<PAGE> 1
================================================================================
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 JUNE 30, 2000
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 AUGUST 11, 2000, THERE WERE OUTSTANDING 3,120,000 SHARES OF THE
ISSUER'S COMMON STOCK, $.01 PAR VALUE.
================================================================================
<PAGE> 2
CDSI HOLDINGS INC.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999......................................... 3
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2000 and
1999.......................................................... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999....................... 5
Notes to the Condensed Quarterly Consolidated Financial
Statements.................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 14
SIGNATURE............................................................................. 15
</TABLE>
<PAGE> 3
CDSI HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
----------- -----------
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ............................ $ 210,680 $ 346,107
Accounts receivable .................................. 889 9,507
Inventory ............................................ 39,829 34,727
Prepaid expenses and other current assets ............ 41,598 32,092
----------- -----------
Total current assets ............................ 292,996 422,433
Property and equipment, net .......................... 30,213 52,013
Other assets ......................................... 18,505 18,505
Intangible assets, net ............................... -- 45,491
----------- -----------
Total assets .................................... $ 341,714 $ 538,442
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable ...................... $ 3,039 $ 2,496
Accounts payable and accrued expenses ................ 104,269 128,791
----------- -----------
Total current liabilities ....................... 107,308 131,287
----------- -----------
Note payable ............................................. 8,094 9,755
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 .................................. (8,014,832) (7,843,744)
----------- -----------
Total stockholders' equity ...................... 226,312 397,440
----------- -----------
Total liabilities and stockholders' equity ...... $ 341,714 $ 538,442
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
CDSI HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------- --------------------------
Three Months Ended Six Months Ended
------------------------- --------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ........................................ $ 105,047 $ 94,288 $ 177,030 $ 205,376
Cost and expenses:
Cost of revenues ........................... 94,573 88,867 150,483 172,190
Research and development ................... -- 30,010 12,616 68,453
Sales and marketing ........................ 6,458 141,462 22,580 242,810
Amortization of intangible assets .......... 42,528 373,617 45,491 396,979
General and administrative ................. 34,060 220,643 121,845 802,252
----------- ----------- ----------- -----------
177,619 854,599 353,015 1,682,684
----------- ----------- ----------- -----------
Operating loss .................................. (72,572) (760,311) (175,985) (1,477,308)
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income .................. 2,130 12,682 5,192 33,550
Interest expense ........................... (174) -- (295) --
Equity in loss of ThinkDirectMarketing.com . -- (275,478) -- (501,924)
----------- ----------- ----------- -----------
1,956 (262,796) 4,897 (468,374)
----------- ----------- ----------- -----------
Net loss ........................................ $ (70,616) $(1,023,107) $ (171,088) $(1,945,682)
=========== =========== =========== ===========
Net loss per share (basic and diluted) .......... $ (0.02) $ (0.33) $ (0.05) $ (0.62)
=========== =========== =========== ===========
Shares used in computing net loss per share ..... 3,120,000 3,120,000 3,120,000 3,120,000
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
CDSI HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
---------------------------
Six Months Ended
---------------------------
June 30, June 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ....................................... $ (171,088) $(1,945,682)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ................................. 2,700 17,043
Amortization of intangible assets ............ 45,491 396,979
Equity loss in ThinkDirectMarketing.com ...... -- 501,924
Provision for obsolescence of equipment ...... 20,000 --
Changes in assets and liabilities:
Accounts receivable ....................... 8,618 1,263
Purchase of machines held for sale or lease -- (8,216)
Inventory ................................. (5,102) 10,664
Prepaid expenses and other current assets . (9,506) 21,502
Accounts payable and accrued expenses ..... (24,522) 77,980
----------- -----------
Net cash used in operating activities ............. (133,409) (926,543)
----------- -----------
Cash flows used in investing activities:
Issuance of loan to ThinkDirectMarketing.com ... -- (100,000)
Acquisition of business ........................ -- (39,313)
Acquisition of property and equipment .......... (900) (45,469)
----------- -----------
Net cash flows used in investing activities ....... (900) (184,782)
----------- -----------
Cash flows used in financing activities:
Payments on note payable ....................... (1,118) --
----------- -----------
Net cash flows used in financing activities ....... (1,118) --
----------- -----------
Net decrease in cash .............................. (135,427) (1,111,325)
Cash and cash equivalents at beginning of period .. 346,107 1,888,813
----------- -----------
Cash and cash equivalents at end of period ........ $ 210,680 $ 777,488
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<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 electronic delivery information service that transmits
name, address, telephone number and other related information digitally
to users of personal computers (the "PC411 Service"). 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 (the "Coinexx Star 10") for
tobacco products. In February 2000, CDSI announced CDS will no longer
actively engage in the business of marketing and leasing an inventory
control system for tobacco products.
