SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 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 September 30, 2004: 39,265,477. (This number represents the number of shares that are required to be reported here. The accompanying report describes additional shares of common stock that are issuable upon conversion of outstanding shares of preferred stock and the exercise of outstanding warrants and outstanding stock options.) INDEX PART I FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets September 30, 2004 (Unaudited) and December 31, 2003 . . . . . . . . . . . . . . . . 3 Statements of Operations (Unaudited) Three and Nine Months Ended September 30, 2004 and 2003 . . . . . . . . . . . 6 Statement of Changes in Convertible Redeemable Preferred Stock and Stockholders' Deficit (Unaudited) Nine Months Ended September 30, 2004. . . . . . . . . . . . . . . . 8 Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2004 and 2003 . . 9 Notes to Financial Statements (Unaudited) . . . . . 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . 41 Item 4. Controls and Procedures . . . . . . . . . . . . . . 42 PART II OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 42 Item 3. Defaults Upon Senior Securities . . . . . . . . . . 43 Item 6. Exhibits. . . . . . . . . . . . . . . . . . . . . . 43 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 44 PART I FINANCIAL INFORMATION Item 1. Financial Statements COOLSAVINGS, INC. BALANCE SHEETS (in thousands, except share and per share data) (Unaudited) SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------ ------------ ASSETS ------ Current assets: Cash and cash equivalents . . . . . . . . $ 5,979 $ 7,347 Accounts receivable, net of allowance of $657 and $676 at September 30, 2004 and December 31, 2003, respectively. . . . . . . . . . . . . . 5,508 4,786 Prepaid assets. . . . . . . . . . . . . . 354 392 Other assets. . . . . . . . . . . . . . . -- 27 ---------- ---------- Total current assets. . . . . . . . . 11,841 12,552 ---------- ---------- Property and equipment. . . . . . . . . . . 9,437 9,112 Capitalized software costs. . . . . . . . . 1,490 1,490 Capitalized web site costs. . . . . . . . . 3,911 3,599 ---------- ---------- Total . . . . . . . . . . . . . . . . 14,838 14,201 Less accumulated depreciation and amortization. . . . . . . . . . . . . (12,053) (11,692) ---------- ---------- 2,785 2,509 Intangible assets, patents and licenses, net of accumulated amortization of $515 and $500 at September 30, 2004 and December 31, 2003, respectively. . . . . . . . . . . . . . . 15 -- Goodwill. . . . . . . . . . . . . . . . . . 569 -- ---------- ---------- Total assets. . . . . . . . . . . . . . . . $ 15,210 $ 15,061 ========== ========== The accompanying notes are an integral part of the financial statements. COOLSAVINGS, INC. BALANCE SHEETS - Continued (in thousands, except share and per share data) (Unaudited) SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------ ------------ LIABILITIES ----------- Current liabilities: Accounts payable, including amounts due to related parties of $52 and $0 at September 30, 2004 and December 31, 2003, respectively . . . . $ 1,225 $ 1,033 Accrued marketing expense, including amount due to related parties of $48 and $68 at September 30, 2004 and December 31, 2003, respectively . . 2,097 1,402 Accrued compensation. . . . . . . . . . . 925 1,368 Accrued interest due to related party . . 87 82 Accrued expenses, including amounts due to related parties of $915 and $962 at September 30, 2004 and December 31, 2003, respectively . . . . 2,260 1,806 Lease exit cost liability . . . . . . . . 215 206 Deferred revenue. . . . . . . . . . . . . 225 484 Senior secured note payable due to related party . . . . . . . . . . . . . 6,435 6,059 ---------- ---------- Total current liabilities . . . . . . 13,469 12,440 ---------- ---------- Long-term liabilities: Deferred revenue. . . . . . . . . . . . . 272 114 Lease exit cost liability . . . . . . . . 1,011 1,069 Deferred income tax liability . . . . . . 10 -- Other long-term liabilities . . . . . . . 10 -- ---------- ---------- Total long-term liabilities . . . . . 1,303 1,183 ---------- ---------- Commitments and contingencies (Note 10) Convertible redeemable cumulative Series B Preferred Stock, $0.001 par value, 258,000,000 shares authorized at September 30, 2004 and December 31, 2003, and 169,400,352 and 159,629,737 issued and outstanding at September 30, 2004 and December 31, 2003, respectively (liquidation preference of $0.1554 per share at September 30, 2004 and December 31, 2003). . . . . . . . . . . . 26,323 24,805 Convertible redeemable Series C Preferred Stock, $0.001 par value, 13,000,000 shares authorized and 13,000,000 shares issued and outstanding at September 30, 2004 and December 31, 2003 (liquidation preference of $0.1665 per share at September 30, 2004 and December 31, 2003) . . . . . . . . . . . . . . . . . . 1,950 1,950 The accompanying notes are an integral part of the financial statements. COOLSAVINGS, INC. BALANCE SHEETS - Continued (in thousands, except share and per share data) (Unaudited) SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------ ------------ STOCKHOLDERS' DEFICIT --------------------- Common stock, $0.001 par value per share, 379,000,000 shares authorized at September 30, 2004 and December 31, 2003, and 39,265,477 and 39,169,270 shares issued and outstanding at September 30, 2004 and December 31, 2003. . . . . . . . . . . . . . . . . . . 39 39 Additional paid-in capital. . . . . . . . . 70,163 71,855 Accumulated deficit . . . . . . . . . . . . (98,037) (97,211) ---------- ---------- Total stockholders' deficit . . . . . (27,835) (25,317) ---------- ---------- Total liabilities, convertible redeemable preferred stock and stockholders' deficit . . . . . . . $ 15,210 $ 15,061 ========== ========== The accompanying notes are an integral part of the financial statements. COOLSAVINGS, INC. STATEMENTS OF OPERATIONS (in thousands, except share and per share data) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Revenues: e-marketing services. . .$ 8,952 $ 7,977 $ 26,068 $ 24,106 License royalties . . . . 12 66 68 207 ---------- ---------- ---------- ---------- Net revenues. . . . . . . . 8,964 8,043 26,136 24,313 Cost of revenues. . . . . . 1,525 772 3,341 2,161 ---------- ---------- ---------- ---------- Gross profit. . . . . . . . 7,439 7,271 22,795 22,152 ---------- ---------- ---------- ---------- Operating expenses: Sales and marketing . . . 5,121 4,511 15,476 13,466 Product development . . . 936 778 2,888 2,255 General and administrative. . . . . 1,421 1,828 4,748 6,460 Lease exit costs. . . . . 32 18 146 427 Loss on asset impairment. . . . . . . -- -- -- 81 ---------- ---------- ---------- ---------- Total operating expenses. . . . . . . . . 7,510 7,135 23,258 22,689 ---------- ---------- ---------- ---------- Income (loss) from operations. . . . . . . . (71) 136 (463) (537) Other income (expense): Interest and other income. . . . . . 12 6 27 31 Interest expense. . . . . (130) (121) (381) (350) ---------- ---------- ---------- ---------- Total other income (expense) . . . . . . . . (118) (115) (354) (319) ---------- ---------- ---------- ---------- Income (loss) before income taxes. . . . . . . (189) 21 (817) (856) Income taxes. . . . . . . . (3) -- (9) -- ---------- ---------- ---------- ---------- Net income (loss) . . . . . (192) 21 (826) (856) Cumulative dividend on Series B Preferred Stock . . . . . . . . . . (526) (486) (1,548) (1,430) ---------- ---------- ---------- ---------- Loss applicable to common stockholders . . .$ (718) $ (465) $ (2,374) $ (2,286) ========== ========== ========== ========== The accompanying notes are an integral part of the financial statements. COOLSAVINGS, INC. STATEMENTS OF OPERATIONS - Continued (in thousands, except share and per share data) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Basic and diluted net loss per share . . . .$ (0.02) $ (0.01) $ (0.06) $ (0.06) ========== ========== ========== ========== Weighted average shares used in the calculation of basic and diluted net loss per share. . . .39,239,689 39,101,636 39,230,522 39,098,802 ========== ========== ========== ========== The accompanying notes are an integral part of the financial statements. COOLSAVINGS, INC. STATEMENT OF CHANGES IN CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (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, December 31, 2003 . . . . 159,629,737 $24,805 13,000,000 $ 1,950 39,169,270 $ 39 $71,855 $(97,211) $(25,317) Cumulative dividend declared on Series B Preferred Stock. . . . 9,770,615 1,518 (1,022) (1,022) Cumulative dividend accrued on Series B Preferred Stock. . . . (526) (526) Stock option expense. . . (160) (160) Stock options exercised. . 96,207 16 16 Net loss. . . (826) (826) ----------- ------- ---------- ------- ---------- ------- ---------- -------- -------- Balances, September 30, 2004 . . . . 169,400,352 $26,323 13,000,000 $ 1,950 39,265,477 $ 39 $ 70,163 $(98,037) $(27,835) =========== ======= ========== ======= ========== ====== ========== ======== ========The accompanying notes are an integral part of the financial statements. COOLSAVINGS, INC. STATEMENTS OF CASH FLOWS (in thousands) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) 2004 2003 ---------- ---------- Cash flows provided by (used in) operating activities: Net loss. . . . . . . . . . . . . . . . . $ (826) $ (856) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization . . . . . 965 1,468 Provision for doubtful accounts . . . . 462 724 Stock option (credit) expense . . . . . (160) 361 Interest payment in kind. . . . . . . . 381 350 Write off of website development costs . . . . . . . . . . . . . . . . 6 -- Increase in deferred tax liability. . . 10 -- Increase in other long-term liabilities . . . . . . . . . . . . . 10 -- Loss on asset impairment. . . . . . . . -- 81 Loss on equipment disposal. . . . . . . 16 -- Changes in assets and liabilities: Decrease in restricted certificates of deposit . . . . . . . . . . . . . . -- 231 (Increase) in accounts receivable. . . . (1,184) (521) Decrease (increase) in prepaid and other current assets . . . . . . . . . 65 (47) Increase (decrease) in accounts payable. . . . . . . . . . . . . . . . 192 (221) (Decrease) in deferred revenue . . . . . (101) (17) Increase in accrued and other liabilities. . . . . . . . . . . . . . 676 226 (Decrease) in lease exit cost liability. . . . . . . . . . . . . . . (49) (11) ---------- ---------- Net cash flows provided by operating activities. . . . . . . . . . . 463 1,768 ---------- ---------- Cash flows used in investing activities: Purchases of property and equipment . . . (585) (73) Acquisition of the business assets of TMS. . . . . . . . . . . . . . . . . (609) -- Capitalized web site development costs. . (660) (379) Proceeds from sale of property and equipment . . . . . . . . . . . . . 7 3 ---------- ---------- Net cash used in investing activities . . . (1,847) (449) ---------- ---------- The accompanying notes are an integral part of the financial statements. COOLSAVINGS, INC. STATEMENTS OF CASH FLOWS - Continued (in thousands) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) 2004 2003 ---------- ---------- Cash flows provided by financing activities: Stock options excercised. . . . . . . . . 16 1 ---------- ---------- Net cash provided by financing activities. . . . . . . . . . . . . . . 16 1 ---------- ---------- Net (decrease) increase in cash . . . . . . (1,368) 1,320 Cash and cash equivalents, beginning of period . . . . . . . . . . . 