Q.
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
In
addition to historical information, this Quarterly Report on Form 10-Q contains
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, among
others, statements about our beliefs, plans, objectives, goals, expectations,
estimates and intentions that are subject to significant risks and uncertainties
and are subject to change based on various factors, many of which are beyond
our
control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,”
“estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar
expressions are intended to identify forward-looking statements.
All
forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from those set
forth in our forward-looking statements. Please see the “Introductory Note” and
Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2005, as amended, and Part II Item A. “Risk Factors” in this
Quarterly Report on Form 10-Q, and in our other filings made from time to time
with the SEC after the date of this Quarterly Report.
Business
Overview
Bankrate,
Inc. (the "Company", “Bankrate”, “We”, “Us”, or “Our”) owns and operates 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 including mortgages, credit cards, new and used automobile loans,
money
market accounts, certificates of deposit, checking and ATM fees, home equity
loans and online banking fees. Additionally, we provide financial applications
and information to a network of distribution partners and also through national
and state publications. Bankrate.com provides the tools and information that
can
help consumers make better financial decisions.
We
regularly survey approximately 4,800 financial institutions in more than 575
markets in all 50 states in order to provide the most current objective,
unbiased information. Hundreds of print and online partner publications depend
on Bankrate.com as the trusted source for financial rates and
information.
Approximately
30 years ago, we began as a print publisher of the newsletter
Bank
Rate Monitor.
Our
rate tables provide, at no cost to the consumer, a detailed list of institutions
by market and include relevant details to help consumers compare
products.
We
continue to enhance our offerings in order to provide Bankrate.com users with
the most complete experience. Features such as financial calculators and email
newsletters allow users to interact with our site. Our
Rate
Trend Index
is a
weekly poll of industry insiders designed to help consumers forecast interest
rate trends. We also have broadened our offerings to include channels on
investing, taxes, small business and financial advice. Each channel offers
a
unique look at its particular topic. Bankrate.com users can find advice and
tips
from the Tax channel, obtain business ideas from the Small Business channel
and
ask a financial expert a question in the Advice channel.
We
believe that the recognition of our research as a leading source of independent,
objective information on banking and credit products is essential to our
success. As a result, we have sought to maximize distribution of our research
to
gain brand recognition as a research authority. We are seeking to build greater
brand awareness of our Web site and to reach a greater number of online users.
Bankrate.com had over 46 million unique visitors in 2005, according to
Omniture.
We
operate a traditional media business on the Internet. We have a high quality,
poised-to-transact audience that has been educated by us and is ready to do
business with our advertisers. We are the number one site for financial
information and advice according to comScore Media Metrix. We sell graphic
advertisements and hyperlinks on our Web site, we publish rates and sell
advertisements in metropolitan newspapers, and we license our rates and
editorial content.
We
believe our potential market is enormous and is still in the early growth stages
of consumer awareness of the Internet as a personal finance tool. Financial
institutions are still in the early stages of adopting the Internet for
advertising products and customer acquisition. Their online advertising spending
is still a very small percentage of their overall advertising
budgets.
We
compete for Internet advertising revenues with the personal finance sections
of
general interest sites such as Yahoo! Finance, AOL Personal Finance and MSN
Money; personal finance destination sites, such as The Motley Fool, CBS
MarketWatch, SmartMoney.com, Kiplinger.com and CNNMoney.com; e-commerce oriented
sites that include banking and credit products, such as LendingTree and
Pricegrabber; lead aggregators, such as LowerMyBills, iHomeowners and NexTag;
Print mortgage table sellers like National Financial News Service; rate listing
sites, such as MonsterMoving, Realtor.com/Move.com, Informa Research Services
and Checkinterestrates.com/CarsDirect; and key word cost-per-click advertising
sites/networks such as Google, Yahoo! Search Marketing, Ask Jeeves and MIVA.
Our
traffic has grown from 700,000 unique visitors per month in early 2000 to
approximately 5 million unique visitors per month in 2006 according to
Omniture.
On
November 30, 2005, we completed the acquisition of
Wescoco LLC, a Delaware limited liability company d/b/a "FastFind" ("FastFind").
On December 1, 2005, we completed the acquisition of Mortgage Market Information
Services, Inc., an Illinois corporation ("MMIS"), and Interest.com, an Illinois
corporation ("Interest.com"). These two acquisitions affect the comparability
of
our results of operations for the three and six-month periods ended June 30,
2006 and 2005.
The
key
drivers to our business are the number of advertisers on our Web site and the
number of consumers visiting our Web site or page views. We added over 60 new
graphic advertisers and over 180 new hyperlink advertisers in 2005. The
number of advertisers has grown from approximately 320 in 2001 to over 400
in
2006. Page views have grown from 237 million in 2001 to 430 million in 2005,
and
were 239.4 million in the first half of 2006.
We
have
improved our gross margin from 71% in 2001 to 74% in 2005. Our gross margin
in
the first half of 2006 was 68% due to the inclusion of the results of Mortgage
Market Information Services, Inc. (“MMIS”), which we acquired in the fourth
quarter of 2005, and we expect our gross margin to remain at approximately
this
level for the remainder of 2006. MMIS added 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 which we expect to continue for the remainder of
2006. We
have
reduced other operating expenses as a percentage of total revenue from 75%
in 2001 to 49% in 2006. Excluding stock compensation expense, barter expense,
legal settlement charges and severance charges, operating expenses as a
percentage of total revenue (excluding barter revenue) decreased from 70% in
2001 to 33% in 2006. Our income before income taxes as a percentage of total
revenue has grown to 20% in 2006, 37% excluding stock compensation
expenses.
Adjusted
Other Operating Expenses and Total Revenue, Excluding
Barter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2
06
|
|
Q1
06
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Total
revenue
|
|
$
|
19,667
|
|
$
|
19,788
|
|
$
|
49,049
|
|
$
|
39,204
|
|
$
|
36,621
|
|
$
|
26,571
|
|
$
|
18,257
|
|
Barter
revenue
|
|
|
—
|
|
|
—
|
|
|
(2,254
|
)
|
|
(3,088
|
)
|
|
(3,164
|
)
|
|
(2,912
|
)
|
|
(2,558
|
)
|
|
|
|
19,667
|
|
|
19,788
|
|
|
46,795
|
|
|
36,116
|
|
|
33,457
|
|
|
23,659
|
|
|
15,699
|
|
Other
operating expenses
|
|
|
9,703
|
|
|
9,060
|
|
|
21,993
|
|
|
21,130
|
|
|
19,301
|
|
|
15,334
|
|
|
13,724
|
|
Barter
expense
|
|
|
—
|
|
|
—
|
|
|
(2,254
|
)
|
|
(3,088
|
)
|
|
(3,164
|
)
|
|
(2,920
|
)
|
|
(2,750
|
)
|
Severance
charge
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(260
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Legal
settlement charge
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(510
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock
compensation expense
|
|
|
(3,185
|
)
|
|
(1,559
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
6,518
|
|
$
|
7,501
|
|
$
|
19,739
|
|
$
|
17,272
|
|
$
|
16,137
|
|
$
|
12,414
|
|
$
|
10,974
|
|
Adjusted
other operating expenses as a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
percentage
of total revenue
|
|
|
33
|
%
|
|
38
|
%
|
|
42
|
%
|
|
48
|
%
|
|
48
|
%
|
|
52
|
%
|
|
70
|
%
|
Critical
Accounting Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make judgments, estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent gains and losses at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
We base our judgments, estimates and assumptions on historical experience and
various other factors that we believe to be reasonable under the circumstances.
