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 March 31, 2003 OR [___] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 000-30199 CoolSavings, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 36-4462895 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 360 N. Michigan Avenue 19th Floor Chicago, Illinois 60601 ---------------------------------------------------------- Address of principal executive offices, including zip code Registrant's telephone number, including area code: (312) 224-5000 _________________________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ] Number of shares of common stock, $0.001 par value per share, outstanding as of April 30, 2003: 39,101,636 INDEX PART I FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets March 31, 2003 (Unaudited) and December 31, 2002. . . . . . . . . . . . . . . . 3 Statements of Operations (Unaudited) Three Months Ended March 31, 2003 and 2002 . . . 6 Statement of Changes in Convertible Redeemable Preferred Stock and Stockholders' Deficit (Unaudited) Three Months Ended March 31, 2003. . 7 Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2003 and 2002 . . . 8 Notes to Financial Statements (Unaudited). . . . . 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . 38 Item 4. Controls and Procedures. . . . . . . . . . . . . . 38 PART II OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . 39 Item 2. Changes in Securities and Use of Proceeds. . . . . 39 Item 3. Defaults Upon Senior Securities. . . . . . . . . . 39 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 40 SIGNATURES AND CERTIFICATIONS . . . . . . . . . . . . . . . . 41 PART I - FINANCIAL INFORMATION Item 1. Financial Statements COOLSAVINGS, INC. BALANCE SHEETS (in thousands, except share and per share data) MARCH 31, 2003 DECEMBER 31, (UNAUDITED) 2002 ------------- ----------- ASSETS ------ Current assets: Cash and cash equivalents . . . . . . . $ 4,914 $ 4,867 Restricted certificates of deposit. . . -- 231 Accounts receivable, net of allowance of $743 and $753 at March 31, 2003 and December 31, 2002, respectively . 4,745 4,900 Prepaid assets. . . . . . . . . . . . . 278 244 Other assets, including amounts due from related parties of $3 and $13 at March 31, 2003 and December 31, 2002, respectively. . . . . . . . . . 124 360 ---------- ---------- Total current assets. . . . . . . 10,061 10,602 ---------- ---------- Property and equipment. . . . . . . . . . 8,909 9,051 Capitalized software costs. . . . . . . . 1,490 1,490 Capitalized web site costs. . . . . . . . 3,257 3,152 ---------- ---------- 13,656 13,693 Less accumulated depreciation and amortization. . . . . . . . . . . . . . (10,938) (10,391) ---------- ---------- 2,718 3,302 Intangible assets, net of accumulated amortization of $460 and $399 at March 31, 2003 and December 31, 2002, respectively. . . . . . . . . . . 40 101 ---------- ---------- Total assets. . . . . . . . . . . . . . . $ 12,819 $ 14,005 ========== ========== COOLSAVINGS, INC. BALANCE SHEETS - Continued (in thousands, except share and per share data) MARCH 31, 2003 DECEMBER 31, (UNAUDITED) 2002 ------------- ----------- LIABILITIES ----------- Current liabilities: Accounts payable, including amounts due to related parties of $14 and $55 at March 31, 2003 and December 31, 2002, respectively. . . . . . . . . . $ 567 $ 1,091 Accrued marketing expense, including amount due to related parties of $115 and $77 at March 31, 2003 and December 31, 2002, respectively . . . 1,410 989 Accrued compensation. . . . . . . . . . 895 1,147 Accrued interest, including amounts due to related parties of $75 and $76 at March 31, 2003 and December 31, 2002, respectively. . . . . . . . . . 75 76 Accrued expenses, including amounts due to related parties of $781 and $782 at March 31, 2003 and December 31, 2002, respectively. . . . . . . . . . 2,367 2,179 Lease exit cost liability . . . . . . . 455 311 Deferred revenue. . . . . . . . . . . . 571 516 Senior secured note payable due to related party . . . . . . . . . . . . 5,706 5,592 ---------- ---------- Total current liabilities . . . . 12,046 11,901 ---------- ---------- Long-term liabilities: Deferred revenue. . . . . . . . . . . . 111 177 Lease exit cost liability . . . . . . . 972 1,014 Accrued expenses due to related parties 3 91 ---------- ---------- Total long-term liabilities . . . 1,086 1,282 ---------- ---------- Commitments and contingencies (Note 9) Convertible redeemable cumulative Series B Preferred Stock, $0.001 par value, 258,000,000 shares authorized at March 31, 2003 and December 31, 2002, and 150,422,668 and 148,600,102 issued and outstanding at March 31, 2003 and December 31, 2002, respectively (liquidation preference of $0.1554 per share at March 31, 2003 and December 31, 2002). . . . . . . . . . . . . . . . . . 23,374 23,091 Convertible redeemable Series C Preferred Stock, $0.001 par value, 13,000,000 shares authorized and 13,000,000 shares issued and outstanding at March 31, 2003 and December 31, 2002 (liquidation preference of $0.1665 per share at March 31, 2003 and December 31, 2002). . 1,950 1,950 COOLSAVINGS, INC. BALANCE SHEETS - Continued (in thousands, except share and per share data) MARCH 31, 2003 DECEMBER 31, (UNAUDITED) 2002 ------------- ----------- STOCKHOLDERS' DEFICIT --------------------- Common stock, $0.001 par value per share, 379,000,000 shares authorized, 39,093,660 shares issued and out- standing at March 31, 2003 and December 31, 2002 . . . . . . . . . . . 39 39 Additional paid-in capital . . . . . . . 73,140 73,608 Accumulated deficit. . . . . . . . . . . (98,816) (97,866) ---------- ---------- Total stockholders' deficit . . . . . . . (25,637) (24,219) ---------- ---------- Total liabilities, convertible redeemable preferred stock and stockholders' deficit . . . . . . . . . $ 12,819 $ 14,005 ========== ========== The accompanying notes are an integral part of the financial statements. COOLSAVINGS, INC. STATEMENTS OF OPERATIONS (in thousands, except share and per share data) FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED) 2003 2002 ---------- ---------- Revenue: e-marketing services. . . . . . . . $ 7,549 $ 5,697 License royalties . . . . . . . . . 75 66 ---------- ---------- Net revenues. . . . . . . . . . . . . 7,624 5,763 Cost of revenues. . . . . . . . . . . 788 984 ---------- ---------- Gross profit. . . . . . . . . . . . . 6,836 4,779 ---------- ---------- Operating expenses: Sales and marketing . . . . . . . . 4,395 3,495 Product development . . . . . . . . 754 1,072 General and administrative. . . . . 2,227 2,486 Lease exit costs. . . . . . . . . . 209 -- Loss on asset impairment. . . . . . 81 -- ---------- ---------- Total operating expenses. . . . . . . 7,666 7,053 ---------- ---------- Loss from operations. . . . . . . . . (830) (2,274) Other income (expense): Interest and other income . . . . . 19 14 Interest expense. . . . . . . . . . (139) (285) ---------- ---------- Total other income (expense). . . . . (120) (271) ---------- ---------- Loss before income taxes. . . . . . . (950) (2,545) Income taxes. . . . . . . . . . . . . -- -- ---------- ---------- Net loss. . . . . . . . . . . . . . . (950) (2,545) Cumulative dividend on Series B Preferred Stock. . . . . . (468) (204) ---------- ---------- Loss applicable to common stockholders. . . . . . . . . . . . $ (1,418) $ (2,749) ========== ========== Basic and diluted net loss per share . . . . . . . . . . . . . $ (0.04) $ (0.07) ========== ========== Weighted average shares used in the calculation of basic and diluted net loss per share. . . . . 39,093,660 39,093,660 ========== ========== The accompanying notes are an integral part of the financial statements. COOLSAVINGS, INC. STATEMENT OF CHANGES IN CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 2003 (UNAUDITED) (in thousands, except share and per share data) Stockholders' Deficit --------------------------------------------------- Series B Redeemable Series C Redeemable Total Preferred Stock Preferred Stock Common Stock Additional Accumu- Stock- ------------------- ------------------- ------------------- Paid-in lated holders' Shares Amount Shares Amount Shares Amount Capital Deficit Deficit ---------- ------- ---------- ------- ---------- ----------------- -------- -------- Balances, January 1, 2003 . . . . .148,600,102 $23,091 13,000,000 $1,950 39,093,660 $ 39 $ 73,608 $(97,866) $(24,219) Cumulative dividend declared on Series B Preferred Stock. . . . . 1,822,566 283 Cumulative dividend accrued on Series B Preferred Stock. . . . . (468) (468) Net loss. . . . (950) (950) ----------- ------- ---------- ------ ---------- ------- -------- -------- -------- Balances, March 31, 2003 . . . . .150,422,668 $23,374 13,000,000 $1,950 39,093,660 $ 39 $ 73,140 $(98,816) $(25,637) =========== ======= ========== ====== ========== ======= ======== ======== ========The accompanying notes are an integral part of the financial statements. COOLSAVINGS, INC. STATEMENTS OF CASH FLOWS (in thousands) FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED) 2003 2002 ---------- ---------- Cash flows provided by (used in) operating activities: Net loss. . . . . . . . . . . . . . . $ (950) $ (2,545) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization . . . . 670 1,210 Provision for doubtful accounts . . . 281 169 Interest payment in kind. . . . . . . 113 105 Write-off related to website project costs . . . . . . . . . . . -- 86 Landmark transaction costs. . . . . . -- 21 Loss on asset impairment. . . . . . . 81 -- Changes in assets and liabilities: Decrease in restricted certificates of deposit. . . . . . . . . . . . . 231 -- (Increase) decrease in accounts receivable. . . . . . . . . . . . . (126) 558 Decrease in prepaid and other current assets. . . . . . . . . . . 202 78 (Decrease) in accounts payable. . . . (524) (821) (Decrease) in deferred revenue. . . . (11) (24) Increase in accrued and other liabilities . . . . . . . . . 83 266 Increase in lease exit cost liability . . . . . . . . . . . . . 102 -- ---------- ---------- Net cash flows provided by (used in) operating activities. . . . . . . . . . 152 (897) ---------- ---------- Cash flows used in investing activities: Purchases of property and equipment . -- (24) Capitalized web site development costs . . . . . . . . . . . . . . . (105) (117) ---------- ---------- Net cash used in investing activities. . . . . (105) (141) ---------- ---------- Cash flows provided by (used in) financing activities: Advances on notes payable . . . . . . -- 1,500 Repayment of debt obligations . . . . -- (763) ---------- ---------- Net cash provided by financing activities. . . . . -- 737 ---------- ---------- Net increase (decrease) in cash . . . . 47 (301) Cash and cash equivalents, beginning of period . . . . . . . . . 4,867 5,144 ---------- ---------- Cash and cash equivalents, end of period . . . . . . . . . . . . $ 4,914 $ 4,843 ========== ========== Supplemental schedule of cash flow information: Cash paid for interest. . . . . . . . $ -- $ 29 ========== ========== The accompanying notes are an integral part of the financial statements. COOLSAVINGS, INC. NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share data) (UNAUDITED) 1. BASIS OF PRESENTATION: CoolSavings, Inc. (the "Company") is a direct marketing and media company that provides smarter solutions to connect marketers to their target consumers by leveraging the Company's distribution network, analytic services and proprietary technology. Under the Company's established brand, advertisers can deliver, target and track a wide array of incentives, including printed and electronic coupons, personalized e-mails, rebates, samples, trial offers, sales notices, and gift certificates to promote sales of products or services in stores or online. The Company has sustained significant net losses 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 and maintain profitable operations. If the Company is unsuccessful in maintaining cash flow positive operations, or if Landmark Communications, Inc. and Landmark Ventures VII, LLC (together, "Landmark") exercise certain repayment rights in connection with Landmark's financing relationship with the Company, the Company's ability to continue to operate the business will be jeopardized. The Company's independent auditors have issued their report on its financial statements for 2002 with an explanatory paragraph. The explanatory paragraph describes the uncertainty as to the Company's ability to continue as a going concern. These financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required in the financial statements included in the Company's most recently filed Annual Report on Form 10-K. These financial statements should be read in conjunction with the financial statements and related notes in the Form 10-K. In the opinion of the Company, the accompanying unaudited financial statements reflect all normal recurring adjustments necessary for a fair statement of the Company's financial position as of March 31, 2003, and its results of operations and cash flows for the three months ended March 31, 2003 and 2002. These quarterly results of operations are not necessarily indicative of those expected for the year. 2. STOCK-BASED COMPENSATION: Financial Accounting Standards Board ("FASB") Statement of Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require, companies to record compensation cost for stock-based compensation at fair value. As permitted by SFAS 123, "Accounting for Stock Based Compensation," the Company continues to apply the accounting provisions of APB Opinion Number 25, "Accounting for Stock Issued to Employees" with regard to the measurement of compensation cost for options granted. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of a share of the Company's stock at the date of the grant over the amount that must be paid to acquire the stock. The Company recognized $0 of compensation expense in the three months ended March 31, 2003 and March 31, 2002, in conjunction with grants made under its fixed stock option plans. The Company has adopted the disclosure requirements of SFAS 148, "Accounting for Stock Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123." No stock option grants were issued during the three months ended March 31, 2003. Had expense been recognized using the fair value method described in SFAS 123, the Company would have reported the following results of operations using the Black-Scholes option pricing model: Three Months Ended March 31, ------------------------ 2003 2002 ---------- ---------- Net loss applicable to common stockholders, as reported . . . . . . . $ (1,418) $ (2,749) Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects . . . . . . . . . . . . . . (371) (610) ---------- ---------- Pro forma net loss applicable to common stockholders . . . . . . . . . . $ (1,789) $ (3,359) ========== ========== Weighted average shares outstanding . . . 