UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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)
6421 Congress Avenue, Suite 210
Boca Raton, Florida 33487
(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 _X_ No ___
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
Item 1 - Financial Statements
Consolidated Balance Sheets (Unaudited)
As of May 28, 2005 and February 28, 2005 ........................ 3
Consolidated Statements of Operations (Unaudited)
For the Thirteen Weeks ended May 28, 2005 and May 29, 2004 ...... 4
Consolidated Statements of Stockholders'/Members' Equity (Deficit)
As of May 28, 2005 and February 28, 2005 (Unaudited) ............ 5
Consolidated Statements of Cash Flows (Unaudited)
For the Thirteen Weeks ended May 28, 2005 and May 29, 2004 ...... 6
Notes to Consolidated Financial Statements ...................... 7-17
Item 2 - Management's Discussion and Analysis And
Results of Operations ....................................... 18-29
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk ........................................... 29
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings ........................................... 30
Item 2 - Exhibits .................................................... 30
Signatures ............................................................... 30
EXPLANATORY NOTE
As explained further in Note 1 to the consolidated financial statements the
Company completed a Merger transaction with Hermes Acquisition Company I LLC
(HACI) on May 20, 2005 which was treated as a reverse acquisition of Cenuco by
HACI for financial reporting purposes. Management believes that, based on
information currently available to it, the consolidated financial statements set
forth herein were compiled in accordance with generally accepted accounting
principles and fairly depict the financial condition and results of operations
of the Company, and include all necessary disclosures to capture the Merger
transaction. As a result of the formal appointment of BDO Seidman, LLP ("BDO")
as the Company's independent registered public accounting firm on July 8, 2005,
the Company has been advised by BDO, that, due to their need to complete
procedures related to the audit of the Company's financial statements for the
year ended February 28, 2005 and the review of the Company's financial
statements for the 13 week periods ended May 28, 2005 and May 29, 2004 BDO is
unable at this time to finalize its review of Cenuco's consolidated financial
statements set forth herein in accordance with established professional
standards and procedures for conducting such reviews as established by PCAOB
standards, which review is required by Rule 10-01(d) of Regulation S-X.
In addition, this will also result in a delayed filing of the financial
statements required by item 9.01(a)(1) and 9.01(b)(1) of form 8-K.
2
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
May 28, 2005 February 28, 2005
------------ -----------------
ASSETS
Current Assets:
Cash and cash equivalents .................. $ 5,351,175 $ 1,827
Accounts receivable, net of allowance for
doubtful accounts of $633,699 at May 28,
2005 and $547,306 at February 28, 2005 .... 9,242,163 8,079,536
Notes receivable, current portion .......... 115,925 -
Inventories ................................ 9,093,334 8,781,439
Prepaid expenses ........................... 1,529,096 833,128
----------- ------------
Total current assets ....................... 25,331,693 17,695,930
Property, plant and equipment - net ........ 5,853,748 5,967,154
Purchase price subject to allocation ....... 37,509,649 -
Notes receivable, less current portion ..... 584,075 -
Other assets ............................... 290,493 337,430
----------- ------------
Total assets ............................... $69,569,658 $ 24,000,514
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................... $11,672,434 $ 10,528,825
Accrued expenses ........................... 2,881,639 2,689,118
Current portion of long-tem debt ........... 11,468,455 10,091,363
----------- ------------
Total current liabilities .................. 26,022,528 23,309,306
Long-term debt, less current portion ....... 6,301,068 5,713,645
Long-term pension obligation ............... 705,171 716,930
Deferred gain from sale of business ........ 200,000 -
----------- ------------
Total liabilities .......................... 33,228,767 29,739,881
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 ................. 36,670,054 -
Accumulated deficit ........................ (294,496) -
Accumulated members' deficit ............... - (5,682,372)
Comprehensive loss ......................... (48,421) (56,995)
----------- ------------
Total stockholders' equity (deficit) ....... 36,340,891 (5,739,367)
----------- ------------
Total liabilities and stockholders' equity . $69,569,658 $ 24,000,514
----------- ------------
See accompanying notes to consolidated financial statements
3
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED
May 28, 2005 May 29, 2004
------------ ------------
Net Sales .................................... $ 17,323,130 $ 17,538,868
Costs of Sales ............................... 16,340,861 14,960,528
------------ ------------
Gross Profit ................................. 982,269 2,578,340
Operating Expenses:
Selling and Marketing ....................... 966,902 1,050,563
General and Administrative ................... 1,762,867 1,487,399
------------ ------------
Total Operating Expenses ..................... 2,729,769 2,537,962
(Loss) income from operations ................ (1,747,500) 40,378
Other expense ................................ 42,368 50,790
Interest expense, net ........................ 377,491 312,231
------------ ------------
Total other expense/interest expense ......... 419,859 363,021
------------ ------------
Loss before Income Taxes ..................... (2,167,359) (322,643)
Income taxes ................................. - -
------------ ------------
Net loss ..................................... $ (2,167,359) $ (322,643)
============ ============
Basic Net loss per share ..................... $ (0.16) -
Diluted Net loss per share ................... $ (0.16) -
Weighted average shares outstanding: ......... 13,750,556
Basic and Diluted ............................ 13,750,556 N/A
See accompanying notes to consolidated financial statements.
