<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 0001-22563
CDSI HOLDINGS INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 95-4463937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 S.E. SECOND STREET, 32ND FLOOR
MIAMI, FL 33131
(Address of principal executive offices) (Zip Code)
(305) 579-8000
(Issuer's telephone number, including area code)
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT 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 [ ]
AS OF NOVEMBER 12, 1999, THERE WERE OUTSTANDING 3,120,000 SHARES OF THE
ISSUER'S COMMON STOCK, $.01 PAR VALUE.
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<PAGE> 2
CDSI HOLDINGS INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998.................................... 2
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30,
1999 and 1998................................................. 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998................. 4
Notes to the Condensed Quarterly Consolidated Financial
Statements.................................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 16
Item 2. Changes in Securities and Use of Proceeds......................... 16
Item 6. Exhibits and Reports on Form 8-K.................................. 18
SIGNATURE........................................................................... 19
</TABLE>
1
<PAGE> 3
CDSI HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- -----------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents..................................... $ 532,859 $ 1,888,813
Restricted assets............................................. -- 30,000
Accounts receivable........................................... 17,114 3,371
Inventory..................................................... 34,382 37,170
Prepaid expenses and other current assets..................... 22,555 73,721
----------- ------------
Total current assets..................................... 606,910 2,033,075
Machines held for sale or lease, net.......................... 241,257 233,885
Property and equipment, net................................... 134,214 110,053
Other assets.................................................. 18,505 18,505
Investment in Digital Asset Management, Inc................... -- 401,924
Intangible assets, net........................................ 49,935 447,930
----------- -----------
Total assets............................................. $1,050,821 $ 3,245,372
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......................... $ 143,528 $ 174,733
---------- -----------
Total current liabilities................................ 143,528 174,733
---------- -----------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 5,000,000
shares; no shares issued and outstanding................... -- --
Common stock, $.01 par value. Authorized 25,000,000
shares; 3,120,000 shares issued and outstanding............ 31,200 31,200
Additional paid-in capital.................................... 8,209,944 8,209,944
Accumulated deficit........................................... (7,333,851) (5,170,505)
---------- ----------
Total stockholders' equity............................... 907,293 3,070,639
---------- ----------
Total liabilities and stockholders' equity............... $1,050,821 $ 3,245,372
========= ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
2
<PAGE> 4
CDSI HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- -------------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
----------------- ---------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Revenues................................... $ 127,207 $ 24,466 $ 332,583 $ 71,977
Cost and expenses:
Cost of revenues...................... 98,636 115,182 270,826 298,622
Research and development.............. 35,550 31,867 104,003 149,540
Sales and marketing................... 141,592 133,538 384,402 453,792
Amortization of intangible assets..... 1,081 20,656 398,060 33,262
General and administrative............ 74,977 359,674 877,229 888,835
---------- --------- ----------- -----------
351,836 660,917 2,034,520 1,824,051
---------- --------- ----------- -----------
Operating loss............................. (224,629) (636,451) (1,701,937) (1,752,074)
---------- --------- ----------- -----------
Other income (expense):
Interest and other income............. 6,965 36,946 40,515 129,266
Equity in loss of DAMI................ -- -- (501,924) --
---------- --------- ----------- -----------
6,965 36,946 (461,409) 129,266
---------- --------- ----------- -----------
Net loss.............................. $ (217,664) $(599,505) $(2,163,346) $(1,622,808)
========== ========= =========== ===========
Net loss per share (basic
and diluted).......................... $ (.07) $ (.19) $ (.69) $ (.53)
========== ======== =========== ============
Shares used in computing net
loss per share........................ 3,120,000 3,120,000 3,120,000 3,050,215
========= ========= ========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE> 5
CDSI HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------
September 30, September 30,
1999 1998
----------------- ----------------
<S> <C> <C>
Cash flows used in operating activities:
Net loss................................................... $(2,163,346) $(1,622,808)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation............................................. 27,421 85,767
Amortization of intangible assets........................ 398,060 --
Equity loss in DAMI...................................... 501,924 --
Changes in assets and liabilities:
Accounts receivable................................... (13,743) 6,121
Purchase of machines held for lease................... (11,193) (470,638)
Prepaid expenses and other current assets............. 53,954 139,109
