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 August 27, 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 August 27, 2005, the issuer had outstanding 13,826,556 shares of common
stock, $.001 par value per share.
CENUCO, INC. AND SUBSIDIARIES
FORM 10-Q
THIRTEEN WEEKS ENDED AUGUST 27, 2005
INDEX
PAGE
PART I. Financial Information
Item 1 - Financial Statements .......................................... 3
Consolidated Balance Sheets
As of August 27, 2005 (Unaudited) and February 28, 2005 ........... 3
Consolidated Statements of Operations (Unaudited)
For the Thirteen and Twenty-Six Weeks ended
August 27, 2005 and August 28, 2004 ............................... 4
Consolidated Statement of Stockholders'/Members' Equity (Deficit)
(Unaudited) For the Twenty-Six Weeks ended August 27, 2005 ........ 5
Consolidated Statements of Cash Flows (Unaudited) For the
Twenty-Six Weeks ended August 27, 2005 and August 28, 2004 ........ 6
Notes to Consolidated Financial Statements ........................ 7
Item 2 - Management's Discussion and Analysis And
Results of Operations ......................................... 8
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk ............................................. 27
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings ............................................. 41
Item 2 - Exhibits ...................................................... 41
Signatures ................................................................. 42
2
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
August 27, February 28,
2005 2005
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents .................. $ 431,078 $ 31,763
Trade receivables, net of allowance for
doubtful accounts of $593,880 at August 27,
2005 and $547,306 at February 28, 2005 .... 8,313,036 8,002,867
Notes receivable, current portion .......... 118,954 -
Inventories ................................ 7,385,019 8,725,952
Prepaid expenses and other ................. 1,069,973 564,617
------------ ------------
Total current assets ....................... 17,318,060 17,325,199
Property, plant and equipment - net ........ 5,799,308 6,017,533
Goodwill ................................... 36,501,655 -
Intangibles - net .......................... 2,355,979 -
Notes receivable, less current portion ..... 559,655 -
Other assets, net .......................... 1,159,601 692,817
------------ ------------
Total assets ............................... $ 63,694,258 $ 24,035,549
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................... $ 10,667,927 $ 10,541,956
Accrued expenses ........................... 3,009,803 2,845,485
Current portion of long-tem debt ........... 7,315,945 8,929,540
------------ ------------
Total current liabilities .................. 20,993,675 22,316,981
Long-term debt, less current portion ....... 6,509,982 6,875,296
Long-term pension obligation ............... 731,361 673,328
Other liabilities .......................... 224,601 -
------------ ------------
Total liabilities .......................... 28,459,619 29,865,605
Stockholders' equity:
Preferred stock, par value $.001 per share;
Authorized 1,000,000 shares; issued
2,553.6746 shares at August 27, 2005;
no shares issued at February 28, 2005 ..... 3 -
Common stock, par value $.001 per share;
Authorized 25,000,000 shares; issued
13,826,556 shares at August 27, 2005;
no shares issued at February 28, 2005 ..... 13,827 -
Additional paid in capital ................. 37,851,653 -
Accumulated deficit ........................ (2,479,506) -
Members' contribution ...................... - 2,000
Accumulated members' loss .................. - (5,707,597)
Accumulated comprehensive loss ............. (151,338) (124,459)
------------ ------------
Total stockholders' equity (deficit) ....... 35,234,639 (5,830,056)
------------ ------------
Total liabilities and stockholders' equity . $ 63,694,258 $ 24,035,549
============ ============
See accompanying notes to consolidated financial statements
3
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Thirteen weeks ended Twenty-six weeks ended
Aug 27, 2005 Aug 28, 2004 Aug 27, 2005 Aug 28, 2004
------------ ------------ ------------ ------------
Net Sales ...................................... $ 16,840,788 $ 16,472,447 $ 34,191,849 $ 34,011,315
Costs of Sales ................................. 15,600,019 14,768,475 31,899,543 29,729,003
------------ ------------ ------------ ------------
Gross Profit ................................... 1,240,769 1,703,972 2,292,306 4,282,312
Operating Expenses:
Selling and Marketing ......................... 876,963 965,829 1,843,865 2,016,392
General and Administrative ..................... 2,332,610 1,454,188 4,068,493 2,941,587
------------ ------------ ------------ ------------
Total Operating Expenses ....................... 3,209,573 2,420,017 5,912,358 4,957,979
Loss from operations ........................... (1,968,804) (716,045) (3,620,052) (675,667)
Other income, net .............................. 152,655 112,894 72,173 62,106
Interest expense, net .......................... (368,861) (326,378) (765,621) (638,610)
------------ ------------ ------------ ------------
Total other/interest expense ................... (216,206) (213,484) (693,448) (576,504)
------------ ------------ ------------ ------------
Loss before Income Taxes ....................... (2,185,010) (929,529) (4,313,500) (1,252,171)
Income taxes ................................... - - - -
------------ ------------ ------------ ------------
Net loss ....................................... $ (2,185,010) $ (929,529) $ (4,313,500) $ (1,252,171)
============ ============ ============ ============
Basic and diluted net loss per share - common .. $ (0.16) $ - $ (0.18) $ -
Basic and diluted net loss per share - preferred $ - $ (364) $ (718) $ (490)
(see Note 10)
Shares used in computing net loss per share:
Basic and diluted - common ................... 13,768,930 - 13,734,420 -
Basic and diluted - preferred ................ 2,554 2,554 2,554 2,554
(see Note 10)
See accompanying notes to consolidated financial statements.