7,347 4,867 ---------- ---------- Cash and cash equivalents, end of period . . . . . . . . . . . . . . $ 5,979 $ 6,187 ========== ========== 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. ("CoolSavings" or the "Company") is an online direct marketing and media company that provides smarter solutions to connect marketers to their target consumers by leveraging the Company's marketing network, analytic services and proprietary technology. Under the Company's established brand, coolsavings.com, and its newly launched brand, freestylerewards.com, advertisers can deliver, target and track a wide array of promotional programs, including printed and electronic coupons, personalized e-mails, rebates, samples, trial offers, sales notices, and gift certificates and develop loyalty marketing programs to promote sales of products or services in stores or online. Landmark Communications, Inc. and Landmark Ventures VII, LLC (together, "Landmark") have the right to at any time require the Company to redeem any or all of the shares of Convertible Redeemable Series B Preferred Stock held by Landmark and to accelerate payment of obligations under a senior secured note payable due to Landmark. If Landmark chose to exercise these rights, the Company's ability to continue to operate the business would be jeopardized. The Company's independent auditors have issued their report on the Company's financial statements for 2003 with an explanatory paragraph. The explanatory paragraph describes the uncertainty as to the Company's ability to continue as a going concern. These financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required in the financial statements included in the Company's most recently filed Annual Report on Form 10-K. These financial statements should be read in conjunction with the financial statements and related notes in the Form 10-K of the Company for the year ended December 31, 2003. In the opinion of the Company, the accompanying unaudited financial statements reflect all normal recurring adjustments necessary for a fair statement of the Company's financial position as of September 30, 2004, its results of operations for the three and nine months ended September 30, 2004 and 2003 and its cash flows for the nine months ended September 30, 2004 and 2003. These quarterly results of operations are not necessarily indicative of those expected for the full year. Certain prior period amounts have been reclassified to conform to the current period's presentation. 2. ACQUISITION OF ASSETS OF TARGETED MARKETING SERVICES On February 6, 2004, the Company acquired certain assets related to the Targeted Marketing Services ("TMS") business line of ADS Alliance Data Systems, Inc. ("ADS"). TMS was acquired to provide the Company with new and expanded strategic capabilities in the areas of frequent shopper data access and paperless coupon solutions to grocery retailers for consumer packaged goods ("CPG") manufacturers. In addition to the assets acquired, the Company contracted for certain data center services, and assumed certain existing customer contracts and service obligations related to the operation of the TMS business line. Among the assets acquired were certain intangible property related to CPG contracts, retail relationships, patent rights, copyrights, trademarks and domain names and an information technology capability necessary to meet existing service obligations. The purchase price was approximately $609, which included $100 paid in cash to the seller and transaction costs of approximately $509. The funds used for the purchase price were provided by the Company's existing working capital. The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations for the period subsequent to the acquisition are included in the Company's financial statements. The Company allocated the purchase price of $609 to the assets acquired, based on a fair value assessment performed by an independent appraiser as follows: Customer relationship . . . . . . . $ 20 Proprietary technology. . . . . . . 10 Computer hardware . . . . . . . . . 10 Goodwill. . . . . . . . . . . . . . 569 ---- Total assets acquired . . . . . . . $609 ==== The customer relationship, proprietary technology, and computer hardware have been assigned useful lives of ten years, six months, and two years, respectively. All identifiable assets are amortized on a straight- line basis. Goodwill will be tested at least annually or more frequently if circumstances indicate that an impairment may have occurred in accordance with Statement of Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." The Company also paid $93 pursuant to a certain Transition Services Agreement dated February 6, 2004 between the Company and ADS which represented the fair value of certain data hosting and facility services to be provided by ADS to support uninterrupted service during the transition of the TMS business from ADS to the Company. The term of the Transition Services Agreement was for up to six months. Transition expenses totaling $0 and $93 have been expensed in cost of sales in the statement of operations of the Company for the three-month and nine-month periods ended September 30, 2004, respectively, as the transition was completed by May 31, 2004. In addition, in connection with the acquisition, the Company released ADS from the future royalty payments due to the Company under a pre- existing cross license agreement. The cross license agreement remains in place between ADS and the Company. As of February 6, 2004, the Company had recorded a deferred revenue liability of $351 related to these royalty obligations. This deferred revenue liability is being amortized over the remaining life of the cross license agreement, which expires in 2011. As of September 30, 2004, the deferred revenue liability relating to this agreement was $319. The following unaudited pro forma combined financial information combines the historical financial information of CoolSavings and TMS for the three and nine months ended September 30, 2004 and September 30, 2003 as if the acquisition had occurred on January 1, 2003. The unaudited pro forma combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined business had the entities actually been combined at the beginning of each period presented and had the impact of possible revenue enhancements and expense efficiencies, among other potential positive and negative factors, been considered, nor does it purport to indicate the results which may be obtained in the future. For the For the Three Months Ended Nine Month Period Ended September 30, September 30, ------------------------ ------------------------ 2004 2003 2004 2003 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------- ----------- ----------- ----------- Pro forma net revenues. . . . . . . $ 8,964 $ 8,112 $ 26,120 $ 24,888 Pro forma net income (loss) . . . . (192) (1,074) (1,332) (4,147) Cumulative dividend on Series B Preferred Stock . . . (526) (486) (1,548) (1,430) Pro forma loss applicable to common stock- holders . . . . . . . $ (718) $ (1,560) $ (2,880) $ (5,577) Pro forma diluted net loss per share. . $ (0.02) $ (0.04) $ (0.07) $ (0.14) Weighted average shares used in the calculation of pro forma diluted net loss per share. . 39,239,689 39,101,636 39,230,522 39,098,802 3. 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 credits of $0 and $160 to compensation expense in the three and nine months ended September 30, 2004, respectively, in conjunction with grants made under its employee stock option plans. Stock option compensation expense of $21 and $361 was recognized in the three and nine months ended September 30, 2003, respectively. The compensation credits and charges were recorded in general and administrative expense and related to stock options previously issued to Steven Golden, a former Chief Executive Officer of the Company. Effective July 30, 2001, the Company entered into a severance agreement with Mr. Golden which changed the terms of his options, requiring that they be accounted for as variable options under APB Opinion Number 25. The compensation expense credits and charges recognized for the three and nine months ended September 30, 2004 and 2003 are based upon the difference between the closing price of the Company's stock at the beginning and end of each period. This charge will continue to be adjusted in future periods for increases and decreases in the Company's stock price above the exercise price of $0.50 until the options are exercised, expire or are forfeited. The Company has adopted the disclosure requirements of SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123." Had expense been recognized using the fair value method described in SFAS 123, the Company would have reported the following results of operations using the Black-Scholes option pricing model: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Net loss applicable to common stock- holders, as reported. . . . . . $ (718) $ (465) $ (2,374) $ (2,286) Add (Deduct): Stock option compensation expense (credit). . -- 21 (160) 361 Deduct: Stock- based employee compensation expense deter- mined under fair value based method for all awards, net of related tax effects . . . . . . (53) (371) (159) (1,114) ---------- ---------- ---------- ---------- Pro forma net loss applicable to common stockholders. . . . $ (771) $ (815) $ (2,693) $ (3,039) ========== ========== ========== ========== Weighted average shares outstanding. 39,239,689 39,101,636 39,230,522 39,098,802 Earnings per share: Basic and diluted - as reported . . . $ (0.02) $ (0.01) $ (0.06) $ (0.06) Basic and diluted - pro forma . . . . $ (0.02) $ (0.02) $ (0.07) $ (0.08) These costs may not be representative of the total effects on pro forma reported income for future years. Factors that may also impact disclosures in future years include the attribution of the awards to the service period, the vesting period of stock options, the timing of additional grants of stock option awards and the number of shares underlying future awards. There were no stock options granted during the three and nine months ended September 30, 2004. The Company granted 100,000 stock options in the three and nine months ended September 30, 2003. 4. SENIOR SECURED LOAN: 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 additional shares of common stock exercisable under a warrant (described below). The Company has the right to prepay the Senior Secured Loan on or after the third anniversary thereof if certain conditions are met. The Amended and Restated Loan Agreement also contains financial covenants and negative and affirmative covenants that, among other things, restrict the Company's ability to incur additional indebtedness and take other actions without the consent of Landmark. At September 30, 2004, the Company was not in compliance with certain financial covenants of the Senior Secured Loan. The Amended and Restated Loan Agreement and the Senior Secured Loan have cross-default provisions and are cross-collateralized. Defaults, which cannot be cured, under these agreements include: . The Company's failure to achieve a prescribed amount of billings during 2001 (a requirement of the Amended and Restated Loan Agreement); . 