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, 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 19th Floor
Chicago, Illinois 60601
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (312) 224-5000
Not Applicable
-------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 2000
--------------------------- --------------------------------
Common stock, no par value 39,093,660
<PAGE>
coolsavings.com inc.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets
September 30, 2000 and December 31, 1999 F-2
Condensed Statements of Operations
Three and Nine Months Ended September 30, 2000 and 1999 F-3
Condensed Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 2000 F-4
Condensed Statements of Cash Flows
Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K F-18
SIGNATURES F-19
</TABLE>
F-1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COOLSAVINGS.COM INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 14,174,000 $ 17,489,000
Restricted cash 100,000 95,000
Accounts receivable, net of allowance of $462,000
and $118,000 at September 30, 2000 and
December 31, 1999, respectively 9,593,000 4,382,000
Prepaid advertising 543,000 2,787,000
Prepaid assets 799,000 290,000
Other assets 533,000 498,000
------------ ------------
Total current assets 25,742,000 25,541,000
------------ ------------
Property and equipment 11,718,000 4,985,000
Less accumulated depreciation and amortization (2,318,000) (936,000)
------------ ------------
9,400,000 4,049,000
Intangible assets, patents and licenses,
net of accumulated amortization of $95,000 730,000 --
------------ ------------
Total assets $ 35,872,000 $ 29,590,000
============ ============
LIABILITIES
Currrent liabilities:
Accounts payable, including amounts due to related
parties of $119,000 and $25,000 at
September 30, 2000 and December 31, 1999, respectively $ 5,047,000 $ 2,345,000
Accrued marketing expense 4,105,000 1,057,000
Other accrued liabilities 2,581,000 775,000
Deferred revenue 1,741,000 418,000
Current maturities of long-term debt 1,245,000 247,000
Long-term debt reclassified as currently payable 1,995,000 --
Convertible subordinated notes payable,
including $3,562,000 due to related parties -- 4,996,000
------------ ------------
Total current liabilities 16,714,000 9,838,000
------------ ------------
Long-term debt, less current maturities -- 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
September 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 September 30, 2000 and December 31, 1999 73,659,000 27,845,000
Additional paid-in capital (47,000) 15,204,000
Deferred stock compensation (990,000) --
Accumulated deficit (49,947,000) (21,112,000)
Notes receivable from related parties (3,517,000) (2,817,000)
------------ ------------
Total stockholders' equity 19,158,000 19,120,000
------------ ------------
Total liabilities and stockholders' equity $ 35,872,000 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenue:
<S> <C> <C> <C> <C>
e-marketing services $ 10,578,000 $ 3,276,000 $ 27,602,000 $ 6,241,000
License royalties 716,000 -- 726,000 --
------------ ------------ ------------ ------------
Net revenues 11,294,000 3,276,000 28,328,000 6,241,000
Cost of revenues 2,202,000 416,000 4,634,000 1,015,000
------------ ------------ ------------ ------------
Gross profit 9,092,000 2,860,000 23,694,000 5,226,000
Operating expenses:
Sales and marketing 10,733,000 4,887,000 31,182,000 8,031,000
Product development 1,664,000 1,136,000 6,166,000 3,263,000
General and administrative, exclusive of
compensation related to stock options 5,526,000 1,636,000 12,260,000 3,922,000
Compensation related to stock options 990,000 -- 2,970,000 --
------------ ------------ ------------ ------------
Total operating expenses 18,913,000 7,659,000 52,578,000 15,216,000
------------ ------------ ------------ ------------
Loss from operations (9,821,000) (4,799,000) (28,884,000) (9,990,000)
Other income (expense):
Interest and other income 376,000 128,000 954,000 328,000
Interest expense (89,000) (54,000) (350,000) (79,000)
Interest expense representing beneficial
coversion feature of subordinated notes -- -- (555,000) --
------------ ------------ ------------ ------------
287,000 74,000 49,000 249,000
------------ ------------ ------------ ------------
Loss before income taxes (9,534,000) (4,725,000) (28,835,000) (9,741,000)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss (9,534,000) (4,725,000) (28,835,000) (9,741,000)
Deemed dividend representing the
beneficial conversion feature
of preferred stock -- -- (19,868,000) --
------------ ------------ ------------ ------------