4
Cenuco, Inc. and Subsidiaries
Consolidated Statements of Stockholders' / Members' Equity (Deficit)
For the twenty-six weeks ended August 27, 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 ............ - - - - - (2,479,506)
Total Comprehensive
Loss:
Conversion from
LLC to Corporation ... 2,553.7 3 - - (7,541,591) -
Exercise of warrants . - - 76,000 76 75,924
Reverse acquisition
of Cenuco, Inc. ...... - - 13,750,556 13,751 45,317,320 -
------- -- ---------- ------- ----------- -----------
BALANCE AT
AUGUST 27, 2005 ...... 2,553.7 $3 13,826,556 $13,827 $37,851,653 $(2,479,506)
======= == ========== ======= =========== ===========
continued
See accompanying notes to consolidated financial statements.
5A
Cenuco, Inc. and Subsidiaries
Consolidated Statements of Stockholders' / Members' Equity (Deficit)
For the twenty-six weeks ended August 27, 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 .......... - - (26,879) (26,879)
Net loss to date of
recapitalization and
Merger ............... - (1,833,994) - (1,833,994)
Net loss subsequent
to Merger ............ - - - (2,479,506)
------------
Total Comprehensive
Loss: ................ (4,340,379)
------------
Conversion from
LLC to Corporation ... - 7,541,591 - 3
Exercise of warrants . - - - 76,000
Reverse acquisition
of Cenuco, Inc. ...... (2,000) - - 45,329,071
------- ----------- --------- ------------
BALANCE AT
AUGUST 27, 2005 ...... $ - $ - $(151,338) $ 35,234,639
======= =========== ========= ============
See accompanying notes to consolidated financial statements.
5B
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Twenty-six weeks ended
Aug 27, 2005 Aug 28, 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... ($4,313,500) ($1,252,171)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization ................................ 590,947 493,243
Provision for bad debts ...................................... 160,647 145,745
Amortization of deferred financing costs ..................... 109,132 73,488
Changes in operating assets and liabilities:
Accounts receivable ...................................... (330,705) (718,288)
Inventories .............................................. 1,340,933 83,374
Prepaid expenses and other .............................. (642,470) (340,281)
Other assets ............................................. (535,815) (8,927)
Accounts payable ......................................... (14,140) 1,325,616
Accrued expenses ......................................... 164,317 (176,166)
Long-term pension obligations ............................ 58,033 9,713
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ........................ (3,412,621) (364,654)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in cash from reverse acquistion of Cenuco ..... 6,235,441 -
Proceeds from note receivable .............................. 200,000 -
Deferred acquisition costs ................................. (343,041) -
Purchase of property, plant and equipment .................. (255,676) (343,016)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .......... 5,836,724 (343,016)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under line of credit ........... (1,607,348) 1,117,931
Deferred financing costs ................................... (95,000) (43,750)
Repayments of long-term debt ............................... (338,426) (338,426)
Repayments of capital leases ............................... (33,135) (30,703)
Proceeds from exercise of warrants ......................... 76,000 -
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .......... (1,997,909) 705,052
----------- -----------
Effect of exchange rates on cash ............................. (26,879) 2,618
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................... 399,315 -
Cash and cash equivalents at beginning of period ............. 31,763 1,828
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................... $ 431,078 $ 1,828
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest ....................................... $ 444,777 $ 572,612
Reverse merger, excluding cash acquired (see Note 1):
Estimated fair value of tangible assets acquired ........... $ 1,199,715 -
Goodwill and identifiable intangible assets acquired ....... 38,974,680 -
Liabilities assumed ........................................ (473,590) -
----------- -----------
Net assets obtained in reverse merger transaction .......... $39,700,805 -
=========== ===========
See accompanying notes to consolidated financial statements.
