SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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.com inc.
(Exact name of registrant as specified in its charter)
Michigan 38-3216102
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
360 N. Michigan Avenue Suite 1900
Chicago, Illinois 60601
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (312) 224-5000
Former name, former address and former fiscal year, if changed since last report
8755 West Higgins Road Suite 100 Chicago, Illinois 60631
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 No X
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2000
-------------------------- ----------------------------
Common stock, no par value 39,093,660
<PAGE>
coolsavings.com inc.
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets
June 30, 2000 and December 31, 1999 F-2
Condensed Statements of Operations
Three and Six Months
Ended June 30, 2000 and 1999 F-3
Condensed Statement of Changes
in Stockholders' Equity
Six Months Ended June 30, 2000 F-4
Condensed Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 F-5
Notes to Condensed Financial Statements F-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations F-10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk F-16
PART II OTHER INFORMATION
Item 1. Legal Proceedings F-17
Item 2. Changes in Securities and Use of Proceeds F-18
Item 4. Submission of Matters to a Vote of Security Holders F-19
Item 6. Exhibits and Reports on Form 8-K F-19
SIGNATURES F-20
F-1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COOLSAVINGS.COM INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- ------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 26,110,000 $ 17,489,000
Restricted cash 100,000 95,000
Accounts receivable, net of allowance of
$617,000 and $118,000 at June 30, 2000
and December 31, 1999, respectively 6,499,000 4,382,000
Prepaid advertising 935,000 2,787,000
Prepaid assets 697,000 290,000
Other assets 453,000 498,000
------------ ------------
Total current assets 34,794,000 25,541,000
------------ ------------
Property and equipment 9,192,000 4,985,000
Less accumulated depreciation and amortization (1,627,000) (936,000)
------------ ------------
7,565,000 4,049,000
Intangible assets, patents and licenses,
net of accumulated amortization of $41,000 784,000 --
------------ ------------
Total assets $ 43,143,000 $ 29,590,000
============ ============
LIABILITIES
Currrent liabilities:
Accounts payable, including amounts
due to related parties of $293,000
and $25,000 at June 30, 2000 and
December 31, 1999, respectively $ 5,518,000 $ 2,345,000
Cash overdraft 506,000 --
Accrued marketing expense 2,565,000 1,057,000
Other accrued liabilities 2,374,000 775,000
Deferred revenue 1,126,000 418,000
Current maturities of long-term debt 1,070,000 247,000
Convertible subordinated notes payable,
including $3,562,000 due to related parties -- 4,996,000
------------ ------------
Total current liabilities 13,159,000 9,838,000
------------ ------------
Long-term debt, less current maturities 2,384,000 632,000
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUTIY
Series A convertible preferred stock,
no par value, 5,000 shares authorized,
zero shares and 2,197.650 shares issued and
outstanding at June 30, 2000 and December 31, 1999
(liquidation preference of $9,100.63 per share) -- --
Common stock, no par value, 69,000,000 shares authorized,
39,093,660 shares and 31,715,449 shares issued and
outstanding at June 30, 2000 and December 31, 1999 73,659,000 27,845,000
Additional paid-in capital (149,000) 15,204,000
Deferred stock compensation (1,980,000) --
Accumulated deficit (40,413,000) (21,112,000)
Notes receivable from related parties (3,517,000) (2,817,000)
------------ ------------
Total stockholders' equity 27,600,000 19,120,000
------------ ------------
Total liabilities and stockholders' equity $ 43,143,000 $ 29,590,000
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-2
<PAGE>
COOLSAVINGS.COM INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 8,948,000 $ 2,075,000 $ 17,034,000 $ 2,965,000
Cost of revenues 1,363,000 343,000 2,432,000 599,000
------------ ------------ ------------ ------------
Gross profit 7,585,000 1,732,000 14,602,000 2,366,000
Operating expenses:
Sales and marketing 10,184,000 1,819,000 20,449,000 3,144,000
Product development 2,897,000 1,129,000 4,502,000 2,127,000
General and administrative, exclusive of
compensation related to stock options 3,874,000 1,281,000 6,734,000 2,286,000
Compensation related to stock options 990,000 -- 1,980,000 --
------------ ------------ ------------ ------------
Total operating expenses 17,945,000 4,229,000 33,665,000 7,557,000
------------ ------------ ------------ ------------
Loss from operations (10,360,000) (2,497,000) (19,063,000) (5,191,000)
Other income (expense):
Interest and other income 360,000 124,000 578,000 200,000
Interest expense (118,000) (19,000) (261,000) (25,000)
Interest expense representing beneficial
coversion feature of subordinated notes (555,000) -- (555,000) --
------------ ------------ ------------ ------------
(313,000) 105,000 (238,000) 175,000
------------ ------------ ------------ ------------
Loss before income taxes (10,673,000) (2,392,000) (19,301,000) (5,016,000)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss (10,673,000) (2,392,000) (19,301,000) (5,016,000)
Deemed dividend representing the
beneficial conversion feature
of preferred stock (14,901,000) -- (19,868,000) --
------------ ------------ ------------ ------------
Loss applicable to common shareholders $(25,574,000) $ (2,392,000) $ (39,169,000) $ (5,016,000)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.72) $ (0.08) $ (1.17) $ (0.18)
============ ============ ============ ============
Weighted average shares used in the calculation
of basic and diluted net loss per share 35,281,040 30,488,448 33,503,310 27,883,439
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-3
<PAGE>
COOLSAVINGS.COM INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
----------------------- ----------------------------- Paid-in
Shares Amount Shares Amount Capital
----------- ---------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Balances, January 1, 2000 2,197.650 -- 31,715,449 $27,845,000 $ 15,204,000
Issuances of common stock,
net of issuance costs 3,300,000 19,625,000
Common stock issued for
convertible preferred stock (2,197.650) 2,822,096 19,868,000
Deemed dividend representing the
beneficial conversion feature
of preferred stock (19,868,000)
Common stock issued for
convertible subordinated notes 793,068 4,996,000
Deemed dividend representing the
beneficial conversion feature
of convertible subordinated notes 555,000
Deferred stock compensation 3,960,000
Compensation expense recognized
Issue common stock for patent rights 83,334 500,000
Exercise of stock options 379,730 825,000
Redemption of fractional shares (17)
Net loss
----------- ---------- -------------- ------------- --------------
Balances, June 30, 2000 -- -- 39,093,660 $73,659,000 $ (149,000)
=========== ========== ============== ============= ==============
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-4
<PAGE>
COOLSAVINGS.COM INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY - continued
(Unaudited)
<TABLE>
<CAPTION>
Notes
Deferred Receivable Total
Stock Accumulated From Related Stockholders'
Compensation Losses Parties Equity
------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Balances, January 1, 2000 $(21,112,000) $ (2,817,000) $19,120,000
Issuances of common stock,
net of issuance costs 19,625,000
Common stock issued for
convertible preferred stock 19,868,000
Deemed dividend representing the
beneficial conversion feature
of preferred stock (19,868,000)
Common stock issued for
convertible subordinated notes 4,996,000
Deemed dividend representing the
beneficial conversion feature
of convertible subordinated notes 555,000
Deferred stock compensation $(3,960,000) -
Compensation expense recognized 1,980,000 1,980,000
Issue common stock for patent rights 500,000
Exercise of stock options (700,000) 125,000
Redemption of fractional shares -
Net loss (19,301,000) (19,301,000)
------------- --------------- --------------- ---------------
Balances, June 30, 2000 $(1,980,000) $(40,413,000) $(3,517,000) $27,600,000
============= =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-4a
<PAGE>
COOLSAVINGS.COM INC.