CDSI intends to explore investments in other Internet-related businesses
as well as other business opportunities. As CDSI has only limited cash
resources, CDSI's ability to complete any acquisition or investment
opportunities it may identify will depend on its ability to raise
additional financing, as to which there can be no assurance.
(2) PRINCIPLES OF REPORTING
The financial statements of the Company as of June 30, 2000 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 June 30, 2000 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.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31,
1999 included in the Company's Form 10-KSB, as amended, filed with the
Securities and Exchange Commission (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 CDS stockholders
received 147,500 shares of the Company's Common Stock at closing. In
addition, the Company agreed to 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 was actively
engaged in the business it is now engaged. As the Company is no longer
engaged in the marketing and leasing of the Coinexx Star 10, the
contingent shares will not be issued.
6
<PAGE> 7
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
CDS did not have any significant tangible assets at the time of
acquisition. 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 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 February 2000, CDSI announced CDS will no longer actively engage in
the business of marketing and leasing an inventory control system for
tobacco products. CDSI determined that CDS could not generate sufficient
revenues from the sale and leasing of the Coinexx Star 10 to justify
continuation of the business. The Company does not anticipate it will
receive any material proceeds from the disposition of the assets of the
business.
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 amortized the costs of the vending
route over an estimated useful life of five years. In the second quarter
of 2000, based on the results of the vending route and future projections
of its fair market value, the Company expensed the remaining unamortized
acquisition costs of $40,488.
(4) THINKDIRECTMARKETING.COM TRANSACTION
On November 5, 1998, the Company contributed the non-cash assets and
certain liabilities of the PC411 Service to ThinkDirectMarketing.com
(formerly known as Digital Asset Management, Inc.).
ThinkDirectMarketing.com was 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 ThinkDirectMarketing.com in exchange for the
contribution of the PC411 Service's net assets. Acxiom Corporation
("Acxiom") purchased preferred stock representing a 42.5% interest in
ThinkDirectMarketing.com for $1,250,000 and initially designated a
majority of the Board of Directors of ThinkDirectMarketing.com.
ThinkDirectMarketing.com's management, including Messrs. Eaker and
Fleiss, held an initial 15% interest in ThinkDirectMarketing.com 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
ThinkDirectMarketing.com 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
ThinkDirectMarketing.com in excess of the carrying value of the Company's
net assets contributed to ThinkDirectMarketing.com. The Company agreed,
under certain conditions, to fund up to $200,000 of an $800,000 working
capital line to be provided to ThinkDirectMarketing.com 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, ThinkDirectMarketing.com has issued approximately
$3,500,000 of convertible notes due June 30, 2000 and warrants to
purchase ThinkDirectMarketing.com preferred stock. Mr. Eaker and Acxiom
agreed to extend the maturity of their working capital lines from June
30, 1999 to March 31, 2000 (which has been extended to June 30, 2000) and
have received warrants to purchase preferred shares. The Eaker and Acxiom
working capital lines are also convertible into ThinkDirectMarketing.com
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. ThinkDirectMarketing.com has not made any payments
to the Company on the working capital line. The Company's interest in
ThinkDirectMarketing.com would decrease from 42.5%
7
<PAGE> 8
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
to approximately 10% assuming the conversion and exercise of all notes
and warrants issued in the above transactions.
ThinkDirectMarketing.com has incurred significant losses and negative
cash flow since its inception and currently has only limited cash
resources. ThinkDirectMarketing.com requires a significant amount of
additional capital to continue its operations and to develop its
business. Although management of ThinkDirectMarketing.com is exploring
possible sources of additional financing and potential sales of assets,
there is a substantial risk that ThinkDirectMarketing.com will not be
able to raise sufficient additional capital to continue its operations.