4
Cenuco, Inc. and Subsidiaries
Consolidated Statements of Stockholders' / Members' Equity (Deficit)
Total
Accumulated Stockholders'
Series A Additional Accumulated Accumulated Other / Members'
Preferred Stock Common Stock Paid-In Stockholders' Members' Comprehensive Equity
Shares Amount Shares Amount Capital Deficit Deficit Loss (Deficit)
------- ------ ---------- ------- ----------- ------------- ----------- ------------- -------------
BALANCE AT
FEBRUARY 28, 2005 - $- - $ - $ - $ - $(5,682,372) $ (56,995) (5,739,367)
Other Comprehensive
Loss:
Foreign currency
translation - - - - - - - 8,574 8,574
Net loss to date of
recapitalization
and Merger - - - - - - (1,872,863) - (1,872,863)
Conversion from LLC
to Corporation 2,553.7 3 - - (7,555,238) - 7,555,235 - -
Net loss subsequent
to Merger - - - - - (294,496) - - (294,496)
Total Comprehensive
Loss - - - - - - - - (2,158,785)
Reverse acquisition
of Cenuco, Inc. - - 13,750,556 13,751 44,225,292 - - - 44,239,043
BALANCE AT
MAY 28, 2005 2,553.7 $3 13,750,556 $13,751 $36,670,054 $(294,496) $ - $ (48,421) $36,340,891
See accompanying notes to consolidated financial statements.
5
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 ..................................... $ (2,167,359) $ (322,643)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization ................ 290,667 278,265
Deferred income taxes ........................ 23,358 -
Changes in operating assets and liabilities:
Accounts receivable ........................ (1,109,441) 397,357
Inventories ................................ (290,256) (726,592)
Prepaid expenses and other ................. (447,385) (49,588)
Accounts payable ........................... 1,044,661 (523,740)
Accrued expenses ........................... (6,403) -
Long-term pension obligations .............. (11,759) -
------------ ------------
NET CASH USED IN OPERATING
ACTIVITIES ................................. (2,673,917) (946,941)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term investments ......... 6,002,607 -
Proceeds from Note Receivable .............. 29,123 -
Purchase of property, plant & equipment .... (27,533) (152,171)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES ................................. 6,004,197 (152,171)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under lines of credit ....... 2,201,584 1,284,408
Repayments of long-term debt ............... (169,213) (169,213)
Repayments of capital leases ............... (13,304) (16,083)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .... 2,019,067 1,099,112
NET INCREASE IN CASH ......................... 5,349,347 -
Cash at beginning of period .................. 1,828 1,828
CASH AT END OF PERIOD ........................ $ 5,351,175 $ 1,828
See accompanying notes to consolidated financial statements.
6
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 REVERSE ACQUISITION
-------------------------------------------------------
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"). In connection
with the completion of the Merger the Company issued 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, became wholly owned subsidiaries of Cenuco. HREI became a wholly
owned subsidiary of HACI on May 20, 2005. Prior thereto, HACI and HREI had
common ownership.
