COOLSAVINGS INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

[___] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 000-30199

CoolSavings, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 36-4462895
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

360 N. Michigan Avenue 19th Floor
Chicago, Illinois 60601
----------------------------------------------------------
Address of principal executive offices, including zip code

Registrant's telephone number, including area code: (312) 224-5000

_________________________________________

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 [ ]

Number of shares of common stock, $0.001 par value per share, outstanding
as of July 31, 2002: 39,093,660

INDEX

PART I FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Balance Sheets
June 30, 2002 and December 31, 2001. . . . . . . . . 3

Statements of Operations
Three and Six Month Periods Ended
June 30, 2002 and 2001 . . . . . . . . . . . . . . 6

Statement of Changes in Convertible Redeemable
Preferred Stock and Stockholders' Deficit
Six Month Period Ended June 30, 2002 . . . . . . . 8

Statements of Cash Flows
Six Month Periods Ended
June 30, 2002 and 2001 . . . . . . . . . . . . . . 9

Notes to Financial Statements. . . . . . . . . . . . . 11

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . 16

Item 3. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . . . 22

PART II OTHER INFORMATION

Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . 23

Item 2. Changes in Securities and Use of Proceeds. . . . . . . 23

Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . 23

Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . 24

Item 5. Other Information. . . . . . . . . . . . . . . . . . . 24

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 24

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

COOLSAVINGS, INC.
BALANCE SHEETS
(in thousands, except share and per share data)

June 30,
2002 December 31,
(Unaudited) 2001
----------- -----------

ASSETS
------

CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . $2,213 $5,144
Restricted certificates of deposit . . . . 231 231
Accounts receivable, net of allowance
of $846 and $881 at June 30, 2002
and December 31, 2001, respectively. . . 3,077 3,610
Prepaid assets . . . . . . . . . . . . . . 518 320
Other assets, including amounts due
from related parties of $25 and $0
at June 30, 2002 and December 31,
2001, respectively . . . . . . . . . . . 115 144
---------- ----------
Total current assets . . . . . . . . 6,154 9,449
---------- ----------

Property and equipment . . . . . . . . . . . 10,918 10,593
Capitalized software costs . . . . . . . . . 1,490 1,490
Capitalized web site costs . . . . . . . . . 3,174 3,152
---------- ----------

15,582 15,235
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . . (9,294) (7,151)
---------- ----------

6,288 8,084

Intangible assets, patents and licenses,
net of accumulated amortization of
$291 and $245 at June 30, 2002 and
December 31, 2001, respectively. . . . . . 259 431
---------- ----------

Total assets . . . . . . . . . . . . . . . . $ 12,701 $ 17,964
========== ==========

COOLSAVINGS, INC.
BALANCE SHEETS - Continued

June 30,
2002 December 31,
(Unaudited) 2001
----------- -----------

LIABILITIES
-----------
CURRENT LIABILITIES:
Accounts payable, including amounts
due to related parties of $46 and
$110 at June 30, 2002 and December 31,
2001, respectively . . . . . . . . . . . $ 1,056 $ 2,902
Accrued marketing expense. . . . . . . . . 579 266
Accrued compensation . . . . . . . . . . . 413 440
Accrued interest, including amounts
due to related parties of $442
and $113 at June 30, 2002 and
December 31, 2001, respectively. . . . . 444 125
Accrued expenses, including amounts
due to related parties of $422
and $405 at June 30, 2002 and
December 31, 2001, respectively. . . . . 1,990 1,845
Deferred revenue . . . . . . . . . . . . . 541 351
Notes payable due to related party . . . . 8,770 7,249
Current maturities of long-term debt . . . 438 1,879
Senior secured note payable. . . . . . . . 5,370 5,153
---------- ----------
Total current liabilities. . . . . . 19,601 20,210
---------- ----------

Long-Term Liabilities:
Deferred revenue . . . . . . . . . . . . . 109 241
Accrued expenses due to related
parties. . . . . . . . . . . . . . . . . 293 478
---------- ----------
Total long-term liabilities. . . . . 402 719

Commitments and contingencies (Note 7)

Convertible redeemable cumulative
Series B Preferred Stock, $0.001
par value, 258,000,000 shares
authorized, 67,096,418 and 65,057,936
issued and outstanding at June 30,
2002 and December 31, 2001,
respectively (liquidation preference
of $0.1554 per share at June 30, 2002
and December 31, 2001) . . . . . . . . . . 10,425 10,108
Convertible redeemable Series C
Preferred Stock, $0.001 par value,
13,000,000 shares authorized,
13,000,000 shares issued and
outstanding at June 30, 2002 and
December 31, 2001 (liquidation
preference of $0.1665 per share at
June 30, 2002 and December 31,
2001). . . . . . . . . . . . . . . . . . . 1,950 1,950

COOLSAVINGS, INC.
BALANCE SHEETS - Continued

June 30,
2002 December 31,
(Unaudited) 2001
----------- -----------

STOCKHOLDERS' DEFICIT
---------------------

Common stock, $0.001 par value per
share, 379,000,000 shares authorized,
39,093,660 shares issued and outstanding
at June 30, 2002 and December 31, 2001 . . 39 39

Additional paid-in capital . . . . . . . . . 74,104 74,517

Accumulated deficit. . . . . . . . . . . . . (93,820) (89,579)
---------- ----------

Total stockholders' deficit. . . . . (19,677) (15,023)
---------- ----------

Total liabilities, convertible
redeemable preferred stock and
stockholders' deficit. . . . . . . $ 12,701 $ 17,964
========== ==========

The accompanying notes are an integral part of the financial statements.

