-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G9kjwzC9O73xZuXrhJWVLtYnsMlV7xmhgB8wryppOJ/h8T+nrA/yuVBd+cu65Yyw yXx2K0SFGYt++UlNZ1Ki0w== 0000931763-01-000539.txt : 20010328 0000931763-01-000539.hdr.sgml : 20010328 ACCESSION NUMBER: 0000931763-01-000539 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANKRATE INC CENTRAL INDEX KEY: 0001080866 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 650423472 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25681 FILM NUMBER: 1580830 BUSINESS ADDRESS: STREET 1: 11811 US HIGHWAY ONE STREET 2: STE 101 CITY: N PALM BEACH STATE: FL ZIP: 33408 BUSINESS PHONE: 5616277330 MAIL ADDRESS: STREET 1: 11811 US HIGHWAY ONE STREET 2: STE 101 CITY: N PALM BEACH STATE: FL ZIP: 33408 FORMER COMPANY: FORMER CONFORMED NAME: ILIFE COM INC DATE OF NAME CHANGE: 20000329 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT LIFE CORP DATE OF NAME CHANGE: 19990301 10-K 1 0001.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 2000 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-25681 BANKRATE, INC. (exact name of registrant specified in its charter) Florida 65-0423422 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11811 U.S. Highway One, Suite 101 North Palm Beach, Florida 33408 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (561) 630-2400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the average of the closing bid and ask quotations for the Common Stock on February 28, 2001, as reported by the OTC Bulletin Board was approximately $3,295,624. The shares of Common Stock held by each officer and director and by each person known to the Company who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 2001, the Registrant had outstanding 13,996,950 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of Stockholders are incorporated by reference into Parts I and III of this report. ITEM 1. BUSINESS EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING DESCRIPTION OF THE COMPANY'S BUSINESS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE OUTCOME OF THE EVENTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS IS SUBJECT TO RISKS AND ACTUAL RESULTS COULD DIFFER MATERIALLY. THE SECTIONS ENTITLED "ITEM 1. BUSINESS - RISK FACTORS THAT COULD IMPACT FUTURE OPERATING RESULTS", "ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT CONTAIN A DISCUSSION OF SOME OF THE FACTORS THAT COULD CONTRIBUTE TO THESE DIFFERENCES. Overview Bankrate, Inc. (the "Company") is an Internet consumer finance marketplace that owns and operates a portfolio of Internet-based personal finance channels including banking, investing, taxes and small business finance. Our flagship site, Bankrate.com, is the Web's leading aggregator of information on over 100 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 the best financial decisions. We regularly survey approximately 4,800 financial institutions in all 50 states in order to provide the most current objective, unbiased rates on banking products such as mortgages, new and used auto loans, credit cards and more. Hundreds of print and online partner publications depend on Bankrate.com as the trusted source for financial rates and information. On September 20, 2000, we changed our name from ilife.com, Inc. to Bankrate, Inc. Since our online debut in 1996, Bankrate.com has won numerous awards and accolades for its rate collection and distribution and original editorial content. In the first half of 2000 alone, such prestigious organizations as Forbes, Fortune, Yahoo!, Internet Life, Money and SmartMoney granted Bankrate "Best of the Web" status. Over two decades 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 lenders by market and include relevant details to help consumers compare loan products. We continue to enhance our offerings in order to provide Bankrate.com users with the most complete experience. Features such as financial calculators, email newsletters, and message boards allow users to interact with our site as well as with other consumers. Our new Rate Trend Index is a weekly poll of industry insiders designed to help consumers forecast interest rate trends. We also 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 download state and federal forms from the Tax channel, obtain business tips from the Small Business channel and ask a financial expert questions on the Advice channel. Bankrate, Inc. Internet Advertising Views and Page Views (in millions) For the year ended December 31: 2000 1999 1998 ---- ---- ---- Ad Views 405 288 104 Page Views 136 89 40 Source of Data: Bankrate, Inc. server reports 2 Prior to 1996, and dating back to 1976, our principal business was the publication of print newsletters, the syndication of unbiased editorial bank and credit product research to newspapers and magazines, and advertising sales of the Consumer Mortgage Guide. We currently syndicate editorial research to 97 newspapers that have combined single day circulation in excess of 28.5 million copies and three national magazines with combined monthly circulation in excess of 2.5 million copies. The Consumer Mortgage Guide is a weekly newspaper- advertising table consisting of product and rate information from local mortgage companies and financial institutions. The Consumer Mortgage Guide appears weekly in approximately 11 U.S. metropolitan newspapers with combined single day circulation in excess of 3.7 million copies. Together, these Bankrate.com branded print activities have the potential of reaching 34.7 million readers according to Editor & Publisher International 2000 Year Book. In 1996, we began our online operations by placing our editorially unbiased research on our Web site, Bankrate.com. By offering our information online, we created new revenue opportunities through the sale of graphical and hyperlink advertising associated with our rate and yield tables. In fiscal 1997, we implemented a strategy to concentrate on building these online operations. We believe that the recognition of our research as a leading source of independent, objective information on banking and credit products is essential to our success. As a result, we have sought to maximize distribution of our research to gain brand recognition as a research authority. We are seeking to build greater brand awareness of our Web site and to reach a greater number of online users. We publish our editorial and research data online through our principal Web site, Bankrate.com, and through distribution (or syndication) arrangements with more than 190 third party Web sites. Bankrate.com contains information covering over 100 financial products within 155 geographic markets, including at least one market in each of the 50 states. The information includes data regarding mortgage and home equity loans, credit cards, automobile loans, checking accounts, ATM fees, and yields on savings instruments. Our unique information, which is compiled by 38 researchers, is accompanied by extensive editorial content designed to assist consumers with their decision-making process. Due to estimates of our audience's average per capita income, level of education and professional status, we believe this audience represents a very desirable target customer for advertisers. Our Opportunity Many financial services customers are relatively uninformed with respect to financial products and services and often rely upon personal relationships when choosing such products and services. Many of these products and services are not well explained and viable, equivalent alternatives typically are not presented when marketed to consumers through traditional media. As the sale of many of these products and services moves to the Internet, where there is little personal contact, we believe that consumers will seek sources of independent objective information such as Bankrate.com to facilitate and support their buying decisions. Because of the interactive nature of the Internet, where Web technology allows us to display extensive research on financial products and services that was previously unavailable to consumers, we believe we are able to provide a superior vehicle to educate consumers in the selection and purchase process. We believe the majority of financial information available on the Web is oriented toward investment advice and providing business news and financial market information, rather than personal and consumer finance data. Our publications are targeted to fulfill the market need for personal and consumer finance information. By expanding our comparative data regarding financial products and related editorial content, we are creating a unique Web-based service designed to enable our audience to keep abreast of personal finance trends and to better manage their financial affairs. As a result, we believe we can assemble a loyal base of users comprised of targeted audiences that are attractive to advertisers. Despite some general and forecasted weakness in advertising spending on the Internet, we have seen steady interest in our primary niches - mortgages, car loans, home equity loans and CD/savings products. In addition, we believe our faith in the long-term benefits of the Internet is well founded. The ability of the Internet to provide a platform for frictionless communication between consumers and businesses has not changed. We believe Bankrate, Inc. will benefit from the anticipated growth in Internet usage and spending on Internet advertising, direct marketing and electronic commerce. 3 Restructuring We have spent much of the year 2000 refocusing the Company's business efforts into our primary Web site - Bankrate.com while actively controlling expenses and pursuing additional sources of revenue. In addition, we sold or curtailed development of under-performing Web sites and business units. The following steps were taking as a direct result of our stategic reorganization initiatives. . We substantially reduced marketing expenditures beginning in January 2000 compared to the second half of 1999. . In June 2000, we reduced employment levels of continuing operations by 10% and began consolidating our physical locations. . In May 2000, we sold CPNet.com, our online advertising network that provided content and advertising management to college newspaper Web sites. . In June 2000, we shut down our Broadcast Operations that produced "Cost of Life" personal finance video segments distributed to television stations. . In June 2000, we shut down ilife.com, our vertical personal finance portal, and incorporated IntelligentTaxes.com, our personal income tax information Web site, as a channel of Bankrate.com. . In July 2000, we sold Pivot.com, our virtual insurance agency and fulfillment/call center. . In August 2000, we shut down and sold certain assets of Consejero.com, our Spanish-language personal finance Web site and Garzarelli.com, our electronic subscription Web site for investment advisor Elaine Garzarelli. . In December 2000, we shut down GreenMagazine.com, our alternative personal finance Web site, and the print publication Green Magazine. Strategy We believe that the consumer-banking sector holds significant opportunities for growth and expansion for a site like Bankrate.com. As we grow, we are consolidating our position as the industry leader in the gathering of rate data and in expanding our brand recognition with consumers and partners. Elements of our strategy include: Continuing to provide advertisers with high-quality, ready-to-transact - ---------------------------------------------------------------------- consumers: By advertising on our site, either through purchasing graphic ads, - --------- hyperlinks, or sponsorships, banks, brokers and other advertisers are tapping into our strongest resource - consumers on the verge of engaging in a transaction. By allowing advertisers to efficiently access this "in-market" consumer, we are helping advertisers lower their own costs in acquiring a new customer, and ultimately creating a win-win-win transaction for the advertiser, Bankrate.com and the consumer. Remaining the dominant brand in consumer bank rate data and content: We are - ------------------------------------------------------------------- continuing our strong push to remain the dominant player in our market. We believe we are the number one competitor in our market on a number of levels - including revenue, the number of banks surveyed, the number of pages viewed by consumers and the number of unique visitors. Continued, low-risk growth through partnering with top Web sites that drives - ---------------------------------------------------------------------------- traffic to Bankrate.com: Our partner network provides Bankrate.com with a steady - ----------------------- stream of visitors, with little to no advertising risk to the Company. As the bulk of these agreements are revenue sharing, we only pay out a percentage of what we actually bring in. Zealously guarding our resources: Our greatest resources are our people, our - -------------------------------- partners and our brand. We carefully weigh every decision against these three axis. Insuring our long-term survival by reaching profitability as quickly as - ----------------------------------------------------------------------- possible: Our primary goal for the coming year is to reach a cash-flow positive - -------- state as quickly as possible. By developing a self-sustaining business, we will be able to better control our own future successes. Bankrate.com Bankrate.com provides consumers with financial data, research and editorial information on non-investment financial products. The Company's team surveys approximately 4,800 financial institutions every week in order to provide objective rate information on banking products including mortgages, credit cards and auto loans. Bankrate.com is unique in its approach to offering objective rate information on 155 markets in all 50 states. We gather and present this information by metropolitan area, which provides more valuable information to consumers than aggregated national information and allows advertisers to target prospective customers geographically. Bankrate.com also distributes electronic newsletters weekly to approximately 200,000 subscribers covering topics such as mortgages, credit cards, banking, small businesses, certificate of deposit rates, and Federal Funds rates. We also maintain message 4 boards where visitors can post questions for members of the Bankrate.com community. Topics parallel the channels offered by Bankrate.com. Distribution Arrangements A significant portion of the traffic to Bankrate.com is attributable to the distribution (or syndication) arrangements we have with other Web site operators. Our distribution arrangements fall into two categories: (1) co- branding in which we establish a "co-branded" site with another Web site operator, and (2) licensing in which we provide content to the other operator's Web site together with a hyperlink to our own site. We have found co-branding to be more effective in driving traffic to our sites. Co-branded sites are created pursuant to agreements with other Web site operators. Generally, agreements relating to co-branded sites provide for us to host the co-branded Web pages, sell and serve the graphical advertising, and collect advertising revenues, which are shared with the third party Web site. Under licensing arrangements, we provide content to other Web sites in exchange for a fee. The content identifies Bankrate.com as its source and typically includes a hyperlink to the Bankrate.com Web site. The table below lists parties with which we have distribution agreements as of December 31, 2000. America Online Edmunds.com, Inc. Nasdaq AT&T ePredict.com LLC Netscape Auto Site Esquire Newsalert Belo Interactive sites FamilyMoney.com NewsMax.com BizRate FinancialWeb.com Oxygen Media Bloomberg Golf.com PricewaterhouseCoopers Broker Agent News Hispanic Online RealTimes Business Today HomeStore.com Realtor.com Carlist.com Houston Chronicle San Antonio Express CarPrices.com Individual Investor Group, Inc. San Diego Insider Carpoint Inman News Features ScarsdaleNet.com Columbus Dispatch Intellichoice Sign on San Diego Compuserve Internet Stock News Silicon Financial Group Cox Interactive sites IPO.com, Inc. Smart Money Magazine CyberInvest.com Job Sleuth Star Tribune Cycal, Inc. JS Online Tegris Dealernet Kiplinger's Tennessean Digital Cities Miami Herald US News & World Report Dizzy Duck Microsoft Network USA Today Dollar Stretcher Military.com Village Online DotPlanet.com, Inc. Milwaukee Journal Sentinel Work.com EarthLink, Inc. Money Magazine Yahoo! ECompare Motley Fool Your New House eComplaints.com mySimon.com TechTV
Financial Product Research Our research staff is made up of 38 employees who track comparative information on over 100 financial products and services, including checking accounts, consumer loans, lines of credit, mortgages, certificates of deposit, savings accounts, credit cards, money market accounts, brokerage accounts and online accounts. We cover both personal and small business accounts offered through branch offices and on the Internet by banks, thrifts, credit unions, credit card issuers, mortgage bankers and mortgage brokers. We estimate that over 350,000 items of data are gathered each week for over 155 markets across the United States from over 4,800 financial institutions. The information obtained includes not only interest rates and yields, but related data such as lock periods, fees, points, and loan sizes for mortgages and grace periods, late penalties, cash advance fees, cash advance APRs, APYs, minimum payments, and terms and conditions for credit cards. We adhere to a strict methodology in developing our markets and our institutional survey group. The market survey includes the 100 largest U.S. markets, as defined by the U.S. Census Bureau's Metropolitan Statistical Area categories, along with 5 the largest market in each state that does not include one of the largest 100 markets. We provide a comparative analysis of data by market as well as on a national basis. Institutions in the survey group include the largest banks and thrifts within each market area based on total deposits. The number of institutions tracked within a given market is based on the types of financial products available and number of institutions in the market area. In each of the largest 25 markets, the Company tracks at least 10 institutions. In each of the smaller markets we track three or more institutions. The Company verifies and adjusts, if necessary, the institutions included in the survey group on an annual basis using FDIC deposit data from year-end call reports. The Company does not include credit unions in the market survey group since product availability is based upon membership. The Company tracks the 50 largest U.S. credit unions as a separate survey group for comparison purposes. All products included in our database have closely defined criteria so that information provided by institutions is truly comparative in nature. Collected data undergoes three levels of quality control prior to being accepted for inclusion in the database. The first level is automatically performed by our editing software, which identifies unusual changes. The second level is visual proofing, which is performed by the researcher who gathers rates from institutions. The researcher reviews the surveys to determine whether there have been any changes in the data on a weekly basis. If there has been a change that is outside of a specified range, the researcher verifies that the data is correct by calling the institution. Once the data is verified, it is forwarded to a senior researcher for review and approval. The third level is performed by a dedicated quality control staff consisting of senior researchers who verify that the information has been correctly updated and entered into our databank. Our quality control staff reviews each listing in relation to regional and national trends and for overall accuracy and consistency fees and related information prior to disclosure of the information to consumers. The staff also reviews the comparability of products, institutional accuracy and survey accuracy. In addition, the quality control team performs anonymous shopping on a weekly basis, in which we place calls to institutions in order to obtain rate information without identifying ourselves as Bankrate.com. Such anonymous shopping allows us to validate the data in a consumer setting. Institutions providing invalid data are contacted by our quality control staff to ensure that future information will be accurate. Institutions listed in our Bankrate.com online tables who purchase hyperlinks to their own sites or purchase other advertising must comply with the same criteria for product listings that apply to other institutions or they will be removed. The criteria for product listings consists of specific attributes, such as loan size and term, that are used to define each type of financial instrument in order to ensure uniformity in the products that are compared. With the exception of the "Internet Banking Deals" table, no special offers are listed on our Internet sites. All of our new research employees are provided with a four-week program of on-the-job training to ensure consistency of data-gathering and validation techniques. Follow-up refresher training is provided to our research employees on an ongoing basis to ensure that skill levels are maintained. At the end of each weekly survey, data is archived as part of our 17-year old cumulative historical data file. This file provides a unique resource for our financial analysts and editorial team in developing trend graphs, charts and narrative analysis that is used by national and local media. We are aware of the potential conflict of interest resulting from the sale of advertising to financial institutions while providing independent and objective research. However, no conflicts of interests have compromised or are expected to compromise our ability to provide independent and objective research. Editorial Content In addition to our research department, we maintain an editorial staff of 14 editors, writers and researchers, and a graphic artist who creates original stories for our Web sites. We also have relationships with more than 20 free- lance writers. Most of our editorial staff are experienced journalists with newspaper or broadcast experience. For example, the reporters and editors of Bankrate.com have professional journalistic work experience ranging from two to 31 years, with an average of 11 years of experience. We believe the quality of our original content plays a critical role in attracting visitors to our site and co-branded partners to the Bankrate.com Web site. The overwhelming majority of the content within our Web sites is original and produced internally. There is a limited amount of third-party content, acquired under advertising revenue-sharing agreements and licenses, that allow us to incorporate relevant information on our Web site that would otherwise require additional resources to produce. An example of this type of arrangement is the incorporation in Bankrate.com of foreclosure information from foreclosures.com. 6 Print Publications We continue to produce traditional print publications to absorb part of the cost of producing research and original editorial content. Additionally, we believe that print publishing activities contribute to greater exposure and branding opportunities for our Internet Web sites. These publications are as follows: Consumer Mortgage Guide: We generate revenue through the sale of mortgage ------------------------ rate and product listings in 11 metropolitan newspapers across the United States with combined Sunday circulation of 3.6 million copies. We enter into agreements with the newspapers for blocks of print space, which is in turn sold to local mortgage lenders and we share the revenue with the newspapers on a percentage basis. Syndication of Editorial Content and Research: We syndicate editorial ---------------------------------------------- research to 97 newspapers, which have combined Sunday circulation more than 28.5 million copies and three national magazines with combined monthly circulation in excess of 2.5 million copies. Newsletters: We publish three newsletters: 100 Highest Yields and Jumbo ------------ Flash Report, which target individual consumers, and Bank Rate Monitor, which targets an institutional audience. These newsletters provide bank deposit interest rate information with minimal editorial content. Consumer Marketing Despite the success of our award-winning "Every Percent Counts" ad campaign in 1999, we determined that going forward, our resources would be better leveraged by expanding non-cash intensive advertising, including a new affiliate program, greatly expanding our barter effort and emphasizing our co-branding model, which requires minimal up-front payments. In addition, we completed a series of limited online advertising buys during fiscal 2000, using in-house talent to purchase and track the advertising as well as in developing creative. Advertising Sales Our advertising sales staff consists of 13 salespeople and support staff. Most of our salespersons are located in our North Palm Beach corporate headquarters and we maintain two smaller satellite offices in New York and Los Angeles. Each salesperson is responsible for a designated geographic area covering the Southeast, Mid-Atlantic, New England, Great Lakes, Midwest, Great Plains, Northwest or Southwest regions of the United States. Salespeople sell advertising related to our Web sites and the Consumer Mortgage Guide. We believe our sales force is highly effective. Our salespeople present advertising solutions to potential advertisers using inventory created by our Web sites as well as the co-branded Web sites. We believe this combined network of sites enhances value for advertisers and direct marketers by (1) alleviating the need to purchase a series of advertising campaigns from numerous Web sites, (2) providing advertisers and direct marketers with advertising opportunities on a wide variety of Web pages containing business and personal finance content, and (3) providing targeted access to Internet users with desirable demographics. Advertisers and direct marketers can enhance the effectiveness of their campaigns by customizing advertising delivery on our networks within a particular content channel or across an entire network. Advertising Alternatives Our advertisers can target prospective customers using three different approaches: . Targeting specific geographic and product areas; for example, mortgage rates in Atlanta, Georgia; . Targeting specific product channels; for example, all borrowers interested in the home equity channel; or . General rotation throughout our site. Our most common graphical advertisement sizes are banners, which are prominently displayed at the top or bottom of a page (486 x 60 pixels) and badges, which are smaller than banners (125 x 125 pixels). We offer banners and badges for general rotation or in specific areas of the site. List prices may vary depending upon the quantity of advertisements purchased by an advertiser and the length of time an advertiser runs an advertisement on our sites. List prices for banner and badge 7 advertisements with premium placement may be as low as $15 CPM (cost per thousand) and as high as $100 CPM. Discounts and commissions are available based upon the volume of advertisements purchased. We also sell posters, which are oversize advertisements that contain more information than traditional advertisements. We position posters on certain pages so that they dominate the page. The list prices range from $133 to $150 CPM. Advertisers may also purchase sponsorship positions on the Bankrate.com home page and the main page for each product channel. The cost of the sponsorship is based on banner rates for impressions received and ranges from a list price $22 to $33 CPM. Advertisers can also sponsor an entire channel. In addition, we offer a number of sponsorship and "custom" advertising opportunities. All list prices are typically negotiated with specific advertisers and pricing can range dramatically based on traffic and size of the advertising. Providing effective tools for managing advertising campaigns is essential to maintaining advertising relationships. We use a state-of-the-art program under license from a third party that allows our advertisers to monitor their spending on our Web sites in real-time for impressions received and click through ratios generated. Hyperlinks Financial institutions that are listed in our rate tables have the opportunity to hyperlink their listings. By clicking on the hyperlink, users are taken to the institution's Web site. A substantial benefit to advertisers with the hyperlink rate listing is that the hyperlinks are in fixed placement on the rate pages and are shown every time a user accesses a page. In contrast, banner advertisements are rotated based on the number of impressions purchased. Hyperlink fees are sold for three-month periods. The number of hyper linked rate listings that can be added to a rate page is limited only by the number of institutions listed, while banner positions are limited by available space. The actual rates for hyperlinks range from $39 to $50 CPM. E-Mail Sponsorships We issue daily and weekly e-mail newsletters to customers who request them. Advertisers can sponsor the e-mails with text listings that are hyper linked to their Web site. The cost for sponsoring an e-mail newsletter is between $0.05 and $0.15 per subscriber. Chat Room Sponsorships We offer advertisers chat rooms in Bankrate.com where they may promote their spokespeople or products and acquire valuable real-time feedback from consumers. Advertisers We market to local advertisers targeting a specific audience in a city or state and also to national advertisers targeting the entire country. No advertiser accounts for more than 10% of our revenues. As of December 31, 2000, we had approximately 55 graphical advertisers and 240 hyperlink advertisers. A representative sample of our national and regional advertisers includes: Advanta Bank Corp. Home Finance of America Secured Funding Corp. American Express iHomeowner, Inc. SNFB Bank Annapolis Federal Mortgage IndyMac Bank / IndyMac Mortgage South Trust Mortgage Corp. Bank Caroline ING Direct State Farm Bank BankDirect Juniper Financial Corporation Umbrellabank.copm Bank One Lasalle Bank Virtual Bank Bank of America Magnolia Mortgage Corp. Washington Mutual Capital One Bank Manhattan Mortgage Corp. Wells Fargo Bank Carteret Mortgage Corp. McCurdy Mortgage Corp. WingspanBank.com Chase Manhattan Bank Middlesex Savings Bank Citibank Mortgage Expo DeepGreen Bank Net Bank Discover Bank Nexity Bank Downey Savings & Loan Next Card E*Trade Bank NJ Mortgage Bankers Corp E-Loan / Car Finance Ameritrade Equitable Mortgage Corp. Ohio Savings Bank First Republic Mortgage Corp. People First Finance FISN, Inc. Presidential Bank Full Spectrum Lending, Inc. Providian Bank / Providian Financial Giantbank.com Prudential Bank Gorman & Gorman Mortgage Services Pulaski Bank
