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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 September 30, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ]
Number of shares of common stock, $0.001 par value per share, outstanding
as of October 31, 2003: 39,101,636. (This number represents the number of
shares that are required to be reported here. The accompanying report
describes additional shares of common stock that are issuable upon
conversion of outstanding shares of preferred stock and the exercise of
outstanding warrants and outstanding stock options.)
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
September 30, 2003 (Unaudited) and
December 31, 2002. . . . . . . . . . . . . . . . 3
Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 2003
and 2002 . . . . . . . . . . . . . . . . . . . . 6
Statement of Changes in Convertible Redeemable
Preferred Stock and Stockholders' Deficit
(Unaudited) Nine Months Ended September 30, 2003 8
Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2003 and 2002. . 9
Notes to Financial Statements (Unaudited). . . . . 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . 21
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . 45
Item 4. Controls and Procedures. . . . . . . . . . . . . . 45
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . 46
Item 2. Changes in Securities and Use of Proceeds. . . . . 46
Item 3. Defaults Upon Senior Securities. . . . . . . . . . 47
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 47
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 48
COOLSAVINGS, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
SEPTEMBER 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------- -----------
ASSETS
------
Current assets:
Cash and cash equivalents . . . . . . . $ 6,187 $ 4,867
Restricted certificates of deposit. . . -- 231
Accounts receivable, net of allowance
of $793 and $753 at September 30,
2003 and December 31, 2002,
respectively. . . . . . . . . . . . . 4,696 4,900
Prepaid assets. . . . . . . . . . . . . 619 244
Other assets, including amounts due
from related parties of $3 and
$13 at September 30, 2003 and
December 31, 2002, respectively . . . 32 360
----------- -----------
Total current assets. . . . . . . 11,534 10,602
Property and equipment. . . . . . . . . . 8,946 9,051
Capitalized software costs. . . . . . . . 1,490 1,490
Capitalized web site costs. . . . . . . . 3,529 3,152
----------- -----------
Total . . . . . . . . . . . . . . 13,965 13,693
Less accumulated depreciation
and amortization. . . . . . . . . . . . (11,664) (10,391)
----------- -----------
2,301 3,302
Intangible assets, patents and licenses,
net of accumulated amortization of
$501 and $399 at September 30, 2003
and December 31, 2002, respectively . . 4 101
----------- -----------
Total assets. . . . . . . . . . . $ 13,839 $ 14,005
=========== ===========
COOLSAVINGS, INC.
BALANCE SHEETS - Continued
(in thousands, except share and per share data)
SEPTEMBER 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------- -----------
LIABILITIES
-----------
Current liabilities:
Accounts payable, including amounts due
to related parties of $10 and $55
at September 30, 2003 and December 31,
2002, respectively. . . . . . . . . . $ 870 $ 1,091
Accrued marketing expense, including
amount due to related parties of $77
and $77 at September 30, 2003 and
December 31, 2002, respectively . . . 1,713 989
Accrued compensation. . . . . . . . . . 1,189 1,147
Accrued interest due to related party . 80 76
Accrued expenses, including amounts due
to related parties of $989 and
$1,066 at September 30, 2003 and
December 31, 2002, respectively . . . 1,934 2,179
Lease exit cost liability . . . . . . . 255 311
Deferred revenue. . . . . . . . . . . . 496 516
Senior secured note payable due to
related party . . . . . . . . . . . . 5,938 5,592
----------- -----------
Total current liabilities . . . . 12,475 11,901
----------- -----------
Long-term liabilities:
Deferred revenue. . . . . . . . . . . . 180 177
Lease exit cost liability . . . . . . . 1,059 1,014
Accrued expenses due to related parties -- 91
----------- -----------
Total long-term liabilities . . . 1,239 1,282
----------- -----------
Commitments and contingencies (Note 9)
Convertible redeemable cumulative Series B
Preferred Stock, $0.001 par value,
258,000,000 shares authorized at
September 30, 2003 and December 31, 2002,
and 156,499,743 and 148,600,102 issued
and outstanding at September 30, 2003 and
December 31, 2002, respectively
(liquidation preference of $0.1554 per
share at September 30, 2003 and
December 31, 2002). . . . . . . . . . . 24,318 23,091
Convertible redeemable Series C Preferred
Stock, $0.001 par value, 13,000,000 shares
authorized and 13,000,000 shares issued
and outstanding at September 30, 2003 and
December 31, 2002 (liquidation preference
of $0.1665 per share at September 30,
2003 and December 31, 2002) . . . . . 1,950 1,950
COOLSAVINGS, INC.
BALANCE SHEETS - Continued
(in thousands, except share and per share data)
SEPTEMBER 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------- -----------
STOCKHOLDERS' DEFICIT
---------------------
Common stock, $0.001 par value per share,
379,000,000 shares authorized at
September 30, 2003 and December 31, 2002,
39,101,636 and 39,093,660 shares issued
and outstanding at September 30, 2003 and
December 31, 2002, respectively . . . . 39 39
Additional paid-in capital . . . . . . . 72,540 73,608
Accumulated deficit . . . . . . . . . . . (98,722) (97,866)
----------- -----------
Total stockholders' deficit . . . (26,143) (24,219)
----------- -----------
Total liabilities, convertible
redeemable preferred stock and
stockholders' deficit . . . . . $ 13,839 $ 14,005
=========== ===========
The accompanying notes are an integral part of the financial statements
COOLSAVINGS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenues:
e-marketing
services. . . . . . $ 7,977 $ 7,057 $ 24,106 $ 17,806
License royalties. . 66 66 207 206
---------- ---------- ---------- ----------
Net revenues. . . . . 8,043 7,123 24,313 18,012
Cost of revenues. . . 772 882 2,161 2,780
---------- ---------- ---------- ----------
Gross profit. . . . . 7,271 6,241 22,152 15,232
---------- ---------- ---------- ----------
Operating expenses:
Sales and
marketing . . . . . 4,511 3,851 13,466 9,978
Product development. 778 947 2,255 2,942
General and admin-
istrative . . . . . 1,828 2,117 6,460 6,668
Lease exit costs . . 18 1,862 427 1,862
Loss on asset
impairment. . . . . -- 1,233 81 1,233
---------- ---------- ---------- ----------
Total operating
expenses . . . . . . 7,135 10,010 22,689 22,683
---------- ---------- ---------- ----------
Income (loss) from
operations . . . . . 136 (3,769) (537) (7,451)
Other income (expense):
Interest and
other income. . . . 6 17 31 42
Interest expense . . (121) (292) (350) (876)
---------- ---------- ---------- ----------
Total other income
(expense). . . . . . (115) (275) (319) (834)
---------- ---------- ---------- ----------
Income (loss)
before income
taxes. . . . . . . . 21 (4,044) (856) (8,285)
Income taxes. . . . . -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) . . 21 (4,044) (856) (8,285)
Cumulative dividend on
Series B Preferred
Stock. . . . . . . . (486) (213) (1,430) (626)
---------- ---------- ---------- ----------
Loss applicable to
common stockholders. $ (465) $ (4,257) $ (2,286)$ (8,911)
========== ========== ========== ==========
COOLSAVINGS, INC.
STATEMENTS OF OPERATIONS - Continued
(in thousands, except share and per share data)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic and diluted net
loss per share . . . $ (0.01) $ (0.11) $ (0.06)$ (0.23)
========== ========== ========== ==========
Weighted average
shares used in the
calculation of basic
and diluted net loss
per share. . . . . . 39,101,636 39,093,660 39,098,802 39,093,660
========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
COOLSAVINGS, INC.
STATEMENT OF CHANGES IN CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
(in thousands, except share and per share data)
Stockholders' Deficit
---------------------------------------------------
Series B Redeemable Series C Redeemable Total
Preferred Stock Preferred Stock Common Stock Additional Accumu- Stock-
------------------- ------------------- ------------------- Paid-in lated holders'
Shares Amount Shares Amount Shares Amount Capital Deficit Deficit
---------- ------- ---------- ------- ---------- ----------------- -------- --------
Balances,
January 1,
2003 . . . . .148,600,102 $23,091 13,000,000 $1,950 39,093,660 $ 39 $ 73,608 $(97,866) $(24,219)
Cumulative
dividend
declared
on Series B
Preferred
Stock. . . . . 7,899,641 1,227 --
Cumulative
dividend
accrued on
Series B
Preferred
Stock. . . . . (1,430) (1,430)
Stock option
expense. . . . 361 361
Stock options
exercised. . . 7,976 1 1
Net loss. . . . (856) (856)
----------- ------- ---------- ------ ---------- ------- -------- -------- --------
Balances,
September 30,
2003 . . . . .156,499,743 $24,318 13,000,000 $1,950 39,101,636 $ 39 $ 72,540 $(98,722) $(26,143)
=========== ======= ========== ====== ========== ======= ======== ======== ========
The accompanying notes are an integral part of the financial statements.
COOLSAVINGS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
---------- ----------
Cash flows provided by (used in)
operating activities:
Net loss. . . . . . . . . . . . . . . $ (856) $ (8,285)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization . . . . 1,468 3,507
Provision for doubtful accounts . . . 724 240
Stock option expense. . . . . . . . . 361 --
Interest payment in kind. . . . . . . 350 324
Write-off related to intangible
asset . . . . . . . . . . . . . . . -- 204
Loss on sale of equipment . . . . . . -- (5)
Landmark transaction costs. . . . . . -- 21
Loss on asset impairment. . . . . . . 81 1,233
Changes in assets and liabilities:
Decrease in restricted certificates
of deposit. . . . . . . . . . . . . 231 --
(Increase) in accounts receivable . . (521) (1,110)
(Increase) decrease in prepaid
and other current assets. . . . . . (47) 3
(Decrease) in accounts payable. . . . (221) (1,739)
(Decrease) increase in deferred
revenue . . . . . . . . . . . . . . (17) 281
Increase in accrued and other
liabilities . . . . . . . . . . . . 226 1,397
(Decrease) increase in lease exit
cost liability. . . . . . . . . . . (11) 1,943
---------- ----------
Net cash flows provided by
(used in) operating
activities. . . . . . . . . . 1,768 (1,986)
---------- ----------
Cash flows provided by (used in)
investing activities:
Purchases of property and equipment . (73) (366)
Capitalized web site development
costs . . . . . . . . . . . . . . . (379) (340)
Proceeds from sale of property and
equipment . . . . . . . . . . . . . 3 31
---------- ----------
Net cash used in
investing activities. . . . . (449) (675)
---------- ----------
COOLSAVINGS, INC.
STATEMENTS OF CASH FLOWS - Continued
(in thousands)
2003 2002
---------- ----------
Cash flows provided by (used in)
financing activities:
Advances on notes payable . . . . . . -- 1,500
Repayment of debt obligations . . . . -- (1,962)
Stock options exercised . . . . . . . 1 --
---------- ----------
Net cash provided by
(used in) financing
activities. . . . . . . . . . 1 (462)
---------- ----------
Net increase (decrease) in cash . . . . 1,320 (3,123)
Cash and cash equivalents,
beginning of period . . . . . . . . . 4,867 5,144
---------- ----------
Cash and cash equivalents,
end of period . . . . . . . . . . . . $ 6,187 $ 2,021
========== ==========
Supplemental schedule of cash
flow information:
Cash paid for interest. . . . . . . . $ -- $ 51
========== ==========
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(UNAUDITED)
1. BASIS OF PRESENTATION:
CoolSavings, Inc. (the "Company") is a direct marketing and media
company that provides smarter solutions to connect marketers to their
target consumers by leveraging the Company's distribution network, analytic
services and proprietary technology. Under the Company's 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.
Landmark Communications, Inc. and Landmark Ventures VII, LLC
(together, "Landmark") have the right to at any time require the Company to
redeem any or all of the shares of Series B Preferred Stock held by
Landmark and repay the senior secured note payable due to Landmark. If
Landmark chose to exercise these rights, the Company's ability to continue
to operate the business would be jeopardized.
The Company's independent auditors have issued their report on the
Company's financial statements for 2002 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. These financial statements
should be read in conjunction with the financial statements and related
notes in the Form 10-K of the Company for the year ended December 31, 2002.
In the opinion of the Company, the accompanying unaudited financial
statements reflect all normal recurring adjustments necessary for a fair
statement of the Company's financial position as of September 30, 2003, its
results of operations for the three and nine months ended September 30,
2003 and 2002 and its cash flows for the nine months ended September 30,
2003 and 2002. These quarterly results of operations are not necessarily
indicative of those expected for the full year. Certain prior period
amounts have been reclassified to conform to the current period's
presentation.
2. STOCK-BASED COMPENSATION:
Financial Accounting Standards Board ("FASB") Statement of Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
encourages, but does not require, companies to record compensation cost for
stock-based compensation at fair value. As permitted by SFAS 123,
"Accounting for Stock Based Compensation," the Company continues to apply
the accounting provisions of APB Opinion Number 25, "Accounting for Stock
Issued to Employees" with regard to the measurement of compensation cost
for options granted. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market value of a share of the
Company's stock at the date of the grant over the amount that must be paid
to acquire the stock.