Accrued expenses...................................... 8,108 10,099
Deferred revenues..................................... -- (24,378)
----------- -----------
Net cash used in operating activities......................... (1,198,815) (1,876,728)
----------- -----------
Cash flows (used in) provided from investing activities:
Decrease in restricted assets.............................. 30,000 --
Issuance of loan to DAMI................................... (100,000) --
Sale of short-term investments............................. -- 3,498,116
Acquisition of business.................................... (39,378) (104,250)
Acquisition of property and equipment...................... (47,761) (118,737)
----------- -----------
Net cash flows (used in) provided from
investing activities....................................... (157,139) 3,275,129
----------- -----------
Cash flows used in financing activities:
Deferred finance charges................................... -- (10,000)
----------- -----------
Net cash flows used in financing activities................... -- (10,000)
----------- -----------
Net (decrease) increase in cash............................... (1,355,954) 1,388,401
Cash and cash equivalents at beginning of period.............. 1,888,813 949,157
----------- -----------
Cash and cash equivalents at end of period.................... $ 532,859 $ 2,337,558
=========== ===========
Detail of acquisition:
Fair value of assets acquired.............................. $ -- $ 339,750
Liabilities assumed........................................ -- 71,500
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE> 6
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BUSINESS AND ORGANIZATION
CDSI Holdings Inc. (the "Company" or "CDSI") was incorporated in
Delaware on December 29, 1993. On January 12, 1999, the Company's
stockholders voted to change the corporate name of the Company from
PC411, Inc. to CDSI Holdings Inc. Prior to May 8, 1998, the Company's
principal business was an on-line service that transmits name, address,
telephone number and other related information digitally to users of
personal computers. On May 8, 1998, the Company acquired Controlled
Distribution Systems, Inc. ("CDS", formerly known as Coinexx
Corporation), a company engaged in the marketing and leasing of an
inventory control system for tobacco products.
(2) PRINCIPLES OF REPORTING
The financial statements of the Company presented herein have been
prepared by the Company and are unaudited. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position as of September 30,
1999 and the results of operations and cash flows for all periods
presented have been made. Results for the interim periods are not
necessarily indicative of the results for the entire year.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. Management is currently
evaluating alternatives to supplement the Company's present cash and
cash equivalents to meet the Company's liquidity requirements over the
next twelve months. Such alternatives include seeking additional
investors and/or lenders and disposing of the Company's interest in
DAMI. Although there can be no assurance, the Company believes that it
will be able to continue as a going concern for the next twelve months.
These financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended
December 31, 1998 included in the Company's Form 10-KSB, as amended
(Commission File No. 0001-22563).
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
(3) CDS ACQUISITION
On May 8, 1998, the Company acquired CDS, a company engaged in the
marketing and leasing of an inventory control system for tobacco
products. Under the terms of the acquisition, the former CDS
stockholders received 147,500 shares of the Company's Common Stock at
closing. In addition, the Company will issue an additional 147,500
shares to CDS stockholders on each of the second, third and fourth
anniversaries of the closing provided that on each such delivery date
CDS is actively engaged in the business it is now engaged. The schedule
for the deferred deliveries of stock is subject to acceleration if the
Company's Common Stock trades at $15 per share for 60 consecutive
trading days. The former president (the "Executive") resigned from CDS
effective February 28, 1999 and is entitled under his employment
agreement to receive salary for a one-year period following his
termination of employment. The Company recorded severance expense of
$105,951 associated with the Executive's termination in the first
quarter of 1999. The Executive was also granted options to purchase
110,000 shares of Common Stock of the Company at $1.50 per share. CDS
did not have any significant tangible assets at the time of acquisition.
The aggregate of the fair value of the shares issued and issuable to the
CDS stockholders as consideration for the acquisition of $339,250 and
the legal and other costs incurred in the acquisition of $104,250 were
capitalized and were being amortized over an estimated useful life of
five years. In the second quarter of 1999, based on the results of such
business since the acquisition and future projections, the Company
expensed the remaining unamortized acquisition costs of $340,017. In
1998, CDS acquired substantially all of the assets of TD Rowe
Corporation's New York state cigarette vending route, including vending
machines, for $59,250. CDS paid $20,000 in 1998 and the remaining
$39,250 in the first quarter of 1999. CDS amortizes the costs of the
vending route over an estimated useful life of five years.
5
<PAGE> 7
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(3) DAMI TRANSACTION
On November 5, 1998, the Company contributed the non-cash assets and
certain liabilities of its on-line electronic delivery information
service (the "PC411 Service") to Digital Asset Management, Inc.