CONDENSED STATEMENTS OF CASHFLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
2000 1999
------------ ------------
Cash flows used in operating activities:
<S> <C> <C>
Net loss $ (19,301,000) $ (5,016,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 808,000 211,000
Loss on disposal of property and equipment 99,000 --
Stock option compensation 1,980,000 --
Provision for doubtful accounts 562,000 11,000
Amortization of prepaid advertising 857,000 --
Amortization of debt discount 555,000 --
Changes in assets and liabilities:
Increase in restricted cash (5,000) --
Increase in accounts receivable (2,679,000) (977,000)
(Increase) decrease in prepaid and other current assets 633,000 (575,000)
Increase in accounts payable 2,641,000 889,000
Increase in deferred revenue 708,000 171,000
Increase in accrued and other liabilities 3,094,000 698,000
------------ ------------
Net cash flows used in operating activities (10,048,000) (4,588,000)
------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment (4,383,000) (849,000)
Cash paid for intangible assets (325,000) --
Capitalized software costs -- (492,000)
------------ ------------
Net cash used in investing activities (4,708,000) (1,341,000)
------------ ------------
Cash flows from financing activities:
Advances on notes payable -- 263,000
Repayment of short-term debt (116,000) --
Increase in cash overdraft 506,000 --
Proceeds from long-term borrowings 2,692,000 --
Proceeds from exercise of stock options 125,000 --
Proceeds from convertible notes payable -- 1,500,000
Proceeds from issuance of common stock 23,100,000 8,500,000
Cash paid for issuance costs (2,930,000) --
------------ ------------
Net cash provided by financing activities 23,377,000 10,263,000
------------ ------------
Net increase in cash 8,621,000 4,334,000
Cash and cash equivalents, beginning of period 17,489,000 4,895,000
------------ ------------
Cash and cash equivalents, end of period $ 26,110,000 $ 9,229,000
============ ============
Non-cash investing and financing activity:
Common stock issued in exchange
for patent rights $ 500,000 --
Common stock issued for
convertible preferred stock $ 19,868,000 --
Common stock issued for
convertible subordinated notes $ 4,996,000 --
Issuance of common stock in exchange
for stockholder notes upon exercise
of stock options and warrants $ 700,000 $ 2,315,000
Issuance of common stock
in exchange for advertising -- $ 3,000,000
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-5
<PAGE>
COOLSAVINGS.COM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
coolsavings.com inc. (the "Company") is a provider of e-marketing solutions
used by offline and online advertisers to build one-to-one customer
relationships. The Company's advertisers include national and local
brick-and-mortar retailers, online merchants, consumer packaged goods
manufacturers and leading service providers. The Company has built a total
infrastructure solution that delivers multiple incentive and promotional
strategies, including targeted coupons and e-mail, loyalty points, category
newsletters, rebates, savings notices, samples, gift certificates and trial
offers.
The Company has sustained significant net losses and negative cash flows
from operations since its inception. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations or raise additional financing through public or
private equity financing, bank financing, or other sources of capital. During
1999, the Company raised approximately $33.0 million from sales of common stock,
preferred stock and convertible subordinated notes. In January 2000, the Company
obtained a line of credit facility providing for borrowings of up to $6.5
million and in May 2000 the Company completed an initial public offering of
shares of its common stock resulting in proceeds to the Company of approximately
$20.0 million, after deducting underwriters discounts and commissions and other
related offering expenses. Management believes current working capital and other
funding sources are sufficient to fund operations through the year 2000.
On April 7, 2000 the Board of Directors approved a 1,150 for 1 common stock
split. All share and per share amounts have been retroactively restated to
reflect the split. On April 7, 2000, the Company's articles of incorporation
were restated to increase the authorized capital stock to 100,000,000 shares of
common stock and 10,000,000 shares of preferred stock.
These condensed 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 prospectus
related to its initial public offering. Accordingly, these financial statements
should be read in conjunction with the financial statements and related notes in
the Company's prospectus related to its initial public offering. The condensed
balance sheet as of December 31, 1999 appearing herein was derived from the
audited financial statements in such prospectus.
In the opinion of the Company, the accompanying condensed consolidated
financial statements reflect all normal recurring adjustments necessary to
present fairly the financial position as of June 30, 2000, and the results of
operations and changes in cash flows for the six month periods ended June 30,
2000 and 1999. Reported interim results of operations are based in part on
estimates that may be subject to year-end adjustments. In addition, these
quarterly results of operations are not necessarily indicative of those expected
for the year.
2. Initial Public Offering
On May 19, 2000 the Company completed its initial public offering ("IPO")
in which the Company sold 3,300,000 shares of its common stock, resulting in
proceeds to the Company of approximately $20.0 million, after deducting
underwriters discounts and commissions and other related offering expenses.
During 1999, the Company issued $4,996,384 of unsecured convertible
subordinated notes with interest at a rate of 10.0% per annum. Upon the closing
of the Company's IPO, all of the convertible subordinated notes automatically
converted into 793,068 shares of common stock, based on the principal amount due
divided by 90% of the public offering price established in the IPO.
