Print publishing and licensing revenue for the quarter ended September 30, 2004 was down $36,000, or 3%, compared to the comparable period in 2003 primarily due to a $70,000, or 6%, decrease inConsumer Mortgage Guide revenue. This decrease was primarily the result of approximately 13% fewerConsumer Mortgage Guideadvertisers during the quarter ended September 30, 2004 than in the comparable quarter in 2003, reflecting lower post re-finance consumer demand.Editorial sales were up $34,000, or 17%, in the three months ended September 30, 2004 primarily due to higher licensing revenue.
Print publishing and licensing revenue for the nine months ended September 30, 2004 was up $105,000, or 3%, over the same period in 2003 due to a $112,000, or 3%, increase inConsumer Mortgage Guide revenue. This increase was a result of higher advertising rates and moreConsumer Mortgage Guide contracts during the period ended September 30, 2004 than in the comparable period in 2003. Editorial sales were down $6,000, or 1%, in the first nine months of 2004 due to newspaper efforts to cut costs and reduce their editorial content advertising spending.
Cost of Revenue
Online Publishing Costs
Online publishing costs represent expenses directly associated with the creation of online publishing revenue. These costs include contractual revenue sharing obligations resulting from our distribution arrangements (distribution payments), editorial costs, research costs and allocated overhead. Distribution payments are made to Web site operators for visitors directed to our Web site; these costs increase proportionately with gains in traffic to our site. Editorial costs relate to writers and editors who create original content for our online publications and associates who build Web pages; these costs have increased as we have added online publications and co-branded versions of our site under distribution arrangements. These sites must be maintained on a daily basis. Research costs include expenses related to gathering data on banking and credit products and consist primarily of compensation and benefits and allocated overhead.
Online publishing costs for the three months ended September 30, 2004 were $290,000, or 28%, higher than the comparable period in 2003 primarily due to higher revenue sharing payments ($257,000, or 79%) to our distribution partners due to higher associated revenue. For the first nine months of 2004, online publishing costs were $876,000, or 26%, higher than the first nine months of 2003 due to higher revenue sharing payments ($742,000, or 74%) to our distribution partners due to higher associated revenue; $57,000, or 34%, higher freelance writer expenses due to expanded products and coverage; and $71,000 higher other professional fees supporting market research on new product initiatives.
Print Publishing and Licensing Costs
Print publishing and licensing costs represent expenses associated with print publishing and licensing revenue. These costs include contractual revenue sharing obligations with newspapers related to theConsumer Mortgage Guide, compensation and benefits, printing and allocated overhead. These costs vary proportionately with the related revenues and increased $57,000, or 6%, for the three months ended September 30, 2004 compared to the same period in 2003 due to higher Consumer Mortgage Guide revenue sharing payments related to higher contractual payment terms and higher human resources costs for business development initiatives. Print publishing and licensing costs were $116,000, or 4%, higher in the first nine months of 2004 compared to 2003 primarily due to higherConsumer Mortgage Guide revenue sharing payments ($151,000, or 6%) resulting from higher revenue and higher contractual payment terms in 2004.
Other Expenses
Sales
Sales costs represent direct selling expenses, principally for online advertising, and include compensation and benefits, sales commissions, and allocated overhead. Sales costs for the three months ended September 30, 2004 were down $426,000, or 32%, from the comparable period in 2003 primarily due to a $360,000, or 54%, reduction in sales commissions. We implemented a new commission plan in the second quarter and actual results fell short of target goals. Human resource costs were also $30,000 lower due to open positions yet to be hired. For the first nine months of 2004, sales expenses were $541,000, or 14%, lower than the first half of 2003 due to a $724,000, or 39%, decline in commission expense, offset by higher human resource costs related to new hires, and recruiting costs related to hiring our new Chief Revenue Officer in the first quarter.
Marketing
Marketing costs represent expenses associated with expanding brand awareness of our products and services to consumers and include print and Internet advertising and marketing and promotion costs. Marketing costs also include barter expense, which represents the non-cash cost of our advertisements that are run on other companies’ Web sites in our barter transactions. Barter expense was $638,000 and $847,000 for the quarters ended September 30, 2004 and 2003, respectively. Excluding barter expense, marketing expenses for the quarter ended September 30, 2004 of $720,000 were $130,000, or 22%, higher than the comparable quarter in 2003. This increase primarily reflects our efforts to improve search engine results with key word (pay per performance) campaigns as traffic acquisition becomes more competitive. For the first nine months of 2004, marketing expenses excluding barter of $2,395,000 were $833,000, or 49%, higher than the first nine months of 2003 due to the key word search campaigns. We anticipate having to spend at comparable levels for key word campaigns in the foreseeable future.
Product Development
Product development costs represent compensation and benefits related to site development, network systems and telecommunications infrastructure support, programming, new product design and development and other technology costs. Product development costs for the three months ended September 30, 2004 were $20,000, or 3%, lower than the same period in 2003 due to the achievement of certain development goals and the curtailment of design and development of other products. Product development costs for the nine months ended September 30, 2004 were $304,000, or 18%, higher than the same period in 2003 due to expenses associated with the design and development of new products, and higher human resource and training costs.