8 Greenpoint Mortgage Riverway Bank Hart West Financial, Inc. Royal Mortgage All of the listed advertisers have been our customers for at least six months and are representative of the types of industries, as well as national and regional scope of our advertising base. Competition We compete for advertising revenues across the broad category of personal finance information provided in traditional media such as newspapers, magazines, radio, and television and in the developing market for online financial publications. There are many competitors that have substantially greater resources than the Company. Our online competition includes the following: . Personal finance sections of general interest sites such as Yahoo! and America Online; . Personal finance destination sites such as MoneyCentral, Forbes, Business Week, Fortune, Smart Money, Kiplinger's and Money.com; and . E-commerce sites that provide bank and credit product information such as e-Loan and GetSmart. Competition in the online segment is generally directed at growing users and revenue using marketing and promotion to increase traffic to Web sites. We believe that our original content, focus and objective product information differentiates us from our competitors. Operations We host our proprietary Web sites and control all of our network operations from our principal office in North Palm Beach, Florida. Internet access is maintained through a fiber optic data circuit with AT&T. The computer equipment used to operate our Web sites is powered by uninterruptible power supply units and a generator. Proprietary Rights Our proprietary intellectual property consists of our unique research and editorial content. We rely primarily on a combination of copyrights, trademarks, trade secret laws, our user policy and restrictions on disclosure to protect this content. Employees As of December 31, 2000, we had 111 full-time employees, of which 20 were in Web site and content operations, 21 in sales, business development and marketing, 38 in content and data research, five in advertising revenue operations, 13 in product development and information technology, eight in finance and accounting, and six in administration. We have never had a work stoppage and none of our employees are represented under collective bargaining agreements. We consider our employee relations to be good. Prior to June 2000, we leased all of our employees, with the exception of the employees of our former subsidiary, Professional Direct Agency, Inc. ("Pivot"), from Vincam Human Resources, Inc. under the terms of a co-employment agreement. This agreement was mutually terminated effective June 1, 2000 and all leased employees became direct employees of the Company. Risk Factors that Could Impact Future Operating Results We have a history of losses and could run out of cash We have incurred net losses in each of our last five fiscal years. We had an accumulated deficit of approximately $59 million as of December 31, 2000. Therefore, we believe that period-to-period comparisons of our financial results should not be relied on as an indication of our future performance. We anticipate that we will incur operating losses and negative cash flows in the foreseeable future. We are working to manage our cash by actively controlling expenses and pursuing additional sources of revenue. For instance, we substantially reduced marketing expenditures beginning in January 2000 compared to the second half of 1999, and followed through with plans to sell or curtail development of certain under-performing, non-core business units. We sold 9 CPNet.com in May 2000, sold Pivot in July 2000, shut down and sold certain assets of Consejero.com in August 2000, and shut down Greenmagazine.com in December 2000 (see Item 8., Notes to Consolidated Financial Statements, Notes 5 & 6). These divestitures yielded cash of approximately $4,392,000 and will result in lower operating expenses. In June 2000, we reduced employment levels of continuing operations by approximately 10% and began efforts to consolidate our physical locations. Based on these actions and our current plan, we believe our existing liquidity and capital resources will be sufficient to satisfy our cash requirements into 2002. There are no assurances that such actions will ensure cash sufficiency through 2002 or that reducing marketing expenses will not potentially curtail revenue growth. We may consider additional options, which include, but are not limited to, the following: forming strategic partnerships or alliances; considering other strategic alternatives, including: a merger or sale, or an acquisition; or raising new debt and/or equity capital. There can be no assurance that we will be able to raise such funds or realize our strategic alternatives on favorable terms or at all. Further, due to the legal matters discussed in Item 7. and Item 8., Notes to Consolidated Financial Statements, Note 10, which we intend to vigorously defend, management could be required to spend significant amounts of time and resources defending these matters which may impact our operations. Our success depends upon Internet advertising revenue We expect to derive more than 70% of our revenues for the foreseeable future through the sale of advertising space and hyperlinks on our Internet Web pages. Our revenue, excluding barter revenue, for 2001 is projected to be relatively flat compared to 2000. Any factors that limit the amount advertisers are willing to spend on advertising on our Web site could have a material adverse effect on our business. These factors may include: (1) lack of standards for measuring Web site traffic or effectiveness of Web site advertising; (2) lack of established pricing models for Internet advertising; (3) failure of traditional media advertisers to adopt Internet advertising; (4) introduction of alternative advertising sources; and (5) a lack of significant growth in Web site traffic. Demonstrating the effectiveness of advertising on our Web site is critical to our ability to generate advertising revenue. Currently, there are no widely accepted standards to measure the effectiveness of Internet advertising, and we cannot be certain that such standards will develop sufficiently to support our growth through Internet advertising. Currently, a number of different pricing models are used to sell advertising on the Internet. Pricing models are typically either CPM-based (cost per thousand) or performance-based (cost per-click). We predominantly utilize the CPM-based model, which is based upon the number of advertisement impressions. The performance based, or per click, model is payable on each individual click even though it may take multiple advertisement impressions to generate one clickthrough. We cannot predict which pricing model, if any, will emerge as the industry standard. Therefore, it is difficult for us to project our future advertising rates and revenues. For instance, banner advertising, which is currently our primary source of online revenue, may not be an effective advertising method in the future. If we are unable to adapt to new forms of Internet advertising and pricing models, our business could be adversely affected. Financial services companies account for a majority of our advertising revenues. We will need to sell advertising to customers outside of the financial services industry in order to significantly increase our revenues. To date, relatively few advertisers from industries other than the technology and financial services industries have devoted a significant portion of their advertising budgets to Internet advertising. If we do not attract advertisers from other industries, our business could be adversely affected. We use barter transactions which do not generate cash revenue Revenue from barter transactions represented approximately 5% of total revenue for the year ended December 31, 2000. Barter revenue may represent a significant portion of our total revenue in future periods. Barter transactions do not generate any cash revenue and are entered into to promote our brand and generate traffic to our Web site without spending any of our cash resources. Our success depends upon interest rate activity and mortgage refinancing We provide interest rate information for mortgages and other loans, credit cards and savings accounts. Visitor traffic to Bankrate.com may increase with interest rate movements and decrease with interest rate stability. Factors that have caused 10 significant visitor fluctuations in the past have been Federal Reserve Board actions and general market conditions affecting home mortgage interest rates. During 2000, approximately 23% of advertisement views on Bankrate.com were on its mortgage pages. Accordingly, the level of traffic to Bankrate.com can be dependent on the general level of interest rates as well as mortgage refinancing activity. A slowdown in mortgage production volumes could also have a material adverse effect on our business. We believe that as we continue to develop our Web site with broader personal finance topics, the percentage of overall traffic seeking mortgage information will remain stabilized at current levels. To accelerate the growth of traffic to Bankrate.com, we are working with our syndication partners to program more intensively, and we are promoting Bankrate.com products aggressively. We cannot be certain that we will be successful in these efforts. Our success depends upon establishing and maintaining distribution arrangements Our business strategy includes the distribution of our content through the establishment of co-branded Web pages with high-traffic business and personal finance sections of online services and Web sites. A co-branded site is typically a custom version of our Web site with the graphical look, feel, and navigation, of the other Web site. Providing access to these co-branded Web pages is a significant part of the value we offer to our advertisers. We compete with other Internet content providers to maintain our current relationships with other Web site operators and establish new relationships. In addition, as we expand our personal finance content, some of these Web site operators may perceive us as a competitor. As a result, they may be unwilling to promote distribution of our banking and credit content. We cannot guarantee that our distribution arrangements will attract a sufficient number of users to support our current advertising model. During 2000, approximately 41% of the traffic to our Web site originated from the Web sites of operators with which we have distribution arrangements. In addition, our business could be adversely affected if we do not establish and maintain distribution arrangements on favorable economic terms. Our success depends upon increasing brand awareness of our Web site Although the Company and its predecessors have been in business since 1976, we commenced our Internet operations by introducing Bankrate.com in 1996. Due to the limited operating history of our Internet operations, it is important that we develop brand awareness of our Web site in order for it to be attractive to advertisers. The importance of our brand recognition will increase as competition in the Internet advertising market increases. As a result, developing and maintaining awareness of our Web site by promoting our brand name is critical to maintaining our growth. As competing Web sites become established on the Internet, the cost of developing brand awareness increases significantly. Successfully promoting and positioning our Web site and brand name will depend largely on the effectiveness of our marketing efforts and our ability to develop favorable traffic patterns to our Web site. Therefore, we may need to modify our financial commitment to creating and maintaining brand awareness among users. If we fail to successfully promote our Web site and brand names or if we incur significant expense in doing so, it could have a material adverse effect on our business. Our markets are highly competitive We compete for Internet advertising revenues with a number of finance- related Web sites, such as MarketWatch.com, CNNfn.com, MoneyCentral, and Money.com and traditional publishers and distributors of personal finance content such as MSNBC, CNN, Money Magazine and USA Today. In addition, new competitors may easily enter this market as there are few barriers to entry. Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than us. Many competitors have complementary products or services that drive traffic to their Web sites. Increased competition could result in lower Web site traffic, advertising rate reductions, reduced margins or loss of market share, any of which would adversely affect our business. We cannot be certain that we will be able to compete successfully against current or future competitors. Our Web site may encounter technical problems and service interruptions In the past, our Web site has experienced significant increases in traffic in response to interest rate movements and other business or financial news events. The number of our users has continued to increase over time, and we are seeking to further increase our user base. As a result, our Internet servers must accommodate spikes in demand for our Web pages in addition to potential significant growth in traffic. 11 Our Web site has in the past and may in the future experience slower response times or interruptions as a result of increased traffic or other reasons. These delays and interruptions resulting from failure to maintain Internet service connections to our site could frustrate users and reduce our future Web site traffic, which could have a material adverse effect on our business. All of our communications and network equipment is co-located at our corporate headquarters in North Palm Beach, Florida and at a secure third party facility in Alpharetta, Georgia. Multiple system failures at these locations could lead to interruptions or delays in service for our Web site, which could have a material adverse effect on our business. Our operations are dependent upon our ability to protect our systems against damage from fires, hurricanes, earthquakes, power losses, telecommunications failures, break-ins, computer viruses, hacker attacks and other events beyond our control. Although we maintain business interruption insurance, it may not adequately compensate us for losses that may occur due to failures of our systems. We rely on the protection of our intellectual property Our intellectual property consists of the content of our Web site and print publications. We rely on a combination of copyrights, trademarks, trade secret laws and our user policy and restrictions on disclosure to protect our intellectual property. We may also enter into confidentiality agreements with our employees and consultants and seek to control access to and distribution of our proprietary information. Despite these precautions, it may be possible for other parties to copy or otherwise obtain and use the content of our Web sites or print publications without authorization. A failure to protect our intellectual property in a meaningful manner could have a material adverse effect on our business. Because we license some of our data and content from other parties, we may be exposed to infringement actions if such parties do not possess the necessary proprietary rights. Generally, we obtain representations as to the origin and ownership of licensed content and obtain indemnification to cover any breach of any such representations. However, such representations may not be accurate and such indemnification may not be sufficient to provide adequate compensation for any breach of such representations. Any future infringement or other claims or prosecutions related to our intellectual property could have a material adverse effect on our business. Any such claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel or require us to introduce new content or trademarks, develop new technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. We may face liability for information on our Web site Much of the information published on our Web site relates to the competitiveness of financial institutions' rates, products and services. We may be subjected to claims for defamation, negligence, copyright or trademark infringement or other theories relating to the information we publish on our Web sites. These types of claims have been brought, sometimes successfully, against online services as well as print publications. Our insurance may not adequately protect us against these types of claims. Future government regulation of the Internet is uncertain and subject to change As Internet commerce continues to evolve, increasing regulation by federal or state agencies or foreign governments may occur. Such regulation is likely in the areas of user privacy, pricing, content and quality of products and services. Additionally, taxation of Internet use or electronic commerce transactions may be imposed. Any regulation imposing fees for Internet use or electronic commerce transactions could result in a decline in the use of the Internet and the viability of Internet commerce, which could have a material adverse effect on our business. Our ownership is heavily concentrated in our management Our officers and directors beneficially own approximately 58% of the Company's outstanding common stock. Peter C. Morse, our largest shareholder, beneficially owns approximately 40% of the Company's outstanding common stock. As a result, our officers and directors will be able to exercise control over all matters requiring shareholder approval. In particular, these controlling shareholders will have the ability to elect all of our directors and approve or disapprove significant corporate transactions. This control could be used to prevent or significantly delay another company or person from acquiring or merging with us. 12 Our rapid growth may strain our operations Since we began our Internet operations in 1996, we have expanded our operations significantly, and we may continue to do so. Our future expansion may place a significant strain on our management. To manage the expected growth of our operations and personnel, we may need to expand and improve our existing management team, and our operational and financial systems. If we fail to expand and improve these systems in a timely manner, this failure could have a material adverse effect on our business. Our new managers must work together effectively as a team We have recently added key managerial, technical and operations personnel. For example, our President and Chief Executive Officer was hired in April 2000, and our Senior Vice President-Chief Revenue Officer was hired in August 2000. During the year ended December 31, 2000, we have also replaced personnel in various positions throughout the Company. These new personnel must integrate themselves into our daily operations and work effectively as a team in order for us to be successful. We cannot be certain that this will occur in all instances. Our success depends upon management and key employees Our success depends largely upon retaining the continued services of our executive officers and other key management, and developing personnel as well as hiring and training additional employees. We have a number of key employees on whom we depend and who may be difficult to replace. Key employees include Elisabeth DeMarse, G. Cotter Cunningham, Robert J. DeFranco and Edward L. Newhouse. A failure to retain our current key employees or to hire enough qualified employees to sustain our growth could have a material adverse effect on our business. Our Articles of Incorporation and Bylaws, as well as Florida law, may prevent or delay a future takeover Our Articles of Incorporation and Bylaws may have the effect of delaying or preventing a merger or acquisition, or making such a transaction less desirable to a potential acquirer, even when shareholders may consider the acquisition or merger favorable. For example, our Articles of Incorporation and Bylaws provide that: (1) the board of directors has the authority, without shareholder approval, to issue up to 10,000,000 shares of preferred stock and to determine the rights (including voting rights) associated with such preferred stock (which issuance may adversely affect the market price of the common stock and the voting rights of the holders of common stock); (2) the board of directors is classified and directors have three-year terms; (3) cumulative voting for the election of directors is prohibited; (4) approval by 66 2/3% of the shareholders is required for material amendments to the Articles of Incorporation or Bylaws: and (5) certain procedures must be followed before matters can be proposed by shareholders for consideration at shareholder meetings. Florida law also contains "control share acquisition" and "affiliate transaction" provisions that may also delay, prevent, or discourage an acquisition of or merger with Bankrate, Inc. We may encounter difficulties with future acquisitions We may acquire complementary Web sites and other content providers as a part of our business strategy. Any acquisitions may present a number of potential risks that could result in a material adverse effect on our business. These risks include the following: failure to integrate the technical operations and personnel in a timely and cost-effective manner; failure to retain key personnel of the acquired company; and assumption of unexpected material liabilities. In addition, we cannot assure you that we will be able to identify suitable acquisition candidates that are available for sale at reasonable prices. We may finance future acquisitions with debt financing, which would increase our debt service requirements, or through the issuance of additional common or preferred stock, which could result in dilution to our shareholders. We cannot be certain that we will be able to arrange adequate financing on acceptable terms. Our results of operations may fluctuate significantly Our results of operations may fluctuate significantly in the future as a result of several factors, many of which are beyond our control. These factors include: (1) changes in fees paid by advertisers; (2) traffic levels on our Web site, which can fluctuate significantly; (3) changes in the demand for Internet products and services; (4) changes in fee or revenue-sharing arrangements with our distribution partners; (5) our ability to enter into or renew key distribution agreements; (6) the introduction of new Internet advertising services by us or our competitors; (7) changes in our capital or operating expenses; and (8) general economic conditions. 13 Our future revenue and results of operations may be difficult to forecast due to these factors. As a result, we believe that period-to-period comparisons of our results of operations may not be meaningful, and you should not rely on past periods as indicators of future performance. In future periods, our results of operations may fall below the expectations of securities analysts and investors, which could adversely affect the trading price of our common stock. Our stock price may be volatile in the future The stock prices and trading volume of Internet-related companies have been extremely volatile. Accordingly, our stock price can be volatile as well. On January 29, 2001, the Company announced that its common stock was removed from the Nasdaq National Market and immediately became eligible for trading on the OTC Bulletin Board. In addition, following periods of downward volatility in the market price of a company's securities, class action litigation is often brought against the Company. Downward volatility of our stock prices could lead to class action litigation, resulting in substantial costs and a diversion of our management's attention and resources. See Item 3. Legal Proceedings below. ITEM 2. PROPERTIES Our principal administrative, sales, Web operations, marketing and research functions are located in one leased facility in North Palm Beach, Florida. The lease is for approximately 14,300 square feet and is currently on a month-to- month basis. We also lease approximately 4,500 square feet in New York City that is principally used for administration, sales and business development. The New York office lease expires in September 2006. The Company also leases approximately 500 square feet on a month-to-month basis in Irvine, California that is used principally as a sales office. ITEM 3. LEGAL PROCEEDINGS On March 28, 2000, a purported class-action lawsuit was filed against the Company and certain of its directors and officers, its auditor and underwriters in the United States District Court for the Southern District of New York (Civil Action No. 00CIV.2337). The action, which seeks an unspecified amount of money damages, was filed purportedly on behalf of all stockholders who purchased shares of our stock during the period from May 13, 1999 through March 27, 2000. The plaintiff alleges that the Company violated federal securities laws by, among other things, misrepresenting and/or omitting material information concerning the Company's financial results for the quarter ended March 31, 1999, and other financial information, in its registration statement and prospectus filed with the Securities and Exchange Commission in connection with the Company's initial public offering. The plaintiff alleges, among other things, that the Company failed to disclose in its registration statement and prospectus the fact that the Company incurred a net loss of approximately $6 million in the quarter ended March 31, 1999. The plaintiff alleges that the information was not made public until May 24, 1999, when the Company issued a press release with respect to the results for that quarter. The Company contends that the loss for the quarter ended March 31, 1999 was properly disclosed. The Company has filed a motion to dismiss this complaint and the motion has been submitted to the court however, no decision has been rendered. If the motion is denied the Company intends to vigorously defend against the lawsuit. Damages, if any, would be substantially covered by insurance. In September 1999, the Company entered into a lease agreement for a new office facility to be constructed in northern Palm Beach County, Florida. The Company provided to the developer a $300,000 letter of credit as a security deposit. The lease provides an initial lease term of ten years commencing from the date of occupancy and includes two five-year renewal options. The annual base rent during the initial term ranges from $660,000 in the first two years to $760,000. The lease contemplated that occupancy would commence on September 15, 2000. In connection with the lease agreement, the Company also entered into an agreement with the developer to purchase an adjoining tract of land for $609,000. The Company paid a deposit of $60,000 to close the transaction no later than June 30, 2000, which is being held in escrow. Subsequent to a dispute with the developer with respect to the lease agreement and the agreement to purchase the adjacent tract, on August 3, 2000, the developer made demand on the bank that issued the letter of credit and the bank paid the developer the full $300,000 under the letter of credit. On August 14, 2000, the developer filed claims against the Company alleging breach of contract under the lease agreement and the agreement to purchase the adjacent tract, and seeks damages in excess of $500,000 plus attorneys fees costs. The Company has filed counterclaims and intends to vigorously defend against both of these matters. While acknowledging the uncertainties of litigation, the Company believes that these matters will be resolved without a material adverse impact on the Company's financial position or results of operations. In July 2000, the Company sold its former wholly owned subsidiary, Professional Direct Agency, Inc. ("Pivot"), for $4,350,000 in cash. In connection with the sale, the Company agreed to indemnify the buyer for liability of up to $1,000,000 in 14 connection with a litigation matter between Pivot and its co-founders and former owner. In March 2001, the case was dismissed based on a technical deficiency. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4A. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT The names, ages at December 31, 2000, and current positions of Bankrate, Inc.'s current executive officers are listed below in accordance with General Instruction G(3) of Form 10-K and Instruction 3 of Item 401(b) of Regulation S- K. Unless otherwise stated, each executive officer has held their position for at least the last five years. All officers are elected for one year terms or until their respective successors are chosen. There are no family relationships among the executive officers nor is there any agreement or understanding between any officer and any other person pursuant to which the officer was elected. Elisabeth DeMarse, 45, has served as President and Chief Executive Officer of the Company since April 27, 2000. Prior to that time, Ms. DeMarse served as Executive Vice President of International Operations at Hoover's, Inc. which operates Hoover's Online since February 1999. Previously, she was an Executive Vice President at Bloomberg L.P., where, as a member of the executive management team, she helped grow the company to $1.5 billion from $50 million in revenue. Ms. DeMarse spent ten years at Bloomberg L.P. in a leadership position where she led the start-up of eight businesses including Bloomberg.com, Bloomberg's e- commerce and i-commerce divisions and Bloomberg's print divisions. At Bloomberg, she arranged more than 20 major deals and new business ventures and redefined the company's brand to extend beyond professional financial services to a broader range of personal service offerings. Prior to Bloomberg, she served four years at Citibank's Information Business, and over four years at Western Union marketing telecommunications services. Ms. DeMarse holds an A.B. with Honors from Wellesley College where she majored in History and an MBA from Harvard with an emphasis on Marketing. G. Cotter Cunningham, 38, has served as Senior Vice President-Chief Operating Officer of the Company since September 2000. Prior to that he served as interim President and Chief Executive Office of the Company since February 25, 2000. Prior to that time, he served as Senior Vice President-Marketing and Sales of the Company since February 1999. From August 1997 to January 1999, Mr. Cunningham was Vice President and General Manager of Valentine McCormick Ligibel, Inc., an advertising agency specializing in new media. From August 1992 to July 1997, Mr. Cunningham was Vice President of Block Financial Corporation, where he created, launched and directed the CompuServe Visa and WebCard Visa credit card programs. Mr. Cunningham holds a B.S. in Economics from the University of Memphis and an M.B.A. from Vanderbilt University's Owen Graduate School of Management. Robert J. DeFranco, 44, has served as Senior Vice President-Chief Financial Officer of the Company since September 2000. Prior to that he served as Vice President - Finance and Chief Accounting Officer since March 1999. From 1978 to 1986 he was part of the commercial audit division of Arthur Andersen & Co., Miami, Florida, where he last served as senior audit manager for a variety of publicly held and privately held companies in industries including banking and other financial institutions, manufacturing, distribution and real estate development. From 1986 to 1999, he held various positions in corporate accounting and finance for companies including Ocwen Financial Corporation as Director of Finance from January 1998 through March 1999, SunTrust Banks, Inc. as Vice President-Financial Reporting from February 1995 through December 1997, Ryder System, Inc. and Southeast Banking Corporation. Mr. DeFranco is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. Mr. DeFranco received a B.S. degree with a major in accounting from Florida State University in 1978. Edward L. Newhouse, 41, has served as Senior Vice President-Chief Revenue Officer since August 31, 2000. Prior to that he was Vice President, Director of Sales of 24/7 Media, Inc. since 1997. He was a founding member of 24/7 Media and was responsible for sales of over 2.2 billion monthly impressions, e-mail sponsorships, ecommerce and direct marketing products representing such marquee sites as AT&T Worldnet, Juno.com, WebCrawler, GoTo.com and AOL.com. In 1996, prior to joining 24/7 Media, Inc., Mr. Newhouse worked with Millennium Media/Katz Media as VP Director, East Coast Sales and as a founding member of the interactive division of the world's largest media rep firm. He has also worked for a variety of publishing companies including Cowles Business Media and Advance Publications/Conde Nast. Mr. Newhouse holds a B.S. from the Rochester Institute of Technology where he studied publishing production and management, and sales and marketing. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS (a) Bankrate, Inc.'s Common Stock traded on the Nasdaq National Market under the symbol "RATE" from September 25, 2000 when the Company changed its name from ilife.com, Inc. to Bankrate, Inc., until January 29, 2001. From May 13, 1999 to September 25, 2000, the Company's Common Stock traded on the Nasdaq National Market under the symbol "ILIF". Prior to that time there was no established market for the shares. On January 29, 2001, the Company announced that its common stock was removed from the Nasdaq National Market and immediately became eligible for trading on the OTC Bulletin Board under the symbol "RATE". Nasdaq's decision to delist the Company's common stock from the Nasdaq National Market was based on the Company's net tangible assets, as defined by Nasdaq, falling below the required $4,000,000 minimum amount. The price per share reflected in the table below represents the range of low and high closing sale prices for the Company's Common Stock as reported by the Nasdaq National Market for the periods indicated: HIGH LOW ---- --- Year ended December 31, 1999 First quarter..................................... $ - $ - Second quarter................................... 13.000 6.125 Third quarter.................................... 7.813 3.813 Fourth quarter................................... 7.313 3.375 Year ended December 31, 2000 First quarter.................................... $ 5.750 $ 2.625 Second quarter................................... 3.000 1.125 Third quarter.................................... 2.000 1.000 Fourth quarter................................... 1.438 0.688 The closing sale price of the Company's Common Stock as reported by the OTC Bulletin Board on February 28, 2001 was U.S. $0.5620 per share. The number of shareholders of record of the Company's Common Stock as of February 28, 2001, was approximately 2,423. As of February 28, 2001, options to purchase 2,072,386 shares of the Company's common stock were outstanding of which 848,187 were exercisable. The Company has never paid cash dividends on its capital stock. The Company currently intends to retain any earnings for use in the business and does not anticipate paying any cash dividends in the foreseeable future. 16 SELECTED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with the consolidated financial statements and notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K. The consolidated statement of operations data for the years ended December 31, 2000 and 1999, the six months ended December 31, 1998 and the year ended June 30, 1998, and the consolidated balance sheet data as of December 31, 2000 and 1999, are derived from, and are qualified by reference to, the audited consolidated financial statements of Bankrate, Inc. included elsewhere in this Form 10-K. The consolidated statement of operations data for the years ended June 30, 1997 and 1996, and the consolidated balance sheet data as of June 30, 1997 and 1996 have been derived from audited consolidated financial statements not included in this Form 10-K. Historical results are not necessarily indicative of results to be expected in the future.
