-----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, GljOR7fokwG991L7jMx84tW9DY/GMUBUF2bpLzcHh3tbPEHSgg4O8xtVAQaX6Ov1 pkcldBqg5iXvAevnJWsxDQ== 0000931763-01-501985.txt : 20020410 0000931763-01-501985.hdr.sgml : 20020410 ACCESSION NUMBER: 0000931763-01-501985 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011108 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25681 FILM NUMBER: 1778681 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-Q 1 d10q.txt QUARTERLY REPORT FOR PERIOD ENDING 9-30-2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 Commission File No. 0-25681 [LOGO BANKRATE, INC.] (Exact name of registrant as 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 33408 North Palm Beach, Florida (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (561) 630-2400 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ -- The number of outstanding shares of the issuer's common stock as of October 31, 2001, was as follows: 13,996,950 shares of Common Stock, $.01 par value. Bankrate, Inc. and Subsidiary Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2001 Index
PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Interim Condensed Consolidated Financial Statements (Unaudited): Condensed Consolidated Balance Sheets at September 30, 2001 and December 31, 2000................. 3 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000................................................................. 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000................................................................. 5 Notes to Condensed Consolidated Financial Statements.............................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................................................. 21 Item 2. Changes in Securities and Use of Proceeds......................................................... 22 Item 3. Defaults Upon Senior Securities................................................................... 22 Item 4. Submission of Matters to a Vote of Security Holders............................................... 22 Item 5. Other Information................................................................................. 22 Item 6. Exhibits and Reports on Form 8-K.................................................................. 22 Signatures.................................................................................................. 23
2 Item 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Bankrate, Inc. and Subsidiary Condensed Consolidated Balance Sheets (Unaudited)
September 30, December 31, 2001 2000 ---- ---- Assets Current Assets: Cash and cash equivalents $ 8,459,259 $ 8,890,649 Accounts receivable, net of allowance for doubtful accounts of $140,000 and $300,000 at September 30, 2001 and December 31, 2000, respectively 1,578,248 1,218,867 Other current assets 252,730 572,185 ------------ ------------ Total current assets 10,290,237 10,681,701 Furniture, fixtures and equipment, net 1,216,547 1,730,455 Intangible assets, net 76,433 88,425 Other assets 143,938 133,809 ------------ ------------ Total assets $ 11,727,155 $ 12,634,390 ============ ============ Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 651,491 $ 772,181 Other accrued expenses 1,487,460 2,016,236 Accrued interest 217,500 - Deferred revenue 413,805 463,224 Current portion of obligations under capital leases 71,841 214,651 Other current liabilities 199,827 158,672 ------------ ------------ Total current liabilities 3,041,924 3,624,964 10% convertible subordinated note payable 4,350,000 4,350,000 Accrued stock compensation expense - 2,452,424 Accrued interest 701,613 592,863 Other liabilities 6,382 40,815 ------------ ------------ Total liabilities 8,099,919 11,061,066 ------------ ------------ 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 shares issued and outstanding 139,969 139,969 Additional paid in capital 63,893,591 60,586,991 Accumulated deficit (60,406,324) (59,153,636) ------------ ------------ Total stockholders' equity 3,627,236 1,573,324 ------------ ------------ Total liabilities and stockholders' equity $ 11,727,155 $ 12,634,390 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 Bankrate, Inc. and Subsidiary Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, Revenue: 2001 2000 2001 2000 ---- ---- ---- ---- Online publishing $ 3,370,657 $ 3,012,405 $ 10,725,010 $ 9,072,950 Print publishing and licensing 817,926 711,639 2,410,639 2,203,029 ------------ ------------- ------------- -------------- Total revenue 4,188,583 3,724,044 13,135,649 11,275,979 ------------ ------------- ------------- -------------- Cost of revenue: Online publishing 750,252 1,697,350 2,426,520 6,116,799 Print publishing and licensing 552,370 454,767 1,595,880 1,540,014 ------------ ------------- ------------- -------------- Total cost of revenue 1,302,622 2,152,117 4,022,400 7,656,813 ------------ ------------- ------------- -------------- Gross margin 2,885,961 1,571,927 9,113,249 3,619,166 ------------ ------------- ------------- -------------- Operating expenses: Sales 680,227 795,531 2,253,226 2,442,210 Marketing 475,552 263,055 2,273,417 3,263,543 Product development 360,211 399,109 1,046,768 1,562,072 General and administrative 1,546,282 2,576,493 4,176,849 7,177,798 Restructuring charge - 843,185 - 2,141,282 Depreciation and amortization 165,454 222,874 547,024 678,150 Goodwill amortization - 73,593 - 220,779 ------------ ------------- ------------- -------------- 3,227,726 5,173,840 10,297,284 17,485,834 ------------ ------------- ------------- -------------- Loss from operations (341,765) (3,601,913) (1,184,035) (13,866,668) ------------ ------------- ------------- -------------- Other income (expense): Interest income 73,964 164,681 283,442 582,675 Interest expense (111,676) (125,570) (352,095) (373,265) ------------ ------------- ------------- -------------- Other income (expense), net (37,712) 39,111 (68,653) 209,410 ------------ ------------- ------------- -------------- Loss before income taxes and discontinued operations (379,477) (3,562,802) (1,252,688) (13,657,258) Income taxes from continuing operations - - - - ------------ ------------- ------------- -------------- Loss before discontinued operations (379,477) (3,562,802) (1,252,688) (13,657,258) ------------ ------------- ------------- -------------- Discontinued operations: Loss from discontinued operations - (248,217) - (3,214,577) Gain on disposal of discontinued operations - 871,212 - 871,212 ------------ ------------- ------------- -------------- - 622,995 - (2,343,365) ------------ ------------- ------------- -------------- Net loss $ (379,477) $ (2,939,807) $ (1,252,688) $ (16,000,623) ============ ============= ============= ============== Basic and diluted net loss per share: Loss before discontinued operations $ (0.03) $ (0.25) $ (0.09) $ (0.99) Discontinued operations - 0.04 - (0.17) ------------ ------------- ------------- -------------- Net loss $ (0.03) $ (0.21) $ (0.09) $ (1.16) ============ ============= ============= ============== Weighted average shares outstanding used in basic and diluted per-share calculation 13,996,950 13,987,077 13,996,950 13,831,099 ============ ============= ============= ==============
See accompanying notes to condensed consolidated financial statements. 4 Bankrate, Inc. and Subsidiary Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2001 2000 ---- ---- Cash flows from operating activities: Continuing operations- Net loss $ (1,252,688) $ (13,657,258) ------------ ------------- Adjustments to reconcile net loss to net cash used in operating activities: Loss from discontinued operations - 3,214,577 Gain on disposal of discontinued operations - (871,212) Goodwill impairment charge - 475,913 Depreciation and amortization 547,024 898,930 Allowance for doubtful accounts 42,302 235,599 Noncash stock compensation 854,174 1,145,088 Changes in operating assets and liabilities: Increase in accounts receivable (401,683) (354,682) Decrease in other assets 301,524 1,226,115 Decrease in accounts payable (120,690) (1,615,023) Decrease in accrued expenses (523,629) (3,228,119) Increase in other liabilities 367,405 350,059 Decrease in deferred revenue (49,419) (83,794) ------------ ------------- Total adjustments 1,017,008 1,393,451 ------------ ------------- Net cash used in continuing operations (235,680) (12,263,807) Net cash used in discontinued operations - (5,394,547) ------------ ------------- Net cash used in operating activities (235,680) (17,658,354) ------------ ------------- Cash flows from investing activities: Purchases of equipment (18,467) (488,814) Proceeds from sale of business - 4,391,800 ------------ ------------- Net cash (used in) provided by (18,467) 3,902,986 ------------ ------------- Cash flows from financing activities: Principal payments on capital lease obligations (177,243) (161,663) Proceeds from exercise of stock options 31,802 Proceeds from issuance of common stock, net - 997,840 ------------ ------------- Net cash (used in) provided by financing activities (177,243) 867,979 ------------ ------------- Net decrease in cash and cash equivalents (431,390) (12,887,389) Cash and cash equivalents, beginning of period 8,890,649 22,491,794 ------------ ------------- Cash and cash equivalents, end of period $ 8,459,259 $ 9,604,405 ============ ============= Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 25,845 $ 47,015 ============ =============
See accompanying notes to condensed consolidated financial statements. 5 BANKRATE, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION AND ACCOUNTING POLICIES The Company 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. 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"), was operated as a virtual insurance agency and fulfillment/call center specializing in direct insurance sales over the Internet and through other direct media (see Note 4). 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 and had an accumulated deficit of approximately $60 million as of September 30, 2001. The Company anticipates that it will continue to incur operating losses for the foreseeable future. The Company is working to manage its cash by actively controlling expenses and pursuing additional sources of revenue. For instance, since early 2000, the Company has substantially reduced marketing expenditures and sold or shut down under-performing, non-core business units. The Company sold CPNet.com in May 2000, sold Pivot in July 2000 (see Note 4), shut down and sold certain assets of Consejero.com in August 2000, and shut down Greenmagazine.com in December 2000. These transactions yielded cash to the Company of approximately $4,392,000 and reduced operating expenses. The Company has also reduced employment levels of continuing operations and consolidated its physical locations. Based on these actions and the Company's current plan, the Company believes its existing capital resources will be sufficient to satisfy its cash requirements into 2003. However, there are no assurances that such actions will ensure cash sufficiency through 2003 or that reducing marketing or other 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 any funds or realize its strategic alternatives on favorable terms or at all. Further, due to the legal matters discussed in Note 3, 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. Basis of Presentation The unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2001 and 2000 included herein have been prepared in accordance with the instructions for Form 10-Q under the Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X under the Securities Act of 1933, as amended. Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. 