SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-30199
coolsavings.com inc.
(Exact name of registrant as specified in its charter)
Michigan 38-3216102
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
360 N. Michigan Avenue 19th Floor
Chicago, Illinois
Address of principal executive offices, including
60601
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2001
----- ----------------------------
Common stock, no par value 39,093,660
coolsavings.com inc.
INDEX
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets
June 30, 2001 and December 31, 2000 1
Statements of Operations
Three and Six Month Periods Ended June 30, 2001
and 2000 2
Statements of Shareholders' Equity
Six Month Period Ended June 30, 2001 3
Statements of Cash Flows
Six Month Period Ended June 30, 2001 and 2000 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COOLSAVINGS.COM INC.
BALANCE SHEET
(UNAUDITED)
June 30, 2001 December 31, 2000
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 252,000 $ 7,041,000
Restricted cash 10,000 28,000
Accounts receivable, net of allowance of $ 942,000 and $1,318,000 at
June 30, 2001 and December 31, 2000, respectively 2,925,000 9,330,000
Prepaid assets 294,000 723,000
Other assets 780,000 662,000
--------------- -----------------
Total current assets 4,261,000 17,784,000
--------------- -----------------
Property and equipment 11,066,000 9,445,000
Capitalized software costs 1,490,000 1,490,000
Capitalized web site costs 3,591,000 2,667,000
----------------- -----------------
Total 16,147,000 13,602,000
Less accumulated depreciation and amortization (5,233,000) (2,913,000)
----------------- -----------------
10,914,000 10,689,000
Intangible assets, patents and licenses, net of accumulated amortization
of $254,000 and $148,000 at June 30, 2001 and December 31, 2000, respectively 579,000 677,000
----------------- -----------------
Total assets $ 15,754,000 $ 29,150,000
================= =================
LIABILITIES
Current liabilities:
Accounts payable, including amounts due to related parties of
$ 460,000 and $180,000 at June 30, 2001 and December 31, 2000, respectively $ 10,599,000 $ 6,730,000
Cash overdraft -- 1,335,000
Accrued marketing expense 886,000 2,289,000
Accrued compensation 501,000 2,230,000
Accrued expenses, including amounts due to related parties of
$ 291,000 and $35,000 at June 30, 2001 and December 31, 2000, respectively 1,384,000 1,282,000
Deferred revenue 1,181,000 1,152,000
Notes payable, net of discount, including amounts due to related parties of $2,319,000 2,611,000 --
Line of credit 1,186,000 --
Current maturities of long-term debt 2,205,000 1,728,000
Long-term debt reclassified as currently payable 160,000 2,661,000
--------------- ------------
Total current liabilities $ 20,713,000 $ 19,407,000
--------------- ------------
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 10,000,000 shares authorized
at June 30, 2001 and December 31, 2000, respectively, zero shares issued and
outstanding at June 30, 2001 and December 31, 2000, respectively,
Common stock, no par value, 100,000,000 shares authorized at
June 30, 2001 and December 31, 2000, 39,093,660
shares issued and outstanding at June 30, 2001 and December 31, 2000,
respectively 73,659,000 73,659,000
Additional paid-in capital 340,000 (47,000)
Accumulated deficit (78,958,000) (60,352,000)
Notes receivable from related parties -- (3,517,000)
--------------- ------------
Total stockholders' (deficit) equity (4,959,000) 9,743,000
--------------- ------------
Total liabilities and stockholders' (deficit) equity $ 15,754,000 $ 29,150,000
=============== ============
The accompanying notes are an integral part of the financial statements.
1
COOLSAVINGS.COM INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Month Six Month
Period Ended Period Ended
June 30, June 30,
-------------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ -------------- ------------
Revenue:
e-marketing services $ 5,197,000 $ 8,938,000 $ 11,430,000 $ 17,024,000
License royalties 66,000 10,000 167,000 10,000
------------ ------------ ------------- ------------
Net revenues 5,263,000 8,948,000 11,597,000 17,034,000
Cost of revenues 1,512,000 1,363,000 3,414,000 2,432,000
------------ ------------ ------------- ------------
Gross profit 3,751,000 7,585,000 8,183,000 14,602,000
Operating expenses:
Sales and marketing 4,070,000 10,184,000 10,938,000 20,449,000
Product development 1,827,000 2,897,000 3,773,000 4,502,000
General and administrative,
inclusive of $3.7 million of expense related
to forgiveness of notes receivable including
interest at June 30, 2001, and $1.0 million
and $2.0 million of compensation related to
stock options, for the three and six month
period ended June 30, 2000, respectively 7,732,000 4,864,000 11,821,000 8,714,000
------------ ------------ ------------- ------------
Total operating expenses 13,629,000 17,945,000 26,532,000 33,665,000
------------ ------------ ------------- ------------
Loss from operations (9,878,000) (10,360,000) (18,349,000) (19,063,000)
Other income (expense):
Interest and other income 55,000 360,000 226,000 578,000
Interest expense (112,000) (118,000) (238,000) (261,000)
Interest expense representing beneficial
conversion feature of convertible debt -- (555,000) -- (555,000)
Amortization of debt discount (20,000) -- (26,000) --
Other expense-settlement (219,000) -- (219,000) --
------------ ------------ ------------- ------------
Total other income (expense) (296,000) (313,000) (257,000) (238,000)
------------ ------------ ------------- ------------
4
Loss before income taxes (10,174,000) (10,673,000) (18,606,000) (19,301,000)
Income taxes -- -- -- --
------------ ------------ ------------- ------------
Net loss (10,174,000) (10,673,000) (18,606,000) (19,301,000)
Deemed dividend representing the
beneficial conversion feature
of preferred stock -- (14,901,000) -- (19,868,000)
------------ ------------ ------------- ------------
Loss applicable to common shareholders $(10,174,000) $(25,574,000) $ (18,606,000) $(39,169,000)
============ ============ ============= ============
Basic and diluted net loss per share $ (0.26) $ (0.72) $ (0.48) $ (1.17)
============ ============ ============= ============
Weighted average shares used in the calculation
of basic and diluted net loss per share 39,093,660 35,281,040 39,093,660 33,503,310
============ ============ ============= ============
The accompanying notes are an integral part of the financial statements.
2
COOLSAVINGS.COM INC.
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
(UNAUDITED)
Additional
Preferred Stock Common Stock Paid-in
--------------------- --------------------------
Shares Amount Shares Amount Capital
---------- ---------- ------------- -------------- ---------------
Balances, January 1, 2001 -- -- 39,093,660 $73,659,000 $(47,000)
Issuances of detachable
warrants -- -- -- -- 387,000
Forgiveness of notes receivable -- -- -- -- --
Net loss -- -- -- -- --
---------- ---------- ------------ ----------- --------
Balances, June 30, 2001 -- -- 39,093,660 $73,659,000 $340,000
========== ========== ============ =========== ========
Notes
Receivable Total
Accumulated From Related Stockholders'
Deficit Parties Equity
------------------- ------------ ---------------
Balances, January 1, 2001 $(60,352,000) $(3,517,000) $ 9,743,000
Issuances of detachable warrants -- -- 387,000
Forgiveness of notes receivable -- 3,517,000 3,517,000
Net loss (18,606,000) -- (18,606,000)
------------------- ------------ ---------------
Balances, June 30, 2001 $(78,958,000) $ -- $ (4,959,000)
=================== ============ ===============
The accompanying notes are an integral part of the financial statements.