Six Months Ended Year Ended December 31, December 31, Year Ended June 30, 2000(A) 1999(B) 1998 1998 1997 1996 ------- ------- ---- ---- ---- ---- Consolidated Statement of Operations Data (In thousands, except share and per share data) Revenue: Online publishing $ 12,283 $ 8,497 $ 1,809 $ 1,281 $ 485 $ 70 Print publishing and licensing 2,922 3,473 1,660 2,559 2,058 1,558 ----------- ----------- ---------- ---------- ---------- ---------- Total revenue 15,205 11,970 3,469 3,840 2,543 1,628 ----------- ----------- ---------- ---------- ---------- ---------- Cost of revenue: Online publishing 7,114 5,627 1,424 1,340 1,002 286 Print publishing and licensing 1,983 2,387 1,101 1,961 1,186 971 ----------- ----------- ---------- ---------- ---------- ---------- Total cost of revenue 9,097 8,014 2,525 3,301 2,188 1,257 ----------- ----------- ---------- ---------- ---------- ---------- Gross margin 6,108 3,956 944 539 355 371 ----------- ----------- ---------- ---------- ---------- ---------- Operating expenses: Sales 3,234 2,977 838 706 131 137 Marketing 3,874 16,459 305 145 1 34 Product development 1,940 2,017 450 698 260 199 General and administrative expenses 7,165 6,159 871 1,663 768 522 Restructuring and impairment charges 2,285 - - - - - Depreciation and amortization 874 422 98 66 74 98 Goodwill amortization 231 186 - - - - Noncash stock based compensation 1,312 3,305 669 89 - - ----------- ----------- ---------- ---------- ---------- ---------- 20,915 31,525 3,231 3,367 1,234 990 ----------- ----------- ---------- ---------- ---------- ---------- Loss from operations (14,807) (27,569) (2,287) (2,828) (879) (619) Other income (expense), net 230 873 192 46 (77) (53) Noncash financing charge - (2,656) - - - - ----------- ----------- ---------- ---------- ---------- ---------- Loss before income taxes and discontinued operations (14,577) (29,352) (2,095) (2,782) (956) (672) Income taxes from continuing operations - - - - - - ----------- ----------- ---------- ---------- ---------- ---------- Loss before discontinued operations (14,577) (29,352) (2,095) (2,782) (956) (672) ----------- ----------- ---------- ---------- ---------- ---------- Discontinued operations: Loss from discontinued operations (3,215) (2,136) - - - - Gain on disposal of discontinued operations 871 - - - - - ----------- ----------- ---------- ---------- ---------- ---------- (2,344) (2,136) - - - - ----------- ----------- ---------- ---------- ---------- ---------- Net loss (16,921) (31,488) (2,095) (2,782) (956) (672) Accretion of Convertible Series A and Series B preferred stock to redemption value - (2,281) - - - - Charge for conversion of nonredeemable convertible Series A preferred stock to redeemable - - (4,438) - - - ----------- ----------- ---------- ---------- ---------- ---------- Net loss applicable to common stock $ (16,921) $ (33,769) $ (6,533) $ (2,782) $ (956) $ (672) =========== =========== ========== ========== ========== ========== Basic and diluted net loss per share: Loss before discontinued operations $ (1.05) $ (2.90) $ (0.52) $ (0.72) $ (0.20) $ (0.13) Discontinued operations (0.17) (0.21) - - - - ----------- ----------- ---------- ---------- ---------- ---------- Net loss (1.22) (3.11) (0.52) (0.72) (0.20) (0.13) Accretion of Convertible Series A and Series B preferred stock to redemption value - (0.23) - - - - Charge for conversion of nonredeemable convertible Series A preferred stock to redeemable - - (1.11) - - - ----------- ----------- ---------- ---------- ---------- ---------- Net loss applicable to common stock $ (1.22) $ (3.34) $ (1.63) $ (0.72) $ (0.20) $ (0.13) =========== =========== ========== ========== ========== ========== Weighted average shares outstanding used in basic and diluted per-share calculation 13,872,788 10,113,928 4,018,700 3,846,200 4,743,590 5,000,000 =========== =========== ========== ========== ========== ========== As of December 31, As of June 30, 2000 1999 1998 1998 1997 1996 ---- ---- ---- ---- ---- ---- Consolidated Balance Sheet Data (In thousands) Cash and cash equivalents $ 8,891 $ 22,492 $ 1,633 $ 910 $ 1,783 $ - Working capital 7,057 18,973 658 164 887 (1,649) Total assets 12,634 32,600 3,099 1,768 2,193 311 Subordinated note payable 4,350 4,350 - - - - Redeemable preferred stock - - 12,198 - - - Total stockholders' equity (deficit) 1,573 17,445 (10,985) 657 1,035 (1,508)
- --------- (A) Excludes the operations of CPNet.com after May 2000 and Pivot after July 2000, and includes GreenMagazine.com through December 2000. (B) Includes the operations of CPNet.com from January 1999, and Pivot and GreenMagazine.com from August 1999, their respective acquisition dates. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and related notes contained in this Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," or "continue," or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-K involve known and unknown risks, uncertainties and other factors that may cause the Company's or our industry's actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These factors include those listed under Item 1. Business "Risk Factors That Could Impact Future Operating Results" and elsewhere in this Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. Overview Bankrate, Inc. ("Bankrate" or the "Company") is an Internet consumer finance marketplace that owns and operates a portfolio of Internet-based personal finance channels including banking, investing, taxes and small business finance. The Company's flagship site, Bankrate.com, is the Web's leading aggregator of information on over 100 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 also through national and state publications. Bankrate.com provides the tools and information that can help consumers make the best financial decisions. We regularly survey approximately 4,800 financial institutions in 50 states in order to provide the most current objective, unbiased rates on banking products such as mortgages, new and used auto loans, credit cards and more. Hundreds of print and online partner publications depend on Bankrate.com as the trusted source for financial rates and information. On September 20, 2000, the Company changed its name from ilife.com, Inc. to Bankrate, Inc. Since our online debut in 1996, Bankrate.com has won numerous awards and accolades for its rate collection and distribution and original editorial content. In the first half of 2000 alone, such prestigious organizations as Forbes, Fortune, Yahoo!, Internet Life, Money and SmartMoney granted Bankrate "Best of the Web" status. Over two decades 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 lenders, by market and include relevant details to help consumers compare loan products. We continue to enhance our offerings in order to provide Bankrate.com users with the most complete experience. Features such as financial calculators, email newsletters, and message boards allow users to interact with our site as well as with other consumers. Our new - and very popular - Rate Trend Index is a weekly poll of industry insiders designed to help consumers forecast interest rate trends. We've also 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 download state and federal forms from the Tax channel, get business tips from the Small Business channel and ask a financial expert money questions on 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. Recent Developments On April 12, 1999, our Board of Directors approved changing our fiscal year-end to December 31 from June 30. 18 On August 20, 1999, the Company acquired Pivot pursuant to a Stock Purchase Agreement, dated August 20, 1999, by and between the Company, the shareholders of Pivot and The Midland Life Insurance Company ("Midland"), a note and warrant holder of Pivot (the "Agreement"), for approximately $4,744,000 including acquisition costs. Pursuant to the Agreement, the Company acquired a 100% interest in Pivot and as a result of the acquisition, Pivot became a wholly owned subsidiary of the Company. The transaction was accounted for using the purchase method of accounting. The net assets acquired were estimated to be at fair market value. The excess of the purchase price over the fair value of the net assets acquired (approximately $4,609,000) was recorded as goodwill and was amortized over three years, the expected benefit period. The total consideration paid in connection with the acquisition consisted of $290,000 in cash paid to the Pivot shareholders and a $4,350,000 five-year convertible subordinated note to Midland. The note bears interest at 10% and is due in one payment on August 20, 2004. Interest is due beginning on August 20, 2002 and thereafter every six months until conversion or payment in full. The note is convertible at any time by Midland into 625,000 shares of our common stock. The Company has the right to require conversion beginning any time after the earlier of (1) August 20, 2000 or (2) the date that the Company files a registration statement under the Securities Act of 1933, as amended (the "Act"), registering the conversion shares for sale under the Act; provided that, within the 55-day period immediately prior to the date the Company notifies Midland of the required conversion, the closing price of our common stock has been at least $10.00 per share for at least twenty consecutive trading days. On July 14, 2000, the Company sold Pivot for $4,350,000 in cash. In connection with the sale, the Company agreed to indemnify the buyer for liability of up to $1,000,000 in connection with a litigation matter between Pivot and its co-founders and Midland. In March 2001, the case was dismissed based on a technical deficiency. Management has excluded any costs contingent on the outcome of this litigation from the calculation of the gain on sale. Pivot's results of operations have been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. The Company recorded a gain on the sale of $871,212 in the quarter ending September 30, 2000. On August 27, 1999, the Company acquired certain assets and assumed certain liabilities of Green Magazine, Inc. ("Green") pursuant to an Asset Purchase Agreement, dated August 27, 1999, by and among the Company, Green, Kenneth A. Kurson, John F. Packel and James Michaels (the "Agreement"), for approximately $831,000 including acquisition costs. Pursuant to the Agreement, the Company acquired the rights to all agreements, contracts, commitments, licenses, copyrights, trademarks and the subscriber/customer list of Green. Kenneth A. Kurson and John F. Packel were also employed by the Company. The total consideration paid was approximately $784,000 consisting of $200,000 in cash and 100,000 unregistered shares of the Company's common stock valued at approximately $584,000. The transaction was accounted for using the purchase method of accounting. The net assets acquired were estimated to be at fair market value. The excess of the purchase price over the fair value of the net assets acquired (approximately $883,000) was recorded as goodwill and was being amortized over three years, the expected benefit period. During the quarter ended September 30, 2000, a decision was made to stop publishing the print version of Green Magazine. Additionally, due to lower than expected traffic levels visiting GreenMagazine.com and continued negative operational cash flows, a revised operating plan was developed and GreenMagazine.com was incorporated into a channel of Bankrate.com. After evaluating the recoverability of the intangible asset, the Company recorded an impairment charge of approximately $476,000 to write the goodwill down to estimated fair value. In December 2000, GreenMagazine was shut down and the remaining goodwill of approximately $73,000 was written off. On November 12, 1999, we changed our name from "Intelligent Life Corporation" to "ilife.com, Inc." to more accurately reflect the Company's major revenue generating activities, which are derived from the Internet. On February 25, 2000, the Company announced that William P. Anderson resigned as its President and Chief Executive Officer and as a director. Under the terms of his Executive Employment Agreement entered into on March 10, 1999, Mr. Anderson received cash compensation totaling approximately $150,000 and continued to vest in his stock options through November 15, 2000, which resulted in a noncash charge of approximately $860,000. Both the cash charge ($150,000) and the noncash charge ($860,000) were recorded in the quarter ended March 31, 2000. On April 5, 2000, Jeffrey M. Cunningham was appointed to the Company's Board of Directors as non-executive chairman. In accordance with the terms of a Stock Purchase Plan and Subscription Agreement (the "Purchase Agreement") entered into on that date, Mr. Cunningham purchased 431,499 shares of the Company's common stock for $997,840 in cash (or $2.313 per share). The purchase price of the shares is equal to the closing price per share of the Company's common stock on April 5, 2000, as reported by the Nasdaq National Market. In addition, on April 5, 2000, Mr. Cunningham was granted stock 19 options under the 1999 Equity Compensation Plan to purchase 141,905 shares of common stock at $4.50 per share and 125,622 shares at $3.75 per share. One-half of the options vest and become exercisable on March 31, 2001, and the balance vest and become exercisable in equal monthly increments commencing on April 30, 2001 and concluding on March 31, 2002. The Company will recognize compensation expense of approximately $217,000 over the vesting period. On April 27, 2000, Elisabeth DeMarse was appointed to the Company's Board of Directors as well as elected President and Chief Executive Officer of the Company. Ms. DeMarse entered into an employment agreement with the Company on that date. Pursuant to the terms of her employment agreement, Ms. DeMarse is entitled to receive an annual base salary of $300,000 and a bonus of $100,000 payable in quarterly installments. The Company has agreed to provide other benefits, including $500,000 in term life insurance and participation in the Company's benefit plans available to other executive officers. Under the terms of the employment agreement, Ms. DeMarse agrees to assign to the Company all of her copyrights, trade secrets and patent rights that relate to the business of the Company. Additionally, during the term of her employment and for a period of one year thereafter, Ms. DeMarse agrees not to compete with the Company and not to recruit any of the Company's employees, unless the Company terminates her without cause or she resigns for good reason. Upon Ms. DeMarse's termination of employment for certain reasons (i.e., without cause, disability, resignation for good reason (as defined in the agreement), or a change of control), the Company agrees to pay her a severance equal to 12 months' base salary, as well as reimburse her for health, dental and life insurance coverage premiums for one year after such termination. The agreement terminates on April 27, 2002, unless otherwise extended by the parties. Ms. DeMarse was also granted options to purchase 541,936 shares of the Company's common stock under the 1999 Equity Compensation Plan at $2.688 per share, the fair market value on the date of grant. The options vest over a 24 month period. The options vest as to 25% of the shares six months from the date of grant; and as to the remaining 75%, in equal monthly installments over the next 18 months thereafter, with 100% vesting on the second anniversary of the date of grant. On May 17, 2000, the Company sold the assets of The College Press Network (CPNet.com) to Colleges.com, Inc. for 190,000 shares of Colleges.com, Inc. common stock of which 125,041 shares were delivered at the time of closing and 64,959 contingent shares. The Company originally recorded such shares at the net book value of the CPNet.com assets which, at the time of the sale, was approximately $71,000. During the quarter ended December 31, 2000, the Company charged this amount to restructuring and impairment charges after determining impairment based on the fact that Colleges.com is an early-stage company subject to significant risk due to their limited operating history and volatile industry-based economic conditions. In June 2000, the Company recorded a restructuring charge of $1,298,000, or $0.09 per share, as a result of implementing certain strategic reorganization initiatives. Approximately $364,000 of this charge pertains to severance, legal and other employee related costs incurred in connection with a reduction of approximately 10% of the workforce in ongoing operations and the elimination of positions in under-performing, non-core business units, all of which was paid in 2000. The remaining $934,000 of this charge relates to the write-off of certain assets, primarily software, licenses and other installation costs, of an abandoned systems installation. In the quarter ended September 30, 2000, the Company recorded restructuring and impairment charges of approximately $843,000, or $0.06 per share, as a result of strategic reorganization initiatives. Approximately $88,000 of this charge pertained to severance, legal and other employee related costs incurred in connection with a further reduction of the workforce, all of which was paid in 2000. Approximately $279,000 relates to the shut down and sale of assets of Consejero.com and other non-core assets. The remaining $476,000 results from the write down of the GreenMagazine.com goodwill discussed above. On August 31, 2000, the Company shut down the operations of Consejero.com and sold certain of its assets including fixed assets, software licenses and other intangible assets, to Consejero Holdings, LLC for $41,800 in cash resulting in a loss of approximately $86,000. Additionally, the Company recorded approximately $193,000 in charges for severance and other related shut down costs, all of which were paid in 2000. On September 20, 2000, the Company changed its name from ilife.com, Inc. to Bankrate, Inc. and changed its Nasdaq National Market stock symbol from ILIF to RATE. On January 29, 2001, the Company announced that its common stock was removed from the Nasdaq National Market and immediately became eligible for trading on the OTC Bulletin Board under the symbol "RATE". Nasdaq's decision to delist the Company's common stock from the Nasdaq National Market was based on the Company's net tangible assets, as defined by Nasdaq, falling below the required $4,000,000 minimum amount. 20 Legal Proceedings On March 28, 2000, a purported class-action lawsuit was filed against the Company and certain of its directors and officers, its auditor and underwriters in the United States District Court for the Southern District of New York (Civil Action No. 00CIV.2337). The action, which seeks an unspecified amount of money damages, was filed purportedly on behalf of all stockholders who purchased shares of the Company's stock during the period from May 13, 1999 through March 27, 2000. The plaintiff alleges that the Company violated federal securities laws by, among other things, misrepresenting and/or omitting material information concerning the Company's financial results for the quarter ended March 31, 1999, and other financial information, in its registration statement and prospectus filed with the Securities and Exchange Commission in connection with the Company's initial public offering. More particularly, the plaintiff alleges, among other things, that the Company failed to disclose in its registration statement and prospectus the fact that the Company incurred a net loss of approximately $6 million in the quarter ended March 31, 1999. The plaintiff alleges that the information was not made public until May 24, 1999, when the Company issued a press release with respect to the results for that quarter. The Company contends that the loss for the quarter ended March 31, 1999, was properly disclosed. The Company has filed a motion to dismiss this complaint and the motion has been submitted to the court however, no decision has been rendered. If the motion is denied the Company intends to vigorously defend against the lawsuit. Damages, if any, would be substantially covered by insurance. In September 1999, the Company entered into a lease agreement for a new office facility to be constructed in northern Palm Beach County, Florida. The Company provided to the developer a $300,000 letter of credit as a security deposit. The lease provides an initial lease term of ten years commencing from the date of occupancy and includes two five-year renewal options. The annual base rent during the initial term ranges from $660,000 in the first two years to $760,000. The lease contemplated that occupancy would commence on September 15, 2000. In connection with the lease agreement, the Company also entered into an agreement with the developer to purchase an adjoining tract of land for $609,000. The Company paid a deposit of $60,000 to close the transaction no later than June 30, 2000, which is being held in escrow. Subsequent to a dispute with the developer with respect to the lease agreement and the agreement to purchase the adjacent tract, on August 3, 2000, the developer made demand on the bank that issued the letter of credit and the bank paid the developer the full $300,000 under the letter of credit. On August 14, 2000, the developer filed claims against the Company alleging breach of contract under the lease agreement and the agreement to purchase the adjacent tract, and seeks damages in excess of $500,000 plus attorneys fees costs. The Company has filed counterclaims and intends to vigorously defend against both of these matters. While acknowledging the uncertainties of litigation, the Company believes that these matters will be resolved without a material adverse impact on the Company's financial position or results of operations. In July 2000, the Company sold its former wholly owned subsidiary, Professional Direct Agency, Inc. ("Pivot"), for $4,350,000 in cash. In connection with the sale, the Company agreed to indemnify the buyer for liability of up to $1,000,000 in connection with a litigation matter between Pivot and its co-founders and former owner. In March 2001, the case was dismissed based on a technical deficiency. The following are descriptions of the revenue and expense components of our statement of operations: Online publishing revenue The Company sells graphical advertisements on its Web site (including co- branded sites) consisting of banner, badge, billboard and poster advertisements. Such advertising is 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 advertisements we have per Web page, (2) the number of visitors viewing our Web pages, and (3) the capacity of our sales force. Advertising sales are invoiced monthly based on the number of advertisement impressions or the number of times the advertisement is viewed by users of the Company's Web site. Revenue is recognized monthly based on the percentage of actual impressions to the total number of impressions contracted. Revenue for impressions invoiced but not delivered is deferred. Additionally, the Company generates 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. The Company is also involved in revenue sharing arrangements with its online partners where the consumer uses co-branded sites principally hosted by the Company. Revenue is effectively allocated to each partner based on the percentage of advertisement views at each site. The allocated revenues are shared according to distribution agreements. Revenue is recorded gross and partnership payments are recorded in cost of revenue. The Company also sells hyperlinks to various third-party Internet sites that generate a fixed monthly fee, which is recognized in the month earned. Online publishing revenue also includes barter revenue which represents the exchange by the Company of advertising space on the Company's web site for reciprocal advertising space or traffic on other web sites. Barter revenues and expenses are 21 recorded at the fair market value of the advertisements delivered or received, whichever is more determinable in the circumstances. In January 2000, the Company adopted Emerging Issues Task Force ("EITF") 99-17, "Accounting for Advertising Barter Transactions". In accordance with EITF 99-17, barter transactions have been valued based on similar cash transactions which have occurred within six months prior to the date of the barter transaction. Revenue from barter transactions is recognized as income when advertisements are delivered on the Company's Web site. Barter expense is recognized when the Company's advertisements are run on the other companies' Web sites, which is typically in the same period barter revenue is recognized. If the advertising impressions are received from the customer prior to the Company delivering the advertising impressions, a liability is recorded. If the Company delivers advertising impressions to the other companies' Web sites prior to receiving the advertising impressions, a prepaid expense is recorded. At December 31, 2000, the Company recorded a prepaid expense of approximately $200,000 for barter advertising to be received. Barter revenue was approximately $757,000 and represented approximately 5% of total revenue for the year ended December 31, 2000. No barter revenue was recorded in prior periods. Print publishing and licensing revenue Print publishing and licensing revenue represents advertising revenue from the sale of advertising in Consumer Mortgage Guide rate tables, newsletter subscriptions, and licensing of research information. We charge a commission for placement of Consumer Mortgage Guide in a print publication. Advertising revenue and commission income is recognized when Consumer 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. 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 sites. These costs increase with gains in traffic to our sites. 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 sites 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 of compensation and benefits, facilities costs, telephone costs and computer systems expenses. Print publishing and licensing costs Print publishing and licensing costs represent expenses directly associated with print publishing revenue. These costs include contractual revenue sharing obligations with newspapers related to Consumer Mortgage Guide, personnel costs, printing and allocated overhead. Sales costs represent direct selling expenses, principally for online advertising, and include sales commissions, personnel costs and allocated overhead. Marketing costs represent expenses associated with expanding brand awareness of our products and services to consumers and include advertising, including banner advertising, marketing and promotion costs. Product development costs represent payroll and related expenses for site development, network systems and telecommunications infrastructure support, contract programmers and consultants and other technology costs. General and administrative expenses represent compensation and benefits for administration, advertising management, accounting and finance, facilities expenses, professional fees and non-allocated overhead. Depreciation and amortization represents the cost of capital asset acquisitions spread over their expected useful lives. These expenses are spread over three to seven years and are calculated on a straight-line basis. Goodwill amortization represents the excess of the purchase price over the fair market value of net assets acquired spread over the expected benefit periods which is between three to five years. Noncash stock based compensation represents expenses associated with stock grants to our officers and employees as additional compensation for their services. 22 Other income (expense) is comprised of interest income on invested cash and interest expense on capital leases and the 10% convertible subordinated note payable associated with the Pivot acquisition. Also included in the year ended December 31, 1999 is a noncash finance charge recorded upon the conversion of a note payable to a stockholder into shares of convertible preferred stock which, upon completion of our initial public offering in May 1999, was subsequently converted into common stock. We have compared our results of operations for the years ended December 31, 2000 and 1999, the years ended December 31, 1999 and 1998, and the years ended June 30, 1998 and 1997. All periods presented have been revised to reflect Pivot as discontinued operations. The following table displays our results for the respective periods expressed as a percentage of total revenues.