Loss applicable to common shareholders $ (9,534,000) $ (4,725,000) $ (48,703,000) $ (9,741,000)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.24) $ (0.15) $ (1.38) $ (0.33)
============ ============ ============ ============
Weighted average shares used in the calculation
of basic and diluted net loss per share 39,093,660 31,681,249 35,380,362 29,163,287
============ ============ ============ ============
</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
Compensatory stock option 102,000
Issue common stock for patent rights 83,334 500,000
Exercise of stock options 379,730 825,000
Redemption of fractional shares (17)
---------- ---------- ------------ ------------ --------------
Balances, September 30, 2000 -- -- 39,093,660 $73,659,000 $ (47,000)
========== ========== ============ ============ ==============
</TABLE>
<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 2,970,000 2,970,000
Compensatory stock option 102,000
Issue common stock for patent rights 500,000
Exercise of stock options (700,000) 125,000
Redemption of fractional shares -
Net loss (28,835,000) (28,835,000)
------------- -------------- --------------- --------------
Balances, September 30, 2000 $ (990,000) $ (49,947,000) $ (3,517,000) $ 19,158,000
============= ============== =============== ==============
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-4
<PAGE>
COOLSAVINGS.COM INC.
CONDENSED STATEMENTS OF CASHFLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
2000 1999
------------ ------------
Cash flows used in operating activities:
<S> <C> <C>
Net loss $(28,835,000) $ (9,741,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,552,000 344,000
Loss on disposal of property and equipment 99,000 --
Stock option compensation 2,970,000 --
Provision for doubtful accounts 1,029,000 57,000
Amortization of prepaid advertising 1,519,000 --
Amortization of debt discount 555,000 --
Changes in assets and liabilities:
Increase in restricted cash (5,000) --
Increase in accounts receivable (6,241,000) (2,018,000)
(Increase) decrease in prepaid and other current assets 284,000 (647,000)
Increase in accounts payable 2,702,000 1,490,000
Increase in deferred revenue 1,323,000 120,000
Increase in accrued and other liabilities 4,854,000 2,448,000
------------ ------------
Net cash flows used in operating activities (18,194,000) (7,947,000)
------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment (5,674,000) (1,341,000)
Cash paid for intangible assets (325,000) --
Capitalized software costs -- (944,000)
Capitalized web site development costs (1,234,000) --
------------ ------------
Net cash used in investing activities (7,233,000) (2,285,000)
------------ ------------
Cash flows from financing activities:
Advances on notes payable -- 743,000
Repayment of debt obligations (330,000) (118,000)
Increase in cash overdraft -- 443,000
Proceeds from long-term borrowings 2,692,000 --
Proceeds from exercise of stock options 125,000 7,000
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 (3,475,000) --
------------ ------------
Net cash provided by financing activities 22,112,000 11,075,000
------------ ------------
Net increase (decrease) in cash (3,315,000) 843,000
Cash and cash equivalents, beginning of period 17,489,000 4,895,000
------------ ------------
Cash and cash equivalents, end of period $ 14,174,000 $ 5,738,000
============ ============
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 $ 2,817,000
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 credit facility that originally provided for borrowings of up to $6.5
million, which was amended in October 2000 to provide for up to an additional
$3.5 million in borrowings. 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 into
the second quarter of 2001.
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 financial
statements reflect all normal recurring adjustments necessary to present fairly
the financial position as of September 30, 2000, and the results of operations
and changes in cash flows for the nine month periods ended September 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.
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
F-6
<PAGE>
COOLSAVINGS.COM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
$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 has recorded a deemed dividend of approximately $19.9 million during the
nine months ended September 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 September 30, 2000 the Company had outstanding borrowings totaling
$3,240,000 under its line of credit facilities at interest rates varying from
8.75% to 10.75%. 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.