General and Administrative
General and administrative expenses represent compensation and benefits for executive, finance and administrative personnel, professional fees, non-allocated overhead and other general corporate expenses. General and administrative expenses for the three months ended September 30, 2004 were $240,000, or 17%, higher than the comparable amount reported in the same period in 2003 primarily due to the following: $86,000 higher human resource costs and recruiting fees related to merit increases and new hire searches; $25,000 higher Internet hosting service fees due to increased traffic levels and bandwidth utilization; $64,000 higher consulting and outside professional service fees; and $275,000 in bad debt expense to increase the allowance for doubtful accounts supporting higher sales levels and receivable balances. These higher costs were offset by a decrease in incentive plan accruals based on mid-year forecasts and measurements to plan, lower travel and entertainment expenses and various decreases in other expenses.
For the first nine months of 2004, general and administrative expenses were $528,000, or 12%, higher than the first nine months of 2003 due to the following: $202,000 higher human resource costs and recruiting fees related to merit increases and new hire searches; $71,000 higher Internet hosting service fees due to increased bandwidth utilization; $82,000 higher consulting and outside professional service fees; $395,000 in bad debt expense to increase the allowance for doubtful accounts supporting higher sales levels and receivable balances; and $30,000 higher bank service charges and merchant fees related to credit card payments on accounts receivable. These higher costs were offset by a decrease in incentive plan accruals based on mid-year forecasts and measurements to plan, and various other operating costs.
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Any additions to the allowance for doubtful accounts are recorded as bad debt expense and included in general and administrative expenses.
Severance and Legal Settlement Charges
August 10, 2004, we entered into a Separation and General Release (the “Agreement”) with Elisabeth DeMarse (“DeMarse”), our former President and CEO, pursuant to the terms of an Executive Employment Agreement by and between the Company and DeMarse dated April 27, 2002 (the “Executive Employment Agreement”). The Agreement provided, among other things, that (i) DeMarse resign as a director of the Company as of August 10, 2004, (ii) DeMarse release and forever discharge the Company from any and all claims DeMarse has or may have against the Company, (iii) DeMarse’s last day as an employee of the Company will be extended until October 21, 2004; (iv) on August 19, 2004, the Company pay DeMarse $125,000, subject to standard withholdings and deductions for the payment of certain of DeMarse’s legal fees, (v) on August 19, 2004, the Company pay DeMarse $54,207.40, subject to standard withholdings, for accrued vacation pay, (vi) on August 19, 2004, the Company pay $10,000 to a third party for outplacement and transitional counseling services for DeMarse, (vii) on August 19, 2004, the Company pay DeMarse for her unpaid and reasonably approved business expenses, (viii) the Company provide DeMarse certain health insurance benefits in accordance with the terms of the Executive Employment Agreement, and (ix) on October 21, 2004, the Company pay DeMarse $125,000, subject to standard withholdings and contingent upon DeMarse executing a second General Release of Claims. Accordingly, we recorded a severance chare of $260,000 in the quarter ended June 30, 2004.
In July 2000, we sold our former wholly-owned subsidiary, Professional Direct Agency, Inc. (“Pivot”), for $4,350,000 in cash. In connection with the sale, we agreed to indemnify the buyer for liability of up to $1,000,000 in connection with a litigation matter between Pivot and its co-founders and former owner. In March 2001, the case was dismissed based on a technical deficiency. In August 2001, the plaintiff re-filed the complaint. On October 8, 2004, we were notified that the buyer settled the litigation matter, effective as of October 1, 2004, and we reimbursed the buyer $390,000 under the indemnity. The $390,000 was recorded in the quarter ended September 30, 2004 as a legal settlement charge.
Depreciation and Amortization
Depreciation and amortization was $25,000, or 16%, higher for the three months ended September 30, 2004 compared to 2003 due to assets placed in service in the third quarter. For the first nine months of 2004, depreciation and amortization was $37,000, or 7%, higher than the first nine months of 2003 due to assets purchased in the first nine months of the year, offset by the first quarter impact of assets becoming fully depreciated during the third and fourth quarters of 2003.
Other Income
Other income consists of interest income generated from invested cash and cash equivalents. Interest income for the three and nine months ended September 30, 2004 was higher than the amounts reported in the same periods in 2003 due to higher cash balances during 2004. Other income for the three months ended September 30, 2004 includes a non-refundable cash advance, net of commissions, of $42,000 from a book authored by the Company’s Chief Operating Officer.
Income Taxes
We have not recognized a provision for income taxes during the nine-month periods ended September 30, 2004 and 2003 as we have sufficient net operating loss carryforwards to offset any income taxes payable on our pre-tax income.