Six Months Ended Year Ended December 31, December 31, Year Ended June 30, ----------------------- ------------ ------------------- 2000 1999 1998 1998 1997 1996 ---- ---- ---- ---- ---- ---- Consolidated Statements of Operations Data Revenue: Online publishing 80.8% 71.0% 52.1% 33.4% 19.1% 4.3% Print publishing and licensing 19.2 29.0 47.9 66.6 80.9 95.7 -------- -------- -------- -------- -------- -------- Total revenue 100.0 100.0 100.0 100.0 100.0 100.0 -------- -------- -------- -------- -------- -------- Cost of revenue: Online publishing 46.8 47.0 41.0 34.9 39.4 17.6 Print publishing and licensing 13.0 19.9 31.7 51.1 46.6 59.6 -------- -------- -------- -------- -------- -------- Total cost of revenue 59.8 67.0 72.8 86.0 86.0 77.2 -------- -------- -------- -------- -------- -------- Gross margin 40.2 33.0 27.2 14.0 14.0 22.8 -------- -------- -------- -------- -------- -------- Operating expenses: Sales 21.3 24.9 24.2 18.4 5.2 8.4 Marketing 25.5 137.5 8.8 3.8 - 2.1 Product development 12.8 16.9 13.0 18.2 10.2 12.2 General and administrative expenses 47.6 51.5 25.1 43.3 30.2 32.1 Restructuring and impairment charges 14.6 - - - - - Depreciation and amortization 5.7 3.5 2.8 1.7 2.9 6.0 Goodwill amortization 1.5 1.6 - - - - Noncash stock based compensation 8.6 27.6 19.3 2.3 - - -------- -------- -------- -------- -------- -------- 137.6 263.4 93.1 87.7 48.5 60.8 -------- -------- -------- -------- -------- -------- Loss from operations (97.4) (230.3) (65.9) (73.6) (34.6) (38.0) -------- -------- -------- -------- -------- -------- Other income (expense), net 1.5 7.3 5.5 1.2 (3.0) (3.3) Noncash financing charge - (22.2) - - - - -------- -------- -------- -------- -------- -------- Loss before income taxes and discontinued operations (95.9) 245.2 (60.4) (72.4) (37.6) (41.3) Income taxes from continuing operations - - - - - - -------- -------- -------- -------- -------- -------- Loss before discontinued operations (95.9) (245.2) (60.4) (72.4) (37.6) (41.3) -------- -------- -------- -------- -------- -------- Discontinued operations: Loss from discontinued operations (21.1) (17.8) - - - - Gain on disposal of discontinued operations 5.7 - - - - - -------- -------- -------- -------- -------- -------- (15.4) (17.8) - - - - -------- -------- -------- -------- -------- -------- Net loss (111.3) (263.1) (60.4) (72.4) (37.6) (41.3) Accretion of Convertible Series A and Series B preferred stock to redemption value - (19.10) - - - - Charge for conversion of nonredeemable convertible Series A preferred stock to redeemable - - (127.93) - - - -------- -------- -------- -------- -------- -------- Net loss applicable to common stock (111.3)% (282.1)% (188.3)% (72.4)% (37.6)% (41.3)% ======== ======== ======== ======== ======== ========
The following table displays selected financial data for the years ended December 31, 2000 and 1999, and unaudited selected financial data for the years ended December 31, 1998 and 1997 for comparison and analysis purposes.
Year Ended December 31, 2000 1999 1998 1997 ---- ---- ---- ---- Consolidated Statement of Operations Data (Unaudited) (Unaudited) (In thousands, except share and per share data) Revenue: Online publishing $ 12,283 $ 8,497 $ 2,582 $ 847 Print publishing and licensing 2,922 3,473 3,039 2,260 ----------- ----------- ---------- ---------- Total revenue 15,205 11,970 5,621 3,107 ----------- ----------- ---------- ---------- Cost of revenue: Online publishing 7,114 5,627 2,203 1,130 Print publishing and licensing 1,983 2,387 2,105 1,578 ----------- ----------- ---------- ---------- Total cost of revenue 9,097 8,014 4,308 2,708 ----------- ----------- ---------- ---------- Gross margin 6,108 3,956 1,313 399 ----------- ----------- ---------- ---------- Operating expenses: Sales 3,234 2,977 1,406 200 Marketing 3,874 16,459 432 19 Product development 1,940 2,017 915 355 General and administrative expenses 7,165 6,159 1,840 1,278 Restructuring and impairment charges 2,285 - - - Depreciation and amortization 874 422 140 67 Goodwill amortization 231 186 - - Noncash stock based compensation 1,312 3,305 757 - ----------- ----------- ---------- ---------- 20,915 31,525 5,490 1,919 ----------- ----------- ---------- ---------- Loss from operations (14,807) (27,569) (4,177) (1,520) Other income (expense), net 230 873 203 (10) Noncash financing charge - (2,656) - - ----------- ----------- ---------- ---------- Loss before income taxes and discontinued operations (14,577) (29,352) (3,974) (1,530) Income taxes from continuing operations - - - - ----------- ----------- ---------- ---------- Loss before discontinued operations (14,577) (29,352) (3,974) (1,530) ----------- ----------- ---------- ---------- Discontinued operations: Loss from discontinued operations (3,215) (2,136) - - Gain on disposal of discontinued operations 871 - - - ----------- ----------- ---------- ---------- (2,344) (2,136) - - ----------- ----------- ---------- ---------- Net loss (16,921) (31,488) (3,974) (1,530) Accretion of Convertible Series A and Series B preferred stock to redemption value - (2,281) - - Charge for conversion of nonredeemable convertible Series A preferred stock to redeemable - - (4,438) - ----------- ----------- ---------- ---------- Net loss applicable to common stock $ (16,921) $ (33,769) $ (8,412) $ (1,530) =========== =========== ========== ========== Basic and diluted net loss per share: Loss before discontinued operations $ (1.05) $ (2.90) $ (1.01) $ (0.35) Discontinued operations (0.17) (0.21) - - ----------- ----------- ---------- ---------- Net loss (1.22) (3.11) (1.01) (0.35) Accretion of Convertible Series A and Series B preferred stock to redemption value - (0.23) - - Charge for conversion of nonredeemable convertible Series A preferred stock to redeemable - - (1.13) - ----------- ----------- ---------- ---------- Net loss applicable to common stock $ (1.22) $ (3.34) $ (2.14) $ (0.35) =========== =========== ========== ========== Weighted average shares outstanding used in basic and diluted per-share calculation 13,872,788 10,113,928 3,925,597 4,383,586 =========== =========== ========== ========== As of December 31, 2000 1999 1998 1997 ---- ---- ---- ---- Consolidated Balance Sheet Data (In thousands) Cash and cash equivalents $ 8,891 $ 22,492 $ 1,633 $ 1,113 Working capital 7,057 18,973 658 564 Total assets 12,634 32,600 3,099 1,783 Subordinated note payable 4,350 4,350 - - Redeemable preferred stock - - 12,198 - Total stockholders' equity (deficit) 1,573 17,445 (10,985) 2,447
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Revenue Total revenue for the year ended December 31, 2000 of $15,204,765 increased $3,235,080, or 27%, over the comparable period in 1999. Online publishing revenue increased $3,785,890 or 45%, to $12,282,795, and represented 81% of total revenue in 2000 compared to 71% in same period in 1999. These increases were due to higher levels of advertising sales and higher advertising rates (approximately 12% higher average rates in 2000 compared to 1999) facilitated by an increase in advertising inventory (approximately 40% higher available inventory in 2000 compared to 1999). Our revenue, excluding barter revenue, for 2001 is projected to be relatively flat compared to 2000. Print publishing and licensing revenue decreased $550,810, or 16%, to $2,921,970 during the year ended December 31, 2000 due primarily to a $590,199, or 24%, decrease in Consumer Mortgage Guide revenues. This decrease was a result of increasing interest rates which slowed the refinance markets and caused certain advertisers not to publish their higher rates. Cost of Revenue Online publishing costs increased 26% to $7,114,258 for the year ended December 31, 2000, from $5,627,713 in the comparable period in 1999. This $1,486,545 increase was due primarily to a $557,171 increase in revenue sharing payments in Bankrate.com due to an increase in the number of distribution partners. Additional costs of approximately $930,000 were incurred during the year ended December 31, 2000 for GreenMagazine.com, ilife.com and IntelligentTaxes.com which were launched in the fourth quarter of 1999. 23 Print publishing and licensing costs of $1,982,885 decreased $404,344, or 17%, from $2,387,229 in 1999 due primarily to a $407,026, or 22%, decrease in revenue sharing payments due to lower levels of revenue. Sales costs of $3,234,148 in 2000 increased $257,709, or 9%, over 1999 due to a $236,723, or 33%, increase in commissions paid on higher levels of online graphic advertising and hyperlink sales during the year. Marketing expenses of $3,873,796 for the year ended December 31, 2000 were $12,585,317, or 76%, lower than the comparable quarter in 1999. These reductions are in line with the Company's strategic initiatives to control costs and curtail certain expenditures. General and administrative expenses of $7,165,157 for the year ended December 31, 2000 were $1,005,791, or 16%, higher than the comparable period in 1999 due primarily to higher human resource costs, facilities costs, and legal professional fees and services supporting the growth in the business. Restructuring and Impairment Charges In June 2000, the Company recorded a restructuring charge of $1,298,000 as a result of implementing certain strategic reorganization initiatives. Approximately $364,000 of this charge pertains to severance, legal and other employee related costs incurred in connection with a reduction of approximately 10% of the workforce in ongoing operations and the elimination of positions in under-performing, non-core business units, all of which was paid in 2000. The remaining $934,000 of this charge relates to the write-off of certain assets, primarily software, licenses and other installation costs, of an abandoned systems installation. During the quarter ended September 30, 2000, the Company recorded restructuring and impairment charges of approximately $843,000 as a result of strategic reorganization initiatives. Approximately $88,000 of this charge pertained to severance, legal and other employee related costs incurred in connection with a further reduction of the workforce, all of which was paid in 2000. Approximately $279,000 relates to the shut down and sale of assets of Consejero.com and facility closing costs. The remaining $476,000 is a result of the GreenMagazine.com goodwill write-off discussed below. On August 27, 1999, the Company acquired certain assets and assumed certain liabilities of Green Magazine, Inc. ("Green") for approximately $831,000 including acquisition costs. Substantially all of the purchase price was allocated to goodwill. During the quarter ended September 30, 2000 a decision was made to stop publishing the print version of Green Magazine. Additionally, due to lower than expected traffic levels visiting GreenMagazine.com and continued negative operational cash flows, a revised operating plan was developed and GreenMagazine.com was incorporated into a channel of Bankrate.com. After evaluating the recoverability of the intangible asset, the Company recorded an impairment charge of approximately $476,000 to write the goodwill down to estimated fair value. In December 2000, Green was shut down and the remaining goodwill of approximately $73,000 was written off. In December 2000, the Company wrote off approximately $71,000 of certain impaired assets related to the sale of CPNet.com. During the years ended December 31, 2000 and 1999, CPNet.com, Consejero.com and GreenMagazine.com had total revenue and total expenses as follows: CPNet.com- $18,162 and $385,973 in 2000 and $49,513 and $577,278 in 1999; Consejero.com- $16,359 and $810,867 in 2000 and $8,036 and $2,217,879 in 1999; GreenMagazine.com- $103,817 and $1,774,188 in 2000 and $1,572 and $263,169 in 1999. Depreciation and amortization of $873,484 for the year ended December 31, 2000 was $451,692, or 107%, higher compared to 1999 due to purchases of software and computer equipment. Goodwill amortization of $220,780 is a result of the Green Magazine.com acquisition in the third quarter of 1999. Noncash stock based compensation expense of $1,311,912 was recorded during the year ended December 31, 2000 compared to $3,305,104 in the same period in 1999. In March 2000, the Company recorded $860,000 of noncash charges upon the resignation of the Company's former president and chief executive officer related to the continued vesting of stock options under the terms of an employment agreement. The remaining expense relates to stock options granted under the 1997 and 1999 Equity Compensation Plans at less than fair market value on the date of grant. In 1999, the Company recorded approximately $2,113,000 of noncash charges when a note receivable for a restricted stock grant to the former president and chief executive officer was forgiven, the unvested shares under the grant (264,932) were reacquired by the Company, the associated put right was cancelled and 189,238 shares of redeemable common stock were reclassified to common stock and vested immediately. Approximately $1,120,000 was recorded for options granted under the 1997 Equity Compensation Plan in March 1999. The Company recorded a noncash financing charge of $2,656,000 in March 1999 compared to none in 2000. In March 1999, one of the Company's Series B convertible preferred stockholders loaned the Company $1,000,000, at 8% interest due April 9, 1999. On April 9, 1999, the principal amount of the loan plus accrued interest was converted, pursuant to its terms, into 6,784 shares of Series B convertible preferred stock and, accordingly, the finance charge was recorded. 24 Interest income of $727,327 during the year ended December 31, 2000 was $359,821, or 33%, lower than the comparable amount in 1999 due to declining cash balances. Interest expense was up $264,364 over the comparable period in 1999 due to the 10% convertible subordinated note payable issued in connection with the Pivot acquisition in August 1999. Interest income in 2001 is projected to decrease due to lower average cash balances. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Revenue Total revenue for the year ended December 31, 1999 of $11,969,685 increased $6,348,156, or 113%, over the comparable period in 1998. Online publishing revenue increased $5,914,461, or 229%, to $8,496,905 and represented 71% of total revenue compared to 46% in 1998. These increases were due to higher levels of advertising sales and higher advertising rates facilitated by an increase in advertising inventory resulting from an increase in the number of distribution partners and higher overall site traffic. Additionally, in July 1999, the Company launched a multi-media integrated communications program to establish brand awareness and build site traffic. This program included a print advertising campaign with insertions in news, business, computer and personal finance publications; an online banner and sponsorship program; a comprehensive public relations program; and various media delivery systems including television. Beginning in January 2000, the Company substantially reduced its levels of spending on marketing compared to the second half of 1999,which could have the effect of substantially slowing down our revenue growth. Print publishing and licensing revenue increased $433,695, or 14%, to $3,472,780 due primarily to a $618,713, or 48%, increase in Consumer Mortgage Guide revenues. This increase was a result of an increased sales effort, higher rates charged per unit sale and an increase in the number of advertisers. Cost of Revenue Online publishing costs increased 156% to $5,627,713 for the year ended December 31, 1999 from $2,202,279 in the comparable period in 1998. This $3,425,434 increase was due to higher advertising costs, expenses incurred in promoting and staffing theWhiz.com, GreenMagazine.com and Consejero.com, increases in revenue sharing obligations and higher personnel costs. Additionally, higher personnel costs were incurred to support the growth in hyperlinked advertisers and the addition of quality control personnel to support overall growth. Print publishing and licensing costs increased 13% to $2,387,229 during the year ended December 31, 1999 from $2,104,960 in 1998, due primarily to higher revenue sharing payments to newspapers based on higher levels of revenue. Sales costs for the year ended December 31, 1999 were $1,570,741, or 112%, higher than 1998 due to higher human resource costs as a result of a doubling of the sales force staff, lead generators and telemarketers, and the opening of the Northern California and Chicago sales offices. Marketing expenses of $16,459,113 for the year ended December 31, 1999 were $16,026,686 higher than in 1998 primarily due to online advertising monies spent for bankrate.com, theWhiz.com, Consejero.com and GreenMagazine.com with the goal of driving more online traffic to our web sites. In July 1999, the Company launched a multi-media integrated communications program to establish brand awareness and build site traffic. This program included a print advertising campaign with insertions in news, business, computer and personal finance publications; an online banner and sponsorship program; a comprehensive public relations program; and various media delivery systems including television. Beginning in January 2000, the Company substantially reduced its levels of spending on marketing compared to the second half of 1999, which could have the effect of substantially slowing down our revenue growth. Product development costs increased $1,101,209, or 120%, for the year ended December 31, 1999 compared to 1998 due to higher personnel and consulting expenses to supporting the growth in revenue and Web sites launched in 1999. General and administrative expenses of $6,159,366 for the year ended December 31, 1999 were $4,319,772, or 235%, higher than the comparable period in 1998 due primarily to higher human resource costs, facilities and professional services expenses supporting the growth in the business. 25 Depreciation and amortization of $421,792 for the year ended December 31, 1999 was $281,723, or 201%, higher compared to 1998 due to purchases of software, computer equipment and components. Goodwill amortization of $98,124 was a result of the Green acquisition. Goodwill of $883,117 was recorded and was being amortized over a three-year period. Noncash stock based compensation expense of $3,305,104 was recorded in the year ended December 31, 1999 compared to $757,563 in the same period in 1998. In 1999 and 1998, approximately $2,113,000 and $460,000, respectively, was recorded as a result of a variable stock option arrangement with our former President and Chief Executive Officer. The variable stock option arrangement was terminated in March 1999. Approximately $1,120,000 was recorded for options granted under the 1997 and 1999 Equity Compensation Plans during the first quarter of 1999 below fair market value on the date of grant. In 1998, compensation expense was recorded in connection with certain restricted stock grants. A noncash financing charge of $2,656,000 was recorded in March 1999 compared to none in 1998. In March 1999 one of the Series B convertible preferred stockholders loaned us $1,000,000, at 8% interest due April 9, 1999. If unpaid on April 9, 1999 the loan, plus accrued interest, converted to fully paid Series B convertible preferred stock at a conversion price of $2.97 per share. On April 9, 1999 the principal amount of the loan plus accrued interest was converted into 6,784 shares of Series B convertible preferred stock and, accordingly, the finance charge was recorded. Interest income of $1,087,148 for the year ended December 31, 1999 was up from $36,006 in the comparable 1998 period due to investing the proceeds from our initial public offering in short-term, interest bearing instruments. Interest expense was up $213,855 over the comparable period in 1998 due to the increase in debt associated with equipment under capital leases and the 10% convertible subordinated note payable issued in connection with the Pivot acquisition. Year Ended June 30, 1998 Compared to Year Ended June 30, 1997 Revenue Total revenue increased to $3,840,577 in fiscal 1998 from $2,542,556 in fiscal 1997, representing a 51% increase. Online publishing revenue increased to $1,281,284 in fiscal 1998 from $484,511 in fiscal 1997, representing a 164% increase. This increase was due to more advertisements being sold, higher advertising rates and an increase in inventory available for sale. A change of site design for bankrate.com to allow for a larger number of advertisements per page also contributed to the revenue growth. Print publishing and licensing revenue increased to $2,559,293 in fiscal 1998 from $2,058,045 in fiscal 1997, representing a 24% increase. The increase resulted from the sale of a higher number of advertisements for Consumer Mortgage Guide, which resulted primarily from growth in the number of participating newspapers. Cost of Revenue Online publishing costs increased to $1,339,540 in fiscal 1998 from $1,003,128 in fiscal 1997, representing a 34% increase. The increase resulted from higher payments made under distribution arrangements and additional editorial staff. Print publishing and licensing costs increased to $1,961,714 in fiscal 1998 from $1,185,969 in fiscal 1997, representing a 65% increase. The increase was substantially a result of higher payments to newspapers given the higher level of Consumer Mortgage Guide revenues. Sales costs increased to $705,595 in fiscal 1998 from $130,436 in fiscal 1997, representing a 441% increase. The increase was due to additional sales staff, higher commissions resulting from increased revenues and higher commission rates for our online sales staff. Marketing costs increased to $145,632 in fiscal 1998 from $1,485 in fiscal 1997. The increase was due to the hiring of a public relations firm to promote our expanded online activities and the costs of creating and producing sales- materials for online advertising. Additional costs were incurred in fiscal 1998 when we purchased such advertising to test its effectiveness in increasing visitors to Bankrate.com. 26 Product development costs increased to $697,767 in fiscal 1998 from $259,191 in fiscal 1997, representing a 169% increase. The increase was principally related to higher personnel costs, consulting expenses and equipment and software costs to support the Company's growth initiatives. General and administrative costs increased to $1,663,728 in fiscal 1998 from $767,957 in fiscal 1997, representing a 117% increase. The increase was principally related to the hiring of new senior management positions, expansion of office space and additional professional fees. Quarterly Results of Operations The following table presents certain unaudited quarterly statement of operations data for each of the last 12 quarters through the year ended December 31, 2000. The information has been derived from our unaudited consolidated financial statements. In the opinion of our management, the unaudited financial statements have been prepared on a basis consistent with the financial statements which appear elsewhere in this Form 10-K and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial position and results of operations for such unaudited periods. Historical results are not necessarily indicative of results to be expected in the future.