3
COOLSAVINGS.COM INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
------------------------------------------------
2001 2000
--------------------- -------------------
Cash flows used in operating activities:
Net loss $ (18,606,000) $ (19,301,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,432,000 808,000
Loss on disposal of property and equipment -- 99,000
Writeoff related to international website costs 360,000 --
Forgiveness of notes receivable and accrued interest
from related parties 3,666,000 --
Stock option compensation -- 1,980,000
Provision for doubtful accounts, net of write offs (237,000) 562,000
Amortization of prepaid advertising -- 857,000
Amortization of debt discount 26,000 555,000
Changes in assets and liabilities:
Decrease (increase) in restricted cash 18,000 (5,000)
Decrease (increase) in accounts receivable 6,781,000 (2,679,000)
Decrease in prepaid and other current assets 694,000 633,000
Increase in accounts payable 3,869,000 2,641,000
Increase in deferred revenue 29,000 708,000
(Decrease) increase in accrued and other liabilities (3,698,000) 3,094,000
--------------------- -------------------
Net cash flows used in operating activities (4,666,000) (10,048,000)
--------------------- -------------------
Cash flows used in investing activities:
Purchases of property and equipment (1,637,000) (4,383,000)
Cash paid for intangible assets -- (325,000)
Capitalization of web site development costs (1,284,000) --
--------------------- -------------------
Net cash used in investing activities (2,921,000) (4,708,000)
--------------------- -------------------
Cash flows from financing activities:
Proceeds from short-term debt 1,186,000 --
Repayment of debt obligations (2,084,000) (116,000)
Advances on notes payable 3,031,000 --
Proceeds from long-term borrowings -- 2,692,000
Proceeds from exercise of stock options -- 125,000
Proceeds from issuance of common stock -- 23,100,000
Cash paid for issuance costs -- (2,930,000)
Cash overdraft (1,335,000) 506,000
--------------------- -------------------
Net cash provided by financing activities 798,000 23,377,000
--------------------- -------------------
Net (decrease) increase in cash (6,789,000) 8,621,000
Cash and cash equivalents, beginning of period 7,041,000 17,489,000
--------------------- -------------------
Cash and cash equivalents, end of period $ 252,000 $ 26,110,000
===================== ===================
Supplemental schedule of cash flow information,
interest paid $ 191,000 $ --
Non-cash investing and financing activity:
Common stock issued in exchange
for patent rights -- $ 500,000
Common stock issued for
convertible preferred stock -- $ 19,868,000
Common stock issued for
convertible subordinated notes -- $ 4,996,000
Issuance of common stock in exchange
for stockholders notes upon exercise -- $ 700,000
of stock options and warrants
Capitalized transaction costs relating
to the Landmark transaction $ 661,000 --
Obligation to issue common stock for
purchase of intellectual property $ 8,000 --
The accompanying notes are an integral part of the financial statements.
4
COOLSAVINGS.COM INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
coolsavings.com inc. (the "Company") is a comprehensive e-marketing
solution for both offline and online advertisers that provides a broad range of
branded consumer promotional incentives and data mining technology to help
leading brick and mortar retailers, e-tailers and consumer packaged good
manufacturers build profitable one-to-one relationships. With a database of more
than 14 million registered members (as of June 30, 2001), the Company supplies
marketers with a single resource for accessing and engaging a dynamic group of
shoppers. Under the Company's established brand, advertisers can deliver, target
and track a wide array of incentives, including printed and electronic coupons,
personalized e-mails, rebates, samples, sales notices, gift certificates,
contests and banner advertisements to promote sales of products or services in
stores or online.
The Company has sustained significant net losses and negative cash flows
from operations since its inception. The Company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations and to consummate the investment by Landmark
Communications, Inc. and Landmark Ventures VII, L.L.C. described in Note 8
below. As of June 30, 2001, the Company had approximately $252,000 in cash and
cash equivalents.
Our independent auditors have issued their report on our financial
statements for 2000 with an explanatory paragraph. This paragraph describes the
uncertainty as to our ability to continue as a going concern.
If we are unsuccessful in consummating the Landmark Funding or fail to
secure additional equity and/or debt financing, fail to achieve and maintain
cash flow positive operations, or if we are unsuccessful in complying with the
forbearance understandings with our banks, our ability to continue to operate
the business will be jeopardized.
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 Form 10-K and the Company's prospectus relating to its initial public
offering. Accordingly, these financial statements should be read in conjunction
with the financial statements and related notes in such documents.
In the opinion of the Company, the accompanying financial statements
reflect all normal recurring adjustments necessary for a fair statement of the
financial position as of June 30, 2001, and the results of operations and
changes in cash flows for the three and six month periods ended June 30, 2001
and 2000. In addition, these quarterly results of operations are not necessarily
indicative of those expected for the year. Certain prior period amounts have
been reclassified to the current period's presentation.
5
COOLSAVINGS.COM INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
2. Related Party Transactions
In March 2001, the Company sold $2.1 million of our 8% Senior Subordinated
Convertible Notes due March 1, 2006 ("Notes") to three accredited
investors. Two of those investors are members of the Board of Directors and each
director purchased $1.0 million of these Notes. These Notes carry warrants to
purchase one share of the Company's common stock for every $2.00 of principal
indebtedness under each Note for a total of one million shares subject to
warrants issued to related parties. The warrants have an exercise price of $1.25
per share. The exercise price may be reduced to $1.00 in the event of a sale of
substantially all of our assets or a change in control of the Company. The Notes
are convertible at any time into common stock at a conversion rate equal to one
share for each outstanding dollar of principal and accrued interest, at the
election of the note holder. Interest is payable quarterly, and for periods
prior to April 1, 2003, the Company has the option to pay interest on the
outstanding principal balance of the notes in cash or by delivery of additional
notes in an amount equal to the amount of the interest. The proportional fair
value of the warrants is $387,000. Such value represents a discount from the
fair value of the Notes and the relative fair value of the warrants has been
recorded in the financial statements as stipulated by APB 14 and will be
amortized over the period that these Notes are outstanding. As part of the
investment, the Company agreed that in the event that the Company sold
securities to investors in a private placement before August 31, 2001, the
Company would permit the security holders to convert their investment in the
Notes and warrants to an investment on essentially the same economic terms as
the investment offered to the other investor in the private placement. In
conjunction with, and as a condition to, the closing of the investment in the
Company by Landmark Communications, Inc. described in Note 9 below, the Company
will issue 13.0 million shares of the Company's Series C Preferred Stock in
exchange for the Notes and accompanying warrants (See Note 8).
The Company forgave the principal and interest on certain promissory notes
made to the Company by current and former directors of the Company, which notes
were executed as payment for the purchase price of common stock of the Company
upon the exercise of options and warrants held by such directors prior to the
Company's initial public offering ("Director Notes"). The Director Notes had an
aggregate principal and accrued, but unpaid interest, of $3.7 million. Each
director and former director was permitted to keep the common stock purchased by
delivery of the Director Notes.
In June 2001, Tomay Charitable Remainder Unitrust u/t/a dated April 12,
1994, as amended, of which one of our directors, Richard H. Rogel, is the
trustee ("Rogel Trust"), loaned the Company a total of $279,000. These loans
consisted of an interest free loan of $60,000 and a loan for $219,000 evidenced
by a promissory note dated June 27, 2001, which accrued interest at a rate equal
to 8.5% per annum. All principal and accrued interest under these loans has been
repaid.
The Company formed a partnership with DIMAC Marketing Partners. Mr. Robert
Kamerschen, a director of the Company, is an officer, director and equity owner
of DIMAC Corporation. DIMAC Corporation and the Company entered into an
agreement whereby the parties market services and products to designated
customers. The Company did not earn any revenue with respect to this contract in
the three month period ended June 30, 2001.
On July 30, 2001, the Company entered into an Employment Agreement with the
Company's President and Chief Executive Officer, Matthew Moog. The Employment
Agreement has a term of three years, provides for an annual base salary of
$345,000, and provides for the grant of an option to purchase 750,000 shares of
the Company's common stock. The Employment Agreement further provides that Mr.
Moog would be granted 200,000 additional options on the first and second
anniversary of the Agreement if he is still employed by the Company.
The Company entered into an Employment Agreement with Steven M. Golden, who
at the date of execution was the Company's Chairman and Chief Executive Officer.
The Employment Agreement had a term of three years, provided for an annual base
salary of $345,000, and the grant of an option to purchase 150,000 shares of the
Company's common stock. All stock options previously issued and not vested were
made immediately vested and exercisable. On July 30, 2001, the Company entered
into a Severance Agreement with Mr. Golden which terminated Mr. Golden's
Employment Agreement. The Severance Agreement provided for
6
COOLSAVINGS.COM INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
three years of severance pay in the amount of $345,000 per year and the
continuation of certain benefits. The Severance Agreement further provides that
all options held by Mr. Golden: (a) become immediately vested and fully
exercisable; (b) be adjusted to have an exercise price of $0.50; and (c) are
exercisable through the tenth anniversary of the grant of each such options.