("DAMI"). DAMI was a newly formed corporation organized by Dean Eaker,
the former President, Chief Executive Officer and director of the
Company, and Edward Fleiss, the former Vice President and Chief
Technology Officer of the Company, to continue to operate and develop
the PC411 Service. The Company received 1,250 shares of preferred stock
representing an initial 42.5% interest in DAMI in exchange for the
contribution of the PC411 Service's net assets. Acxiom Corporation
("Acxiom") purchased preferred stock representing a 42.5% interest in
DAMI for $1,250,000 and initially designated a majority of the Board of
Directors of DAMI. DAMI's management, including Messrs. Eaker and
Fleiss, held an initial 15% interest in DAMI with options which would
have increased their ownership position to 50% upon satisfaction of
operational and financial benchmarks over a three-year period. The
Company's carrying value in the net assets contributed to DAMI totaled
$73,438. The Company recorded $462,360 as a capital contribution in
connection with the transaction, which represented the Company's 42.5%
interest in the capital raised by DAMI in excess of the carrying value
of the Company's net assets contributed to DAMI. The Company agreed,
under certain conditions, to fund up to $200,000 of an $800,000 working
capital line to be provided to DAMI by Acxiom, the Company and Dean
Eaker. The Company funded $100,000 of the working capital line in the
second quarter of 1999.
Since July 1999, DAMI issued approximately $750,000 of convertible notes
due March 31, 2000 and warrants to purchase DAMI Preferred Stock. Mr.
Eaker and Acxiom agreed to extend the maturity of their working capital
lines from June 30, 1999 to March 31, 2000 and have received warrants to
purchase preferred shares. The Eaker and Acxiom working capital lines are
also convertible into DAMI preferred stock. The Company agreed in July
1999 to extend the maturity of its working capital line from June 30,
1999 to August 31, 1999 and was released from any further obligation to
fund additional amounts under the working capital line. DAMI has not made
any payments to the Company on the working capital line. The Company's
interest in DAMI could decrease from 42.5% to approximately 13.0%
assuming the conversion of all notes and warrants issued in the above
transactions.
DAMI has incurred significant losses and negative cash flow since its
inception. DAMI requires a significant amount of additional capital to
continue its operations and to develop its business. DAMI currently has
only limited cash resources to continue its business. Although management
of DAMI is exploring possible sources of additional financing and
potential sales of assets, there is a substantial risk that DAMI will not
be able to raise sufficient additional capital to continue its
operations.
The Company is accounting for its non-controlling interest in DAMI using
the equity basis of accounting after November 5, 1998. The Company's
equity in DAMI's losses for the nine months ended September 30, 1999 has
been adjusted to reflect the difference in the Company's contribution of
its net assets to DAMI and the fair value of those assets recorded by
DAMI. In the second quarter of 1999, the carrying value of the Company's
investment in DAMI was reduced to zero as the cumulative equity in
DAMI's losses exceeded the Company's investment in DAMI of $635,798,
which consisted of the initial carrying value of $535,798 and the
$100,000 working capital loan to DAMI. Since the Company has no
intention or commitment to fund future DAMI losses, commencing in the
second quarter of 1999, the Company suspended recognizing its share of
the additional losses of DAMI.
6
<PAGE> 8
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Summarized financial information as of September 30, 1999 and December
31, 1998 and for the three and nine month periods ended September 30,
1999 for DAMI follows. This information has been prepared by DAMI
assuming DAMI will continue as a going concern.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Current assets.................................. $ 120,957 $ 728,248
Furniture and fixtures, net..................... 209,372 168,022
Noncurrent assets............................... 21,835 21,835
Intangible assets, net.......................... 1,197,974 1,174,839
Current liabilities............................. 433,462 77,878
Notes payable................................... 1,362,000 --
Stockholders' equity............................ (245,324) 2,015,066
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues........................................ $ 13,093 $ 38,745
Costs and expenses.............................. 863,332 2,301,995
Interest income................................. 2 2,798
Net loss........................................ (850,237) (2,260,452)
</TABLE>
7
<PAGE> 9
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(4) RELATED PARTY TRANSACTIONS
Certain accounting and related finance functions are performed on behalf
of the Company by employees of New Valley Corporation, the principal
stockholder of the Company. Expenses incurred relating to these
functions are allocated to the Company and paid as incurred to New
Valley based on management's best estimate of the cost involved. The
amounts allocated were immaterial for all periods presented herein.
(5) NET LOSS PER SHARE
Basic loss per share of common stock is computed by dividing net loss
applicable to common stockholders by the weighted average shares of
common stock outstanding during the period (3,120,000 shares). Diluted
per share results reflect the potential dilution from the exercise or
conversion of securities into common stock.
Stock options, warrants and contingent shares (both vested and
non-vested) totaling 3,421,788 and 3,839,243 shares at September 30,
1999 and 1998, respectively, were excluded from the calculation of
diluted per share results presented because their effect was
anti-dilutive. Accordingly, diluted net loss per common share is the
same as basic net loss per common share.
(6) CONTINGENCIES
In May 1999, the Company agreed to settle a lawsuit asserted by a former
employee seeking a severance payment. During the first quarter of 1999,
the Company accrued $165,000 for the settlement and associated legal
fees and expenses. The amount was paid in the second quarter of 1999.