The Company has accounted for its non-controlling interest in
ThinkDirectMarketing.com using the equity basis of accounting since
November 5, 1998. The Company's equity in ThinkDirectMarketing.com's
losses for the three and six months ended June 30, 1999 was adjusted to
reflect the difference in the Company's contribution of its net assets to
ThinkDirectMarketing.com and the fair value of those assets recorded by
ThinkDirectMarketing.com. In the second quarter of 1999, the carrying
value of the Company's investment in ThinkDirectMarketing.com was reduced
to zero as the cumulative equity in ThinkDirectMarketing.com's losses
exceeded the Company's investment in ThinkDirectMarketing.com of
$635,798, which consisted of the initial carrying value of $535,798 and
the $100,000 working capital loan to ThinkDirectMarketing.com. Since the
Company has no intention or commitment to fund future
ThinkDirectMarketing.com losses, commencing in the second quarter of
1999, the Company suspended recognizing its share of the additional
losses of ThinkDirectMarketing.com.
Summarized financial information for the three and six month periods
ended June 30, 1999 for DAMI follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------ ----------------
Revenues.................. $ 11,085 $ 25,652
Costs and expenses........ 777,047 1,438,663
Interest income........... 2 2,796
Net loss.................. (765,960) (1,410,215)
(5) 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.
(6) 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 2,979,288 and 3,421,788 shares at June 30, 2000 and
1999, 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.
8
<PAGE> 9
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company owns 100% of the issued and outstanding shares of common
stock of CDS and an approximate 10% interest on a fully diluted basis in
ThinkDirectMarketing.com. In February 2000, the Company terminated all
operations relating to marketing and leasing the Coinexx Star 10 inventory
control system, leaving the cigarette vending route as the only current source
of revenue for CDS and the Company.
The Company has limited revenues and working capital and no available
lines of credit to meet its short and long-term working capital requirements.
The Company intends to seek other Internet-related businesses as well as other
business opportunities. As the Company has only limited cash resources, the
Company's ability to complete any acquisition or investment opportunities it may
identify will depend on its ability to raise additional financing, as to which
there can be no assurance. As of the date of this report, the Company has not
identified any potential acquisition or investment. There can be no assurance
that the Company will successfully identify, complete or integrate any future
acquisition or investment, or that acquisitions or investments, if completed,
will contribute favorably to its operations and future financial condition.
CDS
CDS was acquired in May 1998. Under the terms of the acquisition, the
former stockholders of CDS received an aggregate of 147,500 shares of Common
Stock at closing. In addition, the former stockholders were to receive an
additional 147,500 shares of Common Stock on each of May 8, 2000, 2001 and 2002
so long as CDS was actively engaged in the business of marketing and leasing the
Coinexx Star 10 inventory control system. As CDS is no longer actively engaged
in that business, the contingent shares of Common Stock will not be issued to
the former stockholders of CDS.
CDS did not have any significant tangible assets at the time of
acquisition. The fair value of the Common Stock issued and issuable to the CDS
stockholders as consideration for the acquisition of $339,250 and the legal and
other costs incurred in connection with the acquisition of $104,250 have been
capitalized and were being amortized over a five-year period. In the second
quarter of 1999, based on the results of the 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 amortized the costs of the vending route over an
estimated useful life of five years. In the second quarter of 2000, based on the
results of the vending route and future projections of its fair market value,
the Company expensed the remaining unamortized acquisition costs of $40,488.
THINKDIRECTMARKETING.COM
On November 5, 1998, the Company contributed substantially all the
non-cash assets and certain liabilities related to its on-line electronic
delivery information service to ThinkDirectMarketing.com. In exchange, the
Company received preferred stock of ThinkDirectMarketing.com representing an
initial 42.5% interest in ThinkDirectMarketing.com. The assets contributed
include the rights to the name "PC411" and "PC411 for Windows 3.0", distribution
agreements with equipment manufacturers, subscriber contracts for the service,
an internet site and domain name, all property, plant and equipment, including
hardware and software, relating to the service and all accounts receivable,
inventories and prepaid expenses relating to the service. The contributed assets
did not include the Company's cash and marketable securities and other financial
investments. The liabilities assumed by ThinkDirectMarketing.com included the
Company's obligations to Acxiom Corporation pursuant to a data licensing
agreement, up to $10,000 of liabilities under OEM distribution agreements,
obligations to provide the service to subscribers and up to $10,000 of other
pre-closing liabilities.
9
<PAGE> 10
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
The Company's interest in ThinkDirectMarketing.com is accounted for
using the equity method of accounting. Commencing in the second quarter of 1999,
the carrying value of the Company's investment in ThinkDirectMarketing.com was
reduced to zero, and the Company suspended recognizing its share of the
additional losses of ThinkDirectMarketing.com.