These options will be subject to variable accounting under FASB Interpretation
No. 44 "Accounting for Certain Transactions involving Stock Compensation."
3. Bank Lines of Credit and Other Loans
The Company has two separate bank credit facilities under which the Company has
an aggregate outstanding principal balance of $3.6 million, and had $1.8 million
in letters of credit outstanding, at June 30, 2001. Under the credit facility
with American National Bank (the "ANB Facility") the Company has two term loans
and one $3.0 million revolving credit line. The first term loan, which had an
outstanding balance of $1.9 million at June 30, 2001, is payable in
installments. The second term loan, which had an outstanding balance of $1.2
million at June 30, 2001, is payable in installments. The outstanding balances
under the term loans bear interest at the bank's prime rate plus 1.25% (7.75% at
June 30, 2001). Additionally, the Company had $1.8 million of letters of credit
outstanding to collateralize lease deposits on its office facilities. The ANB
Facility is collateralized by all the assets of the Company.
Under the credit facility with Midwest Guaranty Bank ("Midwest Facility"), the
Company has a $1.0 million equipment line of credit. At June 30, 2001, there was
$495,000 outstanding under this line. The weighted average interest rate on the
outstanding borrowings under this line at June 30, 2001 was 9%. Borrowings are
collateralized by the specific equipment purchased and are payable in
installments.
As of June 30, 2001, the Company was not in compliance with the tangible capital
funding and liquid asset requirements of the ANB Facility. This non-compliance
has caused the Company to be out of compliance with the Midwest Facility. The
failure to comply with covenant requirements constitutes an event of default
under the respective lending agreements. As a consequence, the borrowings under
these facilities became immediately payable at the option of the lenders, and,
accordingly, the Company has reclassified $160,000 of otherwise long-term
borrowings under the ANB Facility and the Midwest Facility as currently payable.
On June 15, 2001, the Company entered into a Forbearance and Reaffirmation
Agreement with American National Bank which was amended by a letter agreement
dated July 27, 2001 ("Forbearance Agreement"), wherein American National Bank
agreed to forbear from accelerating borrowings under the ANB Facility for
certain stated defaults based on the continued compliance with the terms of the
Forbearance Agreement, which included an accelerated principal payment schedule
with respect to the ANB Facility. This accelerated payment schedule provides an
additional principal payment of $150,000 per month and for the payment of the
entire indebtedness under the American National Bank term loans on or before
December 31, 2002. At June 30, 2001, the Company is not in compliance with its
base borrowing asset obligations for certain reporting periods under the
7
COOLSAVINGS.COM INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
Forbearance Agreement. The Company is seeking a waiver as to this non-
compliance from American National Bank, but there can be no assurances that
the Company will be able to obtain such waiver.
On June 12, 2001, the Company entered into a Forbearance Letter Agreement
with Midwest Guaranty Bank and on July 27, 2001, the Company entered into a
Loan Forbearance and Reaffirmation Agreement with Midwest Guaranty Bank
(the "Midwest Forbearance Agreement"), wherein Midwest Guaranty Bank agreed
to forbear from accelerating the Midwest Facility for certain stated
defaults based on the continued compliance with the terms of the Midwest
Forbearance Agreement, which included an accelerated principal payment
schedule of $5,000 per month with respect to the Midwest Facility.
In June 2001, Landmark Communications, Inc. loaned the Company a total of
$650,000. Such loan was evidenced by a Loan and Security Agreement dated
June 14, 2001, and amended on July 30, 2001 ("Landmark Bridge Loan
Agreement"). The Landmark Bridge Loan Agreement provided for repayment on
demand and the accrual of interest at a rate of 12%, and granted a second
lien on the Company's assets. The Landmark Bridge Loan Agreement was
amended on July 30, 2001 and replaced by a $5.0 million term loan. (See
Note 8.)
In June 2001 a trust of which one of our directors, Richard H. Rogel is the
trustee, made two loans to the Company totaling $279,000. These loans
consisted of an interest free loan of $60,000 and a loan for $219,000
evidenced by a promissory note dated June 27, 2001, which accrued interest
at a rate equal to 8.5% per annum. All principal and accrued interest under
these loans has been repaid.
4. Commitments and Contingencies:
a. Litigation:
In April 2001, the Company accepted a mediation award in a non-operating
business-related lawsuit pursuant to which the Company paid the plaintiff
the sum of $219,000.
The Company is currently a defendant in two patent infringement lawsuits.
The Company's motion for summary judgement was granted in one of these
patent infringement suits, and the plaintiff therein has filed an appeal in
this matter. While the Company believes that these actions are without
merit and intends to defend them vigorously, the Company's efforts may not
be successful. An unfavorable outcome for the Company is considered neither
probable nor remote by management at this time, and an estimate of the
range of possible losses cannot currently be made. Management does not
believe the outcome of such litigation will have a material adverse effect
on the Company's overall financial position, results of operations or cash
flows.
The Company is also involved in a number of legal proceedings arising in
the ordinary course of business, none of which is expected to have a
material adverse effect on the Company's financial position or results of
operations.
b. Member Incentive Program:
In March 2000, the Company entered into a two-year agreement with a
developer of web-based loyalty incentives programs. Under this agreement,
the Company co-developed a custom loyalty program for its
8
COOLSAVINGS.COM INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
members using software that it licensed from the developer. On June 14,
2001 the Company entered into an amendment to this Agreement which reduced
the remaining commitment to purchase incentive awards during the remaining
term of the Agreement to $580,000.
c. Purchase of Intellectual Property:
On November 30, 2000, the Company entered into an agreement to purchase
certain software and related intellectual property and software. The
Company is obligated to deliver up to $1,000,000 of its common stock for
the purchased assets contingent upon defined revenues, which may be earned
by Company, related to the use of the purchased assets. Through June 30,
2001, the Company has incurred an obligation to issue 6,371 shares of its
common stock pursuant to this Agreement.
5. Earnings Per Share:
Financial Accounting Standards Board ("FASB") Statement of Accounting
Standards ("SFAS") No. 128 requires companies to provide a reconciliation of the
numerator and denominator of the basic and diluted earnings per share
computations. The calculation below provides net loss, weighted average common
shares outstanding and the resultant net loss per share for both basic and
diluted earnings per share for the three month and six month periods ended June
30, 2001 and 2000. The calculation of diluted net loss per share excludes shares
of common stock issuable upon the conversion of employee stock options and
investor warrants as the effect of such exercises would be anti-dilutive.
Three Month Period Ended Six Month Period Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Numerator:
Net loss $(10,174,000) $(10,673,000) $(18,606,000) $(19,301,000)
Deemed dividend relating to
convertible preferred stock -- (14,901,000) -- (19,868,000)
------------ ------------ ------------ ------------
Net loss available to common stockholders $(10,174,000) $(25,574,000) $(18,606,000) $(39,169,000)
============ ============ ============ ============
Denominator:
Weighted average
common shares 39,093,660 35,281,040 39,093,660 33,503,310
============ ============ ============ ============
Loss per share
Basic and diluted $ (0.26) $ (0.72) $ (0.48) $ (1.17)
============ ============ ============ ============
9
COOLSAVINGS.COM INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
6. Stock Option Compensation:
The Company granted options to purchase 150,000 shares of common stock
pursuant to the Employment Agreement with Steven Golden in April 2001. The
Company has granted options to purchase 750,000 shares of common stock pursuant
to the July 2001 employment agreement with Matthew Moog.
Pursuant to the July 30, 2001 Severance Agreement between the Company and
Steven Golden, all the options granted by the Company to Steven Golden as of the
date thereof became immediately vested and fully exercisable at a strike price
of $0.50 per share. These options will be subject to variable accounting under
FASB Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation."
7. Recent Accounting Pronouncements:
In January 2000, the Company adopted Emerging Issues Task Force ("EITF")
99-17, "Accounting for Advertising Barter Transactions". In accordance with EITF
99-17, barter transactions have been valued based on similar cash transactions,
which have occurred within six months prior to the date of the barter
transaction. For the three-month period ended June 30, 2001, barter revenue was
$395,000 or 7.5% of net revenues.