Actual results could differ materially from these estimates under different
assumptions or conditions. We evaluate our judgments, estimates and assumptions
on a regular basis and make changes accordingly. We believe that the judgments,
estimates and assumptions involved in the accounting for income taxes, the
allowance for doubtful accounts receivable, stock-based compensation and legal
contingencies have the greatest potential impact on our financial statements,
so
we consider these to be our critical accounting policies. Below we discuss
the
critical accounting estimates associated with these policies. For further
information on our critical accounting policies, see the discussion in the
section titled “Results of Operations and Critical Accounting Policies” below,
and Note 1 in Notes to Financial Statements in our 2005 Form 10-K.
Income
Taxes
As
required by Statement of Financial Accounting Standards (“SFAS”) No. 109, we use
the asset and liability method of accounting for income taxes. Under this
method, income tax expense is recognized for the amount of taxes payable or
refundable for the current year. Deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the financial reporting and the tax bases of assets and liabilities,
and
for operating losses and tax credit carryforwards. Management must make
assumptions, judgments and estimates to determine our current provision for
income taxes and our deferred tax assets and liabilities, and any valuation
allowance to be recorded against a deferred tax asset. Our assumptions,
judgments and estimates relative to the current provision for income taxes
take
into account current tax laws and our interpretation of current tax laws.
Although we believe our assumptions, judgments and estimates are reasonable,
changes in tax laws or our interpretation of tax laws could significantly impact
the amounts provided for income taxes in our consolidated financial statements.
Our assumptions, judgments and estimates relative to the value of deferred
tax
assets take into account predictions of the amount and category of future
taxable income. Actual operating results and the underlying amount and category
of income in future years could render our current assumptions, judgments and
estimates of recoverable net deferred tax assets inaccurate. Any of the
assumptions, judgments and estimates could cause our actual income tax
obligations to differ from our estimates and could materially impact our
financial position and results of operations.
Allowance
for Doubtful Accounts Receivable
We
maintain an allowance for doubtful accounts for estimated losses resulting
from
the inability or unwillingness of our customers to make required payments.
We
look at historical write-offs and sales growth when determining the adequacy
of
the allowance. Should the financial condition of our customers deteriorate,
resulting in an impairment of their ability to make payments, or if the level
of
accounts receivable increases, the need for possible additional allowances
may
be necessary. Any additions to the allowance for doubtful accounts are recorded
as bad debt expense and included in general and administrative expenses.
Share
Based Compensation
We
adopted the provisions of, and account for share based compensation in
accordance with, SFAS 123R - revised 2004 (“SFAS No. 123R”) Share-Based
Payment,
which
replaced SFAS No. 123, Accounting
for Stock-Based Compensation
and
supersedes Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees,
during
the quarter ended March 31, 2006. We elected the modified-prospective method,
under which prior periods are not revised for comparative purposes. Under the
fair value recognition provisions of this statement, share based compensation
is
measured at the grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the requisite service
period, which is the vesting period.
We
currently use the Black-Scholes option pricing model to determine the fair
value
of our stock options. The determination of the fair value of the awards on
the
date of grant using an option-pricing model is affected by our stock price
as
well as assumptions regarding a number of complex and subjective variables.
These variables include our expected stock price volatility over the term of
the
awards, actual and projected employee stock option exercise behaviors, risk-free
interest rate and expected dividends.
We
estimate the expected term of options granted by taking the average of the
vesting term and the contractual term of the option, as illustrated in the
Staff
Accounting Bulletin (“SAB 107”). We estimate the volatility of our common stock
by using a weighted average of historical stock price volatility and implied
volatility in market traded options in accordance with SAB 107. Our decision
to
use a weighted average volatility factor was based upon the relatively short
period of availability of data on actively traded options on our common stock,
and our assessment that implied volatility is more representative of future
stock price trends than historical volatility. We base the risk-free interest
rate that we use in the option pricing model on U.S. Treasury constant maturity
issues with remaining terms similar to the expected term on the options. We
do
not anticipate paying any cash dividends in the foreseeable future and therefore
use an expected dividend yield of zero in the option pricing model. We are
required to estimate forfeitures at the time of grant and revise those estimates
in subsequent periods if actual forfeitures differ from those estimates. We
use
historical data to estimate pre-vesting option forfeitures and record share
based compensation expense only for those awards that are expected to vest.
All
share based payment awards are amortized on a straight-line basis over the
requisite service periods of the awards, which are generally the vesting
periods.
If
factors change and we employ different assumptions for estimating share based
compensation expense in future periods or if we decide to use a different
valuation model, the future periods may differ significantly from what we have
recorded in the current period and could materially affect our operating income,
net income and net income per share.
The
Black-Scholes option-pricing model was developed for use in estimating the
fair
value of traded options that have no vesting restrictions and are fully
transferable, characteristics not present in our option grants. Existing
valuation models, including the Black-Scholes and lattice binomial models,
may
not provide reliable measures of the fair values of our stock-based
compensation. Consequently, there is a risk that our estimates of the fair
values of our stock-based compensation awards on the grant dates may bear little
resemblance to the actual values realized upon the exercise, expiration, early
termination or forfeiture of those stock-based payments in the future. Certain
stock-based payments, such as employee stock options, may expire worthless
or
otherwise result in zero intrinsic value as compared to the fair values
originally estimated on the grant date and reported in our financial statements.
Alternatively, value may be realized from these instruments that are
significantly higher than the fair values originally estimated on the grant
date
and reported in our financial statements. There currently is no market-based
mechanism or other practical application to verify the reliability and accuracy
of the estimates stemming from these valuation models, nor is there a means
to
compare and adjust the estimates to actual values.