8
<PAGE> 10
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We presently have two lines of business: the marketing of an inventory control
system for tobacco products through our subsidiary, Controlled Distribution
Systems, Inc. ("CDS"), and the delivery of an on-line electronic directory
information service through our investment in Digital Asset Management, Inc.
("DAMI").
CDS. In May 1998, we acquired the stock of CDS, a company engaged in the
marketing and leasing of an inventory control system for tobacco products.
Under the terms of the acquisition, the former CDS stockholders received
147,500 shares of our Common Stock at closing. We also agreed to issue an
additional 147,500 shares to the former CDS stockholders on each of the second,
third and fourth anniversaries of the closing if, on each such delivery date,
CDS was actively engaged in the business it is now engaged. The schedule for
the deferred deliveries of stock is subject to acceleration if our Common Stock
trades at $15 per share for 60 consecutive trading days. The former President
of CDS (the "Executive") resigned from CDS effective February 28, 1999 and is
entitled under his employment agreement to receive salary for a one-year period
following his termination of employment. We recorded severance expense of
$105,951 associated with the Executive's termination in the first quarter of
1999. The Executive was also granted options to purchase 110,000 shares of our
Common Stock at $1.50 per share. CDS did not have any significant tangible
assets at the time of acquisition. The aggregate of the fair value of the
shares issued and issuable to the CDS stockholders as consideration for the
acquisition of $339,250 and the legal and other costs incurred in the
acquisition of $104,250 have been capitalized and were to be amortized over an
estimated useful life of five years. In the second quarter of 1999, based on
the results of such business since acquisition and future projections, we
expensed the remaining unamortized acquisition costs of $340,017.
CDS markets a dispensing machine for cigarettes, which is controlled by a
remote-control device. This machine, the Coinexx Star 10, distributes and is
designed to replace the current money-operated cigarette vending machine. CDS'
product is differentiated from the current money-operated vending machine by a
remote-control transmitter, which may only be activated by an authorized
individual. Thus, the Coinexx Star 10 requires a face-to-face transaction
between the operator (typically a cashier) and the customer wishing to purchase
cigarettes. CDS' management believes that this method for dispensing cigarettes
would be permitted under the final Food and Drug Administration regulations
issued August 28, 1996. Nonetheless, nothing prohibits various state and local
governments from enacting laws, ordinances or regulations prohibiting CDS'
method for dispensing cigarettes. We were recently informed by the City of
Minneapolis, Minnesota, where we had leased seven machines, that it had enacted
such an ordinance. CDS' principal market for its equipment consists of
restaurants, bars and taverns. CDS depreciates the equipment over five years.
As of November 15, 1999, CDS had entered into approximately 105 leases for
machines in addition to the machines leased in Minneapolis.
In December 1998, CDS acquired substantially all of the assets of TD Rowe
Corporation's New York state cigarette vending route, including vending
machines, for $59,250. We paid $20,000 at closing and the remaining $39,250 in
the first quarter of 1999. As part of the transaction, we also purchased the
inventory in the machines for $29,158.
9
<PAGE> 11
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
DAMI. On November 5, 1998, we contributed the non-cash assets and certain
liabilities of our on-line electronic delivery information service (the "PC411
Service") to Digital Asset Management, Inc. ("DAMI"). The assets contributed
include the tradename for "PC411 for Windows 3.0", distribution agreements with
equipment manufacturers, subscriber contracts for the PC411 Service, the PC411
Service internet site and domain name, all property, plant and equipment,
including hardware and software, relating to the PC411 Service and all accounts
receivable, inventories and prepaid expenses relating to the PC411 Service. The
contributed assets did not include our cash and marketable securities and other
financial investments. The liabilities assumed by DAMI included our obligations
to Acxiom Corporation ("Acxiom") under a data licensing agreement, $10,000 of
liabilities under OEM distribution agreements, our obligations to provide the
PC411 Service to subscribers and $10,000 of other pre-closing liabilities.
DAMI was organized by Dean Eaker, our former President, Chief Executive Officer
and director, and Edward Fleiss, our former Vice President and Chief Technology
Officer, to continue to operate and develop the PC411 Service. We received
preferred stock representing an initial 42.5% interest in DAMI in exchange for
the contribution of the PC411 Service. Acxiom purchased preferred stock
representing a 42.5% interest in DAMI for $1,250,000 and initially designated a
majority of the Board of Directors of DAMI. DAMI's management, including
Messrs. Eaker and Fleiss, held an initial 15% interest in DAMI with options
which would have increased their ownership position to 50% upon satisfaction of
operational and financial benchmarks over a three-year period. As a result, we
have accounted for our interest in the PC411 Service by using the equity method
of accounting after November 5, 1998. We recorded $462,360 as a capital
contribution in connection with the transaction, which represented our 42.5%
interest in the capital raised by DAMI in excess of the carrying value of our
net assets contributed to DAMI. We agreed, under certain conditions, to fund up
to $200,000 of an $800,000 working capital line to be provided to DAMI by
Acxiom, Dean Eaker and us. We funded $100,000 of the working capital line in
the second quarter of 1999.