The Company recognized $21 and $361 of compensation expense in the
three months and nine months ended September 30, 2003, respectively, in
conjunction with grants made under its fixed stock option plans. No
similar compensation expense was recognized in 2002. The compensation
charges in 2003 were recorded in general and administrative expense and
related to stock options previously issued to a former CEO, Steven Golden.
Effective July 31, 2001, the Company entered into a severance agreement
with Mr. Golden which changed the terms of his options, requiring that they
be accounted for as variable options under APB Opinion Number 25. The
compensation expense recognized for the three months ended September 30,
2003 represents the difference between the closing price of the Company's
stock on September 30, 2003 of $0.84 and the closing price of the Company's
stock on June 30, 2003 of $0.82. The compensation expense for the nine
months ended September 2003 represents the difference between the closing
price of the Company's stock on September 30, 2003 of $0.84 per share and
the exercise price of the variable options of $0.50 per share. This charge
will continue to be adjusted in future periods for increases and decreases
in the Company's stock price until the options are exercised, expire or are
forfeited.
The Company has adopted the disclosure requirements of SFAS No. 148,
"Accounting for Stock Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123." No stock options were issued during
the three and nine months ended September 30, 2003. Had expense been
recognized using the fair value method described in SFAS 123, the Company
would have reported the following results of operations using the Black-
Scholes option pricing model:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net loss applicable
to common stockholders,
as reported. . . . . $ (465) $ (4,257) $ (2,286) $ (8,911)
Deduct: Stock-based
employee compensa-
tion expense deter-
mined under fair
value based method
for all awards, net
of related tax
effects. . . . . . . (371) (610) (1,114) (1,829)
---------- ---------- ---------- ----------
Pro forma net loss
applicable to common
stockholders . . . . $ (836) $ (4,867) $ (3,400) $ (10,740)
========== ========== ========== ==========
Weighted average
shares outstanding . 39,101,636 39,093,660 39,098,802 39,093,660
Earnings per share:
Basic and diluted -
as reported. . . . $ (0.01) $ (0.11) $ (0.06) $ (0.23)
Basic and diluted -
pro forma. . . . . $ (0.02) $ (0.12) $ (0.09) $ (0.27)
========== ========== ========== ==========
These costs may not be representative of the total effects on pro forma
reported income for future years. Factors that may also impact disclosures
in future years include the attribution of the awards to the service
period, the vesting period of stock options, the timing of additional
grants of stock option awards and the number of shares underlying future
awards.
The assumptions used for valuations of stock option grants calculated
in accordance with SFAS 123 are as follows:
GRANTS DURING THE GRANTS DURING THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Annualized dividend
yield . . . . . . . . . -- 0.00% -- 0.00%
Risk-free rate of
return. . . . . . . . . -- 4.21% -- 4.21%
Expected option term
(in years). . . . . . . -- 5.00 -- 5.00
Expected volatility . . . -- 247.63% -- 247.63%
3. RECENT ACCOUNTING PRONOUNCEMENTS:
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), which
amends SFAS No. 133 for certain decisions made by the FASB Derivatives
Implementation Group. In particular, SFAS 149 (1) clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying derivative
to conform it to language used in FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), and (4) amends certain
other existing pronouncements. This Statement is effective for contracts
entered into or modified after September 30, 2003. In addition, most
provisions of SFAS 149 are to be applied prospectively. The Company does
not expect the adoption of SFAS 149 to have a material effect on its
financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51," which requires all Variable Interest Entities ("VIEs") to be
consolidated by the primary beneficiary. The primary beneficiary is the
entity that holds the majority of the beneficial interests in the VIE. In
addition, the interpretation expands disclosure requirements for both VIEs
that are consolidated as well as VIEs of which the entity is the holder of
a significant percentage of the beneficial interests, but not the majority.
The disclosure requirements of this Interpretation are effective for all
financial statements issued after January 31, 2003. The consolidation
requirements of this Interpretation have been deferred and are effective
for all periods ending after December 15, 2003. The Company has no
investments in variable interest entities.
In July 2003, the Company adopted EITF No. 00-21, "Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21
provides guidance on how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting and how
arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. The adoption of EITF 00-21 did not
have a material effect on the Company's financial position or results of
operations.
In July 2003, the Company adopted SFAS No. 150, "Accounting for
Certain Financial Instruments With Characteristics of Both Liabilities and
Equity" ("SFAS 150"). SFAS 150 establishes standards for how entities
classify and measure in their statement of financial position certain
financial instruments with characteristics of both liabilities and equity.
The adoption of SFAS 150 did not have a material effect on the Company's
financial position or results of operations.
4. BANK LINES OF CREDIT AND OTHER LOANS:
a. Bank Lines of Credit:
During 2002, the Company had two separate credit facilities, both of
which expired as of December 31, 2002. At the time of their expiration,
there was no outstanding balance under either credit facility.
Under a credit facility with American National Bank (the "ANB
Facility"), the Company had one term loan and one $3,000 revolving credit
line. Both the term loan and the revolving credit line were payable in
installments and collateralized by substantially all the assets of the
Company. During 2002, the Company had restricted certificates of deposit
of $231 which related to letters of credit which were issued under the
credit line and expired on December 31, 2002. The restrictions on the
certificates of deposit were removed on January 1, 2003.
Under a credit facility with Midwest Guaranty Bank (the "Midwest
Facility"), the Company had a $1,000 equipment line of credit. Borrowings
were collateralized by the specific equipment purchased and were payable in
installments. The Company does not currently have any credit facility.
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 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
thereof 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 September 30, 2003, the Company was not in compliance with
certain financial covenants of the Senior Secured Loan. Defaults under the
Senior Secured Loan and the Amended and Restated Loan Agreement, which
defaults cannot be cured as the Senior Secured Loan have cross-default
provisions and are cross-collateralized, include:
.. The Company's failure to achieve a prescribed amount of billings
during 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 are immediately due
and payable at the option of Landmark. Accordingly, the Company has
classified as currently payable as of September 30, 2003 the Senior Secured
Loan which, including principal and the paid-in-kind interest which has
been compounded and accrued on the principal balance, totals $6,018.
In connection with the Senior Secured Loan, on November 12, 2001, the
Company issued to Landmark warrants to purchase 10,000,000 shares of the
Company's 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 Landmark Warrants contain a net exercise
feature and are exercisable at an exercise price of $0.50 per share
(increasing to $0.75 per share on July 30, 2005, if not previously
exercised). The Company automatically issues 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 paid-in-kind
interest. As of September 30, 2003, the Landmark Warrants were exercisable
for 11,476,819 shares of the Company's common stock at an exercise price of
$0.50 per share.
5. REDEEMABLE PREFERRED STOCK:
a. Series B Preferred Stock:
On November 12, 2001, pursuant to a securities purchase agreement
between Landmark and the Company, dated July 30, 2001, as amended (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") in exchange for cancellation of $10,108 of outstanding
indebtedness from the Company to Landmark under the Grid Note (defined
below). The Series B Preferred Stock has certain conversion rights and
bears an 8% annual dividend, payable quarterly in additional shares of
Series B Preferred Stock. The holders of the Series B Preferred Stock
(Landmark) also have the right to elect not less than a majority of the
Company's board of directors.
Under the terms of the Securities Purchase Agreement, the Company
agreed that, if certain events occurred prior to December 31, 2002 (the
"Shortfall Events"), Landmark would have the right to acquire additional
shares of Series B Preferred Stock at a price of $0.1554 per share (the
"Shortfall Rights"). The number of shares that Landmark could acquire with
the Shortfall Rights was the quotient determined by dividing the "Shortfall
Amount" (generally the cash needed by the Company in connection with a
Shortfall Event) by $0.1554. Under a letter dated November 12, 2001, the
Company agreed that, when Shortfall Events occurred, Landmark could elect
to loan the Company the Shortfall Amount under a grid note, as amended (the
"Grid Note"), and Landmark could later elect to apply such loaned funds to
the purchase price of additional shares of Series B Preferred Stock under
its Shortfall Rights arising in connection with such Shortfall Events.
On October 24, 2002, in connection with a Shortfall Event which
occurred on June 30, 2002 (related to the amount of current assets compared
to current liabilities at such date), Landmark exercised its right to
purchase 17,825,212 shares of Series B Preferred Stock and paid the Company
$2,770 for such shares ($0.1554 per share). On December 20, 2002,
Landmark, at the Company's request, applied the $8,770 of principal and
$705 of accrued interest then outstanding under the Grid Note toward the
purchase of 60,967,777 shares of Series B Preferred Stock. As of September
30, 2003, Landmark held 156,499,743 shares of Series B Preferred Stock (and
has rights with respect to accrued dividends thereon), in addition to the
warrants to purchase 11,476,819 shares of the Company's common stock
described above. At September 30, 2003, dividends in the amount of
3,129,994 shares of Series B Preferred Stock were accrued. For the three
months and nine months ended September 30, 2003, dividends in the amount of
3,068,622 shares and 7,899,641 shares, respectively, of Series B Preferred
Stock were declared to the holders of Series B Preferred Stock. The Series
B Preferred Stock is subject to certain redemption requirements outside the
control of the Company. As a result of the defaults under the Amended and
Restated Loan Agreement, Landmark may, at its option, require the Company
to redeem all of the issued and outstanding Series B Preferred Stock, which
has an aggregate redemption value of $24,318 as of September 30, 2003, at
any time.
Landmark's ownership will continue to increase due to the issuance of
additional shares of Series B Preferred Stock for dividends accruing on
outstanding Series B Preferred Stock. Landmark's ownership also will
increase if it exercises the Landmark Warrants. The number of Landmark
Warrants will continue to increase as "in-kind" payments are made for
interest accruing on the Senior Secured Loan.
As of September 30, 2003, the Company had reserved approximately
171,000,000 shares of common stock for the conversion of all the
outstanding shares of Series B Preferred Stock and accrued dividends
thereon, and the exercise of all outstanding Landmark Warrants.
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) 13,000,000 shares of
$0.001 par value, redeemable Series C preferred stock (the "Series C
Preferred Stock"). The Series C Preferred Stock was issued 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 those individuals. As of September 30, 2003, the
Company had reserved 13,000,000 shares of common stock for the conversion
of all the outstanding shares of Series C Preferred Stock.
c. Conversion of Series B and C Preferred Stock
As of September 30, 2003, the Company had outstanding 39,101,636
shares of common stock, 156,499,743 shares of Series B Preferred Stock, and
13,000,000 shares of Series C Preferred Stock. The shares of both series of
preferred stock of the Company are convertible at the option of the holders
into shares of common stock on a one-for-one basis, subject to antidilution
provisions set forth in the Company's Certificate of Incorporation. If all
the outstanding shares of preferred stock of the Company had been converted
into shares of common stock, a total of 208,601,379 shares of common stock
would have been outstanding as of September 30, 2003.
6. IMPAIRMENT OF LONG-LIVED ASSETS AND COSTS ASSOCIATED WITH EXIT
ACTIVITIES:
During 2002, following a study of its future expected space
requirements, the Company determined that a significant portion of its
leased office space and the assets associated with that office space were
unnecessary for its future operations. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the
Company determined that the estimated undiscounted cash flows expected to
be generated by the assets were less than their net book value. Therefore,
the Company recorded an operating expense of $1,233 in the three months
ended September 30, 2002 to write down the assets to their estimated fair
value. In addition, in accordance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," the Company recorded an
operating expense of $1,862 in the three months ended September 30, 2002,
representing the estimated future lease obligations related to the office
space and estimated costs associated with subleasing the space, net of
estimated cash flows from future sublease arrangements.
During the three and nine months ended September 30, 2003, given
changing sublease market conditions and future outlook, the Company revised
its estimates of the future net costs associated with office space
determined to be unnecessary for it future operations. As a result of
these revisions, the Company recorded an operating expense $18 and $427 in
the three and nine months ended September 30, 2003, representing
adjustments to the estimated future lease obligations related to the office
space and estimated costs associated with subleasing and disposing of the
space, net of estimated cash flows from future sublease arrangements. In
addition, the Company recorded an operating expense of $81 in the nine
months ended September 30, 2003 to further write down the assets related to
the office space to their estimated fair value.