39,093,660 39,093,660 Earnings per share: Basic and diluted - as reported . . . . $ (0.04) $ (0.07) Basic and diluted - pro forma . . . . . $ (0.05) $ (0.09) ========== ========== These costs may not be representative of the total effects on proforma reported income for future years. Factors that may also impact disclosures in future years include the attribution of the awards to the service period, the vesting period of stock options, the timing of additional grants of stock option awards and the number of shares granted for future awards. The assumptions used for valuations of stock option grants calculated in accordance with SFAS 123 are as follows: Three Months Ended March 31, ------------------------ 2003 2002 ---------- ---------- Annualized dividend yield . . . . . . . . -- 0.00% Risk-free rate of return. . . . . . . . . -- 4.21% Expected option term (in years) . . . . . -- 5.00 Expected volatility . . . . . . . . . . . -- 247.63% 3. RECENT ACCOUNTING PRONOUNCEMENTS: In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," which requires all Variable Interest Entities ("VIEs") to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIE. In addition, the interpretation expands disclosure requirements for both VIEs that are consolidated as well as VIEs of which the entity is the holder of a significant percentage of the beneficial interests, but not the majority. The disclosure requirements of this interpretation are effective immediately, and implementation is effective for periods beginning after June 15, 2003. The Company does not expect this Interpretation to have a material impact on its financial position or results of operations. In January 2003, the FASB issued EITF No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 provides guidance on how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. EITF 00-21 will be effective for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect that the provisions of EITF 00-21 will have a material impact on its financial position or results of operations. The Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long- lived assets and the associated asset retirement costs. The adoption of SFAS 143 did not have a material impact on the Company's financial position or results of operations. The Company adopted Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which expands previously issued accounting guidance and disclosure requirements for certain guarantees. The Interpretation requires an entity to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. This adoption did not have a material impact on the Company's financial position or results of operation. 4. BANK LINES OF CREDIT AND OTHER LOANS: a. Bank Lines of Credit: During 2002, the Company had two separate credit facilities, both of which expired as of December 31, 2002. Under a credit facility with American National Bank (the "ANB Facility"), the Company had one term loan and one $3,000 revolving credit line. Both the term loan and the revolving credit line were payable in installments and collateralized by substantially all the assets of the Company. During 2002, the Company had restricted certificates of deposit of $231 which related to letters of credit which were issued under the credit line and expired on December 31, 2002. The restrictions on the certificates of deposit were removed on January 1, 2003. Under a credit facility with Midwest Guaranty Bank (the "Midwest Facility"), the Company had a $1,000 equipment line of credit. Borrowings were collateralized by the specific equipment purchased and were payable in installments. The Midwest Facility expired on December 31, 2002. b. Landmark Loans: In 2001, Landmark loaned the Company $5,000 pursuant to a senior secured note, which loan is due on June 30, 2006 (the "Senior Secured Loan"). The Senior Secured Loan is governed by the terms of an amended and restated senior secured loan and security agreement dated July 30, 2001, as amended (the "Amended and Restated Loan Agreement"). The Senior Secured Loan is secured by a lien on all of the Company's assets and bears interest at 8.0% per annum. The interest is paid quarterly in arrears in the form of additional notes and warrants (described below). The Company has the right to prepay the Senior Secured Loan on or after the third anniversary thereof if certain conditions are met. The Amended and Restated Loan Agreement also contains financial covenants and negative and affirmative covenants that, among other things, restrict the Company's ability to incur additional indebtedness and take other actions without the consent of Landmark. At March 31, 2003, the Company was not in compliance with certain financial covenants of the Senior Secured Loan. Defaults under the Senior Secured Loan and the Amended and Restated Loan Agreement which defaults cannot be cured, as the Senior Secured Loan and Grid Note have cross-default provisions and are cross-collateralized include: .. The Company's failure to achieve a prescribed amount of billings during 2002; and .. The Company's failure to maintain a minimum level of working capital and a ratio of cash, cash equivalents and certain receivables over current liabilities; and .. The Company's failure to maintain a minimum ratio of total indebtedness over tangible net worth. These failures constitute events of default. Consequently, the Senior Secured Loan and all accrued interest thereon are immediately due and payable at the option of Landmark. Accordingly, the Company has classified the Senior Secured Loan as currently payable as of March 31, 2003, which, including principal and the paid-in-kind interest which has been compounded and accrued on the principal balance, totals $5,781. In connection with the Senior Secured Loan, the Company issued to Landmark warrants to purchase the Company's common stock (the "Landmark Warrants"). The Landmark Warrants have a term of eight years (expiring July 30, 2009) and may be exercised in whole or in part immediately. The Landmark Warrants contain a net exercise feature and were exercisable for 10,000,000 shares of the Company's common stock at an exercise price of $0.50 per share on November 12, 2001 (increasing to $0.75 per share on July 30, 2005, if not previously exercised). The Company automatically issues to Landmark additional warrants to purchase two shares of common stock for each dollar of interest accrued and paid-in-kind on a quarterly basis (January 31, April 30, July 31 and October 31) on the Senior Secured Loan as paid-in-kind interest. As of January 31, 2003, the Landmark Warrants were exercisable for 11,028,758 shares of the Company's common stock. 5. REDEEMABLE PREFERRED STOCK: a. Series B Preferred Stock: On November 12, 2001, pursuant to a securities purchase agreement between Landmark and the Company, dated July 30, 2001, as amended (the "Securities Purchase Agreement"), the Company issued to Landmark 65,057,936 shares of $0.001 par value Series B preferred stock (the "Series B Preferred Stock") in exchange for cancellation of $10,108 of outstanding indebtedness from the Company to Landmark under the Grid Note (defined below). The Series B Preferred Stock has certain conversion rights and bears an 8% annual dividend, payable quarterly in additional shares of Series B Preferred Stock. Under the terms of the Securities Purchase Agreement, the Company agreed that, if certain events occurred prior to December 31, 2002, defined herein as "Shortfall Events", Landmark would have the right to acquire additional shares of Series B Preferred Stock at a price of $0.1554 per share. The number of shares would equal the "Shortfall Amount" (generally the cash needed by the Company in connection with a Shortfall Event) divided by $0.1554. Under a letter dated November 12, 2001, the Company agreed that, when Shortfall Events occurred, Landmark could elect to loan the Company the Shortfall Amount under a grid note, as amended (the "Grid Note"). On October 24, 2002, in connection with a Shortfall Event which occurred on June 30, 2002 (related to the amount of current assets compared to current liabilities at such date), Landmark exercised its right to purchase 17,825,212 shares of Series B Preferred Stock and paid the Company $2,770 for such shares ($0.1554 per share). On December 20, 2002, Landmark, at the Company's request, applied the $8,770 of principal and $705 of accrued interest then outstanding under the Grid Note toward the purchase of 60,967,777 shares of Series B Preferred Stock. As of March 31, 2003, Landmark holds 150,422,668 shares of Series B Preferred Stock (and has rights with respect to accrued dividends thereon) and holds a warrant to purchase 11,028,758 shares of the Company's common stock. For the three months ended March 31, 2003, dividends in the amount of 3,008,453 shares of Series B Preferred Stock accrued and dividends in the amount of 1,822,566 shares of Series B Preferred Stock were declared to the holders of Series B Preferred Stock. The Series B Preferred Stock is subject to certain redemption requirements outside the control of the Company. As a result of the defaults under the Amended and Restated Loan Agreement, Landmark may, at its option, require the Company to redeem all of the issued and outstanding Series B Preferred Stock at any time. Landmark also has the right to elect not less than a majority of the Company's board of directors. Landmark's ownership will continue to increase due to the issuance of additional shares of Series B Preferred Stock for dividends accruing on issued Series B Preferred Stock. Landmark's ownership also will increase if it exercises the Landmark Warrants. The number of Landmark Warrants will continue to increase as "in-kind" payments are made for interest accruing on the Senior Secured Loan. As of March 31, 2003, the Company has reserved approximately 165,000,000 shares of common stock for the conversion of all the outstanding shares of Series B Preferred Stock and accrued dividends, and the exercise of all outstanding Landmark Warrants. b. Series C Preferred Stock: As a condition to the consummation of the Landmark purchase of Series B Preferred Stock on November 12, 2001, the Company issued to three individuals (two of whom are directors of the Company) 13,000,000 shares of $0.001 par value Series C preferred stock (the "Series C Preferred Stock"). The Series C Preferred Stock was issued in exchange for certain notes held by those individuals, the related accrued interest and the accompanying warrants to purchase 1,050,000 shares of common stock previously issued to such individuals. As of March 31, 2003, the Company has reserved 13,000,000 shares of common stock for the conversion of all the outstanding shares of Series C Preferred Stock. c. Conversion of Series B and C Preferred Stock As of March 31, 2003, the Company had outstanding 39,093,660 shares of common stock, 150,422,668 shares of Series B Preferred Stock, and 13,000,000 shares of Series C Preferred Stock. The shares of both classes of Preferred Stock of the Company are convertible at the option of the holders into shares of common stock on a one-for-one basis, subject to antidilution provisions of the Company's Certificate of Incorporation. If all the outstanding shares of Preferred Stock of the Company were converted into shares of common stock, 202,516,328 shares of common stock would have been outstanding as of March 31, 2003. 6. IMPAIRMENT OF LONG-LIVED ASSETS AND COSTS ASSOCIATED WITH EXIT ACTIVITIES: During 2002, following a study of its future expected space requirements, the Company determined that a significant portion of its leased office space and the assets associated with that office space were unnecessary for its future operations. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company determined that the estimated undiscounted cash flows expected to be generated by the assets were less than their net book value. Therefore, the Company recorded an operating expense of $1,233 in 2002 to write down the assets to their estimated fair value. In addition, in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", the Company recorded an operating expense of $2,110 in 2002, representing the estimated future lease obligations related to the office space and estimated costs associated with subleasing the space, net of estimated cash flows from future sublease arrangements. During the three months ended March 31 2003, the Company re-evaluated its future expected space requirements given current market conditions and future outlook and determined that an additional portion of its leased office space and the assets associated with that office space were unnecessary for its future operations. The Company also revised its estimate of the future net costs associated with office space determined to be unnecessary for its future operations. As a result of this re- evaluation, the Company recorded an additional operating expense of $209 in the three months ended March 31, 2003, representing an adjustment to the estimated future lease obligations related to the office space and estimated costs associated with subleasing and disposing of the space, net of estimated cash flows from future sublease arrangements. In addition, the Company recorded an operating expense of $81 in the three months ended March 31, 2003 to write down the assets related to the office space to their estimated fair value. Significant assumptions were required concerning the estimated fair value of the assets. As provided under SFAS No. 144, the Company primarily used discounted cash flow analysis, together with other available information, to estimate the fair values. For the three months ended March 31, 2003, lease exit costs consisted of the following: Three Months Ended March 31, (Unaudited) ------------------------ 2003 2002 ---------- ---------- Lease obligation, net of estimated sub-lease income. . . . . . . . . . . . $ 165 $ -- Broker commissions and other miscellaneous costs . . . . . . . . . . 44 -- ---------- ---------- Lease exit costs. . . . . . . . . . . . . $ 209 $ -- ========== ========== At March 31, 2003, the liability associated with the lease exit costs consisted of the following: Balance at Subsequent Balance at December 31,Accruals, March 31, 2002 Net Payments 2003 ----------- ---------- -------- ----------- Lease obligation, net of estimated sub-lease income . . . $ 1,090 $ 165 $ (77) $ 1,178 Broker commissions and other trans- action costs . . . . . 