6 In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments, necessary to present fairly the financial position of the Company at September 30, 2001, and the results of its operations and its cash flows for the three and nine months ended September 30, 2001 and 2000, respectively. The results for the three and nine months ended September 30, 2001 are unaudited and are not necessarily indicative of the expected results for the full year or any future period. The unuaudited condensed consolidated financial statements included herein should be read in conjunction with the financial statements and related footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, filed with the Securities and Exchange Commission. Consolidation Through the quarter ended September 30, 2000, the condensed consolidated financial statements included the accounts of the Company and its former wholly owned subsidiary, Pivot. As more fully discussed in Note 4, Pivot was sold during the quarter ended September 30, 2000. Pivot's net assets and results of operations have been classified as discontinued operations in the accompanying condensed consolidated financial statements. Barter Revenue Online publishing revenue 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 that 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 in which barter revenue is recognized. If the advertising impressions are received from the customer prior to the Company delivering its advertising impressions, a liability is recorded. If the Company delivers its advertising impressions to the customer's Web site prior to receiving the advertising impressions, a prepaid expense is recorded. At September 30, 2001, the Company had no prepaid expense or liability associated with barter transactions. At December 31, 2000, the Company recorded prepaid expenses of approximately $200,000 for barter advertising to be received. Barter revenue was approximately $450,000 and $1,915,000, and represented approximately 11% and 15% of total revenue, respectively, for the three and nine months ended September 30, 2001. Barter revenue was approximately $87,000 and represented approximately 2% and 1% of total revenue for the three and nine months ended September 30, 2000, respectively. Net Loss Per Share The Company computes net loss per share in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" and Staff Accounting Bulletin No. 98 ("SAB 98"). Under SFAS 128 and SAB 98, basic and diluted net loss per share is computed by dividing the net loss available to common stock 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 and a convertible subordinated promissory note payable, as the effect of their conversion to common stock would be antidilutive. Stock options outstanding that could potentially dilute basic earnings per share in the future (but were not included in diluted earnings per share because their effect on periods presented was antidilutive) totaled 4,156 at September 30, 2001. The Company intends to grant options covering 1,180,002 shares of common stock after February 4, 2002 in connection with its stock option exchange program. See Note 5. Recent Accounting Pronouncements In September 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement was amended in September 2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 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 7 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. The Company has not invested in derivative instruments nor has it participated in hedging activities as of September 30, 2001. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. SFAS 141 is effective immediately, except with regard to business combinations initiated prior to July 1, 2001 and SFAS 142 is effective January 1, 2002. Furthermore, any goodwill and intangible assets determined to have indefinite useful lives that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized until the adoption of SFAS 142. SFAS 141 will require upon adoption of SFAS 142 that goodwill acquired in a prior purchase business combination be evaluated and any necessary reclassifications be made in order to conform to the new criteria in SFAS 141 for recognition apart from goodwill. Any impairment loss will be measured as of the date of the adoption and recognized as a cumulative effect of a change in accounting principles in the first interim period. The Company does not expect the adoption of these standards to have a material effect on its consolidated financial statements. In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and is not expected to have a material impact on the Company's consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operation - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. While SFAS No. 144 retains many of the fundamental provisions of SFAS No. 121, it establishes a single accounting model for long-lived assets to be disposed of by sale, and resolves certain implementation issues not previously addressed by SFAS No. 121. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and is not expected to have a material impact on the Company's consolidated financial statements. Reclassification Certain amounts reported in prior periods have been reclassified to conform to the current presentation. NOTE 2 - SEGMENT INFORMATION The Company changed the reporting of its business segments as of July 1, 2000, and restated its prior periods to conform to 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 the Company's Internet site Bankrate.com, and its 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 Pivot, a virtual insurance agency and fulfillment/call center specializing in direct insurance sales on the Internet and through other direct media. 8 The Company currently operates in two reportable business segments: online publishing, and print publishing and licensing. The online publishing division is primarily engaged in the sale of advertising, sponsorships, and hyperlinks in connection with the Company's 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 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 three and nine months ended September 30, 2001 and 2000, the five largest customers accounted for approximately 19% and 20%, and 22% and 26%, respectively, of total revenue for those periods. No revenues were generated outside of the United States. Summarized segment information as of September 30, 2001 and 2000, and for the three and nine months ended September 30, 2001 and 2000, is presented below.