A description of the Company's credit facilities is as follows:
On January 31, 2000, the Company entered into a credit agreement with
a bank 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 equipment. At September 30, 2000 outstanding borrowings
under this line of credit were $2,542,000, with interest at the prime rate
plus 1.25% (10.75% at September 30, 2000). The second line of credit
provides for maximum borrowings, including letters of credit, of $3.0
million. The line of credit bears interest at the prime rate plus 1%. At
September 30, 2000, no borrowings were outstanding on this line of credit.
However, the Company maintained letters of credit under this line of credit
totaling approximately $1.6 million to collateralize lease deposits on
certain office facilities. At September 30, 2000, unused borrowings of
approximately $1.4 million were available under this line of credit
facility. At September 30, 2000, the Company was in compliance with the
provisions of this credit agreement.
In October 2000, the bank credit agreement was amended to provide up
to $3.5 million of new borrowings to purchase equipment and certain
financial covenants of the loan agreement were amended. Interest on this
line of credit will be at the prime rate plus 1.25%. The line of credit
will be payable in installments with the final installment due on December
31, 2003. In October the Company borrowed $964,000 under this facility.
Additionally, the amended credit agreement extended the due date of the
currently existing $3.0 million line of credit from April 30, 2001 until
September 30, 2001. Currently, the Company is not in compliance with the
tangible capital fund requirement of the amended credit agreement and is
involved in discussions with the bank regarding this condition of
non-compliance. Accordingly, the Company reclassified $1,570,000 of
otherwise long-term borrowings under the credit agreement as currently
payable as of September 30, 2000.
F-7
<PAGE>
COOLSAVINGS.COM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
The Company also has 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 September 30, 2000
borrowings under this line of credit were $698,000 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. The Company was not in compliance with certain
non-financial covenants of this credit facility during 2000. Waivers of the
respective covenants have been received from the lender. However, the
condition of non-compliance under the Company's other bank credit facility
created a condition of non-compliance under this loan agreement and the
Company reclassified $425,000 of otherwise long-term borrowings under this
credit agreement as currently payable as of September 30, 2000.
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 a patent infringement dispute.
As a result of the settlement agreement, the Company is receiving a series of
future royalty payments for licensing the use of its patent.
Effective September 29, 2000, the Company settled a second patent
infringement dispute and received a $650,000 royalty payment pursuant to a
license agreement for prior use of the Company's patent. Subject to certain
contingencies, the Company can earn additional future royalties under the terms
of the license agreement. If there is a change of control in either party to the
license agreement, then, under certain circumstances the acquired party would be
required to make a $1,500,000 cash payment to the other party to the agreement.
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 million on the program during
the second year of the contract term.
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 nine months ended September 30,
2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
Numerator:
<S> <C> <C> <C> <C>
Net loss $ (9,534,000) $ (4,725,000) $(28,835,000) $ (9,741,000)
Deemed dividend relating to
convertible preferred stock* -- -- (19,868,000) --
------------ ------------ ------------ ------------
Net loss available to common stockholders $ (9,534,000) $ (4,725,000) $(48,703,000) $ (9,741,000)
============ ============ ============ ============
Denominator:
Weighted average
common shares 39,093,660 31,681,249 35,380,362 29,163,287
============ ============ ============ ============
Earnings per share:
Basic and diluted $ (0.24) $ (0.15) $ (1.38) $ (0.33)
============ ============ ============ ============
</TABLE>
* 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.
F-8
<PAGE>
COOLSAVINGS.COM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
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 compensation charges of $990,000 and $2,970,000
during the three and nine months ended September 30, 2000, respectively. The
September 30, 2000 balance sheet reflects deferred stock compensation expense of
$990,000.
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 adopted the provisions of EITF 00-2 effective July 1, 2000 and has
capitalized $1,234,000 of web site development costs incurred on projects in
process as of September 30, 2000. Capitalized web site development costs are
included in the September 30, 2000 condensed balance sheet in property and
equipment. Upon completion of the web site development projects, the Company
will begin to amortize these costs on a straight-line basis over periods not to
exceed three years. The Company's web site development costs for all periods
through June 30, 2000 were expensed.
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 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. The Company believes its 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 all fiscal quarters of all
fiscal years beginning after June 15, 2000. As the Company does not have any
derivative instruments or hedging activities, SFAS No. 133 is not expected to
have a material effect on its financial results.
9. Other Information
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.