The
guidance in SFAS 123R and SAB 107 is relatively new. The application of these
principles may be subject to further interpretation and refinement over time.
There are significant differences among valuation models, and there is a
possibility that we will adopt different valuation models in the future. This
may result in a lack of consistency in future periods and materially affect
the
fair value estimate of share based payments. It may also result in a lack of
comparability with other companies that use different models, methods and
assumptions.
Share
based compensation expense recognized in our condensed consolidated statement
of
income for the three and six months ended June 30, 2006 is as
follows:
|
|
Three
Months
|
|
Six
Months
|
|
|
|
Ended
June 30,
|
|
Ended
June 30,
|
|
Income
Statement Classifications
|
|
|
2006
|
|
|
2006
|
|
Cost
of revenue - online publishing
|
|
$
|
288,500
|
|
$
|
496,996
|
|
Cost
of revenue - print publishing and licensing
|
|
|
57,691
|
|
|
67,822
|
|
Sales
|
|
|
170,152
|
|
|
327,038
|
|
Product
development
|
|
|
133,101
|
|
|
246,632
|
|
General
and administrative
|
|
|
2,535,428
|
|
|
3,824,007
|
|
Total
|
|
$
|
3,184,872
|
|
$
|
4,962,495
|
|
Legal
Contingencies
In
March
2002, American Interbanc Mortgage, LLC (“AI”), a mortgage lender that advertised
on Bankrate.com (the “Web site”), filed suit in the Superior Court of California
against several of AI's competitors (not including us) who also advertised
on
the Web site for:
(i)
false
advertising under the federal Lanham Act:
(ii)
common law unfair competition: and
(iii)
violations of certain sections of the California Business and Professions
Code.
In
August
2002, we declined to renew AI's advertising contract. In December 2002, AI
filed
a First Amended Complaint (the “Amended Complaint”), adding us as a defendant,
and asserting an additional claim for an alleged violation of the Cartwright
Act, California's antitrust law, alleging that we conspired with all of the
co-defendants (various mortgage lenders and mortgage brokers) to allow them
to
engage in allegedly false advertising on the Web site while also precluding
AI
from advertising on the Web site. The Amended Complaint sought an undisclosed
sum of monetary damages, restitution of profits, compensation acquired as a
result of the allegedly wrongful conduct, attorney's fees, costs, and injunctive
relief. We filed a special motion to strike the Amended Complaint under
California's anti-SLAPP (Strategic Lawsuits Against Public Participation)
statute, contending that:
(i)
AI's
claims against us were all based on publishing decisions protected by the First
Amendment of the United States Constitution and its counterpart in the
California Constitution; and
(ii)
AI
could not establish a probability of success on the merits of its
claims.
We
also
filed a demurrer to the Amended Complaint, contending that AI failed to state
facts constituting a valid cause of action against us. AI filed
motions:
(i)
for a
preliminary injunction against us, seeking an order requiring us to publish
AI's
advertisements and to cease publishing the alleged false advertisements of
AI's
competitors, and
(ii)
seeking sanctions against us for having filed an allegedly “frivolous”
anti-SLAPP motion.
By
Orders
dated April 24, and May 22, 2003, the trial court:
(i)
denied our anti-SLAPP motion,
(ii)
granted our demurrer as to AI's common law unfair competition claim, but
otherwise overruled
the
demurrer,
(iii)
denied AI's motion for a preliminary injunction, and
(iv)
denied AI's motion for sanctions.
On
May
22, 2003, we appealed the order denying our anti-SLAPP claim, and AI, among
other things, appealed the order denying its motion for preliminary injunction.
The Court of Appeal of the State of California, Fourth Appellate District,
affirmed the various appeals and denied all relief requested. On January 15,
2004, AI filed its Second Amended Complaint asserting five counts, including
claims for:
(i)
false
advertising under the Lanham Act, against all defendants,
(ii)
restraint of trade under the Cartwright Act, against all
defendants,
(iii)
intentional interference with economic relations, against defendants other
than
us,
(iv)
intentional interference with prospective economic advantage, against some
defendants but no longer against us, and
(v)
false
advertising and unfair trade practices, against all defendants.
The
Second Amended Complaint seeks unspecified damages, including treble damages,
interest, attorney's fees, and costs, disgorgement of property and profits
allegedly wrongfully acquired, restitution, an accounting, and injunctive
relief.
On
December 20, 2004, we received a Statement of Damages (the “Statement”) by which
AI, for the first time, indicated the amount of damages it allegedly seeks.
In
the Statement AI states, without factual explanation, that it “is informed and
believes that its damages are not less than $16.5 million,” allegedly “incurred
as a proximate result of [all] defendants' wrongful conduct.” AI seeks to have
those damages trebled and also seeks “reasonable attorney's fees pursuant to 15
U.S.C. Section 1117(b) and California Business and Professions Code Section
16750(a),” and costs. We believe that all of AI's claims against us are
factually and legally without merit.
We
will
continue to vigorously defend against all of AI's claims. We have filed two
motions for summary adjudication. The first, seeking summary adjudication of
AI's false advertising causes of action, was denied. The second, seeking
summary adjudication of AI's conspiracy in restraint of trade causes of action,
is pending and the parties are awaiting the Court's ruling. Trial of the matter
is currently scheduled to begin on November 6, 2006. Currently, the outcome
of
this matter is uncertain. We cannot estimate at this time the amount of loss,
if
any, which could result from an adverse resolution of this
litigation.
Significant
Developments
On
August
2, 2006, we announced that we signed an agreement to acquire three Web sites
owned and operated by East West Mortgage, Inc. for $4,400,000 in cash. The
Web
sites to be purchased include Mortgage-calc.com, Mortgagecalc.com and
Mortgagemath.com. The asset purchase closed on August 4, 2006.
Results
of Operations and Critical Accounting Policies
The
following is
our
analysis
of the
results
of operations for the periods
covered by our financial statements that we believe are critical
to an
understanding of our results of operations and to making the estimates and
judgments underlying our financial statements. This analysis should be read
in
conjunction with our interim condensed consolidated financial statements,
including the related notes. See “Results of Operations and Critical Accounting
Policies” in Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” in our 2005 Form 10-K for additional
information concerning the revenue and expense components of our online and
print publishing operations.