Print Online Publishing Publishing and Licensing Other Total ---------- ------------- ----- ----- Three Months Ended September 30, 2001 Revenue $ 3,370,657 $ 817,926 $ - $ 4,188,583 Cost of revenue 750,252 552,370 - 1,302,622 Gross margin 2,620,405 265,556 - 2,885,961 Sales expenses 680,227 - - 680,227 Marketing expenses 475,552 - - 475,552 Product development expenses 252,148 108,063 - 360,211 General and administrative expenses 1,244,332 301,950 - 1,546,282 Depreciation and amortization 115,818 49,636 - 165,454 Other income (expense), net - - (37,712) (37,712) Segment profit (loss) (147,671) (194,094) (37,712) (379,477) Total assets $ 2,623,822 $ 644,074 $ 8,459,259 $ 11,727,155
9
Print Online Publishing Publishing and Licensing Other Total ---------- ------------- ----- ----- Three Months Ended September 30, 2000 Revenue $ 3,012,405 $ 711,639 $ - $ 3,724,044 Cost of revenue 1,697,350 454,767 - 2,152,117 Gross margin 1,315,055 256,872 - 1,571,927 Sales expenses 795,531 - - 795,531 Marketing expenses 263,055 - - 263,055 Product development expenses 279,376 119,733 - 399,109 General and administrative expenses 2,084,143 492,350 - 2,576,493 Restructuring charge - - 843,185 843,185 Depreciation and amortization 156,012 66,862 - 222,874 Goodwill amortization 73,593 - - 73,593 Other income (expense), net - - 39,111 39,111 Segment profit (loss) (2,336,655) (422,073) (804,074) (3,562,802) Discontinued operations - - 622,995 622,995 Net loss (2,336,655) (422,073) (181,079) (2,939,807) Total assets $ 3,306,590 $ 988,191 $ 9,604,405 $ 13,899,186 Print Online Publishing Publishing and Licensing Other Total ---------- ------------- ----- ----- Nine Months Ended September 30, 2001 Revenue $ 10,725,010 $ 2,410,639 $ - $ 13,135,649 Cost of revenue 2,426,520 1,595,880 - 4,022,400 Gross margin 8,298,490 814,759 - 9,113,249 Sales expenses 2,253,226 - - 2,253,226 Marketing expenses 2,273,417 - - 2,273,417 Product development expenses 732,738 314,030 - 1,046,768 General and administrative expenses 3,410,319 766,530 - 4,176,849 Depreciation and amortization 382,917 164,107 - 547,024 Other income (expense), net - - (68,653) (68,653) Segment profit (loss) (754,127) (429,908) (68,653) (1,252,688) Total assets $ 2,623,822 $ 644,074 $ 8,459,259 $ 11,727,155 Print Online Publishing Publishing and Licensing Other Total ---------- ------------- ----- ----- Nine Months Ended September 30, 2000 Revenue $ 9,072,950 $ 2,203,029 $ - $ 11,275,979 Cost of revenue 6,116,799 1,540,014 - 7,656,813 Gross margin 2,956,151 663,015 - 3,619,166 Sales expenses 2,442,210 - - 2,442,210 Marketing expenses 3,263,543 - - 3,263,543 Product development expenses 1,093,450 468,622 - 1,562,072 General and administrative expenses 5,775,446 1,402,352 - 7,177,798 Restructuring charge - - 2,141,282 2,141,282 Depreciation and amortization 474,705 203,445 - 678,150 Goodwill amortization 220,779 - - 220,779 Other income (expense), net - - 209,410 209,410 Segment profit (loss) (10,313,982) (1,411,404) (1,931,872) (13,657,258) Discontinued operations - - (2,343,365) (2,343,365) Net loss (10,313,982) (1,411,404) (4,275,237) (16,000,623) Total assets $ 3,306,590 $ 988,191 $ 9,604,405 $ 13,899,186
10 NOTE 3 - COMMITMENTS AND CONTINGENCIES 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 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 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 filed a motion to dismiss this complaint and, on March 28, 2001, the suit was dismissed with prejudice. On April 25, 2001, plaintiffs appealed the decision to dismiss the suit to the United States Court of Appeals for the Second Circuit. The Company intends to vigorously defend against the lawsuit. 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, 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 without prejudice based on a technical deficiency. In August 2001, the plaintiff re-filed the complaint. The outcome of this matter is uncertain at this time. 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 non-cash charge of approximately $860,000. Both the cash charge ($150,000) and the non-cash charge ($860,000) were recorded during the nine months ended September 30, 2000. On April 5, 2000, Jeffrey M. Cunningham was elected 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 was 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 vested and became exercisable on March 31, 2001, and 11 the balance vest and become exercisable in equal monthly installments commencing on April 30, 2001 and concluding on March 31, 2002. Mr. Cunningham resigned from the Board on June 19, 2001. The Company recognized compensation expense of approximately $108,000 for the nine months ended September 30, 2001. No further compensation expense related to these options will be recognized after June 30, 2001. On April 27, 2000, Elisabeth DeMarse was elected 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 (as defined in the agreement). Upon Ms. DeMarse's termination of employment for certain reasons (i.e., without cause, disability, resignation for good reason, or a change of control), the Company agrees to pay her 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 previously granted options to purchase 541,936 shares of the Company's common stock under the Company's 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. Twenty five percent of the options vested six months from the date of grant. The remaining options vest in equal monthly installments over the following 18 months through the second anniversary of the date of grant. Ms. DeMarse surrendered all of these options in connection with the Company's stock option exchange program (see Note 5). NOTE 4 - DIVESTITURE Pivot On July 14, 2000, the Company sold Pivot for $4,350,000 in cash. The Company remains liable on the $4,350,000 five-year convertible subordinated note issued in connection with the Pivot acquisition. 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 the holder into 625,000 shares of the Company's common stock and has other rights and privileges. Pivot's results of operations have been classified as discontinued operations in the accompanying condensed consolidated statements of operations. The Company recorded a gain on the sale of $871,212 in the quarter ended September 30, 2000. NOTE 5 - STOCK OPTION EXCHANGE PROGRAM On July 3, 2001, the Company implemented a stock option exchange program in which employees were offered the opportunity to surrender stock options previously granted to them in exchange for new options to purchase an equal number of shares. The new options are to be granted no sooner than six months and one day after the date of cancellation but no later than February 8, 2002. The exercise price of the new options will be the closing market price of the Company's common stock on the date of grant. The exchange program was designed to comply with FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" and is not expected to result in any additional compensation charges or variable plan accounting. Options to purchase 1,180,002 shares were surrendered under this program. As a result of this program, the Company recorded a non-cash compensation charge of approximately $481,000 in the quarter ended September 30, 2001. Additionally, approximately $3,307,000 was reclassified from accrued stock compensation expense to additional paid in capital during the quarter. 