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. 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.
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 (approximately $44.2 million). Consistent with the accounting and
presentation for reverse acquisitions, the accompanying 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.
7
In accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, the Company is in the process of determining the fair
value of the assets acquired and liabilities assumed in the reverse acquisition
of Cenuco. Since this determination of fair values is not yet complete, the
excess of the purchase price over the underlying net book value of Cenuco has
not yet been allocated and is presented in the accompanying balance sheet as
Purchase Price Subject to Allocation in the amount of approximately $37.5
million. When the valuation of acquired assets and assumed liabilities is
finalized such amounts will be reallocated to the appropriate categories on the
balance sheet and will be amortized over the estimated useful lives of the
respective amortizable assets determined to exist. In the event that value is
allocated to categories that do not meet appropriate asset capitalization
criterion under generally accepted accounting principles, then such allocation
will be written off to expense in the quarter during which such allocation is
finalized. The previously recorded value of Cenuco's assets and liabilities at
the date of the Merger were as follows:
Current assets ........................................... $6,499,413
Property, plant, and equipment ........................... 111,382
Other Assets ............................................. 591,807
----------
Total assets acquired ............................ 7,202,602
----------
Current liabilities ...................................... 273,590
Deferred Gain on Sale .................................... 200,000
----------
Total liabilities assumed ........................ 473,590
----------
Net book value of net assets acquired ............ 6,729,012
==========
NOTE 2 - ACQUISITION OF LANDER BUSINESS
---------------------------------------
HACI was formed ON April 25, 2003 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").
In accounting for the Lander acquisition, HACI followed the provisions of
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, which provides specific guidelines for the allocation of purchase
price to the fair value of the assets acquired and liabilities assumed,
including the criteria for the initial recognition and measurement of intangible
assets apart from goodwill.
The following table summarizes the estimated fair values of assets acquired and
liabilities assumed on May 31, 2003, the effective date of the Lander
acquisition made by HACI and HREI:
8
Current assets ............................................ $16,662,185
Property, plant, and equipment ............................ 4,020,599
-----------
Total assets acquired .............................. 20,682,784
-----------
Current liabilities ....................................... 7,755,374
Long-term debt ............................................ 13,416
Long-term pension obligations ............................. 726,725
-----------
Total liabilities assumed .......................... 8,495,515
-----------
Estimated fair value of net assets acquired ........ 12,187,269
Excess of fair value of net assets acquired
over purchase price .................................... 1,095,813
-----------
Purchase price of net assets ....................... $11,091,456
===========
The fair value of property, plant and equipment were reduced by the excess of
fair value of net assets acquired over the purchase price of $1,095,813.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
-----------------------------------------------------------------------------
The accompanying unaudited 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 financial position, results of operations and cash
flows for the periods presented. The results of operations are not necessarily
indicative of results of operations, which may be achieved in the future.
The accompanying unaudited consolidated financial statements included herein
have not been reviewed by an independent registered public accountant using
professional standards and procedures for conducting such reviews, as
established by PCAOB standards, because of the need of BDO Seidman, LLP,
Cenuco's independent auditors, to complete their review procedures.
A summary of the Cenuco's significant accounting policies follows:
Basis of Combination: The accompanying combined financial statements include
the accounts of Cenuco, Inc. and subsidiaries. All intercompany accounts have
been eliminated in combination.
Receivables: Receivables primarily consist of trade accounts receivable.
Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Company's best estimate
of the amount of probable credit losses related to the Company's existing
accounts receivable.
Inventories: Inventories are stated at the lower of cost or market, with cost
determined using the first-in, first-out (FIFO) method.
9
Property, Plant and Equipment: Property, plant and equipment, related to the
Acquisitions and the Merger, are recorded at their estimated fair value
reduced by the excess of the fair value of net assets acquired over the
purchase price (see note 1). Costs of major additions and improvements are
capitalized; 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 depreciated over the shorter of the term of the lease or their estimated
useful lives. Depreciation expense related to property, plant and equipment
was $240,121 for the thirteen weeks ended May 28, 2005 and $246,989 for the
thirteen weeks ended May 29, 2004.