(In thousands, except share and per share data) Year Ended December 31, 2000 Year Ended December 31, 1999 March 31 June 30 September 30 December 31 March 31 June 30 -------- ------- ------------ ----------- -------- ------- Revenue: Online publishing $ 3,014 $ 3,046 $ 3,012 $ 3,210 $ 1,370 $ 1,926 Print publishing and licensing 742 750 712 719 856 886 ----------- ----------- ----------- ----------- ---------- ---------- Total revenue 3,756 3,796 3,724 3,929 2,226 2,812 ----------- ----------- ----------- ----------- ---------- ---------- Cost of revenue: Online publishing 2,407 2,001 1,697 1,008 845 1,175 Print publishing and licensing 535 551 455 443 583 608 ----------- ----------- ----------- ----------- ---------- ---------- Total cost of revenue 2,942 2,552 2,152 1,451 1,428 1,783 ----------- ----------- ----------- ----------- ---------- ---------- Gross margin 814 1,244 1,572 2,478 798 1,029 ----------- ----------- ----------- ----------- ---------- ---------- Operating expenses: Sales 906 781 796 751 530 792 Marketing 1,825 1,175 263 610 714 1,987 Product development 577 559 429 375 377 409 General and administrative expenses 1,941 1,642 2,416 1,166 576 1,161 Restructuring and impairment charges - 1,298 843 144 - - Depreciation and amortization 223 232 223 195 68 105 Goodwill amortization 74 74 74 10 3 - Noncash stock based compensation 918 97 130 167 1,908 711 ----------- ----------- ----------- ----------- ---------- ---------- 6,464 5,858 5,174 3,418 4,176 5,165 ----------- ----------- ----------- ----------- ---------- ---------- Loss from operations (5,650) (4,614) (3,602) (940) (3,378) (4,136) Other income (expense), net 124 46 39 21 7 212 Noncash financing charge - - - - (2,656) - ----------- ----------- ----------- ----------- ---------- ---------- Loss before income taxes and discontinued operations (5,526) (4,568) (3,563) (919) (6,027) (3,924) Income taxes from continuing operations - - - - - - ----------- ----------- ----------- ----------- ---------- ---------- Loss before discontinued operations (5,526) (4,568) (3,563) (919) (6,027) (3,924) ----------- ----------- ----------- ----------- ---------- ---------- Discontinued operations: - - - Loss from discontinued operations (1,587) (1,380) (248) - - - Gain on disposal of discontinued operations - - 871 - - - ----------- ----------- ----------- ----------- ---------- ---------- (1,587) (1,380) 623 - - - ----------- ----------- ----------- ----------- ---------- ---------- Net loss (7,113) (5,948) (2,940) (919) (6,027) (3,924) Accretion of Convertible Series A and Series B preferred stock to redemption value - - - - (1,852) (429) Charge for conversion of nonredeemable convertible Series A preferred stock to redeemable - - - - - - ----------- ----------- ----------- ----------- ---------- ---------- Net loss applicable to common stock $ (7,113) $ (5,948) $ (2,940) $ (919) $ (7,879) $ (4,353) =========== =========== =========== =========== ========== ========== Basic and diluted net loss per share: Loss before discontinued operations $ (0.41) $ (0.33) $ (0.25) $ (0.07) $ (1.47) $ (0.43) Discontinued operations (0.12) (0.10) 0.04 - - - ----------- ----------- ----------- ----------- ---------- ---------- Net loss (0.53) (0.43) (0.21) (0.07) (1.47) (0.43) Accretion of Convertible Series A and Series B preferred stock to redemption value - - - - (0.45) (0.04) Charge for conversion of nonredeemable convertible Series A preferred stock to redeemable - - - - - - ----------- ----------- ----------- ----------- ---------- ---------- Net loss applicable to common stock $ (0.53) $ (0.43) $ (0.21) $ (0.07) $ (1.92) $ (0.47) =========== =========== =========== =========== ========== ========== Weighted average shares outstanding used in basic and diluted per-share calculation 13,543,678 13,960,937 13,987,077 13,996,950 4,099,458 9,195,503 =========== =========== =========== =========== ========== ========== (In thousands, except share and per share data) Year Ended December 31, 1999 Year Ended December 31, 1998 September 30 December 31 March 31 June 30 September 30 December 31 ------------ ----------- -------- ------- ------------ ----------- Revenue: Online publishing $ 2,417 $ 2,784 $ 328 $ 446 $ 817 $ 992 Print publishing and licensing 880 850 621 757 766 894 ----------- ----------- ----------- ---------- --------- ---------- Total revenue 3,297 3,634 949 1,203 1,583 1,886 ----------- ----------- ----------- ---------- --------- ---------- Cost of revenue: Online publishing 1,457 2,151 318 461 651 773 Print publishing and licensing 585 611 536 468 495 606 ----------- ----------- ----------- ---------- --------- ---------- Total cost of revenue 2,042 2,762 854 929 1,146 1,379 ----------- ----------- ----------- ---------- --------- ---------- Gross margin 1,255 872 95 274 437 507 ----------- ----------- ----------- ---------- --------- ---------- Operating expenses: Sales 791 862 147 419 452 385 Marketing 6,121 7,638 47 80 49 256 Product development 545 686 168 297 232 219 General and administrative expenses 1,620 2,801 422 546 426 445 Restructuring and impairment charges - - - - - - Depreciation and amortization 160 85 22 21 43 56 Goodwill amortization 25 161 - - - - Noncash stock based compensation 351 335 - 89 408 260 ----------- ----------- ----------- ---------- --------- ---------- 9,613 12,568 806 1,452 1,610 1,621 ----------- ----------- ----------- ---------- --------- ---------- Loss from operations (8,358) (11,696) (711) (1,178) (1,173) (1,114) Other income (expense), net 400 252 8 3 5 187 Noncash financing charge - - - - - - ----------- ----------- ----------- ---------- --------- ---------- Loss before income taxes and discontinued operations (7,958) (11,444) (703) (1,175) (1,168) (927) Income taxes from continuing operations - - - - - - ----------- ----------- ----------- ---------- --------- ---------- Loss before discontinued operations (7,958) (11,444) (703) (1,175) (1,168) (927) ----------- ----------- ----------- ---------- --------- ---------- Discontinued operations: Loss from discontinued operations (542) (1,593) - - - - Gain on disposal of discontinued operations - - - - - - ----------- ----------- ----------- ---------- --------- ---------- (542) (1,593) - - - - ----------- ----------- ----------- ---------- --------- ---------- Net loss (8,500) (13,037) (703) (1,175) (1,168) (927) Accretion of Convertible Series A and Series B preferred stock to redemption value - - - - - - Charge for conversion of nonredeemable convertible Series A preferred stock to redeemable - - - - - (4,438) ----------- ----------- ----------- ---------- --------- ---------- Net loss applicable to common stock $ (8,500) $ (13,037) $ (703) $ (1,175) $ (1,168) $ (5,365) =========== =========== =========== ========== ========= ========== Basic and diluted net loss per share: Loss before discontinued operations $ (0.59) $ (0.85) $ (0.18) $ (0.31) $ (0.30) $ (0.23) Discontinued operations (0.04) (0.11) - - - - ----------- ----------- ----------- ---------- --------- ---------- Net loss (0.63) (0.98) (0.18) (0.31) (0.30) (0.23) Accretion of Convertible Series A and Series B preferred stock to redemption value - - - - - - Charge for conversion of nonredeemable convertible Series A preferred stock to redeemable - - - - - (1.09) ----------- ----------- ----------- ---------- --------- ---------- Net loss applicable to common stock $ (0.63) $ (0.96) $ (0.18) $ (0.31) $ (0.30) $ (1.32) =========== =========== =========== ========== ========= ========== Weighted average shares outstanding used in basic and diluted per-share calculation 13,477,945 13,540,988 3,846,200 3,846,200 3,954,200 4,053,200 =========== =========== =========== ========== ========= ==========
Liquidity and Capital Resources Bankrate, Inc. has been funded using the capital raised from shareholders, and most recently, from the proceeds of our initial public offering in May, 1999. As of December 31, 2000, we had working capital of $7,056,737. Cash used in continuing operating activities was $12,714,997, $16,102,619, $1,207,153 and $2,760,717 for the years ended December 31, 2000 and 1999, the six months ended December 31, 1998 and the year ended June 30, 1998, respectively, and was primarily for funding operating losses due to the continued expansion of our online publishing efforts through personnel acquisitions and marketing expenditures. These expenditures were significantly curtailed during the year ended December 31, 2000. Cash used in discontinued operations of $5,394,547 and $2,895,388 for the years ended December 31, 2000 and 1999, respectively, represents the net cash funding for our former subsidiary, Professional Direct Agency, Inc. ("Pivot") which was disposed of in July 2000. Cash provided by investing activities of $3,679,784 for the year ended December 31, 2000 was primarily the result of the cash proceeds from the sale of Pivot of $4,350,000 net of expenditures for the purchase of computer and office equipment and furniture. During the year ended December 31, 1999, cash was used to acquire CPNet.com, Pivot and certain assets and liabilities of Green Magazine, Inc. as well as certain other intellectual property rights and computer equipment. Net cash provided from financing activities in 2000 consisted of the cash proceeds from the sale of stock to our Chairman of the Board of Directors of $997,841 and the exercise of common stock options of $50,598. Principal payments on capital lease obligations were $219,824. Net cash provided from financing activities in 1999 consisted of a $1,000,000 convertible promissory note to one of the Series B preferred stockholders which was subsequently converted to shares of Series B preferred stock and ultimately into common stock in connection with the IPO, as well as the net cash proceeds from our initial public offering of $41,300,631. Other financing activities included cash used for payments on capital lease liabilities. During the six months ended December 31, 1998 and the years ended June 30, 1998 and 1997, cash flows from financing activities consisted primarily of the cash proceeds from the issuance of preferred stock and loans from stockholders. In connection with the acquisition of Pivot in August, 1999 the Company signed a $4,350,000 five-year convertible subordinated note payable to Pivot's former owner. The note bears interest at 10% and is due in one payment on August 20, 2004. Interest is due beginning August 20, 2002 and thereafter every six months until conversion or payment in full. The note is convertible at any time by the holder into 625,000 shares of our common stock. 27 The Company has incurred net losses in each of its last five fiscal years. We had an accumulated deficit of approximately $59 million as of December 31, 2000. We anticipate that we will incur operating losses and negative cash flows in the foreseeable future. The Company is working to manage its cash by actively controlling expenses and pursuing additional sources of revenue. For instance, the Company substantially reduced marketing expenditures beginning in January 2000 compared to the second half of 1999, and has followed through with plans to sell or curtail development of certain under-performing, non-core business units. The Company sold CPNet.com in May 2000, sold Pivot in July 2000, shut down and sold certain assets of Consejero.com in August 2000, and shut down GreenMagazine.com in December 2000. These divestitures yielded cash to the Company of approximately $4,392,000 and will result in lower operating expenses. In June 2000, the Company reduced employment levels of continuing operations by approximately 10% and began efforts to consolidate its physical locations. Based on these actions and the Company's current plan, the Company believes its existing liquidity and capital resources will be sufficient to satisfy its cash requirements into 2002. There are no assurances that such actions will ensure cash sufficiency through 2002 or that reducing marketing expenses would not potentially curtail revenue growth. The Company may consider additional options, which include, but are not limited to, the following: forming strategic partnerships or alliances; considering other strategic alternatives, including: a merger or sale of the Company, or an acquisition; or raising new debt and/or equity capital. There can be no assurance that the Company will be able to raise such funds or realize its strategic alternatives on favorable terms or at all. Further, due to the legal matters discussed in Note 10 to the consolidated financial statements included in Item 8. herein, which the Company intends to vigorously defend, management could be required to spend significant amounts of time and resources defending these matters which may impact the operations of the Company. Income Taxes Our effective tax rate differs from the statutory federal income tax rate, primarily as a result of the uncertainty regarding our ability to utilize our net operating loss carryforwards. Due to the uncertainty surrounding the timing or realization of the benefits of net operating loss carryforwards in future tax returns, we have placed a valuation allowance against its otherwise recognizable deferred tax assets. At December 31, 2000, we had approximately $44,290,000 of net operating loss carryforwards for tax reporting purposes available to offset future taxable income. The Company's net operating loss carryforwards expire from 2012 through 2020. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation. Due to the change in our ownership interests in the third quarter of 1997 and the acquisition and subsequent disposition of Pivot in August 1999 and July 2000, respectively, future utilization of our net operating loss carryforwards will be subject to certain limitations or annual restrictions. Recent Accounting Pronouncements In September 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement was amended in September 2000 by Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." Statement No. 138 is effective for the Company beginning January 2001. The new Statement requires all derivatives to be recorded on the balance sheet at fair value and establishes accounting treatment for three types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments: hedges of the variable cash flows of forecasted transactions; and hedges of foreign currency exposures of net investments in foreign operations. To date, the Company has not invested in derivative instruments nor participated in hedging activities and, therefore, does not anticipate there will be a material impact on the result of operations or financial position from Statements No. 133 or No. 138. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") and amended it in March and June 2000. We adopted the provisions of SAB 101 in the fourth quarter of 2000 which did not impact our consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28 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 December 31, 2000, all of our cash equivalents mature in less than three months. Exchange Rate Sensitivity Our exposure to foreign currency exchange rate fluctuations is minimal to none as we do not have any revenues denominated in foreign currencies. Additionally, we have not engaged in any derivative or hedging transactions to date. 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Auditors..................................... Consolidated Balance Sheets as of December 31, 2000 and 1999............................................................... Consolidated Statements of Operations for the Years Ended December 31, 2000 and 1999, the Six Months Ended December 31, 1998, and the Year Ended June 30, 1998........................... Consolidated Statements of Redeemable Stock and Stockholders' Equity (Deficit) for the Years Ended December 31, 2000 and 1999, the Six Months Ended December 31, 1998, and the Year Ended June 30, 1998..................................................... Consolidated Statements of Cash Flows for the Years Ended December 31, 2000 and 1999, the Six Months Ended December 31, 1998, and the Year Ended June 30, 1998........................... Notes to Consolidated Financial Statements......................... 30 INDEPENDENT AUDITORS' REPORT The Board of Directors Bankrate, Inc.: We have audited the accompanying consolidated balance sheets of Bankrate, Inc. (formerly ilife.com, Inc.) and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of operations, redeemable stock and stockholders' equity (deficit) and cash flows for the years ended December 31, 2000 and 1999, the six months ended December 31, 1998, and the year ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bankrate, Inc. and subsidiary as of December 31, 2000 and 1999 , and the results of their operations and their cash flows for the years ended December 31, 2000 and 1999, the six months ended December 31, 1998, and the year ended June 30, 1998 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Atlanta, Georgia January 26, 2001 31 Bankrate, Inc. and Subsidiary Consolidated Balance Sheets
December 31, December 31, 2000 1999 ---- ---- Assets Cash and cash equivalents $ 8,890,649 $ 22,491,794 Accounts receivable, net of allowance for doubtful accounts of $300,000 and $235,000 at December 31, 2000 and 1999, respectively 1,218,867 1,449,765 Net assets of discontinued operations held for sale - 3,880,595 Other current assets 572,185 383,292 ------------ ------------ Total current assets 10,681,701 28,205,446 Furniture, fixtures and equipment, net 1,730,455 2,021,126 Intangible assets, net 88,425 951,290 Other assets 133,809 1,421,714 ------------ ------------ Total assets $ 12,634,390 $ 32,599,576 ============ ============ Liabilities and Stockholders' Equity Liabilities: Accounts payable $ 772,181 $ 2,340,832 Other accrued expenses 2,016,236 5,886,919 Deferred revenue 463,224 656,058 Current portion of obligations under capital leases 214,651 221,151 Other current liabilities 158,672 127,860 ------------ ------------ Total current liabilities 3,624,964 9,232,820 10% Convertible subordinated note payable 4,350,000 4,350,000 Accrued stock compensation expense 2,452,424 1,159,309 Accrued interest 592,863 157,863 Other liabilities 40,815 254,139 ------------ ------------ Total liabilities 11,061,066 15,154,131 ------------ ------------ Commitments and contingencies Stockholders' equity: Preferred stock, 10,000,000 shares authorized and undesignated - - Common stock, par value $.01 per share-- 100,000,000 shares authorized; 13,996,950 and 13,540,988 shares issued and outstanding at December 31, 2000 and 1999, respectively 139,969 135,410 Additional paid in capital 60,586,991 59,543,111 Accumulated deficit (59,153,636) (42,233,076) ------------ ------------ Total stockholders' equity 1,573,324 17,445,445 ------------ ------------ Total liabilities and stockholders' equity $ 12,634,390 $ 32,599,576 ------------ ------------
See accompanying notes to consolidated financial statements. Bankrate, Inc. and Subsidiary Consolidated Statements of Operations
Year Ended December 31, Six Months Ended Year Ended 2000 1999 December 31, 1998 June 30, 1998 ---- ---- ----------------- ------------- Revenue: Online publishing $ 12,282,795 $ 8,496,905 $ 1,808,877 $ 1,281,284 Print publishing and licensing 2,921,970 3,472,780 1,660,314 2,559,293 ------------- ------------- ------------ ------------ Total revenue 15,204,765 11,969,685 3,469,191 3,840,577 ------------- ------------- ------------ ------------ Cost of revenue: Online publishing 7,114,258 5,627,713 1,424,255 1,339,540 Print publishing and licensing 1,982,885 2,387,229 1,100,693 1,961,714 ------------- ------------- ------------ ------------ Total cost of revenue 9,097,143 8,014,942 2,524,948 3,301,254 ------------- ------------- ------------ ------------ Gross margin 6,107,622 3,954,743 944,243 539,323 ------------- ------------- ------------ ------------ Operating expenses: Sales 3,234,148 2,976,439 837,697 705,595 Marketing 3,873,796 16,459,113 304,919 145,632 Product development 1,940,143 2,016,689 450,376 697,767 General and administrative expenses 7,165,157 6,159,366 871,057 1,663,728 Restructuring and impairment charges 2,285,422 - - - Depreciation and amortization 873,484 421,792 98,491 66,666 Goodwill amortization 231,214 186,229 - - Noncash stock based compensation(1) 1,311,912 3,305,104 669,000 88,563 ------------- ------------- ------------ ------------ 20,915,276 31,524,732 3,231,540 3,367,951 ------------- ------------- ------------ ------------ Loss from operations (14,807,654) (27,569,989) (2,287,297) (2,828,628) ------------- ------------- ------------ ------------ Other income (expense): Interest income 727,327 1,087,148 18,924 52,351 Interest expense (496,868) (232,504) (12,433) (6,216) Noncash financing charge - (2,656,000) - - Other - 18,712 185,588 - ------------- ------------- ------------ ------------ Other income (expense), net 230,459 (1,782,644) 192,079 46,135 ------------- ------------- ------------ ------------ Loss before income taxes and discontinued operations (14,577,195) (29,352,633) (2,095,218) (2,782,493) Income taxes from continuing operations - - - - ------------- ------------- ------------ ------------ Loss before discontinued operations (14,577,195) (29,352,633) (2,095,218) (2,782,493) ------------- ------------- ------------ ------------ Discontinued operations: Loss from discontinued operations (3,214,577) (2,135,697) - - Gain on disposal of discontinued operations 871,212 - - - ------------- ------------- ------------ ------------ (2,343,365) (2,135,697) - - ------------- ------------- ------------ ------------ Net loss (16,920,560) (31,488,330) (2,095,218) (2,782,493) Accretion of Convertible Series A and Series B preferred stock to redemption value - (2,281,000) - - Charge for conversion of nonredeemable convertible Series A preferred stock to redeemable - - (4,438,141) - ------------- ------------- ------------ ------------ Net loss applicable to common stock $ (16,920,560) $ (33,769,330) $ (6,533,359) $ (2,782,493) ============= ============= ============ ============ Basic and diluted net loss per share: Loss before discontinued operations $ (1.05) $ (2.90) $ (0.52) $ (0.72) Discontinued operations (0.17) (0.21) - - ------------- ------------- ------------ ------------ Net loss (1.22) (3.11) (0.52) (0.72) Accretion of Convertible Series A and Series B preferred stock to redemption value - (0.23) - - Charge for conversion of nonredeemable convertible Series A preferred stock to redeemable - - (1.11) - ------------- ------------- ------------ ------------ Net loss applicable to common stock $ (1.22) $ (3.34) $ (1.63) $ (0.72) ============= ============= ============ ============ Weighted average shares outstanding used in basic and diluted per-share calculation 13,872,788 10,113,928 4,018,700 3,846,200 ============= ============= ============ ============
(1) Noncash stock compensation expense would be allocated as follows:
Year Ended December 31, Six Months Ended Year Ended 2000 1999 December 31, 1998 June 30, 1998 ---------- ----------- ----------------- ------------- Other expenses: Sales $ - $ 40,792 $ - $ - Product development 9,790 8,158 - - General and administrative 1,302,122 3,256,154 669,000 88,563 ---------- ----------- ---------------- ------------ $1,311,912 $ 3,305,104 $ 669,000 $ 88,563 ========== =========== ================ ============
See accompanying notes to consolidated financial statements. 33 Bankrate, Inc. and Subsidiary Consolidated Statements of Redeemable Stock and Stockholders' Equity (Deficit)