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has included in this filing certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by words such as "expects", "anticipates", "intends", "believes", "may", "could", "should", "would" or similar language. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Important factors that could cause actual results to differ materially from those in forward-looking statements include but are not limited to the following: we have a history of losses and could run out of cash; our success depends on Internet advertising revenue, interest rate activity and mortgage refinancing, establishing and maintaining distribution agreements and increasing brand awareness of our Web site; we use barter transactions which do not generate cash revenue; our markets are highly competitive; our Web site may encounter technical problems and service interruptions; we rely on the protection of our intellectual property; we may face liability for information on our Web site; future government regulation of the Internet is uncertain and subject to change; our ownership is heavily concentrated in our management; our success depends on retaining management and key employees; our rapid growth may strain our operations; our new managers must work together effectively as a team; our Articles of Incorporation and By Laws, as well as Florida law, may prevent or delay a future takeover; we may encounter difficulties with future acquisitions; our results of operation may fluctuate significantly; and our stock price may be volatile in the future. Additional information concerning these and other risk factors are set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and in this Quarterly Report on Form 10-Q. Overview 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. We regularly survey approximately 4,500 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 use Bankrate.com as the source for financial rates and information. Management believes that the recognition of the Company's research as a leading source of independent, objective information on banking and credit products is essential to its success. As a result, the Company has sought to maximize distribution of its research to gain brand recognition as a research authority, to build greater brand awareness of the Bankrate.com Web site and to reach a greater number of online users. The Company has incurred net losses in each of its last five fiscal years and had an accumulated deficit of approximately $60 million as of September 30, 2001. The Company anticipates that it will continue to incur operating losses for the foreseeable future. The Company is working to manage its cash by actively controlling expenses and pursuing additional sources of revenue. For instance, since early 2000, the Company has substantially reduced marketing expenditures and sold or shut down under-performing, non-core business units. The Company sold CPNet.com in May 2000, sold Pivot in July 2000 (see Note 4), shut down and sold certain assets of Consejero.com in August 2000, and shut down Greenmagazine.com in December 2000. These transactions yielded cash to the Company of approximately $4,392,000 and reduced operating expenses. The Company has also reduced employment levels of continuing operations and consolidated its physical locations. Based on these actions and the Company's current plan, the Company believes its existing capital resources will be sufficient to satisfy its cash requirements into 2003. However, there are no assurances that such actions will ensure cash sufficiency through 2002 or that reducing marketing or other expenses would not potentially curtail revenue growth. 13 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 any funds or realize its strategic alternatives on favorable terms or at all. Further, due to the legal matters discussed in Note 3 to the condensed consolidated financial statements included herein and in Item 3., Legal Proceedings, 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. Recent Developments 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, for approximately $4,744,000 including acquisition costs. Pursuant to the Stock Purchase 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 being amortized over three years, the expected benefit period. The total consideration paid in connection with the acquisition of Pivot 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 the Company's 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, registering the conversion shares for sale; provided that, within the 55-day period immediately prior to the date the Company notifies Midland of the required conversion, the closing price of the Company's 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. The Company remains liable on the convertible subordinated note issued in connection with the Pivot acquisition. Pivot's results of operations have been classified as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented. The Company recorded a gain on the sale of $871,212 in the quarter ended 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, for approximately $831,000, including acquisition costs. Pursuant to the Asset Purchase 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 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 14 through November 15, 2000, which resulted in a non-cash charge of approximately $860,000. Both the cash charge ($150,000) and the non-cash 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 installments commencing on April 30, 2001 and concluding on March 31, 2002. Mr. Cunningham resigned from the Board on June 19, 2001. The Company recognized compensation expense of approximately $108,000 for the nine months ended September 30, 2001. No further compensation expense related to these options will be recognized after June 30, 2001. On April 27, 2000, Elisabeth DeMarse was elected 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 (as defined in the agreement). Upon Ms. DeMarse's termination of employment for certain reasons (i.e., without cause, disability, resignation for good reason, or a change of control), the Company agrees to pay her 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 previously granted options to purchase 541,936 shares of the Company's common stock under the Company's 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. Twenty five percent of the options vested six months from the date of grant. The remaining options vest in equal monthly installments over the following 18 months through the second anniversary of the date of grant. Ms. DeMarse surrendered all of these options in connection with the Company's stock option exchange program (see Note 5 to the condensed consolidated financial statements). 