Results
of Operations
Three
and Six Months Ended June 30, 2006 Compared to the Three and Six Months Ended
June 30, 2005
Total
Revenue
Revenue:
|
|
|
Q1
05
|
|
|
Q2
05
|
|
|
Q3
05
|
|
|
Q4
05
|
|
|
Q1
06
|
|
|
Q2
06
|
|
Online
publishing
|
|
$
|
9,266,553
|
|
$
|
11,204,023
|
|
$
|
11,214,265
|
|
$
|
11,611,543
|
|
$
|
15,615,999
|
|
$
|
15,464,987
|
|
Print
publishing and licensing
|
|
|
1,155,296
|
|
|
1,161,007
|
|
|
1,157,758
|
|
|
2,278,586
|
|
|
4,172,433
|
|
|
4,201,383
|
|
Total
revenue
|
|
$
|
10,421,849
|
|
$
|
12,365,030
|
|
$
|
12,372,023
|
|
$
|
13,890,129
|
|
$
|
19,788,432
|
|
$
|
19,666,370
|
|
Revenue
Online
Publishing Revenue
We
sell
graphical advertisements on our 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, or CPM, the advertiser receives. The amount of advertising we
sell
is a function of (1) the number of visitors to our Web site, (2) the number
of
ad pages we serve to those visitors, (3) the number of advertisements per page,
and (4) the capacity of our sales force. Advertising
sales are invoiced monthly at amounts based on specific contract terms. When
the
number of impressions over the contract term is guaranteed, the monthly invoiced
amount is based on the monthly contractual number of impressions to be delivered
at the contractual price, or CPM. Revenue
is recognized monthly based on the actual number of impressions delivered,
and
the revenue corresponding to any under-delivery is deferred as unearned income
on the balance sheet and is recognized later when the under-delivery is served.
When the number of impressions over the contract term is not guaranteed, the
monthly invoiced amount is determined and revenue is recognized based on the
actual number of impressions delivered at the contractual price or
CPM. Additionally,
we generate revenue on a “per action” basis (i.e., a purchase or completion of
an application) when a visitor to our Web site transacts with one of our
advertisers after viewing an advertisement. Revenue is recognized monthly based
on the number of actions reported by the advertiser, subject to our
verification. We
are
also involved in revenue sharing arrangements with our online partners where
the
consumer uses co-branded sites hosted by us. Revenue is effectively allocated
to
each partner based on the percentage of advertisement views at each site. The
allocated revenue is shared according to distribution agreements. Revenue is
recorded at gross amounts and partnership payments are recorded in cost of
revenue, pursuant to the provisions of Emerging Issues Task Force (“EITF”)
99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent.
We also
sell hyperlinks (interest rate table listings) to various third-party Internet
sites that generate a fixed monthly fee, which is recognized in the month
earned. We also sell text links on our rate pages to advertisers on a
cost-per-click, or CPC basis. Advertisers enter an auction bidding process
on a
third-party Web site for placement of their text link based on the amount they
are willing to pay for each click though to their Web site. We recognize revenue
monthly for each text link based on the number of clicks at the CPC contracted
for during the auction bidding process. On October 1, 2005, we launched a new
pay-for-performance pricing structure for our interest rate table (hyperlink)
advertising business. The new pricing structure is a CPC model whereby
advertisers will 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.
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 Emerging Issues Task Force No.
99-17,
Accounting for Advertising Barter Transactions
(EITF
99-17”). In accordance with EITF 99-17, barter transactions were valued based on
similar cash transactions which occurred within six months prior to the date
of
the barter transaction. Revenue from barter transactions was recognized as
income when advertisements were delivered on our Web site. Barter expense was
recognized when our advertisements ran on the other companies' Web sites, which
was typically in the same period barter revenue was recognized. Barter revenue
was approximately $721,000, $1,342,000, and $2,254,000 for the quarter ended
June 30, 2005, the six months ended June 30, 2005 and the year ended December
31, 2005, respectively. Barter revenue was intentionally eliminated as of
January 1, 2006 as we focus more on monetizing our available views through
paid
advertising.
Quarterly
Online Publishing Revenue
|
|
Q1
05
|
|
Q2
05
|
|
Q3
05
|
|
Q4
05
|
|
Q1
06
|
|
Q2
06
|
|
Graphic
ads
|
|
$
|
5,351,065
|
|
$
|
6,665,380
|
|
$
|
6,595,789
|
|
$
|
6,565,494
|
|
$
|
9,159,104
|
|
$
|
9,216,914
|
|
Hyperlinks
|
|
|
3,294,682
|
|
|
3,817,716
|
|
|
4,180,521
|
|
|
4,572,049
|
|
|
6,456,895
|
|
|
6,248,073
|
|
Barter
|
|
|
620,806
|
|
|
720,927
|
|
|
437,955
|
|
|
474,000
|
|
|
—
|
|
|
—
|
|
|
|
$
|
9,266,553
|
|
$
|
11,204,023
|
|
$
|
11,214,265
|
|
$
|
11,611,543
|
|
$
|
15,615,999
|
|
$
|
15,464,987
|
|
Online
publishing revenue of $15,465,000 for the three months ended June 30, 2006
was
$4,982,000, or 48%, higher than the $10,483,000 reported for the same period
in
2005, excluding barter revenue of $721,000. This increase was due to a
$2,552,000, or 38%, increase in graphic ad sales, and a $2,430,000, or 64%,
increase in hyperlink sales. Approximately $2,130,000 of the increase in graphic
ad revenue and $402,000 of the increase in hyperlink revenue was due to the
revenue from Wescoco LLC, d/b/a “FastFind” and Interest.com, both of which were
acquired in the fourth quarter of 2005.
Page
views for the quarter were 116.0 million and were 2.2 million, or 2%, higher
than the 113.8 million reported in the same period in 2005. While
CPM’s on graphic ad sales were slightly less than $1.00 lower than the second
quarter of 2005, we sold approximately 59 million, or 15%, more graphic ads
in
the second quarter of 2006 compared to the second quarter of 2005. Compared
to
the first quarter of 2006, graphic ad revenue was up $1%, on 2% lower CPM’s and
11 million, or 2%, more graphic ads sold.
The
increase in hyperlink sales for the quarter ended June 30, 2006 was due to
favorable product pricing, despite the number of hyperlink advertisers remaining
relatively constant compared to the quarter ended June 30, 2005. Our
new
CPC pricing structure, launched on our rate tables on October 1, 2005, does
not
rely on the quantity of advertisers as did our flat fee-based model, but rather
on page view traffic. Sequentially, hyperlink revenue was down 3%, from the
first quarter as page views declined by 8.2 million, or 7%.
For
the
first half of 2006, graphic ad revenue of $18,376,000 was $6,360,000, or 53%,
higher than the $12,016,000 reported in the first half of 2005. Page views
in
the first half of 2006 were 240.2 million, up 15.4 million, or
7%,
from the 224.8 million reported in the same period in 2005. Approximately
$4,127,000 of the increase in graphic ad revenue and $890,000 of the increase
in
hyperlink revenue was due to the revenue from Wescoco LLC, d/b/a “FastFind” and
Interest.com, both of which were acquired in the fourth quarter of
2005.
