UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Original filed July 18, 2005)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal thirteen weeks ended May 28, 2005
Commission File Number: 033-25900
CENUCO, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2228820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 LENOX DRIVE, SUITE 202
LAWRENCEVILLE, NEW JERSEY 08648
(Address of principal executive offices)
(Zip Code)
(609) 219-0930
(Registrant's Telephone Number, Including Area Code)
(Former Address, If Changed Since Last Report.)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 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 ___ No _X_
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES ___ NO _X_
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
On May 28, 2005, the issuer had outstanding 13,750,556 shares of common stock,
$.001 par value per share.
CENUCO, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTERLY PERIOD ENDED MAY 28, 2005
INDEX
PAGE
PART I. Financial Information - Revised
Item 1 - Financial Statements .......................................... 3
Report of Independent Registered Public Accounting Firm ........... 3
Consolidated Balance Sheets (Unaudited)
As of May 28, 2005 and February 28, 2005 .......................... 4
Consolidated Statements of Operations (Unaudited)
For the Thirteen Weeks ended May 28, 2005 and May 29, 2004 ........ 5
Consolidated Statement of Stockholders'/Members' Equity (Deficit)
(Unaudited) For the Thirteen Weeks ended May 28, 2005 ............. 6
Consolidated Statements of Cash Flows (Unaudited)
For the Thirteen Weeks ended May 28, 2005 and May 29, 2004 ........ 7
Notes to Consolidated Financial Statements ........................ 8
Item 2 - Management's Discussion and Analysis And
Results of Operations ......................................... 27
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk ............................................. 41
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings ............................................. 42
Item 2 - Exhibits ...................................................... 42
Signatures ................................................................. 43
EXPLANATORY NOTE
This filing is a "revised" filing to the original filed July 18, 2005. On that
date the Company's independent registered public accounting firm, BDO Seidman,
LLP ("BDO"), newly appointed on July 8, 2005, did not have enough time to
complete procedures related to the review of Company's financial statements for
the 13 week period ended May 28, 2005 and May 29, 2004.
BDO has now completed the review of the Company's financial statements for the
13 week period ended May 28, 2005 and May 29, 2004 and their report related to
such review is included on page 3.
This revised filing reflect their audit and review of the above mentioned
periods.
2
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Cenuco, Inc.
Lawrenceville, New Jersey
We have reviewed the condensed consolidated balance sheet of Cenuco, Inc. and
subsidiaries as of May 28, 2005, and the related condensed consolidated
statements of operations and cash flows for the three-month periods ended May
28, 2005 and May 29, 2004, included in the accompanying Securities and Exchange
Commission Form 10-Q for the period ended May 28, 2005. These interim financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the combined balance sheet of the
predecessor companies, Hermes Acquisition Company I LLC and subsidiaries and
Hermes Real Estate I LLC as of February 28, 2005, and the related combined
statements of operations, members' loss, and cash flows for the year then ended
(not presented herein); and in our report dated August 12, 2005, we expressed an
unqualified opinion on those combined financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of February 28, 2005 is fairly stated in all material respects in relation to
the combined balance sheet from which it has been derived.
By: /s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
October 10, 2005
3
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
May 28, 2005 February 28, 2005
------------ -----------------
ASSETS
------
Current Assets:
Cash and cash equivalents .................. $ 5,351,348 $ 31,763
Trade receivables, net of allowance for
doubtful accounts of $633,699 at May 28,
2005 and $547,306 at February 28, 2005 .... 9,001,428 8,002,867
Notes receivable, current portion .......... 115,925 -
Inventories ................................ 9,048,334 8,725,952
Prepaid expenses and other ................. 1,372,511 564,617
------------ ------------
Total current assets ....................... 24,889,546 17,325,199
Property, plant and equipment - net ........ 5,902,966 6,017,533
Goodwill ................................... 36,126,655 -
Intangibles - net .......................... 2,473,025 -
Notes receivable, less current portion ..... 584,075 -
Other assets, net .......................... 610,645 692,817
------------ ------------
Total assets ............................... $ 70,586,912 $ 24,035,549
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable ........................... $ 11,570,999 $ 10,541,956
Accrued expenses ........................... 2,987,264 2,845,485
Current portion of long-tem debt ........... 11,073,187 8,929,540
------------ ------------
Total current liabilities .................. 25,631,450 22,316,981
Long-term debt, less current portion ....... 6,696,167 6,875,296
Long-term pension obligation ............... 658,600 673,328
Other liabilities .......................... 223,358 -
------------ ------------
Total liabilities .......................... 33,209,575 29,865,605
Stockholders' equity:
Preferred stock, par value $.001 per share;
Authorized 1,000,000 shares; issued
2,553.6746 shares at May 28, 2005;
no shares issued at February 28, 2005 ..... 3 -
Common stock, par value $.001 per share;
Authorized 25,000,000 shares; issued
13,750,556 shares at May 28, 2005;
no shares issued at February 28, 2005 ..... 13,751 -
Additional paid in capital ................. 37,775,729 -
Accumulated deficit ........................ (294,496) -
Members' contribution ...................... - 2,000
Accumulated members' loss .................. - (5,707,597)
Accumulated comprehensive loss ............. (117,650) (124,459)
------------ ------------
Total stockholders' equity (deficit) ....... 37,377,337 (5,830,056)
------------ ------------
Total liabilities and stockholders' equity . $ 70,586,912 $ 24,035,549
============ ============
See accompanying notes to consolidated financial statements
4
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED
May 28, 2005 May 29, 2004
------------ ------------
Net Sales ...................................... $ 17,351,062 $ 17,562,445
Costs of Sales ................................. 16,299,525 14,960,528
------------ ------------
Gross Profit ................................... 1,051,537 2,601,917
Operating Expenses:
Selling and Marketing ......................... 966,902 1,050,563
General and Administrative ..................... 1,735,883 1,487,399
------------ ------------
Total Operating Expenses ....................... 2,702,785 2,537,962
(Loss) income from operations .................. (1,651,248) 63,955
Other expense .................................. 79,881 74,367
Interest expense, net .......................... 397,361 312,231
------------ ------------
Total other expense/interest expense ........... 477,242 386,598
------------ ------------
Loss before Income Taxes ....................... (2,128,490) (322,643)
Income taxes ................................... - -
------------ ------------
Net loss ....................................... $ (2,128,490) $ (322,643)
============ ============
Basic and diluted net loss per share - common .. $ (0.02) $ -
Basic and diluted net loss per share - preferred $ (718) $ (126)
(see Note 10)
Shares used in computing net loss per share:
Basic and diluted - common ................... 13,750,556 -
Basic and diluted - preferred ................ 2,554 2554
(see Note 10)
See accompanying notes to consolidated financial statements.
5
Cenuco, Inc. and Subsidiaries
Consolidated Statements of Stockholders' / Members' Equity (Deficit)
For the thirteen weeks ended May 28, 2005
Series A
Preferred Additional Accumulated
Stock Common Stock Paid-In Stockholders'
Shares $ Shares $ Capital Deficit
------- -- ---------- ------- ----------- -------------
BALANCE AT
FEBRUARY 28, 2005 .... - $- - $ - $ - $ -
Other Comprehensive
Loss:
Foreign currency
translation .......... - - - - - -
Net loss to date of
recapitalization and
Merger ............... - - - - - -
Net loss subsequent
to Merger ............ - - - - - (294,496)
Total Comprehensive
Loss:
Conversion from
LLC to Corporation ... 2,553.7 3 - - (7,541,591) -
Reverse acquisition
of Cenuco, Inc. ...... - - 13,750,556 13,751 45,317,320 -
------- -- ---------- ------- ----------- ---------
BALANCE AT
MAY 28, 2005 ......... 2,553.7 $3 13,750,556 $13,751 $37,775,729 $(294,496)
======= == ========== ======= =========== =========
continued
See accompanying notes to consolidated financial statements.
6A
Cenuco, Inc. and Subsidiaries
Consolidated Statements of Stockholders' / Members' Equity (Deficit)
For the thirteen weeks ended May 28, 2005
continued
Total
Accumulated Stockholders'
Accumulated Other / Members'
Members' Members' Comprehensive Equity
Contributions Loss Loss (Deficit)
------------- ----------- ------------- -------------
BALANCE AT
FEBRUARY 28, 2005 .... $ 2,000 $(5,707,597) $(124,459) $ (5,830,056)
------------
Other Comprehensive
Loss:
Foreign currency
translation .......... - - 6,809 6,809
Net loss to date of
recapitalization and
Merger ............... - (1,833,994) - (1,833,994)
Net loss subsequent
to Merger ............ - - - (294,496)
------------
Total Comprehensive
Loss: ................ (2,121,681)
------------
Conversion from
LLC to Corporation ... - 7,541,591 - 3
Reverse acquisition
of Cenuco, Inc. ...... (2,000) - - 45,329,071
------- ----------- --------- ------------
BALANCE AT
MAY 28, 2005 ......... $ - $ - $(117,650) $ 37,377,337
======= =========== ========= ============
See accompanying notes to consolidated financial statements.
6B
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED
May 28, 2005 May 29, 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $(2,128,490) $ (322,643)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization ............................... 240,121 278,265
Provision for bad debts ..................................... 57,032 21,598
Amortization of deferred financing costs .................... 50,546 31,275
Changes in operating assets and liabilities:
Accounts receivable ....................................... (1,000,178) 395,231
Inventories ............................................... (300,743) (726,592)
Prepaid expenses and other ............................... (362,272) (117,797)
Other assets .............................................. 23,358 12,679
Accounts payable .......................................... 930,095 (482,348)
Accrued expenses .......................................... (35,573) (36,824)
Long-term pension obligations ............................. (14,728) (4,568)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ....................... (2,540,832) (951,724)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in cash from reverse acquisition of Cenuco ... 6,002,607 -
Proceeds from Note Receivable ............................. 29,123 -
Deferred acquisition costs ................................ (103,468) -
Purchase of property, plant & equipment ................... (14,172) (152,171)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ......... 5,914,090 (152,171)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit ....................... 2,147,253 1,284,408
Deferred financing costs .................................. (25,000) -
Repayments of long-term debt .............................. (169,213) (169,213)
Repayments of capital leases .............................. (13,522) (16,083)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................... 1,939,518 1,099,112
----------- -----------
Effect of exchange rates on cash ............................ 6,809 4,783
----------- -----------
NET INCREASE IN CASH ........................................ 5,319,585 -
Cash at beginning of period ................................. 31,763 1,828
----------- -----------
CASH AT END OF PERIOD ....................................... $ 5,351,348 $ 1,828
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest .................................... $ 233,261 $ 196,556
Reverse merger, excluding cash acquired (see Note 1):
Estimated fair value of tangible assets acquired $ 1,199,715 $ -
Goodwill and identifiable intangible assets acquired 38,599,680 -
Liabilities assumed (473,590) -
----------- -----------
Net assets obtained in reverse merger transaction $39,325,805 $ -
=========== ===========
See accompanying notes to consolidated financial statements.
