<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, 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 NOVEMBER 13, 2000, 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, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999.................................... 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30,
2000 and 1999................................................. 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999................. 5
Notes to the Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................... 15
Item 6. Exhibits and Reports on Form 8-K.................................. 15
SIGNATURE.................................................................... 16
</TABLE>
<PAGE> 3
6
CDSI HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
---------------- -----------------
2000 1999
---------------- -----------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ............................ $ 234,838 $ 346,107
Accounts receivable .................................. -- 9,507
Inventory ............................................ 34,140 34,727
Prepaid expenses and other current assets ............ -- 32,092
----------- -----------
Total current assets ............................ 268,978 422,433
Property and equipment, net .......................... 14,283 52,013
Other assets ......................................... 18,505 18,505
Intangible assets, net ............................... -- 45,491
----------- -----------
Total assets .................................... $ 301,766 $ 538,442
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable ...................... $ 2,855 $ 2,496
Accounts payable and accrued expenses ................ 76,217 128,791
----------- -----------
Total current liabilities ....................... 79,072 131,287
----------- -----------
Note payable ............................................. 7,364 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 .................................. (8,025,814) (7,843,744)
----------- -----------
Total stockholders' equity ...................... 215,330 397,400
----------- -----------
Total liabilities and stockholders' equity ...... $ 301,766 $ 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 Nine Months Ended
----------------- ----------------- ------------------ -----------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues ............................. $ 78,919 $ 127,207 $ 255,949 $ 332,583
Cost and expenses:
Cost of revenues ................ 69,331 98,636 219,814 270,826
Research and development ........ -- 35,550 12,616 104,003
Sales and marketing ............. -- 141,592 22,580 384,402
Amortization of intangible assets -- 1,081 45,491 398,060
General and administrative ...... 22,238 74,977 144,083 877,229
----------- ----------- ----------- -----------
91,569 351,836 444,584 2,034,520
----------- ----------- ----------- -----------
Operating loss ....................... (12,650) (224,629) (188,635) (1,701,937)
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income ....... 1,818 6,965 7,010 40,515
Interest expense ................ (150) -- (445) --
Equity in loss of
ThinkDirectMarketing.com ...... -- -- -- (501,924)
----------- ----------- ----------- -----------
1,668 6,965 6,565 (461,409)
----------- ----------- ----------- -----------
Net loss ........................ $ (10,982) $ (217,664) $ (182,070) $(2,163,346)
=========== =========== =========== ===========
Net loss per share (basic
and diluted) .................... $ (0.00) $ (0.07) $ (0.06) $ (0.69)
=========== =========== =========== ===========
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>
Nine Months Ended
----------------------------------
September 30, September 30,
2000 1999
----------------- ----------------
<S> <C> <C>
Cash flows used in operating activities:
Net loss ............................................ $(182,070) $(2,163,346)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ...................................... 3,771 27,421
Amortization of intangible assets ................. 45,491 398,060
Equity in loss of ThinkDirectMarketing.com ........ -- 501,924
Provision for obsolescence of equipment ........... 20,000 --
Gain on sale of assets ............................ (2,141) --
Changes in assets and liabilities:
Accounts receivable ............................ 9,507 (13,743)
Purchase of machines held for lease ............ -- (11,193)
Inventory ...................................... 587 2,788
Prepaid expenses and other current assets ...... 32,092 51,166
Accounts payable and accrued expenses .......... (52,574) 8,108
--------- -----------
Net cash used in operating activities .................. (125,337) (1,198,815)
--------- -----------
Cash flows provided from (used in) investing activities:
Decrease in restricted assets ....................... -- 30,000
Issuance of loan to ThinkDirectMarketing.com ........ -- (100,000)
Acquisition of business ............................. -- (39,378)
Sale of property and equipment ...................... 17,000 --
Acquisition of property and equipment ............... (900) (47,761)
--------- -----------
Net cash flows provided from (used in)
investing activities ................................ 16,100 (157,139)
--------- -----------
Cash flows used in financing activities:
Payments on note payable ............................ (2,032) --
--------- -----------
Net cash flows used in financing activities ............ (2,032) --
--------- -----------
Net decrease in cash ................................... (111,269) (1,355,954)
Cash and cash equivalents at beginning of period ....... 346,107 1,888,813
--------- -----------
Cash and cash equivalents at end of period ............. $ 234,838 $ 532,859
========= ===========
</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. In October 2000, CDS sold the assets
of its cigarette vending route, the only current source of revenue for
the Company.