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 adversely impact
advertising rates. Future revenue could be adversely affected if we were forced
to reduce our advertising rates or if we were to experience lower
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.
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Q1
|
|
|
124.2
|
|
|
111.0
|
|
|
117.2
|
|
|
106.7
|
|
|
58.4
|
|
|
70.5
|
|
Q2
|
|
|
116.0
|
|
|
113.8
|
|
|
92.6
|
|
|
121.8
|
|
|
48.0
|
|
|
52.2
|
|
Q3
|
|
|
—
|
|
|
107.8
|
|
|
92.0
|
|
|
100.3
|
|
|
82.1
|
|
|
47.3
|
|
Q4
|
|
|
—
|
|
|
97.6
|
|
|
91.3
|
|
|
75.8
|
|
|
79.3
|
|
|
66.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
—
|
|
|
430.2
|
|
|
393.1
|
|
|
404.6
|
|
|
267.8
|
|
|
236.5
|
|
Print
Publishing and Licensing Revenue
Print
publishing and licensing revenue represents advertising revenue from the sale
of
advertising in the Mortgage Guide
(formerly called Consumer
Mortgage Guide)
rate
tables, newsletter subscriptions, and licensing of research information. We
charge a commission for placement of the Mortgage
Guide
in a
print publication. Advertising revenue and commission income is recognized
when
the Mortgage
Guide
runs in
the publication. Revenue from our newsletters is recognized ratably over the
period of the subscription, which is generally up to one year. Revenue from
the
sale of research information is recognized ratably over the contract period.
We
also
earn fees from distributing editorial rate tables that are published in
newspapers and magazines across the United States, from paid subscriptions
to
three newsletters, and from providing rate surveys to institutions and
government agencies. In addition, we license research data under agreements
that
permit the use of rate information we develop to advertise the licensee’s
products in print, radio, television and web site promotions. Revenue for these
products is recognized ratably over the contract/subscription
periods.
Quarterly
Print Publishing & Licensing Revenue
|
|
Q1
05
|
|
Q2
05
|
|
Q3
05
|
|
Q4
05
|
|
Q1
06
|
|
Q2
06
|
|
Mortgage
Guide
|
|
$
|
945,083
|
|
$
|
928,504
|
|
$
|
944,943
|
|
$
|
2,064,044
|
|
$
|
3,927,380
|
|
$
|
4,011,368
|
|
Editorial
|
|
|
210,213
|
|
|
232,503
|
|
|
212,815
|
|
|
214,542
|
|
|
245,048
|
|
|
190,015
|
|
|
|
$
|
1,155,296
|
|
$
|
1,161,007
|
|
$
|
1,157,758
|
|
$
|
2,278,586
|
|
$
|
4,172,428
|
|
$
|
4,201,383
|
|
Print
publishing and licensing revenue for the quarter ended June 30, 2006 was up
$3,040,000, or 262%, compared to the comparable period in 2005 primarily due
to
an increase in Mortgage
Guide
revenue.
We ended the first quarter of 2006 with 179
Mortgage
Guide
contracts, having acquired 107 of the contracts in the MMIS acquisition in
the
fourth quarter of 2005. Editorial sales were down 18%, as we have not renewed
certain custom licensed rate and rate survey data sales contracts due to lack
of
profitability.
Print
publishing and licensing revenue for the first half of 2006 was up $6,058,000,
or 262%, compared to the comparable period in 2005 primarily due to an increase
in Mortgage
Guide
revenue
related to the contracts acquired in the MMIS acquisition in the fourth quarter
of 2005. Editorial sales were essentially flat compared to the six months ended
June 30, 2005.
Cost
of Revenue
Online
Publishing Costs
Online
publishing costs represent expenses directly associated with the creation of
online publishing revenue. These costs include contractual revenue sharing
obligations resulting from our distribution arrangements (distribution
payments), editorial costs, research costs and allocated overhead. Distribution
payments are made to Web site operators for visitors directed to our Web site;
these costs increase proportionately with gains in traffic to our site.
Editorial costs relate to writers and editors who create original content for
our online publications and associates who build Web pages; these costs have
increased as we have added online publications and co-branded versions of our
site under distribution arrangements. These sites must be maintained on a daily
basis. Research costs include expenses related to gathering data on banking
and
credit products and consist primarily of compensation and benefits and allocated
overhead.
Online
Publishing Gross Margin
|
|
Q1
05
|
|
Q2
05
|
|
Q3
05
|
|
Q4
05
|
|
Q1
06
|
|
Q2
06
|
|
GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
publishing revenue
|
|
$
|
9,266,553
|
|
$
|
11,204,023
|
|
$
|
11,214,265
|
|
$
|
11,611,543
|
|
$
|
15,615,999
|
|
$
|
15,464,987
|
|
Cost
of online publishing revenue
|
|
|
1,639,475
|
|
|
1,823,127
|
|
|
1,902,520
|
|
|
2,023,967
|
|
|
2,900,584
|
|
|
2,806,868
|
|
Gross
margin
|
|
$
|
7,627,078
|
|
$
|
9,380,896
|
|
$
|
9,311,745
|
|
$
|
9,587,576
|
|
$
|
12,715,415
|
|
$
|
12,658,119
|
|
Gross
margin as a percentage of revenue
|
|
|
82
|
%
|
|
84
|
%
|
|
83
|
%
|
|
83
|
%
|
|
81
|
%
|
|
82
|
%
|
Non-GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
publishing revenue, excluding barter
|
|
$
|
8,645,747
|
|
$
|
10,483,096
|
|
$
|
10,776,310
|
|
$
|
11,137,543
|
|
$
|
15,615,999
|
|
$
|
15,464,987
|
|
Cost
of online publishing revenue,excluding stock compensation
expense
|
|
|
1,639,475
|
|
|
1,823,127
|
|
|
1,902,520
|
|
|
2,023,967
|
|
|
2,692,088
|
|
|
2,518,368
|
|
Gross
margin
|
|
$
|
7,006,272
|
|
$
|
8,659,969
|
|
$
|
8,873,790
|
|
$
|
9,113,576
|
|
$
|
12,923,911
|
|
$
|
12,946,619
|
|
Gross
margin as a percentage of revenue
|
|
|
81
|
%
|
|
83
|
%
|
|
82
|
%
|
|
82
|
%
|
|
83
|
%
|
|
84
|
%
|
Online
publishing costs for the three months ended June 30, 2006, excluding stock
compensation expense of $289,000 were $695,000, or 38%, higher than the
comparable amount reported in the second quarter of 2005. This increase was
due
primarily to increases in human resource costs of $31,000; higher freelance
writers’ expense to support the increase in special sections on the Web site of
$40,000; higher revenue sharing payments of $181,000 due to higher associated
revenue; and approximately $435,000 of costs associated with the acquisitions
in
the fourth quarter of 2005.