Based on the conversion ratio of the convertible subordinated notes,
management has determined that the discount received by the note holders
constitutes a beneficial conversion feature under the Emerging Issues Task Force
("EITF") Issue 98-5. The value of the beneficial conversion feature was computed
at $555,000 and was recorded by the Company as additional paid in capital and
interest expense upon the completion of the IPO.
F-6
<PAGE>
COOLSAVINGS.COM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
In December 1999, the Company issued 2,197.650 shares of no par value
Series A convertible preferred stock ("Convertible Preferred") at a price of
$9,100.63 per share and received proceeds of $20.0 million. The Company incurred
$132,000 of issuance costs. Upon the closing of the Company's IPO, the entire
Convertible Preferred automatically converted into 2,822,096 shares of the
Company's common stock.
The EITF Issue 98-5 requires that beneficial conversion features present in
the terms of convertible securities should be recognized and measured by
allocating a portion of the proceeds equal to the value of that feature to
additional paid-in capital. The value of the beneficial conversion feature
related to the preferred stock offering is in excess of the $19.9 million net
proceeds. Accordingly, the Company has allocated the full amount of net proceeds
to the beneficial conversion feature and recorded $19.9 million as additional
paid in capital as of December 31, 1999. The beneficial conversion feature was
recognized through accretion using the interest method as a deemed dividend
during 2000 until the conversion resulting from the IPO. Accordingly, the
Company recorded deemed dividends of approximately $14.9 million and $19.9
million during the three and six months ended June 30, 2000.
3. Related Party Transaction
On April 3, 2000, the Company's Chairman and Chief Executive Officer
exercised his vested options to purchase 322,000 shares of the Company's common
stock in exchange for the delivery of a $700,000 promissory note. The note
provides for interest at the rate of 6.71% per annum, payable annually. The
principal amount of the note and all unpaid interest is due on April 3, 2004.
The note is collateralized by the shares of common stock issued upon exercise of
the related stock options and the maker of the note is personally liable for up
to 20% of the face value of the note, plus accrued interest.
4. Bank Lines of Credit:
At June 30, 2000 the Company had outstanding borrowings totaling $3,454,000
under its line of credit facilities at interest rates varying from 8.75% to
10.75%. The credit agreements provide for direct borrowings and letters of
credit. At June 30, 2000, the Company maintained letters of credit totaling
approximately $1.7 million to collateralize lease deposits on all of its office
facilities. Borrowings under the credit agreements are collateralized by trade
accounts receivable and fixed assets. At June 30, 2000, the Company had unused
borrowings of approximately $1.4 million available under a line of credit
facility. The line of credit agreements require certain minimum tangible capital
funds and other financial ratios to be maintained. Additionally, under one
credit facility, the Company may not purchase or retire any outstanding shares
or alter or amend its capital structure without the prior consent of the lender.
The Company was not in compliance with certain non-financial covenants of one of
its credit facilities during 2000. Waivers of the respective covenants have been
received from the lender.
5. Commitments and Contingencies:
Litigation: The Company is a defendant in business-related litigation.
Management does not believe the outcome of such litigation will have a material
adverse effect on the Company's financial position, results of operations or
cash flows. Effective June 30, 2000, the Company settled one patent infringement
dispute. As a result of the settlement agreement, the Company will receive a
series of future royalty payments and for licensing the use of its patent.
Member Incentive Program: In March 2000, the Company entered into a two
year agreement with a developer of web-based loyalty incentives programs. Under
this agreement, the Company co-developed a custom loyalty program for its
members using software that it licensed from the developer. The agreement
commits the Company to spend at least $1.0 million on the program during the
first year of the contract term and at least $2.0 on the program during the
second year of the contract term.
F-7
<PAGE>
COOLSAVINGS.COM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
6. Earnings Per Share:
Financial Accounting Standards Board ("FASB") Statement of Accounting
Standards (SFAS) No. 128 requires companies to provide a reconciliation of the
numerator and denominator of the basic and diluted earnings per share
computations. The calculation below provides net loss, weighted average common
shares outstanding and the resultant net loss per share for both basic and
diluted earnings per share for the three and six months ended June 30, 2000 and
1999.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Numerator:
<S> <C> <C> <C> <C>
Net loss $(10,673,000) $ (2,392,000) $(19,301,000) $ (5,016,000)
Deemed dividend relating to
convertible preferred stock* (14,901,000) -- (19,868,000) --
------------ ------------ ------------ ------------
Net loss available to common stockholders $(25,574,000) $ (2,392,000) $(39,169,000) $ (5,016,000)
============ ============ ============ ============
Denominator:
Weighted average
common shares 35,281,040 30,488,448 33,503,310 27,883,439
============ ============ ============ ============
Earnings per share:
Basic and diluted $ (0.72) $ (0.08) $ (1.17) $ (0.18)
============ ============ ============ ============
<FN>
* Represents a non-cash charge arising primarily from the automatic
conversion of preferred stock into common stock upon the closing of
the Company's IPO.
</FN>
</TABLE>
7. Stock Option Compensation:
On December 30, 1999, the Company entered into a termination and consulting
agreement with its former President and Chief Operating Officer. In conjunction
with the termination and consulting agreement, the Company agreed, effective
January 6, 2000, to extend the expiration date of the former president and chief
operating officer's options to purchase an aggregate of 661,250 shares of the
Company's common stock at a price of $2.17 per share until the first anniversary
of the termination of the consulting agreement. The extension of the stock
option agreements resulted in a remeasurement of the compensation cost
associated with the stock options. Accordingly, a total non-cash compensation
charge of $3,960,000 will be recognized on a straight-line basis during 2000.