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 (requirements of the Amended and Restated Loan Agreement); and . The Company's failure to maintain a minimum ratio of total indebtedness over tangible net worth (a requirement of the Amended and Restated Loan Agreement). These failures constitute events of default. Consequently, the Senior Secured Loan and all accrued interest thereon are immediately due and payable at the option of Landmark. Accordingly, the Company has classified as currently payable as of September 30, 2004 amounts owed pursuant to the Senior Secured Loan which, including principal and the paid-in-kind interest which has been compounded and accrued on the principal balance, totaled $6,522. In connection with the Senior Secured Loan, on November 12, 2001, the Company issued to Landmark a warrant to purchase 10,000,000 shares of the Company's common stock (the "Landmark Warrant"). The Landmark Warrant has a term of eight years (expiring July 30, 2009) and may be exercised in whole or in part immediately. The Landmark Warrant contains a net exercise feature and is exercisable at an exercise price of $0.50 per share (increasing to $0.75 per share on July 30, 2005, if not previously exercised). The number of shares of the Company's common stock that Landmark is entitled to purchase under the Landmark Warrant increases by two shares of common stock for each dollar of interest accrued and paid-in- kind by the Company on a quarterly basis (January 31, April 30, July 31 and October 31) on the Senior Secured Loan as paid-in-kind interest. As of September 30, 2004, the Landmark Warrant was exercisable for 12,439,123 shares of the Company's common stock at an exercise price of $0.50 per share. 5. REDEEMABLE PREFERRED STOCK: a. Series B Preferred Stock: On November 12, 2001, pursuant to a securities purchase agreement between Landmark and the Company, dated July 30, 2001, as amended (the "Securities Purchase Agreement"), the Company issued to Landmark 65,057,936 shares of $0.001 par value Series B preferred stock (the "Series B Preferred Stock") in exchange for cancellation of $10,108 of outstanding indebtedness from the Company to Landmark under the Grid Note (defined below). The Series B Preferred Stock has certain conversion rights (see "c. Conversion of Series B and C Preferred Stock") and bears an 8% annual dividend, payable quarterly in additional shares of Series B Preferred Stock. The holders of the Series B Preferred Stock (Landmark) also have the right to elect not less than a majority of the Company's board of directors. Under the terms of the Securities Purchase Agreement, the Company agreed that, if certain events occurred prior to December 31, 2002 (the "Shortfall Events"), Landmark would have the right to acquire additional shares of Series B Preferred Stock at a price of $0.1554 per share (the "Shortfall Rights"). The number of shares that Landmark could acquire with the Shortfall Rights was the quotient determined by dividing the "Shortfall Amount" (generally the cash needed by the Company in connection with a Shortfall Event) by $0.1554. Under a letter dated November 12, 2001, the Company agreed that, when Shortfall Events occurred, Landmark could elect to loan the Company the Shortfall Amount under a grid note, as amended (the "Grid Note"), and Landmark could later elect to apply such loaned funds to the purchase price of additional shares of Series B Preferred Stock under its Shortfall Rights arising in connection with such Shortfall Events. On October 24, 2002, in connection with a Shortfall Event which occurred on June 30, 2002 (related to the amount of current assets compared to current liabilities at such date), Landmark exercised its right to purchase 17,825,212 shares of Series B Preferred Stock and paid the Company $2,770 for such shares ($0.1554 per share). On December 20, 2002, Landmark, at the Company's request, applied the $8,770 of principal and $705 of accrued interest then outstanding under the Grid Note toward the purchase of 60,967,777 shares of Series B Preferred Stock. As of September 30, 2004, Landmark held 169,400,352 shares (including dividends paid "in- kind") of Series B Preferred Stock (and has rights with respect to accrued dividends thereon), and 10,889,636 shares of common stock, in addition to the warrant to purchase 12,439,123 shares of the Company's common stock described above. At September 30, 2004, dividends in the amount of 3,388,007 shares of Series B Preferred Stock had accrued but had not been declared. For the three months and nine months ended September, 2004, dividends in the amount of 3,321,575 and 9,770,615 shares of Series B Preferred Stock, respectively, were declared to the holders of Series B Preferred Stock. The Series B Preferred Stock is subject to certain redemption requirements outside the control of the Company. As a result of the defaults under the Amended and Restated Loan Agreement, Landmark may, at its option, require the Company to redeem all of the issued and outstanding Series B Preferred Stock, which had an aggregate redemption value of $26,323 as of September 30, 2004, at any time. Landmark's ownership will continue to increase due to the issuance of additional shares of Series B Preferred Stock for dividends accruing on outstanding Series B Preferred Stock. Landmark's ownership also will increase if it exercises the Landmark Warrant. The number of shares of the Company's stock that Landmark is entitled to purchase under the Landmark Warrant will continue to increase as "in-kind" payments are made for interest accruing on the Senior Secured Loan. As of September 30, 2004, the Company had reserved approximately 185 million shares of common stock for the conversion of all the outstanding shares of Series B Preferred Stock and accrued dividends thereon, and the exercise of the outstanding Landmark Warrant. 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) an aggregate of 13,000,000 shares of $0.001 par value, redeemable Series C preferred stock (the "Series C Preferred Stock)". The Series C Preferred Stock has certain conversion rights (see "c. Conversion of Series B and C Preferred Stock"). The Series C Preferred Stock was issued in exchange for certain notes held by those individuals, the related accrued interest, and the accompanying warrants to purchase 1,050,000 shares of common stock previously issued to those individuals. As of September 30, 2004, the Company had reserved 13,000,000 shares of common stock for the conversion of all the outstanding shares of Series C Preferred Stock. c. Conversion of Series B and C Preferred Stock As of September 30, 2004, the Company had outstanding 39,265,477 shares of common stock, 169,400,352 shares of Series B Preferred Stock, and 13,000,000 shares of Series C Preferred Stock. The shares of both series of preferred stock of the Company are convertible at the option of the holders into shares of common stock on a one-for-one basis, subject to anti- dilution provisions set forth in the Company's Certificate of Incorporation. If all the outstanding shares of preferred stock of the Company had been converted into shares of common stock, a total of 221,665,829 shares of common stock would have been outstanding as of September 30, 2004. 6. IMPAIRMENT OF LONG-LIVED ASSETS AND COSTS ASSOCIATED WITH EXIT ACTIVITIES: During 2003, following an ongoing assessment of its future expected space requirements, the Company determined that a portion of its unoccupied 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 $81 in the nine months ended September 30, 2003 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 $18 and $427 in the three and nine months ended September 30, 2003, respectively, representing the estimated future lease obligations related to the office space and estimated costs associated with subleasing the space, net of estimated cash flows from future sublease arrangements. During the three and nine months ended September 30, 2004, due to changing sublease market conditions and future outlook, the Company revised its estimates of the future net costs associated with office space determined to be unnecessary for it future operations. In addition, the Company recorded accretion expense related to the lease exit cost liability. As a result of these revisions and the recording of accretion expense, the Company recorded an operating expense of $32 and $146 in the three and nine months ended September 30, 2004, respectively, representing adjustments to the estimated future lease obligations related to the office space and estimated costs associated with subleasing and disposing of the space, net of estimated cash flows from future sublease arrangements. For the three and nine months ended September 30, 2004 and 2003, lease exit costs consisted of the following: Three Months Ended Nine Months Ended September 30, September 30, (unaudited) (unaudited) ------------------ ------------------ 2004 2003 2004 2003 -------- -------- -------- -------- Lease obligation, net of estimated sub-lease income. . . . . . . . . . . . $ 7 $ 1 $ 77 $ 365 Broker commissions and other miscellaneous costs . . -- (9) (6) (16) Accretion expense . . . . . . . 25 26 75 78 -------- -------- -------- -------- Lease exit costs. . . . . . . . $ 32 $ 18 $ 146 $ 427 ======== ======== ======== ======== At September 30, 2004, the liability associated with the lease exit costs consisted of the following: Balance at Subsequent Balance at December 31, Accruals, Sept. 30, 2003 Net Payments 2004 ----------- ---------- -------- ---------- Lease obligation, net of estimated sub-lease income . . . . $ 1,182 $ 152 $ (195) $ 1,139 Broker commissions and other trans- action costs . . . . . . 93 (6) 87 -------- -------- -------- -------- Total lease exit liability . . . . . . . 1,275 146 (195) 1,226 Less: current portion of lease exit liability. . . . . . . . (206) (215) -------- -------- Long-term lease exit liability . . . . . . . $ 1,069 $ 1,011 ======== ======== Any change in this estimate, based on the availability of new or updated information, will be recorded in the period that it occurs. 7. EARNINGS PER SHARE: FASB SFAS No. 128 requires companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations. The calculation below provides net loss, weighted average common shares outstanding and the resultant net loss per share on both a basic and diluted basis for the three and nine months ended September 30, 2004 and 2003. The calculation of diluted net loss per share for the Company excludes shares of common stock issuable upon the exercise of employee stock options and an investor warrant and the conversion of the outstanding preferred stock, as the effect of such exercises and conversions would be anti-dilutive. As of September 30, 2004, there were outstanding options to purchase 7,567,138 shares of common stock, an outstanding investor warrant to purchase 12,439,123 shares of common stock and outstanding preferred stock convertible into 182,400,352 shares of common stock. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (Unaudited) (Unaudited) --------------------- --------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Numerator: Net (loss) income . . . $ (192) $ 21 $ (826) $ (856) Cumulative dividend on Series B Preferred Stock . . . . . . . . (526) (486) (1,548) (1,430) ---------- ---------- ---------- ---------- Loss applicable to common stockholders . $ (718) $ (465) $ (2,374) $ (2,286) ========== ========== ========== ========== Basic and diluted loss per share . . . . . . . $ (0.02) $ (0.01) $ (0.06) $ (0.06) ========== ========== ========== ========== Denominator: Weighted average shares used in the calculation of basic and diluted loss per share. . . . 