Impairment of Long-Lived Assets: Accounting for the impairment of long-lived
assets and for long-lived assets to be disposed of 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 cost 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.
Other Assets: Other assets consist of deferred financing costs that are being
amortized over the remaining life of the three-year term of the revolving
line of credit ending in June 2006. 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.
10
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 members' loss until there is a sale or liquidation of the
underlying foreign investment.
Foreign currency gains and losses resulting from transactions are included in
the combined statements of operations.
Use of Estimates: The preparation of combined financial statements requires
management of Cenuco to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the combined financial statements and
reported amounts of revenues and expenses during the period. Actual results
could differ from those 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 44% of Cenuco's net sales, with one customer
comprising more than 10%, for the thirteen weeks ended May 28, 2005 and
represented 51% of receivables, with two customers comprising more than 10%,
at May 28, 2005.
Five trade customers comprised 41% of Cenuco's net sales, with two customers
comprising more than 10%, for the thirteen weeks ended May 28, 2004 and
represented 44% of receivables, with two customers comprising more than 10%,
at May 28, 2004.
Income Taxes: Prior to the date of the Merger HACI and HERI were limited
liability corporations and had elected to be treated as corporations for
income tax purposes. Subsequent to the Merger Cenuco and all its consolidated
subsidiaries are taxable corporations for income tax purposes in their
respective jurisdictions.
Income taxes are accounted for under the asset-and-liability method under
which deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statements 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 not 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 May 29, 2004 has been estimated by
management due to the uncertainty that future income will be realized.
11
NOTE 4 - INVENTORIES
--------------------
Inventory consists of the following:
MAY 28, 2005 FEBRUARY 28, 2005
Raw materials ........................ $ 3,130,778 $ 3,189,249
Finished goods ....................... 5,962,556 5,592,190
$ 9,093,334 $ 8,781,439
NOTE 5 - 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 ................... 729,823 481,959
Furniture and fixtures ............... 303,284 252,716
Software ............................. 401,810 401,810
Capital leases ....................... 153,559 153,559
Building ............................. 2,644,864 2,644,864
Machinery and equipment .............. 2,731,538 2,674,929
Dies and molds ....................... 75,626 75,731
Leasehold improvements ............... 120,109 118,571
Construction in progress ............. 8,975 77,959
7,829,588 7,542,099
Less accumulated depreciation ........ (1,975,839) (1,574,945)
$ 5,853,748 $ 5,967,154
NOTE 6 - LONG-TERM DEBT
-----------------------
Long-term debt consists of the following:
MAY 28, 2005 FEBRUARY 28, 2005
Revolving line of credit loans ....... $ 10,346,188 $ 8,198,934
Machinery and equipment loans ........ 978,000 1,039,125
Real estate term loans ............... 1,873,529 1,981,618
Subordinated notes ................... 4,500,000 4,500,000
Capital leases ....................... 71,805 85,331
17,769,523 15,805,008
Less current portion ................. 11,468,455 10,091,363
$ 6,301,068 $ 5,713,645
12
In connection with the Lander Acquisition, HACI and 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. Interest on outstanding loans is payable monthly.
o Machinery and equipment term loans with initial principal amounts
aggregating $1,467,000 have six-year amortization terms through 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 on the machinery and equipment
term loans.
o Real estate term loan with an initial principal amount of $2,450,000 has a
six-year amortization term through 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 on the machinery and equipment term loans..
The interest rates on the Loans bear an annual interest rate of a national
bank's prime (6% as of May 28, 2005) plus 1.25%. HACI and HREI have 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 one-, two- and three-month LIBOR rates were 3.11%, 3.23%, and 3.33%,
respectively. As of May 28, 2004, the national bank prime rate was 4.00% and the
one-, two- and three-month LIBOR rates were 1.11%, 1.22%, and 1.32%,
respectively.
The Loans contained financial and other covenants including an initial
limitation of $750,000, increased to $1,250,000 on capital expenditures during
any fiscal year and a requirement to maintain a monthly fixed charges coverage
ratio of no less than 1.0 to 1.0. The 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 and 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.