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. During the nine months
ended September 30, 2000, approximately 3% of our revenues were 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, 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 September
30, 2000, our accumulated deficit was approximately $49.9 million. We expect to
continue to incur significant operating losses during the remainder of 2000 and
into the first half of 2001. In particular, we expect to invest heavily in sales
and marketing activities, capital expenditures, hiring new sales and software
development personnel, enhancing services and technology, expanding facilities
and defending intellectual property rights.
Results of Operations
Three Months Ended September 30, 2000 and 1999
Net Revenues
Net revenues increased 245% to $11.3 million in the three months ended
September 30, 2000 from $3.3 million in the three months ended September 30,
1999. Net revenues in the three months ended September 30, 2000 included
$716,000 in royalties from license agreements for the use of our patent. 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 10.2 million registered members at September 30, 2000 from
approximately 4.0 million at September 30, 1999.
Gross Profit
Gross profit increased to $9.1 million in the three months ended September
30, 2000, from $2.9 million in the three months ended September 30, 1999. Gross
profit decreased as a percentage of net revenues to 80.5% in the three months
ended September 30, 2000, from 87.3% in the three months ended September 30,
1999. The absolute dollar increase in gross profit 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, fulfillment costs related to member loyalty and rewards
programs and other related operations costs. Our 2000 decrease in gross profit
as a percentage of net revenues relates to fulfillment costs related to
increased customer acceptance of our loyalty and rewards program, which should
continue to drive future revenue growth.
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 $10.7 million, or 95.0% of net revenues, in the three
months ended September 30, 2000, from $4.9 million, or
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149% of net revenues, in the three months ended September 30, 1999. The $5.8
million increase in sales and marketing expenses was primarily due to increased
expenses associated with promotional and marketing efforts and the hiring of
additional sales and marketing personnel. The decrease in sales and marketing
expenses as a percentage of net revenues is a result of the growth in net
revenues. 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. Combined online and offline
advertising expenses during the three months ended September 30, 2000 were $7.5
million as compared to $3.7 million during the three months ended September 30,
1999. 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 September 30, 2000, our blended
member acquisition costs (blended costs include both online and offline
advertising) were $3.17 per member as compared to $3.71 per member in the three
months ended June 30, 2000, $3.81 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
$1.7 million, or 14.7% of net revenues, in the three months ended September 30,
2000, from $1.1 million, or 34.7% of net revenues, in the three months ended
September 30, 1999. On July 1, 2000 we adopted the provisions of EITF 00-2
("Accounting for Web Site Development Costs") and capitalized $1,234,000 of web
site development costs incurred on projects in process during the three months
ended September 30, 2000. For prior periods through June 30, 2000, all product
development expenditures were expensed as incurred. 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, less the effect of
capitalized web site development costs. In recent months, we have aggressively
increased our recruiting of software development personnel to reduce the use of
more costly third-party technical consultants. The decrease in product
development expenses as a percentage of net revenues is a result of the growth
in net revenues and the capitalization of web site development costs in 2000.
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 $5.5 million, or 48.9% of net
revenues, in the three months ended September 30, 2000, from $1.6 million, or
49.9% of net revenues, in the three months ended September 30, 1999. The
increase in general and administrative expenses was primarily due to the hiring
of additional personnel to support the growth of our business and recruiting
costs related to filling key management positions, as well as increased legal
fees and additional provisions for doubtful accounts. In recent months we have
incurred higher occupancy expense associated with our move to a 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 third quarter of 2000.
Other income (expense), net. Net interest income was $287,000 in the three
months ended September 30, 2000 as compared to net interest income of $74,000 in
the three months ended September 30, 1999. We invested unused funds from our May
2000 IPO in cash and cash equivalents.
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.
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Nine Months Ended September 30, 2000 and 1999
Net Revenues
Net revenues increased 354% to $28.3 million in the nine months ended
September 30, 2000 from $6.2 million in the nine months ended September 30,
1999. Net revenues in the nine months ended September 30, 2000 included $726,000
in royalties from license agreements for the use of our patent. 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 10.2 million registered members at September 30, 2000 from
approximately 4.0 million at September 30, 1999.