The Company intends to seek new Internet-related or 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.
(2) PRINCIPLES OF REPORTING
The financial statements of the Company as of September 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 September 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.
6
<PAGE> 7
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
(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.
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 would 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 did not 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.
On October 5, 2000, CDS completed the sale to Gutlove and Shirvint Inc.
("Gutlove") of the assets of its cigarette vending route, including
vending machines and a van. The purchase price for the vending route,
which is primarily located in New York state, was $34,140 in cash and the
assumption of a $10,219 note secured by the van. The cash portion of the
purchase price was based on the cigarette and coin inventory of the
vending route at the open of business on October 2, 2000, and was paid
$29,140 on October 5, 2000 with the remaining $5,000 to be paid by
December 1, 2000.
7
<PAGE> 8
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
(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.
From July 1999 to September 2000, ThinkDirectMarketing.com issued
approximately $4,000,000 of convertible notes and warrants to purchase
ThinkDirectMarketing.com preferred stock. In connection with such
issuances, Mr. Eaker and Acxiom have agreed to extend the maturity of
their working capital lines from June 30, 1999 to December 31, 2001 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.
In October 2000, ThinkDirectMarketing.com and VoyagerIT.com PLC
("VoyagerIT.com") entered into an agreement where VoyagerIT.com purchased
shares of convertible preferred stock for $1,000,000 and agreed to
purchase $4,000,000 of convertible notes the "Notes") on various dates
between November 10, 2000 and June 8, 2001. ThinkDirectMarketing.com's
management has informed the Company that VoyagerIT.com completed its
first scheduled purchase of $360,000 of the Notes on November 10, 2000.
ThinkDirectMarketing.com granted VoyagerIT.com an option to acquire the
remaining shares of ThinkDirectMarketing.com's stock for $20 million,
subject to downward adjustment if certain targets related to revenue,
subscriptions, number of clients, expenses and net income are not met on
or before October 31, 2001 (which may be extended under certain
circumstances to March 31, 2002).
In connection with such agreements, the Company agreed to extend the
maturity of its working capital line from August 31, 1999 until the
earlier of June 8, 2001 or the date on which VoyagerIT.com does not close
on any of its scheduled purchases of the Notes. The Company's interest in
ThinkDirectMarketing.com would decrease to approximately 5.9% 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. No assurance can be given that VoyagerIT.com will complete the
8
<PAGE> 9
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
purchase of the Notes or exercise its option to acquire
ThinkDirectmarketing.com or that ThinkDirectMarketing.com will achieve
the targets stated in the option agreement. As a result, 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 nine months ended September 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 nine month periods
ended September 30, 1999 for ThinkDirectMarketing.com follows:
<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>
(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 September 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.
9
<PAGE> 10
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 5.9% 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. In October 2000, CDS sold the assets of its cigarette vending
route, the only current source of revenue for CDS and the Company.
The Company intends to seek new Internet-related businesses or 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.
On October 5, 2000, CDS completed the sale to Gutlove of the assets of
its cigarette vending route, including vending machines and a van. The purchase
price for the vending route, which is primarily located in New York state, was
$34,140 in cash and the assumption of a $10,219 note secured by the van. The
cash portion of the purchase price was based on the cigarette and coin inventory
of the vending route at the open of business on October 2, 2000, and was paid
$29,140 on October 5, 2000 with the remaining $5,000 to be paid by December 1,
2000.
10
<PAGE> 11
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
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. See Note 4 to the
financial statements for additional information concerning the Company's
investment in ThinkDirectMarketing.com.
