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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 MARCH 31, 2002
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 MAY 14, 2002, THERE WERE OUTSTANDING 3,120,000 SHARES OF THE
ISSUER'S COMMON STOCK, $.01 PAR VALUE.
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CDSI HOLDINGS INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31,
2002 and December 31, 2001.................................... 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 2002 and 2001................ 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2002 and 2001................ 5
Notes to Condensed Consolidated Quarterly 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.................................. 12
SIGNATURE.................................................................. 13
2
CDSI HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
---------------------------------
March 31, December 31,
---------------------------------
2002 2001
----------- -----------
ASSETS:
Current assets:
Cash and cash equivalents $ 256,294 $ 265,685
Total current assets 256,294 265,685
Other assets 18,505 18,505
----------- -----------
Total assets $ 274,799 $ 284,190
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 32,831 $ 33,831
----------- -----------
Total current liabilities 32,831 33,831
----------- -----------
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 (7,999,176) (7,990,784)
----------- -----------
Total stockholders' equity 241,968 250,360
----------- -----------
Total liabilities and stockholders' equity $ 274,799 $ 284,190
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
3
CDSI HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
----------------------------------
Three Months Ended March 31,
----------------------------------
2002 2001
----------------------------------
Revenues ....................................... $ -- $ --
Expenses:
General and administrative ................ 8,920 19,403
----------- -----------
8,920 19,403
----------- -----------
Operating loss ................................. (8,920) (19,403)
----------- -----------
Interest income ........................... 528 3,075
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Net loss ....................................... $ (8,392) $ (16,328)
=========== ===========
Net loss per share (basic and diluted) ......... $ (0.00) $ (0.01)
=========== ===========
Shares used in computing net loss per share .... 3,120,000 3,120,000
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
4
CDSI HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
-------------------------------
Three Months Ended March 31,
-------------------------------
2002 2001
-------------------------------
Cash flows from operating activities:
Net loss ............................................ $ (8,392) $ (16,328)
Decrease in accounts payable and accrued expenses ... (999) (26,226)
--------- ---------
Net cash used in operating activities .................. (9,391) (42,554)
--------- ---------
Net cash from investing activities ..................... -- --
--------- ---------
Net cash from financing activities ..................... -- --
--------- ---------
Net decrease in cash and cash equivalents .............. (9,391) (42,554)
Cash and cash equivalents at beginning of period ....... 265,685 253,187
--------- ---------
Cash and cash equivalents at end of period ............. $ 256,294 $ 210,633
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements
5
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.
At March 31, 2002, the Company had an accumulated deficit of
approximately $8.0 million. The Company has reported an operating loss
in each of its fiscal quarters since inception and it expects to
continue to incur operating losses in the immediate future. The Company
has reduced operating expenses and is seeking acquisition and
investment opportunities. No assurance can be given that the Company
will not continue to incur operating losses.
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 March 31, 2002 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 March 31, 2002 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, 2001 included in the Company's Form 10-KSB 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
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(3) THINKDIRECTMARKETING TRANSACTION
On November 5, 1998, the Company contributed the non-cash assets and
certain liabilities of the PC411 Service to ThinkDirectMarketing, Inc.
("TDMI") (formerly known as Digital Asset Management, Inc.). TDMI 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
TDMI in exchange for the contribution of the PC411 Service's net
assets. Acxiom Corporation ("Acxiom") purchased preferred stock
representing a 42.5% interest in TDMI for $1,250,000 and initially
designated a majority of the Board of Directors of TDMI. TDMI's
management, including Messrs. Eaker and Fleiss, held an initial 15%
interest in TDMI 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 TDMI 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 TDMI in excess of the carrying value of the Company's
net assets contributed to TDMI. The Company agreed, under certain
conditions, to fund up to $200,000 of an $800,000 working capital line
to be provided to ThinkDirectMarketing by Acxiom, the Company and Dean
Eaker. The Company funded $100,000 of the working capital line in the
second quarter of 1999. In July 1999, the Company agreed to extend the
maturity of its working capital line and was released from any further
obligation to fund additional amounts under the working capital line.
In October 2000, TDMI and Cater Barnard plc ("Cater Barnard", formerly
known as VoyagerIT.com) entered into an agreement whereby Cater Barnard
purchased for $5,000,000 shares of TDMI's convertible preferred stock
and convertible notes on various dates between November 10, 2000 and
June 8, 2001. On October 16, 2001, Cater Barnard agreed to use its best
efforts to fund an additional $1,250,000 to TDMI by January 31, 2002
and on the same date, the TDMI stockholders granted Cater Barnard an
option to purchase by January 31, 2002 all of TDMI's common stock not
held by Cater Barnard for an aggregate purchase price of 78,750 shares
of Convertible Preferred Stock of IMX Pharmaceuticals, Inc. ("IMXI").
IMXI is a majority-owned subsidiary of Cater Barnard to which Cater
Barnard had transferred its interest in TDMI. The preferred stock is
convertible into 1,575,000 shares of IMXI common stock.