Gross Profit
Gross profit increased to $23.7 million in the nine months ended September
30, 2000, from $5.2 million in the nine months ended September 30, 1999. Gross
profit as a percentage of net revenues was 83.6% in the nine months ended
September 30, 2000 as compared to 83.7% in the nine months ended September 30,
1999. The increase in gross profit is a result of net revenues increasing more
rapidly than cost of revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $31.2
million, or 110% of net revenues, in the nine months ended September 30, 2000,
from $8.0 million, or 129% of net revenues, in the nine months ended September
30, 1999. The $23.2 million increase in sales and marketing expenses was
primarily due to increased expenses associated with promotional and marketing
efforts and the hiring of additional sales and marketing personnel. The decrease
in sales and marketing expenses as a percentage of net revenues is a result of
the growth in net revenues. We spent $22.5 million combined on online and
offline advertising during the nine months ended September 30, 2000 as compared
to $5.3 million during the nine months ended September 30, 1999. 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 $6.2
million, or 21.8% of net revenues, in the nine months ended September 30, 2000,
from $3.3 million, or 52.3% of net revenues, in the nine months ended September
30, 1999. On July 1, 2000 we adopted the provisions of EITF 00-2 ("Accounting
for Web Site Development Costs") and capitalized $1,234,000 of web site
development costs incurred on projects in process at September 30, 2000. For
prior periods through June 30, 2000, all product development expenditures were
expensed as incurred. 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, less the effect of capitalized web site
development costs. In recent months, we have aggressively increased our
recruiting of software development personnel to reduce the use of more costly
third-party technical consultants. The decrease in product development expenses
as a percentage of net revenues is a result of the growth in net revenues and
the capitalization of web site development costs in 2000.
General and Administrative. General and administrative expenses increased
to $12.3 million, or 43.3% of net revenues, in the nine months ended September
30, 2000, from $3.9 million, or 62.8% of net revenues, in the nine months ended
September 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 and recruiting costs related to filling key management
positions, as well as increased legal fees and additional provisions for
doubtful accounts. 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 a larger office
space and we have expanded our administrative systems to support our planned
growth and operations as a public company.
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Stock Option Compensation. As discussed in Note 7 to our condensed
financial statements, we have recognized a stock option compensation charge of
$2,970,000 million during the nine months ended September 30, 2000.
Other income (expense), net. Net interest income was $49,000 in the nine
months ended September 30, 2000 as compared to net interest income of $249,000
in the nine months ended September 30, 1999. The decrease in net interest income
is attributable to interest expense on borrowings under our credit facilities,
partially offset by interest earned on excess cash invested.
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 previously issued unsecured convertible
subordinated notes with a principal balance of $4,996,000 automatically
converted into 793,068 shares of our common stock and all of our outstanding
Series A convertible preferred stock automatically converted into 2,822,096
shares of our common stock. As of September 30, 2000, we had approximately $14.2
million in cash and cash equivalents.
Net cash used in operating activities was $18.2 million and $7.9 million in
the nine month periods ended September 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 nine months ended September
30, 2000, we had non-cash expenses totaling approximately $5.0 million for
amortization of prepaid advertising costs, amortization of debt discount and
stock option compensation.
Net cash used in investing activities was $7.2 million and $2.3 million in
the nine month periods ended September 30, 2000 and 1999, respectively. In each
period, net cash used in investing activities resulted primarily from purchases
of property and equipment. Additionally in 2000 we capitalized $1.2 million of
web site development costs and in 1999 we capitalized $0.9 million of software
costs.
Net cash provided by financing activities was $22.1 million and $11.1
million in the nine month periods ended September 30, 2000 and 1999,
respectively. Net cash provided by financing activities in the nine month period
ended September 30, 2000 is attributable to the net proceeds of our IPO
(approximately $20 million) and proceeds from long-term borrowings under our
bank line of credit. Net cash provided by financing activities in the nine month
period ended September 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 cash equivalents 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 with a bank 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. Prior to June 30, 2000, we borrowed $2,692,000 under this facility,
which is payable in installments through September 30, 2003. At September 30,
2000 our borrowings under this line of credit were $2,542,000. Interest on this
line of credit is at the prime rate plus 1.25% (10.75% at September 30, 2000).