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 its limited operating history and volatile industry-based economic conditions as well as continued deterioration of its financial performance. 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 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 related 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 further 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 related to the shut-down and sale of assets of Consejero.com and other non-core assets. The remaining $476,000 resulted from the write-down of the GreenMagazine.com goodwill discussed above. 15 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. On July 3, 2001, the Company implemented a stock option exchange program in which employees were offered the opportunity to surrender stock options previously granted to them in exchange for new options to purchase an equal number of shares. The new options are to be granted no sooner than six months and one day after the date of cancellation but no later than February 8, 2002. The exercise price of the new options will be the closing market price of the Company's common stock on the date of grant. The exchange program was designed to comply with FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" and is not expected to result in any additional compensation charges or variable plan accounting. Options to purchase 1,180,002 shares were surrendered under this program. As a result of this program, the Company recorded a non-cash compensation charge of approximately $481,000 in the quarter ended September 30, 2001. Additionally, approximately $3,307,000 was reclassified from accrued stock compensation expense to additional paid in capital during the quarter. Overview of Revenue and Expenses The following are descriptions of the revenue and expense components of our online and print publishing 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 the Company sells is a function of (1) the number of advertisements per Web page, (2) the number of visitors viewing its Web pages, and (3) the capacity of the Company's 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 and recognized when impressions are delivered. Additionally, the Company generates revenue on a "per action" basis (i.e., a purchase or completion of an application) when a visitor to its Web site transacts with one of its advertisers after viewing an advertisement. Revenue is recognized monthly based on the number of actions reported by the advertiser. 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 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 that 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 in which 16 barter revenue is recognized. If the advertising impressions are received from the customer prior to the Company delivering its advertising impressions, a liability is recorded. If the Company delivers its advertising impressions to the customer's Web site prior to receiving the advertising impressions, a prepaid expense is recorded. At September 30, 2001, the Company had no prepaid expense or liability associated with barter transactions. At December 31, 2000, the Company recorded prepaid expenses of approximately $200,000 for barter advertising to be received. Barter revenue was approximately $450,000 and $1,915,000, and represented approximately 11% and 15% of total revenue, respectively, for the three and nine months ended September 30, 2001. Barter revenue was approximately $87,000 and represented approximately 2% and 1% of total revenue for the three and nine months ended September 30, 2000, respectively. 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. The Company charges 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 its 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 the Company's distribution arrangements (distribution payments), editorial costs, research costs and allocated overhead. Distribution payments are made to Web site operators for visitors directed to the Company's Web site. These costs increase with gains in traffic to the Company's 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 the Company has added online publications and co-branded versions of its 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 the Company's products and services to consumers and include advertising, including banner advertising, marketing and promotion costs, and barter expense. 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. 17 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. Results of Operations As discussed in "Recent Developments" above, the Company sold its wholly-owned online insurance subsidiary, Pivot, on July 14, 2000 for $4,350,000 in cash. Pivot's results of operations for the three and nine months ended September 30, 2000 have been classified as discontinued operations in the condensed consolidated financial statements included herein. Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 Total revenue for the three months ended September 30, 2001 of $4,189,000 increased $465,000, or 12%, over the comparable period in 2000. Online publishing revenue increased $358,000, or 12%, to $3,371,000 and represented 80% of total revenue in 2001 compared to 81% in 2000. Excluding barter revenue, total revenue was $102,000, or 3%, higher than the comparable period in 2000, while online revenue (excluding barter revenue) was essentially unchanged compared to the same period in 2000. The slowdown in online revenue was the result of terminating unprofitable advertising and distribution relationships, smaller advertising buys from certain existing customers and customers' response to uncertain economic conditions. Total revenue, excluding barter revenue, for 2001 is projected to be relatively flat compared to 2000. Print publishing and licensing revenue increased $106,000, or 15%, to $818,000 during the three months ended September 30, 2001 compared to the same period in 2000, due primarily to an increase in Consumer Mortgage Guide revenues. This increase was a result of declining interest rates that boosted the refinance markets and caused more advertisers to publish their rates. Online publishing costs of $750,000 for the three months ended September 30, 2001 decreased $947,000, or 56%, from the comparable period in 2000. This decrease was due primarily to costs of approximately $504,000 incurred during the three months ended September 30, 2000 for theWhiz.com, Consejero.com, CPNet.com, GreenMagazine.com and ilife.com. CPNet.com was sold in May 2000 and Consejero.com was sold in August 2000. ilife.com and theWhiz.com were integrated into Bankrate.com beginning in June 2000 and GreenMagazine.com was shut down in December 2000. Additionally, direct costs were lower due to a 30% reduction in full-time equivalent headcount, and a 69% reduction in revenue sharing payments resulting from the termination of unprofitable distribution relationships. Excluding barter expense of $450,000 in 2001 and $87,000 in 2000, marketing expenses of $25,000 for the three months ended September 30, 2001 were $150,000, or 85%, lower than the same period in 2000. This reduction was a direct result