For the three and nine months ended September 30, 2003, lease exit
costs consisted of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
(unaudited) (unaudited)
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Lease obligation, net of
estimated sub-lease
income. . . . . . . . . . . $ 1 $ 1,414 $ 365 $ 1,414
Adjustment to accrued rent
expense . . . . . . . . . . -- (132) -- (132)
Broker commissions and
other miscellaneous costs . (9) 567 (16) 567
Accretion expense . . . . . . 26 13 78 13
-------- -------- -------- --------
Lease exit costs. . . . . . . $ 18 $ 1,862 $ 427 $ 1,862
======== ======== ======== ========
At September 30, 2003, the liability associated with the lease exit
costs consisted of the following:
Balance at Subsequent Balance at
December 31, Accruals, September 30,
2002 Net Payments 2003
----------- ---------- -------- -------------
Lease obligation,
net of estimated
sub-lease income . . . $ 1,052 $ 365 $ (374) $ 1,043
Broker commissions
and other trans-
action costs . . . . . 235 (16) (64) 155
Accretion expense . . . 38 78 -- 116
-------- -------- -------- --------
Total lease exit
liability. . . . . . . 1,325 427 (438) 1,314
Less: current
portion of
lease exit
liability. . . . . . . (311) (255)
-------- --------
Long-term lease
exit liability . . . . $ 1,014 $ 1,059
======== ========
Any change in this estimate, based on the availability of new or
updated information, will be recorded in the period that it occurs.
7. EARNINGS PER SHARE:
FASB 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 on both a
basic and diluted basis for the three and nine months ended September 30,
2003 and 2002. The calculation of diluted net loss per share excludes
shares of common stock issuable upon the exercise of employee stock options
and investor warrants and the conversion of the preferred stock as the
effect of such exercises and conversions would be anti-dilutive. As of
September 30, 2003, there were outstanding options to purchase 8,716,773
shares of common stock, outstanding investor warrants to purchase
11,476,819 shares of common stock and outstanding preferred stock
convertible into 169,499,743 shares of common stock.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Unaudited) (Unaudited)
--------------------- ---------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Numerator:
Net income (loss). . $ 21 $ (4,044) $ (856)$ (8,285)
Cumulative dividend
on Series B
Preferred Stock . . (486) (213) (1,430) (626)
---------- ---------- ---------- ----------
Loss applicable to
common stockholders $ (465) $ (4,257) $ (2,286)$ (8,911)
========== ========== ========== ==========
Basic and diluted
loss per share . . . $ (0.01) $ (0.11) $ (0.06)$ (0.23)
========== ========== ========== ==========
Denominator:
Weighted average
shares used in the
calculation of
basic and diluted
loss per share. . . 39,101,636 39,093,660 39,098,802 39,093,660
========== ========== ========== ==========
8. STOCK OPTION COMPENSATION:
During the nine months ended September 30, 2003, the Company did not
grant any options to purchase shares of common stock.
9. COMMITMENTS AND CONTINGENCIES:
a. LETTERS OF CREDIT
During 2002, the Company maintained five letters of credit totaling
$1,747, net of a $231 restricted certificate of deposit to secure a line of
credit. These letters of credit collateralized the lease deposits for the
Company's office facilities in Chicago, New York, and San Francisco. All
letters of credit expired as of December 31, 2002.
On August 31, 2002, the Company entered into an Amended and Restated
Reimbursement and Security Agreement (the "Reimbursement Agreement") with
Landmark. On behalf of the Company, Landmark applied for and received
letters of credit in the aggregate amount of $1,599 from Wachovia Bank
("Wachovia") to collateralize lease deposits required with respect to the
Company's office facilities (the "Landmark Letters of Credit"). Under the
Reimbursement Agreement, the Company has agreed, among other things, to
reimburse Landmark for all amounts that Landmark is required to pay
Wachovia under the bank agreement related to the Landmark Letters of
Credit, including all fees, penalties, interest and amounts in connection
with draws on the Landmark Letters of Credit. Effective March 31, 2003,
the Company terminated its lease of office facilities in New York,
resulting in a reduction of $92 in the Landmark Letters of Credit, in April
2003. The remaining Landmark Letters of Credit, totaling $1,506, were
renewed in March and April of 2003 for periods of one year. Landmark may,
in its sole discretion, cancel any or all of the Landmark Letters of Credit
upon 90 days' written notice to the Company. If the Landmark Letters of
Credit expire or are so cancelled, the Company would need to enter into an
alternate credit arrangement.
b. LITIGATION
On November 15, 1999, Catalina Marketing International, Inc.
("Catalina Marketing") filed a lawsuit against the Company in the United
States District Court for the Middle District of Florida. The complaint
alleged that the Company's systems and methods infringed Catalina
Marketing's United States Patent No. 4,674,041 (the "'041 Patent"), and
sought to enjoin the Company from further infringing its '041 Patent. The
case was transferred to the Northern District, which ruled that the Company
did not infringe the '041 patent. On May 8, 2002, the United States Court
of Appeals for the Federal Circuit (the "Federal Circuit") affirmed-in-
part, reversed-in-part, and vacated-in-part the non-infringement ruling of
the Northern District. The case was remanded to the Northern District for
further proceedings to determine whether the Company had any liability for
infringement of the '041 Patent. On June 25, 2003, the Northern District
issued a claim construction ruling construing claim terms in dispute
between the parties. Because Catalina Marketing agreed with the Company
that, based upon the Northern District's construction of several claim
terms of the '041 Patent, Catalina Marketing could not establish
infringement of the '041 Patent by the Company, on July 10, 2003 the
parties asked the Northern District to enter a final judgment of non-
infringement in favor of the Company. On September 4, 2003, Catalina
Marketing appealed the final judgment of the Northern District to the
Federal Circuit; that appeal is currently pending. An unfavorable outcome
for the Company is considered neither probable nor remote by the Company's
management at this time, and an estimate of possible loss or range of
possible losses currently cannot be made.
On February 12, 2000, Supermarkets Online, Inc. ("Supermarkets
Online"), an affiliate of Catalina Marketing, filed a lawsuit against the
Company in the United States District Court for the Central District of
California. The complaint alleges that the Company's systems and methods
infringe Supermarkets Online's United States Patent No. 6,014,634 (the
"'634 Patent"), and seeks unspecified damages and injunctive relief. On
March 13, 2003, the Court removed the case from its active caseload until
further application by the parties or Order of the Court. The Company has
filed with the Patent and Trademark Office a request for re-examination of
the '634 patent, which request for re-examination was granted in March
2001. An unfavorable outcome for the Company is considered neither probable
nor remote by the Company's management at this time, and an estimate of
possible loss or range of possible losses currently cannot be made.
The pending lawsuit with Supermarkets Online, while pending for over
three years, is nevertheless in the pre-trial discovery stage and may not
be resolved favorably to the Company. The Company may be required to alter
or stop selling its services, or to pay costs and legal fees or other
damages in connection with this case and the various counterclaims that
have been asserted against the Company, and the Company's patents or future
patents may be found invalid or unenforceable. An unfavorable outcome for
the Company is considered neither probable nor remote by the Company's
management at this time, and an estimate of possible loss or range of
possible losses cannot currently be made.
In October 2002, the Company received a demand for arbitration from
Coupco, Inc. ("Coupco") relating to a dispute over the Company's obligation
to pay royalties under its Patent License Agreement with Coupco which was
executed on April 6, 2000 (the "Patent License Agreement"). On July 29,
2003, the Company entered into a Restated Patent License Agreement with
Coupco which resolved the dispute regarding the Patent License Agreement.
The Company may be involved in additional litigation, investigations
or other proceedings in the future. Separate lawsuits or other proceedings
may be brought against the Company to invalidate its patents or force the
Company to change its services or business methods. Any litigation,
investigation or proceeding, with or without merit, could be costly and
time-consuming and could divert management's attention and resources, which
in turn could harm the Company's business and financial results.
10. SUBSEQUENT EVENT:
In March 2003, a customer claimed that the Company failed to deliver
certain services pursuant to the terms of a 2002 agreement with the
customer. The Company believes the services were delivered in accordance
with the terms of the agreement. In August 2002, the Company accrued a
contingency loss of $70 in general and administrative expenses as an
estimate, at the time, of the cost of resolving the issue. In October
2003, the Company reached an agreement with the customer to resolve this
matter. The agreement involves the delivery of additional services at no
charge. In the three month period ended September 30, 2003, the Company
recorded an additional expense of $184 in general and administrative
expenses to reflect the cost of these services. Revenue will be recorded
in the period these services are delivered.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (dollar amounts are shown in thousands)
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
You should read the following discussion of our financial condition
and results of operations along with the financial statements and the
related notes included elsewhere in this report. This discussion contains
statements that are not historical facts but are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
regarding our expectations, beliefs, hopes, intentions or strategies. Where
possible, these forward-looking statements have been identified by use of
words such as "project," "target," "forecast," "believe," "expects," and
similar expressions. Known and unknown risks, uncertainties and other
factors, both general and specific to the matters discussed in this
Quarterly Report on Form 10-Q, may cause our actual results and performance
to differ materially from the future results and performance expressed in,
or implied by, such forward-looking statements. These risks, uncertainties,
and other factors include, without limitation, our ability to meet any debt
repayment or equity redemption demands of our preferred stockholders, our
ability to protect our patents, trademarks and proprietary rights, our
successful introduction of new products, our ability to add new members,
our ability to attract, assimilate and retain highly skilled personnel, and
our ability to retain our advertisers. For a discussion of these and other
risks, uncertainties and other factors which could cause actual results to
differ materially from those expressed in or implied by the forward-looking
statements, see "Risk Factors" below.
We undertake no obligation to update any of the forward-looking
statements after the date of this report to conform these statements to
actual results or otherwise to reflect new developments or changed
circumstances, unless expressly required by applicable federal securities
laws. You should not place undue reliance on such forward-looking
statements.
OVERVIEW
We are an online direct marketing and media company with a database
of more than 27 million registered households, 12 million of which have
been active in the last 12 months. We help marketers reach their target
consumers by leveraging our broad distribution network, sophisticated
analytics and proprietary technology. Our mission is to be the leading
provider of promotional offers to consumers while most effectively
connecting marketers to their best customers. Utilizing a growing database
of registered consumers, 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
sweepstakes 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 a market leading breadth of sophisticated consumer data
which they may use 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, and travel and financial service
providers.
CRITICAL ACCOUNTING POLICIES
We have prepared the financial information in this report in
accordance with generally accepted accounting principles of the United
States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Management
bases its estimates and judgments on historical experience and various
other factors that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Our critical accounting policies include revenue recognition,
estimation of sales credits and the allowance for doubtful accounts,
capitalization of web site development costs, and the valuation of long-
lived assets including estimates and judgments related to the impairment of
such long-lived assets, lease exit costs and intangible assets. For a
discussion of these critical accounting policies, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies and Estimates" in CoolSavings' Form 10-K for
the year ended December 31, 2002, as filed with the SEC.
RECENT DEVELOPMENTS
On November 15, 1999, Catalina Marketing filed a lawsuit against us
in the United States District Court for the Middle District of Florida.
The complaint alleged that our systems and methods infringed Catalina
Marketing's '041 Patent, and sought to enjoin us from further infringing
its patent. The case was transferred to the Northern District, which ruled
that we did not infringe the '041 Patent. On May 8, 2002, the Federal
Circuit affirmed-in-part, reversed-in-part, and vacated-in-part the non-
infringement ruling of the Northern District. The case was remanded to the
Northern District for further proceedings to determine whether we had any
liability for infringement of the '041 Patent. On June 25, 2003, the
Northern District issued a claim construction ruling construing claim terms
in dispute between the parties. Because Catalina Marketing agreed with us
that based upon the Northern District's construction of several claim terms
of the '041 Patent, Catalina Marketing could not establish infringement of
the '041 Patent by us, on July 10, 2003 the parties asked the Northern
District to enter a final judgment of non-infringement in favor of us. On
September 4, 2003, Catalina Marketing appealed the final judgment of the
Northern District to the Federal Circuit; that appeal is currently pending.
An unfavorable outcome for us is considered neither probable nor remote by
our management at this time, and an estimate of possible loss or range of
possible losses currently cannot be made.
On February 12, 2000, Supermarkets Online, Inc. ("Supermarkets
Online"), an affiliate of Catalina Marketing, filed a lawsuit against us in
the United States District Court for the Central District of California.
The complaint alleges that our systems and methods infringe Supermarkets
Online's United States Patent No. 6,014,634 (the "'634 Patent"), and seeks
unspecified damages and injunctive relief. On March 13, 2003, the Court
removed the case from its active caseload until further application by the
parties or Order of the Court. We have filed with the Patent and Trademark
Office a request for re-examination of the '634 patent, which request for
re-examination was granted in March 2001. The pending lawsuit with
Supermarkets Online, while pending for over three years, is nevertheless in
the pre-trial discovery stage and may not be resolved favorably to us. We
may be required to alter or stop selling its services, or to pay costs and
legal fees or other damages in connection with this case and the various
counterclaims that have been asserted against us, and our patents or future
patents may be found invalid or unenforceable. An unfavorable outcome for
us is considered neither probable nor remote by our management at this
time, and an estimate of possible loss or range of possible losses cannot
currently be made.