The second line of credit provides for maximum borrowings, including letters of
credit, of $3.0 million. The line of credit bears interest at the prime rate
plus 1%. At September 30, 2000, we had no borrowings outstanding on this line of
credit. However, we maintained letters of credit under this line of credit
totaling approximately $1.6 million to collateralize lease deposits on our
office facilities. At September 30, 2000, we had unused borrowings of
approximately $1.4 million available under this line of credit facility.
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In October 2000, our bank credit agreement was amended to provide up to
$3.5 million of new borrowings to purchase equipment and certain financial
covenants of the loan agreement were amended. Interest on this line of credit
will be at the prime rate plus 1.25%. The line of credit will be payable in
installments with the final installment due on December 31, 2003. In October we
borrowed $964,000 under this facility. Additionally, the amended credit
agreement extended the due date of the currently existing $3.0 million line of
credit from April 30, 2001 until September 30, 2001. Currently, we are not in
compliance with the tangible capital fund requirement of the amended credit
agreement and are involved in discussions with the bank regarding this condition
of non-compliance. Accordingly, we reclassified $1,570,000 of otherwise
long-term borrowings under the credit agreement as currently payable as of
September 30, 2000.
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 September 30, 2000 our borrowings under this
line of credit were $698,000 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. We were not in
compliance with certain non-financial covenants of this credit facility during
2000. Waivers of the respective covenants have been received from the lender.
However, the condition of non-compliance under the our other bank credit
facility created a condition of non-compliance under this loan agreement and we
reclassified $425,000 of otherwise long-term borrowings under this credit
agreement as currently payable as of September 30, 2000.
During the nine months ended September 30, 2000, we invested $5.7 million
in capital expenditures and anticipate expending an additional $1.25 million in
capital expenditures during the remainder of fiscal year 2000. We anticipate
investing in capital expenditures at a reduced rate during fiscal year 2001.
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 and into fiscal year 2001. Additionally, we
will continue to evaluate possible investments in businesses, products and
technologies, and plan to expand our sales and marketing programs and conduct
more brand promotions. We currently anticipate that cash and cash equivalents on
hand, together with our existing lines of credit, will be sufficient to meet our
anticipated needs for working capital and capital expenditures into the second
quarter of fiscal year 2001. 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 the second quarter of fiscal year 2001. 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 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 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 adopted the provisions of EITF 00-2 effective July 1, 2000 and has
capitalized $1,234,000 of web site development costs incurred on projects in
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process as of September 30, 2000. Capitalized web site development costs are
included in the September 30, 2000 condensed balance sheet in property and
equipment. Upon completion of the web site development projects, we will begin
to amortize these costs on a straight-line basis over periods not to exceed
three years. Our web site development costs for all prior periods through June
30, 2000 were expensed.
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. We 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 all fiscal quarters of all
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
September 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 September 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 September 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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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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. Subsequently,
we added Ziff-Davis, Inc. as a defendant in our suit against e-centives, Inc.
e-centives filed counterclaims against us alleging invalidity of our patent
and interference with its prospective economic advantage and seeking unspecified
damages and injunctive relief. In addition, 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 alleged that our systems or methods infringe on
e-centives' United States Patent No. 5,710,886, and sought unspecified damages
and to enjoin us from further infringing its patent. 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 alleged that our
systems or methods infringe on e-centives' United States Patent No. 6,035,280,
and sought 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.
Effective September 29, 2000, we settled all patent infringement litigation
matters between e-centives, Inc., Ziff-Davis, Inc. and us. The settlement
provides for cross licensing of the patents respectively owned by e-centives,
Inc. and us, with net royalty payments being made to us.
A complete summary of all pending litigation is set forth in our
Prospectus. 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.
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.
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Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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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: November 14, 2000 /s/ Steven M. Golden
------------------------- -------------------------------
Steven M. Golden
Chairman of the Board and
Chief Executive Officer
Dated: November 14, 2000 /s/ Paul A. Case
------------------------- -------------------------------
Paul A. Case
Executive Vice President and
Chief Financial Officer
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