39,239,689 39,101,636 39,230,522 39,098,802 ========== ========== ========== ========== 8. COMMITMENTS AND CONTINGENCIES: a. LETTERS OF CREDIT On August 31, 2002, the Company entered into an Amended and Restated Reimbursement and Security Agreement (the "Reimbursement Agreement") with Landmark. On behalf of the Company, Landmark applied for and received letters of credit in the aggregate amount of $1,599 from Wachovia Bank ("Wachovia") to collateralize lease deposits required with respect to the Company's office facilities (the "Landmark Letters of Credit"). Under the Reimbursement Agreement, the Company has agreed, among other things, to reimburse Landmark for all amounts that Landmark is required to pay Wachovia under the bank agreement related to the Landmark Letters of Credit, including all fees, penalties, interest and amounts in connection with draws on the Landmark Letters of Credit. The aggregate amount of letters of credit required to collateralize lease deposits on the Company's office facilities declined to $747 as of September 30, 2004, due to the termination of its lease in New York City, and scheduled reductions contained in the lease agreements for the Company's Chicago, Illinois and San Francisco, California facilities. The Landmark Letter of Credit for the Company's Chicago facility was renewed in 2004 for a one-year period ending April 2005. The Landmark Letter of Credit for the Company's San Francisco facility was renewed in 2004 for the period ending July 31, 2004, at which time the letter of credit is no longer required according to the terms of the Company's lease agreement. Landmark may, in its sole discretion, cancel any or all of the Landmark Letters of Credit upon 90 days' written notice to the Company. If the Landmark Letters of Credit expire or are so cancelled, the Company would need to enter into an alternate credit arrangement. b. LONG TERM INCENTIVE PLAN Effective January 1, 2003, the Company established the CoolSavings, Inc. Long Term Incentive Plan (the "LTIP"). Employee participation in the LTIP is at the sole discretion of the Company's Board of Directors. LTIP participants are eligible to receive units which may increase in value if the Company achieves certain long term profitability objectives. After vesting, units which have increased in value above the grant price since the date of grant can be redeemed with the Company for cash payments equal to their increase in value. The Company will record an expense during periods in which the value of the outstanding units increases above the grant price. No expense was recorded during the three and nine months ended September 30, 2004 or 2003 related to the LTIP. c. LITIGATION Since 1999 and 2000, respectively, the Company has been the Defendant in two patent infringement lawsuits filed by Catalina Marketing International, Inc. ("Catalina Marketing") and Supermarkets Online, Inc. ("Supermarkets Online"), an affiliate of Catalina Marketing. On October 19, 2004, the Company entered into a settlement agreement with Catalina Marketing for both of these lawsuits (see Note 9). 9. Subsequent Event On November 15, 1999, Catalina Marketing International, Inc. ("Catalina Marketing") filed a lawsuit against the Company alleging that the Company's systems and methods infringed Catalina Marketing's United States Patent No. 4,674,041 (the "'041 Patent"). On February 12, 2000, Supermarkets Online, Inc. ("Supermarkets Online"), an affiliate of Catalina Marketing, filed a lawsuit against the Company alleging that the Company's systems and methods infringe Supermarket Online's United States Patent No. 6,014,634 (the "'634 Patent"). On October 19, 2004, Catalina Marketing, Supermarkets Online and the Company settled the litigation on mutually agreeable terms that were not material to the Company's financial statements for the nine months ended September 30, 2004 and that will allow the Company to continue to operate its systems and methods without threat of infringement of the Catalina patents that were the subject of the litigation. The financial impact of this settlement is included in the three and nine month results for the period ended September 30, 2004. 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 within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our expectations of revenue growth, expense growth, service capability improvements, and the impact of strategic investments and other statements regarding our expectations, beliefs, hopes, intentions or strategies. Where possible, these forward-looking statements have been identified by use of words such as "project," "target," "forecast," "anticipate," "believe," "will," "expect," and similar expressions. Known and unknown risks, uncertainties and other factors, both general and specific to the matters discussed in this Quarterly Report on Form 10-Q, may cause our actual results and performance to differ materially from the future results and performance expressed in, or implied by, these forward-looking statements. These risks, uncertainties, and other factors include, without limitation, our ability to secure financing to meet our long-term capital needs, our ability to protect our patents, trademarks and proprietary rights, our successful introduction of new services and features, our ability to continue to attract, assimilate and retain highly skilled personnel, our ability to secure long-term contracts with existing advertisers and attract new advertisers, our ability to add new members, and our ability to compete successfully against current and future competitors. For a discussion of these and other risks, uncertainties and other factors which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements, see "Risk Factors" below. We undertake no obligation to update any of the forward-looking statements after the date of this report to conform these statements to actual results or otherwise to reflect new developments or changed circumstances, unless expressly required by applicable federal securities laws. You should not place undue reliance on any such forward-looking statements. OVERVIEW AND RECENT DEVELOPMENTS We are an online direct marketing and media company with an extensive marketing network that has reached more than 15 million consumers in the last 12 months. We help marketers reach their target consumers by leveraging our broad marketing 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. Using our services, marketers drive sales and customer traffic to their stores, web sites, catalogues or call centers by taking advantage of a wide variety of highly targeted marketing services, including lead generation, couponing, targeted e-mail, category newsletters, direct mail, product sampling and banner advertisements. In addition, our proprietary database technology and analytical tools track consumer response, shopping preferences and site behavior at the household and shopper level to provide our clients with a wide range of sophisticated consumer data which they may use to make smarter marketing decisions. Our web sites, coolsavings.com and freestylerewards.com, and our Marketing Network offer consumers convenient and personalized incentives for goods and services from a broad range of advertisers, including national retailers and online retailers, consumer packaged goods ("CPG") manufacturers, media and publishing companies, and travel and financial service providers. Our revenues of $9.0 million for the nine month period ended September 30, 2004 were the highest since the nine month period ended September 30, 2000. We have also recorded positive cash flows from operations of $0.5 million for the nine months ended September 30, 2004. Despite this historically improved performance, we recorded a net loss of $826 for the first nine months of 2004 due primarily to the impact of seasonality on our revenues in the first quarter, the increased cost of online advertising, the increase in workforce and other related expenses associated with the TMS acquisition as described below, and the costs of investments we are making in new service offerings. Despite this loss, we experienced positive year-to-date cash flows from operations in 2004 due primarily to strong cash collection and revenues and the timing of certain online marketing payments and partner fees related to our lead generation distribution network. We expect to generate sufficient cash flow from operations to meet our ongoing operating cash needs for the foreseeable future, excluding any potential acquisitions that may require significant cash outlays, or any accelerated payments under our obligations to Landmark that Landmark has the right to demand. On February 6, 2004, we acquired certain assets of TMS business line of ADS Alliance Data Systems, Inc. ("ADS"). This acquisition provides our company with new and expanded strategic capabilities in the area of frequent shopper card and paperless coupon solutions to grocery retailers and CPG manufacturers. We have expanded the capabilities of this business into a new service offering, Grocery Solutions, and have invested capital and work-force related costs to operate this business and integrate it into our existing business. In late March 2004, we enhanced our Marketing Network with the addition of a new Lead Generation Service offering, a distribution network of other web properties for lead generation offers. This Lead Generation Network became fully operational in the second quarter of 2004. This Lead Generation Network enables us to deliver targeted, highly qualified permission-based leads to marketers. In addition to this service providing additional revenue, we have incurred and paid and expect to incur and pay expenses related to network partner fees in conjunction with this new service. These fees are recorded in cost of revenues in our statement of operations. We are continuing to develop new technology and business relationships to support this new service offering. In September 2004, we expanded our marketing services with the launch of our FreeStyle Rewards Program, our first new brand since 1997. FreeStyle Rewards is a points-based member rewards program, under which members earn points for each dollar spent on qualified purchases. Members can redeem the earned points for a pre-funded Debit Mastercard that can be used as cash at millions of locations and online. With this program, we have added hundreds of merchants and online shopping offers to our existing program of online savings. On July 1, 2004, we declared and paid a dividend in the amount of 3,321,575 shares of Series B Preferred Stock to the holders of our Series B Preferred Stock. As of September 30, 2004, dividends in the amount of 3,388,007 shares of Series B Preferred Stock had accrued "in-kind" on the outstanding shares of Series B Preferred Stock. We declared and paid those dividends on October 1, 2004. The Series B Preferred Stock issued is redeemable at Landmark's option at any time. The Series B Preferred Stock also is convertible into common stock at any time. As of September 30, 2004, Landmark held 169,400,352 shares of Series B Preferred Stock (and has rights with respect to accrued dividends thereon), convertible into an equal number of shares of common stock, and held a Landmark Warrant to purchase 12,439,123 shares of our common stock. CRITICAL ACCOUNTING POLICIES The financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America. However, certain of our accounting policies, which we refer to as our "critical accounting policies," are particularly important to the portrayal of our financial position and results of operations and require application of management's judgments, often as a result of the need to make estimates about matters that are inherently uncertain and may change in future periods. Management bases its estimates and judgments on historical experience and various other factors that it believes to be reasonable under the circumstances. Management considers the following to be our critical accounting policies: . revenue recognition . estimation of sales credits and the allowance of doubtful accounts . capitalization of web site development costs . valuation of long-lived and intangible assets . measurement of lease exit liability . valuation of deferred tax assets . valuation of stock-based compensation For a discussion of these critical accounting policies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the SEC. REVENUE ONLINE DIRECT MARKETING SERVICES REVENUE We generate substantially all of our revenues by providing online marketing services to our advertisers. We charge our advertisers on a variety of bases, the most common of which include: . the number of offers delivered to members, commonly sold on a cost per response basis (coupon prints, samples or trial offers requested); . the number of times members click on an incentive linking the member to the advertiser's web site (known as a click- through response); . the number of leads generated; . the number of emails delivered; and . promotion set-up fees. Our pricing depends upon a variety of factors, including 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 permit either party to terminate the contract upon 30 days' advance written notice. In the three-month period ended September 30, 2004, our largest advertiser accounted for approximately 3.2% of our revenues and our top five advertisers together accounted for approximately 15.6% of our revenues, as compared to 3.5% and 16.1%, respectively, in the same periods of 2003. In the nine-month period ended September 30, 2004, our largest advertiser accounted for approximately 3.5% of our revenues and our top five advertisers together accounted for approximately 15.7% of our revenues, as compared to 4.1% and 15.3%, respectively, in the same periods of 2003. 