of strategic initiatives to control costs. Product development costs of $360,000 for the three months ended September 30, 2001 were $39,000, or 10%, lower than the same period in 2000 due to lower consulting and contract labor costs, and less spent on non-capitalizable system hardware and software. General and administrative expenses of $1,546,000 for the three months ended September 30, 2001 were $1,030,000, or 40%, lower than the comparable period in 2000. Human resource costs were approximately $80,000, or 14%, lower in 2001 due to lower full-time equivalent headcount of 7, or 26%. The remaining decrease of approximately $950,000 was due primarily to lower consulting and professional fees, litigation accruals and other expenses in line with the Company's effort to reduce costs. Depreciation and amortization of $165,000 for the three months ended September 30, 2001 was $57,000, or 26%, lower compared to the same period in 2000 due to the sale of assets and non-core business units in connection with the Company's restructuring plan and strategic initiatives. Goodwill amortization of $74,000 was a result of the Green Magazine.com acquisition in the third quarter of 1999. Interest income of $74,000 for the three months ended September 30, 2001 was down from $165,000 in the comparable 2000 period due to declining cash balances and interest rates. 18 Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 Total revenue for the nine months ended September 30, 2001 of $13,136,000 increased $1,860,000, or 16%, over the comparable period in 2000. Online publishing revenue increased $1,652,000, or 18%, to $10,725,000 and represented 82% of total revenue in 2001 compared to 80% in 2000. Excluding barter revenue, total revenue of $11,221,000 for the nine months ended September 30, 2001 was essentially unchanged compared to the amount reported in 2000. Online revenue excluding barter revenue of $8,810,000 was $176,000, or 2%, less than the amount reported in 2000. This decrease was the result of terminating unprofitable advertising and distribution relationships, smaller advertising buys from certain existing customers and customers' response to uncertain economic conditions. Total revenue, excluding barter revenue, for 2001 is projected to be relatively flat compared to 2000. Print publishing and licensing revenue increased $208,000, or 9%, to $2,411,000 during the nine months ended September 30, 2001 compared to the same period in 2000, due primarily to an increase in Consumer Mortgage Guide revenues. This increase was a result of declining interest rates that boosted the refinance markets and caused more advertisers to publish their rates. Online publishing costs of $2,427,000 for the nine months ended September 30, 2001 decreased $3,690,000, or 60%, from the comparable period in 2000. This decrease was due primarily to costs of approximately $2,775,000 incurred during the nine months ended September 30, 2000 for theWhiz.com, Consejero.com, CPNet.com, GreenMagazine.com, ilife.com, and IntelligentTaxes.com. CPNet.com was sold in May 2000 and Consejero.com was sold in August 2000. IntelligentTaxes.com, ilife.com and theWhiz.com were integrated into Bankrate.com beginning in June 2000 and GreenMagazine.com was shut down in December 2000. Additionally, direct costs were lower due to a 25% reduction in full-time equivalent headcount, and a $668,000, or 50%, reduction in revenue sharing payments resulting from the termination of unprofitable distribution relationships. Excluding barter expense of $2,115,000 in 2001 and $87,000 in 2000, marketing expenses of $159,000 for the nine months ended September 30, 2001 were $3,017,000, or 95%, lower than the comparable quarter in 2000. This reduction was a direct result of the Company's strategic initiatives to control costs. Product development costs of $1,047,000 for the nine months September 30, 2001 were $515,000, or 33%, lower than the same period in 2000 due to lower consulting and contract labor costs, and less spent on non-capitalizable system hardware and software. General and administrative expenses of $4,177,000 for the nine months ended September 30, 2001 were $3,001,000, or 42%, lower than the comparable period in 2000. Non-cash compensation expense was $854,000 (including $481,000 related to the Company's stock option exchange program) during the nine months ended September 30, 2001 compared to $1,145,000 in the comparable period in 2000. In March 2000, the Company recorded approximately $860,000 of non-cash 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 his employment agreement. Human resource costs were approximately $658,000, or 30%, lower in 2001 due to lower full-time equivalent headcount of 10, or 32%. During the quarter ended September 30, 2000, litigation reserves of approximately $955,000 were established. The remaining decrease of approximately $1,097,000 was due primarily to lower consulting and professional fees and other expenses in line with the Company's effort to reduce costs. 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 pertained to severance, legal and other employee-related costs incurred in connection with a reduction of approximately 10% of the workforce in continuing operations and the elimination of positions in under-performing, non-core business units. The remaining $934,000 of this charge related to the write-off of certain costs, primarily software, licenses and other installation costs, of an abandoned systems installation. Depreciation and amortization of $547,000 for the nine months ended September 30, 2001 was $131,000, or 19%, lower compared to the same period in 2000 due to the sale of assets and non-core business units in connection with the Company's restructuring plan and strategic initiatives. Goodwill amortization of $221,000 was a result of the Green Magazine.com acquisition in the third quarter of 1999. 19 Interest income of $283,000 for the nine months ended September 30, 2001 was down from $583,000 in the comparable 2000 period due to declining cash balances and interest rates. Liquidity and Capital Resources The Company has funded its operations using capital raised from stockholders, from the proceeds of its initial public offering of common stock in May 1999, and from its operating revenue. As of September 30, 2001, the Company had working capital of approximately $7,248,000. Cash used in operating activities for the nine months ended September 30, 2001 was approximately $236,000, reflecting the funding of current operating losses and working capital needs. In connection with the acquisition of Pivot in August 1999, the Company issued a $4,350,000 five-year convertible subordinated note payable to Pivot's former owner. The note bears interest at 10% and the principal 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 the Company's common stock. The Company has incurred net losses in each of its last five fiscal years. The Company had an accumulated deficit of approximately $60 million as of September 30, 2001 and anticipates that it will continue to incur operating losses for the foreseeable