In October 2002, we received a demand for arbitration from Coupco,
Inc. ("Coupco") relating to a dispute over our obligation to pay royalties
under a Patent License Agreement with Coupco which was executed on April 6,
2000 ("Patent License Agreement"). On July 29, 2003, we entered into a
Restated Patent License Agreement with Coupco which resolved the dispute
regarding the Patent License Agreement.
As of September 30, 2003, dividends in the amount of 3,129,994 shares
of Series B Preferred Stock had accrued "in-kind" on the outstanding shares
of Series B Preferred Stock. We declared and paid those dividends on
October 1, 2003. The Series B Preferred Stock issued is redeemable at
Landmark's option at any time. The Series B Preferred Stock also is
convertible into common stock at any time. As of September 30, 2003,
Landmark held 156,499,743 shares of Series B Preferred Stock (and has
rights with respect to accrued dividends thereon) and held Landmark
Warrants to purchase 11,476,819 shares of our common stock.
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 e-mails 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 website (known as a
click-through response); and
. the number of purchases made or qualified leads generated.
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
include early termination provisions. In the three month period ended
September 30, 2003, our largest advertiser accounted for approximately 3.5%
of our revenues and our top five advertisers together accounted for
approximately 16.1% of our revenues, as compared to 5.7% and 19.0%,
respectively, in the same period of 2002. In the nine month period ended
September 30, 2003, our largest advertiser accounted for approximately 4.1%
of our revenues and our top five advertisers accounted for approximately
15.3% of our revenues, as compared to 6.4% and 17.9%, respectively, in the
same period of 2002.
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 continue to be subject to
seasonal fluctuations in accordance with general patterns of retail
advertising spending, which is typically highest during the last half of
the third quarter and first half of the fourth quarter. In addition,
expenditures by advertisers tend to be cyclical, reflecting overall general
economic conditions and consumer buying patterns. If purchasing patterns
or timing of purchasing by advertisers change, our results of operations
and quarter-to-quarter comparisons could be affected materially.
Included in online direct marketing services revenue are consulting
services provided to customers interested in learning from our extensive
experience in data collection, direct marketing, and predictive modeling to
execute effective promotional campaigns. Revenue from consulting services
is recognized as the services are performed, and generally charged to
customers on a time and materials basis, usually with certain minimum
monthly billings. Approximately 1% and 2% of our revenue was generated
from consulting services during the three and nine month periods ended
September 30, 2003, respectively.
LICENSING REVENUE
We license portions of our intellectual property, including our
issued patents, to third parties. Licensing revenue is recognized ratably
over the term of the license agreement. Approximately 1% of our revenue
was generated from royalty and license fees and other miscellaneous sources
during both the three and nine month periods ended September 30, 2003.
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, fulfillment costs related to member loyalty
incentives, salaries and related benefits of personnel providing consulting
services to customers, and other operations costs directly related to
revenue generation.
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 and
other marketing expenses related to our products and services 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 employee 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, occupancy costs, and stock-based compensation
expense.
LEASE EXIT COSTS AND LOSS ON ASSET IMPAIRMENT
Lease exit costs and loss on asset impairment reflect costs
associated with our determination that a significant portion of our leased
office space was unnecessary for our future operations. During 2002 and
2003, we recorded lease exit costs representing the estimated future lease
obligations related to the unnecessary leased office space, and estimated
costs associated with subleasing the space, net of estimated cash flows
from future sublease arrangements. These estimates are revised as market
conditions and future outlooks change. We also determined that the
estimated undiscounted cash flows expected to be generated by these assets
in the unnecessary, unoccupied office space were less than the net book
value of the assets. Therefore, we recorded losses on asset impairment to
write-down the assets to their estimated fair value.
Significant assumptions about the timing of a sale or inclusion of
these assets in a future sublease were required in making the estimate of
fair value for these assets. As provided under SFAS No. 144, we primarily
used discounted cash flow analysis, together with other available
information, to estimate the fair values.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
NET REVENUES
Net revenues increased 13% to $8,043 in the three month period ended
September 30, 2003 from $7,123 in the three month period ended
September 30, 2002. The revenue increase was attributable primarily to an
increase in our spending on online advertising, along with the addition of
more well-known brands as advertisers. These factors drove an increase in
the number of revenue producing actions initiated by our members and an
increase in direct mail revenue.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased to $772 in the three month period ended
September 30, 2003, from $882 in the three month period ended September 30,
2002. Gross profit increased as a percentage of net revenues to 90.4% in
the three month period ended September 30, 2003, from 87.6% in the three
month period ended September 30, 2002. The increase in gross profit was
primarily due to the decrease in amortization and depreciation in the third
quarter of 2003 as compared to the third quarter of 2002 caused by a
decrease in capital spending since mid-2001 and certain computer hardware
and software assets being fully amortized as of June 30, 2003.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to
$4,511, or 56% of net revenues in the three month period ended
September 30, 2003, from $3,851, or 54% of net revenues, in the three month
period ended September 30, 2002. The $660 increase in sales and marketing
expenses was primarily due to an increase in personnel and personnel
related costs of $472, an increase in advertising expense of $138, and an
increase in other general expenses as compared to the same period in 2002.
PRODUCT DEVELOPMENT. Product development expenses decreased to $778,
or 10% of net revenues, in the three month period ended September 30, 2003,
from $947, or 13% of net revenues, in the three month period ended
September 30, 2002. The $169 decrease in product development expenses was
primarily due to a decrease in the amortization of capitalized web site
costs of $246 as compared to the same period in 2002. A significant
portion of our capitalized web site costs are fully amortized. Also, there
were no losses on previously capitalized website project costs in the third
quarter of 2003, as compared to $59 in the same period of 2002. These
decreases were partially offset by an increase in personnel and personnel
related expenses of $156.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $1,828, or 23% of net revenues, in the three month period
ended September 30, 2003, from $2,117, or 30% of net revenues, in the three
month period ended September 30, 2002. The $289 decrease in general and
administrative expenses was primarily due to decreases in depreciation and
amortization of $257, office lease expense of $158, bad debt expense of
$156, and royalty fees of $117. Partially offsetting these decreases was
an increase in insurance expense of $101 and an increase in personnel and
personnel related expenses of $89 from the same period of the prior year.
In addition, an expense of $184 was incurred in the third quarter of 2003
involving the resolution of a customer matter, as compared to $70 for that
matter in the third quarter of 2002.
Also, we recorded a $21 charge related to stock options previously
issued to a former CEO, Steven Golden, in the three months ended
September 30, 2003. Effective July 31, 2001, we entered into a severance
agreement with Mr. Golden which changed the terms of his options, requiring
that they be accounted for as variable options under APB Opinion Number 25.
The charge for the three month period ended September 30, 2003 represents
the difference between the closing price of our stock on September 30, 2003
of $0.84 per share and the closing price of our stock on June 30, 2003 of
$0.82 per share. This charge will continue to be adjusted in future periods
for increases and decreases in our stock price above the exercise price of
the variable options of $0.50 per share until the options are exercised,
forfeited or expire. No similar expense was incurred in 2002.
LEASE EXIT COSTS. In accordance with SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," we recorded an
operating expense of $18 and $1,862 in the three months ended September 30,
2003 and 2002, respectively, representing an adjustment to the estimated
future lease obligations related to the unnecessary office space and
estimated costs associated with subleasing and disposing of the space, net
of estimated cash flows from future sublease arrangements. The adjustment
was recorded to reflect changes in estimates in current and projected
sublease market conditions.
LOSS ON ASSET IMPAIRMENT. In August 2002, following completion of a
study of our future space requirements, we determined that a significant
portion of our unoccupied leased office space and the assets associated
with that office space were unnecessary for our future operations. In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," we determined that the estimated undiscounted cash
flows expected to be generated by the assets were less than their net book
value. Therefore, we recorded an operating expense of $1,233 in the three
month period ended September 30, 2002 to write down the assets to their
estimated fair value. No similar expense was incurred in the three month
period ended September 30, 2003.
INCOME (LOSS) FROM OPERATIONS. Our income from operations was $136
for the three month period ended September 30, 2003 compared to a loss of
$3,769 for the same period of 2002. The improvement was primarily due to
an increase in revenue resulting from an increase in our spending on online
advertising, along with the addition of more well-known brands as
advertisers. These factors drove an increase in the number of revenue
producing actions initiated by members. It also reflects lower depreciation
and amortization expense of $788 due to certain assets being fully
amortized as of June 30, 2003. Our income from operations reflects an
expense for lease exit costs of $18 and asset impairment charges of $0 in
the three months ended September 30, 2003, as compared to charges of $1,862
and $1,233, respectively, in the same period of 2002.
INTEREST INCOME (EXPENSE), NET. During the three month period ended
September 30, 2003, we incurred net interest expense of $115, as compared
to net interest expense of $275 for the three month period ended
September 30, 2002. During the three month period ended September 30,
2003, net interest expense decreased due to the conversion of the Grid Note
balance to Series B Preferred Stock in December 2002. Interest incurred on
the Grid Note was $179 in the third quarter of 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002
NET REVENUES
Net revenues increased 35% to $24,313 in the nine month period ended
September 30, 2003 from $18,012 in the nine month period ended
September 30, 2002. The increase in revenue was attributable primarily to
an increase in our spending on online advertising, along with the addition
of more well-known brands as advertisers. These factors drove an increase
in the number of new member registrations and an increase in the number of
revenue producing actions initiated by our members.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues decreased to $2,161 in the nine month period ended
September 30, 2003, from $2,780 in the nine month period ended
September 30, 2002. Gross profit increased as a percentage of net revenues
to 91% in the nine month period ended September 30, 2003, from 85% in the
nine month period ended September 30, 2002. The increase in gross profit
reflects a decrease in amortization and depreciation in the first nine
months of 2003 as compared to the first nine months of 2002 caused by a
decrease in capital spending since mid-2001 and certain computer hardware
and software assets being fully amortized as of December 31, 2002.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased to
$13,466, or 55% of net revenues in the nine month period ended September
30, 2003, from $9,978, or 55% of net revenues, in the nine months ended
September 30, 2002. The $3,488 increase in sales and marketing expenses
was primarily due to a $2,081 increase in online advertising, a $1,152
increase in personnel and personnel related costs, and a $313 offline
advertising credit received in 2002, as compared to $0 in the same period
of 2003, and an increase of $130 in expenditures for promotions and public
relations. Partially offsetting these increases was a $193 decrease in
expenses associated with a decrease in barter revenue.
PRODUCT DEVELOPMENT. Product development expenses decreased to
$2,255 or 9% of net revenues, in the nine month period ended September 30,
2003, from $2,942, or 16% of net revenues, in the nine month period ended
September 30, 2002. The $687 decrease in product development expenses was
primarily due to a $633 decrease in the amortization of capitalized web
site costs as compared to the same period in 2002. A significant portion
of our capitalized web site costs are fully amortized. Also contributing
to this decrease were no write-offs of previously capitalized website
development costs in the first nine months of 2003 compared to $162 in the
first nine months of 2002. Partially offsetting these decreases was a $122
increase in personnel and personnel related costs in the first nine months
of 2003 as compared to the same period of the prior year.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $6,460, or 27% of net revenues, for the nine month period
ended September 30, 2003, compared to $6,668, or 37% of net revenues, in
the nine month period ended September 30, 2002. In the first nine months
of 2003, we incurred $631 and $554 less in depreciation and amortization
expense and office rent, respectively, compared to the first nine months of
2002. Also, office telephone and utility expense decreased by $109, bad
debt expense decreased by $95, and royalty expenses decreased by $67 in the
first nine months of 2003 as compared to the same period in 2002.
These decreases were partially offset by a $374 and a $243 increase
in legal fees and personnel and personnel related costs, respectively, in
the first nine months of 2003, as compared to the same period of 2002, and
$195 in legal settlements reached in 2002 compared to $0 in 2003.
Additionally, in the first nine months of 2003, we incurred a $184 charge
related to the resolution of a customer matter, as compared to $70 for that
matter in the first nine months of 2002. Also, in 2003, we recorded a $361
charge related to stock options previously issued to a former CEO, Steven
Golden, as discussed above.
LEASE EXIT COSTS AND LOSS ON ASSET IMPAIRMENT. During the nine
months ended September 30, 2003, we re-evaluated our future expected space
requirements given current sublease market conditions and future outlook
and determined that an additional portion of our leased office space and
the assets associated with that office space were unnecessary for our
future operations. In accordance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," we recorded an operating
expense of $427 in the nine months ended September 30, 2003, as compared to
an expense of $1,862 in the same period of 2002, representing an adjustment
to the estimated future lease obligations related to the unnecessary office
space and estimated costs associated with subleasing and disposing of the
space, net of estimated cash flows from future sublease arrangements.