10
COOLSAVINGS.COM INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financing Accounting Standards (SFAS) No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No.
141 is effective for any business combination initiated after June 30, 2001.
SFAS No. 141 requires that all business combinations be accounted for under a
single method, the purchase method of accounting. Pooling-of-interests is no
longer permitted. SFAS No. 142 will be effective for the Company January 1,
2002. Under SFAS No. 142, goodwill will no longer be amortized to earnings, but
instead reviewed for impairment, at least on an annual basis. The Company
anticipates that the adoption of SFAS No. 141 and SFAS No. 142 will not have a
significant effect on the Company's results of operations or its financial
position.
8. Other Subsequent Events
11
COOLSAVINGS.COM INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
On July 30, 2001, the Company entered into a series of agreements with
Landmark Communications, Inc. and Landmark Ventures VII, LLC (together,
"Landmark") pursuant to which Landmark has provided to the Company a senior
secured loan of $5.0 million ($1.75 million of which had been previously funded
on an interim basis) (the "Loan") and agreed to purchase up to $10.0 million of
the Company's Series B Cumulative Convertible Preferred Stock ("Series B
Preferred Stock") in two separate tranches subject to certain conditions and
shareholder approvals.
The Loan was funded pursuant to an Amended and Restated Loan Agreement with
Landmark (the "Loan Agreement"). The Loan is payable on demand and bears
interest at 12% per annum, paid quarterly in arrears in the form of additional
notes, and matures on January 26, 2002 (unless extended upon the closing of the
first tranche of the sale to Landmark of the Series B Preferred Stock (the
"Primary Funding")) and is secured by a second lien on all of the Company's
tangible and intangible property. If the Primary Funding closes, the Loan will
be modified as follows: the interest rate will be reduced to 8% per annum, paid
quarterly in arrears in the form of additional notes and warrants to purchase
shares of common stock; the maturity date will be extended to June 30, 2006; and
the Company will have the right to prepay the Loan on or after the third
anniversary if certain conditions are met. The 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.
In connection with the Loan, the Company issued warrants to Landmark (the
"Warrants"). The Warrants have a term of 8 years and may be exercised in whole
or in part immediately (except that Landmark has agreed not to exercise the
Warrants prior to the closing of the Primary Funding unless certain events
occur). The Warrants contain a net exercise feature and are exercisable for:
(a) 7,818,731 shares (equal to 19.99% of the Company's issued and outstanding
shares of common stock at the time of issuance) at an exercise price of $0.01
per share until the earlier of the closing of the Primary Funding or the
termination of the Purchase Agreement (as defined below); (b) 19.99% of the
Company's issued and outstanding common stock, calculated on a fully diluted
basis (including all then outstanding options and warrants) at an exercise price
of $0.01 per share in the event that the Purchase Agreement is terminated; and
(c) 10.0 million shares at an exercise price of $0.50 per share (increasing to
$0.75 per share on July 30, 2005 if not previously exercised) upon the closing
of the Primary Funding. In addition to the payment of "in-kind" interest on the
Loan, after the closing of the Primary Funding, the Company will issue to
Landmark additional Warrants to purchase two shares of common stock for each
dollar of interest accrued on the Loan.
Subject to the conditions in a Securities Purchase Agreement with Landmark dated
July 30, 2001 (the "Purchase Agreement"), the Company has agreed to sell to
Landmark up to $10,000,000 (64,360,810 shares) of Series B Preferred Stock in
two separate tranches. The Series B Preferred Stock will be initially
convertible into common stock equal to 49% of the total, fully-diluted common
stock of the Company (subject to adjustments) and has an 8% quarterly dividend
payable in additional shares of Series B Preferred Stock. The Series B Preferred
Stock is subject to certain redemption requirements outside the control of the
Company. Upon the closing of the Primary Funding, Landmark will have the right
to elect a majority of the Company's board of directors. Assuming the Company
12
COOLSAVINGS.COM INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
has satisfied (or Landmark has waived) the conditions to each of the closings,
Landmark will purchase 32,180,405 shares of Series B Preferred Stock promptly
after the Company's shareholders have approved the transaction and purchase the
balance of the Series B Preferred Stock on October 25, 2001. Landmark will pay
an aggregate of $10.0 million for the shares of Series B Preferred Stock
($0.1554 per share). Landmark also has an option to purchase additional shares
of Series B Preferred Stock at the same price per share upon the occurrence of
certain events. The Company has capitialized $661,000 of costs related to this
Landmark transaction as of June 30, 2001 which will be allocated to the proceeds
upon completion of the transaction.
In connection with the Landmark transaction, certain of the Company's
shareholders owning 63.09% of the Company's outstanding common stock have
entered into a voting agreement pursuant to which such shareholders have agreed
to vote the shares owned by them for approval of the Landmark transaction and
related transactions.
As a condition to the consummation of the Landmark transaction at the
Closing of the Primary Funding, the Company will issue to three individuals (two
of whom are directors of the Company) 13.0 million shares of the Company's
Series C Preferred Stock in exchange for $2.1 million of the Company's 8% Senior
Subordinated Convertible Notes due March 1, 2006 and accompanying warrants to
purchase 1,050,000 shares of common stock previously issued to such individuals.
(See Note 2)
On July 1, 2001, ValueClick, Inc. filed suit against the Company in the
Superior Court Los Angeles California, alleging that it was owed approximately
$301,000 for services rendered. On July 25, 2001, the parties entered into a
Settlement Agreement, wherein the Company agreed to pay ValueClick a total of
$150,000, in full settlement of all claims.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement
You should read the following discussion of our financial condition and
results of operations with the financial statements and the related notes
included elsewhere in this report. This discussion contains forward-looking
statements based on our current expectations, assumptions, estimates and
projections. These forward-looking statements involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of numerous factors, many of which are
described in the "Factors That May Affect Future Results" section and elsewhere
in our Annual Report on Form 10-K for the fiscal year 2000. The Company is under
no duty to update any of the forward-looking statements after the date of this
report to conform these statements to actual results, unless required by
applicable securities laws.
Overview
CoolSavings is a comprehensive e-marketing solution for both offline and
online advertisers that provides a broad range of branded consumer promotional
incentives and data mining technology to help leading brick and mortar
retailers, e-tailers and consumer packaged good manufacturers build profitable
one-to-one relationships. With a database of more than 14 million registered
members (as of June 30, 2001), CoolSavings supplies marketers with a single
resource for accessing and engaging a dynamic group of shoppers. Under our
established brand, advertisers can deliver, target and track a wide array of
incentives, including printed and electronic coupons, personalized e-mails,
rebates, samples, sales notices, gift certificates, contests and banner
advertisements to promote sales of products or services in stores or online.
Recent Developments
On July 30, 2001, the Company entered into a series of agreements with
Landmark Communications, Inc. and Landmark Ventures VII, LLC (together,
"Landmark") pursuant to which Landmark has provided to the Company a senior
secured loan of $5.0 million ($1.75 million of which had been previously funded
in an interim basis) (the "Loan") and agreed, if certain conditions are met, to
purchase up to $10.0 million of the Company's Series B Cumulative Convertible
Preferred Stock ("Series B Preferred Stock") in two separate tranches
(collectively the "Landmark Funding"). For a complete description of the
Landmark Funding see the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 3, 2001.
On July 5, 2001, the Company received a Nasdaq Staff Determination
indicating that our common stock failed to maintain a minimum market value of
public float of $5,000,000 and a minimum bid price of $1.00 over the previous
thirty (30) consecutive days as required by the Nasdaq National Market under
Marketplace Rules 4450(a)(2) and
14
4450(a)(5), respectively. On July 26, 2001, we received a second Nasdaq Staff
Determination indicating that the Company does not currently comply with the net
tangible assets requirement, as required by the Nasdaq National Market under
Marketplace Rule 4450(a)(3). Therefore, the Company's securities are subject to
delisting from The Nasdaq National Market. The Company has, however, requested a
hearing before a Nasdaq Listing Qualifications Panel to review and appeal the
Staff Determination. The Company will continue to trade under the symbol CSAV on
The Nasdaq National Market pending the outcome of these proceedings. There can
be no assurance the Panel will grant the Company's request for continued
listing. In the event the Company's request for continued listing on The Nasdaq
National Market is not granted, the Company will pursue other listing
alternatives.