RESULTS OF OPERATIONS
For the three and six months ended June 30, 2000 and 1999, the results
of operations of CDS, the Company's primary operating unit, were as follows:
<TABLE>
<CAPTION>
--------------------------- ---------------------------
Three Months Ended June 30, Six months ended June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CDS
Revenues ........................ $ 105,047 $ 94,288 $ 177,030 $ 205,376
Cost of revenues ................ 94,573 88,867 150,483 172,190
Research and development ........ -- 30,010 12,616 68,453
Sales and marketing ............. 6,458 141,462 22,580 242,810
Amortization of intangible assets 42,528 373,617 45,491 396,979
General and administrative ...... 31,251 205,386 105,749 510,334
----------- ----------- ----------- -----------
Total expenses ............. 174,810 839,342 336,919 1,390,766
----------- ----------- ----------- -----------
Operating loss .................. $ (69,763) $ (745,054) $ (159,889) $(1,185,390)
=========== =========== =========== ===========
CORPORATE AND OTHER
Revenues ........................ $ -- $ -- $ -- $ --
General and administrative ...... 2,809 15,157 16,096 291,818
----------- ----------- ----------- -----------
Total expenses ............. 2,809 15,157 16,096 291,818
----------- ----------- ----------- -----------
Operating loss .................. $ (2,809) $ (15,157) $ (16,096) $ (291,818)
=========== =========== =========== -----------
</TABLE>
CDS
REVENUES. CDS had revenues of $105,047 and $177,030 for the three and
six months ended June 30, 2000. The revenues for the three-month period resulted
from sales of cigarettes. The revenues for the six-month period resulted from
the following: $1,102 from machine leases, $8,162 from machine sales and
$167,766 from the sales of cigarettes. In February 2000, the Company terminated
all operations relating to marketing and leasing the Coinexx Star 10 inventory
control system, leaving the vending route as the only current revenue for CDS
and the Company. CDS acquired substantially all of the assets of TD Rowe
Corporation's New York state cigarette vending route in December 1999.
CDS had revenues of $94,288 and $205,376 for the three and six months
ended June 30, 1999. The revenues for the three-month period resulted from the
following: $9,066 from machine leases, $3,546 from machine sales and $81,676
from the sales of cigarettes. The revenues for the six-month period resulted
from the following: $15,514 from machine leases, $14,766 from machine sales and
$175,096 from the sales of cigarettes.
10
<PAGE> 11
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
COST OF REVENUES. Cost of revenues of $94,573 and $150,483 for CDS for
the three and six months ended June 30, 2000, respectively, consisted primarily
of costs of cigarettes of $94,573 and $140,398. Cost of revenues of $88,867 and
$172,190 for CDS for the three and six months ended June 30, 1999, respectively,
consisted primarily of costs of cigarettes of $67,876 and $137,107. Cost of
revenues also included warehouse expenses and shipping of machines held for
lease. CDS depreciated its machines held for lease over five years once the
asset was placed in service.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for CDS were
$6,458 and $22,580 for the three and six months ended June 30, 2000,
respectively, as compared to $141,462 and $242,810 for the three and six months
ended June 30, 1999, respectively. The expenses consisted principally of
personnel costs and expenses associated with trade shows in 1999. The expenses
decreased significantly in 2000 due to the Company's decision to terminate all
operations relating to marketing and leasing the Coinexx Star 10 inventory
control system.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for CDS were $31,251 and $105,749 for the three and six months ended
June 30, 2000, respectively, as compared to $205,386 and $510,334 for the three
and six months ended June 30, 1999, respectively. The expenses for the three and
six months ended June 30, 2000 consisted primarily of payroll, consulting and
office expenses.
The expenses for the six-month period in 1999 also included severance
charges associated with the termination of an executive of $105,951. The
expenses decreased significantly in 2000 due to the Company's decision to
terminate all operations relating to marketing and leasing the Coinexx Star 10
inventory control system.
AMORTIZATION OF INTANGIBLE ASSETS. CDS amortized its intangible assets
over a 60-month life. In the second quarter of 2000, based on the results of the
vending route and future projections of its fair market value, the Company
expensed the remaining unamortized acquisition costs of $40,488. In the second
quarter of 1999, CDS wrote-off $340,017 of acquisition costs of the CDS
business, which was based on the results of such business since the date of
acquisition and future projections.