6
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
August 27, 2005 (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 determined the estimated fair value of
the assets acquired and liabilities assumed in the reverse acquisition of
Cenuco. The estimated value of the assets acquired less liabilities has been
allocated as shown below:
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 ..................................................... 36,501,655
Intangibles .................................................. 2,473,025
Other Assets ................................................. 591,807
------------
Total assets acquired ......................... 46,177,282
------------
Total liabilities assumed ..................... (473,590)
------------
Estimated fair value of net assets acquired ... $ 45,703,692
============
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 Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". 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 financial statements of Cenuco as of and for the
thirteen and twenty-six weeks ended August 27, 2005 and August 28, 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 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.
Cash Equivalents: The Company considers all highly liquid investments with
original maturities of three months or less, when purchased, to be cash
equivalents.
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 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.
Goodwill and Other Intangibles: As a result of the Merger (see Note 1), the
Company recorded goodwill of $36,501,655, 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. The Company's preliminary estimate of the useful
lives of the customer lists and brand name is five and fifteen years,
respectively. Amortization expense of the Company's customer list and brand name
totaled $117,046 for the thirteen and twenty-six weeks ended August 27, 2005.
There was no amortization expense on these intangible assets in prior periods.
Other Assets, Net: Other assets, net consist of deferred costs for specific
acquisitions expected to close in the near term 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 $58,586 and $109,132, respectively, for the thirteen and
twenty-six weeks ended August 27, 2005 and $58,586 and $109,132, respectively,
for the thirteen and twenty-six weeks ended August 28, 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 included in net
sales. The cost of shipping products to the customer is recognized at the time
the products are shipped and 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.
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 51% and 48% respectively of Cenuco's net sales,
(with two customers comprising approximately 42% and 40% respectively) for the
thirteen and twenty-six weeks ended August 27, 2005. At August 27, 2005 the same
five trade customers represented 56% of receivables, with one customers
comprising 43%.
Five trade customers comprised 42% and 44% respectively of Cenuco's net sales,
(with two customers comprising approximately 33% and 37% respectively) for the
thirteen and twenty-six weeks ended August 28, 2004. At August 28, 2004 the same
five trade customers represented 44% of receivables, with one customer
comprising 29%.
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 August 27, 2005 and February 28, 2005 has been recorded 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
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:
AUGUST 27, 2005 FEBRUARY 28, 2005
Raw materials ...................... $ 3,281,674 $ 2,900,803
Finished goods ..................... 4,103,345 5,821,149
----------- -----------
$ 7,385,019 $ 8,725,952
=========== ===========
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
Property, plant and equipment consist of the following:
AUGUST 27, 2005 FEBRUARY 28, 2005
Land ............................... $ 660,000 $ 660,000
Computer equipment and software .... 917,004 890,020
Furniture and fixtures ............. 252,797 252,717
Building ........................... 2,644,864 2,644,864
Machinery and equipment ............ 3,178,707 2,961,469
Dies and molds ..................... 75,864 75,731
Leasehold improvements ............. 120,472 118,571
Construction in progress ........... 78,052 77,959
----------- -----------
7,927,760 7,681,331
Less accumulated depreciation and
amortization ...................... (2,128,452) (1,663,798)
----------- -----------
$ 5,799,308 $ 6,017,533
=========== ===========
Depreciation and amortization expense related to property, plant and equipment
totaled $350,826 and $590,947, respectively for the thirteen and twenty-six
weeks ended August 27, 2005 and $246,256 and $493,243, respectively, for the
thirteen and twenty-six weeks ended August 26, 2004.
As of August 27, 2005 and February 28, 2005, machinery and equipment includes
assets under capital leases totaling $153,559. Accumulated amortization on the
capital leases totaled $31,992 and $24,314 as of August 27, 2005 and February
28, 2005, respectively. Amortization expense related to capital leases is
included in depreciation and amortization expense for the thirteen and
twenty-six weeks ended August 27, 2005 and August 28, 2004.
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
AUGUST 27, 2005 FEBRUARY 28, 2005
Revolving line of credit loans ..... $ 6,591,587 $ 8,198,935
Machinery and equipment loans ...... 916,875 1,039,125
Real estate term loans ............. 1,765,441 1,981,618
Subordinated notes ................. 4,500,000 4,500,000
Capital leases ..................... 55,752 85,158
----------- -----------
13,829,655 15,804,836
Less current portion ............... 7,268,440 8,929,540
----------- -----------
$ 6,561,215 $ 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 August 27, 2005, unused availability under the
borrowing base calculation amounted to $2,841,273. 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 August 27, 2005 and February 28, 2005 balance sheets, the
Company has reflected the $6,591,587 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.