COOLSAVINGS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

(UNAUDITED)

COOLSAVINGS, INC.
STATEMENT OF CHANGES IN CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
(Unaudited)
(in thousands, except share and per share data)

COOLSAVINGS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)

SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)

2002 2001
---------- ----------
Cash flows used in operating activities:
Net loss . . . . . . . . . . . . . . . . $ (4,241) $ (18,606)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization. . . . . . 2,398 2,432
Provision for doubtful accounts. . . . . 171 1,847
Interest payment in kind . . . . . . . . 212 --
Forgiveness of notes receivable
and accrued interest from
related parties. . . . . . . . . . . . -- 3,666
Amortization of debt discount. . . . . . -- 26
Write-off related to website project
costs. . . . . . . . . . . . . . . . . 104 360
Write-off related to intangible asset. . 42 --
Landmark transaction costs . . . . . . . 21 --
Changes in assets and liabilities:
Increase in restricted certificates
of deposit . . . . . . . . . . . . . . -- 18
Decrease in accounts receivable. . . . . 360 4,697
(Increase) decrease in prepaid
and other current assets . . . . . . . (169) 694
(Decrease) increase in accounts
payable. . . . . . . . . . . . . . . . (1,846) 3,869
Increase in deferred revenue . . . . . . 58 29
Increase (decrease) in accrued and
other liabilities. . . . . . . . . . . 556 (3,698)
---------- ----------
Net cash flows used in
operating activities . . . . . . . . . . (2,334) (4,666)
---------- ----------

Cash flows used in investing activities:
Purchases of property and equipment. . . (353) (1,637)
Capitalized web site development costs . (230) (1,284)
Sale of property and equipment . . . . . 10 --
---------- ----------
Net cash used in investing activities. . . (573) (2,921)
---------- ----------

Cash flows provided by financing
activities:
Proceeds from short-term debt. . . . . . -- 1,186
Advances on notes payable. . . . . . . . 1,500 3,031
Repayment of debt obligations. . . . . . (1,524) (2,084)
Cash overdraft . . . . . . . . . . . . . -- (1,335)
---------- ----------
Net cash (used in) provided by
financing activities . . . . . . . . . . (24) 798
---------- ----------
Net decrease in cash . . . . . . . . . . . (2,931) (6,789)
Cash and cash equivalents,
beginning of period. . . . . . . . . . . 5,144 7,041
---------- ----------

Cash and cash equivalents,
end of period. . . . . . . . . . . . . . $ 2,213 $ 252
========== ==========

COOLSAVINGS, INC.
STATEMENTS OF CASH FLOWS - Continued

2002 2001
---------- ----------

Supplemental schedule of cash flow
information:
Cash paid for interest . . . . . . . . . $ 47 $ 191

Noncash investing and financing activity:
Capitalized transactions costs
relating to the Landmark transaction . $ -- $ 661
Obligation to issue common stock for
purchase of intellectual property. . . $ -- $ 8

The accompanying notes are an integral part of the financial statements.

COOLSAVINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(Unaudited)

1. BASIS OF PRESENTATION

CoolSavings, Inc. (the "Company") is an online direct marketing and
media company that provides solutions to connect marketers to their target
consumers using analytics and incentive technology. Under our established
brand, advertisers can deliver, target and track a wide array of
incentives, including printed and electronic coupons, personalized e-mails,
rebates, samples, trial offers, sales notices, and gift certificates to
promote sales of products or services in stores or online.

The Company has sustained significant net losses and negative cash
flows from operations since its inception. The Company's ability to meet
its obligations in the ordinary course of business is dependent upon its
ability to establish profitable operations. If the Company is unsuccessful
in achieving and maintaining cash flow positive operations or securing
additional equity and/or debt financing or complying with the terms of its
financing with Landmark Communications, Inc. and Landmark Ventures VII, LLC
(together "Landmark"), its ability to continue to operate the business will
be jeopardized.

The Company's independent auditors have issued their report on its
financial statements for 2001 with an explanatory paragraph. The
explanatory paragraph describes the uncertainty as to the Company's ability
to continue as a going concern.

These financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all the
disclosures required in the financial statements included in the Company's
most recently filed Annual Report on Form 10-K, as amended. Accordingly,
these financial statements should be read in conjunction with the financial
statements and related notes in such document.

In the opinion of the Company, the accompanying unaudited financial
statements reflect all normal recurring adjustments necessary for a fair
statement of the financial position as of June 30, 2002, and the results of
operations for the three and six month periods ended and changes in cash
flows for the six month periods ended June 30, 2002 and 2001. In addition,
these quarterly results of operations are not necessarily indicative of
those expected for the year. Certain prior period amounts have been
reclassified to conform to the current period's presentation.

2. RECENT ACCOUNTING PRONOUNCEMENTS:

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," ("SFAS 143") which addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No. 143
is required to be adopted for fiscal years beginning after June 15, 2002.
The Company does not expect the adoption of SFAS 143 to have a material
impact on its financial position or results of operations.

In July 2000, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal activities," ("SFAS 146"). SFAS 146
addresses financial accounting and reporting for costs associated with exit
or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal activities

that are initiated after December 31, 2002. The Company does not expect
the adoption of SFAS 146 to have a material impact on its financial
position or results of operations.

3. BANK LINES OF CREDIT AND OTHER LOANS

a. Bank Lines of Credit:

The Company has two separate credit facilities under which the
Company had borrowed an aggregate of $438, and had $1,490 in letters of
credit outstanding, at June 30, 2002.