Revenue
E-marketing Services Revenue
We generate substantially all of our revenues primarily by providing online
marketing, or e-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
thousand, or CPM, basis;
. the number of times members click on an incentive linking the member to
the advertiser's web site (known as a click-through response);
. the number of purchases made or qualified leads generated; and
. the number of registered members in our database.
Our pricing depends upon a variety of factors, including, without
limitation, the degree of targeting, the duration of the advertising contract
and the number of offers delivered. The degree of targeting refers to the number
of identified household or member attributes, such as gender, age, or product or
service preferences, used to select the audience for an offer. Generally, the
rates we charge our advertisers increase as the degree of targeting and
customization increases. Revenues subject to time-based contracts are recognized
ratably over the duration of the contract. For contracts based on certain
performance or delivery criteria, revenues are recognized in the month
performance is delivered to the customer. Most of our advertising contracts have
stated terms of less than one year and may include earlier termination
provisions. In the three-month period ending June 30, 2001, our largest
advertiser accounted for 16% of our revenues and our top five advertisers
together accounted for approximately 36% of our revenues.
15
Our revenues for this period depends on a number of factors, including the
number of advertisers sending promotional offers to our members, the size of our
membership base and the responsiveness of our members to each promotion. We
believe that our revenues will be subject to seasonal fluctuations in accordance
with general patterns of retail advertising spending, which is typically highest
during the fourth quarter. In addition, expenditures by advertisers tend to be
cyclical, reflecting overall general economic conditions and consumer buying
patterns. If purchasing patterns or timing of purchasing by advertisers were to
change, our operations and quarter-to-quarter comparisons could be materially
affected.
E-marketing services revenue also includes barter transactions, where we
exchange advertising space on our web site or in e-mails for reciprocal
advertising space or traffic on other web sites. Revenue from these barter
transactions is recorded at the estimated fair value of the advertisements
delivered and is recognized when the advertisements are included on our web site
or in our e-mails. In January 2000, the Company adopted Emerging Issues Task
Force ("EITF") 99-17, "Accounting for Advertising Barter Transactions". In
accordance with EITF 99-17, barter transactions have been valued based on
similar cash transactions that have occurred within six months prior to the date
of the barter transaction. For the three-month period ended June 30, 2001,
barter revenue was $395,000 or 7.5% of net revenues.
Licensing Revenue
We license portions of our intellectual property, including our issued
patents, to third parties. Approximately 1.3% of our revenues were generated
from royalty and license fees and other miscellaneous sources during the three
month period ended June 30, 2001. Licensing revenues were immaterial for the
three-month period ended June 30, 2000.
Expenses
Cost of Revenues
Our cost of revenues consists primarily of Internet connection charges, web
site equipment depreciation, salaries of operations personnel, fulfillment costs
related to member loyalty incentives and other related operations costs.
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, are expensed in the period incurred.
In the fourth quarter of fiscal year 2000 we began to anticipate the slowing
economy and implemented a new cost reduction plan. This plan included a
significant decrease in offline marketing
16
expenditures and a reduction in salaried personnel and third party technical
consultants.
Product Development
Product Development costs include expenses for the development of new or
improved technologies designed to enhance the performance of our service,
including the salaries and related expenses for our technology department, as
well as costs for contracted services and equipment.
General and Administrative
General and administrative expenses include salaries, employee benefits and
expenses for our executive, finance, legal and human resources personnel. In
addition, general and administrative expenses include fees for professional
services and occupancy costs.
Results of Operations
Three Months Ended June 30, 2001 and 2000
We have incurred significant losses since our inception. As of June 30,
2001, our accumulated deficit was approximately $79.0 million. While we incurred
significant operating losses during the three month period ended June 30, 2001,
we have set a goal to have positive earnings before interest, taxes,
depreciation and amortization ("EBITDA") in the fourth quarter of fiscal year
2001. Even though we are experiencing a decrease in top-line revenue as a result
of the slowing economy, we believe that the actions we have taken to reduce
expenses coupled with our emphasis on cost control should permit us to achieve
that goal. There can be no assurance, however, that we will be successful in
achieving our EBITDA goal. See "Liquidity and Capital Resources" below.
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Net Revenues
Net revenues decreased 41% to $5.3 million in the three month period ended
June 30, 2001 from $8.9 million in the three month period ended June 30, 2000.
The revenue decrease was attributable to the Company's cash constraints, which
reduced our ability to invest in marketing, the slowing economy, which caused
reduced advertising spending in general, and increased downward pricing
pressures from competitors.
Cost of Revenues and Gross Profit
Cost of revenues increased to $1.5 million in the three month period ended
June 30, 2001, from $1.4 million in the three month period ended June 30, 2000.
Gross profit decreased as a percentage of net revenues to 71% in the three month
period ended June
17
30, 2001, from 85% in three month period ended June 30, 2000. The absolute
dollar increase in cost of revenues was primarily due to increased depreciation
and costs related to additional operations personnel to service our increased
advertiser base.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased to $4.1
million, or 77% of net revenues in the three month period ended June 30, 2001,
from $10.2 million, or 114% of net revenues, in the three month period ended
June 30, 2000. The $6.1 million decrease in sales and marketing expenses was
primarily due to greatly reduced marketing expenditures through the elimination
of broadcast and cable television advertising, reduced number of member
registrations, and significant reductions in the average cost of registering new
members through our ability to negotiate lower cost per acquisition rates with
other web sites.
Product Development. Product development expenses decreased to $1.8
million, or 35% of net revenues, in the three month period ended June 30, 2001,
from $2.9 million, or 32% of net revenues, in the three month period ended June
30, 2000. On July 1, 2000 we adopted the provisions of EITF 00-2 ("Accounting
for Web Site Development Costs") and capitalized $3.6 million of web site
development costs incurred on projects to date at June 30, 2001, of which $.4
million was capitalized in the three month period ended June 30, 2001. For prior
periods through June 30, 2000, all product development expenditures were
expensed as incurred. The absolute dollar decrease in product development
expenses was primarily due to the decreased use of third-party technical
consultants over the prior year period to enhance the features and functionality
of our web site and the effect of capitalized web site development costs. The
increase in product development expenses as a percentage of net revenues is a
result of the Company writing down $360,000 of capitalized web development costs
relating to the abandonment of our Canadian web site, and lower revenues.
General and Administrative. General and administrative expenses increased
to $7.7 million, or 147% of net revenues, in the three month period ended June
30, 2001, from $4.9 million, or 54% of net revenues, for the three month period
ended June 30, 2000. The absolute dollar increase in general and administrative
expenses was primarily due to a non-cash charge relating to the Company's
forgiveness of certain loans and interest in the amount of $3.7 million in the
three month period ended June 30, 2001 and an increase in the reserves for bad
debt and occupancy offset by decreases in legal and recruiting. Without the non-
recurring charge relating to the forgiveness of director notes receivable and
accrued interest, general and administrative expenses would have been $4.0
million, or 77% of net revenues in the three month period ended June 30, 2001.
In the three month period ended June 30, 2001, we incurred higher occupancy
expense associated with our expansion of our Chicago offices and our opening of
our satellite sales offices in New York City and San Francisco, which occurred
subsequent to June 30, 2000. General and administrative expenses increased as a
percentage of net revenue due to general and administrative expenses decreasing
at a lower rate than the decrease in net revenues over the prior year period.
18
Interest Expense, Net. During the three month period ended June 30, 2001, we
incurred net interest expense of $77,000, as compared to net interest expense of
$313,000 for the three month period ended June 30, 2000, which included a
beneficial conversion charge related to our convertible debt of $555,000. During
the three month period ended June 30, 2001, the Company earned significantly
lower interest income due to the reduced capital available for investment when
compared to the prior year period.
Other Expense. In April 2001, the Company accepted a mediation award in a non-
operation business-related lawsuit pursuant to which the Company paid the
plaintiff the sum of $219,000.
Non-cash charges
During the three month period ended June 30, 2000, the Company incurred a
$14.9 million charge for the beneficial conversion of our pre-initial public
offering shares of Series A convertible preferred stock into post-initial public
offering common shares.