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 were to change, our results of operations and quarter-to-quarter comparisons could be materially affected. LICENSING REVENUE We license portions of our intellectual property, including our issued patents, to third parties. Approximately 0% and 1% of our revenue was generated from royalty and license fees and other miscellaneous sources during the three-month and nine-month periods ended September 30, 2004 and 2003, respectively. We expect to continue to generate substantially lower licensing revenue in 2004 as compared to prior years as a result of our acquisition of the assets of TMS and our related release of payment obligations by ADS to us (See Note 2 in the Notes to the Financial Statements). 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, partner fees related to our distribution network for lead generation offers, transition fees related to the TMS acquisition, and other operations costs directly related to revenue generation. SALES AND MARKETING Sales and marketing expenses include salaries, sales commissions, employee benefits, travel and related expenses of our direct sales force, advertising and promotional expenses, marketing, and sales support functions. Marketing costs associated with increasing our member base and other marketing expenses related to our products and services are expensed in the period incurred. PRODUCT DEVELOPMENT Product development costs include expenses for the development of new or improved technologies designed to enhance the performance of our services, 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 legal and other professional services, occupancy costs, insurance expenses, and stock-based compensation expense. LEASE EXIT COSTS AND LOSS ON ASSET IMPAIRMENT Lease exit costs and loss on asset impairment charges reflect costs associated with our determination that a significant portion of our leased office space was unnecessary for our future operations. During 2003 and the first nine months of 2004, we recorded lease exit costs representing the present value of estimated future lease obligations related to the unnecessary leased office space, and estimated costs associated with subleasing the space, net of estimated cash flows from future sublease arrangements. These estimates are revised as market conditions and future outlooks change. In 2003, we also determined that the estimated undiscounted cash flows expected to be generated by the assets in the unnecessary, unoccupied office space were less than the net book value of the assets. Therefore, we recorded a loss 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 to estimate the fair values. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003 NET REVENUES Net revenues increased 11% to $8,964 in the three-month period ended September 30, 2004 from $8,043 in the three-month period ended September 30, 2003. The revenue increase was attributable to the success of our Lead Generation Network launched in 2004, continued strong demand for targeted e-mail, and pricing improvements associated with the growing sophistication of our yield management system. COST OF REVENUES AND GROSS PROFIT Cost of revenues increased to $1,525 in the three-month period ended September 30, 2004, from $772 in the three-month period ended September 30, 2003. Gross profit decreased as a percentage of net revenues to 83% in the three-month period ended September 30, 2004, from 90% in the three-month period ended September 30, 2003. The decrease in gross profit was primarily due to $861 in partner fee expenses related to our Lead Generation Network, as compared to no such expenses in the same period of 2003. The Lead Generation Network became fully operational during the second quarter of 2004. With the growth of this network, we expect cost of revenues, as a percentage of net revenues, to increase due to payments to be made to the partners in our network. Partially offsetting the increase in partner fees was a direct mail campaign in the third quarter of 2003 resulting in an expense of $164 in that period. There was no direct mail campaign in the third quarter of 2004. OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses increased to $5,121, or 57% of net revenues in the three-month period ended September 30, 2004, from $4,511, or 56% of net revenues, in the three-month period ended September 30, 2003. The $610 increase in sales and marketing expenses was primarily due to an increase in workforce related expenses of $401 due primarily to an increase in the number of employees, and an increase in online marketing expenses of $285. The increase in online advertising expense during the third quarter of 2004 occurred despite a 23% decline in the number of new members registered, as compared to the third quarter of 2003. The increase in online advertising expense was primarily caused by a 44% increase in the average cost of acquiring new members. These increases were partially offset by a decrease in public relations expenses of $46 and a decrease in other media purchases of $29. PRODUCT DEVELOPMENT. Product development expenses increased to $936, or 10% of net revenues, in the three-month period ended September 30, 2004, from $778 or 10% of net revenues, in the three-month period ended September 30, 2003. The $158 increase in product development expenses was primarily due to an increase in workforce related expenses of $55 related mostly to increases in the number of employees, an increase in repairs and maintenance expenses of $56, and an increase in amortization of web site costs of $37. GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased to $1,421, or 16% of net revenues, in the three-month period ended September 30, 2004, from $1,828, or 23% of net revenues, in the three-month period ended September 30, 2003. The $407 decrease in general and administrative expenses was primarily due to a $184 charge in the third quarter of 2003 related to a settlement of a customer matter, a decrease in insurance expense of $147 due to lower premiums, and a decrease in workforce related expenses of $61 primarily due to lower headcount and a lower management bonus accrual. Also, we experienced a decrease in legal fees of $65 as compared to the same period of 2003 primarily due to lower costs to defend and settle lawsuits filed against us by Catalina Marketing and Supermarkets Online (See note 9 to the Financial Statements). Partially offsetting these decreases was an increase in bad debt expense of $75 due to an increase in our estimate of uncollectible receivables due in part to an increase in revenue, and a decrease in the collection of receivables in the third quarter of 2004 which had been previously written off and recorded as a reduction to bad debt expense. We expect general and administrative expenses, as a percentage of net revenues, to decline during the remainder of 2004 compared to the prior year due to lower legal fees related to intellectual property matters and lower insurance expense. LEASE EXIT COSTS. During the three months ended September 30, 2004 and 2003, we revised our estimates of the future net costs associated with office space determined to be 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 $32 and $18 in the three months ended September 30, 2004 and 2003, respectively, representing an adjustment to the estimated future lease obligations related to the unnecessary office space and estimated costs associated with subleasing and disposing of the space, net of estimated cash flows from future sublease arrangements. These estimates are revised quarterly, or as market conditions and future outlook change. INCOME FROM OPERATIONS. Our loss from operations was $71 for the three-month period ended September 30, 2004, compared to income from operations of $136 for the same period of 2003. The $207 decrease was primarily due to the increase in workforce related expenses of $447, $861 in partner fees associated with our lead generation distribution network in the third quarter of 2004, and an increase in online marketing expenses of $285. Partially offsetting these expense increases was an increase in revenue of $921, a decrease in insurance expense of $147, and a decrease in legal fees of $65. We also incurred a charge of $184 in the third quarter of 2003 related to the settlement of a customer matter. INTEREST INCOME (EXPENSE), NET. During the three-month period ended September 30, 2004, we incurred net interest expense of $118, as compared to net interest expense of $115 for the three-month period ended September 30, 2003. The difference was attributable to increased interest expense associated with the higher outstanding balance on our Senior Secured Loan. INCOME TAXES. During the three-month period ended September 30, 2004, we incurred $3 in income tax expense, as compared to $0 in the three- month period ended September 30, 2003. The income tax expense in 2004 relates to book/tax differences arising from the amortization of goodwill for tax purposes, but not for book. The goodwill was recorded as a result of the TMS asset acquisition during the first quarter of 2004 (See Note 2 to the Financial Statements). We expect to record income tax expense of approximately $12 for the year 2004 related to the amortization of goodwill for tax purposes. We do not expect to record income tax expense associated with projected taxable income for 2004 due to existing net operating loss carryforwards. NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003 NET REVENUES Net revenues increased 7% to $26,136 in the nine-month period ended September 30, 2004 from $24,313 in the nine-month period ended September 30, 2003. The revenue increase was attributable to the success of our Lead Generation Network and continued strong demand for targeted e- mail, and pricing improvements associated with the growing sophistication of our yield management system. COST OF REVENUES AND GROSS PROFIT Cost of revenues increased to $3,341 in the nine-month period ended September 30, 2004, from $2,161 in the nine-month period ended September 30, 2003. Gross profit decreased as a percentage of net revenues to 87% in the nine-month period ended September 30, 2004, from 91% in the nine-month period ended September 30, 2003. The decrease in gross profit was due mainly to $1,351 in partner fee expenses related to our distribution