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 August 27, 2005, the national bank
prime rate was 6.50% and the one-, two- and three-month LIBOR rates were 3.67%,
3.76%, and 3.86%, respectively. The interest rate on the Loans was 7.75% at
August 27, 2005. As of August 28, 2004, the national bank prime rate was 4.50%
and the one-, two- and three-month LIBOR rates were 1.65%, 1.72%, and 1.79%,
respectively. The interest rate on the Loans was 5.75% at August 28, 2004.
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
July 15, 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 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
$522,964 and $297,964 as of August 27, 2005 and February 28, 2005, respectively.
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:
AUGUST 27, 2005 FEBRUARY 28, 2005
2006 $ 7,268,440 $ 8,929,540
2007 6,561,215 6,875,296
------------ ------------
$ 13,825,927 $ 15,804,836
============ ============
NOTE 6 - PENSION AND 401(k) PLANS
---------------------------------
Pension Plan:
-------------
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
=========== =========== ===========
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.
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.
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): Total
-----------
Accounts receivable .............. $ 170,000
Inventory ........................ 183,000
Fixed asset depreciation and
amortization .................... (212,000)
Accrued expenses and other ....... 348,000
Net operating loss carry forward . 2,164,000
-----------
Total deferred tax assets ....... $ 2,653,000
Valuation allowance .............. $(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 deferred tax asset related to the net loss of $4.3 million for the
twenty-six weeks ended August 27, 2005 will be fully reserved leading to an
increase in the valuation allowance by approximately $1.7 million.
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%
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:
AUGUST AUGUST FEBRUARY FEBRUARY
27, 2005 27, 2005 28, 2005 28, 2005
CAPITAL OPERATING CAPITAL OPERATING
LEASES LEASES LEASES LEASES
2006 ................ $ 25,488 $ 366,725 $ 59,944 $ 762,790
2007 ................ 31,949 441,877 31,820 342,136
2008 ................ 0 342,262 0 282,940
2009 ................ 0 210,962 0 207,105
2010 ................ 0 205,746 0 204,428
2011 ................ 0 102,000 0 102,000
-------- ----------- -------- -----------
Total minimum
lease payments ...... $ 57,437 $ 1,669,572 $ 91,764 $ 1,901,399
=========== ===========
Less amounts
representing Interest
(at rates ranging
from 5.25% to 8.31% . (1,685) (6,606)
-------- --------
Present value of net
minimum Capital lease
payments ............ $ 55,752 $ 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.
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 August 27, 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 not have been changed.
With respect to vesting, as a result of the Merger on May 20, 2005, all
previously issued Cenuco options that were unvested on that date became
automatically vested.
A summary of the status of the Company's outstanding stock options as of August
27, 2005 and changes since May 28, 2005 is as follows:
Weighted
Average
Exercise
Shares Price
-------- --------
Outstanding at May 28, 2005 ............. 556,668 $ 1.52
Granted .............................. 0 0.00
Exercised ............................ (0) (0.00)
Forfeited ............................ (0) (0.00)
-------- -------
Outstanding at August 27, 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 August 27, 2005:
Options Outstanding Options Exercisable
-------------------------- ---------------------
Weighted -
Average Weighted - Weighted -
Range Remaining Average Average
of 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
======= =======
Common stock warrants
---------------------
A summary of the status of the Company's outstanding stock warrants granted for
services as of August 27, 2005 and changes since May 28, 2005 is as follows:
Weighted
Average
Exercise
Shares Price
--------- --------
Outstanding at May 28, 2005 ................ 2,230,044 $ 3.96
Granted .................................... - -
Exercised .................................. (76,000) (1.00)
Forfeited .................................. - -
--------- --------
Outstanding at August 27, 2005 ............. 2,154,044 $ 4.06
========= ========
Warrants exercisable at August 27,2005 ..... 2,154,044 $ 4.06
========= ========
The following information applies to all warrants outstanding at August 27,
2005:
Warrants Outstanding Warrants Exercisable
------------------------- -----------------------
Weighted -
Average Weighted - Weighted -
Range Remaining Average Average
of Contractual Exercise Exercise
Prices Shares Life (Years) Price Shares Price
-------- --------- ------------ ---------- --------- ----------
$1.00 325,500 3.49 $ 1.00 325,500 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
---------
2,154,044
=========
NOTE 10 - CAPITAL STRUCTURE AND NET LOSS PER COMMON SHARE
---------------------------------------------------------
Capital Structure:
At August 27, 2005, the outstanding share capital of the Company is comprised
of: (i) 13,826,556 shares of common stock ("Common Stock"), and (ii) 2,553.7
shares of Series A Junior Participating Preferred Stock (the "Series A Preferred
Stock").