Redeemable Redeemable Convertible Series A Convertible Series B Preferred Stock Preferred Stock Shares Amount Shares Amount ------ ------ ------ ------ Balances, June 30, 1997 -- $ -- -- $ -- Preferred stock issued, net of issuance costs -- -- -- -- Stockholder loans converted to preferred stock -- -- -- -- Redeemable commons stock issued -- -- -- -- Compensation expense relating to common stock vesting -- -- -- -- Net loss for the period -- -- -- -- ------- ------------ ------- ------------ Balances, June 30, 1998 -- -- -- -- Common stock issued -- -- -- -- Compensation expense related to common stock grants -- -- -- -- Preferred stock issued, net of issuance costs -- -- 17,575 1,982,535 Conversion of nonredeemable convertible Series A preferred stock to redeemable 89,612 10,215,768 -- -- Net loss for the period -- -- -- -- ------- ------------ ------- ------------ Balances, December 31, 1998 89,612 10,215,768 17,575 1,982,535 Accretion of Series A and Series B preferred stock to redemption value -- 1,908,000 -- 373,000 Conversion of Series A and Series B preferred stock to common stock (89,612) (12,123,768) (17,575) (2,355,535) Issuance and conversion of promissory note to Series B preferred stock and conversion of Series B preferred stock to common stock -- -- -- -- Foregiveness of note receivable for redeemable common stock, reclassification of redeemable common stock to common stock, cancellation of the put right associated with such shares and reacquisition of forfeited shares -- -- -- -- Initial public offering of common stock -- -- -- -- Compensation relating to stock grants -- -- -- -- Common stock issued for the acquisition of Green Magazine, Inc. -- -- -- -- Net loss for the period -- -- -- -- ------- ------------ ------- ------------ Balances, December 31, 1999 -- -- -- -- Common stock issued -- -- -- -- Stock options exercised -- -- -- -- Net loss for the period -- -- -- -- ------- ------------ ------- ------------ Balances, December 31, 2000 -- $ -- -- $ -- ======= ============ ======= ============ Redeemable Common Stock Convertible Series A Note Preferred Stock Shares Amount Receivable Shares Amount ------ ------ ---------- ------ ------ Balances, June 30, 1997 -- $ -- $ -- 53,846 $ 3,462,108 Preferred stock issued, net of issuance costs -- -- -- 28,074 1,815,519 Stockholder loans converted to preferred stock -- -- -- 7,692 500,000 Redeemable commons stock issued 454,170 236,168 (236,168) -- -- Compensation expense relating to common stock vesting -- -- -- -- -- Net loss for the period -- -- -- -- -- -------- ------------ ------------ -------- ------------ Balances, June 30, 1998 454,170 236,168 (236,168) 89,612 5,777,627 Common stock issued -- -- -- -- -- Compensation expense related to common stock grants -- -- -- -- -- Preferred stock issued, net of issuance costs -- -- -- -- -- Conversion of nonredeemable convertible Series A preferred stock to redeemable -- -- -- (89,612) (5,777,627) Net loss for the period -- -- -- -- -- -------- ------------ ------------ -------- ------------ Balances, December 31, 1998 454,170 236,168 (236,168) -- -- Accretion of Series A and Series B preferred stock to redemption value -- -- -- -- -- Conversion of Series A and Series B preferred stock to common stock -- -- -- -- -- Issuance and conversion of promissory note to Series B preferred stock and conversion of Series B preferred stock to common stock -- -- -- -- -- Foregiveness of note receivable for redeemable common stock, reclassification of redeemable common stock to common stock, cancellation of the put right associated with such shares and reacquisition of forfeited shares (454,170) (236,168) 236,168 -- -- Initial public offering of common stock -- -- -- -- -- Compensation relating to stock grants -- -- -- -- -- Common stock issued for the acquisition of Green Magazine, Inc. -- -- -- -- -- Net loss for the period -- -- -- -- -- -------- ------------ ------------ -------- ------------ Balances, December 31, 1999 -- -- -- -- -- Common stock issued -- -- -- -- -- Stock options exercised -- -- -- -- -- Net loss for the period -- -- -- -- -- -------- ------------ ------------ -------- ------------ Balances, December 31, 2000 -- $ -- $ -- -- $ -- ======== ============ ============ ======== ============ Unamortized Additional Stock Common Stock Paid in Compensation Shares Amount Capital Expense ------ ------ ------- ------- Balances, June 30, 1997 3,846,200 $ 38,462 $ -- $ -- Preferred stock issued, net of issuance costs -- -- -- -- Stockholder loans converted to preferred stock -- -- -- -- Redeemable commons stock issued -- -- 354,253 (354,253) Compensation expense relating to common stock vesting -- -- -- 88,563 Net loss for the period -- -- -- -- ---------- ------------ ------------ ------------ Balances, June 30, 1998 3,846,200 38,462 354,253 (265,690) Common stock issued 207,000 2,070 266,930 (269,000) Compensation expense related to common stock grants -- -- 415,000 254,000 Preferred stock issued, net of issuance costs -- -- -- -- Conversion of nonredeemable convertible Series A preferred stock to redeemable -- -- (1,036,183) -- Net loss for the period -- -- -- -- ---------- ------------ ------------ ------------ Balances, December 31, 1998 4,053,200 40,532 -- (280,690) Accretion of Series A and Series B preferred stock to redemption value -- -- (2,281,000) -- Conversion of Series A and Series B preferred stock to common stock 5,359,350 53,593 14,425,710 -- Issuance and conversion of promissory note to Series B preferred stock and conversion of Series B preferred stock to common stock 339,200 3,392 3,659,608 -- Foregiveness of note receivable for redeemable common stock, reclassification of redeemable common stock to common stock, cancellation of the put right associated with such shares and reacquisition of forfeited shares 189,238 1,893 1,890,417 220,690 Initial public offering of common stock 3,500,000 35,000 41,265,596 -- Compensation relating to stock grants -- -- -- 60,000 Common stock issued for the acquisition of Green Magazine, Inc. 100,000 1,000 582,780 -- Net loss for the period -- -- -- -- ---------- ------------ ------------ ------------ Balances, December 31, 1999 13,540,988 135,410 59,543,111 -- Common stock issued 431,499 4,315 993,526 -- Stock options exercised 24,463 244 50,354 -- Net loss for the period -- -- -- -- ---------- ------------ ------------ ------------ Balances, December 31, 2000 13,996,950 $ 139,969 $ 60,586,991 $ -- ========== ============ ============ ============ Total Stockholders' Accumulated Equity Deficit (Deficit) ------- --------- Balances, June 30, 1997 $ (2,465,077) $ 1,035,493 Preferred stock issued, net of issuance costs -- 1,815,519 Stockholder loans converted to preferred stock -- 500,000 Redeemable commons stock issued -- -- Compensation expense relating to common stock vesting -- 88,563 Net loss for the period (2,782,493) (2,782,493) ------------ ------------ Balances, June 30, 1998 (5,247,570) 657,082 Common stock issued -- -- Compensation expense related to common stock grants -- 669,000 Preferred stock issued, net of issuance costs -- -- Conversion of nonredeemable convertible Series A preferred stock to redeemable (3,401,958) (10,215,768) Net loss for the period (2,095,218) (2,095,218) ------------ ------------ Balances, December 31, 1998 (10,744,746) (10,984,904) Accretion of Series A and Series B preferred stock to redemption value -- (2,281,000) Conversion of Series A and Series B preferred stock to common stock -- 14,479,303 Issuance and conversion of promissory note to Series B preferred stock and conversion of Series B preferred stock to common stock -- 3,663,000 Foregiveness of note receivable for redeemable common stock, reclassification of redeemable common stock to common stock, cancellation of the put right associated with such shares and reacquisition of forfeited shares -- 2,113,000 Initial public offering of common stock -- 41,300,596 Compensation relating to stock grants -- 60,000 Common stock issued for the acquisition of Green Magazine, Inc. -- 583,780 Net loss for the period (31,488,330) (31,488,330) ------------ ------------ Balances, December 31, 1999 (42,233,076) 17,445,445 Common stock issued -- 997,841 Stock options exercised -- 50,598 Net loss for the period (16,920,560) (16,920,560) ------------ ------------ Balances, December 31, 2000 $(59,153,636) $ 1,573,324 ============ ============
See accompanying notes to consolidated financial statements. Bankrate, Inc. and Subsidiary Consolidated Statements of Cash Flows
Year Ended December 31, Six Months Ended Year Ended 2000 1999 December 31, 1998 June 30, 1998 ---- ---- ----------------- ------------- Cash flows from operating activities: Continuing operations- Net loss $ (14,577,195) $ (29,352,633) $ (2,095,218) $ (2,782,493) ------------- ------------- ------------ ------------- Adjustments to reconcile net loss to net cash used in operating activities: Loss from discontinued operations 3,214,577 2,135,697 - - Gain on disposal of discontinued operations (871,212) - - - Goodwill impairment charge 552,696 - - - Depreciation and amortization 1,104,698 608,021 98,491 66,666 Loss on disposal of fixed assets 129,203 - - - Provision for doubtful accounts 364,991 210,153 - - Noncash stock compensation 1,311,912 3,305,104 669,000 88,563 Noncash financing charge - 2,656,000 - - Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (134,093) (1,138,016) (216,021) (42,451) (Increase) decrease in other assets 1,177,967 (2,214,143) (84,375) (22,305) Increase (decrease) in accounts payable (1,568,651) 2,032,165 102,876 (168,214) Increase (decrease) in accrued expenses (3,692,868) 5,325,912 181,554 118,932 Increase (decrease) in other current liabilities 465,812 285,723 - - Increase (decrease) in deferred revenue (192,834) 43,398 136,540 (19,415) -------------- -------------- ------------- -------------- Total adjustments 1,862,198 13,250,014 888,065 21,776 -------------- -------------- ------------- -------------- Net cash used in continuing operations (12,714,997) (16,102,619) (1,207,153) (2,760,717) Net cash used in discontinued operations (5,394,547) (2,895,388) - - -------------- -------------- ------------- -------------- Net cash used in operating activities (18,109,544) (18,998,007) (1,207,153) (2,760,717) -------------- -------------- ------------- -------------- Cash flows used in investing activities: Purchases of equipment (712,016) (1,691,469) (26,875) (407,203) Proceeds from sale of discontinued operations 4,391,800 - - - Acquisitions, net of cash acquired - (536,983) - - -------------- -------------- ------------- -------------- Net cash provided by (used in) investing activities 3,679,784 (2,228,452) (26,875) (407,203) -------------- -------------- ------------- -------------- Cash flows from financing activities: Loans from stockholders - 1,000,000 - 500,000 Principal payments on capital lease obligations (219,824) (215,478) (25,834) - Proceeds from issuance of preferred stock - - 1,982,535 1,815,519 Proceeds from exercise of stock options 50,598 - - - Proceeds from issuance of common stock, net 997,841 41,300,631 - _ -------------- -------------- ------------- -------------- Net cash provided by financing activities 828,615 42,085,153 1,956,701 2,315,519 -------------- -------------- ------------- -------------- Net increase (decrease) in cash and cash equivalents (13,601,145) 20,858,694 722,673 (852,401) Cash and equivalents, beginning of period 22,491,794 1,633,100 910,427 1,762,828 -------------- -------------- ------------- -------------- Cash and equivalents, end of period $ 8,890,649 $ 22,491,794 $ 1,633,100 $ 910,427 =============== ============== ============= ============== Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 61,868 $ 87,504 $ 12,433 $ 6,216 =============== ============== ============= ============== Supplemental schedule of noncash investing and finance activities: Equipment acquired under capital leases $ - $ 314,000 $ 380,000 $ 18,000 =============== ============== ============= ============== Stockholder loans contributed to capital for preferred stock $ - $ - $ - $ 500,000 =============== ============== ============= ============== Conversion of nonredeemable convertible Series A preferred stock to redeemable and related charge $ - $ - $ 14,653,909 $ - =============== ============== ============= ============== Accretion of Series A and Series B preferred stock to redemption valve $ - $ 2,281,000 $ - $ - =============== ============== ============= ============== Conversion of Series A and Series B preferred stock to common stock $ - $ 14,479,303 $ - $ - =============== ============== ============= ============== Issuance of common stock for business acquired $ - $ 584,000 $ - $ - =============== ============== ============= ============== Convertible subordinated note issued in connection with business acquired $ - $ 4,350,000 $ - $ - =============== ============== ============= ==============
See accompanying notes to consolidated financial statements. BANKRATE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION Bankrate, Inc. (the "Company") is an Internet consumer finance marketplace which owns and operates a portfolio of Internet-based personal finance channels including banking, investing, taxes and small business finance. The Company's flagship Web site, Bankrate.com, is an aggregator of information on over 100 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 also through national and state publications. The Company's former wholly owned subsidiary, Professional Direct Agency, Inc. ("Pivot"), is a virtual insurance agency and fulfillment/call center specializing in direct insurance sales over the Internet and through other direct media (see Note 6). The Company is organized under the laws of the state of Florida. On September 20, 2000, the Company changed its name from ilife.com, Inc. to Bankrate, Inc. The Company has incurred net losses in each of its last five fiscal years. We had an accumulated deficit of approximately $59 million as of December 31, 2000. Therefore, the Company believes that period-to-period comparisons of our financial results should not be relied on as an indication of our future performance. We anticipate that we will incur operating losses and negative cash flows in the foreseeable future. The Company is working to manage its cash by actively controlling expenses and pursuing additional sources of revenue. For instance, the Company substantially reduced marketing expenditures beginning in January 2000 compared to the second half of 1999, and has followed through with plans to sell or curtail development of certain under-performing, non-core business units. The Company sold CPNet.com in May 2000, sold Pivot in July 2000, shut down and sold certain assets of Consejero.com in August 2000, and shut down Greenmagazine.com in December 2000 (see Notes 5 and 6). These divestitures yielded cash to the Company of approximately $4,392,000 and will result in lower operating expenses. In June 2000, the Company reduced employment levels of continuing operations by approximately 10% and began efforts to consolidate its physical locations. Based on these actions and the Company's current plan, the Company believes its existing liquidity and capital resources will be sufficient to satisfy its cash requirements into 2002. There are no assurances that such actions will ensure cash sufficiency through 2002 or that reducing marketing expenses would not potentially curtail revenue growth. The Company may consider additional options, which include, but are not limited to, the following: forming strategic partnerships or alliances; considering other strategic alternatives, including: a merger or sale of the Company, or an acquisition; or raising new debt and/or equity capital. There can be no assurance that the Company will be able to raise such funds or realize its strategic alternatives on favorable terms or at all. Further, due to the legal matters discussed in Note 10, which the Company intends to vigorously defend, management could be required to spend significant amounts of time and resources defending these matters which may impact the operations of the Company. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Change of Fiscal Year On April 12, 1999, the Company's Board of Directors approved changing the Company's fiscal year-end from June 30 to December 31. Consolidation Prior to the quarter ended June 30, 2000, the consolidated financial statements included the accounts of the Company and it's former wholly owned subsidiary, Professional Direct Agency, Inc. ("Pivot"). As more fully discussed in Note 6, Pivot was sold during the quarter ended September 30, 2000. Pivot's net assets and results of operations have been classified as discontinued operations for all periods presented. 36 Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of less than three months to be cash equivalents. The carrying value of these investments approximates fair value. Fixed Assets Property and equipment are stated at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets which range from three to seven years. Leasehold improvements are amortized on a straight- line basis over the shorter of the lease term or the estimated useful lives of the improvements. Equipment under capital leases are stated at the present value of the future minimum lease payments. Intangible Assets Intangible assets consisted primarily of goodwill resulting from the acquisitions of CPNet.com, Pivot and certain assets and liabilities of Green Magazine, Inc. (see Notes 5 and 6), and trademarks. Goodwill was being amortized on a straight-line basis over three to five years, the estimated benefit period. Trademarks are being amortized over their estimated useful lives, which are approximately five years, on a straight-line basis. The Company reviews it intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Basic and Diluted Net Loss Per Share The Company computes net loss per share in accordance with the provisions of Statement of Financial Standards No. 128, "Earnings per Share" ("FAS 128") and Staff Accounting Bulletin No. 98 ("SAB 98"). Under FAS 128 and SAB 98, basic and diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding for the period. The calculation of diluted net loss per share excludes common stock equivalents, consisting of outstanding stock options in 2000 and 1999, and outstanding stock options, redeemable preferred stock and convertible preferred stock for 1998, as the effect of their conversion to common stock would be antidilutive. Common stock equivalents that could potentially dilute basic earnings per share in the future were not included in diluted earnings per share because their effect on periods presented was antidilutive total 2,091,066 at December 31, 2000. The antidilutive shares do not include the shares issuable on the assumed conversion of the 10% convertible subordinated note payable. Stock-Based Compensation The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("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 is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. Fair Value of Financial Instruments The Company does not currently use derivative financial instruments in the normal course of its business. The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturities of these assets and liabilities. The Company does not have a readily comparable fair value for its 10% convertible subordinated note payable. The Company believes that its fair value would be less than its carrying value of $4,350,000. 37 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. Revenue Recognition The Company generates revenue from two primary sources: online publishing and print publishing and licensing. Online publishing- The Company sells graphical advertisements on its Web site (including co- branded sites) consisting of banner, badge, poster and billboard advertisements. Advertising sales are invoiced monthly based on the expected number of advertisement impressions or the number of times the advertisement is viewed by users of the Company's Web site. Revenue is recognized monthly based on the percentage of actual impressions to the total number of impressions contracted. Revenue for impressions invoiced but not delivered is deferred. Additionally, the Company generates revenue on a "per action" basis (i.e., a purchase or completion of an application) when a visitor to the Company's Web site transacts with one of our advertisers after viewing an advertisement. Revenue is recognized monthly based on the number of actions reported by the advertiser. The Company is also involved in revenue sharing arrangements with its online partners where the consumer uses co-branded sites principally hosted by the Company. Revenue is effectively allocated to each partner based on the percentage of advertisement views at each site. The allocated revenues are shared according to distribution agreements. Revenue is recorded gross and partnership payments are recorded in cost of revenue. The Company also sells hyperlinks to various third-party Internet sites that generate a fixed monthly fee, which is recognized in the month earned. Online publishing revenue also includes barter revenue which represents the exchange by the Company of advertising space on the Company's web site for reciprocal advertising space on other web sites. Barter revenues and expenses are recorded at the fair market value of the advertisements delivered or received, whichever is more determinable in the circumstances. In January 2000, the Company adopted Emerging Issues Task Force ("EITF") 99-17, "Accounting for Advertising Barter Transactions". In accordance with EITF 99-17, barter transactions have been valued based on similar cash transactions which have occurred within six months prior to the date of the barter transaction. Revenue from barter transactions is recognized as income when advertisements are delivered on the Company's Web site. Barter expense is recognized when the Company's advertisements are run on the other companies' Web sites, which is typically in the same period barter revenue is recognized. If the advertising impressions are received from the customer prior to the Company delivering the advertising impressions, a liability is recorded. If the Company delivers advertising impressions to the other companies' Web sites prior to receiving the advertising impressions, a prepaid expense is recorded. At December 31, 2000, the Company recorded a prepaid expense of approximately $200,000 for barter advertising to be received. Barter revenue was approximately $757,000 and represented approximately 5% of total revenue for the year ended December 31, 2000. No barter revenue was recorded in prior periods. Print publishing and licensing- The Company sells advertisements for consumer mortgage rate tables. The rate tables and advertising are published in various newspapers under revenue sharing arrangements. Revenue is recognized when the tables are run in the respective newspaper. Revenue is recorded gross and revenue sharing payments are recorded in cost of revenue. The Company also earns fees from distributing editorial rate tables that are published in newspapers and magazines across the United States, from paid subscriptions to three newsletters and from providing rate surveys to institutions and government agencies. In addition, the Company licenses research data under agreements that permit the use of Company developed rate information 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. 38 Marketing Expenses Marketing includes advertising costs, which are charged to expense as incurred. Advertising costs were $4,073,796, $16,459,305, $304,919 and $145,632 for the years ended December 31, 2000 and 1999, the six month period ended December 31, 1998 and the year ended June 30, 1998, respectively. Barter expense of approximately $557,000 was recorded for the year ended December 31, 2000. No barter expense was recorded in prior periods. Comprehensive Income No statements of comprehensive income (loss) have been included in the accompanying consolidated financial statements since comprehensive income (loss) and net loss presented in the accompanying consolidated statements of operations, redeemable stock and stockholders' equity (deficit) and statements of cash flows would be the same. Segment Reporting Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". The Company currently operates in two reportable business segments: online publishing, and print publishing and licensing. Recent Accounting Pronouncements In September 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement was amended in September 2000 by Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." Statement No. 138 is effective for the Company beginning January 2001. The new Statement requires all derivatives to be recorded on the balance sheet at fair value and establishes accounting treatment for three types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments: hedges of the variable cash flows of forecasted transactions; and hedges of foreign currency exposures of net investments in foreign operations. To date, the Company does not believe it has invested in derivative instruments nor participated in hedging activities and, therefore, does not believe there will be a material impact on the results of operations or financial position from Statements No. 133 or No. 138. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") and amended it in March and June 2000. We adopted the provisions of SAB 101 in the fourth quarter of 2000 which did not impact our consolidated financial statements. Reclassification Certain amounts reported in prior periods have been reclassified to conform with the current presentation. NOTE 3 - CAPITALIZATION Initial Public Offering On May 13, 1999, the Company completed an initial public offering ("IPO") of 3,500,000 shares of the Company's common stock resulting in net proceeds of approximately $41.3 million. Upon closing of the IPO, both classes of outstanding redeemable convertible preferred stock converted to common stock at 50 shares of common stock for each share of redeemable convertible preferred stock. Additionally, upon the effective date of the IPO, the Company's articles of incorporation were further amended and restated to among other matters, designate 10 million shares of preferred stock with respect to which the Board will have the authority to designate rights and privileges. Stock Splits In August 1997, the Company authorized and executed a 10-for-1 stock split. Additionally, on April 9, 1999, the Company authorized and executed a 5-for-1 stock split, effected as a stock dividend, of each issued and outstanding share of common stock. The information in the accompanying consolidated financial statements has been retroactively restated to reflect the effects of these stock splits and dividend. 39 Authorized Shares In April 1999, the Company amended and restated its articles of incorporation. As a result, the total number of shares which the Company is authorized to issue is 100,120,000; 100,000,000 of these shares are common stock, each having a par value of $.01; and 120,000 shares are preferred stock, each having a par value of $.01, of which 90,000 shares are Series A Convertible Preferred stock and 30,000 are Series B Convertible Preferred stock. Common Stock and Convertible Preferred Stock In June 1997, the Company and certain investors entered into a Series A Preferred Stock Purchase Agreement ("the Agreement"). The Series A Preferred Stock is voting, non-cumulative and preferred as to the first $4.55 per share per year of funds legally available and declared by the Board of Directors, has a liquidation preference above common stockholders of $65.00 per share, each share is convertible into 50 shares of common stock at a conversion price of $1.30, and has other rights and preferences. Pursuant to the Agreement, investors acquired 30,770 shares of Series A Preferred Stock at $65.00 per share. During 1997, Peter C. Morse("Morse") a director and majority stockholder, exchanged 1,153,800 shares of common stock for 23,076 shares of Series A preferred. In August and September 1997, 11,538 shares of Series A Preferred Stock were issued at $65.00 per share, resulting in net proceeds to the Company of $740,709. In October 1997, an additional 1,154 shares of Series A Preferred Stock were issued at $65.00 per share, resulting in net proceeds to the Company of $75,000. Investors agreed to acquire 23,074 shares of Series A Preferred Stock at $65.00 per share, resulting in net proceeds to the Company of $1,499,810. This purchase included the contribution of loans due to Morse in the amount of $200,000 and the contribution of $300,000 in loans due to other investors for an aggregate of 7,692 shares of Series A Preferred Stock. In November 1998, the Series A Preferred Stock was converted from non- redeemable Preferred Stock to redeemable Preferred Stock. This transaction was treated as an extinguishment and the new instrument was recorded at fair value on the conversion date. The difference between the fair value on the conversion date and the carrying value was charged to equity. In November 1998, the Company and certain investors entered into a Series B Preferred Stock Purchase Agreement. Pursuant to this agreement, 17,575 shares of Series B Preferred Stock were issued at $113.80 per share, resulting in net proceeds to the Company of $1,982,535. The Series B Preferred Stock is voting, non-cumulative and preferred as to the first $8.00 per share per year out of funds legally available and declared by the Board of Directors, has liquidation preferences over the Series A Preferred and common stockholders of $113.80 per share, each share is convertible into 50 shares of common stock at a conversion price of $2.28, and has other rights and preferences. The redemption clause of the Series A and Series B Preferred Stock allows the holders of 20% or more of the aggregate number of shares of common stock issuable upon conversion of the Series A and Series B Preferred then outstanding to redeem their shares on or after January 2, 2003, provided that the maximum number of shares of Series A and Series B Preferred which the Company is obligated to redeem does not exceed the aggregate of 35,729 shares prior to January 3, 2004 and 71,458 shares prior to January 3, 2005, and thereafter the Company is obligated to redeem all such shares outstanding as to which such right has been exercised. The redemption price is equal to the greatest of (as defined in the respective agreement) (x) the Series A liquidation preference or Series B liquidation preference, applicable to such shares or (y) the fair market value of such shares or (z) an amount per share of Series A or Series B Preferred equal to ten (10) times the net after tax earnings per share for the most recently completed fiscal year of the Company times the number of shares of common stock issuable upon the conversion of one (1) share of Series A or Series B Preferred and the conversion price then in effect. The Company recorded accretion on the Series A and Series B Preferred Stock equal to the difference between the net proceeds received and the redemption amount of approximately $14,500,000 based on the estimated fair value at December 31, 1998 using the interest method from the conversion date for the Series A Preferred and original issue date for the Series B Preferred through the final redemption date of January 3, 2005. Upon closing of the IPO, both classes of outstanding redeemable convertible preferred stock converted to 5,359,350 shares of common stock at 50 shares of common stock for each share of redeemable convertible preferred stock. 