Six Months Ended June 30, 2001 and 2000
Net Revenues
Net revenues decreased 32% to $11.6 million in the six month period ended
June 30, 2001 from $17.0 million in the six month period ended June 30, 2000.
The revenue decrease was attributable to the Company's cash constraints which
reduced our ability to invest in marketing, the slowing economy, which caused
reduced advertising spending in general, and increased downward pricing
pressures from competitors.
Cost of Revenues and Gross Profit
Cost of revenues increased to $3.4 million in the six month period ended
June 30, 2001, from $2.4 million in the six month period ended June 30, 2000.
Gross profit decreased as a percentage of net revenues to 71% in the six month
period ended June 30, 2001, from 86% in six month period ended June 30, 2000.
The absolute dollar increase in cost of revenues was primarily due to increased
costs for incentive points and gift certificates, increased depreciation, and
additional costs related to operations personnel to service our increased
advertiser base.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased to $10.9
million, or 94% of net revenues in the six month period ended June 30, 2001,
from $20.4 million, or 120% of net revenues, in the six month period ended June
30, 2000. The $9.5 million decrease in sales and marketing expenses was
primarily due to greatly reduced marketing expenditures through the elimination
of broadcast and cable television advertising, reduced member registrations and
significant reductions in the average cost of registering new members through
our ability to negotiate lower cost per acquisition rates with other web sites.
Product Development. Product development expenses decreased to $3.8
million, or
19
33% of net revenues, in the six month period ended June 30, 2001, from $4.5
million, or 26% of net revenues, in the six month period ended June 30, 2000. On
July 1, 2000 we adopted the provisions of EITF 00-2 ("Accounting for Web Site
Development Costs") and capitalized $3.6 million of web site development costs
incurred on projects to date at June 30, 2001, of which $1.3 million was
capitalized in the six month period ended June 30, 2001. For prior periods
through June 30, 2000, all product development expenditures were expensed as
incurred. The absolute dollar decrease in product development expenses was
primarily due to the decreased use of third-party technical consultants offset
by increased personnel costs over the prior year period to enhance the features
and functionality of our web site, and the effect of capitalized web site
development costs. The increase in product development expenses as a percentage
of net revenues is a result of the Company writing down $360,000 of capitalized
web development costs relating to the abandonment of our Canadian web site and
lower revenues.
General and Administrative. General and administrative expenses increased
to $11.8 million, or 102% of net revenues, for the six months ended June 30,
2001, from $8.7 million, or 51% of net revenues, for the six months ended June
30, 2000. The absolute dollar increase in general and administrative expenses
was primarily due to a non-cash charge relating to the Company's forgiveness of
certain loans and interest in the amount of $3.7 million in the six month period
ended June 30, 2001 and an increase in the reserves for bad debt. Without the
non-recurring charge relating to forgiveness of certain loans and accrued
interest, general and administrative expenses would have been $8.1 million, or
70% of net revenues in the six month period ended June 30, 2000. In the six
month period ended June 30, 2001, we incurred higher occupancy expense
associated with our opening and expansion of our Chicago offices, which occurred
in May 2000, and our opening of our satellite sales offices in New York City and
San Francisco, which occurred subsequent to June 30, 2000. General and
administrative expenses increased as a percentage of net revenue due to expenses
decreasing at a lower rate than the decrease in net revenues over the prior year
period.
Interest Expense, Net. During the six month period ended June 30, 2001, we
incurred net interest expenses of $38,000, as compared to net interest expense
of $238,000 for the six month period ended June 30, 2000, which included a
beneficial conversion charge related to our convertible debt of $555,000. During
the six month period ended June 30, 2001, the Company earned significantly lower
interest income due to the reduced capital available for investment when
compared to the year prior period.
Other Expense. In April 2001, the Company accepted a mediation award in a
non-operation business-related lawsuit pursuant to which the Company paid the
plaintiff the sum of $219,000.
Non-cash charges
During the six month period ended June 30, 2000, we incurred a $19.9
million charge for the beneficial conversion of our pre-initial public offering
shares of Series A convertible preferred stock into post initial public offering
common shares.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the
sale of our common and preferred stock and convertible subordinated notes. In
May 2000, we
20
completed an initial public offering of 3.3 million shares of our common stock,
resulting in proceeds to us of approximately $20 million after deducting
underwriters discounts and commissions and other related offering expenses. In
March 2001, we received proceeds from the sale of our convertible subordinated
promissory notes and warrants in the amount of $2,100,000. As of June 30, 2001,
we had approximately $.3 million in cash and cash equivalents.
Net cash used in operating activities was $4.7 million, and $10.0 million
in the six month period ended June 30, 2001 and 2000, respectively. In the six
month period ended June 30, 2001, net cash used in operating activities resulted
primarily from operating expenses exceeding revenues and revenues decreasing
over the prior year period. Additionally, during the six month period ended June
30, 2001, we had non-cash expenses totaling approximately $6.2 million for
depreciation and amortization, forgiveness of notes receivable, provision for
doubtful accounts, write off of capitalized web site development costs relating
to our Canadian web site, and amortization of debt discount.
Net cash used in investing activities was $2.9 million, and $4.7 million in
the six month period ended June 30, 2001 and 2000, respectively. In each period,
net cash used in investing activities resulted from purchases of property and
equipment and amounts used in developing our web site. Included in the investing
activities above, we capitalized $1.3 million of web site development costs in
the six month period ended June 30, 2001 and we did not capitalized any software
development costs in the six month period ended June 30, 2000.
Net cash provided by financing activities was $0.8 and $23.4 million in the
six month period ended June 30, 2001 and 2000, respectively. Net cash provided
by financing activities in the six month period ended June 30, 2001 is
attributable to the net proceeds of the issuance of our convertible subordinated
promissory notes in the amount of $2.1 million, $1.2 million of proceeds from
borrowings under our lines of credit, $279,000 in loans from one of our
directors, Richard H. Rogel, and $650,000 in loans from Landmark Communications,
Inc., reduced by payment of $2.1 million of debt obligations and $1.3 million
related to a cash overdraft. Net cash provided by financing activities in the
six month period ended June 30, 2000 resulted primarily from proceeds of
approximately $20 million from our initial public offering, advances on notes
payable of $2.7 million and stock options exercised. We invest these proceeds in
cash equivalents with maturities not exceeding 90 days. We intend to continue
investing our excess cash in various short-term securities.
On July 30, 2001, the Company entered into a series of agreements with
Landmark pursuant to which Landmark has provided to the Company the Loan and
agreed, if certain conditions are met, to purchase up to $10.0 million of Series
B Preferred Stock in two separate tranches (collectively the "Landmark
Funding"). If the Landmark Funding is consummated, the Company believes that it
will have sufficient capital
21
resources to meet the Company's foreseeable capital needs. If the Company fails
to consummate the Landmark Funding, the Company will require additional debt
and/or equity financing during 2001 to finance its operations. Even if the
Landmark Funding is consummated, if we are unable to achieve positive cash flow
in the fourth quarter of 2001 and maintain cash flow positive operations
thereafter, it is likely that the Company will require additional capital to
fund its operations in 2002. There can be no assurances that the Company will be
able to consummate the Landmark Funding or, if the Landmark Funding is not
consummated, that the Company will be able to achieve positive cash flow or
secure additional financing on terms acceptable to the Company.
The Company has two separate bank credit facilities under which the Company
had borrowed an aggregate of $3.6 million, and had $1.8 million in letters of
credit outstanding, at June 30, 2001. Under the credit facility with American
National Bank (the "ANB Facility") the Company has two term loans and one $3.0
million revolving credit line. The first term loan, which had an outstanding
balance of $1.9 million at June 30, 2001, is payable in installments. The second
term loan, which had an outstanding balance of $1.2 million at June 30, 2001, is
payable in installments. The outstanding balances under the term loans bear
interest at the bank's prime rate plus 1.25% (7.75% at June 30, 2001).
Additionally, the Company had $1.8 million of letters of credit outstanding to
collateralize lease deposits on its office facilities. The ANB Facility is
collateralized by all the assets of the Company.