As required by Statement of Financial Accounting Standards No. 109, we recognize deferred tax assets on the balance sheet if it is more likely than not that they will be realized. Through the third quarter of 2003, we provided a full valuation allowance against accumulated deferred tax assets, reflecting the uncertainty associated with our future profitability. In the fourth quarter of 2003 we reassessed the valuation allowance previously established against deferred tax assets. Factors considered by us included: our historical results of operations, volatility of the economic and interest rate environment and projected earnings based on current operations. Based on this evidence, we concluded that it is more likely than not that a portion of the deferred tax assets would be realized. Accordingly, we released $3,400,000 of the valuation allowance.
The valuation allowance at December 31, 2003 was approximately $9.4 million. We will continue to evaluate the need for a valuation allowance on deferred tax assets based on the actual results of operations and projected earnings for future periods. It is possible that all or part of the valuation allowance will be reversed during 2004 resulting in an income tax credit for the amount reversed. As of September 30, 2004, we had $3,400,000 in deferred tax assets. The realization of deferred tax assets will depend on our ability to continue to generate taxable income in the future.
Liquidity and Capital Resources
Our principal source of liquidity is the cash generated by our operations. As of September 30, 2004, we had working capital of $30,742,000, and our primary commitments were approximately $1,406,000 in operating lease payments over the next five years, as well as capital expenditures and recurring payables and accruals arising during the course of operating our business, estimated at approximately $3,933,000 through September 30, 2005. We generally establish payment terms with our vendors that extend beyond the amount of time required to collect from our customers. There are no other significant commitments or any off-balance sheet arrangements.
Contractual Obligations
The following table represents the amounts due under the specified types of contractual obligations.
| | Payments Due (In thousands) |
| | |
| | | | Less than | | | One to | | | Three to | | | More than | |
Contractual obligations | | | one year | | | three years | | | five years | | | five years | |
| Long-term debt oblibations | | $ | - | | $ | - | | $ | - | | $ | - | |
| Capital lease obligations (1) | | | - | | | - | | | - | | | - | |
| Operating lease obligations (1) | | | 646,903 | | | 759,394 | | | - | | | - | |
| Purchase obligations (2) | | | 521,474 | | �� | 152,230 | | | - | | | - | |
| Other long-term obligations | | | - | | | - | | | - | | | - | |
| | | | | | | | | | | | | | |
| (1) Includes our obligations under existing operating leases. | | | | | | |
(2) Represents base contract amounts for Internet hosting, co-location content distribution and otherinfrastructure costs. |
During the nine months ended September 30, 2004, we generated $6,007,000 of net cash from operating activities. Our net income of $6,533,000 was adjusted for depreciation and amortization of $552,000, bad debt expense of $395,000, and a net negative change in the components of operating assets and liabilities of $1,473,000. Of this negative change, $1,300,000 resulted from an increase in accounts receivable, and $326,000 resulted from an increase in other assets. Accounts receivable balances were higher at September 30, 2004 supporting higher sales levels. The increase in other assets was primarily due to an increase in prepaid expenses related to the purchase of software licenses and maintenance agreements. During the nine months ended September 30, 2004, net cash of $767,000 was used to purchase equipment and other fixed assets, and $790,000 was provided by financing activities, primarily the result of stock option exercises.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The primary objective of our investment strategy is to preserve principal while maximizing the income we receive from investments without significantly increasing risk. To minimize this risk, to date we have maintained our portfolio of cash equivalents in short-term and overnight investments which are not subject to market risk, as the interest paid on such investments fluctuates with the prevailing interest rates. As of September 30, 2004, all of our cash equivalents matured in less than three months.
Exchange Rate Sensitivity
Our exposure to foreign currency exchange rate fluctuations is minimal to none as we do not have any revenues denominated in foreign currencies. Additionally, we have not engaged in any derivative or hedging transactions to date.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives, and management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon the evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to accomplish their objectives.
Changes in Internal Controls
In addition, management, including our Chief Executive Officer and our Chief Financial Officer, reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls during the period covered by this report.
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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. In August 2001, the plaintiff re-filed the complaint. On October 8, 2004, the Company was notified that the buyer settled the litigation matter, effective as of October 1, 2004, and the Company reimbursed the buyer $390,000 under the indemnity. The $390,000 was recorded in the quarter ended September 30, 2004 as a legal settlement charge.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
| | 31.1 | Certification of Thomas R. Evans, Chief Executive Officer and President of Bankrate, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. |
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| | 31.2 | Certification of Robert J. DeFranco, Senior Vice President and Chief Financial Officer of Bankrate, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. |
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| | 32.1 | Certification of Thomas R. Evans, Chief Executive Officer and President of Bankrate, Inc., Pursuant to 18 U.S.C. Section 1350. |
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| | 32.2 | Certification of Robert J. DeFranco, Senior Vice President and Chief Financial Officer of Bankrate, Inc., Pursuant to 18 U.S.C. Section 1350. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | Bankrate, Inc. |
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| Dated: November 8, 2004 | By: | /s/ ROBERT J. DEFRANCO |
| | Robert J. DeFranco |
| | Senior Vice President Chief Financial Officer |