Since July 1999, DAMI issued approximately $750,000 of convertible notes due
March 31, 2000 and warrants to purchase DAMI preferred stock. Mr. Eaker and
Acxiom agreed to extend the maturity of their working capital lines from June
30, 1999 to March 31, 2000, and received warrants to purchase preferred shares.
The Eaker and Acxiom working capital lines also are convertible into DAMI
preferred stock. Further, we agreed to extend the maturity of our working
capital line from June 30, 1999 to August 31, 1999 and were released from any
further obligation to fund additional amounts under the working capital line.
DAMI has not made any payments to us on the working capital line. Our interest
in DAMI could decrease from 42.5% to approximately 13.0% assuming the conversion
of all notes and warrants issued in the above transactions.
DAMI has incurred significant losses and negative cash flow since its inception.
DAMI requires a significant amount of additional capital to continue its
operations and to develop its business. DAMI currently has only limited cash
resources to continue its business. Although management of DAMI is exploring
possible sources of additional financing and potential sales of assets, there is
a substantial risk that DAMI will not be able to raise sufficient additional
capital to continue its operations.
10
<PAGE> 12
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
We may also seek to acquire other businesses and/or properties, which may or
may not be related to our existing businesses. Acquisitions involve numerous
risks, including difficulties in the assimilation of the operations and
products or services of the acquired companies, the expenses incurred in
connection with the acquisition and subsequent assimilation of operations and
products or services, the diversion of management's attention from other
business concerns and the potential loss of key employees of the acquired
company. We may also face increased competition for acquisition opportunities
which may inhibit our ability to consummate suitable acquisitions on terms
favorable to us. There can be no assurance that we will successfully identify,
complete or integrate any future acquisitions, or that acquisitions, if
completed, will contribute favorably to our operations and future financial
condition.
Our operating results may fluctuate significantly in the future as a result of
a variety of factors, many of which are outside our control. In addition, we do
not have historical financial data for any significant period of time on which
to base planned operating expenses. Our expense levels are based in part on our
expectations concerning future revenue and to a large extent are fixed.
Quarterly revenue and operating results depend substantially upon signing up
new customers and retaining such customers which are difficult to forecast
accurately. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall, and any significant shortfall
in revenue in relation to our expectations would have an immediate adverse
effect on our business, results of operations and financial condition.
Year 2000 Costs. We have evaluated the implementation of the century date
change on our internal computer systems and those of CDS and DAMI and believe
we are all Year 2000 compliant. CDS believes that its dispensing machine is
Year 2000 compliant and we have been informed by DAMI that the PC411 Service is
Year 2000 compliant. Furthermore, we use personal computers less than three
years old for all accounting functions. However, the failure of our service
providers to resolve their own processing issues in a timely manner could
result in a material financial risk. As a result, we are presently confirming
that our service providers are adequately addressing Year 2000 issues. However,
there can be no complete assurance of success, or that interaction with service
providers will not impair CDS' and DAMI's services.