13
As part of the acquisition of the Lander US business, HACI also obtained
long-term financing from the seller in the form of a $4,500,000 subordinated
note with a three-year term expiring in June 2006. Annual principal payments of
$1,166,667 were required in June 2004 and June 2005 with the balance due in June
2006. A provision in the long-term financing from the seller permits the
deferral of a principal payment if certain financial targets are not achieved by
Lander. Accordingly, the principal payment due in June 2004 and June 2005 have
been deferred until June 2006. Interest is payable quarterly at an annual
interest rate of 10%. A provision in the long-term financing from the seller
permits the deferral of interest payments in the event of non-compliance with
certain covenants contained in the loan agreements with the financial
institution. Accordingly, HACI has not paid any interest accrued on the
financing from the seller from July 1, 2004 to date. The ability of HACI to make
principal and interest payments under the subordinated note is subject to
financial and other covenants. If HACI does not have a fixed charges coverage
ratio of at least 1.0 to 1.0 for the fiscal year in which a principal payment is
due or HACI's borrowing availability under the line of credit with the financial
institution is less than $2,000,000, then the principal payment due is deferred
to the maturity date of the subordinated note.
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, to
satisfy the $4,500,000 principal amount of subordinated debt. Interest required
to be paid under this agreement includes all nterest accrued on the $4,500,000
subordinated 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 August 31, 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.
For purposes of classifying the outstanding debt in the May 28, 2005 and
February 28, 2005 balance sheets, Cenuco has reflected the $10,346,188 and
$8,198,934, respectively, of borrowings under the revolving line of credit
facility as a current liability, since it is subject to collection, lock-box
arrangements.
The aggregate maturities of long-term debt are as follows:
MAY 28, 2005 FEBRUARY 28, 2005
FY
2006 ................................. $ 11,468,455 $ 10,091,363
2007 ................................. 6,301,068 5,713,645
$ 17,769,523 $ 15,805,008
NOTE 7 - PENSION AND 401(k) PLANS
---------------------------------
The Company has two noncontributory defined benefit pension plans (the Plans)
that cover substantially all employees of HACI and subsidiaries in the United
States 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. The following is a summary of the Plans, as of February 28,
2005.
14
UNITED STATES CANADA
------------- ------
Benefit obligation at February 28, 2005 ............ $ 1,847,272 $ 2,305,779
Fair value of plan assets at February 28, 2005 ..... 1,589,586 2,105,121
----------- -----------
Funded status ...................................... $ (257,686) $ (200,658)
=========== ===========
Accrued benefit cost ............................... $ 257,686 $ 658,544
Weighted average assumptions as of February 28, 2005
Discount rate .............................. 5.75% 5.75%
Expected return on plan assets ............. 6.50 7.00
Employer contribution .............................. $ 131,087 $ 205,732
Benefits paid ...................................... 113,511 272,623
The Company also has a defined contribution plan under Section 401(k) of the
Internal Revenue Code of 1986 for all United States employees of HACI and
subsidiaries. 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 period from April 25, 2003
(inception) to May 28, 2005.
NOTE 8 - INCOME TAXES
---------------------
Income tax (benefit) expense in the thirteen weeks ended May 28 2005 and 2004 is
$0, which differs from the federal statutory rate of 34% due to the Company's
inability to recognized a deferred tax asset on net operating loss carryforward
generated in the period. As of May 28, 2005 a full valuation allowance of
approximately $3 million has been estimated by management, due to the
uncertainty that future taxable income will be generated during the periods in
which its cumulative temporary differences become deductible.
NOTE 9 - 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 ............. 264,334 0 282,940
2009 ............. 206,717 0 207,105
2010 ............. 204,000 0 204,428
2011 ............. 51,000 0 102,000
Total minimum
lease payments ... $ 75,032 $ 1,882,551 $ 91,764 $ 1,901,399
15
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 10 - Stock Options
-----------------------
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.
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. If options had been issued, no compensation expense would have been
recognized. 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 are automatically vested.
