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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 June 30, 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 AUGUST 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.
QUARTERLY REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001..................................... 2
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 2002 and
2001...................................................... 3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001................... 4
Notes to the Condensed Quarterly Consolidated Financial
Statements................................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 12
SIGNATURE................................................................ 13
CDSI HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2002 2001
----------- -----------
ASSETS:
Current assets:
Cash and cash equivalents ............................ $ 237,939 $ 265,685
Total current assets ............................ 237,969 265,685
Other assets ......................................... 18,505 18,505
----------- -----------
Total assets .................................... $ 256,444 $ 284,190
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................ $ 26,381 $ 33,831
----------- -----------
Total current liabilities ....................... 26,381 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 .................................. (8,011,081) (7,990,784)
----------- -----------
Total stockholders' equity ...................... 230,063 250,360
----------- -----------
Total liabilities and stockholders' equity ...... $ 256,444 $ 284,190
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
2
CDSI HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues ........................................... $ -- $ -- $ -- $ --
Cost and expenses:
General and administrative .................... 12,408 16,278 21,328 35,681
----------- ----------- ----------- -----------
12,408 16,278 21,328 35,681
----------- ----------- ----------- -----------
Operating loss ..................................... (12,408) (16,278) (21,328) (35,681)
----------- ----------- ----------- -----------
Other income (expense):
Interest and other income ..................... 503 1,933 1,031 5,008
Payment of note receivable from
TDMI ........................................ -- 100,000 -- 100,000
----------- ----------- ----------- -----------
503 101,933 1,031 105,008
----------- ----------- ----------- -----------
Net (loss) income .................................. $ (11,905) $ 85,655 $ (20,297) $ 69,327
=========== =========== =========== ===========
Net (loss) income per share (basic and diluted) .... $ (0.00) $ 0.03 $ (0.01) $ 0.02
=========== =========== =========== ===========
Shares used in computing net (loss) income per share 3,120,000 3,120,000 3,120,000 3,120,000
=========== =========== =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
3
CDSI HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
-----------------------------
June 30, June 30,
2002 2001
--------- ---------
Cash flows from operating activities:
Net (loss) income ..................................... $ (20,297) $ 69,327
Adjustments to reconcile net (loss) income to net cash
Used in operating activities:
Payment of note receivable from TDMI ................ -- (100,000)
Changes in assets and liabilities:
Accounts payable and accrued expenses ............ (7,449) (34,801)
--------- ---------
Net cash used in operating activities .................... (27,746) (65,474)
--------- ---------
Cash flows used in investing activities:
Payment of note receivable from TDMI .................. -- 100,000
--------- ---------
Net cash flows used in investing activities .............. -- 100,000
--------- ---------
Net cash flows from financing activities ................. -- --
--------- ---------
Net (decrease) increase in cash .......................... (27,746) 34,526
Cash and cash equivalents at beginning of period ......... 265,685 253,187
--------- ---------
Cash and cash equivalents at end of period ............... $ 237,939 $ 287,713
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements
4
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 June 30, 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 June 30, 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 June 30, 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).
5
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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) 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 TDMI 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
6
CDSI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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 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 for the three and six months ended
June 30, 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 INCOME (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 656,798
and 2,979,288 shares at June 30, 2002 and 2001, respectively, were
excluded from the calculation of diluted per share results presented
because their effect was anti-dilutive. Accordingly, diluted net income
(loss) per common share is the same as basic net loss per common share.
On May 13, 2002, a total of 2,322,500 of the stock options and warrants
expired.
7
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.
8
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
RESULTS OF OPERATIONS
REVENUES
For the three and six months ended June 30, 2002 and 2001, the Company
did not generate revenues from operations.
EXPENSES
Expenses associated with corporate activities were $12,408 and $21,328
for the three and six months ended June 30, 2002, respectively, as compared to
$16,278 and $35,681 for the same periods in the prior year. The expenses were
primarily associated with costs necessary to maintain a public company. The
decrease in expenses is associated with lower audit expenses in 2002 and a
$1,688 refund of prepaid franchise taxes in 2002. The expenses have been reduced
by adjustments of previously established accruals of $1,250 and $2,500 for the
three and six months ended June 30, 2002, respectively, as compared to $5,000
and $10,000 for the same periods in the prior year. These adjustments related to
liabilities established when the Company conducted an on-line electronic
directory service. The Company evaluates accruals on a quarterly basis and
adjusts as appropriate.
OTHER INCOME (EXPENSE)
Interest and other income was $503 and $1,031 for the three and six
months ended June 30, 2002, compared to $1,993 and $5,008 for the three and six
months ended June 30, 2001. The difference was primarily due to lower interest
rates in 2002. The Company recorded $100,000 in income in the second quarter of
2001 relating to the repayment of a loan receivable from TDMI. The carrying
value of the loan had been reduced to zero in the second quarter of 1999 when
the Company suspended recognizing its share of the additional losses of TDMI.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 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
9
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
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 unexercised on May 13,
2002.
Cash used for operations for the six months ended June 31, 2002 and
2001 was $27,746 and $65,474, respectively. The decrease is primarily due to a
lower balance in accrued expenses at December 31, 2001 versus December 31, 2000,
which resulted in lower payments of accounts payable and accrued liabilities for
the six months ended June 30, 2002 as compared to the six months ended June 30,
2001. Included in the Company's accrued liabilities as of June 30, 2002 are
$1,250 of accruals related to the Company's former on-line electronic directory
service and $14,725 of liabilities established in the disposal of the Company's
former business of marketing and leasing an inventory control system for tobacco
products. The Company evaluates its accruals on a quarterly basis and makes
adjustments when appropriate.
The Company does not expect significant capital expenditures during the
year ended December 31, 2002.
At June 30, 2002, the Company had cash and cash equivalents of
$237,939. 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, 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 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
10
CDSI HOLDINGS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
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
99.1 Certification of Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
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: August 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