For
the
first half of 2006, online publishing costs, excluding share based compensation
expense of $497,000 were $1,748,000, or 50%, higher than the first half of
2005
due to higher human resource costs of $210,000; higher revenue sharing payments
of $612,000; higher freelance writer’s expense of $50,000; and approximately
$865,000 of costs associated with the acquisitions in the fourth quarter of
2005.
Print
Publishing and Licensing Costs
Print
publishing and licensing costs
represent expenses associated with print publishing and licensing revenue.
These
costs include contractual revenue sharing obligations with newspapers related
to
the
Mortgage Guide,
compensation and benefits, printing and allocated overhead. These costs
typically vary proportionately with the related revenues.
Print
Publishing & Licensing Gross Margin
|
|
Q1
05
|
|
Q2
05
|
|
Q3
05
|
|
Q4
05
|
|
Q1
06
|
|
Q2
06
|
|
GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
publishing & licensing revenue
|
|
$
|
1,155,296
|
|
$
|
1,161,007
|
|
$
|
1,157,758
|
|
$
|
2,278,586
|
|
$
|
4,172,433
|
|
$
|
4,201,383
|
|
Cost
of print publishing & licensing revenue
|
|
|
1,103,169
|
|
|
1,075,375
|
|
|
1,116,943
|
|
|
2,050,530
|
|
|
3,542,110
|
|
|
3,773,258
|
|
Gross
margin
|
|
$
|
52,127
|
|
$
|
85,632
|
|
$
|
40,815
|
|
$
|
228,056
|
|
$
|
630,323
|
|
$
|
428,125
|
|
Gross
margin as a percentage of revenue
|
|
|
5
|
%
|
|
7
|
%
|
|
4
|
%
|
|
10
|
%
|
|
15
|
%
|
|
10
|
%
|
Non-GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
publishing & licensing revenue
|
|
$
|
1,155,296
|
|
$
|
1,161,007
|
|
$
|
1,157,758
|
|
$
|
2,278,586
|
|
$
|
4,172,433
|
|
$
|
4,201,383
|
|
Cost
of print publishing & licensing revenue excluding stock compensation
expense
|
|
|
1,103,169
|
|
|
1,075,375
|
|
|
1,116,943
|
|
|
2,050,530
|
|
|
3,531,979
|
|
|
3,715,567
|
|
Gross
margin
|
|
$
|
52,127
|
|
$
|
85,632
|
|
$
|
40,815
|
|
$
|
228,056
|
|
$
|
640,454
|
|
$
|
485,816
|
|
Gross
margin as a percentage of revenue
|
|
|
5
|
%
|
|
7
|
%
|
|
4
|
%
|
|
10
|
%
|
|
15
|
%
|
|
12
|
%
|
Print
publishing and licensing costs, excluding stock compensation expense of $58,000,
for the quarter ended June 30, 2006 of $3,716,000 increased by approximately
$2,640,000 from the comparable amount reported in the second quarter of 2005
due
to the acquisition of the newspaper rate table business of MMIS in the fourth
quarter of 2005. Our gross margin dropped to approximately 12% due to an
increase in revenue sharing payments of approximately $248,000, or 31%.
For
the
first half of 2006, print publishing and licensing costs of $7,248,000,
excluding stock compensation expense of $68,000, increased $5,069,000 from
the
first half of 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
$409,000, or 26% over the comparable period in 2005.
Operating
Expenses
Sales
Sales
costs represent direct selling expenses, principally for online advertising,
and
include compensation and benefits, sales commissions, and allocated overhead.
Sales costs for the three months ended June 30, 2006, excluding stock
compensation expense of $170,000 were $1,078,000, and were approximately
$107,000, or 11%, higher than the comparable amount reported in the second
quarter of 2005. The increase is due primarily to higher human resource costs
from additional hires. For the first half of 2006, sales costs, excluding stock
compensation expense of $327,000, were $2,009,000, up $197,000, or 11%, over
the
comparable period in 2005, due to higher human resource costs of $101,000;
higher commission expense of approximately $56,000 due to higher revenue; and
$36,000 in recruiting costs.
Marketing
Marketing
costs represent expenses associated with expanding brand awareness of our
products and services to consumers and include key word (pay per performance)
campaigns on Internet search engines, print and Internet advertising, marketing
and promotion costs. Marketing costs also included barter expense prior to
January 1, 2006 which represented the non-cash cost of our advertisements that
were run on other companies’ Web sites in our barter transactions. Barter
expense was $721,000 and $1,342,000 for the quarter and six months ended June
30, 2005, respectively. Excluding barter expense, marketing expenses for the
quarter ended June 30, 2006 of $1,189,000 were approximately 20% higher than
the
$992,000 reported in the second quarter of 2005. Approximately
$274,000 more was spent to drive traffic to the FastFind.com and Interest.com
Web sites acquired in the fourth quarter of 2005. Advertising
for Bankrate.com was approximately $77,000 higher in the second quarter of
2006
compared to the same quarter in 2005 despite a 7.0 million, or 6%, drop in
page
views. During the second quarter of 2006, approximately 94% of traffic to
Bankrate.com came directly to our Web site, up from 87% in the second quarter
of
2005.
For
the
first half of 2006, marketing costs of $2,040,000 were $149,000, or 8%, higher
than the comparable amount reported in 2005, excluding barter expense, primarily
due to efforts to drive traffic to the FastFind.com and Interest.com Web
sites.
Product
Development
Product
development costs represent compensation and benefits related to site
development, network systems and telecommunications infrastructure support,
programming, new product design and development and other technology costs.
Product development costs for the three months ended June 30, 2006, excluding
stock compensation expense of $133,000, were $672,000, and were $161,000, or
32%, higher than the comparable amount reported in the second quarter of 2005
due to higher human resource costs ($93,000) and higher training and development
costs ($37,000).
For
the
first half of 2006, excluding stock compensation expense of $246,000, product
development costs of $1,583,000 were $568,000, or 56%, higher than the
comparable amount in the first half of 2005. The increase is due primarily
to
the addition of our Chief Technology Officer in May 2005, additional
infrastructure costs associated with the FastFind acquisition, and expenses
associated with the design and development of new products and higher human
resources costs supporting our expanded infrastructure.