Under the credit facility with Midwest Guaranty Bank ("Midwest Facility"),
the Company has a $1.0 million equipment line of credit. At June 30, 2001, there
was $495,000 outstanding under this line. The weighted average interest rate on
the outstanding borrowings under this line at June 30, 2001 was 9%. Borrowings
are collateralized by the specific equipment purchased and are payable in
installments.
As of June 30, 2001, the Company was not in compliance with the tangible
capital funding and liquid asset requirements of the ANB Facility. This non-
compliance has caused the Company to be out of compliance with the Midwest
Facility. The failure to comply with covenant requirements constitutes an event
of default under the respective lending agreements. As a consequence, the
borrowings under these facilities became immediately payable at the option of
the lenders, and, accordingly, the Company has reclassified $160,000 of
otherwise long-term borrowings under the ANB Facility and the Midwest Facility
as currently payable.
On June 15, 2001, we entered into a Forbearance and Reaffirmation Agreement
with American National Bank, which was amended by a letter agreement dated July
27, 2001 ("Forbearance Agreement"), wherein American National Bank agreed to
forbear from accelerating borrowings under the ANB Facility for certain stated
defaults based on the continued compliance with the terms of the Forbearance
Agreement, which included an accelerated principal payment schedule with respect
to the ANB Facility. This accelerated payment schedule provides an additional
principal payment of $150,000 per month and for the payment of the entire
indebtedness under the American National Bank term loans on or before December
31, 2002. At June 30, 2001, the Company was not in compliance with its base
borrowing asset obligations for certain reporting periods under the Forbearance
Agreement. The Company is seeking a waiver as to this non-compliance from
American National Bank, but there can be no assurances that the Company will be
able to obtain such waiver.
22
On June 12, 2001, we entered into a Forbearance Letter Agreement with
Midwest Guaranty Bank and on July 27, 2001, we entered into a Loan Forbearance
and Reaffirmation Agreement with Midwest Guaranty Bank ("the Midwest Forbearance
Agreement"), wherein Midwest Guaranty Bank agreed to forbear from accelerating
the Midwest Facility for certain stated defaults based on the continued
compliance with the terms of the Midwest Forbearance Agreement, which included
an accelerated principal payment schedule of $5,000 per month with respect to
the Midwest Facility.
In June 2001, Landmark Communications, Inc. loaned the Company a total
of $650,000. Such loan was evidenced by a Loan and Security Agreement dated June
14, 2001, and amended on July 30, 2001 ("Landmark Bridge Loan Agreement"). The
Landmark Bridge Loan Agreement provided for repayment on demand and the accrual
of interest at a rate of 12%, and granted a second lien on the Company's assets.
The Landmark Bridge Loan Agreement was amended on July 30, 2001 and replaced by
a $5.0 million term loan. (See Note 8 of the footnotes to financial statements
contained elsewhere herein).
In June 2001, a trust of which one of our directors, Richard H. Rogel is
the trustee, made loans to the Company totaling $279,000. These loans consisted
of an interest free loan of $60,000 and a loan for $219,000 evidenced by a
promissory note dated June 27, 2001, which accrued interest at a rate equal to
8.5% per annum. All principal and accrued interest under these loans has been
repaid.
Our operations have generated a negative cash flow in each year of our
existence. Commencing in the fourth quarter of fiscal year 2000, we implemented
a new cost reduction plan. This plan included a significant decrease in offline
marketing expenditures and a reduction in salaried personnel and third party
technical consultants. In the second quarter of 2001, the Company experienced
reductions in salaried personnel through attrition. We further reduced marketing
expenditures in the second quarter of 2001. We believe that this plan will
significantly reduce operating expenses and have a positive effect on cash flow.
However, even with our cost reduction plan in place we will need to consummate
the Landmark Funding or otherwise obtain additional debt and/or equity financing
during 2001. Even if the Landmark Funding is consummated, if we are unable to
achieve positive cash flow in the fourth quarter of 2001 and maintain cash flow
profitable operations thereafter, it is likely that the Company will require
additional capital to fund its operations in 2002.
The Company cancelled certain promissory notes (and related interest) made to
the Company by current and former directors of the Company, which notes were
executed as payment for the purchase price of common stock of the Company upon
the exercise of options and warrants held by such directors prior to the
Company's initial public offering ("Director Notes"). The Director Notes had an
aggregate principal and accrued, but unpaid interest, of $3.7 million. Each
director and former director was permitted to keep the common stock purchased by
delivery of the Director Notes.
23
We currently are in default under the terms of our lease for our Chicago
headquarters, for our failure to timely renew or provide certain letters of
credit and other defaults. On June 14, 2001, we entered into a forbearance
letter agreement with the landlord for this property. On July 6, 2001, we
entered into a Waiver Letter Agreement with the landlord waiving the landlord's
right to require us to comply with certain terms set forth under the June 14,
2001 Forbearance Letter Agreement. Pursuant to the forbearance letter agreement
and waiver letter agreement, the landlord has agreed to not exercise its
remedies with respect to the currently existing defaults by the Company pursuant
to the lease, provided that the Company abides by the terms of the Forbearance
Letter Agreement.
Our independent auditors have issued their report on our financial statements
for 2000 with an explanatory paragraph. This paragraph describes the uncertainty
as to our ability to continue as a going concern.
If we are unsuccessful in consummating the Landmark Funding or fail to secure
additional equity and/or debt financing, fail to achieve and maintain cash flow
positive operations or if we are unsuccessful in complying with the forbearance
understandings with our banks, our ability to continue to operate the business
will be jeopardized.
Recent Accounting Pronouncements
In January 2000, the EITF released the final Issue No. 99-17, "Accounting for
Advertising Barter Transactions". EITF Issue 99-17 establishes standards for
determining the amount of revenue that may be recognized in barter transactions
involving the exchange of advertising services. Our barter revenue recognition
policy is in compliance with EITF Issue 99-17.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financing Accounting Standards (SFAS) No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No.
141 is effective for any business combination initiated after June 30, 2001.
SFAS No. 141 requires that all business combinations be accounted for under a
single method, the purchase method of accounting. Pooling-of-interests is no
longer permitted. SFAS No. 142 will be effective for the Company January 1,
2002. Under SFAS No. 142, goodwill will no longer be amortized to earnings, but
instead reviewed for impairment, at least on an annual basis. The Company
anticipates that the adoption of SFAS No. 141 and SFAS No. 142 will not have a
significant effect on the Company's results of operations or its financial
position.
24
Factors Affecting Operating Results
Our results of operations have varied widely in the past and we expect that
they will continue to vary significantly in the future due to a number of
factors, including those set forth in our Annual Report on Form 10-K filed for
the fiscal year 2000.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We had no holdings of derivative financial or commodity instruments at June
30, 2001. However, we are exposed to financial market risks associated with
fluctuations in interest rates. Because all of the amounts in our portfolio have
expected maturities of three month period or less, we believe that the fair
value of our investment portfolio or related income would not be significantly
impacted by increases or decreases in interest rates due mainly to the short-
term nature of our investment portfolio. If market rates were to increase
immediately by 10 percent from levels on June 30, 2001, the fair value of this
investment portfolio would decline by an immaterial amount. A sharp decline in
interest rates could reduce future interest earnings of our investment
portfolio. If market rates were to decrease immediately by 10 percent from
levels on June 30, 2001, the resultant decrease in interest earnings of our
investment portfolio would not have a material impact on our earnings as a
whole.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On November 15, 1999, Catalina Marketing filed a lawsuit against us in the
United States District Court for the Middle District of Florida. The complaint
alleges that our systems and methods infringe Catalina Marketing's United States
Patent No. 4,674,041, and seeks to enjoin us from further infringing its patent.
On March 27, 2001, our motion for summary judgment in this matter was granted.
The defendant in this matter has filed an appeal to this decision. We intend to
defend the appeal vigorously.
In addition, on September 21, 1999, Kathryn L. Meklir, the ex-wife of
Steven M. Golden, our former Chairman and Chief Executive Officer, filed suit
against both Mr. Golden and CoolSavings in Oakland County, Michigan, alleging
several claims, arising out of her March 1998 sale of 2,000 shares of our common
stock to Mr. Golden. In April 2001, both parties accepted a mediation award in
the amount of $219,000 payable to Ms. Meklir, which amount has been paid.