7
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
NOTE 1 - DESCRIPTON OF BUSINESS AND REORGANIZATION
--------------------------------------------------
On May 20, 2005, Hermes Holding Company, Inc., a newly formed wholly owned
subsidiary of Cenuco, Inc., ("Cenuco", a public company traded on the American
Stock Exchange under the symbol, "ICU") merged (the "Merger") with Hermes
Acquisition Company I LLC (HACI), a limited liability company organized on April
25, 2003 in the State of Delaware.
The Merger was completed through the issuance of 2,553.7 shares of Cenuco's
Series A Junior Participating Preferred Stock (representing 65% of the
outstanding voting power of Cenuco capital stock) in exchange for all the
outstanding membership units of HACI. As a consequence of the Merger, HACI,
together with its wholly owned subsidiaries Lander Co., Inc., a Delaware
corporation ("Lander US"), Hermes Real Estate I LLC, a New York limited
liability company ("HREI"), and Lander Co. Canada Limited, an Ontario
corporation ("Lander Canada" and together with Lander US and HREI, "Lander")
became wholly owned subsidiaries of Cenuco.
For financial reporting purposes, the Merger was treated as a recapitalization
of HACI followed by the reverse acquisition of Cenuco by HACI for a purchase
price equivalent to the total market value of Cenuco stock outstanding prior to
the Merger, plus the fair value of the options that automatically vested on the
date of the Merger (approximately $45.3 million). Consistent with the accounting
and presentation for reverse acquisitions, the historical financial statements
of Cenuco prior to the date of the Merger reflect the financial position and
results of operations of HACI and HREI, with the results of operations of Cenuco
being included commencing on May 20, 2005. Effective with the completion of the
Merger Cenuco changed its fiscal year end to be the last day of February,
consistent with HACI's prior fiscal year.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, the Company has estimated the fair value of the assets
acquired and liabilities assumed in the reverse acquisition of Cenuco. The
estimated fair value of the assets acquired less liabilities assumed is
$45,328,692.
The allocation of Purchase Price is as follows:
Cash and cash equivalents .................................... $ 6,002,887
Other current assets ......................................... 496,526
------------
Total current assets ......................................... 6,499,413
Property, plant, and equipment ............................... 111,382
Goodwill ..................................................... 36,126,655
Intangibles .................................................. 2,473,025
Other Assets ................................................. 591,807
------------
Total assets acquired ......................... 45,802,282
------------
Total liabilities assumed ..................... (473,590)
------------
Estimated fair value of net assets acquired ... $ 45,328,692
============
8
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
Following the Merger, the Company's business consists of the Health and Beauty
Care ("HBC") Division and the Wireless Application Development ("WAD") Division.
The HBC Division is doing business as Lander Co., Inc. ("Lander"). Lander's
principal business activity is the manufacture and distribution of health,
beauty and oral-care products, primarily throughout the United States and
Canada. The WAD Division is doing business as Cenuco, Inc. and has primary focus
on wireless application development. WAD is engaged in the wireless application
technology business, primarily related to the transmission of secure and
non-secured video onto cellular platforms via proprietary technologies. This is
also known as remote video monitoring via cellular device. In this wireless
segment, WAD provides cellular carriers, Internet Service Providers, resellers,
and distributors a host of wireless video streaming products that can generate
an increase in subscriber adoption of wireless data services, as well as
broadband Internet services.
HACI was formed to acquire the business activities of Lander US and Lander
Canada. Effective May 31, 2003, HACI purchased certain assets and assumed
certain liabilities associated with the Lander US business operations and
acquired 100% of the outstanding stock of Lander Canada for an aggregate
purchase price of $11,091,456, including acquisition costs of $1,160,456. In
addition, HREI purchased the Lander US production plant located in Binghamton,
New York for a purchase price of $3,304,864, including acquisition costs of
$254,864, on October 15, 2003 (collectively the "Acquisitions"). Property, plant
and equipment was recorded at fair value reduced by the excess of fair value of
net assets acquired over the purchase price of $1,095,813. In accounting for
these acquisitions, the Company followed the provisions of SFAS No. 141. This
Statement requires the purchase method of accounting be used for all business
combinations and provide specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill. On March 1, 2005, HREI
became a wholly owned subsidiary of HACI. Prior thereto, HACI an HREI had the
same ownership.
The Company is subject to various risks, including, but not limited to, (i) the
ability to obtain adequate financing to fund operations, (ii) a limited
operating history, (iii) reliance on certain markets, and (iv) reliance on key
personnel.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
-----------------------------------------------------------------------------
The accompanying unaudited consolidated financial statements of Cenuco as of and
for the thirteen weeks ended May 28, 2005 and May 29, 2004 have been prepared in
accordance with generally accepted accounting principles. The financial
information furnished reflects all adjustments, consisting only of normal
recurring accruals, which are, in the opinion of management, necessary for a
fair presentation of the consolidated financial position, results of operations
and cash flows for the periods presented. The results of operations for the
respective interim periods are not necessarily indicative of results to be
expected for the full year.
A summary of the Cenuco's significant accounting policies follows:
Basis of Consolidation: The accompanying consolidated financial statements
include the accounts of Cenuco, Inc. and subsidiaries. All intercompany accounts
have been eliminated in consolidation.
9
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
Accounts Receivable: Trade accounts receivable are recorded at the invoiced
amount and do not bear interest. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. If the financial condition of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required, which would increase our
operating costs.
Inventories: Inventories are stated at the lower of cost or market, with cost
determined using the first-in, first-out (FIFO) method. Inventories consist of
raw materials used to manufacture the Company's health, beauty and oral care
products, as well as, finished goods that consist of the Company's product lines
sold to its customers. The Company writes down inventory for estimated excess
and discontinued products equal to the difference between cost and estimated
market value based upon assumptions about future demand and market conditions.
Excess and discontinued product inventory could arise due to numerous factors,
including but not limited to, the competitive nature of the market and product
demand by consumers. If market conditions are less favorable than those
anticipated by management, additional write-downs may be required, including
provisions to reduce inventory to net realizable value.
Property, Plant and Equipment: Property, plant and equipment are stated at cost
less accumulated depreciation and amortization. The costs of major additions and
improvements are capitalized and maintenance and repairs that do not improve or
extend the life of the respective assets are charged to operations as incurred.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets ranging from three to twenty-five years. Leasehold
improvements are amortized over the shorter of the term of the lease or their
estimated useful lives. If the Company determines that a change is required in
the useful life of an asset, future depreciation/amortization is adjusted
accordingly.
Impairment of Long-Lived Assets: Accounting for the impairment of long-lived
assets, including property, plant and equipment, requires that long-lived assets
and certain identifiable intangibles to be held and used or disposed of by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Under such
circumstances, the accounting principles require that such assets be reported at
the lower of their carrying amount or fair value less costs to sell.
Accordingly, when events or circumstances indicate that long-lived assets may be
impaired, the Company estimates the assets' future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future undiscounted cash flows is less than the carrying amount of the
asset, an impairment loss is recognized based on the excess of the carrying
amount over the fair value of the asset.
Goodwill and Other Intangibles: As a result of the Merger (see Note 1), the
Company recorded goodwill of $36,126,655, customer lists of $2,000,000 and a
brand name of $473,025. Goodwill represents the excess of cost over the fair
value of net assets acquired. SFAS 142, "Goodwill and Other Intangible Assets",
requires goodwill and other intangibles that have indefinite lives to not be
amortized but to be reviewed annually for impairment or more frequently if
impairment indicators arise. SFAS 142 also requires that intangible assets with
finite useful lives be amortized over their respective estimated useful lives
and reviewed for impairment.
10
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
Other Assets, Net: Other assets, net consist of deferred acquisition costs and
deferred financing costs that are being amortized using the straight-line method
over the expected term of the revolving line of credit. Amortization expense
related to deferred financing costs was $50,546 for the thirteen weeks ended May
28, 2005 and $31,275 for the thirteen weeks ended May 29, 2004.
Fair Value of Financial Instruments: The carrying amounts reported in the
accompanying balance sheets for accounts receivable, accounts payable and
accrued expenses approximate fair value due to the short-term nature of these
accounts. Accounts receivable are carried at original invoice amount less an
estimate made for doubtful receivables based on a review of all outstanding
amounts on a periodic basis. Management determines the allowance for doubtful
accounts by regularly evaluating individual customer receivables and considering
a customer's financial condition, credit history, and current economic
conditions.
Revenue Recognition: For the Health & Beauty Care (HBC) division, revenue from
product sales is recognized when the related goods are shipped, all significant
obligations of the Company have been satisfied, persuasive evidence of an
arrangement exists, the price to the buyer is fixed or determinable and
collection is reasonably assured or probable.
Amounts billed to customers related to shipping and handling are classified
revenues. The cost of shipping products to the customer is recognized at the
time the products are shipped and is included in cost of sales.
In connection with the development and sale of wireless solutions and web
services, which include the development of business-to-business and
business-to-consumer wireless applications, and state of the art wireless
technology and services, the Wireless Application Development (WAD) division
recognizes revenue as services are performed on a pro-rata basis over the
contract term or when products are delivered. WAD periodically enters into
agreements whereby the customer or distributor may purchase wireless products on
a consignment type basis. Revenues are recognized under these arrangements only
when the customer or distributor has resold the product and the Company has an
enforcement right to its sales price.
Revenues are earned from licensing arrangements pursuant to the terms of those
agreements.
Foreign Currency Translation: In accordance with SFAS No. 52, Foreign Currency
Translation, the financial statements are measured using local currency as the
functional currency. Assets and liabilities of Lander Canada have been
translated at U.S. dollars at the fiscal period-end exchange rates. Revenues and
expenses have been translated at average exchange rates for the related period.
Net translation gains and losses are reflected as a separate component of
stockholders' equity until there is a sale or liquidation of the underlying
foreign investment.
Foreign currency gains and losses resulting from transactions are included in
the consolidated statements of operations.
11
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
Estimates: The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates the estimates and
may adjust them based upon the latest information available. These estimates
generally include those related to product returns, bad debts, inventory
reserves for excess and discontinued products, income taxes and contingencies.
The Company bases the estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis of making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results could differ from these estimates.
Concentration of Credit Risk: Cenuco provides credit to its customers in the
normal course of business and does not require collateral. To reduce credit
risk, Cenuco performs ongoing credit evaluations of its customers.
Five trade customers comprised 49% of Cenuco's net sales, with two customers
comprising 25% and 10% respectively, for the thirteen weeks ended May 28, 2005
and represented 51% of receivables, with two customers comprising 25% and 10%
respectively, at May 28, 2005.
Five trade customers comprised 41% of Cenuco's net sales, with two customers
comprising 25% and 10% respectively, for the thirteen weeks ended May 29, 2004
and represented 51% of receivables, with one customer comprising 25%, at
May 29, 2004.
Income Taxes: Income taxes are accounted for under the asset-and-liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
In accessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. A full valuation allowance
at May 28, 2005 and February 28, 2005 has been estimated by management due to
the uncertainty that future income will be realized.