235 44 (30) 249 -------- -------- -------- -------- Total lease exit liability. . . . . . . 1,325 209 (107) 1,427 Less: current portion of lease exit liability. . . . . . . (311) (455) -------- -------- Long-term lease exit liability . . . . $ 1,014 $ 972 ======== ======== Any change in this estimate, based on the availability of new or updated information, will be recorded in the period that it occurs. 7. EARNINGS PER SHARE: FASB SFAS No. 128 requires companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations. The calculation below provides net loss, weighted average common shares outstanding and the resultant net loss per share on both a basic and diluted basis for the three months ended March 31, 2003 and 2002. The calculation of diluted net loss per share excludes shares of common stock issuable upon the exercise of employee stock options and investor warrants and the conversion of the preferred stock as the effect of such exercises and conversions would be anti-dilutive. Three Months Ended March 31, (Unaudited) ------------------------ 2003 2002 ---------- ---------- Numerator: Net loss. . . . . . . . . . . . . . . . $ (950) $ (2,545) Cumulative dividend on Series B Preferred Stock. . . . . . . . . . . . (468) (204) ---------- ---------- Loss applicable to common stockholders. $ (1,418) $ (2,749) ========== ========== Basic and diluted loss per share. . . . . $ (0.04) $ (0.07) ========== ========== Denominator: Weighted average shares used in the calculation of basic and diluted loss per share . . . . . . . . . . . . 39,093,660 39,093,660 ========== ========== 8. STOCK OPTION COMPENSATION: During the first quarter of 2003, the Company did not grant any stock options to purchase shares of common stock pursuant to the 2001 Stock Option Plan. 9. COMMITMENTS AND CONTINGENCIES: a. LETTERS OF CREDIT During 2002, the Company maintained five letters of credit totaling $1,747, net of a $231 restricted certificate of deposit to secure a line of credit. These letters of credit collateralized the lease deposits for the Company's office facilities in Chicago, New York, and San Francisco. All letters of credit expired as of December 31, 2002. On August 31, 2002, the Company entered into an Amended and Restated Reimbursement and Security Agreement (the "Reimbursement Agreement") with Landmark. On behalf of the Company, Landmark applied for and received letters of credit in the aggregate amount of $1,599 from Wachovia Bank ("Wachovia") to collateralize lease deposits on the Company's office facilities (the "Landmark Letters of Credit"). Under the Reimbursement Agreement, the Company has agreed, among other things, to reimburse Landmark for all amounts that Landmark is required to pay Wachovia under the bank agreement related to the Landmark Letters of Credit, including all fees, penalties, interest and amounts in connection with draws on the Landmark Letters of Credit. The Landmark Letters of Credit were renewed in March and April of 2003 for periods of one year. Landmark may, in its sole discretion, cancel such Letters of Credit upon ninety (90) days' written notice to the Company. If the Landmark Letters of Credit so expire or are cancelled, the Company will need to enter into an alternate credit arrangement. Effective March 31, 2003, the Company terminated its lease of office facilities in New York, resulting in a reduction of $92 in the Landmark Letters of Credit in April 2003. b. LITIGATION On October 21, 1998, the Company instituted a lawsuit in the Northern District of Illinois against Catalina Marketing International, Inc. and its affiliate, Supermarkets Online, Inc. (together with Catalina Marketing International, Inc. "Catalina Marketing"), for infringement of the Company's United States Patent No. 5,761,648 (the "'648 Patent") seeking unspecified damages and a permanent injunction against further infringement. The defendants filed counterclaims alleging the invalidity and unenforceability of the '648 patent and sought unspecified damages and injunctive relief. In addition, on February 18, 2000, Catalina Marketing filed a request for re-examination of the '648 Patent with the United States Patent and Trademark Office, which request was granted on May 2, 2000. Therefore, the '648 Patent will be re-examined, which may result in the patent being narrowed in scope or declared invalid. On February 21, 2003, the Company settled this lawsuit and agreed to pay Catalina Marketing $350. The settlement dismissed all claims and counterclaims of the parties, including claims for attorneys' fees and expenses, with prejudice. The payment of this settlement was shared with a third party, resulting in a net expense to the Company of $150. The Company recorded this net expense as a charge to general and administrative expense in 2002. On November 15, 1999, Catalina Marketing filed a separate lawsuit against the Company in the United States District Court for the Middle District of Florida. The complaint alleges that the Company's systems and methods infringe Catalina Marketing's United States Patent No. 4,674,041 (the "'041 Patent"), and seeks to enjoin the Company from further infringing its patent. The case was transferred to the U.S. District Court for the Northern District of Illinois, which ruled that the Company did not infringe the '041 patent. On May 8, 2002, the United States Court of Appeals for the Federal Circuit affirmed-in-part, reversed-in-part, and vacated-in-part the non-infringement ruling of the U.S. District Court for the Northern District of Illinois. As a result of this ruling, this litigation is not concluded. The case has been remanded to the Northern District for further proceedings to determine whether the Company has any liability for infringement of the '041 patent. Discovery in this case is ongoing, and trial has been set for January 2004. The Company will continue to defend the action vigorously. An unfavorable outcome for the Company is considered neither probable nor remote by the Company's management at this time, and an estimate of possible loss or range of possible losses currently cannot be made. On February 12, 2000, Supermarkets Online, Inc. filed a lawsuit against the Company in the United States District Court for the Central District of California. The complaint alleges that the Company's systems and methods infringe Supermarkets Online's United States Patent No. 6,014,634 (the "'634 Patent"), and seeks unspecified damages and injunctive relief. On March 13, 2003, the Court removed the case from its active caseload until further application by the parties or Order of the Court. The Company has filed with the Patent and Trademark Office a request for re-examination of the '634 patent, which request for re-examination was granted in March 2001. An unfavorable outcome for the Company is considered neither probable nor remote by the Company's management at this time, and an estimate of possible loss or range of possible losses currently cannot be made. On August 23, 1999, the Company instituted a lawsuit in the Northern District of Illinois against Brightstreet.com, Inc. ("Brightstreet") for infringement of the '648 Patent, seeking unspecified damages and a permanent injunction against further infringement. Brightstreet filed counterclaims alleging the invalidity and unenforceability of the patent, and sought unspecified damages and injunctive relief. The parties agreed to a settlement of the lawsuit in open court on October 29, 2001. Subsequently, Brightstreet objected to the report and recommendation of the court that the written settlement agreement the Company presented most accurately reflected the agreement reached by the parties. On July 8, 2002, the United States District Court for the Northern District of Illinois fully adopted the report and recommendation of the Magistrate Judge concurring with the Company's belief that the litigation had been settled, denied Brightstreet's objections to the report and recommendation, adopted the written settlement agreement the Company presented, and dismissed the case with prejudice. On August 9, 2002, Brightstreet appealed the ruling of the District Court to the United States Court of Appeals for the Federal Circuit (the "Federal Circuit"). Both parties have submitted written positions to the Federal Circuit, which held an oral argument on May 9, 2003. An unfavorable outcome for the Company is considered neither probable nor remote by the Company's management at this time, and an estimate of possible loss or range of possible losses currently cannot be made. The foregoing pending lawsuits, while pending for at least three years, are nevertheless in the pre-trial discovery stage (except to the extent we may have reached a settlement in the Brightstreet lawsuit) and may not be resolved favorably to the Company. For example, the Company may not prevail and prevent others from using its proprietary rights. The Company may be required to alter or stop selling its services, or to pay costs and legal fees or other damages in connection with these cases and the various counterclaims that have been asserted against the Company, and its patents or future patents may be found invalid or unenforceable. However, an unfavorable outcome for the Company is considered neither probable nor remote by the Company's management at this time, and an estimate of possible loss or range of possible losses cannot currently be made. Furthermore, additional counterclaims, separate lawsuits or other proceedings may be brought against the Company to invalidate its patents or force the Company to change its services or business methods. In October 2002, the Company received a demand for arbitration from Coupco, Inc. ("Coupco") relating to a dispute over the Company's obligation to pay royalties under its Patent License Agreement with Coupco which was executed on April 6, 2000. The Company has opposed Coupco's demand and is currently investigating the factual and legal bases for Coupco's demand; however, the Company recorded a charge in 2002 of $200 and a charge of $50 in the first quarter of 2003 for the full amount of the demand. In February 2003, the Company received notice of entry of an order by the United States Bankruptcy Court of the Northern District of California, Division 3, approving a Settlement Agreement and Mutual Release with Netcentives, Inc. (the "Netcentives Settlement"). Pursuant to the Netcentives Settlement, the Company recorded, as a subsequent event, a gain of $256 in its financial statements as a reduction of cost of revenues in 2002. In addition, the Netcentive Settlement released the Company from any past or future obligation of payments to Netcentives, Inc. The Company had recorded a charge of $321 for unpaid service fees to Netcentives, Inc. in 2001. This charge was reversed against cost of revenues as a subsequent event in 2002. Currently, the Company is involved in other legal proceedings arising in the ordinary course of business, none of which is expected to have a material adverse effect on its financial position or results of operations. The Company 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 management's attention and resources, which in turn could harm the Company's business and financial results. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amounts are shown in thousands) CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS You should read the following discussion of our financial condition and results of operations along with the financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections. We have tried to identify these statements by using words such as "believe," "expect," and similar expressions, but that is not the exclusive means of identifying such statements. Our actual results could differ materially from those expressed in or implied by these forward-looking statements as a result of numerous risks, uncertainties and other factors, including, without limitation, our ability to obtain additional debt and/or equity financing, our ability to protect our patents, trademarks and proprietary rights, and the proliferation of unsolicited email on the Internet which creates a negative public perception of Internet marketing. For a discussion of these and other risks, uncertainties and other factors which could cause actual results to differ from those expressed in or anticipated by the forward-looking statements, see "Risk Factors" below. We undertake no obligation to update any of the forward-looking statements after the date of this report to conform these statements to actual results or otherwise to reflect new developments or changed circumstances, unless expressly required by applicable federal securities laws. OVERVIEW We are an online direct marketing and media company with a database of more than 25 million registered households. We help marketers reach their target consumers by leveraging our broad distribution network, sophisticated analytics and proprietary technology. Our mission is to be the leading provider of promotional offers to consumers while most effectively connecting marketers to their best customers. Utilizing a growing database of registered consumers, we supply marketers with a single resource for accessing and engaging a dynamic group of shoppers. Through our customized, integrated direct marketing and media products, advertisers can target a wide array of incentives, including printed and electronic coupons, personalized e-mails, rebates, trial offers, samples, sales notices and sweepstakes to promote sales of products or services and drive customers into brick-and-mortar stores or online web sites. In addition, our proprietary database technology tracks consumer response, shopping preferences and site behavior at the household and shopper level to provide our clients with a market leading breadth of sophisticated consumer data which they may use to make smarter marketing decisions. Our web site, coolsavings.com, offers consumers convenient and personalized incentives for goods and services from a broad range of advertisers, including brick-and-mortar retailers, online retailers, consumer packaged goods manufacturers, and travel and financial service providers. CRITICAL ACCOUNTING POLICIES We have prepared the financial information in this report in accordance with generally accepted accounting principles