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 nine months ended September 30, 2000 and 1999, the
results of operations of CDS, the Company's primary operating unit, were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------------
2000 1999 2000 1999
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
CDS
Revenues .................. $ 78,919 $ 127,207 $ 255,949 $ 332,583
Cost of sales ............. 69,331 98,636 219,814 270,826
Research and development .. -- 35,550 12,616 104,003
Sales and marketing ....... -- 141,592 22,580 384,402
Amortization of intangibles -- 1,081 45,491 398,060
General and administrative 6,619 55,746 112,368 566,180
-------- --------- --------- -----------
Total expenses ....... 75,950 332,605 412,869 1,723,471
-------- --------- --------- -----------
Operating income (loss) ... $ 2,969 $(205,398) $(156,920) $(1,390,888)
======== ========= ========= ===========
CORPORATE AND OTHER
Revenues .................. $ -- $ -- $ -- $ --
General and administrative 15,619 19,231 31,715 311,049
-------- --------- --------- -----------
Total expenses ....... 15,619 19,231 31,715 311,049
-------- --------- --------- -----------
Operating loss ............ $(15,619) $ (19,231) $ (31,715) $ (311,049)
======== ========= ========= ===========
</TABLE>
CDS
REVENUES. CDS had revenues of $78,919 and $255,949 for the three and
nine months ended September 30, 2000. The revenues for the three-month period
resulted from sales of cigarettes. The revenues for the nine-month period
resulted from the following: $1,102 from machine leases, $8,162 from machine
11
<PAGE> 12
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
sales and $246,685 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. On October 5, 2000, CDS completed the sale to Gutlove
of the assets of the cigarette vending route, including vending machines and a
van.
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.
COST OF REVENUES. Cost of revenues of $69,331 and $219,814 for CDS for
the three and nine months ended September 30, 2000, respectively, consisted
primarily of costs of cigarettes of $69,331 and $209,729. Cost of revenues of
$98,636 and $270,826 for CDS for the three and nine months ended September 30,
1999, respectively, consisted primarily of costs of cigarettes of $73,211 and
$210,318. 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
$0 and $22,580 for the three and nine months ended September 30, 2000,
respectively, as compared to $141,592 and $384,402 for the three and nine months
ended September 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 $6,619 and $112,368 for the three and nine months ended
September 30, 2000, respectively, as compared to $55,746 and $566,180 for the
three and nine months ended September 30, 1999, respectively. The expenses for
the three and nine months ended September 30, 2000 consisted primarily of
payroll, consulting and office expenses.
The expenses for the nine-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 $15,619 and $31,715
for the three and nine months ended September 30, 2000, respectively, as
compared to $19,231 and $311,049 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 $1,818 and $7,010 for the three and nine
months ended September 30, 2000, compared to $6,965 and $40,515 for the three
and nine months ended September 30, 1999. The decrease is principally related to
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CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
lower balances of cash and cash equivalents in 2000. The Company recorded an
equity loss in ThinkDirectMarketing.com of $501,924 for the nine months ended
September 30, 1999. 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
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 nine months ended September 30, 2000
and 1999 was $125,337 and $1,198,815, respectively. The decrease is primarily
due to a decreased net loss of $1,981,276 offset by decreased non-cash charges
in 1999 related primarily to equity loss in ThinkDirectMarketing.com of $501,924
and lower amortization of intangible assets of $352,569.
Cash provided from investing activities was $16,100 for the nine months
ended September 30, 2000 versus cash used in investing activities of $157,139
for the nine months ended September 30, 1999, respectively. Cash provided from
investing activities for the 2000 period resulted primarily from the sale of
equipment at CDS' headquarters of $17,000. 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. On October 5, 2000, CDS completed the sale to Gutlove of
the assets of its cigarette vending route, including vending machines and a van.
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. Capital expenditures of $900 for the nine months ended September 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 September 30, 2000, the Company had cash and cash equivalents of
$234,838 (approximately $250,000 at November 10, 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 nine months ended September 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 its interest in
ThinkDirectMarketing.com. 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.
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CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
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 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.
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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 nine months ended September 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.
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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 13, 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)
16