The Series A 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 Series A 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 Series A Preferred Stock, the Company shall
declare a dividend or distribution on the Series A Preferred Stock equal to any
amount declared on the Common Stock. Holders of the Series A Preferred Stock
(using the number of common shares into which each share of Series A 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 Series A 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 Series A Preferred
Stock are entitled to liquidation preferences over all other classes of capital
stock. The holders of Series A Preferred Stock shall receive an amount equal to
$1,000 per share of the Series A 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 Series A
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 Series A
Preferred Stock is convertible). Each share of Series A Preferred Stock carries
the voting rights on a basis such that the rights of the Series A Preferred
Stock as a whole correspond to 65 percent of the aggregate rights of the Series
A 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 Series A Preferred Stock
will automatically convert into shares of Common Stock on such a basis that,
following conversion, the holders of the Series A Preferred Stock will hold the
same proportional rights to general distributions and voting rights that they
held immediately prior to such conversion. The Series A 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 For the twenty-six weeks ended
August 27, 2005 August 27, 2004 August 27, 2005 August 28, 2004
--------------- --------------- --------------- ---------------
Allocation of net loss
Basic and Diluted:
- Common Stock .............. $(2,185,010) $ - $(2,479,506) $ -
- Series A Preferred ........ - (929,529) (1,833,994) (1,252,171)
----------- ----------- ----------- -----------
Net loss .................... $(2,185,010) $ (929,529) $(4,313,500) $(1,252,171)
=========== =========== =========== ===========
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:
13 weeks ended 26 weeks ended
08/27/05 08/28/04 08/27/05 08/28/04
------------ ------------ ----------- ------------
Weighted average number of Common
Stock shares - basic and diluted .... 13,768,930 - 13,734,420 -
Weighted average number of Series A
Preferred shares - basic and diluted 2,554 2,554 2,554 2,554
Basic and diluted net loss per share
- common ........................... $ (0.16) $ - $ (0.18) $ -
Basic and diluted net loss per share
- Series A Preferred ............... $ - $ (364) $ (718) $ (490)
NOTE 11 - SEGMENT AND GEOGRAPHIC INFORMATION
--------------------------------------------
13 WEEKS ENDED AUGUST 27, 2005
------------------------------
DIVISION HBC WAD TOTAL
--- --- -----
Revenues $16,827,000 $ 13,788 $16,840,788
Operating loss (1,470,484) (381,274) (1,851,758)
Net loss (1,710,064) (474,946) (2,185,010)
26 WEEKS ENDED AUGUST 27, 2005
------------------------------
DIVISION HBC WAD TOTAL
--- --- -----
Revenues $34,174,747 $ 17,102 $34,191,849
Operating loss (3,058,503) (561,549) (3,620,052)
Net loss (3,775,925) (537,575) (4,313,500)
Assets $23,237,339 $40,456,919 $63,694,258
GEOGRAPHIC
LONG-LIVED
REVENUES ASSETS
-------- ------
Thirteen weeks ended:
United States $10,750,980 $44,069,123
Canada 4,048,763 587,819
Other foreign countries 2,041,045 -
----------- -----------
Total $16,840,788 $44,655,942
=========== ===========
Twenty-six weeks ended:
United States $22,259,799
Canada 7,778,503
Other foreign countries 4,153,547
-----------
Total $34,191,849
===========
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
$258,807 for professional fees, facility usage and reimbursable expenses for the
twenty-six weeks ended August 27, 2005 and $260,151 for the twenty-six weeks
ended August 28, 2004. At August 27, 2005, the Company owed THGLLP $29,568. 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 twenty-six weeks ended August 27, 2005, ZVLLC
invoiced the Company for $19,078. For the twenty-six weeks ended August 28,
2004, ZVLLC invoiced the Company for $14,959. Effective May 20, 2005, the date
of the Merger, ZVLLC ceased providing consulting services to the Company. The
balance due ZVLLC at August 27, 2005 was $0.
Another member of the Board of Directors of Cenuco, Inc. (effective May 20,
2005) provided consulting services to the Company. For the twenty-six weeks
ended August 27, 2005, he invoiced the Company $5,000. For the twenty-six weeks
ended August 28, 2004 he did not invoice the Company. Effective May 20, 2005,
the date of the Merger, he ceased providing consulting services to the Company.
The balance due at August 27, 2005 was $0.
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 twenty-six weeks
ended August 27, 2005 and August 28, 2004.
26 weeks ended 26 weeks ended
August 27 August 28
2005 2004
-------------- --------------
Net sales ............................ $ 34,231,886 $ 34,026,057
Loss before extraordinary items ...... (5,114,306) (3,906,446)
Amortization of intangible assets .... (215,176) (215,176)
Net loss ............................. $ (5,299,235) $ (4,121,622)
Loss per common
share- basic and diluted ............. $ (.39) $ (.32)
Weighted average shares .............. 13,734,420 13,750,556
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 for purposes of closing on the Asset Acquisition and paying
existing indebtedness. The Company anticipates entering into the bridge
loan facility on or about 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 on or about October 21, 2005. 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 approximately $5 million for working
capital purposes.