Earnings per share: Emerging Issues Task Force ("EITF") 03-6, "Participating
Securities and the Two-Class Method under FASB Statement No. 128" ("EITF 03-6")
provides guidance in determining when the two-class method, as defined in SFAS
No. 128, "Earnings per Share" must be utilized in calculating earnings per share
by a Company that has issued securities other than common stock that
contractually entitles the holder to participate in dividends and earnings of
the Company when, and if, the Company declares dividends on its common stock.
Under the two-class method earnings are allocated to common stock and
participating securities to the extent that each security may share in such
earnings and as if such earnings for the period had been distributed. Under the
12
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
two-class method losses are allocated to participating securities to the extent
that such security is obligated to fund the losses of the issuing entity or the
contractual principal or mandatory redemption amount of the participating
security is reduced as a result of losses incurred by the issuing entity. In
accordance with EITF 03-6, basic earnings per share for the Company's common
stock and Series A Junior Participating Preferred Stock ("Series A Preferred")
is calculated by dividing net loss allocated to common stock and Series A
Preferred by the weighted average number of shares of common stock and Series A
Preferred outstanding, respectively. Diluted earnings per share for the
Company's common stock is calculated similarly, except that the calculation
includes the effect, if dilutive, of the assumed exercise of stock options
issuable under the Company's stock-based employee compensation plan and the
assumption of the conversion of all of the Company's Series A Preferred stock to
common stock. Basic and diluted loss per share for the Company's common stock is
calculated by dividing the net loss for the period during which such shares were
outstanding by the weighted average number of shares outstanding. No losses are
allocated to the Series A Preferred for the period during which the Company's
common stock is outstanding since the holders of the Series A Preferred are not
obligated to share in the Company's losses as described above.
NOTE 3 - INVENTORIES
--------------------
Inventory consists of the following:
MAY 28, 2005 FEBRUARY 28, 2005
Raw materials ........................ $3,389,007 $2,900,803
Finished goods ....................... 5,659,327 5,821,149
---------- ----------
$9,048,334 $8,725,952
========== ==========
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
Property, plant and equipment consist of the following:
MAY 28, 2005 FEBRUARY 28, 2005
Land ................................. $ 660,000 $ 660,000
Computer equipment and software ...... 903,160 890,020
Furniture and fixtures ............... 252,652 252,717
Building ............................. 2,644,864 2,644,864
Machinery and equipment .............. 3,303,276 2,961,469
Dies and molds ....................... 75,626 75,731
Leasehold improvements ............... 117,058 118,571
Construction in progress ............. 8,975 77,959
----------- -----------
7,965,611 7,681,331
Less accumulated depreciation and
amortization ........................ (2,062,645) (1,663,798)
----------- -----------
$ 5,902,966 $ 6,017,533
=========== ===========
13
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
Depreciation and amortization expense related to property, plant and equipment
totaled $240,121 for the thirteen weeks ended May 28, 2005 and $278,265 for the
thirteen weeks ended May 29, 2004. As of May 28, 2005 and February 28, 2005,
machinery and equipment includes assets under capital leases totaling $153,559.
Accumulated amortization on the capital leases totaled $26,300 as of May 28,
2005 and $24,314 as of February 28, 2005. Amortization expense related to
capital leases is included in depreciation and amortization expense for the
thirteen weeks ended May 28, 2005 and May 29, 2004.
NOTE 5 - LONG-TERM DEBT
-----------------------
Long-term debt consists of the following:
MAY 28, 2005 FEBRUARY 28, 2005
Revolving line of credit loans ....... $10,346,187 $ 8,198,935
Machinery and equipment loans ........ 978,000 1,039,125
Real estate term loans ............... 1,873,530 1,981,618
Subordinated notes ................... 4,500,000 4,500,000
Capital leases ....................... 71,637 85,158
----------- -----------
17,769,354 15,804,836
Less current portion ................. 11,073,187 8,929,540
----------- -----------
$ 6,696,167 $ 6,875,296
=========== ===========
In connection with the Acquisitions, HACI/HREI obtained long-term financing
commitments (Financing Arrangement) from a financial institution comprised of
the following (collectively the Loans):
o Revolving line of credit facility of $11,000,000 with a three-year term
expiring in June 2006. Annual renewals of the facility are available in
one-year increments after the initial term. Available borrowings are
determined by a borrowing base calculation using eligible receivables and
inventories of Lander US and Lander Canada, which are the collateral for
this facility. As of May 28, 2005, unused availability under the borrowing
base calculation amounted to $764,564. As of February 28, 2005 the unused
availability amounted to $567,995. Interest on outstanding balance is
payable monthly. For purposes of classifying the outstanding debt in the
May 28, 2005 and February 28, 2005 balance sheets, the Company has
reflected the $10,346,187 and $8,198,935, respectively, of borrowings
under the revolving line of credit facility as a current liability, since
it is subject to collection lock-box arrangements and contains a
subjective acceleration clause.
o Machinery and equipment term loans with initial principal amounts
aggregating $1,467,000 have six-year amortization terms expiring in June
2009. Such loans are subject to termination upon the expiration of the
revolving line of credit and are collateralized by the machinery and
equipment of Lander US and Lander Canada. Principal payments aggregating
$20,375 plus interest are payable monthly.
14
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
o Real estate term loan with initial principal amount of $2,450,000 has a
six-year amortization term expiring in December 2009. Such loan is subject
to termination upon the expiration of the revolving line of credit and is
collateralized by the Lander US production plant located in Binghamton,
New York. Principal payments aggregating $36,029 plus interest are payable
monthly.
The interest rates on the Loans bear an annual interest rate of a national
bank's prime rate plus 1.25%. HACI/HREI has the option of converting all or a
portion of the Loans outstanding to an annual interest rate of the one-, two- or
three-month LIBOR rate plus 3.75%. As of May 28, 2005, the national bank prime
rate was 6.00% and the one-, two- and three-month LIBOR rates were 3.11%, 3.23%,
and 3.33%, respectively. The interest rate on the Loans was 7.25% at May 28,
2005. As of February 28, 2005, the national bank prime rate was 5.50% and the
one-, two- and three-month LIBOR rates were 2.72%, 2.80%, and 2.92%,
respectively. The interest rate on the Loans was 6.75% at February 28, 2005. To
date the Company has not exercised the option of converting the prime rate to
LIBOR.
The Loans contain financial and non-financial covenants including a limitation
of $1,250,000 on capital expenditures during any fiscal year and maintaining on
a monthly basis a fixed charges coverage ratio of no less than 1.0 to 1.0. The
fixed charge ratio is calculated by dividing earnings before interest,
depreciation and amortization less any unfunded capital expenditures and
improvements by fixed charges. Fixed charges include interest expense, capital
lease obligations, principal payments on indebtedness and payments for income
tax obligations.
HACI/HREI was not in compliance with the fixed charges coverage ratio and the
limitation on capital expenditures for fiscal 2004 and fiscal 2005 and through
May 28, 2005. In June 2004, December 2004 and July 2005, the Financing Agreement
was amended and the events of noncompliance were waived by the financial
institution. As part of the third amendment, which was dated July 15, 2005, the
fixed charge coverage ratio covenant requirement is only triggered when
availability under the revolving line of credit is less than $2,000,000.
As part of the HACI/HREI Acquisition of the Lander US business, HACI also has
long term financing from the seller in the form of a $4,500,000 subordinated
note ("Seller Note") with a three year term expiring in June 2006. The Seller
Note is subordinate to the Financing Agreement. Interest is payable quarterly at
an annual interest rate of 10%. Annual principal payments of $1,166,667 are
required under this Seller Note; however a provision permits the Company to
defer principal payments if certain financial targets, pursuant to the Financing
Arrangement are not achieved by Lander. As a result of the Company not achieving
these financial targets in fiscal 2004 and 2005, principal payment due in June
2004 and June 2005 have been deferred until June 2006. Additionally, there is a
provision in the Seller Note that permits the deferral of interest payments in
the event of non-compliance with certain covenants contained in the Financings
Arrangement. Accordingly, HACI has not paid any interest accrued on the Seller
Note from July 1, 2004 to date. Accrued interest on the Seller Note totaled
$360,464 and $297,964 as of May 28, 2005 and February 28, 2005, respectively.
15
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
On March 16, 2005, HACI and the seller entered into Settlement and Release
Agreement whereby HACI has the option to pay $2,000,000, plus interest at 10%,
to satisfy the $4,500,000 principal amount of the Seller Note. In addition, HACI
would be required to pay interest accrued on the $4,500,000 Seller Note from
July 1, 2004 through March 16, 2005 and interest on the $2,000,000 from March
17, 2005 through the date of payment. Such option is available to HACI up to
November 30, 2005. In exchange for this option, HACI has agreed to release the
seller from certain claims against and indemnifications of the seller under the
agreement for the purchase of Lander US and Lander Canada.
The aggregate maturities of long-term debt are as follows:
MAY 28, 2005 FEBRUARY 28, 2005
2006 $ 11,073,187 $ 8,929,540
2007 6,696,167 6,875,296
------------ ------------
$ 17,769,354 $ 15,804,836
------------ ------------
NOTE 6 - PENSION AND 401(k) PLANS
---------------------------------
Pension Plans:
--------------
The Company has two non-contributory defined benefit pension plans (the "Plans")
that cover substantially all employees in the United States ("US") and Canada.
It is the Company's policy to fund, at a minimum, pension contributions as
required by the Employee Retirement Income Security Act of 1974 ("ERISA") each
year.
At February 28, 2005, the US Plan assets consisted of fixed return contracts.
During the past year the US plan was frozen and no longer available to new
employees for participation. The Canadian Plan assets consisted primarily of
stocks, bonds and US Treasury Bills. The pension liabilities and their related
costs are computed in accordance with the laws of the US and Canada and the
appropriate actuarial practices.
Net periodic pension costs of the defined benefit pension plans covering the
year ended February 28, 2005 were as follows:
US Canada Total
-- ------ -----
Service costs on benefits earned during the year $ 80,544 $ 183,379 $ 263,923
Interest cost on projected benefit obligation .. 99,262 156,446 255,708
Expected return on plan assets ................. (99,100) (147,411) (246,511)
Amortization of unrecognized net loss .......... 34,792 - 34,792
----------- ----------- -----------
Net periodic pension cost ...................... $ 115,498 $ 192,414 $ 307,912
=========== =========== ===========
16
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
During fiscal 2005, the Company contributed $131,087 to the US Plan and $205,732
to the Canadian Plan. Benefit payments made amounted to $113,511 for the US Plan
and $272,623 for the Canadian Plan in fiscal 2005. The present value of benefit
obligations and funded status of the Plans as computed by the actuaries as of
February 28, 2005 were as follows:
US Canada Total
-- ------ -----
Projected benefit obligation ................... $(1,847,272) $(2,305,779) $(4,153,051)
Plan assets at fair value ...................... 1,589,586 2,105,121 3,694,707
----------- ----------- -----------
Funded status ......................... (257,686) (200,658) (458,344)
Unrecognized net (gain) or loss ................ 664,109 (171,638) 492,471
----------- ----------- -----------
Net pension asset/(liability) ......... $ 406,423 $ (372,296) $ 34,127
=========== =========== ===========
As of February 28, 2005, the accumulated benefit obligation was $1,847,272 for
the US Plan and $2,305,779 for the Canadian Plan.