The Company has recognized a $990,000 compensation charge during the second
quarter of 2000 and the June 30, 2000 balance sheet reflects deferred stock
compensation expense of $1,980,000. In addition, previously reported results for
the first quarter of 2000 have been revised to include a $990,000 compensation
charge applicable to this period. A summary of the revised first quarter 2000
results of operations and the effect on the components of stockholders' equity
at March 31, 2000 is as follows:
Three Months Ended March 31, 2000
---------------------------------
Previously
Reported As Revised
------------ ------------
Net revenues $ 8,086,000 $ 8,086,000
============ ============
Loss from operations $ (7,712,000) $ (8,702,000)
============ ============
Net loss $ (7,638,000) $ (8,628,000)
============ ============
Loss available to
common shareholders $(12,605,000) $(13,595,000)
============ ============
Basic and diluted loss
per common share $ (0.40) $ (0.43)
============ ============
F-8
<PAGE>
COOLSAVINGS.COM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 2000
----------------------------
Previously
Reported As Revised
------------ ------------
Stockholders' Equity:
Series A convertible preferred stock $ 4,967,000 $ 4,967,000
Common stock 27,948,000 27,948,000
Additional paid-in capital 14,197,000
10,237,000
Deferred stock compensation -- (2,970,000)
Accumulated deficit (28,750,000) (29,740,000)
Notes receivable from related parties (2,817,000) (2,817,000)
------------ ------------
Total stockholders' equity $ 11,585,000 $ 11,585,000
============ ============
8. Recent Accounting Pronouncements
In May 2000, the EITF released Issue 00-2, "Accounting for Web Site
Development Costs". EITF Issue 00-2 establishes standards for determining the
capitalization or expensing of incurred costs relating to the development of
Internet web sites based upon the respective stage of development. The Issue is
effective for fiscal quarters beginning after June 30, 2000 (including costs
incurred for projects in process at the beginning of the quarter of adoption).
The Company plans to adopt the provisions of EITF 00-2 effective July 1, 2000.
Our website development costs for all periods through June 30, 2000 have been
expensed. The capitalization of a major portion of our website development costs
could have a significant effect on the results of our operations in the
remainder of fiscal year 2000 and future periods.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25" (the "Interpretation"). The Interpretation is intended to
clarify certain issues that have arisen in practice since the issuance of APB
25. The Company has adopted the provisions of this pronouncement during the
first quarter of 2000.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements", which provides additional
guidance in applying generally accepted accounting principles for revenue
recognition. We believe our revenue recognition policy is in compliance with SAB
No. 101.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires recognition of all derivatives as assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. The statement, as amended, is effective for fiscal years beginning after
June 15, 2000. As we do not have any derivative instruments or hedging
activities, SFAS No. 133 is not expected to have a material effect on our
financial results.
F-9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement
This Report contains forward-looking statements based on our current
expectations, estimates and projections about our industry, management's beliefs
and certain assumptions made by us. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," "may," "will" and
variations of these words or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. Such statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, our actual results could differ materially and adversely
from those anticipated in any forward-looking statements as a result of numerous
factors, many of which are described in the "Risk Factors" section in our
prospectus filed with the SEC on May 22, 2000. You should carefully consider
those risks, in addition to the other information in this Report and in our
other filings with the SEC, before deciding to invest in our company or to
maintain or increase your investment. We undertake no obligation to revise or
update publicly any forward-looking statements for any reason.
Overview
We are a provider of e-marketing solutions used by offline and online
advertisers to build one-to-one customer relationships. Our advertisers include
national and local brick-and-mortar retailers, online merchants, consumer
packaged goods manufacturers and leading service providers. We have built a
total infrastructure solution that delivers multiple incentive and promotional
strategies, including targeted coupons and e-mail, loyalty points, category
newsletters, rebates, savings notices, samples, gift certificates and trial
offers. We were incorporated in December 1994 as Interactive Coupon Marketing
Group, Inc. and changed our corporate name to coolsavings.com inc. in November
1998. From inception through February 1997, our primary activities consisted of
initiating sales and marketing efforts, developing our business model, building
our software and hardware infrastructure, developing and protecting our
intellectual property, raising capital and recruiting employees. We launched our
web site in February 1997 and thereafter began generating revenues.
We generate substantially all of our revenues by providing online
marketing, or e-marketing, services to our advertisers. Approximately 1% of our
revenues are generated from royalty and license fees and other miscellaneous
sources. We charge our advertisers on a variety of bases, the most common of
which include:
o the number of offers delivered to members, commonly sold on a cost per
thousand, or CPM, basis;
o the number of times members click on an incentive linking the member
to the advertiser's web site (known as a click-through response);
o the number of purchases made or qualified leads generated; and
o the number of registered members in our database.
Our pricing depends upon a variety of factors, including, without
limitation, the degree of targeting, the duration of the advertising contract
and the number of offers delivered. The degree of targeting refers to the number
of identified household or member attributes, such as gender, age or product or
service preferences, used to select the audience for an offer. Generally, the
rates we charge our advertisers increase as the degree of targeting and
customization increases. Revenues subject to time-based contracts are recognized
ratably over the duration of the contract. For contracts based on certain
performance or delivery criteria, revenues are recognized in the month
performance is delivered to the customer. Most of our advertising contracts have
stated terms of less than one year and include earlier termination provisions.
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Our revenues for each period depend on a number of factors, including the
number of advertisers sending promotional offers to our members, the size of our
membership base and the responsiveness of our members to each promotion. We
believe that our revenues will be subject to seasonal fluctuations in accordance
with general patterns of retail advertising spending, which is typically highest
during the fourth quarter. In addition, expenditures by advertisers tend to be
cyclical, reflecting overall general economic conditions and consumer buying
patterns.
Our cost of revenues consists primarily of Internet connection charges, web
site equipment depreciation, salaries of operations personnel, fulfillment costs
related to member loyalty incentives and other related operations costs. We have
recently expanded, and expect to continue to expand significantly, our web
server capacity and our investment in data mining tools and personnel. This
requires us to commit relatively large fixed expenses in advance of potential
future revenues. As a result, we expect to incur higher cost of revenues during
future periods. We have added, and anticipate that we will continue to add, new
advertisers, necessitating this investment in infrastructure. Due to these
anticipated increases in our web server capacity and other infrastructure
expenditures, our fixed costs to operate our business will rise and our gross
profit will suffer in the near term until increased revenues are realized. The
demand for our services is subject to seasonal variations. We will likely
experience declines in our gross margin from quarter to quarter.
We have incurred significant losses since our inception. As of June 30,
2000, our accumulated deficit was approximately $40.4 million. We expect to
continue to incur significant operating losses and capital expenditures. In
particular, we expect to invest heavily in sales and marketing activities,
hiring new personnel, enhancing services and technology, expanding and
relocating facilities and defending intellectual property rights.
Results of Operations
The following is a table of our results of operations for the three and six
months ended June 30, 2000 and 1999 expressed as a percentage of net revenues
represented by each line item. Figures below are rounded to the nearest whole
percentage, and thus line items representing subtotal and total percentages may
differ, due to rounding, from the sum of the percentages for each line item.