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", we determined that the estimated
undiscounted cash flows expected to be generated by the assets associated
with unnecessary office space were less than the net book value of the
assets. As a result, we recorded an operating expense of $81 in the nine
months ended September 30, 2003 to write down the assets to their estimated
fair value, as compared to an expense of $1,233 in the nine months ended
September 30, 2002. Significant assumptions about the timing of a sale or
inclusion of these assets in a future sublease were required in making the
estimate of fair value for these assets. As provided under SFAS No. 144,
we primarily used discounted cash flow analysis, together with other
available information, to estimate fair values.
INCOME (LOSS) FROM OPERATIONS. Our loss from operations was $537 for
the nine month period ended September 30, 2003 compared to a loss of $7,451
for the same period of 2002. The improvement of the loss was due to the
improvement in revenue reflecting the increase in our spending on online
advertising, along with the addition of more well-known brands as
advertisers. These factors drove an increase in the number of new member
registrations and the number of revenue producing actions initiated by
members. The improvement also reflects a $2,039 decline in depreciation
and amortization expense due to certain assets being fully amortized as of
December 31, 2002. Our loss from operations reflects charges for lease
exit costs and asset impairment of $427 and $81, respectively, for the nine
months ended September 30, 2003, as compared to $1,862 and $1,233 in the
nine months ended September 30, 2002.
INTEREST INCOME (EXPENSE), NET. During the nine months ended
September 30, 2003, we incurred net interest expense of $319, as compared
to net interest expense of $834 for the nine month period ended September
30, 2002. Net interest expense decreased due to the conversion of the Grid
Note balance to Series B Preferred Stock in December 2002. Interest
incurred on the Grid Note was $512 in the first nine months of 2002.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, we had $6,187 in cash and cash equivalents
compared to $4,867 at December 31, 2002. Accounts receivable, net of
allowances for doubtful accounts, were $4,696 at September 30, 2003
compared to $4,900 at the end of 2002. At September 30, 2003, our current
liabilities totaled $12,475, compared to $11,901 at the end of 2002.
Our independent auditors have issued their report on our financial
statements for 2002 with an explanatory paragraph. The explanatory
paragraph describes the uncertainty as to our ability to continue as a
going concern. If Landmark elects to exercise some or all of its rights to
accelerate payment under our obligations to Landmark, our ability to
operate our business would be jeopardized.
We expect our current liquidity position to meet our anticipated cash
needs for working capital and capital expenditures, excluding potential
acquisitions, legal settlements or any accelerated payments that Landmark
may require for at least the next 12 months. If cash generated from our
operations is insufficient to satisfy our cash needs, we may be required to
raise additional capital or issue additional debt. If we raise additional
funds through the issuance of equity securities, our stockholders may
experience significant dilution. Furthermore, additional financing may not
be available when we need it, or if available, may not be on terms
favorable to us or to our stockholders. If financing is not available when
needed or is not available on acceptable terms, we may be unable to develop
or enhance our products or services. In addition, we may be unable to take
advantage of business opportunities or respond to competitive pressures.
Any of these events could have a material adverse effect on our business,
results of operations and financial condition.
Net cash provided by operating activities was $1,768 in the nine
month period ended September 30, 2003. Net cash provided by operating
activities resulted mainly from increased revenues, improved cash
collections, ongoing control of cash outlays, and the return of restricted
certificates of deposit of $231 associated with the collateral on our
Letters of Credit. The restrictions on these certificates of deposit were
lifted on January 1, 2003. Net cash used by operating activities was
$1,986 in the nine month period ended September 30, 2002. The improvement
in 2003 reflects the improvement in our net loss and the reduction of
accounts payable in 2002.
Net cash used in investing activities was $449 in the nine month
period ended September 30, 2003 as compared to $675 for the same period of
2002. Net cash used in investing activities resulted primarily from
amounts used in developing our web site.
Net cash provided by financing activities was $1 in the nine month
period ended September 30, 2003, compared to net cash used in financing
activities of $462 in the same period of 2002. The improvement was due to
the repayment of debt obligations during the first nine months of 2002, net
of advances received on notes payable. There were no similar repayments
made during the first nine months of 2003.
Since our inception, we have financed our operations primarily
through the sale of our stock and the issuance of notes payable. In June
and July 2001, we received proceeds of $5,000 from loans to us by Landmark
(the "Senior Secured Loan"). The Senior Secured Loan is payable on June 30,
2006 and bore interest at 12.0% per annum until November 12, 2001, at which
time the interest rate was reduced to 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 thereof if certain conditions are met. The
Senior Secured Loan 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 September 30, 2003, we were not in compliance with certain
financial covenants of the Senior Secured Loan including our failure to
achieve a prescribed amount of billings in 2002, our failure to maintain a
minimum level of working capital and a ratio of cash, cash equivalents, and
certain receivables over current liabilities, and our failure to maintain a
minimum ratio of total indebtedness over tangible net worth. This failure
to comply constitutes an event of default. Consequently, the Senior Secured
Loan including accrued interest thereon is immediately due and payable at
the option of Landmark. Accordingly, we have classified the Senior Secured
Loan, including the paid-in-kind interest which has been compounded and
accrued on the principal balance, totaling $6,018, as currently payable as
of September 30, 2003.
In connection with the Senior Secured Loan, on November 12, 2001 we
issued to Landmark warrants to purchase 10,000,000 shares of our common
stock (the "Landmark Warrant"). The Landmark Warrants have a term of eight
years (expiring July 30, 2009) and may be exercised in whole or in part
immediately. The Landmark Warrants contain a net exercise feature and are
exercisable at an exercise price of $0.50 per share (increasing to $0.75
per share on July 30, 2005 if not previously exercised). The number of
shares exercisable under the Landmark Warrants automatically increases by
two shares of common stock for each dollar of interest accrued on the
Senior Secured Loan on a quarterly basis (January 31, April 30, July 31 and
October 31) on the Senior Secured Loan as paid-in-kind interest.
Our Series B Preferred Stock issued is redeemable at Landmark's
option at any time. As of September 30, 2003, Landmark held 156,499,743
shares of Series B Preferred Stock (and has rights with respect to accrued
dividends thereon) and held Landmark Warrants to purchase 11,476,819 shares
of our common stock. Landmark's ownership will continue to increase due to
the issuance of additional shares of Series B Preferred Stock for dividends
accruing on outstanding Series B Preferred Stock. Landmark's ownership
also will increase if it exercises the Landmark Warrants. The number of
Landmark Warrants will continue to increase as "in-kind" payments are made
for interest accruing on the Senior Secured Loan.
As of September 30, 2003, there were 39,101,636 shares of common
stock, 156,499,743 shares of Series B Preferred Stock, and 13,000,000
shares of Series C Preferred Stock outstanding. The shares of both series
of our preferred stock are convertible at the option of the holders into
shares of common stock on a one-for-one basis, subject to antidilution
provisions set forth in our Certificate of Incorporation. If all the
outstanding shares of our preferred stock were converted into shares of
common stock, a total of 208,601,379 shares of common stock would have been
outstanding as of September 30, 2003.
On August 31, 2002, we entered into an Amended and Restated
Reimbursement and Security Agreement with Landmark (the "Reimbursement
Agreement"). On our behalf, Landmark applied for and received letters of
credit (the "Landmark Letters of Credit") in the aggregate amount of $1,599
from Wachovia Bank to collateralize lease deposits required with respect to
our office facilities. Under the Reimbursement Agreement, we have agreed,
among other things, to reimburse Landmark for all amounts that Landmark is
required to pay Wachovia Bank under the bank agreement related to the
Landmark Letters of Credit, including all fees, penalties, interest and
amounts in connection with draws on the Letters of Credit. We have secured
such obligations with a lien on all of our assets. If we fail to pay
Landmark any such amount when due, interest will accrue and compound on all
such amounts at the rate of 7% per annum until such time as Landmark
demands payment. Upon Landmark's demand for payment, interest will accrue
and compound on all such amounts at the rate of 10% per annum from the date
of the demand, increasing monthly at a rate of 1%. We reimbursed Landmark
$4 for fees related to the Landmark Letters of Credit in 2002 and $7 in the
nine months ended September 30, 2003. The Landmark Letters of Credit were
renewed in March and April of 2003 for periods of one year. Effective March
31, 2003, we terminated our lease of office facilities in New York. This
resulted in a reduction of $92 in the Landmark Letters of Credit, bringing
the total outstanding Letters of Credit at September 30, 2003 to $1,506.
Landmark may, at its sole discretion, cancel any or all of the Landmark
Letters of Credit on 90 days written notice to us. If the Landmark Letters
of Credit expire or are so cancelled, we will need to enter into an
alternate credit arrangement. If an alternate arrangement is not available
when required or is not available on acceptable terms, our business,
results of operations and financial condition may be adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), which
amends SFAS No. 133 for certain decisions made by the FASB Derivatives
Implementation Group. In particular, SFAS 149 (1) clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying derivative
to conform it to language used in FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), and (4) amends certain
other existing pronouncements. This Statement is effective for contracts
entered into or modified after September 30, 2003. In addition, most
provisions of SFAS 149 are to be applied prospectively. We do not expect
the adoption of SFAS 149 to have a material effect on our financial
position or results of operations.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51," which requires all Variable Interest Entities ("VIEs") to be
consolidated by the primary beneficiary. The primary beneficiary is the
entity that holds the majority of the beneficial interests in the VIE. In
addition, the interpretation expands disclosure requirements for both VIEs
that are consolidated as well as VIEs of which the entity is the holder of
a significant percentage of the beneficial interests, but not the majority.
The disclosure requirements of this Interpretation are effective for all
financial statements issued after January 31, 2003. The consolidation
requirements of this Interpretation have been deferred and are effective
for all periods ending after December 15, 2003. We have no investments in
variable interest entities.
In July 2003, we adopted EITF No. 00-21, "Revenue Arrangements with
Multiple Deliverables" ("EITF 00-21"). EITF 00-21 provides guidance on how
to determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting and how arrangement consideration
should be measured and allocated to the separate units of accounting in the
arrangement. The adoption of EITF 00-21 did not have a material effect on
our financial position or results of operations.
In July 2003, we adopted SFAS No. 150, "Accounting for Certain
Financial Instruments With Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how entities classify and
measure in their statement of financial position certain financial
instruments with characteristics of both liabilities and equity. The
adoption of SFAS 150 did not have a material effect on our financial
position or results of operations.
RISK FACTORS
You should carefully consider the risks, uncertainties and other
factors described below because they could materially and adversely affect
our business, financial condition, operating results, cash flow and
prospects, and/or the market price of our common stock.
WE MAY NOT BE ABLE TO SECURE FINANCING TO MEET OUR SHORT AND LONG
TERM CAPITAL NEEDS
At September 30, 2003, we had $6,187 of cash and cash equivalents.
We are in default under the terms of an Amended and Restated Senior Secured
Loan and Security Agreement dated July 30, 2001 (the "Amended and Restated
Loan Agreement") with Landmark. The entire loan plus accrued interest,
totaling $6,018 at September 30, 2003, is immediately due and payable at
the option of Landmark. Furthermore, Landmark could at any time require us
to redeem any or all of the shares of Series B Preferred Stock held by
Landmark, which had an aggregate redemption value of $24,318 as of
September 30, 2003. Although Landmark has funded our recent cash needs,
Landmark has reserved its rights with respect to all breaches and defaults,
and Landmark is under no obligation to advance us any additional funds. If
we are unable to generate sufficient cash flows from operations or obtain
continuing financing, we may be unable to operate our business.
We have received a report from our independent auditors for our
fiscal year ended December 31, 2002 containing an explanatory paragraph
that describes the uncertainty as to our ability to continue as a going
concern due to our historical negative cash flow and because, as of the
date they issued their report, we did not have access to sufficient
committed capital to meet our anticipated needs for at least the next 12
months. See "Liquidity and Capital Resources."
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET
LOSSES
We incurred a net loss of $856 in the first nine months of 2003, in
addition to annual losses of $8,287 in 2002, $29,227 in 2001 and $39,240 in
2000. As of September 30, 2003, our accumulated deficit was $98,722. We
had positive net income of $21 for the three months ended September 30,
2003. There is no guaranty we will be able to sustain profitability in the
future.
OUR UNPROVEN BUSINESS MODEL MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS
We launched our web site in February 1997, and operate in a market
that continues to change. We face risks, uncertainties, expenses and
difficulties frequently encountered by companies in new and rapidly
evolving markets, including the Internet advertising and direct marketing
markets. To address these risks and uncertainties, we must, among other
things:
. maintain relationships with existing advertisers and attract
additional advertisers;
. attract members who actively and repeatedly take advantage of
our offers and who make purchases, request information and
otherwise interact with our advertisers;
. attract, integrate, motivate and retain qualified personnel;
. enhance our brand recognition;
. develop new promotions and services;
. continue to upgrade and develop our systems and infrastructure
to accommodate growth in membership and service enhancements;
. anticipate and adapt to the evolving Internet advertising and
direct marketing markets and changes in advertisers'
promotional needs and policies;
. maintain and defend our intellectual property rights; and
. respond to changes in government regulations.