Results of Operations
For the three and nine months ended September 30, 1999 and 1998, the results of
operations of our primary operating units, which include the PC411 Service and
CDS, were as follows. We acquired CDS on May 8, 1998. We contributed the PC411
Service to DAMI in exchange for preferred stock in DAMI on November 5, 1998. We
have accounted for our interest in the PC411 Service using the equity method of
accounting subsequent to November 5, 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
CDS
Sales................................... $ 127,207 $ 1,369 $ 332,583 $ 1,369
Cost of sales........................... 98,636 28,822 270,826 28,822
Research and development................ 35,550 -- 104,003 --
Sales and marketing..................... 141,592 88,012 384,402 88,012
Amortization of intangibles............. 1,081 20,656 398,060 33,262
General and administrative.............. 55,746 200,405 566,180 273,772
--------- ---------- ----------- ----------
Total expenses..................... 332,605 337,895 1,723,471 423,868
-------- ---------- ---------- ----------
Operating loss.......................... $(205,398) $ (337,895) $(1,390,888) $ (422,499)
======== ========== ========== ==========
</TABLE>
11
<PAGE> 13
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
PC411 SERVICE
Sales................................... $ -- $ 24,466 $ -- $ 70,608
Cost of sales........................... -- 86,360 -- 269,800
Research and development................ -- 31,867 -- 120,291
Sales and marketing..................... -- 45,526 -- 365,781
General and administrative.............. -- 140,975 -- 525,914
------------ ---------- ---------- -----------
Total expenses..................... 304,728 1,281,786
------------ ---------- ---------- -----------
Operating loss.......................... $ $ (280,262) $ $(1,211,178)
============ ========== ========== ===========
CORPORATE AND OTHER
Sales................................... $ -- $ -- $ -- $ --
Cost of sales........................... -- -- -- --
Research and development................ -- -- -- 29,249
Sales and marketing..................... -- -- -- --
General and administrative.............. 19,231 18,294 311,049 89,148
------------ ---------- ---------- -----------
Total expenses..................... 19,231 18,294 311,049 118,397
------------ ---------- ---------- -----------
Operating loss.......................... $ (19,231) $ (18,294) $ (311,049) $ (118,397)
============ ========== ========== ===========
</TABLE>
CDS
Revenues. CDS had revenues of $127,207 and $332,583 for the three and nine
months ended September 30, 1999. The revenues for the three-month period
resulted from the following: $12,681 from machine leases, $10,923 from machine
sales and $103,603 from the sales of cigarettes. The revenues for the nine
month period resulted from the following: $28,195 from machine leases, $25,689
from machine sales and $278,699 from the sales of cigarettes. CDS acquired
substantially all of the assets of TD Rowe Corporation's New York state
cigarette vending route in December 1998.
Cost of Revenues. Cost of revenues of $98,636 and $270,826 for CDS for the
three and nine months ended September 30, 1999 consisted primarily of costs of
cigarettes $73,211 and $210,318 in each respective period. Cost of revenues
also included warehouse expenses and shipping of machines held for lease or
sale. We depreciate our machines held for lease over five years once the asset
is placed in service and remove the machine and related accumulated
depreciation from our financial statements upon sale.
Sales and Marketing Expenses. Sales and marketing expenses for CDS were
$141,592 and $384,402 for the three and nine months ended September 30, 1999.
The expenses consisted principally of personnel costs and expenses associated
with trade shows.
General and Administrative Expenses. General and administrative expenses for
CDS were $55,746 and $566,180 for the three and nine months ended September 30,
1999. The CDS expenses consisted principally of payroll, amortization of
intangible assets, consulting and office expenses. The expenses for the nine
month period also included severance charges associated with the termination of
an executive of $105,951. General and administrative expenses for the three and
nine months ended September 30, 1998 consisted primarily of payroll and
consulting expenses.
12
<PAGE> 14
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
Amortization of Intangible Assets. We amortize intangible assets over a
60-month life. We wrote off $340,017 of acquisition costs of the CDS business
in the nine months ended September 30, 1999. The write-off of the acquisition
costs was based on the results of such business since the date of acquisition
and future projections.
THE PC411 SERVICE
Revenues. Our revenues from the PC411 Service in 1998 were derived from
registration fees and usage charges for the modem dial-up PC411 service.
Revenues were recognized over the period in which the related services were
provided. Revenues for the PC411 Service for the three and nine months ended
September 30, 1998 were $24,466 and $70,608. Our policy was to recognize
revenues over the period that the services were provided.
Cost of Revenues. Cost of revenues consisted primarily of the cost of data and
the distribution fees payable to OEM partners, employee compensation and
depreciation associated with the maintenance of the PC411 Service in 1998. Cost
of revenues for the three and nine months ended September 30, 1998 were $86,360
and $269,800.
Research and Development. Research and development expenses consisted primarily
of employee compensation associated with the design, programming, and testing
of the PC411 service. Research and development expenses for the three and nine
months ended September 30, 1998 were $31,867 and $120,291.
Sales and Marketing Expenses. Sales and marketing expenses consisted primarily
of direct mail, public relations, print advertising, and trade shows. Sales and
marketing expenses for the three and nine months ended September 30, 1998 were
$45,526 and $365,781.
General and Administrative Expenses. General and administrative expenses
consist primarily of expenses for administration, office operations, and
general management activities, including legal, accounting, and other
professional fees. General and administrative expenses for the PC411 Service
were $140,975 and $525,914 for the three and nine months ended September, 1998.
CORPORATE AND OTHER
Expenses associated with corporate activities were $19,231 and $311,049 for the
three and nine months ended September 30, 1999, as compared to $18,294 and
$118,397 for the same periods in the prior year. The increase in the nine month
period was primarily due to amounts accrued for the settlement of a lawsuit and
associated legal fees and expenses. The balance of the expenses were primarily
associated with costs necessary to maintain a public company.