network for lead generation offers in the first nine months of 2004 and $199 in expenses related to the transitioning of certain data hosting and facility services of TMS in 2004. No similar expenses were incurred in the first nine months of 2003. Partially offsetting these increases was a decrease of $246 related to a direct mail campaign incurred in the first nine months of 2003. There was no direct mail campaign in the first nine months of 2004. Also, a decrease of $131 in expenses associated with a gift certificate program helped offset the increases in cost of revenues in the first nine months of 2004. OPERATING EXPENSES SALES AND MARKETING. Sales and marketing expenses increased to $15,476, or 59% of net revenues, in the nine-month period ended September 30, 2004, from $13,466, or 55% of net revenues, in the nine-month period ended September 30, 2003. The $2,010 increase in sales and marketing expenses was primarily due to higher workforce related expenses of $932 due primarily to an increase in the number of employees, higher online marketing expenses of $837, and higher promotions expense of $190 compared to the same period of the prior year. The increase in online advertising expense during the first nine months of 2004 occurred despite a 28% decline in the number of new members registered, as compared to the first nine months of 2003. The increase in online advertising expense was primarily caused by a 53% increase in the average cost of acquiring new members. PRODUCT DEVELOPMENT. Product development expenses increased to $2,888, or 11% of net revenues, in the nine-month period ended September 30, 2004, from $2,255, or 9% of net revenues, in the nine-month period ended September 30, 2003. The $633 increase in product development expenses was primarily due to an increase in workforce related expenses of $566 and an increase of $129 in repairs and maintenance expenses. Partially offsetting this increase was a decrease in amortization of website development costs of $85. GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased to $4,748, or 18% of net revenues, in the nine-month period ended September 30, 2004, from $6,460, or 27% of net revenues, in the nine-month period ended September 30, 2003. The $1,712 decrease in general and administrative expenses was primarily due to lower legal fees of $503 due to lower legal costs to defend and settle lawsuits filed against us by Catalina Marketing and Supermarkets Online (see note 9 to the Financial Statements). In addition, we recorded a credit of $160 to stock option compensation expense in the nine month period ended September 30, 2004, compared to an expense of $361 recorded during the same period of 2003, related to options granted to a former CEO (see note 3 to the Financial Statements). Also contributing to the decrease were lower workforce related expenses of $348, due mainly to a decrease in a management bonus accrual. We also experienced a decrease in depreciation and amortization of approximately $337 due to the write down and disposal of assets in our office facilities, and a decrease in insurance expense of $146 due to a decrease in premiums. Partially offsetting these decreases was an increase in bad debt expense of $217 due to an increase in our estimate of uncollectible receivables due in part to an increase in revenue, and a decrease in the collection of receivables in the first nine months of 2004 compared to the prior year which had been previously written off and recorded as a reduction to bad debt expense. LEASE EXIT COSTS AND LOSS ON ASSET IMPAIRMENT. During the nine months ended September 30, 2004 and 2003, we re-evaluated our future expected space requirements given current market conditions and future outlook, and as a result, we revised our estimates of the future net costs associated with office space determined to be 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 $146 and $427 in the nine months ended September 30, 2004 and 2003, respectively, representing an adjustment to the estimated future lease obligations related to the unnecessary office space and estimated costs associated with subleasing and disposing of the space, net of estimated cash flows from future sublease arrangements. These estimates are revised as market conditions and future outlook change. 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 nine months ended September 30, 2003 to write down the assets to their estimated fair value. No such charge was incurred in the nine months ended September 30, 2004. 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. These estimates are revised as market conditions and future outlook change. LOSS FROM OPERATIONS. Our loss from operations was $463 for the nine-month period ended September 30, 2004, compared to a loss of $537 for the same period of 2003. The $74 reduction in the loss was primarily due to the increase in revenue of $1,823 reflecting the improvement of revenue per member action taken, and credits to stock option compensation expense of $160 recorded during the nine months ended September 30, 2004, compared to an expense of $361 recorded during the same period of 2003. Partially offsetting these favorable variances were increases in partner fees related to our new distribution network for lead generation offers of $1,351 and an increase of $837 in online advertising expense in the first nine months of 2004 as compared to the first nine months of 2003. INTEREST INCOME (EXPENSE), NET. During the nine-month period ended September 30, 2004, we incurred net interest expense of $354, as compared to net interest expense of $319 for the nine-month period ended September 30, 2003. The difference was mostly attributable to interest income earned of $20 in the first quarter of 2003 as our certificates of deposit matured. No such interest was earned in 2004. The remaining increase in net interest expense is associated with the higher outstanding balance on our Senior Secured Loan. INCOME TAXES. During the nine-month period ended September 30, 2004, we incurred $9 in income tax expense, as compared to $0 in the nine-month period ended September 30, 2003. The income tax expense in 2004 relates to book/tax differences arising from the amortization of goodwill for tax purposes, but not for book. The goodwill was recorded as a result of the TMS asset acquisition during the first quarter of 2004 (See Note 2 to the Financial Statements). LIQUIDITY AND CAPITAL RESOURCES At September 30, 2004, we had approximately $5,979 in cash and cash equivalents compared to $7,347 at December 31, 2003. Accounts receivable, net of allowances for doubtful accounts, were $5,508 at September 30, 2004 compared to $4,786 at the end of 2003. At the end of the third quarter of 2004, our current liabilities totaled $13,469 compared to $12,440 at the end of 2003. Our independent auditors have issued their report on our financial statements for 2003 with an explanatory paragraph. The explanatory paragraph describes the uncertainty as to our ability to continue as a going concern. If Landmark elects to exercise some or all of its rights to accelerate payment under our obligations to Landmark, our ability to operate our business will be jeopardized. We occasionally enter into contracts where we commit to make guaranteed minimum payments in exchange for certain services. As of September 30, 2004, the Company was not a party to any such arrangements. Other contractual obligations have not materially changed from those reported in our annual report filed on Form 10-K for the year ended December 31, 2003. We expect our current liquidity position to meet our anticipated cash needs for working capital and capital expenditures, excluding potential acquisitions that may require significant cash outlays, or any accelerated payments that Landmark may require, for the foreseeable future. However, 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 or equity-linked 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 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. For the nine-month period ended September 30, 2004, net cash provided by operating activities was $463 due mainly to increased revenues and ongoing control of cash outlays. These factors were partially offset by the increase in our trade accounts receivable, driven by higher revenue compared to cash collections. Net cash provided by operating activities in the nine-month period ended 2003 was $1,768 resulting primarily from increased revenues, improved cash collections, ongoing control of cash outlays, and the return of restricted certificates of deposit of $231 associated with the collateral on our Letters of Credit. The restrictions on these certificates of deposit were lifted on January 1, 2003. Net cash used in investing activities was $1,847 in the nine-month period ended September 30, 2004 as compared to $449 for the same period of 2003. Net cash used in investing activities in the first nine months of 2004 resulted primarily from amounts used in the acquisition of TMS, the purchase of computer equipment, and amounts used in developing our web site. Net cash used in investing activities in the first nine months of 2003 resulted from amounts used in developing our web site. Net cash provided by financing activities was $16 in the nine months ended September 30, 2004 as compared to $1 for the same period of 2003. Net cash provided by financing activities in both periods resulted from the exercise of employee stock options. 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 bears interest at the rate of 8.0% per annum and is secured by a lien on all of our assets. 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 its third anniversary if certain conditions are met. The Senior Secured Loan also contains financial covenants and negative and affirmative covenants that, among other things, restrict our ability to incur additional indebtedness and take other actions without the consent of Landmark. At September 30, 2004, 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 is immediately due and payable at the option of Landmark. Accordingly, we have classified the Senior Secured Loan, including the paid-in-kind interest which has been compounded and accrued on the principal balance, totaling $6,522, as currently payable as of September 30, 2004. 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. As of September 30, 2004, the Landmark Warrant was exercisable for 12,439,123 shares of our common stock. The Series B Preferred Stock issued is redeemable at Landmark's option at any time. As of September 30, 2004, Landmark held 169,400,352 shares (including dividends paid "in-kind") of Series B Preferred Stock at an aggregate redemption value of $26,323 (and has rights with respect to accrued dividends thereon), 10,889,636 shares of common stock, and a Landmark Warrant to purchase 12,439,123 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 Warrant. The number of shares subject to the Landmark Warrant will continue to increase as "in-kind" payments are made for interest accruing on the Senior Secured Loan. Effective 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 these 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%. The aggregate amount of letters of credit required to collateralize lease deposits on our office facilities declined to $747 as of September 30, 2004, due to the termination of our lease in New York City, and scheduled reductions contained in our lease agreements for our Chicago, Illinois and San Francisco, California facilities. The Landmark Letter of Credit for our Chicago facility was renewed in 2004 through April 2005. The Landmark Letter of Credit for our San Francisco facility was renewed in 2004 through July 2004, at which time the letter of credit was no longer required according to the terms of our lease agreement. Landmark may, at its sole discretion, cancel the Landmark Letters of Credit on 90 days written notice to us. If the Landmark Letters of Credit 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 materially adversely affected. 