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 will contain two business divisions, (1)
Health & Beauty Care (HBC) and (2) Wireless Application Development (WAD).
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 Canadian 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.
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 a
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 would make sales derived from
acquisitions extremely accretive.
Lander Customers
----------------
Approximately 65% of the Company's business is conducted in the United States,
23% in Canada and 12% outside North America. The Company's largest customer is
Wal-Mart, which comprises approximately 37% of the business conducted in the
U.S. and approximately 35% 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 those located in Latin America, Africa, the Middle East, as
well as, Mexico and the Philippines.
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 18,000 stores.
WIRELESS APPLICATION DEVELOPMENT (WAD)
The Wireless Application Development ("WAD") segment 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, the Company provides cellular carriers, Internet Service Providers,
resellers, and distributors a host of wireless video streaming products that can
generate an increase in subscribers of wireless data services, as well as
broadband Internet services.
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 access to new emerging
technologies provided by these organizations, as well as, co-operative marketing
programs, which provides 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. Additionally, the Company has successfully licensed
its technology to a specialty camera manufacturer and extensive testing
continues as we upgrade this specialty camera with our proprietary core
technology.
Our WAD segment, with its core proprietary (patent-pending) technology,
currently addresses one primary market; security and surveillance. This 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 world-wide.
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.
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 August 27, 2005. Prior to
the Merger the Wireless Application Development division's financial information
and other pertinent information is contained in the 10-Q for the first quarter
ended March 31, 2005 filed by Cenuco in May 2005.
THIRTEEN WEEKS ENDED AUGUST 27, 2005 COMPARED TO THE THIRTEEN WEEKS ENDED AUGUST
28, 2004
REVENUES
Net revenues for the thirteen weeks ended August 27, 2005 increased $368,341
(2.2%) when compared to net revenues for the thirteen weeks ended August 28,
2004.This quarter's volume was favorably impacted by a substantial increase in
sales on the Company's expanding line of premium value products which are
typically sold at Food, Drug and Mass Merchant outlets. The U.S. sales on these
premium products, grew from $2,238,000 in Q2 FY2005 to $4,535,000 in Q2 FY2006
or a 97.4% increase. This increase, however, was offset by a sales reduction of
$1,129,000 attributed to the termination of a prior year's marketing and
administrative service agreement for the sale of licensed products and a sales
decline of $926,000 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.
Additionally, the Company experienced a $300,000 increase in sales for private
label products in Canada, offset by a decline in International (exports) sales
of $200,000.
GROSS PROFIT
Consolidated gross profit declined by $0.4 million for the thirteen weeks ended
August 27, 2005 from $1.7 million for the thirteen weeks ended August 28, 2004.
Inflationary increases resulting from rising oil prices impacted commodity
pricing resulting in higher raw material prices for surfactants, mineral oil,
plastic bottles and caps negatively impacted the quarter by $1.0 million which
was partially offset by favorable product mix $.6 million relating to the launch
of the premium value Lander Essentials products.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses amounted to $3.2 million for the thirteen
weeks ended August 27, 2005 compared to $2.4 million for the thirteen weeks
ended August 28, 2004. This increase is primarily attributable to the Merger
with Cenuco on May 20, 2005. Selling and administrative costs of Cenuco's WAD
division added $0.4 million in total cost to the current period. Salaries and
salary related expenses of $0.2 million in conjunction with outside legal,
professional and audit fees of $0.3 million are the primary factors contributing
to the increase. Sales and marketing expenses are $0.1 million below prior year
primarily due to reductions in salary and salary related expenses partially
offset by higher broker commissions and promotional expenses related to the
launch of the new premium product line "Lander Essentials".
TWENTY-SIX WEEKS ENDED AUGUST 27, 2005 COMPARED TO THE TWENTY-SIX WEEKS ENDED
AUGUST 28, 2004
REVENUES
Net revenues for the twenty-six weeks ended August 27, 2005 increased $180,534
(0.5%) when compared to net revenues for the twenty-six weeks ended August 28,
2004. The increase resulted from increased sales to select major retailers due
to introductions of new product offerings.
Sales revenue for the 26 weeks was favorably impacted by a substantial increase
in sales on the Company's expanding line of premium value products which are
typically sold at Food, Drug and Mass Merchant outlets. The US sales on these
premium products, increased from $4,810,000 in FY2005 to $8,680,000 in FY2006 or
an 80.5% gain. This gain, however, was offset by a reduction of $1,100,00
attributed to the termination of a prior year's marketing and administrative
service agreement for sale of licensed products along with a decline of
$3,019,000 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. Additionally the
company experienced a $429,000 increase in sales for private label products in
Canada.