future. The Company is working to manage its cash by actively controlling expenses and pursuing additional sources of revenue. For instance, since early 2000, the Company has substantially reduced marketing expenditures and sold or shut down under-performing, non-core business units. The Company sold CPNet.com in May 2000, sold Pivot in July 2000 (see Note 4), shut down and sold certain assets of Consejero.com in August 2000, and shut down Greenmagazine.com in December 2000. These transactions yielded cash to the Company of approximately $4,392,000 and reduced operating expenses. The Company has also reduced employment levels of continuing operations and consolidated its physical locations. Based on these actions and the Company's current plan, the Company believes its existing capital resources will be sufficient to satisfy its cash requirements into 2003. However, there are no assurances that such actions will ensure cash sufficiency through 2003 or that reducing marketing or other 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 any funds or realize its strategic alternatives on favorable terms or at all. Further, due to the legal matters discussed in Note 3 to the condensed consolidated financial statements included herein and in Item 3., Legal Proceedings, 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. Recent Accounting Pronouncements In September 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement was amended in September 2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 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. The Company has not invested in derivative instruments nor has it participated in hedging activities as of September 30, 2001. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. SFAS 141 is effective immediately, except with regard to business combinations initiated prior to July 1, 2001 and SFAS 142 is effective January 1, 2002. 20 Furthermore, any goodwill and intangible assets determined to have indefinite useful lives that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized until the adoption of SFAS 142. SFAS 141 will require upon adoption of SFAS 142 that goodwill acquired in a prior purchase business combination be evaluated and any necessary reclassifications be made in order to conform to the new criteria in SFAS 141 for recognition apart from goodwill. Any impairment loss will be measured as of the date of the adoption and recognized as a cumulative effect of a change in accounting principles in the first interim period. The Company does not expect the adoption of these standards to have a material effect on the Company's consolidated financial statements. In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and is not expected to have a material impact on the Company's consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operation - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. While SFAS No. 144 retains many of the fundamental provisions of SFAS No. 121, it establishes a single accounting model for long-lived assets to be disposed of by sale, and resolves certain implementation issues not previously addressed by SFAS No. 121. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and is not expected to have a material impact on the Company's consolidated financial statements. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The primary objective of the Company's investment strategy is to preserve principal while maximizing the income it receive from investments without significantly increasing risk. To minimize this risk, to date the Company has maintained its portfolio of cash equivalents in short-term and overnight investments that are not subject to market risk, as the interest paid on such investments fluctuates with the prevailing interest rates. As of September 30, 2001, all of the Company's cash equivalents mature in less than three months. Exchange Rate Sensitivity The Company's exposure to foreign currency exchange rate fluctuations is minimal to none as it does not have any revenues denominated in foreign currencies. Additionally, the Company has not engaged in any derivative or hedging transactions to date. Part II - OTHER INFORMATION Item 1. 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 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 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 filed a motion to dismiss this complaint and, on March 28, 2001, the suit was dismissed with prejudice. On April 25, 2001, plaintiffs appealed the decision to dismiss the suit to the United States Court of Appeals for the Second Circuit. The Company intends to vigorously defend against the lawsuit. In the opinion of management, the ultimate disposition of this matter will not have a 21 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, Pivot, for $4,350,000 in cash. In connection with the sale, the Company agreed to indemnify the buyer for liability of up to $1,000,000 in connection with a litigation matter between Pivot and its co-founders and former owner. In March 2001, the case was dismissed based on a technical deficiency. In August 2001, the plaintiff re-filed the complaint. The outcome of this matter is uncertain at this time. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The effective date of the Company's registration statement, filed on Form S-1 under the Securities Act of 1933, as amended (File No. 333-74291), relating to the Company's initial public offering of its common stock, was May 13, 1999. A total of 3,500,000 shares of the Company's common stock were sold to an underwriting syndicate at $13.00 per share ($12.09 per share after deducting underwriters' discounts and commissions). The managing underwriters were ING Baring Furman Selz LLC and Warburg Dillon Read LLC. The initial public offering resulted in gross proceeds of $45,500,000, $3,185,000 of which was applied to the underwriting discount and approximately $1,014,000 of which was applied to related expenses. As a result, the net proceeds of the offering to the Company were approximately $41,301,000. From the date of receipt through September 30, 2001, approximately $17,366,000 of the net proceeds was used for marketing, advertising and promotional expenditures, and the remainder was used for working capital or invested in short-term interest bearing investments. None of the net proceeds of the offering were paid directly or indirectly to any director or officer of the Company (other than payment of salaries and bonuses in the ordinary course of business) or any of their associates, or to any persons owning ten percent or more of the Company's common stock, or to any affiliates of the Company. Item 3. DEFAULTS UPON SENIOR SECURITIES None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Item 5. OTHER INFORMATION None. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K None. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Bankrate, Inc. Dated: November 8, 2001 By: /s/ ROBERT J. DEFRANCO ----------------------------- Robert J. DeFranco Senior Vice President Chief Financial Officer 23 -----END PRIVACY-ENHANCED MESSAGE-----