Under the credit facility with American National Bank (the "ANB
Facility") the Company has one term loan and one $3,000 revolving credit
line. The term loan had no outstanding balance at June 30, 2002. The
revolving credit line, which had an outstanding balance of $361 at June 30,
2002, is payable in installments. The borrowings outstanding under the
revolving line of credit bear interest at the bank's prime rate plus 1.00%
or 5.75% at June 30, 2002. Additionally, the Company had $1,490 of letters
of credit outstanding under the credit line to collateralize lease deposits
on its office facilities. The Company had restricted certificates of
deposit relating to the letters of credit in the amount of $231 at June 30,
2002. These letters of credit, net of restricted certificates of deposit,
reduce the amount of borrowings available to the Company under the credit
line dollar for dollar. The Company has $1,380 available under the
revolving credit line as of June 30, 2002. Borrowings are collateralized
by substantially all the assets of the Company.

Under the credit facility with Midwest Guaranty Bank (the "Midwest
Facility"), the Company has a $1,000 equipment line of credit. At June 30,
2002, there was $77 outstanding under this line. The weighted average
interest rate on the outstanding borrowings under this line at June 30,
2002 was 9.0%. Borrowings are collateralized by the specific equipment
purchased and are payable in installments.

b. Landmark Loans:

In 2001, Landmark loaned the Company $5,000 pursuant to a senior
secured note, which loan is due on June 30, 2006 (the "Senior Secured
Loan"). The Senior Secured Loan is governed by the terms of an amended and
restated senior secured loan and security agreement dated July 30, 2001, as
amended (the "Amended and Restated Loan Agreement"). The Senior Secured
Loan is secured by a lien on all of the Company's assets, subordinate only
to the liens in favor of American National Bank and Midwest Guaranty Bank,
and bears interest at 8.0% per annum. The interest is paid quarterly in
arrears in the form of additional notes and warrants (described below). The
Company has the right to prepay the Senior Secured Loan on or after the
third anniversary if certain conditions are met. The Amended and Restated
Loan Agreement also contains financial covenants and negative and
affirmative covenants that, among other things, restrict the Company's
ability to incur additional indebtedness and take other actions without the
consent of Landmark.

At June 30, 2002, the Company was not in compliance with certain
financial covenants of the Senior Secured Loan. The following is a list of
the significant defaults under the Senior Secured Loan and the Amended and
Restated Loan Agreement, and therefore under the Grid Note (described
below), as these notes have cross-default provisions and are cross-
collateralized:

.. The Company's failure to achieve a prescribed amount of billings
during the first and second quarters of 2002; and

.. The Company's failure to maintain a minimum level of working capital
and a ratio of cash, cash equivalents and certain receivables over
current liabilities; and

.. The Company's failure to maintain a minimum ratio of total
indebtedness over tangible net worth.

These failures constitute events of default. Consequently, the
Senior Secured Loan and all accrued interest thereon is immediately due and
payable at the option of Landmark. Accordingly, the Company has classified
the Senior Secured Loan as currently payable as of June 30, 2002, including
the paid-in-kind interest which has been compounded on the principal
balance, totaling $5,370.

In connection with the Senior Secured Loan, the Company issued to
Landmark warrants to purchase common stock (the "Landmark Warrants"). The
Landmark Warrants have a term of eight years (expiring July 30, 2009) and
may be exercised in whole or in part immediately. The warrants contain a
net exercise feature and were exercisable for 10.0 million shares of the
Company's common stock at an exercise price of $0.50 per share on November
12, 2001 (increasing to $0.75 per share on July 30, 2005, if not previously
exercised). The Company will issue to Landmark additional warrants to
purchase two shares of common stock for each dollar of interest accrued and
paid-in-kind on a quarterly basis (January 31, April 30, July 31 and
October 31) on the Senior Secured Loan. As of April 30, 2002, the Landmark
Warrants were exercisable for 10,379,072 shares of our common stock.

Landmark has funded additional amounts to the Company pursuant to a
grid note, as amended (the "Grid Note"). The Grid Note is governed by the
terms of the Amended and Restated Loan Agreement. The Grid Note bears
interest at 8% per annum, is payable on demand, and may evidence up to
$20,000 in advances. During the second half of 2001 and through the first
quarter of 2002, Landmark loaned to the Company under the Grid Note an
aggregate of $18,770, of which $18,000 related to cash advances (in several
separate advances) and $770 related to transaction costs reimbursable to
Landmark. This agreement is subject to cross-default provisions, is cross-
collateralized with the Senior Secured Loan, and maintains the exact same
covenants as the Senior Secured Loan pursuant to the Amended and Restated
Loan Agreement.

On November 12, 2001, Landmark, pursuant to the securities purchase
agreement between Landmark and the Company dated July 30, 2001, as amended
(the "Securities Purchase Agreement"), exercised their right to apply
$10,000 of principal and $108 of accrued interest under the Grid Note to
the purchase of the Company's Series B Preferred Stock (Note 4).
Consequently, the outstanding principal balance under the Grid Note at
June 30, 2002 is $8,770.

4. REDEEMABLE PREFERRED STOCK:

a. Series B Preferred Stock:

On November 12, 2001, under the Securities Purchase Agreement, the
Company issued to Landmark 65,057,936 shares of $0.001 par value Series B
preferred stock (the "Series B Preferred Stock") for $10,108. As a result
of this issuance of Series B Preferred Stock, Landmark has the right to
elect not less than a majority of the Company's board of directors. The
Series B Preferred Stock has certain conversion rights and has an 8% annual
dividend, payable quarterly in additional shares of Series B Preferred
Stock. As of June 30, 2002, a dividend in the amount of 1,341,928 shares
of Series B Preferred Stock has accrued, but has not been declared to the
holders of Series B Preferred Stock. As a result of the defaults under the
Amended and Restated Loan Agreement, Landmark may at its option require the
Company to redeem the Series B Preferred Stock at any time.