Amounts recognized in the combined balance sheet as of February 28, 2005 consist
of:
US Canada Total
-- ------ -----
Current portion of accrued benefit liability,
included in accrued expenses ................... $ (120,000) $ (187,543) $ (307,543)
Long term portion of accrued benefit liability,
included in other long term liabilities ........ $ (137,686) $ (535,642) $ (673,328)
----------- ----------- -----------
Net amount recognized .......................... $ (257,686) $ (723,185) $ 980,871
=========== =========== ===========
Weighted-average assumptions used in developing the projected benefit obligation
and net cost as of and for the year ended February 28, 2005 were as follows:
US Canada
-- ------
Discount rate .................................. 5.75% 5.25%
Rate of increase in compensation ............... 0% 3.00%
Rate of return on plan assets .................. 6.50% 7.00%
The Company's expected long-term rate of return on assets is 6.50 % for the US
Plan and 7.00 % for the Canadian Plan. The expected long- term rate of return is
based on the portfolio as a whole and not on the sum of the returns on
individual asset categories. The return is based exclusively on historical
returns, without adjustments.
17
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
Plan(s) Assets
--------------
The weighted-average asset allocation of the US and Canadian pension benefits at
February 28, 2005 were as follows:
US Canada
-- ------
Equity Securities .............................. 0% 60%
Debt securities ................................ 100% 40%
---- ----
Total .......................................... 100% 100%
==== ====
The Company's investment policies and strategies for the pension benefits plans
utilize target allocations for the individual asset categories. The Company's
investment goals are to maximize returns subject to specific risk management
policies.
Cash Flows
----------
For the US Plan the benefits expected to be paid in each year ending February 28
2006-2010 are $33,695, $39,240, $44,444, $60,504, and $75,368, respectively. The
aggregate benefits expected to be paid in the five years from 2011-2015 are
$509,778.
For the Canadian Plan the benefits expected to be paid in each year ending
February 28, 2006-2010 are $375,740, $112,224, $69,400, $156,343 and $209,866,
respectively. The aggregate benefits to be paid in the five years from 2011-2015
are $1,756,822.
The expected benefits are based on the same assumptions used to measure the
Company's benefit obligation at February 28 and include estimated future
employee service.
401(K) Plan:
------------
The Company also has a defined contribution plan under Section 401(k) of the
Internal Revenue Code for all United States employees. Employees can elect to
contribute up to certain maximum percentages of their weekly gross pay. The
Company matches are discretionary. The Company had no discretionary matches for
the fiscal year ended February 28, 2005.
18
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
NOTE 7 - INCOME TAXES
---------------------
The significant components of the Company's net deferred tax assets as of
February 28, 2005 are as follows:
US Dollars
-----------------------------------------
Deferred tax assets (liabilities): US Canada Total
----------- --------- -----------
Accounts receivable .............. $ 170,000 $ - $ 170,000
Inventory ........................ 183,000 - $ 183,000
Fixed asset depreciation and
amortization .................... (269,000) 57,000 (212,000)
Accrued expenses and other ....... 152,000 196,000 348,000
Net operating loss carry forward . 1,933,000 231,000 2,164,000
----------- --------- -----------
Total deferred tax assets ....... $ 2,169,000 $ 484,000 $ 2,653,000
Valuation allowance .............. $(2,169,000) $(484,000) $(2,653,000)
----------- --------- -----------
Net deferred tax assets ......... $ - $ - $ -
=========== ========= ===========
Lander US has a net operating loss carry forward as of February 28, 2005 of
approximately $5,524,000 ($4,928,000 for U.S. income tax purposes) which will
begin to expire in 2024. The Lander Canada net operating loss carry forward of
approximately U.S. $700,000 will begin to expire in 2011.
The net loss of $2.1 million for the thirteen weeks ended May 28, 2005 will
increase the valuation allowance by approximately $0.8 million.
The table below summarizes the differences between the Company's effective tax
rate and the statutory federal rate as follows:
A reconciliation summary of the differences between the statutory federal rate
and the Company's effective tax rate for fiscal 2005 as follows:
US
--
Statutory tax expense (benefit) ....... -34.00%
Abatements, credits and surtax ........ 0.00%
State and Foreign income taxes ........ -5.00%
Valuation allowance ................... 39.00%
Effective tax rate .................... 0.0%
19
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
NOTE 8 - COMMITMENTS AND CONTINGENCIES
--------------------------------------
The Company has various noncancelable operating leases for manufacturing and
office facilities. Future minimum lease payments under noncancelable operating
leases (with initial or remaining lease terms in excess of one year) and future
minimum capital lease payments for each period are as follows:
MAY 28, MAY 28, FEBRUARY FEBRUARY
2005 2005 28, 2005 28, 2005
CAPITAL OPERATING CAPITAL OPERATING
LEASES LEASES LEASES LEASES
2006 ................ $ 55,210 $ 767,072 $ 59,944 $ 762,790
2007 ................ 19,822 389,428 31,820 342,136
2008 ................ 0 264,334 0 282,940
2009 ................ 0 206,717 0 207,105
2010 ................ 0 204,000 0 204,428
2011 ................ 0 51,000 0 102,000
-------- ----------- -------- -----------
Total minimum
lease payments ...... $ 75,032 $ 1,882,551 $ 91,764 $ 1,901,399
=========== ===========
Less amounts
representing Interest
(at rates ranging
from 5.25% to 8.31%) (3,395) (6,606)
-------- --------
Present value of net
minimum Capital lease
payments ............ $ 71,637 $ 85,158
======== ========
The Company is subject to certain claims and litigation in the normal course of
business. Management believes, after consulting with legal counsel, that the
ultimate liability resulting from these matters will not materially affect the
combined results of operations or financial position of the Company.
NOTE 9 - STOCK OPTIONS AND WARRANTS
-----------------------------------
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
20
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
The exercise prices of all options granted by the Company equal the market price
at the dates of grant. From the date of the Merger to May 28, 2005 no options
were issued. Had compensation cost for the stock option plan been determined
based on the fair value of the options at the grant dates consistent with the
method of SFAS 123, "Accounting for Stock Based Compensation", the Company's net
loss and loss per share would have been changed.
With respect to vesting, as a result of the Merger on May 20, 2005, all unvested
options automatically vested.
A summary of the status of the Company's outstanding stock options as of May 28,
2005 and changes since February 28, 2005 is as follows:
Weighted
Average
Exercise
Shares Price
-------- --------
Outstanding at February 28, 2005 ........ 0 $ 0.00
Cenuco options outstanding at date of
acquisition ............................ 556,668 1.52
Granted .............................. 0 0.00
Exercised ............................ (0) (0.00)
Forfeited ............................ (0) (0.00)
-------- -------
Outstanding at May 28, 2005 ............. 556,668 $ 1.52
======== =======
Options exercisable at end of period .... 556,668 $ 1.52
======== =======
Weighted-average fair value of options
granted during the period ......... $ 0.00
The following information applies to options outstanding at May 28, 2005:
Options Outstanding Options Exercisable
-------------------------- ---------------------
Weighted -
Range Average Weighted - Weighted -
of Remaining Average Average
Contractual Exercise Exercise
Prices Shares Life (Years) Price Shares Price
-------- ------- ------------ ---------- ------- ----------
$0.42 73,332 7.09 $ 0.42 73,332 $0.42
$0.55 40,000 5.59 $ 0.55 40,000 $0.55
$1.15 218,335 8.69 $ 1.15 25,000 $1.15
$1.55 35,001 7.69 $ 1.55 23,333 $1.55
$2.00 130,000 8.69 $ 2.00 113,333 $2.00
$3.71 40,000 8.84 $ 3.71 40,000 $3.71
$4.00 20,000 9.09 $ 4.00 20,000 $4.00
------- -------
556,668 556,668
======= =======
21
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
Common stock warrants
---------------------
A summary of the status of the Company's outstanding stock warrants granted for
services as of May 28, 2005 and changes since February 28, 2005 is as follows:
Weighted
Average
Exercise
Shares Price
--------- --------
Outstanding at February 28, 2005 ........ 0 $ 0.00
Cenuco warrants outstanding at date
of acquisition ......................... 2,230,044 3.96
Granted ................................. - -
Exercised ............................... - -
Forfeited ............................... - -
--------- --------
Outstanding at May 28, 2005 ........... 2,230,044 $ 3.96
========= ========
Warrants exercisable at May 28,2005 ..... 2,230,044 $ 3.96
========= ========
The following information applies to all warrants outstanding at May 28, 2005:
Warrants Outstanding Warrants Exercisable
------------------------- ---------------------
Weighted -
Range Average Weighted - Weighted -
of Remaining Average Average
Contractual Exercise Exercise
Prices Shares Life (Years) Price Shares Price
-------- --------- ------------ ---------- --------- ----------
$1.00 401,500 3.49 $ 1.00 401,500 1.00
$4.00 105,784 4.09 $ 4.00 105,784 4.00
$4.50 1,372,760 3.97 $ 4.50 1,372,760 4.50
$5.00 to
$6.50 350,000 4.09 $ 5.21 350,000 5.21
---------
2,230,044
=========
NOTE 10 - CAPITAL STRUCTURE & NET LOSS PER COMMON SHARE
-------------------------------------------------------
Capital Structure:
------------------
At May 28, 2005, the outstanding share capital of the Company is comprised of:
(i) 13,750,556 shares of common stock ("Common Stock"), and (ii) 2,553.7 shares
of Series A Junior Participating Preferred Stock (the "Preferred Stock").
22
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
The Preferred Stock was issued in connection with the completion of the Merger
as described in Note 1 to the consolidated financial statements. The holders of
the Preferred Stock are entitled to receive when, as and if declared by the
Board of Directors, quarterly cumulative dividends commencing on March 31, 2006
in an amount per share equal to $0.001. In addition to the dividends payable to
the holders of Preferred Stock, the Company shall declare a dividend or
distribution on the Preferred Stock equal to the amount declared on the Common
Stock. Holders of the Preferred Stock (using the number of common shares into
which each share of Preferred Stock is convertible) and the holders of Common
Stock vote together as one class on all matters submitted to a vote of
stockholders of the Company provided however that the holders of the Preferred
Stock are not entitled to any voting rights on any matter relating to the
Merger. Upon liquidation, dissolution or winding up of the Company, the holders
of the Preferred Stock are entitled to liquidation preferences over all other
classes of capital stock. The holders of Preferred Stock shall receive an amount
equal to $1,000 per share of the Preferred Stock, plus an amount equal to
accrued and unpaid dividends and distributions prior to any distribution of
holders of any other class of capital stock. If the assets available for
distribution are sufficient to permit a full payment of the above amounts then,
after such amounts have been fully distributed, holders of the Preferred Stock
shall share equally with holder of the Common Stock on a per share basis (using
the number of common shares into which each share of Preferred Stock is
convertible). Each share of Preferred Stock carries the voting rights on a basis
such that the rights of the Preferred Stock as a whole correspond to 65 percent
of the aggregate rights of the Preferred Stock and Common Stock outstanding as
of the completion of the Merger. Upon the approval of the holders of the Common
Stock and an increase in the Company's authorized share capital, each share of
Preferred Stock will automatically convert into shares of Common Stock on such a
basis that, following conversion, the holders of the Preferred Stock will hold
the same proportional rights to general distributions and voting rights that
they held immediately prior to such conversion. The Preferred Stock is not
redeemable.