of the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our critical accounting policies include revenue recognition, estimating sales credits and the allowance for doubtful accounts, capitalization of web site development costs, the valuation of long-lived assets including estimates and judgments related to the impairment of such long-lived assets, lease exit costs and intangible assets. For a discussion of these critical accounting policies, see "Summary of Significant Accounting Policies" in CoolSavings' Form 10-K for the year ended December 31, 2002, filed with the SEC. RECENT DEVELOPMENTS On October 21, 1998, we instituted a lawsuit in the Northern District of Illinois against Catalina Marketing International, Inc. and its affiliate Supermarkets Online, Inc. (together with Catalina Marketing International, Inc., "Catalina") for infringement of our United States Patent No. 5,761,648 (the " '648 Patent"), seeking unspecified damages and a permanent injunction against further infringement. Catalina filed counterclaims alleging the invalidity and unenforceability of our patent and sought unspecified damages, attorneys' fees and injunctive relief. On February 21, 2003, we settled this lawsuit and agreed to pay Catalina $350. The settlement dismissed all claims and counterclaims of the parties, including claims for attorneys' fees and expenses, with prejudice. We shared the payment of this settlement with a third party, resulting in a net expense to us of $150. We recorded this net expense as a charge to general and administrative expenses in 2002. In February of 2003, we received notice of entry of an order by the United States Bankruptcy Court of the Northern District of California, Division 3, approving a Settlement Agreement and Mutual Release with Netcentives, Inc. (the "Netcentives Settlement"). Pursuant to the Netcentives Settlement, we recorded a gain of $256, which was recorded in our financial statements as a reduction of cost of revenues in 2002. In addition, the Netcentives Settlement released us from any past or future obligation of payments to Netcentives, Inc. We recorded a charge of $321 for unpaid service fees to Netcentives, Inc. in 2001. This charge was reversed against cost of revenues in 2002. As of March 31, 2003, dividends in the amount of 3,008,453 shares of Series B Preferred Stock have been accrued "in-kind" on the existing shares of Series B Preferred Stock declared and paid those dividends on April 1, 2003. REVENUE ONLINE DIRECT MARKETING SERVICES REVENUE We generate substantially all of our revenues by providing online marketing services to our advertisers. We charge our advertisers on a variety of bases, the most common of which include: . the number of e-mails delivered to members, commonly sold on a cost per thousand, or CPM, basis; . the number of times members click on an incentive linking the member to the advertiser's web site (known as a click-through response); and . the number of purchases made or qualified leads generated. Our pricing depends upon a variety of factors, including, without limitation, the degree of targeting, the duration of the advertising contract and the number of offers delivered. The degree of targeting refers to the number of identified household or member attributes, such as gender, age, or product or service preferences, used to select the audience for an offer. Generally, the rates we charge our advertisers increase as the degree of targeting and customization increases. Revenues subject to time- based contracts are recognized ratably over the duration of the contract. For contracts based on certain performance or delivery criteria, revenues are recognized in the month performance is delivered to the customer. Most of our advertising contracts have stated terms of less than one year and may include earlier termination provisions. In the three month period ended March 31, 2003, our largest advertiser accounted for 5.4% of our revenues and our top five advertisers together accounted for approximately 19.0% of our revenues, as compared to 9.3% and 23.9%, respectively, in the same period of 2002. Our revenues for each period depend on a number of factors including the number of advertisers sending promotional offers to our members, the size of our membership base and the responsiveness of our members to each promotion. We believe that our revenues will continue to be subject to seasonal fluctuations in accordance with general patterns of retail advertising spending, which is typically highest during the last half of the third quarter and first half of the fourth quarter. In addition, expenditures by advertisers tend to be cyclical, reflecting overall general economic conditions and consumer buying patterns. If purchasing patterns or timing of purchasing by advertisers change, our operations and quarter- to-quarter comparisons could be affected materially. CONSULTING SERVICES REVENUE By analyzing individual, demographic and correlative information in our database, we provide advertisers with several methods to gain insight into our members' preferences. We can also apply our analytic infrastructure to analyze the databases of our advertisers upon their request. We use sophisticated data mining tools to help our advertisers execute effective promotional campaigns, and we use the collected information to create predictive models to make future targeting even more effective. Using e-mail, we can also contact and survey members who have responded to a specific offer. Approximately 2% of our revenue was generated from consulting services during the three month period ended March 31, 2003. LICENSING REVENUE We license portions of our intellectual property, including our issued patents, to third parties. Approximately 1% of our revenue was generated from royalty and license fees and other miscellaneous sources during the three month period ended March 31, 2003. EXPENSES COST OF REVENUES Our cost of revenues consists primarily of Internet connection charges, web site equipment depreciation, salaries and related benefits of operations personnel, fulfillment costs related to member loyalty incentives and other directly related operations costs. SALES AND MARKETING Sales and marketing expenses include salaries, sales commissions, employee benefits, travel and related expenses of our direct sales force, advertising and promotional expenses, marketing, and sales support functions. Marketing costs associated with increasing our member base and other marketing expenses related to our products and services are expensed in the period incurred. PRODUCT DEVELOPMENT Product development costs include expenses for the development of new or improved technologies designed to enhance the performance of our service, including employee salaries, employee benefits, amortization of capitalized website development costs, and related expenses for our technology department, as well as costs for contracted services and equipment. GENERAL AND ADMINISTRATIVE General and administrative expenses include salaries, employee benefits and expenses for our executive, finance, legal and human resources personnel. In addition, general and administrative expenses include fees for professional services and occupancy costs. LEASE EXIT COSTS AND LOSS ON ASSET IMPAIRMENT Lease exit costs and Loss on asset impairment reflect costs associated with our determination that a significant portion of our leased office space was unnecessary for our future operations. During 2002 and 2003, we recorded lease exit costs representing the estimated future lease obligations related to the unnecessary leased office space, and estimated costs associated with subleasing the space, net of estimated cash flows from future sublease arrangements. We also determined that the estimated undiscounted cash flows expected to be generated by these assets in the unnecessary, unoccupied office space were less than their net book value. Therefore, we recorded losses on asset impairment to write-down the assets to their estimated fair value. Significant assumptions about the timing of a sale or inclusion of these assets in a future sublease were required in making the estimate of fair value for these assets. As provided under SFAS No. 144, we primarily used discounted cash flow analysis, together with other available information, to estimate the fair values. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002 NET REVENUES Net revenues increased 32% to $7,624 in the three month period ended March 31, 2003 from $5,763 in the three month period ended March 31, 2002. The revenue increase was attributable to an increase in the number of new member registrations and an increase in the number of revenue producing actions initiated by our members. COST OF REVENUES AND GROSS PROFIT Cost of revenues decreased to $788 in the three month period ended March 31, 2003, from $984 in the three month period ended March 31, 2002. Gross profit increased as a percentage of net revenues to 90% in the three month period ended March 31, 2003, from 83% in the three month period ended March 31, 2002. The increase in gross profit is primarily due to the decrease in amortization and depreciation in the first quarter of 2003 as compared to the first quarter of 2002 caused by a decrease in capital spending since mid-2001 and certain assets being fully amortized as of December 31, 2002. OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses increased to $4,395, or 58% of net revenues in the three month period ended March 31, 2003, from $3,495, or 61% of net revenues, in the three month period ended March 31, 2002. The $900 increase in sales and marketing expenses was primarily due to higher online advertising expense compared to the same period in 2002. PRODUCT DEVELOPMENT. Product development expenses decreased to $754, or 10% of net revenues, in the three month period ended March 31, 2003, from $1,072, or 19% of net revenues, in the three month period ended March 31, 2002. The $318 decrease in product development expenses was primarily due to a decrease in the amortization of capitalized web site costs as compared to the same period in 2002. A significant portion of our capitalized web site costs are fully amortized. GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased to $2,227, or 29% of net revenues, in the three month period ended March 31, 2003, from $2,486, or 43% of net revenues, in the three month period ended March 31, 2002. The $259 decrease in general and administrative expenses was primarily due to a decrease in office rent of $227, and a decrease in depreciation and amortization of approximately $157 due to the write down and disposal of assets in our office facilities. Partially offsetting these decreases was an increase in payroll related expenses of $91 compared to the same period in 2002. LEASE EXIT COSTS AND LOSS ON ASSET IMPAIRMENT. During the three months ended March 31 2003, we re-evaluated our future expected space requirements given current market conditions and future outlook and determined that an additional portion of our leased office space and the assets associated with that office space were unnecessary for our future operations. In accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", we recorded an operating expense of $209 in the three months ended March 31, 2003 representing an adjustment to the estimated future lease obligations related to the unnecessary office space and estimated costs associated with subleasing and disposing of the space, net of estimated cash flows from future sublease arrangements. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", we determined that the estimated undiscounted cash flows expected to be generated by these assets were less than their net book value. As a result, we recorded an operating expense of $81 in the three months ended March 31, 2003 to write down the assets to their estimated fair value. Significant assumptions about the timing of a sale or inclusion of these assets in a future sublease were required in making the estimate of fair value for these assets. As provided under SFAS No. 144, we primarily used discounted cash flow analysis, together with other available information, to estimate fair values. LOSS FROM OPERATIONS. Our loss from operations was $830 for the three month period ended March 31, 2003 compared to a loss of $2,274 for the same period of 2002. The improvement or reduction of the loss was due to the improvement in revenue reflecting the increase in new member registrations and the number of revenue-producing actions initiated by members. Our loss from operations included charges for lease exit costs and asset impairment of $209 and $81, respectively, for the three months ended March 31, 2003. We did not incur any lease exit costs or asset impairment charges for the same period of 2002. INTEREST INCOME (EXPENSE), NET. During the three month period ended March 31, 2003, we incurred net interest expense of $120, as compared to net interest expense of $271 for the three month period ended March 31, 2002. During the three month period ended March 31, 2003, net interest expense decreased due to the conversion of the Grid Note balance to Series B Preferred Stock in December 2002. No interest was incurred on the Grid Note in the first three months of 2003. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2003, we had approximately $4,914 in cash and cash equivalents compared to $4,867 at December 31, 2002. Accounts receivable, net of allowances for doubtful accounts, were $4,745 at March 31, 2003 compared to $4,900 at the end of 2002. At the end of the first quarter of 2003, our current liabilities totaled $12,046 compared to $11,901 at the end of 2002. Our independent auditors have issued their report on our financial statements for 2002 with an explanatory paragraph. The explanatory paragraph describes the uncertainty as to our ability to continue as a going concern. If Landmark exercises some or all of its rights to accelerate payment under our obligations to Landmark, our ability to operate our business will be jeopardized. We expect our current liquidity position to meet our anticipated cash needs for working capital and capital expenditures, excluding potential acquisitions, legal settlements or any accelerated payments to Landmark, for the next 12 months. If cash generated from our operations is insufficient to satisfy our cash needs, we may be required to raise additional capital or issue additional debt. If we raise additional funds through the issuance of equity securities, our stockholders may experience significant dilution. Furthermore, additional financing may not be available when we need it, or if available may not be on terms favorable to us or to our stockholders. If financing is not available when needed or is not available on acceptable terms, we may be unable to develop or enhance our products or services. In addition, we may be unable to take advantage of business opportunities or respond to competitive pressures. Any of these events could have a material adverse effect on our business, results of operations and financial condition. Net cash provided by operating activities was $152 in the three month period ended March 31, 2003. Net cash provided by operating activities resulted mainly from the decrease in restricted certificates of deposit of $231 associated with the collateral on our Letters of Credit. The restrictions on the certificates of deposit were lifted on January 1, 2003. Net Cash used by operating activities was $897 in the three month period ended March 31, 2002. The improvement reflects our reduction in net loss, payment of payables and accrued liabilities. Net cash used in investing activities was $105 in the three month period ended March 31, 2003 as compared to $141 for the same period of 2002. Net cash used in investing activities resulted primarily from amounts used in developing our web site. Since our inception, we have financed our operations primarily through the sale of our stock and the issuance of notes payable. In June and July 2001, we received proceeds of $5,000 from loans to us by Landmark (the "Senior Secured Loan"). The Senior Secured Loan is payable on June 30, 2006 and bore interest at 12.0% per annum until November 12, 2001, at which time the interest rate was reduced to 8.0% per annum. The interest is paid quarterly in arrears in the form of additional notes and warrants (described below). We have the right to prepay the Senior Secured Loan on or after the third anniversary thereof if certain conditions are met. The Senior Secured Loan also contains financial covenants and negative and affirmative covenants that, among other things, restrict our ability to incur additional indebtedness and take other actions without the consent of Landmark. At March 31, 2003, we were not in compliance with certain financial covenants of the Senior Secured Loan. This failure to comply constitutes an event of default. Consequently, the Senior Secured Loan including accrued interest thereon is immediately due and payable at the option of Landmark. Accordingly, we have classified the Senior Secured Loan, including the paid-in-kind interest which has been compounded and accrued on the principal balance, totaling $5,781, as currently payable as of March 31, 2003. In connection with the Senior Secured Loan, we issued a warrant to Landmark (the "Landmark Warrant"). The Landmark Warrant has a term of eight years and may be exercised in whole or in part immediately. The Landmark Warrant contains a net exercise feature and was exercisable for 10,000,000 shares of our common stock at an exercise price of $0.50 per share at November 12, 2001 (increasing to $0.75 per share on July 30, 2005 if not previously exercised). The number of shares exercisable under the Landmark Warrant automatically increases by two shares of common stock for each dollar of interest accrued on the Senior Secured Loan as paid-in-kind interest. The Series B Preferred Stock issued is redeemable at Landmark's option at any time. As of March 31, 2003, Landmark held 150,422,668 shares of Series B Preferred Stock (and has rights with respect to accrued dividends thereon) and holds a warrant to purchase 11,028,758 shares of our common stock. Landmark's ownership will continue to increase due to the issuance of additional shares of Series B Preferred Stock for dividends accruing on issued Series B Preferred Stock. Landmark's ownership also will increase if it exercises the Landmark Warrants. The number of Landmark Warrants will continue to increase as "in-kind" payments are made for interest accruing on the Senior Secured Loan. On August 31, 2002, we entered into an Amended and Restated Reimbursement and Security Agreement (the "Reimbursement Agreement") with Landmark. On our behalf, Landmark has applied for and received letters of credit (the "Landmark Letters of Credit") in the aggregate amount of $1,559 from Wachovia Bank to collateralize lease deposits on our office facilities. Under the Reimbursement Agreement, we have agreed, among other things, to reimburse Landmark for all amounts that Landmark is required to pay Wachovia under the bank agreement related to the Landmark Letters of Credit, including all fees, penalties, interest and amounts in connection with draws on the Letters of Credit. We have secured such obligations with a lien on all of our assets. If we fail to pay Landmark any amount when due, interest will accrue and compound on all such amounts at the rate of 7% per annum until such time as Landmark demands payment. Upon Landmark's demand for payment, interest will accrue and compound on all such amounts at the rate of 10% per annum from the date of the demand, increasing monthly at a rate of 1%. We reimbursed Landmark $4 for fees related to the Landmark Letters of Credit in 2002 and $0.3 in the three months ended March 31, 2003. The Landmark Letters of Credit were renewed in March and April of 2003 for periods of one year. Effective March 31, 2003, we terminated our lease of office facilities in New York. This resulted in a reduction of $92 in the Landmark Letters of Credit in April 2003. Landmark may, at its sole discretion, cancel such Letters of Credit on 90 days written notice to us. If the Landmark Letters of Credit so expire or are cancelled, we will need to enter into an alternate credit arrangement. If an alternate arrangement is not available when required or is not available on acceptable terms, our business, results of operations and financial condition may be affected. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," which requires all Variable Interest Entities ("VIEs") to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIE. In addition, the interpretation expands disclosure requirements for both VIEs that are consolidated as well as VIEs of which the entity is the holder of a significant percentage of the beneficial interests, but not the majority. The disclosure requirements of this interpretation are effective for all periods beginning after June 15, 2003. We do not expect this Interpretation to have a material impact on our financial position or results of operations. In January 2003, the FASB issued EITF No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 provides guidance on how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. EITF 00-21 will be effective for arrangements entered into in fiscal periods beginning after June 15, 2003. We do not expect that the provisions of EITF 00-21 will have a material impact on our financial position or results of operations. We adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long- lived assets and the associated asset retirement costs. The adoption of SFAS 143 did not have a material impact on our financial position or results of operations. We adopted Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which expands previously issued accounting guidance and disclosure requirements for certain guarantees. The Interpretation requires an entity to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. This adoption did not have a material impact on our financial position or results of operation. RISK FACTORS You should carefully consider the risks, uncertainties and other factors described below because they could materially and adversely affect our business, financial condition, operating results, cash flow and prospects, and/or the market price of our common stock. WE MAY NOT BE ABLE TO SECURE FINANCING TO MEET OUR SHORT AND LONG TERM CAPITAL NEEDS At March 31, 2003, we had $4,914 of cash and cash equivalents. We are in default under the terms of an amended and restated senior secured loan and security agreement dated July 30, 2001 (the "Amended and Restated Loan Agreement") with Landmark. The entire loan plus accrued interest, totalling $5,781 at March 31, 2003, is immediately due and payable at the option of Landmark. Secondly, Landmark could redeem its holding of $23,374 of our Series B Preferred Stock as of March 31, 2003 at any time. Although Landmark has funded our recent cash needs, Landmark has reserved its rights with respect to all breaches and defaults, and Landmark is under no obligation to advance us any additional funds. If we are unable to generate sufficient cash flows from operations or obtain continuing financing, we may be unable to operate our business. We have received a report from our independent auditors for our fiscal year ended December 31, 2002 containing an explanatory paragraph that describes the uncertainty as to our ability to continue as a going concern due to our historical negative cash flow and because, as of the date they issued their report, we did not have access to sufficient committed capital to meet our anticipated needs for at least the next 12 months. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES We incurred net losses of $950 in the first quarter of 2003, $8,287 in 2002, $29,227 in 2001 and $39,240 in 2000. As of March 31, 2003, our accumulated deficit was $98,816. We expect to continue to incur net losses through the remainder of 2003. We may not be able to achieve or sustain profitability in the future. OUR UNPROVEN BUSINESS MODEL MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS We launched our web site in February 1997, and operate in a market that continues to change. We face risks, uncertainties, expenses and difficulties frequently encountered by companies in new and rapidly evolving markets, including the Internet advertising and direct marketing markets. To address these risks and uncertainties, we must, among other things: . maintain relationships with existing advertisers and attract additional advertisers; . attract members who actively and repeatedly take advantage of our offers and who make purchases, request information and otherwise interact with our advertisers; . attract, integrate, motivate and retain qualified personnel; . enhance our brand recognition; . develop new promotions and services; . continue to upgrade and develop our systems and infrastructure to accommodate growth in membership and service enhancements; . anticipate and adapt to the evolving Internet advertising and direct marketing markets and changes in advertisers' promotional needs and policies; . maintain and defend our intellectual property rights; and . respond to changes in government regulations. We may not be successful in accomplishing these objectives. Further, we may not be able to generate or secure the necessary funding to achieve these objectives. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." OUR COMMON STOCK IS VOLATILE, HAS LIMITED PUBLIC LIQUIDITY AND MAY LEAD TO LOSSES BY INVESTORS AND RESULT IN SECURITIES LITIGATION Our common stock currently trades on the OTC Bulletin Board (OTCBB). Stockholders may have difficulty buying and selling our stock on the OTCBB. Since the OTCBB is a broker driven marketplace, we are dependent on professional market makers to facilitate trading of our stock on the OTCBB. If market makers do not register to trade our stock on the OTCBB, stockholders may not have a public market for the purchase and sale of our securities. The market price of our common stock has been volatile and may be subject to wide fluctuations. Since our public offering in May 2000, the per share price of our common stock has fluctuated from a high of $7.13 per share to a low of $0.03 per share. Factors that might cause the market price of our common stock to fluctuate include, without limitation: . quarterly variations in our operating results; . operating results that vary from the expectations of securities analysts and investors or from our own forecasts; . interpretation of the effect of our Series B Preferred Stock and Series C Preferred Stock on our overall capital structure; . changes in expectations as to our future financial performance, including our own forecasts and financial estimates by securities analysts and investors; . changes in market valuations of other Internet companies; . changes in governmental regulation of the Internet or Internet advertising, including any governmental inquiry of another Internet company; . loss of major advertisers; . resolution of our pending or future patent litigation or other changes in the status of our intellectual property rights; . pursuit of significant claims or legal proceedings against us; . announcements of technological innovations or new services by us or our competitors; . announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments; . changes in our liquidity position; . changes in key personnel; . future sales of our common stock, including sales of common stock acquired upon conversion of our Series B Preferred Stock; . announcements of material events related to outstanding loans to us; and . volatility in the equity markets. The market prices of the securities of Internet-related and technology companies are often highly volatile and subject to wide fluctuations that bear little relation to actual operating performance of these companies. Also, some companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. Any securities class action litigation involving us likely would result in substantial costs and a diversion of senior management's attention and resources, and likely would harm our stock price. WE DERIVE MOST OF OUR REVENUES FROM CONTRACTS WITH OUR ADVERTISERS THAT MAY BE CANCELLED ON 30-DAYS NOTICE A majority of our current advertising contracts permit either party to terminate the contract upon 30-days advanced written notice. We may be unsuccessful in securing longer commitments. Some advertisers prefer short- term contracts because they use our service to promote limited-time promotional events or seasonal products and services. The possibility that our advertising contracts can be terminated on 30-days advance written notice makes it difficult for us to forecast our revenues. We may not be able to renew our existing contracts or attract new advertisers. OUR OPERATING RESULTS ARE SUBJECT TO SEASONAL FLUCTUATIONS Our operating results are subject to seasonal fluctuations that may make our stock price more