OTHER INCOME (EXPENSE)
Interest and other income was $6,965 and $40,515 for the three and nine months
ended September 30, 1999, compared to $36,946 and $129,266 for the three and
nine months ended September 30, 1998. The decrease is principally related to
lower balances in cash and cash equivalents in 1999. We recorded equity losses
in DAMI of $501,924 for the nine months ended September 30, 1999. Commencing in
the second quarter of 1999, the carrying value of our investment in DAMI was
reduced to zero and we suspended recognizing our share of the additional losses
of DAMI.
13
<PAGE> 15
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
Liquidity and Capital Resources
We have not been able to generate sufficient cash from operations and, as a
consequence, financing has been required to fund ongoing operations. We have
financed our operations to date primarily through the sale of our Preferred
Stock, secured short-term borrowings from New Valley Corporation ("NVC"), our
principal stockholder, and the proceeds of our May 1997 initial public offering
("IPO"). Three of our directors and our President and our Chief Financial
Officer are or have been executive officers of NVC.
Cash used for operations for the nine months ended September 30, 1999 and 1998
was $1,198,815 and $1,876,728, respectively. The decrease in 1999 is primarily
due to non-cash charges related to equity loss in DAMI of $501,924, increased
depreciation and amortization of $339,714 associated with CDS and a net
decrease in purchases of machines held for lease of $459,445 offset by
increased net loss of $540,538.
Cash used in investing activities was $157,139 for the nine months ended
September 30, 1999 compared with cash provided from investing activities of
$3,275,129 for same period in the prior year. Cash used in investing activities
for the 1999 period resulted primarily from the $100,000 loan to DAMI, the
acquisition of substantially all of the assets of TD Rowe Corporation's New
York state cigarette vending route, including vending machines, for $59,250 and
capital expenditures of $47,761. We paid $20,000 in 1998 and the remaining
$39,250 in the first quarter of 1999. Cash provided from investing activities
for the nine months ended September 30, 1998 of $3,275,129 consisted primarily
of sale of short-term investments of $3,498,116, offset by costs associated
with the acquisition of CDS of $104,250 and capital expenditures of $118,737.
Our capital expenditures of $47,761 for the nine months ended September 30,
1999 consisted primarily of the purchase of a booth for trade shows and a
vehicle. We expect capital expenditures will be approximately $50,000 for the
year ended December 31, 1999.
In connection with the DAMI transaction, we agreed, under certain
circumstances, to fund up to $200,000 of an $800,000 line of credit to be
provided to DAMI by various of its stockholders. We funded $100,000 of the
working capital line in 1999. On July 8, 1999, we were released from any
further obligation to fund additional amounts under the working capital line.
Effective May 1, 1999, we entered into a sublease for our former headquarters
in Inglewood, California. We expensed approximately $25,000 associated with the
costs to locate a new tenant and the relocation of our headquarters.
Nonetheless, the agreement is a sublease and no assurance can be given that we
will not ultimately be liable for future lease payments.
In May, 1999 we agreed to settle a lawsuit brought by a former employee seeking
a severance payment. We have accrued $165,000 for the settlement and associated
legal fees and expenses. The amounts were paid in the second quarter of 1999.
14
<PAGE> 16
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
We expect that we will continue to incur significant losses and negative cash
flow. At September 30, 1999, our cash and cash equivalents were $532,859. We do
not currently have any commitments for any additional financing, and there can
be no assurance that any such commitments can be obtained. Any additional
equity financing may be dilutive to our existing stockholders, and debt
financing, if available, may involve pledging some or all of our assets and may
contain restrictive covenants with respect to raising future capital and other
financial and operational matters.
The accompanying financial statements have been prepared assuming we will
continue as a going concern. Management is currently evaluating alternatives to
supplement our present cash and cash equivalents to meet our liquidity
requirements over the next twelve months. Such alternatives include seeking
additional investors and/or lenders and disposing of our interest in DAMI.
Although there can be no assurance, we believe that we will be able to continue
as a going concern for the next twelve months.
We or our affiliates, including NVC, may, from time to time, based upon present
market conditions, purchase shares of our Common Stock in the open market or in
privately negotiated transactions.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We and our representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities
Reform Act of 1995 (the "Reform Act"), including any statements that may be
contained in the foregoing "Management's Discussion and Analysis of Financial
Condition and Results of Operations", in this report and in other filings with
the Securities and Exchange Commission and in our reports to stockholders,
which represent our expectations or beliefs with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties and, in connection with the "safe-harbor" provisions of
the Reform Act, we have identified under "Risk Factors" in Item 1 of our Form
10-KSB for the year ended December 31, 1998 filed with the SEC and in this
section important factors that could cause actual results to differ materially
from those contained in any forward-looking statements made by us or on our
behalf.