Net loss per share:
-------------------
For purposes of computing loss per share, the Company's net loss is allocated
between the two classes of stock, common stock and Series A Preferred. The
allocation between each class is based upon the two-class method. The following
table shows how the net loss was allocated using the two-class method:
For the thirteen weeks ended
May 28, 2005 May 29, 2004
------------ ------------
Allocation of net loss
Basic and Diluted:
- Common Stock $ $(294,496) $ -
- Series A Preferred (1,833,994) (322,643)
----------- ---------
Net loss $(2,128,490) $(322,643)
=========== =========
23
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
The following table illustrates the weighted average number of Common Stock and
Series A Preferred shares outstanding during the period utilized in the
calculation of loss per share:
Weighted average number of Common
Stock shares - basic and diluted 13,750,556 -
Weighted average number of Series A
Preferred shares - basic and diluted 2,554 2,554
Basic and diluted net loss per share
- common $ (0.02) $ -
Basic and diluted net loss per share
- Series A Preferred $ (718) $ (126)
NOTE 11 - SEGMENT INFORMATION AS OF AND FOR THE THIRTEEN WEEKS ENDED
MAY 28, 2005
--------------------------------------------------------------------
DIVISION HBC WAD TOTAL
--- --- -----
Revenues $17,347,747 $ 3,314 $17,351,062
Operating loss (1,588,019) (63,229) (1,651,248)
Net loss (2,065,861) (62,629) (2,128,490)
Assets $25,314,080 $45,272,832 $70,586,912
GEOGRAPHIC
LONG-LIVED
REVENUES ASSETS
-------- ------
United States $11,480,889 $5,326,785
Canada 3,729,740 576,181
Other foreign countries 2,140,433 -
----------- ----------
Total $17,351,062 $5,902,966
=========== ==========
NOTE 12 - TRANSACTIONS WITH RELATED PARTIES
-------------------------------------------
The Hermes Group LLP (THGLLP), a certified public accounting firm, provided
various professional services and facilities usage to the Company. THGLLP also
paid expenses on behalf of the Company. THGLLP invoiced the Company a total of
$133,029 for professional fees, facility usage and reimbursable expenses for the
thirteen weeks ended May 28, 2005 and $145,013 for the thirteen weeks ended May
29, 2004. At May 28, 2005, and February 28, 2005, the Company owed THGLLP $0 and
$28,341, respectively, which is reflected in accrued expenses. A Managing Member
of HACI (pre-Merger), is a founding Partner and is currently a non-active
partner in THGLLP. THGLLP ceased providing facilities to the Company in June
2005.
24
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
Zephyr Ventures LLC (ZVLLC) provided consulting services to the Company. A
member of the Board of Directors of Cenuco (effective May 20, 2005) is a
Managing Member of ZVLLC. For the thirteen weeks ended May 28, 2005 and May 29,
2004, ZVLLC invoiced the Company $19,078 and $10,946, respectively. Effective
May 20, 2005, the date of the Merger, ZVLLC ceased providing consulting services
to the Company. The balance due ZVLLC at May 28, 2005 and February 28, 2005
totaled $2,559 and $0, respectively.
Another member of the Board of Directors of Cenuco, Inc. (effective May 20,
2005) provided consulting services to the Company totaling $5,000 for the
thirteen weeks ended May 28, 2005. Effective May 20, 2005, the date of the
Merger, this member of the Board of Directors ceased providing consulting
services to the Company. These consulting services were paid in full by the
Company as of May 28, 2005.
The Company's management believes the charges for the above related party
services and facilities are consistent with those that would be paid to
independent third parties.
NOTE 13 - SUPPLEMENTAL PRO FORMA INFORMATION
--------------------------------------------
The following discloses the results of operations (excluding discontinued
operations) for the current interim period (and corresponding period in the
preceding year) as though the Merger had been completed as of March 1, the
beginning of the period. The combined results consist of the thirteen weeks
ended May 28, 2005 and May 29, 2004 for the HBC division and the three months
ended June 30, 2005 and 2004 for WAD division.
13 weeks ended 13 weeks ended
May 28/June 30 May 29/June 30
2005 2004
---- ----
Net sales ............................ $17,419,029 $17,600,763
Net loss ............................. $(3,006,645) $(3,084,505)
Amortization of intangibles included
in net loss ......................... 107,588 107,588
Loss per common share- basic and
diluted ............................. $ (.22) $ (.22)
Weighted average shares .............. 13,750,556 13,750,556
Transaction fees related to Merger of $375,000 are included in net loss for the
13 weeks ended May 28/June 30, 2005.
25
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Thirteen Weeks Ended May 28, 2005 and May 29, 2004 (Unaudited)
NOTE 14 - SUBSEQUENT EVENTS
---------------------------
o On October 10, 2005 the Company entered into agreements with Prencen, LLC,
Highgate House Funds and Cornell Capital Partners for equity and
convertible debt financing to be used in connection with the acquisition
of a series of leading brands from a leading Consumer Products company
(the "Asset Acquisition"), the refinancing of existing debt, and general
working capital purposes. This financing facility (the "New Financing")
includes three elements: (i) proceeds of $25 million in connection with
the sale of shares of a new series of participating preferred stock at a
price of $3.80 per share, convertible into an aggregate of 6,578,947
shares of common stock, subject to certain restrictions on conversion,
along with the issuance of warrants exercisable for a period of 5 years to
acquire an aggregate of 1,973,684 shares of common stock at an exercise
price of $4.37 per share, (ii) proceeds of $40 million in connection with
the issuance of a 24 month secured debenture, convertible into common
stock at any time at a conversion price at $4.56 per share, bearing
interest at 12% per annum, along with warrants ("Debt Warrants")
exercisable for a period of 5 years to acquire 1,052,631 shares of common
stock at an exercise price of $4.56 per share, and (iii) a standby equity
subscription facility, providing for the sale of up to $100 million in
common stock of Cenuco at 98% of the then current market price (as
defined). The exercise price of the Debt Warrants noted above is subject
to a discount to $0.95 per share in the event certain conditions of
default are triggered under the secured debenture financing agreement.
Funding under the New Financing will not be available until the completion
of various corporate and securities law requirements, including a vote of
the Company's shareholders to approve the issuance of the common stock and
convertible securities in connection with the New Financing. Prior to that
date, the Company anticipates entering into a bridge loan facility for $65
million with the same parties involved in the New Financing for purposes
of closing on the Asset Acquisition and paying existing indebtedness as
described below. The Company anticipates finalizing the bridge loan
facility prior to October 21, 2005.
Of the $65 million in proceeds received from the bridge loan facility, $45
million will be used in connection with the $60 million Asset Acquisition,
with the balance of the consideration in the form of a three-year, $15
million promissory note payable to the seller. The Asset Acquisition is
expected to be signed at the time of finalizing the bridge facility. The
remaining $20 million of proceeds from the bridge facility will be used to
(i) repay approximately $10 million of existing funded debt and related
interest, (ii) pay $5 million for costs associated with the New Financing
and the Asset Acquisition and (iii) provide $5 million for working capital
purposes.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
report. Management's discussion and analysis contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
Section 21E of the Securities Exchange Act of 1934 that involve risks and
uncertainties, including but not limited to: quarterly fluctuations in results;
customer demand for the Company's products; the development of new technology;
domestic and international economic conditions; the achievement of lower costs
and expenses; the continued availability of financing in the amounts and on the
terms required to support the Company's future business; credit concerns in this
industry; and other risks detailed from time to time in the Company's other
Securities and Exchange Commission filings. Actual results may differ materially
from management's expectations. The risks included here are not exhaustive.
Other sections of this report may include additional factors that could
adversely affect the Company's business and financial performance. Moreover, the
Company operates in a very competitive and rapidly changing environment. New
risk factors emerge from time to time and it is not possible for management to
predict all such risk factors, nor can it assess the impact of all such risk
factors on the Company's business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.
Investors should also be aware that while the Company does communicate with
securities analysts from time to time, it is against its policy to disclose to
them any material non-public information or other confidential information.
Accordingly, investors should not assume that the Company agrees with any
statement or report issued by any analyst irrespective of the content of the
statement or report. Furthermore, the Company has a policy against issuing or
confirming financial forecast or projections issued by others. Therefore, to the
extent that reports issued by securities analysts contain any projections,
forecasts or opinions, such reports are not the responsibility of the Company.
EXECUTIVE SUMMARY
On May 20, 2005, Hermes Holding Company, Inc., a newly formed wholly owned
subsidiary of Cenuco, Inc., ("Cenuco" or the "Company") merged (the "Merger")
with Hermes Acquisition Company I LLC, a limited liability company organized on
April 25, 2003 under the laws of the State of Delaware ("HACI"). As a
consequence of the Merger, HACI, together with its wholly owned subsidiaries
Lander Co., Inc., a Delaware corporation ("Lander US"), Hermes Real Estate I
LLC, a New York limited liability company ("HREI"), and Lander Co. Canada
Limited, an Ontario corporation ("Lander Canada") and together with Lander US
and HREI, became wholly owned subsidiaries of Cenuco. HREI became a wholly owned
subsidiary of HACI on March 1, 2005. Prior thereto, HACI and HREI had the same
ownership.
For accounting purposes, HACI is considered the acquirer in a reverse
transaction and consequently the Merger will be treated as a recapitalization of
HACI. Thus, HACI's financial statements are the historical financial statements
of the post-Merger entity.
Effective May 20, 2005, Cenuco, Inc has two business divisions, (1) Health &
Beauty Care (HBC) and (2) Wireless Application Development (WAD).
27
HEALTH AND BEAUTY CARE (HBC)
Lander Co., Inc. (Lander) and its Canadian affiliate, Lander Canada Limited,
(Lander Canada) manufacture, market and distribute a leading value brand
(Lander(R)) of health and beauty care products. Additionally, through its
Canadian facility, Lander produces a series of private label brands for a
limited number of large Canadian retail chains.
Lander maintains a category leadership position in the marketplace for value
priced health and beauty care products, which are sold in dollar stores such as
Dollar Tree and value-focused retailers such as Wal-Mart and Kmart. Management
presently intends that Lander will serve as a platform for Company growth
through acquisitions of additional health and beauty care (HBC) brands.
The Company presently distributes on an annual basis more than 100 million units
of health and beauty products (primarily liquid fill bath care, baby care, and
skin care products) in North America, and another 20 million internationally.