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 HAVE A HISTORY OF NET LOSSES We incurred net losses in all years prior to 2003, and we incurred a net loss in the first nine months of 2004 of $826. As of September 30, 2004, our accumulated deficit was $98,037. We may not be able to achieve or sustain profitability or positive operating cash flows in the future. WE MAY NOT BE ABLE TO SECURE FINANCING TO MEET OUR SHORT AND LONG TERM CAPITAL NEEDS At September 30, 2004, we had $5,979 of cash and cash equivalents. We are in default under the terms of an Amended and Restated Senior Secured Loan and Security Agreement dated July 30, 2001 (the "Amended and Restated Loan Agreement") with Landmark. The entire loan plus accrued interest, totaling $6,522 at September 30, 2004, is immediately due and payable at the option of Landmark. Furthermore, Landmark could at any time require us to redeem any or all of the shares of Series B Preferred Stock held by Landmark, which had an aggregate redemption value of $26,323 as of September 30, 2004. 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 to meet our long-term capital needs, we may be unable to operate our business. We have received a report from our independent auditors for our fiscal year ended December 31, 2003 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 in the event Landmark exercises some or all of its rights to accelerate payment under our obligations to Landmark. See "Liquidity and Capital Resources." WE DERIVE MOST OF OUR REVENUES FROM CONTRACTS WITH OUR ADVERTISERS AND NETWORK PARTNERS THAT MAY BE CANCELLED ON SHORT-TERM NOTICE A majority of our current advertising contracts and Lead Generation Network partner contracts permit either party to terminate the contract upon advance written notice ranging from 2 to 60 days. 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 and Lead Generation Network partner contracts can be terminated on 60-days or less 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 or network partners. INTELLECTUAL PROPERTY LITIGATION AGAINST US COULD BE COSTLY AND COULD RESULT IN THE LOSS OF SIGNIFICANT RIGHTS Third parties may 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." Previously, we have had to defend lawsuits filed by competitors alleging that our technology or business methods infringe on the competitors' 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, if they arise, may not be successful. Our failure to prevail in these types of potential litigation could result in: . our paying monetary damages, which could be tripled if infringement is found and determined to have been willful; . an injunction requiring us to stop offering our services in their then-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 higher operating costs. Because of the ongoing technical efforts of others in our market and the ongoing introduction of our technology, we may 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. 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. During the second half of 2003 and the first nine months of 2004, we experienced an increase in advertising rates that have resulted in lower advertising activity. We face the potential risk of a diminished difference between the price we pay for advertising and the price for which we can sell advertising should advertising rates continue to increase over the long term. 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 currently in use or those being developed, such as e-mail surcharges (electronic stamps, ISP- approved lists of legitimate and recognized mailers ("white lists"), or e- mail sender password verifications), may not respect the choice made by our members. We, along with others in the industry that send e-mail, have at various times during 2003 and 2004 experienced the failure of an ISP to deliver e-mails to their customers who also are our members. Many of our members use e-mail services 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 addition, if one or more of those ISP's adopt electronic stamp technology or a white list, our costs related to e-mail delivery may increase substantially. In any of these situations, 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 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 sites and marketing network. 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 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 MAY BE HARMED IF RETAILERS REFUSE TO ACCEPT ELECTRONIC PRINT-AT- HOME COUPON OR 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. Some traditional retailers may not readily accept computer-generate coupons as valid, in part because of their cashiers' lack of familiarity with them and the risk that coupons can be counterfeited. We have occasionally received, and expect to continue to receive, complaints from our members about retailers' failure to honor our coupons. If such complaints become more common and/or costly to our members, 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, and increase our costs of doing business. 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 are generally 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 MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE COMPETITORS The market for e-marketing services continues to evolve and is 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. 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. Increased competition may cause us to lose brand recognition and market share and could otherwise harm our business. WE MAY BE SUBJECT TO CLAIMS OR REGULATORY INVESTIGATIONS AS A RESULT OF OUR DATA ANALYSIS ACTIVITIES Some people who receive promotions from us may register complaints or initiate legal action against us. In addition, we provide advertisers with aggregate information regarding member demographics, shopping preferences and past behavior. 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 REPUTATION AND BUSINESS COULD BE DAMAGED IF WE ENCOUNTER SYSTEM INTERRUPTIONS Our web sites must be able to handle 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 sites and marketing network. The satisfactory performance, reliability and availability of our web sites and marketing network, 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 our members and our ability to process their coupon downloads, e-mail responses and other transactions on our web sites and our partners' web sites. 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 would hinder our sales and marketing efforts. We and our partners have experienced periodic system interruptions, and they 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. 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 sites' infrastructure is co- located at the suburban Chicago facility of Exodus, a Savvis Communications Corporation data center. Our support arrangement with this provider is for a term of two years 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. Our success and our ability to attract new members and motivate our members to respond to our advertisers' offers depends on the efficient and uninterrupted operation of our computer and communications hardware systems. Our web servers and the database behind our system, as well as the servers we use to perform data analysis, are currently located at Exodus. Currently, all site traffic is directed to the Exodus system, and we maintain a redundant version of our critical systems at our Chicago headquarters. The computer systems at each of our two hosting sites are vulnerable to damage or interruption from floods, fires, power losses, telecommunication failures, and other natural disasters or other unanticipated problems. In addition, the 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 sites, sending e-mail notifications of new offers or delivering coupons or other certificates to our members. 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, or 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 may damage our reputation and harm our business. 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, potential competitors may be more inclined to offer similar products and services. PATENTS Although we have two issued United States patents and three pending United States patent applications directed to different aspects of our technology and business processes: . our United States patents and any other patent we may obtain could be challenged successfully by third parties, which could limit or deprive us of the right to prevent others from exploiting the electronic certificate issuing and processing method or other inventions claimed in our current or future patents; . current and future competitors could devise new methods of competing with our business that are not covered by our issued patents or any other patents we may obtain, or against which our issued patents and any other patents we may obtain may be ineffective; . our pending patent applications for a "System and Method of Generating Sales Leads by Way of a Computer Network," a "System and Method of Using Web Beacons to Determine Browsing Behavior Based on Demographic and/or Psychographic Make up," and "Secure Promotions" may not result in the issuance of any 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 patents and other proprietary rights. Any such impact would need to be assessed in the context of a particular situation. We are also uncertain whether countries other than the United States will grant patents for inventions pertaining to Internet-related businesses, or as to the extent of protection those foreign patents would afford if issued. As in the United States, the legal standards applied abroad for intellectual property in Internet-related businesses are evolving and unproven. Any ruling or legislation that reduces the validity or enforceability of our patents may seriously harm our business. We may not prevent others from infringing on our patents and using our proprietary rights. In the event that we are sued for patent infringement, such lawsuits may seek damages against us and/or seek to prevent us from using features of our system or business. Competitors also may take steps in the United States Patent and Trademark Office to contest our patent rights. Our United States Patent No. 5,761,648, "Interactive Marketing Network and Process Using Electronic Certificates" (the "'648 Patent") is currently with the United States Patent and Trademark Office and will be re-examined. The re-examination may result in the '648 Patent being narrowed in scope or declared invalid. A decision by the United States Patent and Trademark Office to either narrow the scope of the '648 Patent or declare the '648 Patent invalid may seriously harm our business. TRADEMARKS, COPYRIGHTS, TRADE SECRETS AND DOMAIN NAMES In addition to patents, 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. WE MAY NOT BE ABLE TO CONTINUE TO ATTRACT, ASSIMILATE AND RETAIN HIGHLY SKILLED PERSONNEL Our future success depends on the continued services of our senior management and other key sales and technical personnel. Our future success also depends on our ability to identify, attract, retain and motivate highly skilled employees. Competition for the best employees in our industry remains intense. We have occasionally encountered, and may continue to encounter, difficulties in hiring and retaining highly skilled employees, particularly qualified software developers for our web site and database systems. We may be unable to retain our current key employees or identify, attract, assimilate or retain other highly qualified employees in the future. WE MAY BE SUBJECT TO PENALTIES OR FINES FOR FACILITATING OUR ADVERTISERS' ACTIVITIES 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. 