volatile. Advertising sales in traditional media, such as television and radio, generally are lower in the first and third calendar quarters of each year. Further, Internet traffic typically decreases during the summer months, which in turn may reduce the amount of advertising to sell and deliver. We anticipate that our future revenues will continue to reflect these seasonal patterns. WE DEPEND ON COMPELLING PROMOTIONAL OFFERS BY OUR ADVERTISERS Our members' usage of our services, and the resulting attractiveness of our service to advertisers, depends upon the quality of the promotional offers we deliver and our members' interest in them. In addition, under some of our advertising contracts, our revenues depend on members' responsiveness to specific promotions. We currently consult with our advertisers about the type and frequency of incentives they offer, but we cannot control their choice of promotions or their fulfillment of incentives. If our advertisers' promotional offers are not attractive to our members, we will not be able to maintain or expand our membership or generate adequate revenues based on the size of our membership or on the responses we produce. Moreover, if our members are not satisfied with the offers our advertisers make available to them or with the products or services they receive upon redemption of offers, their negative experiences might result in publicity that could damage our reputation, which would harm our efforts to attract and retain members and advertisers. WE DEPEND ON THE SUCCESSFUL INTRODUCTION OF NEW SERVICES AND FEATURES To retain and attract members and advertisers, we believe that we will need to continue to introduce additional services and new features on our web site. These new features and services may require us to spend significant funds on product development and on educating our advertisers and consumers about our new service offerings. New services and features may contain errors or defects that are discovered only after introduction. Correcting these defects may result in significant costs, service interruptions, loss of advertisers' and members' goodwill and damage to our reputation. In addition, our successful introduction of new technologies will depend on our advertisers' ability to adapt to using these technologies, over which we have no control. If we introduce a service or feature that is not favorably received, our current members may use our web site and other services less frequently, our existing advertisers may not renew their contracts, and we may be unable to attract new members and advertisers. WE MUST BE ABLE TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH OPERATORS OF OTHER WEB SITES TO ATTRACT NEW MEMBERS We advertise on third-party web sites using banner advertisements to attract potential new members. Competition for banner and sponsorship placements on the highest traffic web sites is intense, and we may not be able to enter into these relationships on commercially reasonable terms, or at all. Even if we enter into or maintain our current relationships with other web site operators, those sites may not attract significant numbers of users or increase traffic to our web site. INTELLECTUAL PROPERTY LITIGATION AGAINST US CONTINUES TO BE COSTLY AND COULD RESULT IN THE LOSS OF SIGNIFICANT RIGHTS We expect that, as the number of services and competitors in Internet advertising and direct marketing grows, we will be increasingly subject to intellectual property infringement, unfair competition and related claims against us. Third parties may also seek to invalidate our United States Patents, No. 5,761,648, entitled "Interactive Marketing Network and Process Using Electronic Certificates" and No. 5,855,007, entitled "Electronic Coupon Communication System." Currently, we are a defendant in two lawsuits filed by a competitor, each of which alleges that our technology or business methods infringe on the competitor's patent. The lawsuits seek, among other things, to prevent us from using methods that allegedly violate the competitor's patents. In addition, competitors have in the past, and may in the future, name our customers as defendants in these suits, which may cause these customers to terminate their relationships with us. Our efforts to defend these actions may not be successful. Our failure to prevail in this litigation could result in: . our paying monetary damages, which could be tripled if the infringement is found to have been willful; . an injunction requiring us to stop offering our services in their current form; . our having to redesign our technology and business methods, which could be costly and time-consuming, even where a redesign is feasible; or . our having to pay fees to license intellectual property rights, which may result in unanticipated or higher operating costs. Because of the ongoing technical efforts of others in our market and the relatively recent introduction of our technology, we may continue to be involved with one or more of our competitors in legal proceedings to determine the parties' rights to various intellectual property, including the right to our continued ownership of our existing patents. Our failure to prevail in these proceedings could harm our business. See "Part II - Item 1 - Legal Proceedings" We cannot predict whether other third parties will assert claims of infringement or similar charges against us, or whether any past or future claims will harm our business. We believe that participants in our market increasingly are attempting to obtain patent protection for their business methods. We cannot predict when or if patents will result from these efforts, or whether any of these third parties' patents will cover aspects of our business. The details of currently pending United States patent applications are not publicly disclosed until either the patent is issued or 18 months from filing, depending on the application filing date. Any third-party claim, with or without merit, could be time-consuming, result in costly litigation and damages, cause us to reduce or alter our services, delay or prevent service enhancements or require us to enter into royalty or licensing agreements. In addition, legal standards regarding the validity, enforceability and scope of intellectual property in Internet-related businesses are unproven and continue to evolve. In this legal environment, we may be required to license other parties' proprietary rights in an effort to clarify our ability to conduct business or develop new services. Royalty or licensing agreements, if required, might not be available on terms acceptable to us, or at all. If there is a successful claim of infringement against us and we are unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, our business could be substantially harmed. PROTECTING OUR PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS MAY BE COSTLY AND MAY DISTRACT OUR MANAGEMENT We regard the protection of our patent rights, copyrights, service marks, trademarks, trade dress and trade secrets as important to our future success. However, the steps we take to protect these and other proprietary rights will be costly, may require significant management resources and may be inadequate. If the steps we take are not adequate, we may lose license revenues, and potential competitors may be more inclined to offer similar products and services. Either of these possibilities could harm our business. PATENTS Although we have two issued United States patents and several pending United States and foreign patent applications directed to different aspects of our technology and business processes: . our United States patents and any other patent we may obtain could be successfully challenged by third parties, which could limit or deprive us of the right to prevent others from exploiting the electronic certificate issuing and processing method or other inventions claimed in our current or future patents; . current and future competitors could devise new methods of competing with our business that are not covered by our issued patents or any other patents we may obtain, or against which our issued patents and any other patents we may obtain may be ineffective; . our pending patent applications may not result in the issuance of patents; . our ability to receive royalties for use of our patents by third parties may be limited; and . a third party may have or obtain one or more patents that cause specific aspects of our business to be restricted or that require us to pay license fees. We cannot predict how United States laws and court decisions may impact our proprietary rights. Any such impact would need to be assessed in the context of a particular situation. We are also uncertain whether countries other than the United States will grant patents for inventions pertaining to Internet-related businesses, or as to the extent of protection those foreign patents would afford if issued. As in the United States, the legal standards applied abroad for intellectual property in Internet-related businesses are evolving and unproven. Any ruling or legislation that reduces the validity or enforceability of our patents may seriously harm our business. We presently have one lawsuit pending against a company we believe has infringed on our patents. We believe that we have settled that lawsuit, and the court in that case issued an initial report and recommendation concurring with our belief and specifying proposed settlement terms. That initial report and recommendation has been appealed by the defendant to the Federal Circuit, and is awaiting disposition. This litigation has been costly, and, if the above described settlement is not finalized, the lawsuit may continue over the course of several years. The outcome of this lawsuit, as well as any other lawsuits we may file, may not be favorable to us. We may not prevail and prevent others from infringing on our patents and using our proprietary rights. Furthermore, one company we sued and an affiliate of that company have filed two separate lawsuits against us seeking damages or to prevent us from using features of our system or business. Both companies in the above described lawsuits are taking steps in the United States Patent and Trademark Office to contest our patent rights. On May 2, 2000, the United States Patent and Trademark Office granted the request for re-examination of our Patent. Therefore, our United States Patent No. 5,761,648, "Interactive Marketing Network and Process Using Electronic Certificates" (the "'648 Patent") will be re- examined. The re-examination may result in the '648 Patent being narrowed in scope or declared invalid. We expect that, like other participants in our market, we will increasingly be subject to infringement claims as the number of services and competitors in our industry segment grows. Any infringement claim, regardless of its merit, could be time-consuming, result in costly litigation, cause service modifications or delays or require us to enter into royalty or licensing agreements. Licenses for third party patents might not be available on terms that are acceptable to us, or at all. TRADEMARKS, COPYRIGHTS AND TRADE SECRETS We rely on a combination of laws and contractual restrictions to establish and protect our proprietary rights. The contractual arrangements and other steps we have taken to protect our intellectual property may not prevent misappropriation of our proprietary rights or deter independent third-party development or use of similar intellectual property. In addition, we have registered and have applied for registration of trademarks and service marks in the United States and in other countries. However, our pending registrations might not be issued and our registered marks may not prevent others from using similar marks. DOMAIN NAMES We currently hold the Internet domain name coolsavings.com, as well as various other related names. The requirements for holding domain names could change. As a result, we may not acquire or maintain the "coolsavings.com" domain name in the United States or all of the countries in which we wish to conduct business in the future. This could impair our efforts to increase brand recognition and to increase traffic to our web site. We also could be subject to disputes over our ownership of our domain names, which could be costly and disruptive. LICENSES As of April 30, 2003, we have granted licenses to eight competitors under our patent, several on the condition that they restrict their coupon distribution in ways acceptable to us. Several of these license agreements involve the payment to us of royalties or license fees. Total revenues generated under these licenses for the three months ended March 31, 2003 and 2002 were $75 and $66, respectively. If the nature or scope of the licenses were disputed, we would need to institute proceedings to enforce our rights under these agreements or under our patent. In that case, if we did not institute proceedings to enforce our rights, or if we did not succeed in such proceedings, then our license revenues could decrease substantially or entirely. WE MAY LOSE BUSINESS OR INCUR LIABILITIES TO OUR ADVERTISERS DUE TO UNCERTAINTIES OR INACCURACIES IN OUR DATABASE INFORMATION It is important to our advertisers that we accurately record our members' demographics, and track our delivery of offers and advertisements and, in some instances, redemptions of incentives that are offered to our members. If the systems we have developed to record information about our members' demographic profiles, usage of our web site and other member information do not perform as intended, we may not be able to accurately evaluate our members' household characteristics or the success of an advertiser's promotional campaign. We rely on the accuracy of the demographic, income and other information provided by our registering members. If advertisers perceive our tracking and evaluations to be unreliable or if our members' self-reported information proves to be inaccurate, we may lose current and potential advertisers, suffer erosion in our advertising rates or face disputes over proper advertising charges. FAILURE TO PROMOTE AND PROTECT OUR BRAND WILL HARM OUR BUSINESS We believe that strengthening our brand will be increasingly important because our market is competitive and has low barriers to entry. Our ability to promote and position our brand depends on the success of our marketing efforts and whether we can provide high quality services that motivate our members to use our services. If our brand enhancement