We may not be successful in accomplishing these objectives. Further,
we may not be able to generate or secure the necessary funding to achieve
these objectives. See "Liquidity and Capital Resources."
OUR COMMON STOCK IS VOLATILE, HAS LIMITED PUBLIC LIQUIDITY AND MAY
LEAD TO LOSSES BY INVESTORS AND RESULT IN SECURITIES LITIGATION
Our common stock currently trades on the OTC Bulletin Board (OTCBB).
Stockholders may have difficulty buying and selling our stock on the OTCBB.
Since the OTCBB is a broker driven marketplace, we are dependent on
professional market makers to facilitate trading of our stock on the OTCBB.
If market makers do not register to trade our stock on the OTCBB,
stockholders may not have a public market for the purchase and sale of our
securities.
The market price of our common stock has been volatile and may be
subject to wide fluctuations. Since our public offering in May 2000, the
per share price of our common stock has fluctuated from a high of $7.13 per
share to a low of $0.03 per share. Factors that might cause the market
price of our common stock to fluctuate include, without limitation:
. quarterly variations in our operating results;
. interpretation of the effect of our Series B Preferred Stock
and Series C Preferred Stock on our overall capital structure
(if all the outstanding shares of our preferred stock were
converted into shares of common stock, a total of 208,601,379
shares of common stock would have been outstanding as of
September 30, 2003);
. the expiration, on November 12, 2003, of the covenant/
restriction by which Landmark agreed it would not take action
to cause us to become a privately-held company (such covenant
was contained in an agreement among certain of our stockholders
and Landmark; we are not a party to such agreement and it may
be amended or terminated at any time without our involvement or
consent);
. interpretation of the effect of our outstanding stock options
and warrants on our overall capital structure;
. operating results that vary from the expectations of securities
analysts and investors or from our own forecasts;
. changes in expectations as to our future financial performance,
including our own forecasts and financial estimates by
securities analysts and investors;
. changes in market valuations of other Internet companies;
. changes in governmental regulation of the Internet or Internet
advertising, including any governmental inquiry of another
Internet company;
. loss of major advertisers;
. resolution of our pending or future patent litigation or other
changes in the status of our intellectual property rights;
. pursuit of significant claims or legal proceedings against us;
. announcements of technological innovations or new services by
us or our competitors;
. announcements by us or our competitors of significant
contracts, acquisitions, dispositions, strategic partnerships,
joint ventures or capital commitments;
. changes in our liquidity position;
. changes in key personnel;
. future sales of our common stock, including sales of common
stock acquired upon conversion of our Series B Preferred Stock;
. announcements of material events related to outstanding loans
to us; and
. volatility in the equity markets.
The market prices of the securities of Internet-related and
technology companies are often highly volatile and subject to wide
fluctuations that bear little relation to actual operating performance of
these companies. Also, some companies that have experienced volatility in
the market price of their stock have been subject to securities class
action litigation. Any securities class action litigation involving us
likely would result in substantial costs and a diversion of senior
management's attention and resources, and likely would harm our stock
price.
WE DERIVE MOST OF OUR REVENUES FROM CONTRACTS WITH OUR ADVERTISERS
THAT MAY BE CANCELLED ON 30-DAYS NOTICE
A majority of our current advertising contracts permit either party
to terminate the contract upon 30-days advance written notice. We may be
unsuccessful in securing longer commitments. Some advertisers prefer short-
term contracts because they use our service to promote limited-time
promotional events or seasonal products and services. The possibility that
our advertising contracts can be terminated on 30-days advance written
notice makes it difficult for us to forecast our revenues. We may not be
able to renew our existing contracts or attract new advertisers.
OUR OPERATING RESULTS ARE SUBJECT TO SEASONAL FLUCTUATIONS
Our operating results are subject to seasonal fluctuations that may
make our stock price more volatile. Advertising sales in traditional
media, such as television and radio, generally are lower in the first and
third calendar quarters of each year. Further, Internet traffic typically
decreases during the summer months, which in turn may reduce the amount of
advertising to sell and deliver. We anticipate that our future revenues
will continue to reflect these seasonal patterns.
WE DEPEND ON COMPELLING PROMOTIONAL OFFERS BY OUR ADVERTISERS
Our members' usage of our services, and the resulting attractiveness
of our service to advertisers, depends upon the quality of the promotional
offers we deliver and our members' interest in them. In addition, under
some of our advertising contracts, our revenues depend on members'
responsiveness to specific promotions. We currently consult with our
advertisers about the type and frequency of incentives they offer, but we
cannot control their choice of promotions or their fulfillment of
incentives. If our advertisers' promotional offers are not attractive to
our members, we will not be able to maintain or expand our membership or
generate adequate revenues based on the size of our membership or on the
responses we produce. Moreover, if our members are not satisfied with the
offers our advertisers make available to them or with the products or
services they receive upon redemption of offers, their negative experiences
might result in publicity that could damage our reputation, which would
harm our efforts to attract and retain members and advertisers.
WE DEPEND ON THE SUCCESSFUL INTRODUCTION OF NEW SERVICES AND FEATURES
To retain and attract members and advertisers, we believe that we
will need to continue to introduce additional services and new features on
our web site. These new features and services may require us to spend
significant funds on product development and on educating our advertisers
and consumers about our new service offerings. New services and features
may contain errors or defects that are discovered only after introduction.
Correcting these defects may result in significant costs, service
interruptions, loss of advertisers' and members' goodwill and damage to our
reputation. In addition, our successful introduction of new technologies
will depend on our advertisers' ability to adapt to using these
technologies, over which we have no control. If we introduce a service or
feature that is not favorably received, our current members may use our web
site and other services less frequently, our existing advertisers may not
renew their contracts, and we may be unable to attract new members and
advertisers.
WE MUST BE ABLE TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH
OPERATORS OF OTHER WEB SITES TO ATTRACT NEW MEMBERS
We advertise on third-party web sites using banner advertisements to
attract potential new members. Competition for banner and sponsorship
placements on the highest traffic web sites is intense, and we may not be
able to enter into these relationships on commercially reasonable terms, or
at all. Even if we enter into or maintain our current relationships with
other web site operators, those sites may not attract significant numbers
of users or increase traffic to our web site.
INTELLECTUAL PROPERTY LITIGATION AGAINST US CONTINUES TO BE COSTLY
AND COULD RESULT IN THE LOSS OF SIGNIFICANT RIGHTS
We expect that, as the number of services and competitors in Internet
advertising and direct marketing grows, we will be increasingly subject to
intellectual property infringement, unfair competition and related claims
against us. Third parties may also seek to invalidate our United States
Patents, No. 5,761,648, entitled "Interactive Marketing Network and Process
Using Electronic Certificates" and No. 5,855,007, entitled "Electronic
Coupon Communication System." Currently, we are a defendant in one lawsuit
filed by a competitor, which alleges that our technology or business
methods infringe on the competitor's patent. The lawsuit seeks, among
other things, to prevent us from using methods that allegedly violate the
competitor's patents. In addition, competitors have in the past, and may
in the future, name our customers as defendants in these suits, which may
cause these customers to terminate their relationships with us. Our
efforts to defend these actions may not be successful. Our failure to
prevail in this litigation could result in:
. our paying monetary damages, which could be tripled if the
infringement is found to have been willful;
. an injunction requiring us to stop offering our services in
their current form;
. our having to redesign our technology and business methods,
which could be costly and time-consuming, even where a redesign
is feasible; or
. our having to pay fees to license intellectual property rights,
which may result in an anticipated or higher operating costs.
Because of the ongoing technical efforts of others in our market and
the relatively recent introduction of our technology, we may continue to be
involved with one or more of our competitors in legal proceedings to
determine the parties' rights to various intellectual property, including
the right to our continued ownership of our existing patents. Our failure
to prevail in these proceedings could harm our business. See "Part II -
Item 1 - Legal Proceedings"
We cannot predict whether other third parties will assert claims of
infringement or similar charges against us, or whether any past or future
claims will harm our business. We believe that participants in our market
increasingly are attempting to obtain patent protection for their business
methods. We cannot predict when or if patents will result from these
efforts, or whether any of these third parties' patents will cover aspects
of our business. The details of currently pending United States patent
applications are not publicly disclosed until either the patent is issued
or 18 months from filing, depending on the application filing date. Any
third-party claim, with or without merit, could be time-consuming, result
in costly litigation and damages, cause us to reduce or alter our services,
delay or prevent service enhancements or require us to enter into royalty
or licensing agreements.
In addition, legal standards regarding the validity, enforceability
and scope of intellectual property in Internet-related businesses are
unproven and continue to evolve. In this legal environment, we may be
required to license other parties' proprietary rights in an effort to
clarify our ability to conduct business or develop new services. Royalty
or licensing agreements, if required, might not be available on terms
acceptable to us, or at all. If there is a successful claim of
infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely
basis, our business could be substantially harmed.
PROTECTING OUR PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS MAY BE
COSTLY AND MAY DISTRACT OUR MANAGEMENT
We regard the protection of our patent rights, copyrights, service
marks, trademarks, trade dress and trade secrets as important to our future
success. However, the steps we take to protect these and other proprietary
rights will be costly, may require significant management resources and may
be inadequate. If the steps we take are not adequate, we may lose license
revenues, and potential competitors may be more inclined to offer similar
products and services.
PATENTS
Although we have two issued United States patents and several pending
United States and foreign patent applications directed to different aspects
of our technology and business processes:
. our United States patents and any other patent we may obtain
could be challenged successfully by third parties, which could
limit or deprive us of the right to prevent others from
exploiting the electronic certificate issuing and processing
method or other inventions claimed in our current or future
patents;
. current and future competitors could devise new methods of
competing with our business that are not covered by our issued
patents or any other patents we may obtain, or against which
our issued patents and any other patents we may obtain may be
ineffective;
. our pending patent applications may not result in the issuance
of patents;
. our ability to receive royalties for use of our patents by
third parties may be limited; and
. a third party may have or obtain one or more patents that cause
specific aspects of our business to be restricted or that
require us to pay license fees.
We cannot predict how United States laws and court decisions may
impact our proprietary rights. Any such impact would need to be assessed
in the context of a particular situation. We are also uncertain whether
countries other than the United States will grant patents for inventions
pertaining to Internet-related businesses, or as to the extent of
protection those foreign patents would afford if issued. As in the United
States, the legal standards applied abroad for intellectual property in
Internet-related businesses are evolving and unproven. Any ruling or
legislation that reduces the validity or enforceability of our patents may
seriously harm our business.
We may not prevent others from infringing on our patents and using
our proprietary rights. Furthermore, one company we sued and an affiliate
of that company have filed lawsuits against us that are still pending, and
those lawsuits seek damages against us and further seek to prevent us from
using features of our system or business. The plaintiffs in those lawsuits
and another company we sued in the past are taking steps in the United
States Patent and Trademark Office to contest our patent rights. On May 2,
2000, the United States Patent and Trademark Office granted the request for
re-examination of our patent. Therefore, our United States Patent No.
5,761,648, "Interactive Marketing Network and Process Using Electronic
Certificates" (the "'648 Patent") will be re-examined. The re-examination
may result in the '648 Patent being narrowed in scope or declared invalid.
We expect that, like other participants in our market, we will
increasingly be subject to infringement claims as the number of services
and competitors in our industry segment grows. Any infringement claim,
regardless of its merit, could be time-consuming, result in costly
litigation, cause service modifications or delays or require us to enter
into royalty or licensing agreements. Licenses for third party patents
might not be available on terms that are acceptable to us, or at all.
TRADEMARKS, COPYRIGHTS AND TRADE SECRETS
We rely on a combination of laws and contractual restrictions to
establish and protect our proprietary rights. The contractual arrangements
and other steps we have taken to protect our intellectual property may not
prevent misappropriation of our proprietary rights or deter independent
third-party development or use of similar intellectual property. In
addition, we have registered and have applied for registration of
trademarks and service marks in the United States and in other countries.
However, our pending registrations might not be issued, and our registered
marks may not prevent others from using similar marks.
DOMAIN NAMES
We currently hold the Internet domain name coolsavings.com, as well
as various other related names. The requirements for holding domain names
could change. As a result, we may not acquire or maintain the
"coolsavings.com" domain name in the United States or all of the countries
in which we wish to conduct business in the future. This could impair our
efforts to increase brand recognition and to increase traffic to our web
site. We also could be subject to disputes over our ownership of our
domain names, which could be costly and disruptive.
LICENSES
As of September 30, 2003, we had granted licenses to eight
competitors under our patent, several on the condition that they restrict
their coupon distribution in ways acceptable to us. Several of these
license agreements involve the payment to us of royalties or license fees.