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 the United States Congress as well as 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 and expect to continue to conduct trivia quizzes and other contests and sweepstakes on our web site, which may be subject to gaming and sweepstakes laws, the effect of which is often unclear. In addition, since our web site can be accessed from foreign counties, our business may be subject to foreign laws and regulations. Activities that may be acceptable in the United States may not be acceptable in foreign jurisdictions. We expect that regulation of the Internet and Internet advertising will intensify. New laws could slow the growth in Internet use and otherwise adversely affect the Internet as a commercial medium, which would harm our business. Due to the proliferation of unsolicited email, the United States Congress passed, and the President signed, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 ("CAN- SPAM"), which has caused us to employ certain new procedures in the deployment of our e-mail such as conducting a suppression against the advertisers' e-mail opt out list and thereby causing longer production cycles for sending e-mail for our advertisers. Additionally, a number of proposals to restrict the collection of information about Internet users and to tax Internet-based transactions are under consideration by federal, state, local and foreign governmental organizations. A three-year federal moratorium on new taxes on Internet access expired in October 2001, and was extended in November 2001 for two years. This moratorium expired November 1, 2003, although the United States Senate passed the "Internet Tax Nondiscrimination Act" on April 29, 2004 which proposes to extend the moratorium until November 1, 2007. Currently, the United States House of Representatives is working on its version of an Internet tax moratorium bill. The future status of taxes on Internet transactions is uncertain. There is no federal law preempting state tax laws or the levy of state sales taxes to online e-commerce activities. The taxation of online transactions or other new regulations could increase our costs of doing business or otherwise harm us by making the Internet less attractive for consumers and businesses. The application of existing laws such as those governing intellectual property and privacy to the Internet and Internet advertising lends additional uncertainty to our business. Any application of existing laws and regulations to the Internet; new legislation or regulation that imposes stricter restrictions on privacy, consumer protection or advertising practices; any government investigation of our privacy practices or other business methods; or the application of laws from jurisdictions whose laws do not currently apply to us could: . create uncertainty in the marketplace that could reduce demand for our services; . limit our ability to collect and to use data from our members, which could prevent us from attracting and retaining advertisers; . result in expensive litigation, costly and disruptive efforts to respond to governmental investigations and burdensome fines or other 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 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; . pay dividends on, or purchase, redeem or otherwise acquire for value any shares of our capital stock (with certain exceptions); or . authorize or issue equity securities or securities exercisable for or convertible into equity securities other than shares issued for cash, shares issuable upon conversion and exercise of securities outstanding on the date of issuance of the Series B Preferred Stock, and shares issuable under our 2001 Stock Option Plan. These restrictions provide the holder of the Series B Preferred Stock with significant control over us and may discourage others from initiating potential merger or other change of control transactions. OUR STOCKHOLDERS COULD SUFFER SUBSTANTIAL DILUTION AS A RESULT OF OUTSTANDING PREFERRED STOCK, WARRANTS AND STOCK OPTIONS AND NEW ISSUANCES OF PREFERRED STOCK AND WARRANTS, AND OUR STOCK PRICE MAY DECLINE IF A LARGE NUMBER OF SHARES ARE SOLD OR THERE IS A PERCEPTION THAT SUCH SALES COULD OCCUR As of November 1, 2004, we had a total of 185,788,359 shares of Series B and Series C Preferred Stock issued and outstanding. Under the terms and conditions of the Series B and Series C Preferred Stock, these shares are convertible into an equal number of shares of our common stock at the holders' option. In addition, as of November 1, 2004, we had an outstanding warrant exercisable for 12,693,434 shares of our common stock (exercisable for 12,439,123 shares of our common stock as of September 30, 2004) and outstanding stock options exercisable for 7,567,138 of our common stock. Also, we continue to issue additional shares of Series B Preferred Stock and warrants as "in-kind" payments for dividends and interest accruing on the Series B Preferred Stock and the Senior Secured Note. Our stockholders may suffer substantial additional dilution as a result of the issuance of additional shares of preferred stock and warrants. Further- more, our stock price may decline as a result of sales of a large number of the shares of common stock issuable upon conversion or exercise of the preferred stock, warrants and/or stock options or the perception that such sales could occur. 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, but are not limited to: . quarterly variations in our operating results; . interpretation of the effect of our Series B Preferred Stock and Series C Preferred Stock on our overall capital structure; . the expiration, on November 12, 2003, of the covenant restriction by which Landmark had agreed it would not take action to cause us to become a privately-held company (such covenant was contained in an agreement among certain of our stockholders and Landmark); . our ability to meet our earnings forecasts; . interpretation of the effect of our outstanding stock options and warrants on our overall capital structure; . changes in governmental regulation of the Internet or Internet advertising, including any governmental inquiry of another Internet company; . resolution of our pending or future patent litigation or other changes in the status of our intellectual property rights; . announcements of technological innovations or new services by us or our competitors; . changes in our liquidity position; . changes in key personnel; . future sales of our common stock, including sales of common stock issued upon conversion of our Series B Preferred Stock, Series C Preferred Stock, or exercise of outstanding warrants or options; . 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We had no holdings of derivative financial or commodity instruments at September 30, 2004. However, we are exposed to financial market risks associated with fluctuations in interest rates. Because all of the amounts in our investment portfolio are cash or cash equivalents, the related income would not be significantly impacted by increases or decreases in interest rates due to the short-term nature of our investment portfolio and we believe our portfolio is at fair value. If market rates were to increase immediately by 10% from levels on September 30, 2004, the fair value of this investment portfolio would increase by an immaterial amount. If market rates were to decrease immediately by 10% from levels on September 30, 2004, the resultant decrease in interest earnings of our investment portfolio would not have a material impact on our earnings as a whole. As of September 30, 2004, we had only fixed rate debt. On April 5, 2002, Landmark acquired 10,889,636 shares of our common stock from Lend Lease International Pty. Limited of Australia. Contemporaneously with the purchase, we entered into a call option agreement with Landmark, whereby we have the right to call, subject to certain terms and conditions, all 10,889,636 shares of common stock from Landmark. The call price is $0.08 per share plus seven percent interest thereon, compounded annually. We accounted for this call option as permanent equity and a contribution from Landmark under EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company's Own Stock. We ascribed a value of $1,200 to the option at issuance. ITEM 4. CONTROLS AND PROCEDURES Based upon an evaluation of our disclosure controls and procedures performed by our management, with the participation of our chief executive officer and chief financial officer, our chief executive officer and chief financial officer have concluded that, as of September 30, 2004, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There was not any change in our internal control over financial reporting during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We were a defendant in two patent infringement lawsuits, both of which were settled on October 19, 2004 on mutually agreeable terms that were not material to the Company's financial statements for the nine months ended September 30, 2004 and that will allow the Company to continue to operate its systems and methods without threat of infringement of the Catalina patents that were the subject of the litigation. The financial impact of this settlement is included in the three and nine month results for the period ended September 30, 2004. For a further discussion of these legal proceedings, see "Part I. Item 3. - Legal Proceedings" in our Annual Report on Form 10-K for the year ended December 31, 2003, and "Part II. Item 1. - Legal Proceedings" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, both as filed with the SEC. We may be involved in additional litigation, investigations or other proceedings in the future. Separate lawsuits or other proceedings may be brought against us to invalidate our patents or force us to change our services or business methods. Any litigation, investigation or proceedings, with or without merit, could be costly and time-consuming and could divert our management's attention and resources, which in turn could harm our business and financial results. ITEM 3. DEFAULTS UPON SENIOR SECURITIES At September 30, 2004, 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 2001; and . our failure to maintain a minimum level of working capital and ratio of cash, cash equivalents and certain receivables over current liabilities; and . our failure to maintain a minimum ratio of total indebtedness over tangible net worth. Consequently, the Senior Secured Loan and all accrued interest thereon are immediately due and payable at the option of Landmark. Accordingly, we have classified the amounts owed pursuant to the Senior Secured Loan, including principal and the paid-in-kind interest which has been compounded and accrued on the principal balance, totaling $6,522, as currently payable as of September 30, 2004. ITEM 6. EXHIBITS Exhibits: 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002). 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002). 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COOLSAVINGS, INC. Dated: November 10, 2004 /s/ Matthew Moog ----------------------------------- Matthew Moog President and Chief Executive Officer (duly authorized officer) Dated: November 10, 2004 /s/ David B. Arney ----------------------------------- David B. Arney Senior Vice President of Operations and Chief Financial Officer (principal financial and accounting officer)