strategy is unsuccessful, our business will be harmed. WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE COMPETITORS The market for e-marketing services is new, rapidly evolving and intensely competitive. Barriers to entry for companies in our market are low, and current and potential competitors can launch new web sites and e- marketing services at relatively low cost. Many of our current and potential competitors have longer operating histories, greater brand recognition, larger customer or user bases, and significantly greater financial, marketing, technical and other resources than we do. In addition, our competitors may be acquired by, receive investments from or enter into other commercial relationships with larger, well-established and well-financed companies. Therefore, some of our competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to web site and systems development. They may also try to attract advertisers by offering free services. Increased competition may cause us to lose brand recognition and market share and could otherwise harm our business. OUR FAILURE TO ATTRACT, ASSIMILATE AND RETAIN HIGHLY SKILLED PERSONNEL MAY SERIOUSLY HARM OUR BUSINESS Our future success depends on the continued services of our senior management and other key sales and technical personnel, particularly Matthew Moog, our President and Chief Executive Officer, David Arney, our Chief Financial Officer, John J. Adams, our Chief Operating Officer, Ken Treske, our Chief Marketing Officer, Charlie Kingery, our Senior Vice President of Sales, and David Desser, our Vice President of Business Affairs and General Counsel. Our future success also depends on our ability to identify, attract, retain and motivate highly skilled employees. Competition for the best employees in our industry remains intense. We have occasionally encountered and may continue to encounter difficulties in hiring and retaining highly skilled employees, particularly qualified software developers for our web site and database systems. We may be unable to retain our key employees or identify, attract, assimilate or retain other highly qualified employees in the future. OUR REPUTATION AND BUSINESS COULD BE DAMAGED IF WE ENCOUNTER SYSTEM INTERRUPTIONS OR CAPACITY LIMITATIONS We seek to generate a high volume of traffic and transactions on our web site. Our database must also handle a large volume of member data and information about members' usage of our web site. The satisfactory performance, reliability and availability of our web site, database systems and network infrastructure are critical to our reputation and our ability to attract and retain large numbers of members. Our revenues depend on promotional offers being readily available for members and our ability to process their coupon downloads, e-mail responses or other transactions on our web site. Any system interruptions that result in the unavailability of our service or reduced member activity would impair the effectiveness of our service to advertisers. Interruptions of service may also inhibit our ability to attract and retain members, which in turn will hinder our sales and marketing efforts. We have experienced periodic system interruptions, which may occur from time to time in the future. Additionally, acts of sabotage, known as denial of service attacks, on prominent, high traffic web sites have caused extended interruptions of service on those web sites. Like other operators of web sites, we could also face system interruptions or shutdowns as a result of a denial of service attack. A substantial increase in rate of traffic on our web site will require us to expand and upgrade our technology, processing systems and network infrastructure. Any unexpected upgrades could be disruptive and costly. In addition, our existing systems may encounter unexpected problems as our member base expands. Our failure to handle the growth of our databases could lead to system failures, inadequate response times or corruption of our data. We may be unable to expand and upgrade our systems and infrastructure to accommodate this growth in a timely manner. Any failure to expand or upgrade our systems could damage our reputation and our business. Furthermore, the increased use of the Internet has caused frequent interruptions and delays in accessing and transmitting data over the Internet. If the use of the Internet continues to grow rapidly, the Internet's infrastructure may not continue to support the demands placed on it, and its performance and reliability may decline. Interruptions or delays in Internet transmissions may disrupt our members' ability to access advertisers' offers on our web site and our ability to send targeted e- mails. We also rely on web browser technology to create and target promotional offers. If access to these web-based systems is interrupted, our ability to disseminate new offers will be impaired, which could cause lost revenues or disputes with our advertisers. WE RELY ON THIRD PARTY SERVICE AND EQUIPMENT PROVIDERS, AND ANY DISRUPTION OR FAILURE IN THE SERVICES OR THE COMPUTER HARDWARE THEY PROVIDE WILL HARM OUR BUSINESS We rely on a third-party service provider to provide access to our web site and support its operation. Our web site infrastructure is co- located at the suburban Chicago facility of Exodus Communications, Inc. which filed for protection under Chapter 11 of the U.S. Bankruptcy Code in 2001 and was acquired by Cable and Wireless PLC in February 2002. Our support arrangement with this provider is for a term of one year and may be canceled on 30 days notice in certain circumstances. In the event this arrangement is terminated, we may not be able to find alternative service providers on a timely basis, on terms acceptable to us or at all. In addition, we rely on software licenses from third parties. If these licenses are terminated or if such software is no longer supported by its manufacturer, we may not be able to find and install satisfactory alternate software on a timely basis, on terms acceptable to us or at all. Our success and our ability to attract new members and motivate our members to respond to our advertisers' offers depends on the efficient and uninterrupted operation of our computer and communications hardware systems. Our web servers and the database behind our system, as well as the servers we use to perform data analysis, are currently located at Exodus, a Cable and Wireless Service data center in Oak Brook, Illinois. Currently, all site traffic is directed to the Exodus system and we maintain a redundant version of our entire system at our Chicago headquarters. The computer systems at each of our two hosting sites are vulnerable to damage or interruption from floods, fires, power loss, telecommunication failures, and other natural disasters. In addition, the backup system in our Chicago facility has only two hours of emergency back-up power. The occurrence of a natural disaster or other unanticipated problems at our facility or at the Exodus facility could result in interruptions in or degradation of our services. Our business interruption insurance may not adequately compensate us for resulting losses. Furthermore, the computer servers running our system are vulnerable to general mechanical breakdown or component failure, computer viruses, physical or electronic break-ins, sabotage, vandalism and similar disruptions, which could lead to loss or corruption of data or prevent us from posting offers on our web site, sending e-mail notifications of new offers or delivering coupons or other certificates to our members. WE DEPEND ON INTERNET SERVICE PROVIDERS TO DELIVER OUR E-MAIL TRANSMISSIONS We send e-mail messages on behalf of advertisers to our members who have requested to receive e-mail from us; we also assemble and transmit e- mail newsletters to our members which contain promotions from multiple advertisers. In order for our members to receive our e-mails, we depend on Internet Service Providers (ISPs) to accept and deliver those messages to our members. Due to the proliferation of unsolicited e-mail, many ISPs are developing technologies to limit or eliminate the delivery of unsolicited e-mail to their members. Although we send e-mail only to those members who specifically have requested we do so, the technologies being developed or currently in use may not respect the choice made by our members. We, along with others in the industry that send e-mail, have at various times and during the first quarter of 2003 experienced the failure of an ISP to deliver e-mails to their customers who also are our members. Many of our members use an e-mail service provided by one of the relatively small number of large ISPs. If one or more of those ISPs fails to deliver our e-mail transmissions, our inability to communicate with those members could harm our business. In such a circumstance, we may not be able to send the volume of e-mail requested by an advertiser. Additionally, our inability to communicate with those members may cause them to stop visiting our web site. If our database of e-mail addresses shrinks materially as a result of the failure of one or more ISPs to deliver our e-mail, advertisers may be less willing to purchase our e-mail products and services. WE MAY BE SUBJECT TO CLAIMS OR REGULATORY INVESTIGATIONS AS A RESULT OF OUR DATA ANALYSIS ACTIVITIES The information in our database is an integral part of our business. We do not sell member identifying information to third parties without the consent of the member. Furthermore, we send our e-mail notices and newsletters to members who have elected to receive them. Some people who receive promotions from us may be unhappy that we contacted them. In addition, we provide advertisers with aggregate information regarding member demographics, shopping preferences and past behavior. Our use of this aggregated information may cause dissatisfaction among our members or otherwise lead to negative publicity. There has been substantial publicity, governmental investigations and litigation regarding privacy issues involving the Internet and Internet-based advertising. To the extent that our data mining and/or other activities conflict with any privacy protection initiatives or if any private or personally identifiable information is inadvertently made public, we may become a defendant in lawsuits or the subject of regulatory investigations relating to our practices in the collection, maintenance and use of information about, and our disclosure of these information practices to, our members. Litigation and regulatory inquiries of these types are often expensive and time consuming, and their outcome is uncertain. We may need to spend significant amounts on our legal defense, and senior management may be required to divert its attention from other aspects of our business. Furthermore, a judgment or decree may be entered against us which could require us to pay damages or to make changes to our present and planned products or services. OUR BUSINESS WILL BE HARMED IF OUR ONLINE SECURITY MEASURES FAIL Because our efforts to attract and retain members depend, in part, on potential members' expectations of privacy in using our services, our business could be damaged by any security breach of our database or web site. We may be required to spend significant capital and other resources to protect against security breaches or to alleviate problems caused by these breaches. Someone circumventing our security measures could misappropriate proprietary information, corrupt our database or otherwise interrupt our operations. We could also be subject to liability as a result of any security breach or misappropriation of our members' personal data. This could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims, as well as claims based upon other misuses of personal information, such as unauthorized marketing. These claims could result in costly litigation and could limit our ability to attract and retain advertisers and members. Our security measures may fail to prevent security breaches. Any failure to prevent security breaches will damage our reputation and harm our business. WE MAY BE LIABLE FOR SUPPLYING INACCURATE PROMOTIONAL INFORMATION TO CONSUMERS Our employees may make errors in posting our advertisers' promotions. We may face liability if the promotional information in the offers available to our members is inaccurate. Additionally, any negative publicity generated as a result of inaccurate information in the offers we deliver could damage our reputation and diminish the value of our brand name. WE MAY BE HARMED IF OUR ADVERTISERS FAIL TO HONOR THEIR PROMOTIONS ON OUR WEB SITE OR TO COMPLY WITH APPLICABLE LAWS Our success depends largely upon retailers honoring our electronic and printed coupons and upon advertisers reliably delivering and accurately representing the listed goods and services. We have occasionally received, and expect to continue to receive, complaints from our members about retailers' failure to honor our coupons or about the quality of the goods and services featured in our promotions. These complaints may be accompanied by requests for reimbursement or threats of legal action against us. Any resulting reimbursements or related litigation could be costly for us, divert management attention, or increase our costs of doing business. In addition, our advertisers' promotion of their goods and services may not comply with federal, state and local laws. Our role in facilitating advertisers' sales activities may expose us to liability under these laws. If we are exposed to this kind of liability, we could be required to pay substantial fines or penalties, redesign our web site or business processes, discontinue some of our services or otherwise spend resources to limit our liability. WE DEPEND ON WIDESPREAD ACCEPTANCE OF ONLINE DIRECT MARKETING AND PROMOTIONS AND THE CONTINUED GROWTH OF ONLINE COMMERCE Our success depends on the continued growth and acceptance by both consumers and advertisers of online direct marketing and other promotional services available through the Internet. Although incentive promotions and direct marketing have been provided for many years through newspaper inserts, direct mailing and other conventional marketing and sales channels, they have only recently been offered on the Internet. Many of our current or potential advertising customers, particularly traditional offline businesses, have little or no experience using the Internet for advertising purposes, and may be reluctant to spend money on our services. As