40 Loan From Stockholder On March 9, 1999, one of the Series B convertible preferred stockholders loaned the Company $1,000,000 bearing interest at 8%, due April 9, 1999. If unpaid on the due date, the note was to convert into fully paid Series B convertible preferred stock at a conversion price of $2.97 per share. On April 9, 1999, the principal amount of the loan plus accrued interest was converted into 6,784 shares of Series B convertible preferred stock. The Company recorded a finance charge of $2,656,000 representing the difference between the estimated fair market value of the common stock (as if the 6,784 shares were converted) at date of issuance and the $2.97 conversion price. Upon closing of the IPO, the preferred stock was converted into 339,200 shares of common stock at 50 shares of common stock for each share of convertible preferred stock. Restricted Stock Grants In August 1998, the Company entered into a Restricted Stock Grant Agreement (the "Stock Agreement") with an employee of the Company (the "Grantee") that provides for the issuance of restricted stock to the Grantee in accordance with the 1997 Equity Compensation Plan (Note 4) in satisfaction of certain obligations as described in an employment agreement between the Company and the Grantee. The Company issued 207,000 shares of its common stock to the Grantee in August 1998, subject to restrictions set forth in the Stock Agreement. Restrictions lapsed on 138,000 shares during 1998 and the remainder lapsed in 1999. Total compensation expense recognized by the Company over the vesting period was $269,000 (based on estimated values from other transactions involving sales of the Company's stock) of which $60,000 and $209,000 was recognized in the year ended December 31, 1999 and the six month period ended December 31, 1998, respectively. In March 1998, the Company entered into a Restricted Stock Grant Agreement (the "Grant Agreement") with an officer of the Company (the "Officer") that provided for the issuance of restricted stock to the Officer in accordance with the 1997 Equity Compensation Plan (Note 4). On March 23, 1998, the Company issued 454,170 shares of its common stock to the Officer for an aggregate consideration of $236,168, which was paid by an interest-bearing promissory note from the Officer. The Officer had a put right which required the Company to repurchase the shares at the same price the Officer paid for the shares including interest. Restriction lapsed as follows: 113,540 shares on July 1, 1998, and 9,460 shares on the first day of each month starting August 1, 1998 and ending July 1, 2001. In accordance with Emerging Issues Task Force 95-16, this arrangement was accounted for as a variable plan which requires increases or decreases in stock based compensation expense based on increases or decreases in the fair market value of the Company's common stock. Compensation expense recognized in accordance with FASB Interpretation No. 28 was approximately $2,113,000, $460,000 and $88,000 for the year ended December 31, 1999, the six months ended December 31, 1998 and the year ended June 30, 1998, respectively, based on estimated values from other transactions involving sales of the Company's stock. On March 10, 1999 the note receivable for the restricted stock grant to the Officer was forgiven, the unvested shares (264,932) were effectively forfeited, the Officer's put right was cancelled, and certain other changes were made. Accordingly, "fixed" option accounting treatment was established on this date. NOTE 4 - STOCK OPTION PLANS 1997 Equity Compensation Plan During 1997, the Company adopted the 1997 Equity Compensation Plan (the "Plan") to provide directors, officers, non-employee members of the Board of Directors of the Company and certain consultants and advisors with the opportunity to receive grants of incentive stock options, non-qualified stock options and restricted stock. The Board of Directors has the sole authority to determine who receives such grants, the type, size and timing of such grants, and specify the terms of any noncompetition or other agreements relating to the grants. The aggregate number of common shares that may be issued under the Plan was 900,000. In January 1999, the Company amended the Plan to increase the number of shares authorized to 1,500,000 shares. As of December 31, 2000, 870,897 shares were available for grant under the Plan. The exercise price of any option grant shall be determined by the Board of Directors and may be equal to, greater than, or less than the fair market value of the stock on the grant date. Provided, however, that the exercise price shall be equal to or greater than the fair market value of the stock on the date of grant and an option may not be granted to an employee who at the time of the grant owns more than 10 % of the total combined voting power of all classes of stock of the Company, unless the exercise price is not less than 110 % of the fair market value of the stock on the date of the grant. Options granted generally vest over four years, 25% after the first year and monthly thereafter over the remaining three years, and expire ten years after the date of grant. 41 On March 2 and March 12, 1999, the Company granted 201,720 and 5,000 options, respectively, under the Plan to purchase common stock at $2.97 per share. The options vest over a 48 month period and, accordingly, the Company initially began recognizing compensation expense of approximately $1,620,000 ratably over the vesting period. As of December 31, 2000, 161,250 of these options remained outstanding due to options forfeited by terminated grantees for which the Company is recognizing approximately $684,000 in compensation expense over the remaining vesting period. On April 12, 1999, the Board approved grants under the Plan for outside directors of the Company. Under these grants, 80,000 options were granted on May 13, 1999 to purchase common stock at $13.00 per share. The options vest over 48 months and expire 10 years from date of grant, unless prohibited by the 1997 Plan. No options were granted to outside directors during 2000. 1999 Equity Compensation Plan In March 1999, the Company's stockholders approved the 1999 Equity Compensation Plan (the "1999 Plan"), to provide designated employees of the Company, certain consultants and non-employee members of the Board of Directors with the opportunity to receive grants of incentive stock options, nonqualified stock options and restricted stock. The 1999 Plan was originally authorized to grant options for up to 1,500,000 shares. In April 2000, the Company amended the 1999 Plan to increase the number of shares authorized to 3,500,000 which was approved by the Company's stockholders. Options granted generally vest over four years, 25% after the first year and monthly thereafter over the remaining three years, and expire ten years after the date of grant. As of December 31, 2000, 2,038,037 shares were available for grant under the 1999 Plan. In March 1999, the Company granted 358,500 options to an officer (the "Officer") of the Company to purchase shares of common stock at $2.97 which vest over a 36 month period. The Company began recognizing compensation expense of approximately $2,807,000 ratably over the vesting period. In February 2000, the Officer resigned from his position with the Company (see Note 10). Under the terms of an agreement entered into in March 1999, the Officer continued to vest in the stock options through November 15, 2000 for a total of 199,167 shares which resulted in a noncash charge of approximately $860,000 recorded in 2000. During the year ended December 31, 2000, the Company granted stock options to certain key executives and directors (See Note 10). Accrued Stock Compensation Expense The Company accounts for stock-based compensation arrangements in accordance with Accounting Principles Board ("APB) Opinion No. 25, "Accounting for Stock Issued to Employees". Under APB No. 25, compensation expense for fixed plan option accounting is recognized over the respective vesting period based on the difference, if any, on the date the option is granted, between the fair value of the Company's common stock and the option exercise price, and a liability is established. This liability is reduced for terminations and forfeitures as well as option exercises. Pro Forma Disclosures Under SFAS No. 123 The per share weighted average fair value of stock options granted during the years ended December 31, 2000 and 1999 was between $0.74 and $3.17 and $9.70 and $13.00, respectively, and was between $0.40 and $1.30 for the six months ended December 31, 1998, and was approximately $0.40 for the year ended June 30, 1998 on the date of grant using the Black Scholes option pricing model. The following weighted average assumptions were used: expected volatility of 75% in 2000, 100% in 1999 and 0% for the six months ended December 31, 1998 and the year ended June 30, 1998; expected dividend yield of 0% for all periods presented; risk-free interest rates of 6% for the year ended December 31, 2000, 6.50% for the year ended December 31, 1999 and 5.50% for the six months ended December 31, 1998 and the year ended June 30, 1998; and expected lives of 5 years for all periods presented. The Company applies APB Opinion No. 25 in accounting for its Plan. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the net losses would have increased to the pro forma amounts indicated below:
Six Months Year Ended Ended Year Ended December 31, December 31, June 30, 2000 1999 1998 1998 ---- ---- ---- ---- Net loss applicable to common stock: As reported $ (16,920,560) $ (33,769,330) $ (6,533,359) $ (2,782,493) Pro forma (17,856,418) (36,969,194) (6,548,359) (2,792,493) Basic net loss per common share as reported (1.22) (3.34) (1.63) (0.72) Basic net loss per common share pro forma (1.29) (3.66) (1.63) (0.73)
42 Stock option activity during the years ended December 31, 2000 and 1999, the six month period ended December 31, 1998, and the year ended June 30, 1998 is as follows:
Number of Price Per Weighted Average Shares Share Exercise Price ------ ----- -------------- Balance, June 30, 1997 - $ - $ - Granted 89,530 1.30 1.30 Exercised - - - Forfeited - - - Expired - - - -------- Balance, June 30, 1998 89,530 1.30 1.30 Granted 102,750 1.30 1.30 Exercised - - - Forfeited - - - Expired - - - -------- Balance, December 31, 1998 192,280 1.30 1.30 Granted 1,725,036 1.30 to 13.00 7.01 Exercised - - - Forfeited (28,958) 1.30 to 13.00 6.63 Expired - - - -------- Balance, December 31, 1999 1,888,358 1.30 to 13.00 6.43 Granted 1,510,504 1.00 to 5.375 2.90 Exercised (24,463) 1.30 1.30 Forfeited (1,283,333) 1.00 to 13.00 6.28 Expired - - - --------- Balance, December 31, 2000 2,091,066 1.00 to 13.00 $ 4.03 =========
Additional information with respect to outstanding options as of December 31, 2000 is as follows:
Options Outstanding Options Exercisable ------------------------------------- --------------------------- Weighted Average Average Number Remaining Number Exercise Prices of Shares Contractual Life (Years) of Shares Price ------ --------- ------------------------ --------- ------ $ 1.30 44,350 7.7 29,032 $ 1.30 1.75 219,284 9.45 23,333 1.75 1.84 to 4.31 1,309,320 9.05 476,275 2.86 4.50 231,694 9.21 267 4.50 4.53 to 12.58 63,408 8.62 20,605 7.19 13.00 223,010 8.36 153,940 13.00 --------- ------- 2,091,066 8.99 703,452 $ 5.10 ========= =======
NOTE 5 - RESTRUCTURING AND IMPAIRMENT CHARGES In the quarter ended June 30, 2000, the Company recorded a restructuring charge of approximately $1,298,000 as a result of implementing certain strategic reorganization initiatives. Approximately $364,000 of this charge pertained to severance, legal and other employee related costs incurred in connection with a reduction of approximately 10% of the workforce in ongoing operations and the elimination of positions in under-performing, non-core business units, all of which was paid in 2000. The remaining $934,000 of this charge relates to the write-off of certain assets, primarily software, licenses and other installation costs, of an abandoned systems installation. In the quarter ended September 30, 2000, the Company recorded restructuring and impairment charges of approximately $843,000 as a result of strategic reorganization initiatives. Approximately $88,000 of this charge pertained to severance, legal and other employee related costs incurred in connection with a further reduction of the workforce, all of which was paid in 2000. Approximately $279,000 relates to the shut down and sale of assets of Consejero.com (see discussion below) and other non-core assets. The remaining $476,000 relates to the write-off of GreenMagazine.com goodwill (see discussion below). On August 27, 1999, the Company acquired certain assets and assumed certain liabilities of Green Magazine, Inc. ("Green") pursuant to an Asset Purchase Agreement, dated August 27, 1999, by and among the Company, Green, Kenneth A. Kurson, John F. Packel and James Michaels (the "Agreement"), for approximately $831,000 including acquisition costs. Pursuant to the Agreement, the Company acquired the rights to all agreements, contracts, commitments, licenses, copyrights, trademarks and the subscriber/customer list of Green. Kenneth A. Kurson and John F. Packel were also employed by the Company. The total consideration paid was approximately $784,000 consisting of $200,000 in cash and 100,000 unregistered shares of the Company's common stock valued at approximately $584,000. The transaction was accounted for using the purchase method of accounting. The net assets acquired were estimated to be at fair market value. The excess of the purchase price over the fair value of the net assets acquired (approximately $883,000) was recorded as goodwill and was being amortized over three years, the expected benefit period. During the quarter ended September 30, 2000, a decision was made to stop publishing the print version of Green Magazine. Additionally, due to lower than expected traffic levels visiting GreenMagazine.com and continued negative operational cash flows, a revised operating plan was developed and GreenMagazine.com was incorporated into a channel of Bankrate.com. After evaluating the recoverability of the intangible asset, the Company recorded an impairment charge of approximately $476,000 to write the goodwill down to estimated fair value. In December 2000, GreenMagazine.com was shut down and the remaining goodwill of approximately $73,000 was written off. During the years ended December 31, 2000 and 1999, GreenMagazine.com had total revenue and total expenses of $103,817 and $1,774,188, and $1,572 and $263,169, respectively. On August 31, 2000, the Company shut down the operations of Consejero.com and sold certain of its assets including fixed assets, software licenses and other intangible assets, to Consejero Holdings, LLC for $41,800 in cash resulting in a loss of approximately $86,000. Additionally, the Company recorded approximately $193,000 in charges for severance and other related shut down costs, all of which were paid in 2000. During the years ended December 31, 2000 and 1999, Consejero.com had total revenue and total expenses of $16,359 and $810,867, and $8,036 and $2,217,879, respectively. As more fully described in Note 6 below, in December 2000, the Company wrote off approximately $71,000 of impaired assets related to the sale of CPNet.com. 43 NOTE 6 - DIVESTITURES Bank Advertising News In December 1998, the Company sold substantially all of the assets, including the intellectual property of one of its newsletters, Bank Advertising News. The newsletter was sold for $125,000 in cash and assumed liabilities of approximately $80,000. The gain on the sale was $185,588, net of $16,524 of selling expenses, and has been recorded in other income. Revenue for Bank Advertising News for the six month period ended December 31, 1998 and the year ended June 30, 1998 was $82,953 and $178,270, respectively. Cost of operations for Bank Advertising News for the six month period ended December 31, 1998 and the year ended June 30, 1998 $53,138 and $57,445, respectively. Net liabilities of Bank Advertising News at the date of sale were approximately $80,000. CPNet.com In January 1999, the Company acquired all of the assets of The College Press Network ("CPNet.com"), excluding cash and real or personal property leases, for $25,000 in cash and stock options. An additional payment of $25,000 was made to the sellers in January 2000. The transaction was accounted for using the purchase method of accounting. The net assets acquired were estimated to be at fair market value. The excess of the purchase price over the fair value of the net assets acquired (approximately $50,000) was recorded as goodwill and was being amortized over 5 years, the expected benefit period. The sellers were employed by the Company and were granted 30,000 options under the 1997 Equity Compensation Plan with an exercise price of $1.30 which vest over a 48 month period. Approximately $45,000 of compensation expense was amortized over the vesting period. CPNet.com's historical statements of operations were not material to the Company. On May 17, 2000, the Company sold the assets of CPNet.com to Colleges.com, Inc. for 190,000 shares of Colleges.com, Inc. common stock of which 125,041 shares were delivered at the time of closing and 64,959 contingent shares. The Company originally recorded such shares at the net book value of the CPNet.com assets which, at the time of the sale, was approximately $71,000. During the quarter ended December 31, 2000, the Company charged this amount to restructuring and impairment charges after determining impairment based on the fact that Colleges.com is an early stage company subject to significant risk due to their limited operating history and volatile industry-based economic conditions. During the years ended December 31, 2000 and 1999, CPNet.com had total revenue and total expenses of $18,162 and $385,973, and $49,513 and $577,278, respectively. Professional Direct Agency, Inc. ("Pivot") On August 20, 1999, the Company acquired Pivot pursuant to a Stock Purchase Agreement, dated August 20, 1999, by and between the Company, the shareholders of Pivot and The Midland Life Insurance Company ("Midland"), a note and warrant holder of Pivot (the "Agreement"), for approximately $4,744,000 including acquisition costs. Pursuant to the Agreement, the Company acquired a 100% interest in Pivot and as a result of the acquisition, Pivot became a wholly owned subsidiary. The transaction was accounted for using the purchase method of accounting. The net assets acquired were estimated to be at fair market value. The excess of the purchase price over the fair value of the net assets acquired (approximately $4,609,000) was recorded as goodwill and was amortized over three years, the expected benefit period. The total consideration paid in connection with the acquisition consisted of $290,000 in cash paid to the Pivot shareholders and a $4,350,000 five-year convertible subordinated note to Midland. The note bears interest at 10% and is due in one payment on August 20, 2004. Interest is due beginning on August 20, 2002 and thereafter every six months until conversion or payment in full. The note is convertible at any time by Midland into 625,000 shares of our common stock. The Company has the right to require conversion beginning any time after the earlier of (1) August 20, 2000 or (2) the date that the Company files a registration statement under the Securities Act of 1933, as amended (the "Act"), registering the conversion shares for sale under the Act; provided that, within the 55-day period immediately prior to the date the Company notifies Midland of the required conversion, the closing price of our common stock has been at least $10.00 per share for at least twenty consecutive trading days. On July 14, 2000, the Company sold Pivot for $4,350,000 in cash. In connection with the sale, the Company agreed to indemnify the buyer for liability of up to $1,000,000 in connection with a litigation matter between Pivot and its co-founders and Midland. In March 2001, the case was dismissed based on a technical deficiency. Management has excluded any costs contingent on the outcome of this litigation from the calculation of the gain on sale. Pivot's results of operations have been classified as discontinued operations 44 in the accompanying consolidated statements of operations. The Company recorded a gain on the sale of $871,212 in the quarter ended September 30, 2000. Summary operating results of discontinued operations are as follows: Year Ended December 31, 2000 1999 ---- ---- Revenue $ 384,278 $ 147,827 Marketing expenses (320,880) (619,560) General and administrative expenses (2,321,699) (1,046,709) Depreciation and amortization (128,031) (151,914) Goodwill amortization (832,182) (469,436) ------------ ------------ Operating loss (3,218,514) (2,139,792) Interest income 3,937 4,095 ------------ ------------ Loss from discontinued operations $ (3,214,577) $ (2,135,697) ============ ============ Net assets of discontinued operations held for sale as of December 31, 1999 relate to Pivot. NOTE 7 - FINANCIAL STATEMENT DETAILS Furniture, Fixtures and Equipment Furniture, fixtures and equipment consist of the following:
December 31, 2000 1999 ---- ---- Furniture and fixtures $ 349,360 $ 322,800 Computers and software, including assets under capital leases of $694,721 at December 31, 2000 and 1999, respectively 2,621,339 2,133,833 Equipment, including assets under capital lease of $17,950 at December 31, 2000 and 1999, respectively 140,813 152,258 Leasehold improvements 160,701 172,357 Land 63,354 63,354 ----------- ----------- 3,335,567 2,844,602 Less accumulated depreciation and amortization, including amounts related to assets under capital leases of $465,001 and $233,915 at December 31, 2000 and 1999, respectively (1,605,112) (823,476) ----------- ----------- $ 1,730,455 $ 2,021,126 =========== ===========
Intangible Assets
Intangible assets consist of the following: December 31, 2000 1999 ---- ---- Goodwill $ - $ 949,818 Trademarks and URL's 129,011 127,976 Other 151,362 151,992 ----------- ----------- 280,373 1,229,786 Less accumulated amortization (191,948) (278,496) ---------- ---------- $ 88,425 $ 951,290 =========== ==========
Amortization expense was $264,558, $155,239, $543 and $5,937 for the years ended December 31, 2000 and 1999, the six months ended December 31, 1998, and the year ended June 30, 1998, respectively. Other Assets
Other assets consist of the following: December 31, 2000 1999 ---- ---- Restricted cash $ 15,239 $ 304,366 Computers and software deposits 55,583 998,580 Other deposits 62,987 118,768 --------- ---------- $ 133,809 $1,421,714 ========= ==========
Other Accrued Expenses
Other accrued expenses consist of the following: December 31, 2000 1999 ---- ---- Accrued payroll and related benefits $ 379,389 $ 235,466 Vacation 146,275 240,355 Sales commissions 306,470 311,356 Marketing 334,807 4,476,969 Partner payments 136,613 140,231 Professional fees 234,032 470,864 Legal and other 478,650 11,678 ----------- ----------- $ 2,016,236 $ 5,886,919 =========== ===========
NOTE 8 - INCOME TAXES The Company did not record any income tax expense or benefit for the years ended December 31, 2000 and 1999, the six months ended December 31, 1998 and the year ended June 30, 1998 due to the losses incurred. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities consist of the following:
Six Months Ended Year Ended December 31, December 31, Year Ended 2000 1999 1998 June 30, 1998 ---- ---- ---- ------------- Deferred Tax Assets: Net operating loss carryforwards $ 16,666,480 $ 12,276,287 $ 1,983,228 $ 1,196,975 Intangible assets and other 249,942 253,712 143,438 143,438 Allowance for doubtful accounts 75,260 88,431 9,350 9,011 Deferred compensation 906,116 436,248 - - ------------- ------------- ----------- ------------- Total gross deferred tax assets 17,897,798 13,054,678 2,136,016 1,349,424 Less valuation allowance (17,833,626) (12,984,981) (2,136,016) (1,349,424) ------------- ------------- ----------- ------------- Net deferred tax assets 64,172 69,697 - - Deferred Tax Liabilities: Depreciation (64,172) (69,697) - - ------------- ------------- ------------ ------------- $ - $ - $ - $ - ============= ============= ============ =============