Three Months Six Months
Ended June 30 , Ended June 30,
--------------- ---------------
2000 1999 2000 1999
----- ----- ----- -----
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 15.2 16.5 14.3 20.2
----- ----- ----- -----
Gross profit (loss)
84.8 83.5 85.7 79.8
Operating expenses:
Sales and marketing 113.8 87.7 120.0 106.0
Product development 32.4 54.4 26.4 71.7
General and administrative 43.3 61.7 39.5 77.1
Stock option compensation 11.1 -- 11.6 --
----- ----- ----- -----
Total operating expenses 200.6 203.8 197.5 254.8
----- ----- ----- -----
Loss from operations (115.8) (120.3) (111.8) (175.0)
Other income:
Interest income (expense), net (3.5) 5.0 (1.4) 5.9
----- ----- ----- -----
Net loss (119.3)% (115.3)% (113.2)% (169.1)%
===== ===== ===== =====
Three Months Ended June 30, 2000 and 1999
Net Revenues
Net revenues increased 331% to $8.9 million in the three months ended June
30, 2000 from $2.1 million in the three months ended June 30, 1999. The revenue
increase was attributable to our continued ability to rapidly expand our member
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base, to sign up additional offline and online advertisers, and to expand
programs with existing advertisers into more comprehensive promotion programs,
including targeted e-mail, category newsletters, printable coupons, e-coupons,
savings notices, rebates, lead generation, loyalty points and free samples. Our
member base grew to over 8.4 million registered members at June 30, 2000 from
approximately 3.3 million at June 30, 1999.
Gross Profit
Gross profit increased to $7.6 million in the three months ended June 30,
2000, from $1.7 million in the three months ended June 30, 1999. Gross profit
increased as a percentage of net revenues to 84.8% in the three months ended
June 30, 2000, from 83.5% in the three months ended June 30, 1999. The absolute
dollar increase in gross profit and the increase in gross profit as a percentage
of net revenues is a result of net revenues increasing more rapidly than cost of
revenues, which consists primarily of Internet connection charges, web site
equipment depreciation, salaries of operations personnel and other related
operations costs.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
advertising, salaries of sales and marketing personnel, commissions paid to our
sales personnel and other marketing related expenses. Sales and marketing
expenses increased to $10.2 million, or 114% of net revenues, in the three
months ended June 30, 2000, from $1.8 million, or 87.7% of net revenues, in the
three months ended June 30, 1999. The $8.4 million increase in sales and
marketing expenses was primarily due to increased expenses associated with
promotional and marketing efforts, the hiring of additional sales and marketing
personnel and increased sales commissions. Our promotional and marketing efforts
included online advertising, such as banner advertisements on high-traffic web
sites, used to acquire member registrations. This online advertising is placed
primarily with operators of high-traffic web sites who are paid a fee on the
basis of each member registration we receive, each impression delivered or each
click-through to our web site. We also place some online advertising with
operators of lower traffic web sites that generally receive a fee for each
member registration we receive. Fees to operators of web sites are expensed in
the periods incurred. Our promotional and marketing efforts also include offline
advertising, consisting of cable television and trade print advertising. Despite
our significant growth in net revenues, sales and marketing expenses increased
as a percentage of net revenues due to our offline advertising efforts during
fiscal year 2000. We spent approximately $7.0 million combined on online and
offline advertising during the three months ended June 30, 2000 as compared to
approximately $900,000 during the three months ended June 30, 1999. The majority
of the increase in advertising was for our offline advertising program. Our
advertising program has increased our brand awareness which, along with a more
cost effective mix of online and offline advertising, has resulted in a
significant reduction in the average cost of registering new members during
fiscal year 2000. During the three months ended June 30, 2000, our blended
member acquisition costs (blended costs include both online and offline
advertising) were $3.71 per member as compared to $5.14 per member in the three
months ended March 31, 2000 and $8.15 per member in the three months ended
December 31, 1999. We expect our brand recognition will permit us to continue to
pursue a more cost effective customer acquisition strategy with reduced emphasis
on more costly offline advertising.
Product Development. Product development expenses consist primarily of
salaries of software development personnel and expenditures related to
third-party technical consultants. Product development expenses increased to
$2.9 million, or 32.4% of net revenues, in the three months ended June 30, 2000,
from $1.1 million, or 54.4% of net revenues, in the three months ended June 30,
1999. The absolute dollar increase in product development expenses was primarily
due to expenditures related to third-party technical consultants and the hiring
of additional personnel to enhance the features and functionality of our web
site. In recent months, the company has aggressively increased its recruiting of
software development personnel to reduce the use of more costly third-party
technical consultants. Product development expenses decreased as a percentage of
net revenues due to the growth in net revenues. To date, all product development
expenditures have been expensed as incurred.
General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive and administrative
personnel, facilities, professional services, including legal expenses relating
to protection of our patent rights, travel and other general corporate expenses.
General and administrative expenses increased to $3.9 million, or 43.3% of net
revenues, in the three months ended June 30, 2000, from $1.3 million, or 61.7%
of net revenues, in the three months ended June 30, 1999. The absolute dollar
increase in general and administrative expenses was primarily due to the
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hiring of additional personnel to support the growth of our business, recruiting
costs related to filling key management positions and legal fees. General and
administrative expenses decreased as a percentage of net revenues due to the
growth in net revenues. In recent months we have incurred higher occupancy
expense associated with our move to larger office space and we have expanded our
administrative systems to support our planned growth and operations as a public
company.
Stock Option Compensation. As discussed in Note 7 to our condensed
financial statements, we have recognized a stock option compensation charge of
$990,000 during the second quarter of 2000.
Other income (expense), net. In the three months ended June 30, 2000 we
incurred net interest expense of $313,000 as compared to net interest income of
$105,000 in the three months ended June 30, 1999. Upon the closing of the our
IPO, our convertible subordinated notes (plus any accrued but unpaid interest)
automatically converted into shares of our common stock based on the principal
divided by 90% of the public offering price. Based on the conversion ratio of
the convertible subordinated notes, we determined that the discount received by
the note holders constituted a beneficial conversion feature under the EITF
Issue 98-5. The value of the beneficial conversion feature was computed at
$555,000 and was recorded by the Company as additional paid in capital and
interest expense upon the completion of the IPO.
Income Taxes
As of December 31, 1999, we had approximately $23.5 million of federal and
state net operating loss carryforwards, which may be available to offset future
taxable income. Our federal and state net operating loss carryforwards expire
beginning in 2018. We were unable to recognize an income tax benefit in
connection with the company's 2000 and 1999 pre-tax losses due to the company's
tax loss carryforwards and the uncertainty of future taxable income.