CORPORATE AND OTHER
Expenses associated with corporate activities were $2,809 and $16,096
for the three and six months ended June 30, 2000, respectively, as compared to
$15,157 and $291,818 for the same periods in the prior year. The decrease in
2000 was primarily due to amounts accrued for the settlement of a lawsuit and
associated legal fees and expenses in 1999. The balance of the expenses were
primarily associated with costs necessary to maintain a public company.
OTHER INCOME (EXPENSE)
Interest and other income was $2,130 and $5,192 for the three and six
months ended June 30, 2000, compared to $12,682 and $33,550 for the three and
six months ended June 30, 1999. The decrease is principally related to lower
balances of cash and cash equivalents in 2000. The Company recorded an equity
loss in ThinkDirectMarketing.com of $275,478 and $501,924 for the three and six
months ended June 30, 1999, respectively. Commencing in the second quarter of
1999, the carrying value of the Company's investment in ThinkDirectMarketing was
reduced to zero, and the Company suspended recognizing its share of the
additional losses of ThinkDirectMarketing.com.
LIQUIDITY AND CAPITAL RESOURCES
The Company has limited available cash, limited cash flow, limited
liquid assets and no credit facilities. The Company has not been able to
generate sufficient cash from operations and, as a consequence, financing has
11
<PAGE> 12
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
been required to fund ongoing operations. Since completion of the Company's
initial public offering of its common stock (the "IPO") in May 1997, the Company
has primarily financed its operations with the net proceeds of the IPO. The
funds were used to complete the introduction of the PC411 Service over the
Internet, to expand marketing, sales and advertising, to develop or acquire new
services or databases, and for general corporate purposes.
Cash used for operations for the six months ended June 30, 2000 and
1999 was $133,409 and $926,543, respectively. The decrease is primarily due to a
decreased net loss of $1,774,594 offset by decreased non-cash charges in 1999
related primarily to equity loss in ThinkDirectMarketing.com of $501,924, lower
amortization of intangible assets of $351,488 and higher accrued expenses of
$102,502 recorded in 1999.
Cash used in investing activities was $900 and $184,782 for the six
months ended June 30, 2000 and 1999, respectively. Cash used in investing
activities for the 1999 period resulted primarily from issuance of a loan to
ThinkDirectMarkeing.com and 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. CDS paid $39,250 of the purchase price in the
first quarter of 1999. CDS amortized the costs of the vending route over an
estimated useful life of five years.
Capital expenditures of $45,469 for the six months ended June 30, 1999
consisted primarily of the purchase of a booth for trade shows and a vehicle.
Capital expenditures of $900 for the six months ended June 30, 2000 consisted
primarily of the purchase of office equipment. The Company does not expect
significant capital expenditures during the year ended December 31, 2000.
At June 30, 2000, the Company had cash and cash equivalents of $210,680
(approximately $180,000 at August 11, 2000). The Company does 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 its existing stockholders, and debt financing, if available, may
involve pledging some or all of its assets and may contain restrictive covenants
with respect to raising future capital and other financial and operational
matters.
Inflation and changing prices had no material impact on revenues or the
results of operations for the six months ended June 30, 2000 and 1999.
Management is currently evaluating alternatives to supplement the
Company's present cash and cash equivalents to meet its liquidity requirements
over the next twelve months. Such alternatives include seeking additional
investors and/or lenders and disposing of the interest in
ThinkDirectMarketing.com or CDS' cigarette vending route. 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.
The Company or its affiliates, including New Valley, may, from time to
time, based upon present market conditions, purchase shares of the Common Stock
in the open market or in privately negotiated transactions.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its 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 its reports to
stockholders, which represent the Company's 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, the Company has identified under
"Risk
12
<PAGE> 13
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (CONTINUED)
Factors" in Item 1 of the Company's Form 10-KSB for the year ended December 31,
1999 filed with the Securities and Exchange Commission and in this section
important factors that could cause actual results to differ materially from
those contained in any forward-looking statements made by or on behalf of the
Company.
The Company's plans and objectives are based, in part, on assumptions
involving judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that its assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this report will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, particularly in view of the Company's limited
operations, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. Readers 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. The Company does not undertake to update any
forward-looking statement that may be made from time to time on its behalf.
13
<PAGE> 14
CDSI HOLDINGS INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No securities of the Company which were not registered under the
Securities Act of 1933, as amended, have been issued or sold by the
Company during the six months ended June 30, 2000.
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.
14
<PAGE> 15
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: August 14, 2000 By: /s/ J. BRYANT KIRKLAND III
-------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
15