Facilities
----------
The Company is headquartered in Lawrenceville, NJ, and operates two
manufacturing and distribution facilities in Binghamton, NY (owned) and Toronto
(leased). Additionally, Lander utilizes two outside public warehouse facilities
in Buena Park, CA and in Charlotte, NC. The primary core competencies of both
manufacturing facilities are Health and Beauty Care liquid fill and talc powder
filling. The two distribution facilities act as remote warehouses and FOB pick
up locations. Both manufacturing facilities have warehouse and distribution
capability supplemented by the two remote warehouses.
Lander's Binghamton facility is a 168,000 sq. ft. facility with 200 employees
working 24 hours a day in three shifts, five days a week. The hourly employees
are represented by the United Chemical Workers and to the Company's knowledge,
labor relations are good. This plant primarily produces Health and Beauty Care
products sold in the United States and internationally under the Lander(R) Brand
name. Products produced in this plant include, bubble bath, lotions and creams,
baby products such as shampoo, baby oil, and baby powder. Additionally, this
facility is approved by the FDA (United States Food and Drug Administration) and
the New York Board of Pharmacy to manufacture Over-the-Counter (OTC) drugs such
as topical analgesics and vapor rubs.
Lander's Toronto facility is a 98,000 sq. ft. facility with 80 employees working
24 hours a day in three shifts, five days a week. The hourly employees are
represented by the Teamsters, and to the Company's knowledge, labor relations
are good. This plant produces private label Health and Beauty Care products for
Canada's largest retail and drug stores as well as Lander(R) Brand products sold
in the U.S. Lander Canada also produces and sells products domestically under
the Lander(R) Brand. Products produced in this plant include lotions and creams,
baby products such as shampoo, baby oil, baby powder, mouthwash, and nail polish
remover. Additionally, this facility is approved by Health Canada and FDA to
manufacture OTC drugs, including antiseptic mouthwash, topical analgesics and
vapor rubs.
28
Both manufacturing facilities have production capacity capable of absorbing
additional production requirements for projected volume increases from
additional organic sales as well as additional sales from acquisitions with
modest capital investment. In addition selected products will continue to be
manufactured by third party manufacturers. The Company anticipates operating
efficiencies in the areas of freight and distribution, raw material procurement,
as well as labor and overhead absorption, which make sales derived from
acquisition extremely accretive.
Lander Customers
----------------
Approximately 70% of the Company's business is conducted in the United States,
20% in Canada and 10% outside North America. The Company's largest customer is
Wal-Mart that comprises 31% of the business conducted in the U.S. and
approximately 33% of the Canadian private label business. Other major customers
include Dollar Tree, Family Dollar, Kmart, Bargain Wholesale and Shopper's Drug
Mart. Internationally, the Lander products are distributed to 90 countries,
including Latin America, Mexico, The Philippines, Africa and the Middle East.
Industry
--------
Currently, Lander competes primarily within the "extreme value" sector of
several major Health and Beauty Care categories: bath additives, skin care, baby
care, oral care and hair care products. The brands that management currently
targets for acquisition fall within these same Health and Beauty Care
categories, however they are priced as premium brands, which can be integrated
within our existing infrastructure. According to Information Resources Inc.
(IRI), these product categories in aggregate account for over three billion
dollars of retail sales annually in the U.S. alone.
Lander's strategy is to build upon its premium brands both organically and
through brand acquisition. One of Lander's existing premium brands, Lander
Essentials 3 IN 1, has now been purchased by over 14,000 stores.
The new launches of Lander's Essentials Body Lotions and Lander's Essentials
Foam Bath have over 2,500 stores to date committed to purchasing the Body Lotion
and over 4,000 stores committed to purchasing the Foam Bath.
Recently, the Lander Company was proud to be one of a select group of
manufacturers to win the Vendor of the Quarter Award in the Health and Beauty
Aids Category at Wal-Mart, most notably for our success at maintaining an
exceptionally high in stock rate - one of this major retailer's key metrics of
operational success.
WIRELESS APPLICATION DEVELOPMENT (WAD)
The primary focus of the Wireless Application Development is on wireless
application development. This segment is engaged in a wireless application
technology business, primarily related to the transmission of secure and
non-secured video onto cellular platforms via proprietary technologies. This is
also known as remote video monitoring via cellular device. In this wireless
segment, the Company provides cellular carriers, Internet Service Providers,
resellers, and distributors a host of wireless video streaming products that can
generate an increase in subscriber adoption of wireless data services, as well
as broadband Internet services.
29
Our wireless remote video monitoring technologies via cellular device (cellular
phone, Pocket PC mobile Edition, Smart Phone, remote wireline computer, and
remote cellular connected computer) have been productized to service a variety
of market segments. We have been awarded the General Services Administration
contract number GS-03F-0025N by the United States government, allowing the
Company to sell its products, technologies, and services to every branch of the
United States government, including all military agencies and the Department of
Homeland Security.
The technology group's partnerships and affiliates include: Intel Corporation,
Microsoft Corporation, Qualcomm, Tyco, and other leading technology
organizations. These relationships allow Cenuco technology access to new
emerging technologies provided by these firms, as well as co-operative marketing
programs, providing us access to significant resources in the wireless remote
monitoring market.
We have the ability to license our proprietary core technology to third party
organizations. We initiated discussions with a number of leading technology
companies regarding: direct embedding of the Company's technologies onto
existing security systems, DVR's, DSL or cable modems, routers, IP cameras, and
other appliance oriented hardware. The Company has successfully licensed its
technology to a specialty camera manufacturer with extensive plans to continue
in this model.
Our wireless solutions segment, with its core proprietary (patent-pending)
technology, currently addresses one primary market; security and surveillance.
The wireless segment offers software solutions but can also bundle hardware that
will allow real-time mobile access to mission-critical data and live video from
most Internet enabled personal digital assistants (PDA) or cellular phones, from
anywhere on the globe. We have already initiated efforts into delivering content
over cellular devices using our existing software.
Our wireless video monitoring solutions allows users to view real-time streaming
video of security cameras at their home or place of business from anywhere they
receive a cellular connection, regardless of the cellular carrier or user's
location. Our systems are also delivered with a password protected PC desktop
client, which allows for single click access to any remote camera, manage user
accounts, and review archival video.
During Fiscal 2004, we completed a full patent filing with the United States
Patent and Trademark office. The Utility Patent Application entitled "Wireless
Security Audio-Video Monitoring", was accepted by the USPTO during June 2004, at
which time Cenuco was issued Patent pending number 10/846426. This latest
intellectual property filing also reflects the culmination of Cenuco's
provisional patent application(s) for viewing live streaming wireless video
transmission on cellular devices, filed during Fiscal 2003. Recently we have
added additional filings regarding our new peer to peer/cell to cell live video
technology.
Cenuco has completed the development of its new commercial security product line
that will be sold through Security companies existing sales channels and though
7 nationwide distributors.
30
Several national and international cellular carriers are currently testing our
mobile viewing software. Western Wireless Corporation has recently deployed
MobileMonitorsm product kits and software through select carrier retail
locations across nineteen western states and is now available to Western
Wireless subscribers. Cenuco's Product kits and software have already been
delivered to the carrier retail locations through Cenuco's distribution partner,
CellStar.
Cenuco continues to develop software for Tyco's Research and Development group.
Revenue and expense for the Wireless Application Development division reflects
activity from the date of the Merger (May 20, 2005) to May 28, 2005. Prior to
the Merger the Wireless Application Development division's financial information
and other pertinent information in contained in the 10-Q for the first quarter
ended March 31, 2005 filed by Cenuco in May 2005.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses, and the related disclosure of
contingent assets and liabilities. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Senior management has discussed the
development, selection and disclosure of these estimates with the Audit
Committee of the Board of Directors. Actual results may differ from these
estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are uncertain at the
time the estimate is made, and if different estimates that reasonably could have
been used, or changes in the accounting estimates that are reasonably likely to
occur periodically, could materially impact the consolidated financial
statements.
Cenuco's accounting policies are discussed in note 2 to the consolidated
financial statements in this report. Management believes the following critical
accounting policies reflect its more significant estimates and assumptions used
in the preparation of the consolidated financial statements.
Revenue Recognition
Revenue from health and beauty care product sales is recognized when the related
goods are shipped, all significant obligations of the Company have been
satisfied, persuasive evidence of an arrangement exists, the price to the buyer
is fixed or determinable and collection is reasonably assured and/or probable.
Amounts billed to customers related to shipping and handling are classified as
revenues. The cost of shipping products to the customer is recognized at the
time the products are shipped and is included in cost of sales.
31
In connection with the development and sale of wireless solutions and web
services, which include the development of business-to-business and
business-to-consumer wireless applications, and state of the art wireless
technology and services, the Wireless Application Development segment recognizes
revenue as services are performed on a pro-rata basis over the contract term or
when products are delivered. The Company periodically enters into agreements
whereby the customer or distributor may purchase wireless products on a
consignment type basis. Revenues are recognized under these arrangements only
when the customer or distributor has resold the product and the Company has an
enforcement right to its sales price.
Revenues are earned from licensing arrangements pursuant to the terms of those
agreements.
Trade Receivables
Cenuco makes judgments about the credit worthiness of both current and
prospective customers based on ongoing credit evaluations performed by the
Company's credit department. These evaluations include, but are not limited to,
reviewing customers' prior payment history, analyzing credit applications,
monitoring the aging of receivables from current customers and reviewing
financial statements, if applicable. The allowance for doubtful accounts is
developed based on several factors including overall customer credit quality,
historical write-off experience and a specific account analysis that project the
ultimate collectibility of the accounts. As such, these factors may change over
time causing the reserve level to adjust accordingly. When it is determined that
a customer is unlikely to pay, a charge is recorded to bad debt expense in the
consolidated statements of operations and the allowance for doubtful accounts is
increased. When it becomes certain the customer cannot pay, the receivable is
written off by removing the trade receivable amount and reducing the allowance
for doubtful accounts accordingly.
At May 28, 2005, there were approximately $9.6 million in gross outstanding
trade receivables and $0.6 million recorded in the allowance for doubtful
accounts to cover potential future customer non-payments. At February 28, 2005,
there were approximately $8.5 million in gross outstanding trade receivables and
$0.5 million recorded in the allowance for doubtful accounts. If economic
conditions deteriorate significantly or if one of the Company's large customers
were to declare bankruptcy, a larger allowance for doubtful accounts might be
necessary.
Inventory Valuation
Inventories are stated at the lower of cost (first-in, first-out) or market and
include appropriate elements of material, labor and overhead. The Company's
policy is to evaluate all inventory quantities for amounts on-hand that are
potentially in excess of estimated usage requirements, and to write down any
excess quantities to estimated net realizable value. Inherent in the estimates
of net realizable values are management's estimates related to the Company's
future manufacturing schedules and customer demand. Management has managed these
risks in the past and believes that it can manage them in the future, however,
operating margins may suffer if they are unable to effectively manage these
risks. At May 28, 2005, the Company had recorded gross inventory of
approximately $9.0 million. This compared to $8.7 million at February 28, 2005.
32
Long-lived Assets
The Company reviews long-lived assets, exclusive of goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which the
carrying amount of the assets exceeds their fair value. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to
sell.