During the first quarter, the Company launched a strategically focused new
premium product line "Lander Essentials" This line is an upscale collection of
bath and body lotion products. The "Lander Essentials" line has been very well
received by retailers throughout the U.S., with over 16,000 stores committed
purchasing the product line by the end of Q2. As planned, additional premium
value "Lander Essentials" products have subsequently been developed,
specifically in the Lotions and the Foam Bath categories. These new products are
scheduled to begin shipping in Q3, and are expected to increase Lander's volume
in the premium value category. The Company's focus and strategy is to increase
its expansion for its premium, higher margin products.
GROSS PROFIT
Consolidated gross profit declined to $2.3 million for the twenty-six weeks
ended August 27, 2005 from $4.3 million for the twenty-six weeks ended August
28, 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. This resulted in higher raw
material prices for surfactants, mineral oil, plastic bottles and caps, which
negatively impacted gross profit by $1.9 million versus prior year. An agreement
with a third party manufacturer that was terminated in Q1 produced a $0.1
million reduction to gross profit as inventories were liquidated at below market
pricing.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses amounted to $5.9 million for the twenty-six
weeks ended August 27, 2005 compared to $5.0 million for the twenty-six weeks
ended August 28, 2004. This increase is primarily attributable to the Merger
with Cenuco on May 20, 2005. Selling and administrative costs of Cenuco's WAD
division added $0.4 million to total cost in the current period. In addition,
salary and salary related expenses in conjunction with outside legal,
professional and audit fees amounted to $0.4 million. In addition the increase
included a one time promotional allowance to a major retailer of $0.1 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 $0.1 million.
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 For the twenty-six weeks ended
August 27, 2005 August 27, 2004 August 27, 2005 August 28, 2004
--------------- --------------- --------------- ---------------
Allocation of net loss
Basic and Diluted:
- Common Stock .............. $(2,185,010) $ - $(2,479,506) $ -
- Series A Preferred ........ - (929,529) (1,833,994) (1,252,171)
----------- ----------- ----------- -----------
Net loss .................... $(2,185,010) $ (929,529) $(4,313,500) $(1,252,171)
=========== =========== =========== ===========
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:
13 weeks ended 26 weeks ended
08/27/05 08/28/04 08/27/05 08/28/04
------------ ------------ ----------- ------------
Weighted average number of Common
Stock shares - basic and diluted .... 13,768,930 - 13,734,420 -
Weighted average number of Series A
Preferred shares - basic and diluted 2,554 2,554 2,554 2,554
Basic and diluted net loss per share
- common ........................... $ (0.16) $ - $ (0.18) $ -
Basic and diluted net loss per share
- Series A Preferred ............... $ - $ (364) $ (718) $ (490)
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 August 27, 2005, the amount of availability was $2,841,273. On February 28,
2005, the amount of availability was $567,995.
CASH FLOW - TWENTY-SIX WEEKS ENDED AUGUST 27, 2005 AND AUGUST 28, 2004
Net cash used in operating activities was $3.4 million and $0.4 million,
respectively for the twenty-six weeks ended August 27, 2005 and August 28, 2004.
For the twenty-six weeks ended August 27, 2005, the items primarily contributing
to negative operating cash flow consisted of the net loss of $4.3 million less
non-cash expenses of $0.9 million, plus increases in accounts receivable of $0.3
million, increases in other assets of $1.1 million and a reduction in accounts
payable of $0.1 million, offset by decreases in inventory of $1.3 million and
other liabilities of $0.2 million. For the twenty-six weeks ended August 28,
2004, the major contributors to negative operating cash flow was a net income
loss of $1.3 million, less non-cash expenses of $0.7 million, an increase in
accounts payable of $1.3 million, offset by increases in trade receivables and
prepaid assets of $1.1 million.
Net cash provided by (used in) investing activities amounted to $5,836,724 for
the twenty-six weeks ended August 27, 2005 compared to $(343,016) for the
twenty-six weeks ended August 28, 2004. For the twenty-six weeks ended August
27, 2005, the major activity consisted of cash received of $6,235,441 from
reverse acquisition of Cenuco. Other 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 of $343,016 was also
expended for deferred expenditures related to acquisitions. For the twenty-six
weeks ended August 28, 2004, cash of $343,016 was expended for capital
equipment.
Net cash provided by (used in) financing activities for the twenty-six weeks
ended August 27, 2005 amounted to $(1,997,909) compared to cash provided by
financing activities for the thirteen weeks ended August 28, 2004 of $705,052.
The majority of the activity relates to borrowings and repayments under the
Company's line of credit, plus other related debt payments.