Note 11 - Net loss per common share
-----------------------------------
Basic net loss per share equals net loss divided by the weighted average shares
outstanding during the period. For the thirteen weeks ended May 28, 2005, the
computation of diluted net earnings per share does not include dilutive common
stock equivalents in the weighted average shares outstanding as they would be
antidilutive. Not included in basic shares are 2,786,712 stock options and
warrants because they are anti-dilutive. Also not included are the Series A
Junior Participating Preferred shares that if converted would add an additional
25,536,746 shares. In addition, if all options and warrants were converted to
common, the current holders of Series A Junior Participating Preferred shares
would receive additional shares (to maintain 65% ownership) convertible to
common. This would increase the total from 25,536,746 to 30,712,069 shares.
Series A Junior Participating Preferred shares are not included in basic shares
since they would be antidilutive.
16
CENUCO, INC.
FOR THE THIRTEEN WEEKS ENDED MAY 28, 2005
Earnings per share calculation
Common Stock Preferred *
Shares Options & Converted Total Net Loss
Outstanding Warrants to Common Shares Net Loss per share
----------- --------- ----------- ---------- ------------ ---------
Basic: 13,750,556 0 0 13,750,556 $(2,167,359) $ (0.16)
Diluted: 13,750,556 N/A N/A 13,750,556 $(2,167,359) $ (0.16)
* The shares of Series A Junior Participating Preferred Stock, will
automatically convert to common upon the approval by the Company's stockholders
of such conversion and an increase in the company's authorized common. Each
preferred share will be convertible into 10,000 common shares. The Series A
Junior Participating Preferred Stock represents 65% of the voting power and if
converted to common would represent 65% of the common shares outstanding. If any
options or warrants are converted to common stock, the owners of the preferred
stock will be issued additional shares equivalent to the number required to
maintain their 65% ownership and voting position.
Conversion Preferred
factor Ownership Common Current
10,000 % shares Outstanding Total
---------- --------- ---------- ----------- ----------
Preferred stock shares outstanding ... 2,553.6746 65% 25,536,746 13,750,556 39,287,302
Additional preferred shares if options
or warrants are converted to common .. 517.5323 65% 5,175,323 2,786,712 7,962,035
---------- ---------- ---------- ----------
Total ................................ 3,071.2069 65% 30,712,069 16,537,268 47,249,337
========== ========== ========== ==========
Note 12 - Affiliated Companies
o The Hermes Group LLP (THGLLP) is a certified public accounting firm that
provided various services and facilities to HACI and related companies,
including due diligence work related to the acquisition of Lander in
FY2004. Mark I. Massad, a Managing Member of HACI (pre-Merger), was a
founding Partner and is currently a non-active partner in The Hermes Group
LLP. For the thirteen weeks ended May 28, 2005 THGLLP invoiced HACI and
related companies for $133,029. For the thirteen weeks ended May 29, 2004,
THGLLP invoiced HACI and related companies for $145,013.
o Zephyr Ventures LLC (ZVLLC) provided various consulting services to HACI
and related companies. Edward J. Doyle, a member of the Board of Directors
of Cenuco (effective May 2005), is a Managing Member of Zephyr Ventures
LLC. For the thirteen weeks ended May 28, 2005, ZVLLC invoiced $16,519.
For the thirteen weeks ended May 29, 2004, ZVLLC invoiced $10,946.
17
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"), became wholly owned
subsidiaries of Cenuco. HREI became a wholly owned subsidiary of HACI on May 20,
2005. Prior thereto, HACI and HREI had common ownership.
For accounting purposes, HACI will be deemed to be the acquirer in a reverse
transaction and consequently the Merger will be treated as a recapitalization of
HACI. HACI's financial statements will become the historical financial
statements of the post-Merger entity.
Effective May 20, 2005, Cenuco, Inc will contain two business segments, (1)
Health & Beauty Care and (2) Wireless Application Development.
18
HEALTH AND BEAUTY CARE
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.
19
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 division 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.
20
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 division'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.
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.
21
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 3 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.
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.
22
Revenues are earned from licensing arrangements pursuant to the terms of those
agreements.
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 accounts receivable amount and reducing the
allowance for doubtful accounts accordingly.
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.
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, 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.
23
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 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 not 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.
THIRTEEN WEEKS ENDED MAY 28, 2005 COMPARED TO THE THIRTEEN WEEKS ENDED MAY 29,
2004
As a result of the reverse acquisition of Cenuco (which includes the Wireless
Application Development Business) in the Merger which closed on May 20, 2005,
the following discussion of operations focuses primarily on the Health and
Beauty Care business of Lander.