The Company's most significant long-lived assets, exclusive of goodwill, subject
to these periodic assessments of recoverability are property, plant and
equipment, which have a net book value of $5.9 million at May 28, 2005. Because
the recoverability of property, plant and equipment is based on estimates of
future undiscounted cash flows, these estimates may vary due to a number of
factors, some of which may be outside of management's control. To the extent
that the Company is unable to achieve management's forecasts of future income,
it may become necessary to record impairment losses for any excess of the net
book value of property, plant and equipment over its fair value.
Goodwill: As a result of the Merger and reverse acquisition of assets (Note 1),
the Company recorded Goodwill of $36,126,655. In accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 142, the Company
will perform the impairment test as required.
Other intangibles: As a result of the Merger and reverse acquisition of assets
(Note 1), the Company acquired customers list for $2,000,000 and a brand name
for $473,025. These intangible assets will be amortized over the expected useful
life.
Income Taxes
Income taxes are accounted for under the asset and liability method. The Company
uses an estimate of its annual effective rate at each interim period based on
the facts and circumstances known at the time, while the actual effective rate
is calculated at year-end. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
In accessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. A full valuation allowance
at May 28, 2005 and February 28, 2005 has been estimated by management due to
the uncertainty that future income will be realized.
33
THIRTEEN WEEKS ENDED MAY 28, 2005 COMPARED TO THE THIRTEEN WEEKS ENDED MAY 29,
2004
REVENUES
Net revenues for the thirteen weeks ended May 28, 2005 (the "Quarter") declined
1.2% when compared to net revenues for the thirteen weeks ended May 29, 2004.
The decrease resulted from the erosion of the dollar customer business, offset
partially by increased sales to select major retailers due to introductions of
new product offerings.
The Quarter's volume was favorably impacted by a substantial increase in sales
on the Company's expanding line of premium value products. Lander's United
States sales on premium products, which are typically sold at Food, Drug and
Mass Merchant outlets increased by $1,632,000 to $4,145,000, or 64.9%. This
gain, however, was offset by a decline of 30.4% in the Company's non-focus
extreme value business in the United States. Lander's extreme value products are
typically sold at a one-dollar retail price point in dollar stores and other low
price venues.
The Company successfully launched during the Quarter a strategically focused,
new premium product line, Lander Essentials 3 IN 1 - an upscale collection of
indulgent surfactant based products that can be used as a Bubble Bath, a Body
Wash and as a Shampoo. The Lander Essentials 3 IN 1 line has been very well
received by retailers throughout the U.S., with over 14,000 stores having
committed to purchasing the product line by the Quarter's close. Shipments of
over $600,000 occurred during the period, and initial sell through rates have
been very favorable.
As planned, additional premium value Lander Essentials product lines have
subsequently been developed, specifically in the Lotions and the Foam Bath
categories. These new products are scheduled to begin shipping in Q2, and are
expected to increase Lander's volume in the premium value category. The
Company's focus is to maintain its expansion for its premium, higher margin
products from its non-focused extreme value products. Management believes it is
executing on this strategy.
GROSS PROFIT
Consolidated gross profit declined to $1.0 million for the thirteen weeks ended
May 28, 2005 from $2.6 million for the thirteen weeks ended May 29, 2004. The
company has implemented cost reduction programs and continues to streamline its
manufacturing processes however, inflationary increases resulting from rising
oil prices impacted commodity pricing resulting in higher raw material prices
for surfactants, mineral oil, plastic bottles and caps in addition to customer
freight by $1.1 million versus prior year. An agreement with a third party
manufacturer that was terminated this period produced a $.1 million reduction to
gross profit as inventories were liquidated at below market pricing.
Furthermore, the recording of manufacturing variances between the balance sheet
and income statement were changed this period to more accurately depict the
results of operations. This action resulted in a reduction of $.4 million in
gross profit due to the accelerated write-off of inventory variances.
34
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses amounted to $2.7 million for the thirteen
weeks ended May 28, 2005 compared to $2.5 million for the thirteen weeks ended
May 29, 2004 and as a percent of revenue increased to 15.6% in 2005 from 14.5%
in 2004. This increase included a one time promotional allowance to a major
retailer of $.1 million, which is projected to positively impact revenue during
the balance of the year. Furthermore, in connection with the current and future
higher margin product introduction as well as brand acquisitions, a consulting
firm was engaged to assist in the solidification of our strategic plan that
represented an additional one-time charge to income in the amount of $.1
million. In addition, as a result of the merger on May 20, 2005, the Selling and
administrative expense of $2.7 million includes $.1 million of selling and
administrative expenses related to WAD division.
OTHER FINANCIAL ITEMS
Net loss per share
For purposes of computing loss per share, the Company's net loss is allocated
between the two classes of stock, common stock and Series A Preferred. The
allocation between each class is based upon the two-class method. The following
table shows how the net loss was allocated using the two-class method:
For the thirteen weeks ended
May 28, 2005 May 29, 2004
------------ ------------
Allocation of net loss
Basic and Diluted:
- Common Stock $ $(294,496) $ -
- Series A Preferred (1,833,994) (322,643)
----------- ---------
Net loss $(2,128,490) $(322,643)
=========== =========
The following table illustrates the weighted average number of Common Stock and
Series A Preferred shares outstanding during the period utilized in the
calculation of loss per share:
Weighted average number of Common
Stock shares - basic and diluted 13,750,556 -
Weighted average number of Series A
Preferred shares - basic and diluted 2,554 2,554
Basic and diluted net loss per share
- common $ (0.02) $ -
Basic and diluted net loss per share
- Series A Preferred $ (718) $ (126)
35
LIQUIDITY AND CAPITAL RESOURCES
Revolver
The Company is a party to a revolving credit facility with a financial
institution expiring June 30, 2006. The credit facility provides for borrowings
for working capital, fixed assets and other operating requirements. See Note 5
to Financial Statements for details.
On May 28, 2005, the amount of availability was $764,564. On February 28, 2005,
the amount of availability was $567,995.
Cash Flow
Net cash used in operating activities was $2.5 million. Items contributing to
negative operating cash flow consisted of net income loss of $2.1 million less
non-cash expenses of $.3 million, increases in accounts receivable of $1.0
million, increases in inventory of $.3 million and increases in other assets of
$.3 million, offset by an increase in accounts payable and other liabilities of
$.9 million.
Net cash provided by (used in) investing activities amounted to $5,914,090 for
the thirteen weeks ended May 28, 2005 compared to $(152,171) for the thirteen
weeks ended May 29, 2004. The major activity consists of proceeds of $6,002,607
from the cash received a a result of the reverse acquisition of Cenuco. Other
minor activity includes proceeds from a note receivable less amounts expended
for capital expenditures for the purchase of equipment to meet current and
expected sales demand. Cash was also expended for deferred expenditures related
to acquisitions.
Net cash provided by financing activities for the thirteen weeks ended May 28,
2005 amounted to $1,939,518 compared to cash provided by financing activities
for the thirteen weeks ended May 29, 2004 of $1,099,112. The majority of the
proceeds are borrowings under the Company's line of credit, less debt payments.
AT MAY 28, 2005, CENUCO HAD CASH AND CASH EQUIVALENTS OF $5.4 MILLION.
MANAGEMENT BELIEVES THIS COMBINED WITH AVAILABILITY FROM THE REVOLVER OF $.6
MILLION AND OTHER FINANCING SOURCES AVAILABLE TO THE COMPANY PROVIDES CENUCO
WITH SUFFICIENT OPERATING LIQUIDITY.
Transactions with Related and Certain Other Parties
The Hermes Group LLP (THGLLP), a certified public accounting firm, provided
various professional services and facilities usage to the Company. THGLLP also
paid expenses on behalf of the Company. THGLLP invoiced the Company a total of
$133,029 for professional fees, facility usage and reimbursable expenses for the
thirteen weeks ended May 28, 2005 and $145,013 for the thirteen weeks ended May
29, 2004. At May 28, 2005, and February 28, 2005, the Company owed THGLLP $0 and
$28,341, respectively, which is reflected in accrued expenses. A Managing Member
of HACI (pre-Merger), is a founding Partner and is currently a non-active
partner in THGLLP. THGLLP ceased providing facilities to the Company in June
2005.
Zephyr Ventures LLC (ZVLLC) provided consulting services to the Company. A
member of the Board of Directors of Cenuco (effective May 20, 2005) is a
Managing Member of ZVLLC. For the thirteen weeks ended May 28, 2005 and May 29,
2004, ZVLLC invoiced the Company $19,078 and $10,946, respectively. Effective
May 20, 2005, the date of the Merger, ZVLLC ceased providing consulting services
to the Company. The balance due ZVLLC at May 28, 2005 and February 28, 2005
totaled $2,559 and $0, respectively.
36
Another member of the Board of Directors of Cenuco, Inc. (effective May 20,
2005) provided consulting services to the Company totaling $5,000 for the
thirteen weeks ended May 28, 2005. Effective May 20, 2005, the date of the
Merger, this member of the Board of Directors ceased providing consulting
services to the Company. These consulting services were paid in full by the
Company as of May 28, 2005.
The Company's management believes the charges for the above related party
services and facilities are consistent with those that would be paid to
independent third parties.
RISK FACTORS
Cenuco's top ten customers accounted for approximately 49% of consolidated net
revenues for the thirteen weeks ended May 28, 2005. Trade accounts receivable
from these customers represented approximately 49% of net consolidated
receivables at May 28, 2005. Wal-Mart Stores Inc. accounted for approximately
25.1% of consolidated net revenues for the thirteen weeks ended May 28, 2005.
Dollar Tree Stores Inc accounted for approximately 10.1% of net consolidated
revenues for the thirteen weeks ended May 28, 2005. A significant decrease or
interruption in business from the Company's major customers could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company could also be adversely affected by such
factors as changes in foreign currency rates and weak economic and political
conditions in each of the countries in which the Company sells its products.
Financial instruments that potentially expose the Company to a concentration of
credit risk principally consist of accounts receivable. The Company sells
product to a large number of customers in many different geographic regions. To
minimize credit concentration risk, the Company performs ongoing credit
evaluations of its customers' financial condition or uses letters of credit.
Increased competition also results in continued exposure to the Company. If the
Company loses market share or encounters more competition relating to its
products, the Company may be unable to lower its cost structure quickly enough
to offset the lost revenue. To counter these risks, the Company has initiated a
cost reduction program, continues to streamline its manufacturing processes and
is formulating a strategy to respond to the marketplace. However, no assurances
can be given that this strategy will succeed.
The Company depends on third parties to manufacture a portion of the products
that we sell. If we are unable to maintain these manufacturing relationships or
enter into additional or different arrangements, we may fail to meet customer
demand and our sales and profitability may suffer as a result.
Disruption in our main manufacturing/distribution center may prevent us from
meeting customer demand and our sales and profitability may suffer as a result.
Efforts to acquire other companies, brands or product lines may divert our
managerial resources away from our business operations, and if we complete an
acquisition, we may incur or assume additional liabilities or experience
integration problems.