Landmark also has the right to purchase additional shares of Series B
Preferred Stock at the same price per share ($0.1554 per share) (the
"Landmark Shortfall Rights") upon the occurrence of certain events
("Shortfall Events"). Under the Securities Purchase Agreement and a side
letter entered into by Landmark and the Company on November 12, 2001, the
funds advanced by Landmark to the Company under the Grid Note, by
definition, gave rise to a Shortfall Event. This Shortfall Event gives
Landmark the right to elect to apply all or any part of the advances and

accrued interest under the Grid Note to purchase additional shares of
Series B Preferred Stock. As of June 30, 2002, the Company has reserved
approximately 138 million shares of common stock for the conversion of all
the outstanding shares of Series B Preferred Stock and accrued dividends,
the exercise of all outstanding Landmark Shortfall Rights and the exercise
of all outstanding Landmark Warrants.

Landmark's ownership will continue to increase through the issuance
of additional shares of Series B Preferred Stock for dividends accruing on
the Series B Preferred Stock. Landmark's ownership also will increase if
it exercises the Landmark Warrants or the Landmark Shortfall Rights. The
number of Landmark Warrants will continue to increase as "in-kind" payments
are made for interest accruing on the Senior Secured Loan. The number of
Landmark Shortfall Rights will continue to increase as interest accrues on
the Grid Note and may continue to increase to the extent additional
Shortfall Events occur.

The sale of Series B Preferred Stock to Landmark together with the
loans advanced by Landmark under the Grid Note and the Senior Secured Loan
resulted in a change in voting control of the Company.

b. Series C Preferred Stock:

As a condition to the consummation of the Landmark purchase of
Series B Preferred Stock on November 12, 2001, the Company issued to three
individuals (two of whom are directors of the Company) 13 million shares of
$0.001 par value Series C preferred stock (the "Series C Preferred Stock").
The Series C Preferred Stock was given in exchange for certain notes held
by those individuals, the related accrued interest and the accompanying
warrants to purchase 1,050,000 shares of common stock previously issued to
such individuals. As of June 30, 2002, the Company has reserved 13 million
shares of common stock for the conversion of all the outstanding shares of
Series C Preferred Stock.

5. EARNINGS PER SHARE:

Financial Accounting Standards Board ("FASB") Statement of Accounting
Standards ("SFAS") No. 128 requires companies to provide a reconciliation
of the numerator and denominator of the basic and diluted earnings per
share computations. The calculation below provides net loss, weighted
average common shares outstanding and the resultant net loss per share for
both basic and diluted earnings per share for the three and six month
periods ended June 30, 2002 and 2001. The calculation of diluted net loss
per share excludes shares of common stock issuable upon the conversion of
employee stock options and investor warrants, and the conversion of the
preferred stocks as the effect of such conversions would be anti-dilutive.

Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited) (Unaudited)
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator:
Net loss . . . . . . . . $ (1,696) $ (10,174) $ (4,241) $ (18,606)
Cumulative dividend on
Series B Preferred
Stock. . . . . . . . . (209) -- (413) --
---------- ---------- ---------- ----------
Loss applicable to
Common shareholders. . $ (1,905) $ (10,174) $ (4,654) $ (18,606)
========== ========== ========== ==========

Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited) (Unaudited)
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Denominator:
Weighted average
shares used in the
calculation of
basic and diluted
loss per share . . . . 39,093,660 39,093,660 39,093,660 39,093,660
========== ========== ========== ==========

Basic and diluted loss
per share. . . . . . . . $ (0.05) $ (0.26) $ (0.12) $ (0.48)
========== ========== ========== ==========

6. STOCK OPTION COMPENSATION:

During the first and second quarters of 2002, the Company granted
options to purchase 3,893,741 shares of common stock pursuant to the 2001
Stock Option Plan. The options were granted to virtually all the employees
of the Company. The options have a term of 10 years and vest equally over
the next four years. The options were issued at an exercise price at or
above the fair value of the underlying stock on the date of grant. The
Company has not recognized any compensation expense with the issuance of
these options.

7. COMMITMENTS AND CONTINGENCIES

The Company is currently a defendant in two patent infringement
lawsuits. While the Company believes that these actions are without merit
and intends to defend them vigorously, the Company's efforts may not be
successful. An unfavorable outcome for the Company is considered neither
probable nor remote by management at this time, and an estimate of possible
loss or range of possible losses cannot currently be made.

8. CALL OPTION ON CERTAIN LANDMARK SHARES

On April 5, 2002, Landmark acquired 10,889,636 shares of the
Company's common stock from Lend Lease International Pty. Limited of
Australia. Contemporaneously with the purchase, the Company entered into a
call option agreement with Landmark, whereby the Company has the right to
call, subject to certain terms and conditions, all 10,889,636 shares of
common stock from Landmark. The call price is $0.08 per share plus seven
percent interest thereon, compounded annually. The option can be exercised
at any time after April 5, 2003 and prior to March 31, 2008. The Company
does not have any right to call any other shares of capital stock in the
Company held by Landmark. The Company accounted for this call option as
permanent equity and a contribution from Landmark under EITF 00-19
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock". The Company ascribed a
value of $1.2 million to the option at issuance.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT

You should read the following discussion of our financial condition
and results of operations with the financial statements and the related
notes included elsewhere in this report. This discussion contains
forward-looking statements based on our current expectations, assumptions,
estimates and projections. These forward-looking statements involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of numerous
factors, many of which are described in the "Factors That May Affect Future
Results" section and elsewhere in our Annual Report on Form 10-K, as
amended, for the fiscal year 2001. We are under no duty to update any of
the forward-looking statements after the date of this report to conform
these statements to actual results, unless required by applicable
securities laws.