Six Months Ended June 30, 2000 and 1999
Net Revenues
Net revenues increased 475% to $17.0 million in the six months ended June
30, 2000 from $3.0 million in the six months ended June 30, 1999. The revenue
increase was attributable to our continued ability to rapidly expand our member
base, to sign up additional offline and online advertisers, and to expand
programs with existing advertisers into more comprehensive promotion programs,
including targeted e-mail, category newsletters, printable coupons, e-coupons,
savings notices, rebates, lead generation, loyalty points and free samples. Our
member base grew to over 8.4 million registered members at June 30, 2000 from
approximately 3.3 million at June 30, 1999.
Gross Profit
Gross profit increased to $14.6 million in the six months ended June 30,
2000, from $2.4 million in the six months ended June 30, 1999. Gross profit
increased as a percentage of net revenues to 85.7% in the six months ended June
30, 2000, from 79.8% in the six months ended June 30, 1999. The absolute dollar
increase in gross profit and the increase in gross profit as a percentage of net
revenues is a result of net revenues increasing more rapidly than cost of
revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $20.4
million, or 120% of net revenues, in the six months ended June 30, 2000, from
$3.1 million, or 106% of net revenues, in the six months ended June 30, 1999.
The $17.3 million increase in sales and marketing expenses was primarily due to
increased expenses associated with promotional and marketing efforts, the hiring
of additional sales and marketing personnel and increased sales commissions.
Despite our significant growth in net revenues, sales and marketing expenses
increased as a percentage of net revenues due to our offline advertising efforts
during fiscal year 2000. We spent approximately $15.0 million combined on online
and offline advertising
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during the six months ended June 30, 2000 as compared to approximately $1.6
million during the six months ended June 30, 1999. The majority of the increase
in advertising was for our offline advertising. Our advertising program has
increased our brand awareness which, along with a more cost effective mix of
online and offline advertising, has resulted in a significant reduction in the
average cost of registering new members during fiscal year 2000. We expect our
brand recognition will permit us to continue to pursue a more cost effective
customer acquisition strategy with reduced emphasis on more costly offline
advertising.
Product Development. Product development expenses increased to $4.5
million, or 26.4% of net revenues, in the six months ended June 30, 2000, from
$2.1 million, or 71.7% of net revenues, in the six months ended June 30, 1999.
The absolute dollar increase in product development expenses was primarily due
to expenditures related to third-party technical consultants and the hiring of
additional personnel to enhance the features and functionality of our web site.
In recent months, the company has aggressively increased its recruiting of
software development personnel to reduce the use of more costly third-party
technical consultants. Product development expenses decreased as a percentage of
net revenues due to the growth in net revenues. To date, all product development
expenditures have been expensed as incurred.
General and Administrative. General and administrative expenses increased
to $6.7 million, or 39.5% of net revenues, in the six months ended June 30,
2000, from $2.3 million, or 77.1% of net revenues, in the six months ended June
30, 1999. The absolute dollar increase in general and administrative expenses
was primarily due to the hiring of additional personnel to support the growth of
our business, recruiting costs related to filling key management positions and
legal fees. General and administrative expenses decreased as a percentage of net
revenues due to the growth in net revenues. In recent months we have incurred
higher occupancy expense associated with our move to larger office space and we
expanded our administrative systems to support our planned growth and operations
as a public company.
Stock Option Compensation. As discussed in Note 7 to our condensed
financial statements, we have recognized a stock option compensation charge of
$1,980,000 million during the six months ended June 30, 2000.
Other income (expense), net. In the six months ended June 30, 2000 we
incurred net interest expense of $238,000 as compared to net interest income of
$175,000 in the six months ended June 30, 1999. Upon the closing of the our IPO,
our convertible subordinated notes (plus any accrued but unpaid interest)
automatically converted into shares of our common stock based on the principal
divided by 90% of the public offering price. Based on the conversion ratio of
the convertible subordinated notes, we determined that the discount received by
the note holders constituted a beneficial conversion feature under the EITF
Issue 98-5. The value of the beneficial conversion feature was computed at
$555,000 and was recorded by the Company as additional paid in capital and
interest expense upon the completion of the IPO.
Income Taxes
As of December 31, 1999, we had approximately $23.5 million of federal and
state net operating loss carryforwards, which may be available to offset future
taxable income. Our federal and state net operating loss carryforwards expire
beginning in 2018. We were unable to recognize an income tax benefit in
connection with the company's 2000 and 1999 pre-tax losses due to the company's
tax loss carryforwards and the uncertainty of future taxable income.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the
private placement of our capital stock and convertible subordinated notes. On
May 19, 2000 we completed an IPO of 3,300,000 shares of our common stock,
resulting in proceeds to us of approximately $20,000,000, after deducting
underwriters discounts and commissions and other related offering expenses. Upon
the closing of the IPO, all of our unsecured convertible subordinated notes with
a principal balance of $4,996,000, plus accrued interest, automatically
converted into 793,068 shares of our common stock and all of our Series A
convertible preferred stock issue automatically converted into 2,822,096 shares
of our common stock. As of June 30, 2000, we had approximately $26.1 million in
cash and cash equivalents.
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<PAGE>
Net cash used in operating activities was $10.0 million and $4.6 million in
the six month periods ended June 30, 2000 and 1999, respectively. In each
period, net cash used in operating activities resulted primarily from our net
losses and increases in accounts receivable, partially offset by increases in
accounts payable and accrued expenses. During the six months ended June 30,
2000, we had non-cash expenses totaling approximately $3.4 million for
amortization of prepaid advertising costs, amortization of debt discount and
stock option compensation.
Net cash used in investing activities was $4.7 million and $1.3 million in
the six month periods ended June 30, 2000 and 1999, respectively. In each
period, net cash used in investing activities resulted primarily from purchases
of property and equipment.
Net cash provided by financing activities was $23.4 million and $10.3
million in the six month periods ended June 30, 2000 and 1999, respectively. Net
cash provided by financing activities in the six month period ended June 30,
2000 resulted from net proceeds of our IPO (approximately $20,000,000) and
proceeds from long-term borrowings under our bank line of credit. Net cash
provided by financing activities in the six month period ended June 30, 1999
resulted primarily from the cash proceeds received from our issuance of shares
of common stock and convertible notes. We have invested these proceeds in money
market funds with maturities not exceeding 90 days. We intend to continue
investing our excess cash in various short-term securities.