Total revenues generated under these licenses for the three months ended
September 30, 2003 and 2002 were $66 and $66, respectively, and total
revenues generated under these licenses for the nine months ended September
30, 2003 and 2002 were $206 and $206, respectively. If the nature or scope
of the licenses were disputed, we would need to institute proceedings to
enforce our rights under these agreements or under our patent. In that
case, if we did not institute proceedings to enforce our rights, or if we
did not succeed in such proceedings, then our license revenues could
decrease substantially or entirely. If the '648 Patent, currently being
re-examined in the United States Patent and Trademark Office, is narrowed
in scope or declared invalid, our royalty and license revenues may decrease
substantially or be eliminated entirely.
WE MAY LOSE BUSINESS OR INCUR LIABILITIES TO OUR ADVERTISERS DUE TO
UNCERTAINTIES OR INACCURACIES IN OUR DATABASE INFORMATION
It is important to our advertisers that we accurately record our
members' demographics, and track our delivery of offers and advertisements
and, in some instances, redemptions of incentives that are offered to our
members. If the systems we have developed to record information about our
members' demographic profiles, usage of our web site and other member
information do not perform as intended, we may not be able to accurately
evaluate our members' household characteristics or the success of an
advertiser's promotional campaign. We rely on the accuracy of the
demographic, income and other information provided by our registering
members. If advertisers perceive our tracking and evaluations to be
unreliable or if our members' self-reported information proves to be
inaccurate, we may lose current and potential advertisers, suffer erosion
in our advertising rates or face disputes over proper advertising charges.
FAILURE TO PROMOTE AND PROTECT OUR BRAND WILL HARM OUR BUSINESS
We believe that strengthening our brand will be increasingly
important because our market is competitive and has low barriers to entry.
Our ability to promote and position our brand depends on the success of our
marketing efforts and whether we can provide high quality services that
motivate our members to use our services. If our brand enhancement
strategy is unsuccessful, our business will be harmed.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS
The market for e-marketing services is new, rapidly evolving and
intensely competitive. Barriers to entry for companies in our market are
low, and current and potential competitors can launch new web sites and e-
marketing services at relatively low cost.
Many of our current and potential competitors have longer operating
histories, greater brand recognition, larger customer or user bases, and
significantly greater financial, marketing, technical and other resources
than we do. In addition, our competitors may be acquired by, receive
investments from or enter into other commercial relationships with larger,
more well-established and more well-financed companies. Therefore, some of
our competitors may be able to devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing policies and devote
substantially more resources to web site and systems development. They may
also try to attract advertisers by offering free services. Increased
competition may cause us to lose brand recognition and market share and
could otherwise harm our business.
OUR FAILURE TO ATTRACT, ASSIMILATE AND RETAIN HIGHLY SKILLED
PERSONNEL MAY SERIOUSLY HARM OUR BUSINESS
Our future success depends on the continued services of our senior
management and other key sales and technical personnel. Our future success
also depends on our ability to identify, attract, retain and motivate
highly skilled employees. Competition for the best employees in our
industry remains intense. We have occasionally encountered and may
continue to encounter difficulties in hiring and retaining highly skilled
employees, particularly qualified software developers for our web site and
database systems. We may be unable to retain our key employees or
identify, attract, assimilate or retain other highly qualified employees in
the future.
OUR REPUTATION AND BUSINESS COULD BE DAMAGED IF WE ENCOUNTER SYSTEM
INTERRUPTIONS OR CAPACITY LIMITATIONS
We seek to generate a high volume of traffic and transactions on our
web site. Our database must also handle a large volume of member data and
information about members' usage of our web site. The satisfactory
performance, reliability and availability of our web site, database systems
and network infrastructure are critical to our reputation and our ability
to attract and retain large numbers of members. Our revenues depend on
promotional offers being readily available for members and our ability to
process their coupon downloads, e-mail responses or other transactions on
our web site. Any system interruptions that result in the unavailability
of our service or reduced member activity would impair the effectiveness of
our service to advertisers. Interruptions of service may also inhibit our
ability to attract and retain members, which in turn will hinder our sales
and marketing efforts. We have experienced periodic system interruptions,
which may occur from time to time in the future.
Additionally, acts of sabotage, known as denial of service attacks,
on prominent, high traffic web sites have caused extended interruptions of
service on those web sites. Like other operators of web sites, we could
also face system interruptions or shutdowns as a result of a denial of
service attack.
A substantial increase in rate of traffic on our web site will
require us to expand and upgrade our technology, processing systems and
network infrastructure. Any unexpected upgrades could be disruptive and
costly. In addition, our existing systems may encounter unexpected problems
as our member base expands. Our failure to handle the growth of our
databases could lead to system failures, inadequate response times or
corruption of our data. We may be unable to expand and upgrade our systems
and infrastructure to accommodate this growth in a timely manner. Any
failure to expand or upgrade our systems could damage our reputation and
our business.
Furthermore, the increased use of the Internet has caused frequent
interruptions and delays in accessing and transmitting data over the
Internet. If the use of the Internet continues to grow rapidly, the
Internet's infrastructure may not continue to support the demands placed on
it, and its performance and reliability may decline. Interruptions or
delays in Internet transmissions may disrupt our members' ability to access
advertisers' offers on our web site and our ability to send targeted e-
mails. We also rely on web browser technology to create and target
promotional offers. If access to these web-based systems is interrupted,
our ability to disseminate new offers will be impaired, which could cause
lost revenues or disputes with our advertisers.
WE RELY ON THIRD PARTY SERVICE AND EQUIPMENT PROVIDERS, AND ANY
DISRUPTION OR FAILURE IN THE SERVICES OR THE COMPUTER HARDWARE THEY PROVIDE
WILL HARM OUR BUSINESS
We rely on a third-party service provider to provide access to our
web site and support its operation. Our web site infrastructure is co-
located at the suburban Chicago facility of Exodus, a Cable and Wireless
Service plc data center. Our support arrangement with this provider is for
a term of one year and may be canceled on 30 days notice in certain
circumstances. In the event this arrangement is terminated, we may not be
able to find alternative service providers on a timely basis, on terms
acceptable to us or at all. In addition, we rely on software licenses from
third parties. If these licenses are terminated or if such software is no
longer supported by its manufacturer, we may not be able to find and
install satisfactory alternate software on a timely basis, on terms
acceptable to us or at all.
Our success and our ability to attract new members and motivate our
members to respond to our advertisers' offers depends on the efficient and
uninterrupted operation of our computer and communications hardware
systems. Our web servers and the database behind our system, as well as the
servers we use to perform data analysis, are currently located at Exodus.
Currently, all site traffic is directed to the Exodus system and we
maintain a redundant version of our entire system at our Chicago
headquarters. The computer systems at each of our two hosting sites are
vulnerable to damage or interruption from floods, fires, power loss,
telecommunication failures, and other natural disasters. In addition, the
backup system in our Chicago facility has only two hours of emergency back-
up power. The occurrence of a natural disaster or other unanticipated
problems at our facility or at the Exodus facility could result in
interruptions in or degradation of our services. Our business interruption
insurance may not adequately compensate us for resulting losses.
Furthermore, the computer servers running our system are vulnerable
to general mechanical breakdown or component failure, computer viruses,
physical or electronic break-ins, sabotage, vandalism and similar
disruptions, which could lead to loss or corruption of data or prevent us
from posting offers on our web site, sending e-mail notifications of new
offers or delivering coupons or other certificates to our members.
WE DEPEND ON INTERNET SERVICE PROVIDERS TO DELIVER OUR E-MAIL
TRANSMISSIONS
We send e-mail messages on behalf of advertisers to our members who
have requested to receive e-mail from us; we also assemble and transmit e-
mail newsletters to our members which contain promotions from multiple
advertisers. In order for our members to receive our e-mails, we depend on
Internet Service Providers (ISPs) to accept and deliver those messages to
our members.
Due to the proliferation of unsolicited e-mail, many ISPs are
developing technologies to limit or eliminate the delivery of unsolicited
e-mail to their members. Although we send e-mail only to those members who
specifically have requested we do so, the technologies being developed or
currently in use may not respect the choice made by our members. We, along
with others in the industry that send e-mail, have at various times and
during the first nine months of 2003 experienced the failure of an ISP to
deliver e-mails to their customers who also are our members.
Many of our members use an e-mail service provided by one of the
relatively small number of large ISPs. If one or more of those ISPs fails
to deliver our e-mail transmissions, our inability to communicate with
those members could harm our business. In such a circumstance, we may not
be able to send the volume of e-mail requested by an advertiser.
Additionally, our inability to communicate with those members may cause
them to stop visiting our web site. If our database of e-mail addresses
shrinks materially as a result of the failure of one or more ISPs to
deliver our e-mail, advertisers may be less willing to purchase our e-mail
products and services.
WE MAY BE SUBJECT TO CLAIMS OR REGULATORY INVESTIGATIONS AS A RESULT
OF OUR DATA ANALYSIS ACTIVITIES
The information in our database is an integral part of our business.
We do not sell member identifying information to third parties without the
consent of the member. Furthermore, we send our e-mail notices and
newsletters to members who have elected to receive them. Some people who
receive promotions from us may be unhappy that we contacted them. In
addition, we provide advertisers with aggregate information regarding
member demographics, shopping preferences and past behavior. Our use of
this aggregated information may cause dissatisfaction among our members or
otherwise lead to negative publicity. There has been substantial publicity,
governmental investigations and litigation regarding privacy issues
involving the Internet and Internet-based advertising. To the extent that
our data mining and/or other activities conflict with any privacy
protection initiatives or if any private or personally identifiable
information is inadvertently made public, we may become a defendant in
lawsuits or the subject of regulatory investigations relating to our
practices in the collection, maintenance and use of information about, and
our disclosure of these information practices to, our members. Litigation
and regulatory inquiries of these types are often expensive and time
consuming, and their outcome is uncertain. We may need to spend significant
amounts on our legal defense, and senior management may be required to
divert its attention from other aspects of our business. Furthermore, a
judgment or decree may be entered against us, which could require us to pay
damages or to make changes to our present and planned products or services.
OUR BUSINESS WILL BE HARMED IF OUR ONLINE SECURITY MEASURES FAIL
Because our efforts to attract and retain members depend, in part, on
potential members' expectations of privacy in using our services, our
business could be damaged by any security breach of our database or web
site. We may be required to spend significant capital and other resources
to protect against security breaches or to alleviate problems caused by
these breaches. Someone circumventing our security measures could
misappropriate proprietary information, corrupt our database or otherwise
interrupt our operations. We could also be subject to liability as a result
of any security breach or misappropriation of our members' personal data.
This could include claims for unauthorized purchases with credit card
information, impersonation or other similar fraud claims, as well as claims
based upon other misuses of personal information, such as unauthorized
marketing. These claims could result in costly litigation and could limit
our ability to attract and retain advertisers and members. Our security
measures may fail to prevent security breaches. Any failure to prevent
security breaches will damage our reputation and harm our business.
WE MAY BE LIABLE FOR SUPPLYING INACCURATE PROMOTIONAL INFORMATION TO
CONSUMERS
Our employees may make errors in posting our advertisers' promotions.
We may face liability if the promotional information in the offers
available to our members is inaccurate. Additionally, any negative
publicity generated as a result of inaccurate information in the offers we
deliver could damage our reputation and diminish the value of our brand
name.
WE MAY BE HARMED IF OUR ADVERTISERS FAIL TO HONOR THEIR PROMOTIONS ON
OUR WEB SITE OR TO COMPLY WITH APPLICABLE LAWS
Our success depends largely upon retailers honoring our electronic
and printed coupons and upon advertisers reliably delivering and accurately
representing the listed goods and services. We have occasionally received,
and expect to continue to receive, complaints from our members about
retailers' failure to honor our coupons or about the quality of the goods
and services featured in our promotions. These complaints may be
accompanied by requests for reimbursement or threats of legal action
against us. Any resulting reimbursements or related litigation could be
costly for us, divert management attention, or increase our costs of doing
business. In addition, our advertisers' promotion of their goods and
services may not comply with federal, state and local laws. Our role in
facilitating advertisers' sales activities may expose us to liability under
these laws. If we are exposed to this kind of liability, we could be
required to pay substantial fines or penalties, redesign our web site or
business processes, discontinue some of our services or otherwise spend
resources to limit our liability.
WE DEPEND ON WIDESPREAD ACCEPTANCE OF ONLINE DIRECT MARKETING AND
PROMOTIONS AND THE CONTINUED GROWTH OF ONLINE COMMERCE
Our success depends on the continued growth and acceptance by both
consumers and advertisers of online direct marketing and other promotional
services available through the Internet. Although incentive promotions and
direct marketing have been provided for many years through newspaper
inserts, direct mailing and other conventional marketing and sales
channels, they have only recently been offered on the Internet. Many of our
current or potential advertising customers, particularly traditional
offline businesses, have little or no experience using the Internet for
advertising purposes, and may be reluctant to spend money on our services.