OVERVIEW

We are an online direct marketing and media company that provides
smarter solutions to connect marketers to their target consumers using
industry-leading analytics and incentive technology. Our mission is to be
the leading provider of promotional offers to consumers while most
effectively connecting marketers to their best customers. With a database
of nearly 20 million registered U.S. households as of August 1, 2002, we
supply marketers with a single resource for accessing and engaging a
dynamic group of shoppers. Through our customized, integrated direct
marketing and media products, advertisers can target a wide array of
incentives, including printed and electronic coupons, personalized e-mails,
rebates, trial offers, samples, sales notices and gift certificates, to
promote sales of products or services and drive customers into brick-and-
mortar stores or online web sites. In addition, our proprietary database
technology tracks consumer response, shopping preferences and site behavior
at the household and shopper level to provide our clients with an
unprecedented breadth of sophisticated consumer data from which to make
smarter marketing decisions.

Our web site, coolsavings.com, offers consumers convenient and
personalized incentives for goods and services from a broad range of
advertisers, including brick-and-mortar retailers, online retailers,
consumer packaged goods manufacturers, travel and financial service
providers.

RECENT DEVELOPMENTS

On April 5, 2002, Landmark acquired 10,889,636 shares of our common
stock from Lend Lease International Pty. Limited of Australia.
Contemporaneously with the purchase, we entered into a call option
agreement with Landmark, whereby we have the right to call, subject to
certain terms and conditions, all 10,889,636 shares of common stock from
Landmark. The call price is $0.08 per share plus seven percent interest
thereon, compounded annually. The option can be exercised at any time after
April 5, 2003 and prior to March 31, 2008. We do not have any right to
call any other shares of our capital stock held by Landmark.

On May 8, 2002, the United States Court of Appeals for the Federal
Circuit affirmed-in-part, reversed-in-part, and vacated-in-part the non-
infringement ruling of the U.S. District Court for the Northern District of
Illinois in a lawsuit filed against us by Catalina Marketing International,
Inc. The complaint alleges that our systems and methods infringe Catalina's
United States Patent No. 4,674,041, and seeks to enjoin us from further
infringing its patent. As a result of the ruling, this litigation is not
concluded. The case has been remanded to the Northern District for further
proceedings to determine whether we have any liability for infringement of
the '041 Patent. We intend to defend the action vigorously.

REVENUE

ONLINE DIRECT MARKETING SERVICES REVENUE

We generate substantially all of our revenues by providing online
marketing services to our advertisers.

We charge our advertisers on a variety of bases, the most common of
which include:

. the number of offers delivered to members, commonly sold on a
cost per thousand, or CPM, basis;

. the number of times members click on an incentive linking the
member to the advertiser's web site (known as a click-through
response);

. the number of purchases made or qualified leads generated; and

. the number of registered members in our database.

Our pricing depends upon a variety of factors, including, without
limitation, the degree of targeting, the duration of the advertising
contract and the number of offers delivered. The degree of targeting refers
to the number of identified household or member attributes, such as gender,
age, or product or service preferences, used to select the audience for an
offer. Generally, the rates we charge our advertisers increase as the
degree of targeting and customization increases. Revenues subject to time-
based contracts are recognized ratably over the duration of the contract.
For contracts based on certain performance or delivery criteria, revenues
are recognized in the month performance is delivered to the customer. Most
of our advertising contracts have stated terms of less than one year and
may include earlier termination provisions. In the three month period
ending June 30, 2002, our largest advertiser accounted for 3.95% of our
revenues and our top five advertisers together accounted for approximately
17.53% of our revenues.

Our revenues for each period depend on a number of factors, including
the number of advertisers sending promotional offers to our members, the
size of our membership base and the responsiveness of our members to each
promotion. We believe that our revenues will be subject to seasonal
fluctuations in accordance with general patterns of retail advertising
spending, which is typically highest during the fourth quarter. In
addition, expenditures by advertisers tend to be cyclical, reflecting
overall general economic conditions and consumer buying patterns.

LICENSING REVENUE

We license portions of our intellectual property, including our
issued patents, to third parties. Approximately 1% of our revenue was
generated from royalty and license fees and other miscellaneous sources
during the three month period ended June 30, 2002.

EXPENSES

COST OF REVENUES

Our cost of revenues consists primarily of internet connection
charges, web site equipment depreciation, salaries and related benefits of
operations personnel and other directly related operations costs.

SALES AND MARKETING

Sales and marketing expenses include salaries, sales commissions,
employee benefits, travel and related expenses of our direct sales force,
advertising and promotional expenses, marketing, and sales support
functions. Marketing costs associated with increasing our member base are
expensed in the period incurred.

PRODUCT DEVELOPMENT

Product development costs include expenses for the development of new
or improved technologies designed to enhance the performance of our
service, including the salaries, employee benefits, amortization of
capitalized website development costs, and related expenses for our
technology department, as well as costs for contracted services and
equipment.

GENERAL AND ADMINISTRATIVE

General and administrative expenses include salaries, employee
benefits and expenses for our executive, finance, legal and human resources
personnel. In addition, general and administrative expenses include fees
for professional services and occupancy costs.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED
JUNE 30, 2001

NET REVENUES

Net revenues decreased 3% to $5.1 million in the three month period
ended June 30, 2002 from $5.3 million in the three month period ended June
30, 2001. The revenue decrease was attributable to the continuing slow
economy, which caused reduced advertising spending in general, and
increased downward pricing pressures from competitors.