On January 31, 2000, we entered into a credit agreement that provided for
two line of credit facilities. The first line of credit facility provided up to
$3.5 million of borrowings through June 30, 2000 to purchase new equipment. We
borrowed $2,692,000 under this facility, which is payable in installments
through June 30, 2003. Interest on this line of credit is at the prime rate plus
1.25% (10.75% at June 30, 2000). The second line of credit provides for maximum
borrowings, including letters of credit, of $3.0 million. The line of credit is
due on April 30, 2001 and bears interest at the prime rate plus 1%. At June 30,
2000, we had no borrowings outstanding on this line of credit, but we maintained
letters of credit under this line of credit totaling approximately $1.6 million
to collateralize lease deposits on our office facilities. At June 30, 2000, we
had unused borrowings of approximately $1.4 million available under this line of
credit facility.
We also have a bank line of credit facility that provides for a $1.0
million revolving facility for equipment purchases, and bears interest at the
bank's prime rate plus 1.0%. At June 30, 2000 our borrowings under this line of
credit were $762,000 with a weighted average interest rate of 9.0%. Borrowings
under this line of credit are collateralized by the specific equipment
purchased. Principal balances under these borrowings are repaid in installments,
with the final installment due August 2003.
Our future liquidity and capital requirements depend on numerous factors,
including market acceptance of our services, the resources we devote to
marketing and selling our services and our investment in developing and
promoting our brand. We have experienced a substantial increase in capital
expenditures since our inception consistent with the growth in our operations
and staffing, and we anticipate that this will continue at a reduced rate during
the remainder of fiscal year 2000. Additionally, we will continue to evaluate
possible investments in businesses, products and technologies, and plan to
expand our sales and marketing programs and conduct aggressive brand promotions.
We currently anticipate that the net proceeds from our IPO, together with our
existing line of credit and available funds, will be sufficient to meet our
anticipated needs for working capital and capital expenditures for the remainder
of fiscal year 2000. In addition we have the ability to revise our business plan
to reduce our operating costs, including deferring expenses and capital
expenditures and reducing discretionary advertising expenditures, so that cash
on hand and cash from operations and available credit facilities will fund our
operations beyond fiscal year 2000. Based on our current expectations, we
believe we will require additional equity or debt financing to fund our
operations thereafter. Additional financing may not be available to us on
favorable terms, or at all. If adequate funds are not available on acceptable
terms, we may not be able to continue or expand our business operations, and,
our business, results of operations and financial condition may be materially
adversely affected.
Year 2000 Compliance
Problems associated with software and computer systems' use of two digits
to define the year and the inability of computer systems to process dates
occurring in the year 2000 or beyond are referred to as "Year 2000" issues.
Although to date we have not experienced any significant Year 2000 issues
relating to our principal internally developed programs and
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<PAGE>
systems, or systems provided to us by others, these systems could experience
Year 2000 problems at any time during 2000 and beyond. These problems could
disrupt our business and require us to incur significant, unanticipated expenses
to remedy them. We cannot guarantee that our Internet service providers and
other third parties on which our services depend will not encounter Year 2000
issues.
Recent Accounting Pronouncements
In May 2000, the Emerging Issues Task Force ("EITF") released Issue 00-2,
"Accounting for Web Site Development Costs". EITF Issue 00-2 establishes
standards for determining the capitalization or expensing of incurred costs
relating to the development of Internet web sites based upon the respective
stage of development. The Issue is effective for fiscal quarters beginning after
June 30, 2000 (including costs incurred for projects in process at the beginning
of the quarter of adoption). We plan to adopt the provisions of EITF 00-2
effective July 1, 2000. Our website development costs for all periods through
June 30, 2000 have been expensed. The capitalization of a major portion of our
website development costs could have a significant effect on the results of our
operations in the remainder of fiscal year 2000 and future periods.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25" (the "Interpretation").
The Interpretation is intended to clarify certain issues that have arisen in
practice since the issuance of APB 25. The Company has adopted the provisions of
this pronouncement during the first quarter of 2000.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements", which provides additional
guidance in applying generally accepted accounting principles for revenue
recognition. We believe our revenue recognition policy is in compliance with SAB
No. 101.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires recognition of all derivatives as assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. The statement, as amended, is effective for fiscal years beginning after
June 15, 2000. As we do not have any derivative instruments or hedging
activities, SFAS No. 133 is not expected to have a material effect on our
financial results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We had no holdings of derivative financial or commodity instruments at June
30, 2000. However, we are exposed to financial market risks associated with
fluctuations in interest rates. Because all of the amounts in our portfolio have
expected maturities of three months or less, we believe that the fair value of
our investment portfolio or related income would not be significantly impacted
by increases or decreases in interest rates due mainly to the short-term nature
of our investment portfolio. If market rates were to increase immediately by 10
percent from levels on June 30, 2000, the fair value of this investment
portfolio would decline by an immaterial amount. A sharp decline in interest
rates could reduce future interest earnings of our investment portfolio. If
market rates were to decrease immediately by 10 percent from levels on June 30,
2000, the resultant decrease in interest earnings of our investment portfolio
would not have a material impact on our earnings as a whole.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 12, 2000, Supermarkets Online 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 its United States Patent
No. 6,014,634, and seeks unspecified damages and injunctive relief. In addition,
on February 18, 2000, Catalina Marketing filed a request for reexamination of
our United States Patent No. 5,761,648 with the United States Patent and
Trademark Office, which request was granted on May 2, 2000. Therefore our United
States Patent No. 5,761,648 will be reexamined, which may result in the patent
being narrowed in scope or found invalid.
On October 21, 1998, we instituted a lawsuit in the United States District
Court for the Northern District of Illinois against planet U, Inc. and Brodbeck
Enterprises, Inc., d/b/a Dick's Supermarkets, for infringement of our United
States Patent No. 5,761,648, seeking unspecified damages and a permanent
injunction against further infringement.
On February 16, 2000, planet U filed a lawsuit against us and one of our
customers, Pep Boys Manny Moe & Jack, Inc., d/b/a Pep Boys, in the United States
District Court for the Northern District of California. The complaint alleges
that our systems and methods infringe planet U's recently purchased United
States Patent No. 5,907,830 and seeks unspecified damages and injunctive relief.