As a result, we face a longer sales cycle when dealing with traditional
offline businesses. At times, these sales cycles can last more than a year.
In addition, some traditional retailers may not readily accept our
computer-generated certificates as valid, in part because of their
cashiers' lack of familiarity with them and the risk that these coupons can
be counterfeited. The other services we offer, including the use of
targeted e-mails to alert consumers to savings opportunities, also
represent new marketing methods whose acceptance by consumers and
advertisers is less certain than traditional marketing methods. Although we
do not send unsolicited e-mail, commonly known as "spam," negative public
perception associated with "spam" could reduce the demand for our services.
In addition, we are dependent upon the continued growth of the
Internet as a medium for commerce. Demand for services and products sold
over the Internet is uncertain for a number of reasons, including concerns
related to network reliability and poor performance. Furthermore, concerns
about the security of transactions conducted on the Internet and consumer
privacy may inhibit the growth of the Internet generally, and online
commerce in particular. Any compromise of security involving Internet-based
transactions could result in negative publicity and deter people from using
the Internet or from using it to conduct transactions that involve
transmitting confidential information, such as registering for membership
or purchasing goods and services. Changes in or insufficient availability
of telecommunications services to support the Internet also could result in
slower response times and reduced usage of the Internet. If use of the
Internet does not continue to grow or grows more slowly than expected, our
business will suffer.
CHANGES IN CONSUMER AND ADVERTISER TRENDS COULD HARM OUR BUSINESS
We derive substantially all of our revenues from fees charged to
advertisers for our promotional services. Therefore, we will be affected by
changing trends in retail advertising, such as the trend away from periodic
promotions and toward "everyday low prices." In addition, many of our
advertisers are national retailers and suppliers of consumer products and
services. These businesses are affected by the general economy as well as
consumer confidence, which has at times diminished despite otherwise strong
financial conditions. Consumer spending also can be affected by trends
related to lifestyle, such as changing tastes in fashion or entertainment.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL DEVELOPMENTS
AND EVOLVING INDUSTRY STANDARDS
The Internet is characterized by rapidly changing technology,
evolving industry standards, frequent new service and product
announcements, introductions and enhancements, and changing consumer and
advertiser demands. Our future success will depend on our ability to adapt
our services to rapidly changing technologies and evolving industry
standards and to continually improve the performance, features and
reliability of our services. For example, we may be required to adapt our
services to be compatible with Internet-connected devices other than
traditional personal computers, such as handheld and wireless devices. We
may also need to adapt to evolving standards resulting from the convergence
of the Internet, television and other media. The widespread adoption of new
Internet, networking or telecommunications technologies or other
technological changes could require us to incur substantial expenditures to
modify or adapt our services or infrastructure.
FEDERAL, STATE AND LOCAL GOVERNMENTS MAY FURTHER REGULATE THE
INTERNET, INTERNET ADVERTISING AND PRIVACY WHICH COULD SUBSTANTIALLY HARM
OUR BUSINESS
The adoption or modification of laws or regulations relating to the
Internet, Internet-based advertising and privacy, solicitation of consumers
by email, and the application of traditional legal principles to on-line
activities, could harm our business. In particular, our business could be
severely damaged by any regulatory restrictions on our collection or use of
information about our members.
Laws and regulations that apply to Internet advertising and
communications and Internet users' privacy are becoming more prevalent. For
example, the United States Congress and Federal Trade Commission have
adopted laws and regulations regarding the online collection and use of
information from children and the content of Internet communications, and
various states regulate e-mail marketing and online privacy. However, even
in areas where there has been some legislative action, the laws governing
the Internet remain largely unsettled. There is no single government body
overseeing our industry, and some existing state laws have different and
sometimes inconsistent application to our business. It may take years to
determine whether and how existing laws, such as those governing
intellectual property, privacy, libel, taxation, determination of proper
state jurisdiction taxation and the need to qualify to do business in a
particular state, apply to the Internet, Internet advertising and online
activities in general. Also, we have conducted trivia quizzes and other
contests and sweepstakes on our web site, which may be subject to gaming
and sweepstakes laws. Our attempts to comply with these laws may be
inadequate, in part because the effect of these laws on our activities is
often unclear. In addition, since our web site can be accessed from
foreign counties, our business may be subject to foreign laws and
regulations. Activities that may be acceptable in the United States may
not be acceptable in foreign jurisdictions.
We expect that regulation of the Internet and Internet advertising
will intensify. New laws could slow the growth in Internet use and
otherwise adversely affect the Internet as a commercial medium, which would
harm our business. Due to the proliferation of unsolicited email, almost
40 states have enacted legislation regulating unsolicited commercial email
including California, which recently enacted legislation that is the most
stringent spam legislation to date. Any pending court interpretations of
the California legislation which restrict permissioned e-mail marketing
could adversely affect our business. Several bills that would regulate
unsolicited, commercial email are also being considered at the federal
level. Additionally, for example, a number of proposals to restrict the
collection of information about Internet users and to tax Internet-based
transactions are under consideration by federal, state, local and foreign
governmental organizations. A three-year federal moratorium on new taxes on
Internet access expired in October 2001, and was extended in November 2001
for two years. This moratorium expired November 1, 2003, and the future
status of taxes on Internet transactions is uncertain. There is no federal
law preempting state tax laws or the levy of state sales taxes to online e-
commerce activities. The taxation of online transactions or other new
regulations could increase our costs of doing business or otherwise harm us
by making the Internet less attractive for consumers and businesses. The
application of existing laws such as those governing intellectual property
and privacy to the Internet and Internet advertising lends additional
uncertainty to our business.
Any application of existing laws and regulations to the Internet; new
legislation or regulation that imposes stricter restrictions on privacy,
consumer protection or advertising practices; any government investigation
of our privacy practices or other business methods; or the application of
laws from jurisdictions whose laws do not currently apply to us could:
. create uncertainty in the marketplace that could reduce demand
for our services;
. limit our ability to collect and to use data from our members,
which could prevent us from attracting and retaining
advertisers;
. result in expensive litigation, costly and disruptive efforts
to respond to governmental investigations and burdensome fines
or penalties;
. increase the cost of delivering our services to advertisers;
. reduce the effectiveness of our targeted promotional services;
or
. in some other manner harm our business.
OUR SERIES B PREFERRED STOCKHOLDER HAS THE ABILITY TO EXERCISE
SIGNIFICANT CONTROL OVER US WHICH MAY DETER THIRD PARTIES FROM ACQUIRING US
The holder of our Series B Preferred Stock has the ability to control
all matters requiring approval by our stockholders, including the election
and removal of directors and the approval of any merger, consolidation or
sale of all or substantially all of our assets. In addition, pursuant to
the terms of our Certificate of Incorporation, the Series B Preferred
stockholder is entitled to designate not less than a majority of the Board
of Directors of the Company. Among other limitations, without the approval
of the holders of at least a majority of the outstanding shares of Series B
Preferred Stock, we may not:
. amend our charter document or our bylaws;
. merge or consolidate with any other company or sell all or
substantially all of our assets;
. make acquisitions of other businesses or assets or enter into
joint ventures or partnerships with other entities that would
involve the payment of consideration of $1 million or more;
. purchase, redeem or otherwise acquire for value any shares of
our capital stock (with certain exceptions); or
. authorize or issue equity securities or securities exercisable
for or convertible into equity securities other than shares
issued for cash, shares issuable upon conversion and exercise
of securities outstanding on the date of issuance of the
Series B Preferred Stock, and shares issuable under our 2001
Stock Option Plan.
These restrictions provide the holder of the Series B Preferred Stock
with significant control over us and may discourage others from initiating
potential merger or other change of control transactions. In addition, if
the holder of the Series B Preferred Stock were to convert a portion of the
Series B Preferred Stock and sell the common stock issued on conversion,
the price of our common stock could decrease substantially.
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 investment portfolio
have expected maturities of three months or less, we believe that the fair
value of this portfolio or related income would not be impacted materially
by increases or decreases in interest rates. If market rates were to
increase immediately by 10% from levels on September 30, 2003, the fair
value of this investment portfolio would increase by an immaterial amount.
If market rates were to decrease immediately by 10% from levels on
September 30, 2003, the resulting decrease in interest earnings of our
investment portfolio would not have a material impact on our earnings as a
whole.
ITEM 4. CONTROLS AND PROCEDURES
Based upon an evaluation of our disclosure controls and procedures
performed by our management, with the participation of our chief executive
officer and chief financial officer, our chief executive officer and chief
financial officer have concluded that, as of September 30, 2003, our
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in the reports that we
issue or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission.
A control system, no matter how well designed and operated, can
provide only reasonable (not absolute) assurance that its objectives will
be met. Furthermore, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been
detected.
There was not any change in our internal control over financial
reporting during the quarter ended September 30, 2003 that has materially
affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are currently a defendant in one patent infringement lawsuit. For
a further discussion of legal proceedings, see "Legal Proceedings" in our
Annual Report on Form 10-K for the year ended December 31, 2002, and our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, both as
filed with the SEC, and the update below.
On November 15, 1999, Catalina Marketing filed a lawsuit against us
in the United States District Court for the Middle District of Florida.
The complaint alleged that our systems and methods infringed Catalina
Marketing's '041 Patent, and sought to enjoin us from further infringing
its patent. The case was transferred to the Northern District, which ruled
that we did not infringe the '041 Patent. On May 8, 2002, the Federal
Circuit affirmed-in-part, reversed-in-part, and vacated-in-part the non-
infringement ruling of the Northern District. The case was remanded to the
Northern District for further proceedings to determine whether we had any
liability for infringement of the '041 Patent. On June 25, 2003, the
Northern District issued a claim construction ruling construing claim terms
in dispute between the parties. Because Catalina Marketing agreed with us
that, based upon the Northern District's construction of several claim
terms of the '041 Patent, Catalina Marketing could not establish
infringement of the '041 Patent by us, on July 10 the parties asked the
Northern District to enter a final judgment of non-infringement in favor of
us. On September 4, 2003, Catalina Marketing appealed the final judgment
of the Northern District to the Federal Circuit; that appeal is currently
pending.
In March 2003, a customer claimed that we failed to deliver certain
services pursuant to the terms of a 2002 agreement with the customer. We
believe the services were delivered in accordance with the terms of the
agreement. In August 2002, we accrued a contingency loss of $70 in general
and administrative expenses as an estimate, at the time, of the cost of
resolving the issue. In October 2003, we reached agreement with the
customer to resolve this matter. The agreement involves the delivery of
additional services at no charge. In the three month period ended
September 30, 2003, we recorded an additional expense of $184 in general
and administrative expenses to reflect the cost of these services. Revenue
will be recorded in the period the services are delivered.
We may be involved in additional litigation, investigations or other
proceedings in the future. Separate lawsuits or other proceedings may be
brought against us to invalidate our patents or force us to change our
services or business methods. Any litigation, investigation or
proceedings, 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 September 30, 2003, a dividend in the amount of 3,129,994
shares of Series B Preferred Stock accrued, but had not been declared to
the holders of our Series B Preferred Stock. We declared and paid those
dividends on October 1, 2003.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At September 30, 2003, we were not in compliance with certain
financial covenants of the Senior Secured Loan. Defaults under the Senior
Secured Loan and the Amended and Restated Loan Agreement which cannot be
cured, as the Senior Secured Loan and Grid Note have cross-default
provisions and are cross-collateralized include:
.. our failure to achieve a prescribed amount of billings during 2002;
and
.. our failure to maintain a minimum level of working capital and ratio
of cash, cash equivalents and certain receivables over current
liabilities; and
.. our failure to maintain a minimum ratio of total indebtedness over
tangible net worth.
Consequently, the Senior Secured Loan and all accrued interest
thereon are immediately due and payable at the option of Landmark.
Accordingly, we have classified the Senior Secured Loan, including
principal and the paid-in-kind interest which has been compounded and
accrued on the principal balance, totaling $6,018, as currently payable as
of September 30, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 31.1 Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) (Section 302 of
the Sarbanes-Oxley Act of 2002).
Exhibit 31.2 Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) (Section 302 of
the Sarbanes-Oxley Act of 2002).
Exhibit 32 Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
(b) Reports on Form 8-K:
On July 24, 2003, the Company filed a Current Report on
Form 8-K in which the Company furnished under Items 9 and 12
information regarding the Company's results of operations and
financial position as of, and for the three month period ended,
June 30, 2003.
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.
COOLSAVINGS, INC.
Dated: November 10, 2003 /s/ Matthew Moog
-----------------------------------
Matthew Moog
President and Chief Executive Officer
(duly authorized officer)
Dated: November 10, 2003 /s/ David B. Arney
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David B. Arney
Senior Vice President of Operations
and Chief Financial Officer
(principal financial and
accounting officer)