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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
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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.
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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
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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
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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.
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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
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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
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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
----------- ----------- ---------- ----------
Gro