Effective June 30, 2000, we settled all patent infringement litigation matters
between planet U, Inc., Brodbeck Enterprises, Inc., Pep Boys Manny, Moe & Jack,
Inc., and us. The settlement provides for cross licensing of the patents
respectively owned by Planet U, Inc. and the Company, with net royalty payments
being made to us.
On August 10, 1998, we instituted a lawsuit in the Northern District of
Illinois against e-centives, Inc. (f/k/a emaginet, Inc.) for infringement of our
United States Patent No. 5,761,648, entitled "Interactive Marketing Network and
Process Using Electronic Certificates," seeking unspecified damages and a
permanent injunction against e-centives for further infringement. (the "Illinois
e-centives Case"). We have also added Ziff-Davis, Inc. as a defendant in our
suit against e-centives, Inc. e-centives has filed counterclaims alleging
invalidity of our patent and interference with their prospective economic
advantage and is seeking unspecified damages and injunctive relief. As noted
below, e-centives also recently initiated two separate lawsuits against us
alleging infringement of its patents. The Illinois e-centives Case is scheduled
for trial in December, 2000. The outcome of this trial is uncertain, and there
are no assurances that the outcome of the Illinois e-centives Case will be
favorable to us.
On April 27, 1999, e-centives, Inc. filed a lawsuit against us in the
United States District Court for the District of Maryland. The complaint alleges
that our systems or methods infringe on e-centives' United States Patent No.
5,710,886, and seeks unspecified damages and to enjoin us from further
infringing its patent. While the litigation is in the early stage and its
outcome cannot be predicted, we believe that our technology does not infringe
e-centives' patent and that this litigation is therefore without merit. We
intend to defend the action vigorously.
On March 17, 2000, e-centives, Inc. filed a related lawsuit against us in
the United States District Court for the District of Maryland. The complaint
alleges that our systems or methods infringe on e-centives' United States Patent
No. 6,035,280, and seeks unspecified damages and to enjoin us from further
infringing its patent. This patent is a continuation in part of the patent
application which resulted in United States Patent No. 5,710,886, which is the
subject matter of e-centives' April 27, 1999 lawsuit against us. While this
litigation is in the early stage and its outcome cannot be predicted, we believe
that our technology does not infringe e-centives' patent and that this
litigation is therefore without merit. We intend to defend the action
vigorously.
A complete summary of all pending litigation is set forth in our
Prosepectus. Except as noted above, all of the lawsuits and allegations set
forth in the Prospectus are at an early stage and may not be resolved favorably
to us. For example, we may not prevail and prevent others from using our
proprietary rights. We may be required to alter or stop selling our services, or
to pay costs and legal fees or other damages in connection with these cases and
the various counterclaims that have been asserted against us. Our patents or
future patents may be found invalid or unenforceable. Furthermore, additional
counterclaims, separate lawsuits or other proceedings may be brought against us
to invalidate our patents or force us to change our services or business
methods.
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We may be involved in additional litigation, investigations or other
proceedings in the future. Any litigation, investigation or proceeding, with or
without merit, could be costly and time-consuming and could divert our
management's attention and resources, which in turn could harm our business and
financial results.
Item 2. Changes in Securities and Use of Proceeds
(c) Sales of Unregistered Securities.
---------------------------------
Upon the closing of our initial public offering,
unsecured convertible subordinated notes with a principal
balance of $4,996,000, plus accrued interest, automatically
converted into 793,068 shares of the Company's common stock.
Additionally, the Company's entire Series A convertible
preferred stock issue automatically converted into 2,822,096
shares of the Company's common stock upon the closing of the
offering.
On April 3, 2000, the Company's Chairman and Chief
Executive Officer exercised his vested options to purchase
322,000 shares of the Company's common stock in exchange for
the delivery of a $700,000 promissory note. The note provides
for interest at the rate of 6.71% per annum, payable annually.
The principal amount of the note and all unpaid interest is
due on April 3, 2004. This sale was made pursuant to an
exemption from registration afforded by Section 4(2) and Rule
701 of the Securities Act of 1933.
On June 19, 2000, the Company issued 83,334 shares of
common stock to two individuals as consideration for certain
patent rights. The common stock issued was valued at $500,000
based upon the closing price of the Company's common stock on
the date of issuance. This sale was made pursuant to an
exemption from registration afforded by Section 4(2) of the
Securities Act of 1933.
During the three months ended June 30, 2000,
following the exercise of options to purchase shares of common
stock that had been granted under our Stock Option Plan by 1
employee, we issued an aggregate of 10,350 shares of common
stock for an aggregate purchase price of $22,500. This sale
was made pursuant to an exemption from registration afforded
by Rule 701 of the Securities Act of 1933.
(d) Use of Proceeds from Sales of Registered Securities
---------------------------------------------------
On May 19, 2000, the Company completed an initial
public offering of 3,300,000 shares of common stock at an
offering price of $7.00 per share. The managing underwriters
in the offering were Chase H&Q, Lehman Brothers and Thomas
Weisel Partners LLC. The shares of common stock sold in the
offering were registered under the Securities Act of 1933 on a
Registration Statement on Form S-1 (Registration No.
333-94677) that was declared effective by the SEC on May 19,
2000. The purchase price to the public was $7.00 per share
and, after deducting underwriting discounts and commissions,
the proceeds to the Company was $6.51 per share. The aggregate
offering price was approximately $23.1 million. The Company
incurred expenses of approximately $3.5 million, of which
approximately $1.6 million represented underwriting discounts
and commissions and approximately $1.9 million represented
other expenses related to the offering. The proceeds to us
from the offering, after deducting underwriting discounts and
commissions and other offering expenses, were approximately
$19.6 million. As of June 30, 2000, the Company has applied
the net proceeds from the offering toward general corporate
purposes, including working capital, sales and marketing
expenses, capital expenditures and strategic investment. None
of the net proceeds from the offering were paid directly or
indirectly to any director or officer of the Company or any of
their associates, persons owning 10% or more of any class of
equity securities of the Company, or any affiliate of the
Company.
F-18
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On April 7, 2000, holders of the requisite majority
of the then outstanding shares of capital stock of the Company
approved a resolution by written consent approving the
adoption of amended and restated articles of incorporation.
Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
F-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
coolsavings.com inc.
--------------------
Registrant
Dated: August 11, 2000 /s/ Steven M. Golden
----------------------- ----------------------------------
Steven M. Golden
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Dated: August 11, 2000 /s/ William R. Razzino
------------------------ ----------------------------------
William R. Razzino
Controller
(Principal Accounting Officer)
F-20