COST OF REVENUES AND GROSS PROFIT

Cost of revenues decreased to $0.9 million in the three month period
ended June 30, 2002, from $1.5 million in the three month period ended June
30, 2001. Gross profit increased as a percentage of net revenues to 82% in
the three month period ended June 30, 2002, from 71% in the three month
period ended June 30, 2001. The increase in gross profit reflects the
realization of the personnel and personnel related cost reductions that
occurred during fiscal year 2001. Our fulfillment costs related to member
loyalty incentives decreased due to the cessation of the member incentive
program. Additionally, we had a decrease in gift certificate costs due to
lower revenue involving gift certificate incentives.

OPERATING EXPENSES

SALES AND MARKETING. Sales and marketing expenses decreased to $2.6
million, or 51% of net revenues in the three month period ended June 30,
2002, from $4.1 million, or 79% of net revenues, in the three month period
ended June 30, 2001. The $1.5 million decrease in sales and marketing
expenses was primarily due to the realization of the personnel and
personnel related cost reductions that occurred during fiscal year 2001.

PRODUCT DEVELOPMENT. Product development expenses decreased to $0.9
million, or 18% of net revenues, in the three month period ended June 30,
2002, from $1.9 million, or 36% of net revenues, in the three month period
ended June 30, 2001. The $1.0 million decrease in product development
expenses was primarily due to the realization of the personnel and
personnel related cost reductions that occurred during fiscal year 2001.
Additionally, the decrease is attributable to the reduced use of
third-party technical consultants.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $2.1 million, or 40% of net revenues, in the three month
period ended June 30, 2002, from $7.6 million, or 144% of net revenues, for
the three month period ended June 30, 2001. The $5.5 million decrease in
general and administrative expenses was primarily due to a one time $3.7
million charge relating to our forgiveness of certain loans and interest in
2001, the realization of the personnel and personnel related cost
reductions that occurred during fiscal year 2001 and the reduced bad debt
expense recognized in the three month period ended June 30, 2002 versus the
same period in 2001.

INTEREST INCOME (EXPENSE), NET. During the three month period ended
June 30, 2002, we incurred net interest expense of $288, as compared to net
interest expense of $57 (exclusive of the amortization of debt discount)
for the three month period ended June 30, 2001. During the three month
period ended June 30, 2002, interest expense increased due to interest on
the Landmark Senior Secured Loan and the Landmark Grid Note.

SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30,
2001

NET REVENUES

Net revenues decreased 6% to $10.9 million in the six month period
ended June 30, 2002 from $11.6 million in the six month period ended
June 30, 2001. The decrease in revenue was attributable to the continuing
slow economy, which caused reduced advertising spending in general, and
increased downward pricing pressures from competitors.

COST OF REVENUES AND GROSS PROFIT

Cost of revenues decreased to $1.9 million in the six month period
ended June 30, 2002, from $3.5 million in the six month period ended June
30, 2001. Gross profit increased as a percentage of net revenues to 83% in
the six month period ended June 30, 2002, from 70% in the six month period
ended June 30, 2001. The increase in gross profit reflects the realization
of the personnel and personnel related cost reductions that occurred during
fiscal year 2001. Our fulfillment costs related to member loyalty
incentives decreased due to the cessation of the member incentive program.
Additionally, we had a decrease in gift certificate costs due to lower
revenue involving gift certificate incentives.

OPERATING EXPENSES

SALES AND MARKETING. Sales and marketing expenses decreased to $6.1
million, or 56% of net revenues in the six month period ended June 30,
2002, from $11.1 million, or 96% of net revenues, in the six month period
ended June 30, 2001. The $5.0 million decrease in sales and marketing
expenses was primarily due to the realization of the personnel and
personnel related cost reductions that occurred during fiscal year 2001.
The decrease is also attributable to greatly reduced marketing expenditures
through the elimination of broadcast and cable television advertising, and
reductions in spending to acquire new members.

PRODUCT DEVELOPMENT. Product development expenses decreased to $2.0
million, or 18% of net revenues, in the six month period ended June 30,
2002, from $3.9 million, or 34% of net revenues, in the six month period
ended June 30, 2001. The $1.9 million decrease in product development
expenses was primarily due to the realization of the personnel and
personnel related cost reductions that occurred during fiscal year 2001.
Additionally, the decrease is also attributable to the reduced use of
third-party technical consultants.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $4.6 million, or 42% of net revenues, in the six month period
ended June 30, 2002, from $11.5 million, or 99% of net revenues, for the
six month period ended June 30, 2001. The $6.9 million decrease in general
and administrative expenses was primarily due to a one time $3.7 million
charge relating to our forgiveness of certain loans and interest in 2001,
the realization of the personnel and personnel related cost reductions that
occurred during fiscal year 2001 and the reduced bad debt expense
recognized in the six month period ended June 30, 2002 versus the same
period in 2001.