REVENUES
Net revenues for the thirteen weeks ended May 28, 2005 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.
24
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.
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 wireless application development.
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OTHER FINANCIAL ITEMS
Earnings per share calculation:
Common Stock Preferred *
Shares Options & Converted Total Net Loss
Outstanding Warrants to Common Shares Net Loss per share
----------- --------- ----------- ---------- ------------ ---------
Basic: 13,750,556 0 0 13,750,556 $(2,167,359) $ (0.16)
Diluted: 13,750,556 N/A N/A 13,750,556 $(2,167,359) $ (0.16)
* The shares of Series A Junior Participating Preferred Stock, will
automatically convert to common upon the approval by the Company's stockholders
of such conversion and an increase in the company's authorized common. Each
preferred share will be convertible into 10,000 common shares. The Series A
Junior Participating Preferred Stock represents 65% of the voting power and if
converted to common would represent 65% of the common shares outstanding. If any
options or warrants are converted to common stock, the owners of the preferred
stock will be issued additional shares equivalent to the number required to
maintain their 65% ownership and voting position.
Conversion Preferred
factor Ownership Common Current
10,000 % shares Outstanding Total
---------- --------- ---------- ----------- ----------
Preferred stock shares outstanding ... 2,553.6746 65% 25,536,746 13,750,556 39,287,302
Additional preferred shares if options
or warrants are converted to common .. 517.5323 65% 5,175,323 2,786,712 7,962,035
---------- ---------- ---------- ----------
Total ................................ 3,071.2069 65% 30,712,069 16,537,268 47,249,337
========== ========== ========== ==========
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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 6
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 $656,535.
Cash Flow
Net cash provided by operating activities was a negative $2.7 million Items
contributing to negative operating cash flow consisted of net loss of $2.1
million, increases in accounts receivable of $1.1 million, increases in
inventory of $.3 million and increases in other assets of $.2 million, offset by
an increase in accounts payable and other liabilities of $1.0 million.
Net cash provided by (used in) investing activities amounted to $6,004,197 for
the thirteen weeks ended May 28, 2005 compared to $(152,171) for the thirteen
weeks ended May 29, 2004. The activity consists of proceeds from the liquidation
of short-term investments and capital expenditures for the purchase of equipment
to meet current and expected sales demand.
Net cash provided by financing activities for the thirteen weeks ended May 28,
2005 amounted to $2,019,066 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. This
Combined with availability from the revovler of $.7 million provides Cenuco with
sufficient operating liquidity.
Transactions with Related and Certain Other Parties
The Hermes Group LLP (THGLLP) is an accounting firm that provided various
services and facilities to HACI and related companies, including due diligence
work related to the acquisition of Lander Company in FY2004. Mark I. Massad, a
Managing Member of HACI (pre-Merger), was a founding Partner and is currently a
non-active partner in The Hermes Group LLP. For the thirteen weeks ended May 28,
2005 THGLLP invoiced HACI and related companies for $133,029. For the thirteen
weeks ended May 29, 2004, THGLLP invoiced HACI and related companies for
$145,013.
Zephyr Ventures LLC (ZVLLC) provided various consulting services to HACI and
related companies. Edward J. Doyle, a member of the Board of Directors of Cenuco
(effective May 2005), is a Managing Member of Zephyr Ventures LLC. For the
thirteen weeks ended May 28, 2005, ZVLLC invoiced $16,519. For the thirteen
weeks ended May 29, 2004, ZVLLC invoiced $10,946.
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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.
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.
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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.
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:
Long-term debt - See Note 6 of Financials Statements
Operating leases - See Note 9 of Financial Statements
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 1% unfavorable
price increase related to the price of oil and other related inflationary raw
materials could cost the Company approximately $150,000.
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.
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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 allegedly 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. Mr. Joao asserts 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
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: /s/ Joseph A. Falsetti
Joseph A. Falsetti, President & CEO
By: /s/ Brian J. Geiger
Brian J. Geiger, Chief Financial Officer
Date: July 18, 2005
30