Our plans and objectives are based, in part, on assumptions involving the
market acceptance of CDS' products and services, our ability to market
successfully the Coinexx Star 10 System as a legally permitted and more
convenient and reliable alternative to current comparable and widely used
tobacco dispensing control systems and that there will be no unanticipated
material adverse change in our business or regulatory developments. Assumptions
relating to the foregoing involve judgments with respect to, among other
things, future economic, competitive, regulatory and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control.
Results actually achieved may differ materially from expected results included
in these statements as a result of these or other factors particularly in light
of our early stage operations. Due to such uncertainties and risks, you are
cautioned not to place undue reliance on such forward-looking statements, which
speak only as of the date on which such statements are made. We do not
undertake to update any forward-looking statement that may be made from time to
time on our behalf.
15
<PAGE> 17
CDSI HOLDINGS INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to information entitled "Contingencies" in Note 6 to
our Financial Statements included elsewhere in this report on Form
10-QSB.
Item 2. Changes in Securities and Use of Proceeds
On May 21, 1997, we completed an initial public offering ("IPO") of
1,322,500 units (including 172,500 units from the exercise of the
underwriter's over-allotment option), each unit consisting of one
share of Common Stock and one Warrant. The units were sold for $5.75
each and we received, after expenses of the IPO, approximately $5.9
million in net proceeds.
On August 14, 1997, we filed our initial report of sales of securities
and use of proceeds therefrom on Form SR. Form SR has been
discontinued and we will continue to report the following information
in our quarterly and annual filings until the proceeds have been fully
used.
1. The offering commenced May 14, 1997 and all registered securities
were sold.
2. The managing underwriter was Biltmore Securities, Inc.
3. Title of Securities:
a. Units - Each Unit consists of one share of Common
Stock and one Warrant.
b. Common Stock - Common Stock included in Units,
par value $.01.
c. Warrants - Each Warrant is convertible into one
share of Common Stock at an exercise price of
$6.10.
d. Common stock issuable upon conversion of the
Warrants ("Other Common Stock").
e. Underwriter's Options - The Underwriter's Options
are convertible into Units at an exercise price
of $9.49 per Unit.
16
<PAGE> 18
4. The Amount and Aggregate Offering Price of Securities Registered
and Sold to Date For the Account of the Issuer:
<TABLE>
<CAPTION>
AGGREGATE PRICE
OF OFFERING
TITLE OF SECURITY AMOUNT REGISTERED AMOUNT REGISTERED AMOUNT SOLD
----------------- ------------------ ----------------- ------------
<S> <C> <C> <C>
Units 1,322,500 $ 7,604,375 1,322,000
Common Stock 1,322,500 -- --
Warrants 1,322,500 -- --
Other Common Stock 1,322,500 $ 8,067,250 --
Underwriter's Options 73,600 $ 1,147,424 --
</TABLE>
5. Expenses Incurred in Connection with Issuance of Securities:
Underwriting discounts and commissions $760,438
Expenses paid to underwriters $228,131
Other expenses (estimated) $730,880
(All expenses were direct or indirect to others)
6. Net offering proceeds after the total expenses above were
$5,885,000.
7. Amount of net offering proceeds used for each of the purposes
listed below:
Amounts paid to affiliates of the Company:
Repayment of Indebtedness; preferred stock dividends $ 619,016
Amounts paid to others:
Temporary investments:
Money market cash accounts $ 532,859
Purchase of machines held for lease/sale $ 482,315
Loan to Digital Asset Management, Inc. $ 100,000
Purchase of equipment $ 204,744
Employee compensation - estimated $1,554,829
Costs associated with acquisition of CDS $ 104,250
Costs associated with acquisition of vending route $ 59,250
Other working capital - estimated $2,227,737
17
<PAGE> 19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
None.
18
<PAGE> 20
CDSI HOLDINGS INC.
(A DEVELOPMENT STAGE COMPANY)
SIGNATURE
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.
CDSI HOLDINGS INC.
(Registrant)
Date: November 15, 1999 By: /s/ J. Bryant Kirkland III
---------------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 532,859
<SECURITIES> 0
<RECEIVABLES> 17,114
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 606,910
<PP&E> 417,161
<DEPRECIATION> 41,690
<TOTAL-ASSETS> 1,050,821
<CURRENT-LIABILITIES> 143,528
<BONDS> 0
0
0
<COMMON> 31,200
<OTHER-SE> 876,093
<TOTAL-LIABILITY-AND-EQUITY> 1,050,821
<SALES> 332,583
<TOTAL-REVENUES> 0
<CGS> 270,826
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,763,694
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,163,346)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,163,346)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,163,346)
<EPS-BASIC> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