INTEREST INCOME (EXPENSE), NET. During the six month period ended
June 30, 2002, we incurred net interest expense of $559, as compared to net
interest expense of $12 (exclusive of the amortization of debt discount)
for the six month period ended June 30, 2001. During the six month period
ended June 30, 2002, interest expense increased due to interest on the
Landmark Senior Secured Loan and the Landmark Grid Note.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception we have financed our operations primarily through
the sale of our stock and the issuance of notes payable. In March 2001, we
received proceeds from the sale of our convertible subordinated promissory
notes and warrants in the amount of $2.1 million. In June and July 2001,
we received proceeds of $5.0 million in loans from Landmark. In addition,
Landmark funded an additional $10.0 million through October 31, 2001 to us
under the Grid Note, which amount plus accumulated interest was applied to
Landmark's purchase of 65,057,936 shares of Series B Preferred Stock on
November 12, 2001. As of November 12, 2001, Landmark has voting control of
us. In addition, we are in default under the covenants of the Securities
Purchase Agreement and the Amended and Restated Loan Agreement, thereby
giving Landmark the right to demand repayment of the outstanding Senior
Secured Loan and the Grid Note borrowings. As a result of these defaults,
Landmark may at its option also require us to redeem the Series B Preferred
Stock at any time. We have received cash proceeds of $8.0 million in
additional borrowings from Landmark under the Grid Note since November 12,
2001. At June 30, 2002 we had approximately $2.2 million in cash and cash
equivalents.

Net cash used in operating activities was $2.3 million in the six
month period ended June 30, 2002. Net cash used in operating activities
resulted primarily from ongoing losses in the business and a decrease in
liabilities, partially offset by a decrease in accounts receivable due to
lower revenues.

Net cash used in investing activities was $0.6 million in the six
month period ended June 30, 2002. Net cash used in investing activities
resulted from purchases of property and equipment and amounts used in
developing our web site.

Net cash used in financing activities was $0.02 million in the six
month period ended June 30, 2002. Net cash provided by financing activities
is attributable to the $1.5 million of proceeds from borrowings under our
Grid Note offset by $1.52 million in repayment of debt obligations. We
invest all proceeds in cash equivalents with maturities not exceeding 90
days. We intend to continue investing our excess cash in various short-term
securities.

We have two separate credit facilities under which we owed $0.4
million, and had $1.49 million in letters of credit outstanding, at
June 30, 2002.

Under the credit facility with American National Bank (the "ANB
Facility") we have one term loan and one $3 million revolving credit line.
The term loan had no outstanding balance at June 30, 2002. The revolving
credit line, which had an outstanding balance of $0.36 million at June 30,
2002, is payable in installments. The borrowings outstanding under the
revolving line of credit bear interest at the bank's prime rate plus 1.00%
or 5.75% at June 30, 2002. Additionally, we had $1.49 million of letters
of credit outstanding under the credit line to collateralize lease deposits
on our office facilities. We had restricted certificates of deposit
relating to the letters of credit in the amount of $0.23 million at
June 30, 2002. These letters of credit, net of restricted certificates of
deposit, reduce the amount of borrowings available to us under the credit
line dollar for dollar. We have $1.38 million available under the revolving
credit line as of June 30, 2002. Borrowings are collateralized by
substantially all of our assets.

Under the credit facility with Midwest Guaranty Bank (the "Midwest
Facility"), we have a $1 million equipment line of credit. At June 30,
2002, there was $0.08 million outstanding under this line. The weighted
average interest rate on the outstanding borrowings under this line at
June 30, 2002 was 9.0%. Borrowings are collateralized by the specific
equipment purchased and are payable in installments.

In 2001, Landmark loaned us $5 million pursuant to a senior secured
note, which loan is due on June 30, 2006 (the "Senior Secured Loan"). The
Senior Secured Loan is governed by the terms of an amended and restated
senior secured loan and security agreement dated July 30, 2001, as amended
(the "Amended and Restated Loan Agreement"). The Senior Secured Loan is
secured by a lien on all of our assets, subordinate only to the liens in
favor of American National Bank and Midwest Guaranty Bank, and bears
interest at 8.0% per annum. The interest is paid quarterly in arrears in
the form of additional notes and warrants (described below). We have the
right to prepay the Senior Secured Loan on or after the third anniversary
if certain conditions are met. The Amended and Restated Loan Agreement
also contains financial covenants and negative and affirmative covenants
that, among other things, restrict our ability to incur additional
indebtedness and take other actions without the consent of Landmark.

At June 30, 2002, we were not in compliance with certain financial
covenants of the Senior Secured Loan. Our failure to comply constitutes an
event of default. Consequently, the loan is immediately due and payable at
the option of Landmark, including accrued interest. Accordingly, we have
classified the Senior Secured Loan as currently payable as of June 30,
2002, including the paid-in-kind interest which has been compounded on the
principal balance totaling $5.4 million.

In connection with the Senior Secured Loan, we issued to Landmark
warrants to purchase our common stock (the "Landmark Warrants"). The
Landmark Warrants have a term of eight years (expiring July 30, 2009) and
may be exercised in whole or in part immediately. The warrants contain a
net exercise feature and were originally exercisable for 10.0 million
shares of our common stock at an exercise price of $0.50 per share on
November 12, 2001 (increasing to $0.75 per share on July 30, 2005 if not
previously exercised). We will issue to Landmark additional warrants to
purchase two shares of common stock for each dollar of interest accrued and
paid-in-kind on a quarterly basis (January 31, April 30, July 31 and
October 31) on the Senior Secured Loan. As of April 30, 2002, the Landmark
Warrants were exercisable for 10,379,072 shares of our common stock.

Landmark has also funded additional amounts to us pursuant to a grid
note, as amended (the "Grid Note"). The Grid Note is also governed by the
terms of the Amended and Restated Loan Agreement. The Grid Note bears
interest at 8% per annum, is payable on demand, and may evidence up to
$20.0 million in advances. During the second half of 2001 and through the
first quarter of 2002, Landmark loaned us under the Grid Note an aggregate
of $18.8 million, of which $18 million related to cash advances (in several
separate advances) and $0.8 million related to transaction costs
reimbursable to Landmark. The Grid Note is cross-collateralized with the
Senior Secured Loan and maintains the exact same covenants as the Senior
Secured Loan pursuant to the Amended and Restated Loan Agreement.