General
and Administrative
General
and administrative expenses represent compensation and benefits for executive,
finance and administrative personnel, professional fees, non-allocated overhead
and other general corporate expenses. Excluding stock compensation expense
of
$2,535,000 in the second quarter of 2006, these costs were $3,361,000 and were
$1,140,000, or 51% higher than the comparable amount reported in the second
quarter of 2005. Approximately $616,000 of these costs were general and
administrative costs for the fourth quarter 2005 acquisitions. Other
cost increases included human resource costs - $174,000; legal and accounting
-
$23,000; bad debt expense - $230,000; bank service and merchant charges -
$59,000; and rent - $91,000.
Excluding
share based compensation expense of $3,824,000 in the first half of 2006,
general and administrative expenses of $7,611,000 were $3,475,000, or 84%,
higher than the first half of 2005. Approximately $1,773,000 of these costs
were
general and administrative costs for FastFind, MMIS and Interest.com, acquired
in the fourth quarter of 2005. Other cost increases included legal and
accounting - $799,000; human resource costs - $139,000; bad debt expense -
$380,000; bank service and merchant charges - $108,000; rent - $94,000; and
increases in various other infrastructure costs.
Depreciation
and Amortization
Depreciation
and amortization expense for the three and six months ended June 30, 2006 was
$356,000, or 171%, and $725,000, or $182%, respectively, higher than the amounts
reported in the same periods in 2005 due primarily to intangibles amortization
related to the fourth quarter 2005 acquisitions.
Other
Income
Other
income consists of interest income generated from invested cash and cash
equivalents. Interest income for the three and six months ended June 30, 2006
was higher than the amounts reported in the same periods in 2005 due to the
$
92.4 million net proceeds received in May 2006 from our secondary offering.
Additionally, the quarter ended March 31, 2005 included a $221,000 gain from
insurance proceeds.
Income
Taxes
|
|
Three
Months Ended
June
30,
|
|
|
|
Six
Months Ended
June
30,
|
|
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
Provision
for income taxes
|
|
$
|
1,481,815
|
|
$
|
1,540,634
|
|
|
-4
|
%
|
$
|
3,446,349
|
|
$
|
2,708,024
|
|
|
27
|
%
|
Percentage
of total revenues
|
|
|
8
|
%
|
|
12
|
%
|
|
—
|
|
|
9
|
%
|
|
12
|
%
|
|
—
|
|
Effective
tax rate
|
|
|
37
|
%
|
|
38
|
%
|
|
—
|
|
|
41
|
%
|
|
38
|
%
|
|
—
|
|
Our
effective tax rate decreased by 4% in the second quarter of 2006, primarily
the
result of adopting SFAS 123R as of January 1, 2006. Overall, our effective
tax
rate increased in the six months ended June 30, 2006 compared to 2005 due to
adopting SFAS 123R as of January 1, 2006, as well as expansion of our operations
into certain higher state tax jurisdictions.
Goodwill
and Intangible Assets
In
accordance with SFAS No. 142,
Goodwill and Other Intangible Assets,
we test
goodwill for impairment at least annually at the reporting unit level in lieu
of
amortization. We have determined that we have two reporting units, online
publishing and print publishing and licensing, under SFAS No. 142 as these
are
the components of the business for which discrete financial information is
available and for which segment management regularly reviews the operating
results.
The
goodwill impairment test is a two-step test. Under the first step, the fair
value of the reporting unit is compared with its carrying value, including
goodwill. If the fair value of the reporting unit is less than its carrying
value, an indication of goodwill impairment exists for the reporting unit,
accordingly, the enterprise must perform step two of the impairment test
(measurement).
We
will
perform an annual impairment review of goodwill for both reporting units during
the fourth quarter of each year.
SFAS
No.
142 also requires that intangible assets with definite lives be amortized over
their estimated useful life and reviewed for impairment in accordance with
SFAS
No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
In
connection with the acquisition of FastFind on November 30, 2005, the Company
made a final payment of approximately $149,000 based on an adjustment to Closing
Date Net Working Capital as defined under Section 3.03 of the Agreement and
Plan
of Merger dated November 20, 2005. Accordingly, goodwill was increased by this
amount during the quarter ended June 30, 2006.
The
Agreement and Plan of Merger for the acquisition of MMIS and Interest.com dated
December 1, 2005 contains a provision in Section 3.03 for the potential
adjustment to Closing Date Equity, as defined. To date, no such adjustment
has
been agreed upon.
Liquidity
and Capital Resources
|
|
June
30, 2006
|
|
December
31, 2005
|
|
Change
|
|
Cash
and cash equivalents
|
|
$
|
102,359,536
|
|
$
|
3,479,609
|
|
$
|
98,879,927
|
|
Working
capital
|
|
|
114,693,261
|
|
|
9,809,238
|
|
|
104,884,623
|
|
Stockholders'
equity
|
|
|
158,885,277
|
|
|
52,852,952
|
|
|
106,032,325
|
|
Our
principal source of liquidity is the cash generated by our publishing revenue.
Another source of cash is proceeds from the exercise of employee stock options.
In May 2006, we closed a public offering of 2,697,776 shares of our common
stock, of which 2,005,991 shares were sold by the Company and 691,785 shares
were sold by certain of our existing shareholders, at a price of $48.25 per
share resulting in net proceeds to us of approximately $92.4 million, which
includes $1.7 million in proceeds from the exercise of stock options by existing
shareholders.
As
of
June 30, 2006, our primary commitments were approximately $10,386,000 in
operating lease payments over the next 10 years, as well as capital expenditures
and recurring payables and accruals arising during the course of operating
our
business, estimated at approximately $5,736,000 through June 30, 2007. We
generally establish payment terms with our vendors that extend beyond the amount
of time required to collect from our customers. There are no other significant
commitments or any off-balance sheet arrangements.
The
following table represents the amounts due under
the specified types of contractual obligations as of June 30, 2006.
|
|
Payments
Due
|
|
|
|
|
|
Less
than
|
|
One
to
|
|
Three
to
|
|
More
than
|
|
|
|
Total
|
|
one
year
|
|
three
years
|
|
five
years
|
|
five
years
|
|
Long-term
debt obligations
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Capital
lease obligations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating
lease obligations (1)
|
|
|
10,385,924
|
|
|
1,132,287
|
|
|
2,107,296
|
|
|
1,903,460
|
|
|
5,242,881
|
|
Purchase
obligations (2)
|
|
|
418,316
|
|
|
381,916
|
|
|
36,400
|
|
|
—
|
|
|
—
|
|
Other
long-term obligations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
10,804,240
|
|
$
|
1,514,203
|
|
$
|
2,143,696
|
|
$
|
1,903,460
|
|
$
|
5,242,881
|
|
(1)
Includes our obligations under existing operating leases.