a result, we face a longer sales cycle when dealing with traditional offline businesses. At times, these sales cycles can last more than a year. In addition, some traditional retailers may not readily accept our computer-generated certificates as valid, in part because of their cashiers' lack of familiarity with them and the risk that these coupons can be counterfeited. The other services we offer, including the use of targeted e-mails to alert consumers to savings opportunities, also represent new marketing methods whose acceptance by consumers and advertisers is less certain than traditional marketing methods. Although we do not send unsolicited e-mail, commonly known as "spam," negative public perception associated with "spam" could reduce the demand for our services. In addition, we are dependent upon the continued growth of the Internet as a medium for commerce. Demand for services and products sold over the Internet is uncertain for a number of reasons, including concerns related to network reliability and poor performance. Furthermore, concerns about the security of transactions conducted on the Internet and consumer privacy may inhibit the growth of the Internet generally, and online commerce in particular. Any compromise of security involving Internet-based transactions could result in negative publicity and deter people from using the Internet or from using it to conduct transactions that involve transmitting confidential information, such as registering for membership or purchasing goods and services. Changes in or insufficient availability of telecommunications services to support the Internet also could result in slower response times and reduced usage of the Internet. If use of the Internet does not continue to grow, grows more slowly than expected or does not become a viable commercial marketplace, our business will suffer. CHANGES IN CONSUMER AND ADVERTISER TRENDS COULD HARM OUR BUSINESS We derive substantially all of our revenues from fees charged to advertisers for our promotional services. Therefore, we will be affected by changing trends in retail advertising, such as the trend away from periodic promotions and toward "everyday low prices." In addition, many of our advertisers are national retailers and suppliers of consumer products and services. These businesses are affected by the general economy as well as consumer confidence, which has at times diminished despite otherwise strong financial conditions. Consumer spending also can be affected by trends related to lifestyle, such as changing tastes in fashion or entertainment. WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL DEVELOPMENTS AND EVOLVING INDUSTRY STANDARDS The Internet is characterized by rapidly changing technology, evolving industry standards, frequent new service and product announcements, introductions and enhancements, and changing consumer and advertiser demands. Our future success will depend on our ability to adapt our services to rapidly changing technologies and evolving industry standards and to continually improve the performance, features and reliability of our services. For example, we may be required to adapt our services to be compatible with Internet-connected devices other than traditional personal computers, such as handheld and wireless devices. We may also need to adapt to evolving standards resulting from the convergence of the Internet, television and other media. The widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to incur substantial expenditures to modify or adapt our services or infrastructure. FEDERAL, STATE AND LOCAL GOVERNMENTS MAY FURTHER REGULATE THE INTERNET, INTERNET ADVERTISING AND PRIVACY WHICH COULD SUBSTANTIALLY HARM OUR BUSINESS The adoption or modification of laws or regulations relating to the Internet, Internet-based advertising and privacy, and the application of traditional legal principles to on-line activities, could harm our business. In particular, our business could be severely damaged by any regulatory restrictions on our collection or use of information about our members. Laws and regulations that apply to Internet advertising and communications and Internet users' privacy are becoming more prevalent. For example, the United States Congress and Federal Trade Commission have adopted laws and regulations regarding the online collection and use of information from children and the content of Internet communications, and various states regulate e-mail marketing and online privacy. However, even in areas where there has been some legislative action, the laws governing the Internet remain largely unsettled. There is no single government body overseeing our industry, and some existing state laws have different and sometimes inconsistent application to our business. It may take years to determine whether and how existing laws, such as those governing intellectual property, privacy, libel, taxation, determination of proper state jurisdiction taxation and the need to qualify to do business in a particular state, apply to the Internet, Internet advertising and online activities in general. Also, we have conducted trivia quizzes and other contests and sweepstakes on our web site, which may be subject to gaming and sweepstakes laws. Our attempts to comply with these laws may be inadequate, in part because the effect of these laws on our activities is often unclear. In addition, since our web site can be accessed from foreign counties, our business may be subject to foreign laws and regulations. Activities that may be acceptable in the United States may not be acceptable in foreign jurisdictions. We expect that regulation of the Internet and Internet advertising will intensify. New laws could slow the growth in Internet use and otherwise adversely affect the Internet as a commercial medium, which would harm our business. For example, a number of proposals to restrict the collection of information about Internet users and to tax Internet-based transactions are under consideration by federal, state, local and foreign governmental organizations. A three-year federal moratorium on new taxes on Internet access expired in October 2001, and was extended in November 2001 for two years. This moratorium does not preempt state tax laws; there is no federal law preempting the levy of state sales taxes to online e-commerce activities. The taxation of online transactions or other new regulations could increase our costs of doing business or otherwise harm us by making the Internet less attractive for consumers and businesses. The application of existing laws such as those governing intellectual property and privacy to the Internet and Internet advertising lends additional uncertainty to our business. Any application of existing laws and regulations to the Internet; new legislation or regulation that imposes stricter restrictions on privacy, consumer protection or advertising practices; any government investigation of our privacy practices or other business methods; or the application of laws from jurisdictions whose laws do not currently apply to us could: . create uncertainty in the marketplace that could reduce demand for our services; . limit our ability to collect and to use data from our members, which could prevent us from attracting and retaining advertisers; . result in expensive litigation, costly and disruptive efforts to respond to governmental investigations and burdensome fines or penalties; . increase the cost of delivering our services to advertisers; . reduce the effectiveness of our targeted promotional services; or . in some other manner harm our business. OUR SERIES B PREFERRED STOCKHOLDER HAS THE ABILITY TO EXERCISE SIGNIFICANT CONTROL OVER US WHICH MAY DETER THIRD PARTIES FROM ACQUIRING US The holder of our Series B Preferred Stock has the ability to control all matters requiring approval by our stockholders, including the election and removal of directors and the approval of any merger, consolidation or sale of all or substantially all of our assets. In addition, pursuant to the terms of our Certificate of Incorporation, the Series B Preferred stockholder is entitled to designate not less than a majority of the Board of Directors of the Company. Among other limitations, without the approval of the holders of at least a majority of the outstanding shares of Series B Preferred Stock, we may not: . amend our charter document or our bylaws; . merge or consolidate with any other company or sell all or substantially all of our assets; . make acquisitions of other businesses or assets or enter into joint ventures or partnerships with other entities that would involve the payment of consideration of $1 million or more; . purchase, redeem or otherwise acquire for value any shares of our capital stock (with certain exceptions); or . authorize or issue equity securities or securities exercisable for or convertible into equity securities other than for cash and shares issuable upon conversion and exercise of securities outstanding on the date of issuance of the Series B Preferred Stock and shares issuable under our 2001 Stock Option Plan. These restrictions provide the holder of the Series B Preferred Stock with significant control over us and may discourage others from initiating potential merger or other change of control transactions. In addition, if the holder of the Series B Preferred Stock were to convert a portion of the Series B Preferred Stock and sell the common stock issued on conversion, the price of our common stock could decrease substantially. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks associated with fluctuations in interest rates. Because all of the amounts in our 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 impacted materially by increases or decreases in interest rates. If market rates were to increase immediately by 10% from levels on March 31, 2003, the fair value of this investment portfolio would increase by an immaterial amount. If market rates were to decrease immediately by 10% from levels on March 31, 2003, the resultant decrease in interest earnings of our investment portfolio would not have a material impact on our earnings as a whole. ITEM 4. CONTROLS AND PROCEDURES (a) We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we issue or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon our evaluation of our disclosure controls and procedures performed within 90 days of the filing date of this report, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are adequate. (b) We have made no significant changes in internal controls or in other factors that could significantly affect those controls subsequent to the date of our evaluation of those controls by our chief executive officer and chief financial officer. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are currently a defendant in two patent infringement lawsuits and a plaintiff in another patent infringement lawsuit. For a further discussion of legal proceedings, see Part 1, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2002 filed with the SEC, and the update below. On February 12, 2000, Supermarkets Online, an affiliate of Catalina Marketing, filed a lawsuit against us in the United States District Court for the Central District of California. The complaint alleges that our systems and methods infringe its United States Patent No. 6,014,634, and seeks unspecified damages and injunctive relief. On March 13, 2003, the Court removed the case from its active caseload until further application by the parties or Order of the Court. We have filed with the Patent and Trademark Office a request for a re-examination of the '634 patent, which request for re-examination was granted in March 2001. An unfavorable outcome for us is considered neither probable nor remote by management at this time, and an estimate of possible loss or range of possible losses cannot be made. We also are involved in a number of legal proceedings arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations. We may be involved in additional litigation, investigations or other proceedings in the future. Any litigation, investigation or proceeding, with or without merit, could be costly and time-consuming and could divert our management's attention and resources, which in turn could harm our business and financial results. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS As of March 31, 2003, a dividend in the amount of 3,008,453 shares of Series B Preferred Stock has accrued, but had not been declared to the holders of our Series B Preferred Stock. ITEM 3. DEFAULTS UPON SENIOR SECURITIES At March 31, 2003, we were not in compliance with certain financial covenants of the Senior Secured Loan. Defaults under the Senior Secured Loan and the Amended and Restated Loan Agreement which cannot be cured, as the Senior Secured Loan and Grid Note have cross-default provisions and are cross-collateralized include: .. Our failure to achieve a prescribed amount of billings during 2002; and .. Our failure to maintain a minimum level of working capital and a ratio of cash, cash equivalents and certain receivables over current liabilities; and .. Our failure to maintain a minimum ratio of total indebtedness over tangible net worth. Consequently, the Senior Secured Loan and all accrued interest thereon are immediately due and payable at the option of Landmark. Accordingly, we have classified the Senior Secured Loan, including principal and the paid-in-kind interest which has been compounded and accrued on the principal balance totaling $5,781, as currently payable as of March 31, 2003. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: The Company did not file any current reports on form 8-K during the first quarter ended March 31, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. COOLSAVINGS, INC. Dated: May 14, 2003 /s/ Matthew Moog ---------------------------- Matthew Moog Chief Executive Officer and President (Duly Authorized Officer) Dated: May 14, 2003 /s/ David B. Arney ---------------------------- David B. Arney Chief Financial Officer (Principal Financial Officer) CERTIFICATIONS -------------- I, Matthew Moog, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CoolSavings, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Matthew Moog ----------------------------------- Matthew Moog President & Chief Executive Officer I, David B. Arney, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CoolSavings, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ David B. Arney ----------------------------------- David B. Arney Chief Financial Officer