On November 12, 2001, pursuant to the securities purchase agreement
between Landmark and us dated July 30, 2001, as amended (the "Securities
Purchase Agreement"), Landmark exercised their right to apply $10 million
of principal and $0.1 million of accrued interest under the Grid Note to
the purchase of our Series B Preferred Stock. Consequently, the
outstanding principal balance under the Grid Note at June 30, 2002 is $8.8
million.

Our operations have generated negative cash flows since inception.
The cost reduction plan implemented in the fourth quarter of fiscal year
2000 included a significant decrease in offline marketing expenditures and
a reduction in salaried personnel and third party technical consultants. In
the second and third quarters of 2001, we experienced reductions in
salaried personnel through attrition. We further reduced salaried personnel
and marketing expenditures in the second quarter and third quarter of 2001.
We believe that this plan has significantly reduced operating expenses and
will continue to have a positive effect on cash flow during 2002.

Our independent auditors have issued their report on our financial
statements for 2001 with an explanatory paragraph. The explanatory
paragraph describes the uncertainty as to our ability to continue as a
going concern. Even with the Landmark funding completed and our cost
reduction plan in place we will need to obtain additional debt and/or
equity financing during 2002 to remain in operation.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to the Company's Financial Statements.

FACTORS AFFECTING OPERATING RESULTS

Our results of operations have varied widely in the past and we expect
that they may continue to vary in the future due to a number of factors,
including those set forth in our Annual Report on Form 10-K, as amended,
filed for the fiscal year 2001.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks associated with fluctuations
in interest rates. Because all of the amounts in our portfolio have
expected maturities of three months or less, we believe that the fair value
of our investment portfolio or related income would not be significantly
impacted by increases or decreases in interest rates due mainly to the
short-term nature of our investment portfolio. If market rates were to
increase immediately by 10% from levels on June 30, 2002, the fair value of
this investment portfolio would increase by an immaterial amount. A sharp
decline in interest rates could reduce future interest earnings of our
investment portfolio. If market rates were to decrease immediately by 10%
from levels on June 30, 2002, the resultant decrease in interest earnings
of our investment portfolio would not have a material impact on our
earnings as a whole. We have both fixed and variable rate debt as
described in Note 3.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are currently a defendant in two patent infringement lawsuits and a
plaintiff in another patent infringement lawsuit. For a further discussion
of legal proceedings see Part 1, Item 3 of our Annual Report on Form 10-K,
as amended, for the fiscal year ended December 31, 2001 and the update
below.

On May 8, 2002 the United States Court of Appeals for the Federal
Circuit affirmed-in-part, reversed-in-part, and vacated-in-part the non-
infringement ruling of the U.S. District Court for the Northern District of
Illinois in a lawsuit filed against us by Catalina Marketing International,
Inc. The complaint alleges that our systems and methods infringe Catalina's
United States Patent No. 4,674,041, and seeks to enjoin us from further
infringing its patent. As a result of the ruling, this litigation is not
concluded. The case has been remanded to the Northern District for further
proceedings to determine whether we have any liability for infringement of
the '041 Patent. We intend to defend the action vigorously.

On August 23, 1999, we instituted a lawsuit in the Northern District
of Illinois against Brightstreet.com, Inc. ("Brightstreet") for
infringement of our United States Patent No. 5,761,648, seeking unspecified
damages and a permanent injunction against further infringement.
Brightstreet filed counterclaims alleging the invalidity and
unenforceability of our patent and seeking unspecified damages and
injunctive relief. The parties agreed to a settlement of the lawsuit in
open court on October 29, 2001. Subsequently, Brightstreet objected to the
report and recommendation of the court that the written settlement
agreement presented by the Company most accurately reflected the agreement
reached by the parties. On July 8, 2002, the United States District Court
for the Northern District of Illinois (the "District Court") fully adopted
the report and recommendation of the Magistrate Judge concurring with our
belief that the litigation had been settled, denied Brightstreet's objec-
tions to the report and recommendation, adopted the written settlement
agreement presented by the Company, and dismissed the case with prejudice.
On August 9, 2002, Brightstreet appealed the ruling of the District Court
to the United States Court of Appeals for the Federal Circuit.

We are also involved in a number of legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on our financial position or results of operations.

We may be involved in additional litigation, investigations or other
proceedings in the future. Any litigation, investigation or proceeding,
with or without merit, could be costly and time-consuming and could divert
our management's attention and resources, which in turn could harm our
business and financial results.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

As of June 30, 2002, a dividend in the amount of 1,341,928 shares of
Series B Preferred Stock has accrued, but has not been declared to the
holders of our Series B Preferred Stock. In addition, interest has
continued to accrue on the amount outstanding under the Grid Note. As a
result, the number of shares of Series B Preferred Stock that Landmark may
acquire by applying the principal and interest outstanding under the Grid
Note to the purchase price for the stock has increased.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

At June 30, 2002, we were in default under the Amended and Restated
Loan Agreement with Landmark. The entire amount due under the Senior
Secured Loan has been classified as current.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit 99 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

None.

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 thereunder duly authorized.

COOLSAVINGS, INC.

Dated: August 14, 2002 /s/ Matthew Moog
----------------------------
Matthew Moog
Chief Executive Officer and
President
(Duly Authorized Officer)

Dated: August 14, 2002 /s/ David B. Arney
----------------------------
David B. Arney
Chief Financial Officer
(Principal Financial Officer)