The valuation allowance for deferred tax assets as of December 31, 2000, 1999 and 1998, and as of June 30, 1998 was $17,833,626, $12,984,981, $2,136,016, and $1,349,424, respectively. The net change in the total valuation allowance for the years ended December 31, 2000 and 1999, the six month period ended December 31, 1998 and the year ended June 30, 1998, was an increase of $4,848,645, $10,848,965, $786,592, and $1,211,946, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income and tax planning strategies in making this assessment. An increase in the gross deferred tax assets and the related valuation allowance was generated by net operating losses which are not currently useable. This increase generates the principal differences between the expected amounts of tax benefits computed by applying the statutory Federal income tax rate to the Company's loss before income taxes for the years ended December 31, 2000 and 1999, the six month period ended December 31, 1998 and the year ended June 30, 1998. The Company recorded no tax benefit for these periods. The difference between the expected income tax benefit and the actual income tax benefit is due primarily to an approximately $5,000,000 higher gain on the disposal of discontinued operations for tax purposes. 45 At December 31, 2000, the Company had net operating loss carryforwards of approximately $44,290,000 which expire beginning in 2012 through 2020. The amount of net operating loss carryforwards may be limited if the Company has an ownership change. NOTE 9 - OTHER RELATED PARTY TRANSACTIONS The Company leases office space in North Palm Beach, Florida from Bombay Holdings, Inc. ("Bombay"), which is wholly owned by Peter C. Morse ("Morse"), a director and majority stockholder. Total rent paid to Bombay for the years ended December 31, 2000 and 1999, the six month period ended December 31, 1998, and the year ended June 30, 1998 was $287,164, $265,815, $99,192 and $164,552, respectively. Morse has from time to time advanced capital to the Company. Such loans for the year ended December 31, 2000 and 1999, the six month period ended December 31, 1998 and the year ended June 30, 1998 amounted to $0, $0, $0, and $200,000, respectively. Interest rates for the loans were 6.5% - 7%. During 1997, certain stockholder loans were contributed to capital (Note 3). NOTE 10 - COMMITMENTS AND CONTINGENCIES Leases Bombay is wholly owned by Morse. The Company leases office space in North Palm Beach, Florida from Bombay on a month-to-month basis under the terms of lease agreements dated May 1, 1994 (amended July 28, 1998) and January 31, 1999. The lease requires the Company to pay a percentage of the common maintenance charges and lease payments are subject to an annual increase based on the consumer price index of the Fort Lauderdale/Miami region. The Company leases office space in New York City under the terms of a lease entered into on October 7, 1999 expiring September 30, 2006. Facilities leased in Los Angeles, California are on a month-to-month basis. Total rent expense for the years ended December 31, 2000 and 1999, the six month period ended December 31, 1998, and the year ended June 30, 1998, amounted to $562,702, $485,718, $109,872, and $164,552, respectively. Future minimum lease payments under non-cancelable operating leases and future minimum capital lease payments as of December 31, 2000 were:
Operating Capital Leases Leases ------ ------ Year Ending December 31, - ----------------------- 2001 $ 154,720 $ 232,331 2002 160,136 37,683 2003 165,740 3,518 2004 171,541 - 2005 177,545 - Thereafter 136,624 - --------- --------- Total minimum lease payments $ 966,306 273,532 ========= Less amount representing interest at rates ranging from 3.94% to 23.23% (18,066) --------- Present value of net minimum capital lease payments 255,466 Less current installments (214,651) --------- Obligations under capital leases, excluding current installments, included in other liabilities $ 40,815 =========
The above minimum lease payments have not been reduced by minimum sublease rentals of approximately $105,600 due in 2001 and 2002 under a non-cancelable sublease. Distribution Agreements The Company has various agreements with advertisers, content providers and other web sites that require it to feature such parties exclusively in certain sections of its Web site. Legal Proceedings In September 1999, the Company entered into a lease agreement for a new office facility to be constructed in northern Palm Beach County, Florida. The Company provided to the developer a $300,000 letter of credit as a security deposit. The lease 46 provides an initial lease term of ten years commencing from the date of occupancy and includes two five-year renewal options. The annual base rent during the initial term ranges from $660,000 in the first two years to $760,000. The lease contemplated that occupancy would commence on September 15, 2000. In connection with the lease agreement, the Company also entered into an agreement with the developer to purchase an adjoining tract of land for $609,000. The Company paid a deposit of $60,000 to close the transaction no later than June 30, 2000, which is being held in escrow. Subsequent to a dispute with the developer with respect to the lease agreement and the agreement to purchase the adjacent tract, on August 3, 2000, the developer made demand on the bank that issued the letter of credit and the bank paid the developer the full $300,000 under the letter of credit. On August 14, 2000, the developer filed claims against the Company alleging breach of contract under the lease agreement and the agreement to purchase the adjacent tract, and seeks damages in excess of $500,000 plus attorneys fees and costs. The Company has filed counterclaims and intends to vigorously defend against both of these matters. While acknowledging the uncertainties of litigation, the Company believes that these matters will be resolved without a material adverse impact on the Company's financial position or results of operations. On March 28, 2000, a purported class-action lawsuit was filed against the Company and others in the United States District Court for the Southern District of New York. The suit alleges that the Company violated federal securities laws by, among other things, misrepresenting and/or omitting material information concerning the Company's financial results for the quarter ended March 31, 1999, and other financial information, in the Company's registration statement and prospectus filed with the Securities and Exchange Commission in connection with the Company's initial public offering. The action, which seeks an unspecified amount of money damages, was filed purportedly on behalf of all stockholders who purchased shares of the Company's common stock during the period from May 13, 1999, through March 27, 2000. The Company has filed a motion to dismiss this complaint and the motion has been submitted to the court however, no decision has been rendered. If the motion is denied the Company intends to vigorously defend against the lawsuit. The Company has accrued an appropriate amount and, in the opinion of management, the ultimate disposition of this matter will not have a material adverse effect on the Company's financial position, results of operations or liquidity. Damages, if any, would be substantially covered by insurance. In July 2000, the Company sold its former wholly owned subsidiary, Professional Direct Agency, Inc. ("Pivot"), for $4,350,000 in cash. In connection with the sale, the Company agreed to indemnify the buyer for liability of up to $1,000,000 in connection with a litigation matter between Pivot and its co-founders and its former owner. In March 2001, the case was dismissed based on a technical deficiency. Other Commitments On February 25, 2000, the Company announced that William P. Anderson resigned as its President and Chief Executive Officer and as a director. Under the terms of his Executive Employment Agreement entered into on March 10, 1999, Mr. Anderson received cash compensation totaling approximately $150,000 and continued to vest in his stock options through November 15, 2000, which resulted in a noncash charge of approximately $860,000. Both the cash charge ($150,000) and the noncash charge ($860,000) were recorded in the quarter ended March 31, 2000. On April 5, 2000, Jeffrey M. Cunningham was appointed to the Company's Board of Directors as non-executive chairman. In accordance with the terms of a Stock Purchase Plan and Subscription Agreement (the "Purchase Agreement") entered into on that date, Mr. Cunningham purchased 431,499 shares of the Company's common stock for $997,840 in cash (or $2.313 per share). The purchase price of the shares is equal to the closing price per share of the Company's common stock on April 5, 2000, as reported by the Nasdaq National Market. In addition, on April 5, 2000, Mr. Cunningham was granted stock options under the 1999 Equity Compensation Plan to purchase 141,905 shares of common stock at $4.50 per share and 125,622 shares at $3.75 per share. One-half of the options vest and become exercisable on March 31, 2001, and the balance vest and become exercisable in equal monthly increments commencing on April 30, 2001 and concluding on March 31, 2002. The Company will recognize compensation expense of approximately $217,000 over the vesting period. On April 27, 2000, Elisabeth DeMarse was appointed to the Company's Board of Directors as well as elected President and Chief Executive Officer of the Company. Ms. DeMarse entered into an employment agreement with the Company on that date. Pursuant to the terms of her employment agreement, Ms. DeMarse is entitled to receive an annual base salary of $300,000 and a bonus of $100,000 payable in quarterly installments. The Company has agreed to provide other benefits, including $500,000 in term life insurance and participation in the Company's benefit plans available to other executive officers. Under the terms of the employment agreement, Ms. DeMarse agrees to assign to the Company all of her copyrights, trade secrets and patent rights that relate to the business of the Company. Additionally, during the term of her employment and for a period of one year thereafter, Ms. DeMarse agrees not to compete with the Company and not to recruit any of the Company's employees, unless the Company terminates her without cause or she resigns for good reason. Upon Ms. DeMarse's termination of employment for certain reasons (i.e., without cause, disability, resignation for good reason (as defined in the agreement), or a change of control), 47 the Company agrees to pay her a severance equal to 12 months' base salary, as well as reimburse her for health, dental and life insurance coverage premiums for one year after such termination. The agreement terminates on April 27, 2002, unless otherwise extended by the parties. Ms. DeMarse was also granted options to purchase 541,936 shares of the Company's common stock under the 1999 Equity Compensation Plan at $2.688 per share, the fair market value on the date of grant. The options vest over a 24 month period. The options vest as to 25% of the shares six months from the date of grant; and as to the remaining 75%, in equal monthly installments over the next 18 months thereafter, with 100% vesting on the second anniversary of the date of grant. NOTE 11 - SEGMENT INFORMATION The Company elected to change the reporting of its business segments as of July 1, 2000, and restated its prior periods to conform with this revised segment reporting. The Company formerly reported operating in three business divisions consisting of six reportable segments. The three business divisions consisted of online publishing, print publishing and licensing and insurance sales. The online publishing division is primarily engaged in the sale of advertising, sponsorships and hyperlinks in connection with our Internet site Bankrate.com, and our former separate sites theWhiz.com, IntelligentTaxes.com, GreenMagazine.com, Consejero.com and CPNet.com. Bankrate.com, theWhiz.com, Consejero.com and Greenmagazine.com constituted segments within this division. CPNet.com was sold on May 17, 2000 and Consejero.com was shut down on August 31, 2000, while theWhiz.com and IntelligentTaxes.com were incorporated into channels of Bankrate.com. GreenMagazine.com was shut down in December 2000. The former insurance division, which was sold on July 14, 2000, constituted a segment and operated through a virtual insurance agency and fulfillment/call center specializing in direct insurance sales on the Internet and through other direct media. 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 our Internet site Bankrate.com. The print publishing and licensing division and segment is primarily engaged in the sale of advertising in the Consumer Mortgage Guide rate tables, newsletter subscriptions, and licensing of research information. The Company also charges a commission for the placement of the Consumer Mortgage Guide in print publications. The Company evaluates the performance of its operating segments based on segment profit (loss). Although no one customer accounted for greater than 10% of total revenues for the years ended December 31, 2000 and 1999, the six months ended December 31, 1998, and the year ended June 30, 1998, the five largest customers accounted for approximately 21%, 14%, 18% and 13%, respectively, of total revenue for those periods. No revenues were generated outside of the United States. Summarized segment information as of December 31, 2000, 1999 and 1998, and June 30, 1998, for the years ended December 31, 2000 and 1999, and for the six months ended December 31, 1998, and for the year ended June 30, 1998, respectively, is presented below.
Print Online Publishing Publishing and Licensing Other Total ---------- ------------- ----- ----- Year Ended December 31, 2000: Revenue $ 12,282,795 $ 2,921,970 $ - $ 15,204,765 Cost of revenue 7,114,258 1,982,885 - 9,097,143 Gross margin 5,168,537 939,085 - 6,107,622 Sales 3,234,148 - - 3,234,148 Marketing 3,873,796 - - 3,873,796 Product development 1,358,100 582,043 - 1,940,143 General and administrative expenses 5,788,196 1,376,961 - 7,165,157 Restructuring and impairment charges - - 2,285,422 2,285,422 Depreciation and amortization 611,439 262,045 - 873,484 Goodwill amortization 231,214 - - 231,214 Noncash based stock compensation - - 1,311,912 1,311,912 Other income (expense), net - - 230,459 230,459 Segment profit (loss) (9,928,356) (1,281,964) (3,366,875) (14,577,195) Discontinued operations - - (2,343,365) (2,343,365) Net loss (9,928,356) (1,281,964) (5,710,240) (16,920,560) Total assets $ 2,714,672 $ 1,029,069 $ 8,890,649 $ 12,634,390 Print Online Publishing Publishing and Licensing Other Total ---------- ------------- ----- ----- Year Ended December 31, 1999: Revenue $ 8,496,905 $ 3,472,780 $ - $ 11,969,685 Cost of revenue 5,627,713 2,387,229 - 8,014,942 Gross margin 2,869,192 1,085,551 - 3,954,743 Sales 2,976,439 - - 2,976,439 Marketing 16,459,113 - - 16,459,113 Product development 1,411,682 605,007 - 2,016,689 General and administrative expenses 4,372,341 1,787,025 - 6,159,366 Depreciation and amortization 295,254 126,538 - 421,792 Noncash based stock compensation - - 3,305,104 3,305,104 Other income (expense), net - - (1,782,644) (1,782,644) Segment profit (loss) (22,831,866) (1,433,019) (5,087,748) (29,352,633) Discontinued operations - - (2,135,697) (2,135,697) Net loss (22,831,866) (1,433,019) (7,223,445) (31,488,330) Total assets $ 4,861,765 $ 1,365,422 $26,372,389 $ 32,599,576 Print Online Publishing Publishing and Licensing Other Total ---------- ------------- ----- ----- Six Months Ended December 31, 1998: Revenue $ 1,808,877 $ 1,660,314 $ - $ 3,469,191 Cost of revenue 1,424,255 1,100,693 - 2,524,948 Gross margin 384,622 559,621 - 944,243 Sales 837,697 - - 837,697 Marketing 304,919 - - 304,919 Product development 315,263 135,113 - 450,376 General and administrative expenses 454,179 416,878 - 871,057 Depreciation and amortization 68,944 29,547 - 98,491 Goodwill amortization - - - - Noncash based stock compensation - - 669,000 669,000 Other income (expense), net - - 192,079 192,079 Segment profit (loss) (1,596,380) (21,917) (476,921) (2,095,218) Total assets $ 1,117,111 $ 349,141 $ 1,633,100 $ 3,099,352 Print Online Publishing Publishing and Licensing Other Total ---------- ------------- ----- ----- Year Ended June 30, 1998: Revenue $ 1,281,284 $ 2,559,293 $ - $ 3,840,577 Cost of revenue 1,339,540 1,961,714 - 3,301,254 Gross margin (58,256) 597,579 - 539,323 Sales 705,595 - - 705,595 Marketing 145,632 - - 145,632 Product development 488,437 209,330 - 697,767 General and administrative expenses 555,049 1,108,679 - 1,663,728 Depreciation and amortization 46,666 20,000 - 66,666 Noncash based stock compensation - - 88,563 88,563 Other income (expense), net - - 46,135 46,135 Segment profit (loss) (1,999,635) (740,430) (42,428) (2,742,493) Total assets $ 651,904 $ 205,568 $ 910,427 $ 1,767,899
NOTE 12 - SUBSEQUENT EVENTS (Unaudited) On January 29, 2001, the Company announced that its common stock was removed from the Nasdaq National Market and immediately became eligible for trading on the OTC Bulletin Board under the symbol "RATE". Nasdaq's decision to delist the Company's common stock from the Nasdaq National Market was based on the Company's net tangible assets, as defined by Nasdaq, falling below the required $4,000,000 minimum amount. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 48 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In accordance with General Instruction G(3) of the Form 10-K, the information relating to the directors of Bankrate, Inc., including directors who are executive officers of the Company, is set forth in the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders (the "Proxy Statement") and is incorporated herein by reference. Pursuant to Instruction 3 of Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K, information relating to the executive officers of is set forth under the caption "Executive Officers of the Registrant" in Part I, Item 4A of this report. Compliance with Section 16(a) of the Securities Exchange Act of 1934: Section 16(a) of the Securities Exchange of 1934, as amended, and regulations of the Securities and Exchange Commission thereunder require Bankrate, Inc.'s directors and executive officers and any persons who own more than 10% of Bankrate, Inc.'s Common Stock, as well as certain affiliates of such persons, to file reports with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. with respect to their ownership of Bankrate, Inc.'s Common Stock. Directors, executive officers and persons owning more than 10% of Bankrate, Inc.'s Common Stock are required by Securities and Exchange Commission regulations to furnish Bankrate, Inc. with copies of all Section 16(a) reports they file. Based solely on its review of the copies of such reports received by it and written representations that no other reports were required of those persons, Bankrate, Inc. believes that during fiscal 2000, all filing requirements applicable to its directors and executive officers were complied with in a timely manner except that G. Cotter Cunningham, Robert J. DeFranco, Joseph Jones and Procopia Skoran filed a late Form 4. Bankrate, Inc. is not aware of any other persons other than directors and executive officers and their affiliates who own more than 10% of the Company's Common Stock. ITEM 11. EXECUTIVE COMPENSATION In accordance with General Instruction G(3) of Form 10-K, the information relating to executive compensation is set forth in the Proxy Statement and is incorporated herein by reference; provided, such incorporation by reference shall not be deemed to include or incorporate by reference the information referred to in Item 402 (a)(8) of Regulation S-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT In accordance with General Instruction G(3) of Form 10-K, the information relating to security ownership by certain persons is set forth in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In accordance with General Instruction G(3) of Form 10-K, the information relating to certain relationships and related transactions is set forth under the caption "Related Party Transactions" in the Proxy Statement and is incorporated herein by reference. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS PART OF THIS REPORT: (1) Financial Statements. See Index to Financial Statements under Item 8. (2) Financial Statement Schedule. All financial statement schedules have been omitted since the required information is not material or is included in the consolidated financial statements or notes thereto. (3) Exhibits. The following exhibits are filed with or incorporated by reference in this report. Where filing is made by incorporation by reference to a previously filed registration statement or report, such registration statement or report is identified in parenthesis. 49 The Company will furnish any exhibit upon request to Robert J. DeFranco, Secretary, Bankrate, Inc., 11811 U.S. Highway One, Suite 101, North Palm Beach, Florida 33408. 3.1 Amended and Restated Articles of Incorporation. (1) 3.2 Articles of Amendment to Amended and Restated Articles of Incorporation.(5) 3.3 Amended and Restated Bylaws.(1) 4.1 See exhibits 3.1 and 3.3 for provisions of the Amended and Restated Articles of Incorporation and Amended and Restated Bylaws of the registrant defining rights of the holders of common stock of the registrant. 4.2 Specimen Stock Certificate. * 10.1 Lease Agreement dated May 1, 1994, between the registrant and Bombay Holdings, Inc. as amended. (1) 10.2 Lease Agreement dated October 6, 1997, between the registrant and Bombay Holdings, Inc.(1) 10.3 Lease Agreement dated January 31, 1999, between the registrant and Bombay Holdings, Inc.(1) 10.4 Professional Employer Agreement dated February 25, 1999, between the registrant and Vincam Human Resources, Inc.(1) 10.5 ilife.com, Inc. 1997 Equity Compensation Plan.(1) 10.6 ilife.com, Inc. 1999 Equity Compensation Plan.(1) 10.7 Form of Stock Option Agreement under the 1997 Equity Compensation Plan.(1) 10.8 Promissory Note, dated March 9, 1999, executed by the registrant and payable to Antares Capital Fund II Limited Partnership.(1) 10.9 Cancellation and Stock Repurchase Agreement, dated as of March 10, 1999, by the registrant in favor of William P. Anderson, III.(1) 10.10 Agreement of Cancellation and Release, dated as of March 10, 1999, between the registrant and William P. Anderson, III.(1) 10.11 Incentive Stock Option Grant Agreement, dated as of March 10, 1999, between the registrant and William P. Anderson, III.(1) 10.12 Executive Employment Agreement, dated as of March 10, 1999, between ilife.com and William P. Anderson, III.(1) 10.13 Stock Purchase Agreement dated August 20, 1999, by and between the registrant, the shareholders of Professional Direct Agency, Inc., and The Midland Life Insurance Company.(2) 10.14 Asset Purchase Agreement dated August 27, 1999, by and among the registrant, Green Magazine, Inc., Kenneth A. Kurson, John F. Packel, and James Michaels.(3) 50 10.15 Lease Agreement dated September 27, 1999 between WK3 Investors, LTD and registrant. (4) 10.16 Purchase and Sale Agreement dated September 27, 1999 by and between registrant and Workplace Holdings, LTD. (4) 10.17 Stock Purchase Plan and Subscription Agreement, dated April 5, 2000, between Jeffrey Cunningham and ilife.com, Inc. (6) 10.18 Stock Option Grant to Jeffrey Cunningham dated April 5, 2000 under the ilife.com, Inc. 1999 Equity Compensation Plan for 125,622 shares of common stock. (6) 10.19 Stock Option Grant to Jeffrey Cunningham dated April 5, 2000 under the ilife.com, Inc. 1999 Equity Compensation Plan for 141,905 shares of common stock. (6) 10.20 Executive Employment Agreement dated April 27, 2000 between Elisabeth DeMarse and ilife.com, Inc. (6) 10.21 Stock Option Grant to Elisabeth DeMarse dated April 27, 2000 under the ilife.com, Inc. 1999 Equity Compensation Plan for 541,936 shares of common stock. (6) 10.22 Asset Sale and Assignment Agreement dated May 17, 2000 between ilife.com, Inc. and Colleges.com, Inc. (6) 10.23 Stock Purchase Agreement dated July 14, 2000 by and between ilife.com, Inc. and Signet Insurance Services, Inc. (7) 23.1 Consent of KPMG LLP.* * Filed herewith. (1) The Exhibit is incorporated by reference to the exhibit filed in response to Item 16(a), "Exhibits" of the registrant's Registration Statement on Form S- 1 (File No. 333-74291) declared effective on May 13, 1999. (2) The Exhibit is incorporated by reference to Exhibit 2.1 included with the registrant's Current Report on Form 8-K filed on August 27, 1999. (3) The Exhibit is incorporated by reference to Exhibit 2.1 included with the registrant's Current Report on Form 8-K filed on September 10, 1999. (4) The Exhibit is incorporated by reference to Exhibits filed in response to Item 14. (A) (3), "Exhibits" included with the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as amended, filed on March 29, 2000. (5) The Exhibit is incorporated by reference to Exhibit 2.2 included with the registrant's Quarterly Report on Form 10-Q for the Quarterly period ended September 30, 2000 filed on November 13, 2000. (6) The Exhibit is incorporated by reference to Exhibits filed in response to Item 6.(a), "Exhibits" included with the registrant's Quarterly Report on Form 10-Q for the Quarterly period ending June 30, 2000 filed on August 14, 2000. (7) The Exhibit is incorporated by reference to Exhibit 2.1 included with the registrant's Quarterly Report on Form 10-Q for the Quarterly period ended September 30, 2000 filed on November 13, 2000. 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of the 27th day of March, 2001. BANKRATE, INC. By: /s/ Elisabeth DeMarse Elisabeth DeMarse President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date /s/ Elisabeth DeMarse President and March 27, 2001 - ------------------------ Chief Executive Officer Elisabeth DeMarse (Principal Executive Officer) /s/ Robert J. DeFranco Senior Vice President March 27, 2001 - ------------------------ Chief Financial Officer Robert J. DeFranco /s/ G. Cotter Cunningham Senior Vice President March 27, 2001 - ------------------------ Chief Operating Officer G. Cotter Cunningham /s/ Jeffrey M. Cunningham Chairman of the Board March 27, 2001 - ------------------------ Jeff M. Cunningham /s/ Bruns H. Grayson Director March 27, 2001 - ------------------------ Bruns H. Grayson /s/ Bill Martin Director March 27, 2001 - ------------------------ Bill Martin /s/ Peter C. Morse Director March 27, 2001 - ------------------------ Peter C. Morse /s/ Robert P. O'Block Director March 27, 2001 - ------------------------ Robert P. O'Block /s/ Randall E. Poliner Director March 27, 2001 - ------------------------ Randall E. Poliner 52 EX-4.2 2 0002.txt SPECIMEN STOCK CERTIFICATE Specimen Stock Certificate EXHIBIT 4.2 - -------------------------------------------------------------------------------- NUMBER SHARES BR [LOGO OF BANKRATE, INC. APPEARS HERE] SEE REVERSE FOR CERTAIN DEFINITIONS INCORPORATED UNDER THE LAWS OF THE STATE OF FLORIDA CUSIP 06646V 10 8 THIS CERTIFIES THAT IS THE OWNER OF FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $0.01 PER SHARE ,OF BANKRATE, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated [CORPORATE SEAL OF BANKRATE, INC. APPEARS HERE] /s/ Robert J. DeFranco /s/ Elisabeth Demarse SENIOR VICER PRESIDENT AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER - -------------------------------------------------------------------------------- COUNTER SIGNED AND REGISTERED SUNTRUST BANK TRANSFER AGENT AND REGISTRAR BY: AUTHORIZED SIGNATURE EX-23.1 3 0003.txt CONSENT OF KPMG LLP EXHIBIT 23.1 ACCOUNTANTS' CONSENT The Board of Directors Bankrate, Inc.: We consent to incorporation by reference in the registration statement (No. 33-87955) on Form S-8 of Bankrate, Inc. of our report dated January 26, 2001, relating to the consolidated balance sheets of Bankrate, Inc. and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of operations, redeemable stock and stockholders' equity (deficit) and cash flows for the years ended December 31, 2000 and 1999, the six months ended December 31, 1998 and the year ended June 30, 1998, which report appears in the December 31, 2000 annual report on Form 10-K of Bankrate, Inc. /s/ KPMG LLP Atlanta, Georgia March 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----