We depend on our key personnel and the loss of the service by any of our
executive officers or other key employees could harm our business and results of
operations.
37
The Company's manufacturing processes utilizes multiple sources for the purchase
of raw materials. Although the Company has not to-date experienced a significant
difficulty in obtaining these raw materials, no assurance can be given that
shortages will not arise in the future. The loss of any one or more of such
sources could have a short-term adverse effect on the Company until alternative
sources are determined. The Company believes that there are adequate alternative
sources of such raw materials and components of sufficient quantity and quality.
Hedging and Trading Activities
The Company does not engage in any hedging activities, including
currency-hedging activities, in connection with its foreign operations and
sales. To date, except for Canada, all of the Company's international sales have
been denominated in U.S. dollars.
Long-term debt (Note 5 of Financials Statements)
Long-term debt consists of the following:
MAY 28, 2005 FEBRUARY 28, 2005
Revolving line of credit loans ....... $10,346,187 $ 8,198,935
Machinery and equipment loans ........ 978,000 1,039,125
Real estate term loans ............... 1,873,530 1,981,618
Subordinated notes ................... 4,500,000 4,500,000
Capital leases ....................... 71,637 85,158
----------- -----------
17,769,354 15,804,836
Less current portion ................. 11,073,187 8,929,540
----------- -----------
Total ................................ $ 6,696,167 $ 6,875,296
=========== ===========
In connection with the Acquisitions, HACI/HREI obtained long-term financing
commitments (Financing Arrangement) from a financial institution comprised of
the following (collectively the Loans):
o Revolving line of credit facility of $11,000,000 with a three-year term
expiring in June 2006. Annual renewals of the facility are available in
one-year increments after the initial term. Available borrowings are
determined by a borrowing base calculation using eligible receivables and
inventories of Lander US and Lander Canada, which are the collateral for
this facility. As of May 28, 2005, unused availability under the borrowing
base calculation amounted to $764,564. As of February 28, 2005 the unused
availability amounted to $567,995. Interest on outstanding balance is
payable monthly. For purposes of classifying the outstanding debt in the
May 28, 2005 and February 28, 2005 balance sheets, the Company has
reflected the $10,346,187 and $8,198,935, respectively, of borrowings
under the revolving line of credit facility as a current liability, since
it is subject to collection lock-box arrangements and contains a
subjective acceleration clause.
o Machinery and equipment term loans with initial principal amounts
aggregating $1,467,000 have six-year amortization terms expiring in June
2009. Such loans are subject to termination upon the expiration of the
revolving line of credit and are collateralized by the machinery and
equipment of Lander US and Lander Canada. Principal payments aggregating
$20,375 plus interest are payable monthly.
38
o Real estate term loan with initial principal amount of $2,450,000 has a
six-year amortization term expiring in December 2009. Such loan is subject
to termination upon the expiration of the revolving line of credit and is
collateralized by the Lander US production plant located in Binghamton,
New York. Principal payments aggregating $36,029 plus interest are payable
monthly.
The interest rates on the Loans bear an annual interest rate of a national
bank's prime rate plus 1.25%. HACI/HREI has the option of converting all or a
portion of the Loans outstanding to an annual interest rate of the one-, two- or
three-month LIBOR rate plus 3.75%. As of May 28, 2005, the national bank prime
rate was 6.00% and the one-, two- and three-month LIBOR rates were 3.11%, 3.23%,
and 3.33%, respectively. The interest rate on the Loans was 7.25% at May 28,
2005. As of February 28, 2005, the national bank prime rate was 5.50% and the
one-, two- and three-month LIBOR rates were 2.72%, 2.80%, and 2.92%,
respectively. The interest rate on the Loans was 6.75% at February 28, 2005. To
date the Company has not exercised the option of converting the prime rate to
LIBOR.
The Loans contain financial and non-financial covenants including a limitation
of $1,250,000 on capital expenditures during any fiscal year and maintaining on
a monthly basis a fixed charges coverage ratio of no less than 1.0 to 1.0. The
fixed charge ratio is calculated by dividing earnings before interest,
depreciation and amortization less any unfunded capital expenditures and
improvements by fixed charges. Fixed charges include interest expense, capital
lease obligations, principal payments on indebtedness and payments for income
tax obligations.
HACI/HREI was not in compliance with the fixed charges coverage ratio and the
limitation on capital expenditures for fiscal 2004 and fiscal 2005 and through
May 28, 2005. In June 2004, December 2004 and July 2005, the Financing Agreement
was amended and the events of noncompliance were waived by the financial
institution. As part of the third amendment, which was dated July 15, 2005, the
fixed charge coverage ratio covenant requirement is only triggered when
availability under the revolving line of credit is less than $2,000,000.
As part of the HACI/HREI Acquisition of the Lander US business, HACI also has
long term financing from the seller in the form of a $4,500,000 subordinated
note ("Seller Note") with a three year term expiring in June 2006. The Seller
Note is subordinate to the Financing Agreement. Interest is payable quarterly at
an annual interest rate of 10%. Annual principal payments of $1,166,667 are
required under this Seller Note; however a provision permits the Company to
defer principal payments if certain financial targets, pursuant to the Financing
Arrangement are not achieved by Lander. As a result of the Company not achieving
these financial targets in fiscal 2004 and 2005, principal payment due in June
2004 and June 2005 have been deferred until June 2006. Additionally, there is a
provision in the Seller Note that permits the deferral of interest payments in
the event of non-compliance with certain covenants contained in the Financings
Arrangement. Accordingly, HACI has not paid any interest accrued on the Seller
Note from July 1, 2004 to date. Accrued interest on the Seller Note totaled $XXX
and $297,964 as of May 28, 2005 and February 28, 2005, respectively.
39
On March 16, 2005, HACI and the seller entered into Settlement and Release
Agreement whereby HACI has the option to pay $2,000,000, plus interest at 10%,
to satisfy the $4,500,000 principal amount of the Seller Note. In addition, HACI
would be required to pay interest accrued on the $4,500,000 Seller Note from
July 1, 2004 through March 16, 2005 and interest on the $2,000,000 from March
17, 2005 through the date of payment. Such option is available to HACI up to
November 30, 2005. In exchange for this option, HACI has agreed to release the
seller from certain claims against and indemnifications of the seller under the
agreement for the purchase of Lander US and Lander Canada.
The aggregate maturities of long-term debt are as follows:
MAY 28, 2005 FEBRUARY 28, 2005
2006 $ 11,468,455 $ 8,929,540
2007 6,301,068 6,875,296
------------ ------------
$ 17,769,523 $ 15,804,836
============ ============
Off Balance Sheet Arrangements and Contractual Obligations
The Company's off balance sheet arrangements consist principally of leasing
various assets under operating leases. The future estimated payments under these
arrangements are summarized below along with the Company's other contractual
obligations:
Operating leases (Note 8 of Financial Statements)
The Company has various noncancelable operating leases for manufacturing and
office facilities. Future minimum lease payments under noncancelable operating
leases (with initial or remaining lease terms in excess of one year) and future
minimum capital lease payments for each period are as follows:
MAY 28, MAY 28, FEBRUARY FEBRUARY
2005 2005 28, 2005 28, 2005
CAPITAL OPERATING CAPITAL OPERATING
LEASES LEASES LEASES LEASES
2006 ................ $ 55,210 $ 767,072 $ 59,944 $ 762,790
2007 ................ 19,822 389,428 31,820 342,136
2008 ................ 0 264,334 0 282,940
2009 ................ 0 206,717 0 207,105
2010 ................ 0 204,000 0 204,428
2011 ................ 0 51,000 0 102,000
-------- ----------- -------- -----------
Total minimum
lease payments ...... $ 75,032 $ 1,882,551 $ 91,764 $ 1,901,399
=========== ===========
Less amounts
representing Interest
(at rates ranging
from 5.25% to 8.31%) (3,395) (6,606)
-------- --------
Present value of net
minimum Capital lease
payments ............ $ 71,637 $ 85,158
======== ========
40
The Company is subject to certain claims and litigation in the normal course of
business. Management believes, after consulting with legal counsel, that the
ultimate liability resulting from these matters will not materially affect the
combined results of operations or financial position of the Company.
Inflation
The Company believes that the relatively moderate rates of inflation in recent
years have not had a significant impact on its net revenues or profitability.
The Company did experience higher than normal prices on certain raw materials
during the period coupled with higher freight costs as freight companies passed
on a portion of higher gas and oil costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company markets its products throughout the United States and the world. As
a result, the Company could be adversely affected by such factors as rising
commodity costs and weak global economic conditions. Forecasted purchases during
the next thirteen weeks are approximately $15 million. An average 2% unfavorable
price increase related to the price of oil and other related inflationary raw
materials could cost the Company approximately $300,000.
The Company has also evaluated its exposure to fluctuations in interest rates.
If the Company would borrow up to the maximum amount available, a one percent
increase in the interest rates would increase interest expense by approximately
$50,000 per quarter. $17.8 million is currently outstanding under the revolver
and other term loan credit facilities. Interest rate risks from the Company's
other interest-related accounts such as its postretirement obligations are
deemed to not be significant.
The Company has not historically and is not currently using derivative
instruments to manage the above risks.
41
PART II. Other Information
Item 1. Legal Proceedings -Wireless Application Development
In February 2005, Cenuco was made a party to a patent infringement suit
by Raymond Anthony Joao, an individual who has reportedly developed a
monitoring apparatus and method, a control, monitoring and / or
security apparatus and method and a control apparatus and method for
vehicles and / or for premises. He believes that we use a type of
monitoring apparatus and / or method for which he has been granted a
patent in the United States. The United States District Court Southern
District of New York (USDC SD NY 05 Civ. 1037 (CM) (MDF)) is hearing
allegations of infringement brought by Joao.
We filed an answer to Joao's complaint denying infringement and
asserting certain other defenses. In April 2005, we filed a
counter-claim in this litigation alleging that prior to February 2005
all involved parties in this lawsuit executed an agreement that
specifically prohibits this suit. An executed copy of this agreement,
signed by Joao and Cenuco, was submitted for the court's review as part
of our counter-claim. Among other things, the outcome will likely
depend not only upon the enforcement of the aforementioned agreement
but may also be upon whether the aforementioned patents are determined
to be valid and infringed. Management believes that we are not
infringing, and that this lawsuit has no basis. However, we are
presently unable to predict either the effect or degree of effect this
litigation will have on our business and financial condition. There is
no other pending material litigation to which we are a party or to
which any of our property is subject.
Item 2. Exhibits
Exhibit 31.1 - Certification of Joseph A. Falsetti filed herein
Exhibit 31.2 - Certification of Brian J. Geiger filed herein
Exhibit 32 - Certifications Pursuant to Rules 13a-14(b) and 15d-14(b)
of the Securities Exchange Act of 1934 filed herein
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CENUCO, INC.
By: Joseph A. Falsetti, President & CEO
/s/ Joseph A. Falsetti
By: Brian J. Geiger, Chief Financial Officer
/s/ Brian J. Geiger
Date: October 10, 2005
43