On January 31, 2002, IMXI acquired all the shares of TDMI it did not
already own by exercising the option previously granted to Cater
Barnard. CDSI received 8,250 shares of IMXI Class B Convertible
Preferred Stock in exchange for its interest in TDMI. Each share of
IMXI Class B Preferred Stock is entitled to receive an annual dividend
of $4.00 on December 31 of each year. The dividend may be paid at the
option of IMXI in shares of its Common Stock, which trades on the NASD
OTC Electronic Bulletin Board under the symbol "IMXI". The shares of
IMXI Class B Preferred Stock to be received by the Company are
convertible into 165,000 shares of IMXI Common Stock and may be
converted on the earlier of (i) October 1, 2002 or (ii) the effective
date of a registration statement under the Securities Act of 1933 for
the Common Stock into which the Class B Preferred Stock may be
converted. Under an Investors' Rights Agreement dated January 31, 2002
between IMXI and the former TDMI stockholders, if IMXI receives after
7
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
July 31, 2002 a written request from at least 50% of the former TDMI
stockholders to register the IMXI Common Stock issuable on conversion
of the IMXI Class B Preferred Stock, it must use its best efforts to
file, within 90 days of the receipt of such request, a registration
statement covering the registration of such securities under the
Securities Act of 1933. Management estimates that CDSI's interest in
IMXI is approximately 1% on a fully-diluted basis.
The Company accounted for its non-controlling interest in TDMI using
the equity basis of accounting since November 5, 1998. In the second
quarter of 1999, the carrying value of the Company's investment in
TDMI, including the $100,000 note receivable, was reduced to zero as
the cumulative equity in TDMI's losses exceeded the Company's
investment in TDMI. Since the Company had no intention or commitment to
fund future TDMI losses, commencing in the second quarter of 1999, the
Company suspended recognizing its share of the additional losses of
TDMI. The Company recorded income of $100,000 in 2001 in connection
with the repayment of the $100,000 note receivable from TDMI.
(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 and warrants (both vested and non-vested) totaling
2,979,288 shares at March 31, 2002 and 2001, 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. On May
13, 2002, 2,322,500 of the stock options and warrants expired.
8
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company owns an approximate 1% interest on a fully diluted basis in
IMXI. 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.
THINKDIRECTMARKETING, INC.
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 TDMI, and received preferred stock of TDMI. See
Note 3 to the Condensed Consolidated Financial Statements for additional
information concerning the Company's former investment in TDMI.
The Company's interest in TDMI was accounted for using the equity
method of accounting. Commencing in the second quarter of 1999, the carrying
value of the Company's investment in TDMI was reduced to zero, and the Company
suspended recognizing its share of the additional losses of TDMI. In the second
quarter of 2001, TDMI repaid a $100,000 note receivable due to the Company. As a
result, the Company recorded $100,000 of income associated with the repayment
for the year ended December 31, 2001.
On January 31, 2002, IMXI acquired all the shares of TDMI it did not
already own by exercising an option previously granted by the remaining TDMI
stockholders. The Company received preferred stock of IMXI in exchange for its
interest in TDMI. The preferred stock is convertible into IMXI common stock
representing an approximate 1% interest in IMXI on a fully diluted basis.
RESULTS OF OPERATIONS
REVENUES
For the three months ended March 31, 2002 and 2001, the Company did not
generate revenues from operations.
EXPENSES
Expenses associated with corporate activities were $8,920 for the three
months ended March 31, 2002, as compared to $19,403 for the same period in the
prior year. The amounts were primarily due to the costs necessary to maintain a
public company.
9
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME (EXPENSE)
Interest income was $528 for the three months ended March 31, 2002,
compared to $3,075 for the three months ended March 31, 2001. The difference was
primarily due to lower interest rates in 2002.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company had an accumulated deficit of
approximately $8.0 million. The Company has reported an operating loss in each
of its fiscal quarters since inception and it expects to continue to incur
operating losses in the immediate future. The Company has reduced operating
expenses and is seeking acquisition and investment opportunities. No assurance
can be given that the Company will not continue to incur operating losses.
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, to acquire CDS and for general corporate purposes.
In connection with the IPO, the Company issued 2,322,500 Redeemable
Class A Warrants (the "Warrants"), including 1,000,000 of which were held by New
Valley. The Warrants, which entitled the holder to purchase one share of Common
Stock at an initial exercise price of $6.10, expired on May 13, 2002.
Cash used for operations for the three months ended March 31, 2002 and
2001 was $9,391 and $42,554, respectively. The decrease is primarily due to
payments of accounts payable and accrued liabilities for the three months ended
March 31, 2001.
The Company does not expect significant capital expenditures during the
year ended December 31, 2002.
At March 31, 2002, the Company had cash and cash equivalents of
$256,294. 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 three months ended March 31, 2002 and 2001.
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
10
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
include seeking additional investors and/or lenders and disposing of the
interest in IMXI. 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 Factors" in Item 1 of the Company's Form 10-KSB for the year ended
December 31, 2001 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.
11
CDSI HOLDINGS INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Date Items Financial Statements
---- ----- --------------------
February 14, 2002 5 None
12
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: May 14, 2002 By: /s/J. Bryant Kirkland III
--------------------------------
J. Bryant Kirkland III
Vice President, Treasurer
and Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
13