On July 1, 2001, ValueClick, Inc. filed suit against us in the Superior
Court Los Angeles California, alleging that it was owed approximately $301,000
for services rendered. On July 25, 2001, the parties entered into a Settlement
Agreement, wherein we agreed to pay ValueClick a total of $150,000, in full
settlement of all claims.
25
We are also involved in a number of legal proceedings arising in the ordinary
course of business, none of which is expected to have a material adverse effect
on our financial position or results of operations.
We are involved in additional litigation, see Part 1, Item 3 of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
We may be involved in additional litigation, investigations or other
proceedings in the future. Any litigation, investigation or proceeding, with or
without merit, could be costly and time-consuming and could divert our
management's attention and resources, which in turn could harm our business and
financial results.
Item 2. Changes in Securities and Use of Proceeds
In March 2001, we sold $2.1 million of our 8% Senior Subordinated
Convertible Notes due March 1, 2006. These notes carry warrants to purchase one
share of our common stock for every $2.00 of principal indebtedness under each
Note for a total of 1.05 million shares subject to warrants. The warrants have
an exercise price of $1.25 per share. The exercise price may be reduced to
$1.00 in the event of a sale of substantially all of our assets or a change in
control of the Company. The notes are convertible at any time into the our
common stock at a conversion rate equal to one share for each outstanding dollar
of principal and accrued interest, at the election of the note holder. Interest
is payable quarterly, and for periods prior to April 1, 2003, we have the option
to pay interest on the outstanding principal balance of the notes in cash or by
delivery of additional notes in an amount equal to the amount of the interest.
In conjunction with and as a condition to the consumation of the investment by
Landmark Communications, Inc. described in Note 8 of the footnotes to financial
statements contained elsewhere herein, the Company will issue 13.0 million
shares of the Company's Series C Preferred Stock in exchange for the Notes and
accompanying warrants.
On July 30, 2001, the Company entered into a series of agreements with
Landmark, pursuant to which Landmark has provided to the Company the Loan and
agreed, if certain conditions are met, to purchase up to $10.0 million of Series
B Preferred Stocks in two separate tranches (See Note 8 of the footnotes to
financial statements contained elsewhere herein).
Item 3. Defaults Upon Senior Securities.
The Company is currently in default under the ANB Facility and the Midwest
Facility. The Company has entered into Forbearance Agreements with Midwest
Guaranty Bank and American National Bank. The Company is not in compliance with
the Forbearance Agreement with American National Bank. (See Note 3 of the
footnotes to the financial statements contained elsewhere herein).
Item 5. Other Information.
26
On July 30, 2001, the Company entered into an employment agreement with the
Company's President and Chief Executive Officer, Matthew Moog, providing for an
annual salary of $345,000. The Company has granted Mr. Moog options to purchase
750,000 shares of common stock and agreed to grant additional options to
purchase 200,000 shares of common stock on each of the first two anniversaries
of the employment agreement; provided that he remains an employee of the
Company.
Pursuant to the Employment Agreement dated April 1, 2001, entered into
between the Company and Steven M. Golden, the Company granted Mr. Golden options
to purchase 150,000 shares of common stock. On July 30, 2001, the Company and
Steven M. Golden entered into a severance agreement, whereby Mr. Golden resigned
and the Company agreed to continue to provide certain benefits and his salary of
$345,000 per annum until March 31, 2004. Additionally, all the options granted
by the Company to Steven M. Golden as of the date thereof: (a) immediately
vested and became fully exercisable; (b) adjusted to have an exercise price of
$0.50; and (c) are exercisable through the tenth anniversary of the grant of
such options.
On July 31, 2001, we implemented a staff reduction of approximately 26
percent or 47 people. On July 31, 2001, Steven M. Golden, our Chief Executive
Officer, and Paul A. Case our Chief Financial Officer, resigned. The Company
currently plans to use existing personnel to fulfill the duties of these
departed officers.
Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits:
See the Exhibit Index appearing elsewhere in the report, which is
incorporated herein by reference.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on August 3, 2001. The Company
reported under Item 5 the execution of a series of agreements with Landmark
Communications, Inc, and Landmark Ventures VII, LLC.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
Undersigned thereunder duly authorized.
coolsavings.com inc.
-------------------------------------
Registrant
Dated: August 14, 2001 /s/ Matthew Moog
---------------------- -------------------------------------
Matthew Moog
Chief Executive Officer and President
(Duly Authorized Officer)
Dated: August 14, 2001 /s/ Laurie Streling
---------------------- -------------------------------------
Laurie Streling
Senior Vice President, Controller
(Principal Financial Officer)
28
EXHIBIT INDEX
Exhibit Number Description
2.1 Securities Purchase Agreement dated as of July 30, 2001 between
coolsavings.com inc., CoolSavings, Inc., Landmark Communications,
Inc., and Landmark Ventures VII, LLC (incorporated herein by
reference to Exhibit 2.1 to the Company's Current Report on Form
8-k filed with the Securities and Exchange Commission on August
3, 2001 (the "August 8-K))
2.2 Agreement and Plan of Merger dated as of July 30, 2001 by and
between coolsavings.com inc. and CoolSavings, Inc. (incorporated
herein by reference to Exhibit 2.2 to the August 8-K)
3.1 Bylaws of coolsavings.com inc., as amended, as of July 30, 2001
(incorporated herein by reference to Exhibit 3.1 to the August 8-
K)
3.2 Certificate of Designations, Number, Voting Powers, Preferences
and Rights Of Series B Convertible Preferred Stock (incorporated
herein by reference to Exhibit 3.2 to the August 8-K)
3.3 Certificate Of Designations, Number, Voting Powers, Preferences
and Rights Of Series C Convertible Preferred Stock (incorporated
herein by reference to Exhibit 3.3 to the August 8-K)
4.1 Warrant between coolsavings.com inc. and Landmark Communications,
Inc. dated July 30, 2001 (incorporated herein by reference to
Exhibit 4.1 to the August 8-K)
4.2 Registration Rights Agreement between coolsavings.com inc.,
Landmark Ventures VII, LLC and certain coolsavings.com inc.
shareholders dated July 30, 2001 (incorporated herein by
reference to Exhibit 4.2 to the August 8-K)
9.1 Voting Agreement between Landmark Communications, Inc., Landmark
Ventures VII, LLC and certain coolsavings.com inc. shareholders
dated July 30, 2001 (incorporated herein by reference to Exhibit
9.1 to the August 8-K)
10.1 Amended and Restated Senior Secured Loan and Security Agreement
dated July 30, 2001 between coolsavings.com inc. and Landmark
Communications, Inc. (incorporated herein by reference to Exhibit
10.1 to the August 8-K)
10.2 Commercial Demand Grid Note dated July 30, 2001 between
coolsavings.com inc. and Landmark Communications, Inc.
(incorporated herein by reference to Exhibit 10.2 to the August
8-K)
10.3 2001 Stock Option Plan (incorporated herein by reference to
Exhibit 10.3 to the August 8-K)
10.4 Form of Shareholders Agreement between CoolSavings, Inc.,
Landmark Ventures VII, LLC and certain shareholders of
coolsavings.com inc. (incorporated herein by reference to Exhibit
10.4 to the August 8-K)
10.5 Forbearance and Reaffirmation Agreement dated June 15, 2001
between coolsavings.com inc. and American National Bank and Trust
Company of Chicago
10.6 Letter Agreement dated July 27, 2001 between coolsavings.com inc.
and American National Bank and Trust Company of Chicago
10.7 Forbearance and Reaffirmation Agreement dated July 27, 2001
between coolsavings.com inc. and Midwest Guaranty Bank
10.8 Addendum to the Netcentives, Inc. Incentive Management Program
Agreement dated June 14, 2001 between coolsavings.com inc. and
Netcentives, Inc.
10.9 Forbearance Letter Agreement dated June 14, 2001 between
coolsavings.com inc. and 360 North Michigan Trust.
10.10 Employment Agreement dated April 1, 2001 between coolsavings.com,
inc. and Steven M. Golden
10.11 Severance Agreement dated July 29, 2001 between coolsavings.com
inc. and Steven M. Golden
10.12 Employment Agreement dated July 29, 2001 between coolsavings.com,
inc. and Matthew M. Moog