(2)
Represents base contract amounts for Internet hosting, co-location content
distribution and other infrastructure
costs.
During
the six months ended June 30, 2006, we generated $4,505,000 of net cash from
operating activities. Our net income of $4,868,000 was adjusted for the impact
of share based compensation expense and the excess tax benefit from exercised
stock options of $4,962,000 and $575,000, respectively; the deferred income
tax
provision of $341,000; depreciation and amortization of $1,122,000, bad debt
expense of $666,000, and a net negative change in the components of operating
assets and liabilities of $8,029,000. Of this negative change, $5,382,000
resulted from an increase in accounts receivable, $614,000 resulted from a
decrease in accounts payable, and $2,008,000 resulted from a decrease in accrued
expenses. Accounts
receivable balances were higher at June 30, 2006 supporting higher sales levels,
larger customers buying advertising through agencies that typically extend
payments beyond 60 days, and slower collections from the recently acquired
MMIS
newspaper rate table business. The
decrease in accounts payable and accrued expenses was due to scheduled payments
to trade vendors, and payments made in the first half of 2006 for 2005 sales
commission and the management incentive plan. During the six months ended June
30, 2006, net cash of $877,000 was used to purchase furniture & equipment;
we paid $294,000 in lease security deposits for the new Chicago and New York
offices; and we paid an additional $149,000 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 shareholders, including 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 $90,694,000, the proceeds from the sales of the selling
shareholders’ and other stock options of $2,648,000, and $2,285,000 of excess
tax benefits related to the adoption of FAS 123R as of January 1, 2006.
Our
existing cash and cash equivalents may decline in the event of weakening of
the
economy or changes in our planned cash outlay. However, based on our current
business plan and revenue prospects, we believe that our existing balances
together with our anticipated cash flows from operations will be sufficient
to
meet our working capital and operating resource expenditure requirements for
the
next twelve months. Also, while we currently have no committed lines of credit,
we believe that our banking relationships and good credit should afford us
the
opportunity to raise sufficient debt in the banking or public markets, if
required.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest
Rate Risk
The
primary objective of our investment strategy is to preserve principal while
maximizing the income we receive from investments without significantly
increasing risk. To minimize this risk, to date we have maintained our portfolio
of cash equivalents in short-term and overnight investments which are not
subject to market risk, as the interest paid on such investments fluctuates
with
the prevailing interest rates. As of June 30, 2006, all of our cash equivalents
matured in less than three months.
Exchange
Rate Sensitivity
Our
exposure to foreign currency exchange rate fluctuations is minimal to none
as we
do not have any revenues denominated in foreign currencies. Additionally, we
have not engaged in any derivative or hedging transactions to date.
Item
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Based
on
their evaluations as of June 30, 2006, the Company’s Chief Executive Officer and
Chief Financial Officer have concluded that the Company’s disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange
Act
of 1934, as amended) were sufficiently effective to ensure that the information
required to be disclosed by the Company in this Quarterly Report on Form 10-Q
was recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and instructions for Form 10-Q.
Changes
in Internal Control over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting
during the quarter ended June 30, 2006 that have materially affected, or are
reasonably likely to materially affect, its internal control over financial
reporting.
Part
II - OTHER INFORMATION
Item
1. LEGAL PROCEEDINGS
See
Note
5 “Commitments and Contingencies” of Notes to Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Quarterly Report for a discussion
of legal proceedings pending against the Company.
Item
1A. Risk Factors
In
addition to the other information set forth in this Quarterly Report, you should
carefully consider the factors discussed in Part I, Item 1A. "Risk Factors"
in
our 2005 Annual Report. There have been no material changes in the
Company's risk factors from those disclosed in our 2005 Annual Report other
than
as follows:
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. Click-through 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.
Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
Item
3. DEFAULTS UPON SENIOR SECURITIES
None.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
Company held its annual meeting of shareholders on June 14, 2006. At the
meeting, the shareholders elected Robert P. O’Block (14,587,774 affirmative
votes and 441,079 votes withheld) and Randall E. Poliner (14,587,774 affirmative
votes and 441,079 votes withheld) to the Company’s Board of Directors. The
shareholders also ratified the selection of KPMG LLP to serve as the Company’s
independent registered public accounting firm for the fiscal year ended December
31, 2006 (14,894,843 affirmative votes, 129,363 votes against, and 4,647 votes
abstaining).
Item
5. OTHER INFORMATION
On
August
4, 2006, we entered into an Asset Purchase Agreement (the “Asset Purchase
Agreement”) with East West Mortgage, Inc. (“East West”), the Doug Bui Family
Trust (2006), and Doug Bui (the “Shareholder”). Pursuant to the Asset Purchase
Agreement, we acquired certain assets from East West consisting principally
of
three domain names, www.mortgage-calc.com, www.mortgagecalc.com, and
www.mortgagemath.com, as well as the related intellectual property and goodwill
for a cash purchase price of $4.4 million. The acquisition closed on August
4,
2006.
In
connection with the execution of the Asset Purchase Agreement, the Seller and
Shareholder entered into a standard five-year non-competition and
confidentiality agreement with us.
The
above
description of the Asset Purchase Agreement does not purport to be a complete
statement of the parties' rights and obligations under the Asset Purchase
Agreement and the transactions contemplated thereby. The above description
is
qualified in its entirety by reference to the Asset Purchase Agreement, a copy
of which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.1,
and
incorporated herein by reference.
Item
6. EXHIBITS
|
2.1 |
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 have been omitted pursuant to Item 601(b)(2)
of
regulation S-K).
|
|
31.1 |
Certification
of Thomas R. Evans, Chief Executive Officer and President of Bankrate,
Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
|
|
31.2 |
Certification
of Edward J. DiMaria, Senior Vice President and Chief Financial Officer
of
Bankrate, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange
Act
of 1934.
|
|
32.1 |
Certification
of Thomas R. Evans, Chief Executive Officer and President of Bankrate,
Inc., Pursuant to 18 U.S.C. Section
1350.
|
|
32.2 |
Certification
of Edward J. DiMaria, Senior Vice President and Chief Financial Officer
of
Bankrate, Inc., Pursuant to 18 U.S.C. Section
1350.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
Bankrate,
Inc. |
|
|
|
Dated:
August 9, 2006 |
By:
|
/s/ EDWARD J. DIMARIA |
|
Edward
J. DiMaria
Senior
Vice President and Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
|
|