AT AUGUST 27, 2005 CENUCO HAD CASH AND CASH EQUIVALENTS OF $0.4 MILLION.
MANAGEMENT BELIEVES THIS COMBINED WITH AVAILABILITY FROM THE REVOLVER OF $2.8
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
$258,807 for professional fees, facility usage and reimbursable expenses for the
twenty-six weeks ended August 27, 2005 and $260,151 for the twenty-six weeks
ended August 28, 2004. At August 27, 2005, the Company owed THGLLP $29,568. A
Managing Member of HACI (pre-Merger), is a founding Partner and is currently a
non-active partner in THGLLP.
Zephyr Ventures LLC (ZVLLC) provided consulting services to the Company for
fees. A member of the Board of Directors of Cenuco (effective May 20, 2005) is a
Managing Member of ZVLLC. For the twenty-six weeks ended August 27, 2005, ZVLLC
invoiced the Company for $19,078. For the twenty-six weeks ended August 28,
2004, ZVLLC invoiced the Company for $14,959. Effective May 20, 2005, the date
of the Merger, ZVLLC ceased providing consulting services to the Company. The
balance due ZVLLC at August 27, 2005 was $0.
Another member of the Board of Directors of Cenuco, Inc. (effective May 20,
2005) provided consulting services to the Company. For the twenty-six weeks
ended August 27, 2005, he invoiced the Company $5,000. For the twenty-six weeks
ended August 28, 2004 he did not invoice the Company. Effective May 20, 2005,
the date of the Merger, he ceased providing consulting services to the Company.
The balance due at August 27, 2005 was $0.
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 and twenty-six weeks ended August 27, 2005. Trade
accounts receivable from these customers represented approximately 49% of net
consolidated receivables at August 27, 2005. Wal-Mart Stores Inc. accounted for
approximately 25% of consolidated net revenues for the thirteen and twenty-six
weeks ended August 27, 2005. Dollar Tree Stores Inc accounted for approximately
10% of net consolidated revenues for the thirteen and twenty-six weeks ended
August 27, 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.
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:
AUGUST 27, 2005 FEBRUARY 28, 2005
Revolving line of credit loans ..... $ 6,591,587 $ 8,198,935
Machinery and equipment loans ...... 916,875 1,039,125
Real estate term loans ............. 1,765,441 1,981,618
Subordinated notes ................. 4,500,000 4,500,000
Capital leases ..................... 55,752 85,158
----------- -----------
13,829,655 15,804,836
Less current portion ............... 7,268,440 8,929,540
----------- -----------
Total .............................. $ 6,561,215 $ 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 August 27, 2005, unused availability under the
borrowing base calculation amounted to $2,841,273. As of February 28, 2005
the unused availability amounted to $567,995. Interest on outstanding
loans is payable monthly. For purposes of classifying the outstanding debt
in the August 27, 2005 and February 28, 2005 balance sheets, the Company
has reflected the $6,591,587 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.
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 August 27, 2005, the national bank
prime rate was 6.50% and the one-, two- and three-month LIBOR rates were 3.67%,
3.76%, and 3.86%, respectively. The interest rate on the Loans was 7.75% at
August 27, 2005. As of August 28, 2004, the national bank prime rate was 4.50%
and the one-, two- and three-month LIBOR rates were 1.65%, 1.72%, and 1.79%,
respectively. The interest rate on the Loans was 5.75% at August 28, 2004.
The Loans contained 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
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
July 15, 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 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
$522,964 and $297,964 as of August 27, 2005 and February 28, 2005, respectively.
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. In addition, HACI
would be required to pay interest 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 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:
AUGUST 27, 2005 FEBRUARY 28, 2005
2006 $ 7,268,440 $ 8,929,540
2007 6,561,215 6,875,296
------------ ------------
$ 13,829,655 $ 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:
AUGUST AUGUST FEBRUARY FEBRUARY
27, 2005 27, 2005 28, 2005 28, 2005
CAPITAL OPERATING CAPITAL OPERATING
LEASES LEASES LEASES LEASES
2006 ................ $ 25,488 $ 366,725 $ 59,944 $ 762,790
2007 ................ 31,949 441,877 31,820 342,136
2008 ................ 0 342,262 0 282,940
2009 ................ 0 210,962 0 207,105
2010 ................ 0 205,746 0 204,428
2011 ................ 0 102,000 0 102,000
-------- ----------- -------- -----------
Total minimum
lease payments ...... $ 57,437 $ 1,669,572 $ 91,764 $ 1,901,399
=========== ===========
Less amounts
representing Interest
(at rates ranging
from 5.25% to 8.31% . (1,685) (6,606)
-------- --------
Present value of net
minimum Capital lease
payments ............ $ 55,752 $ 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.
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
$35,000 per quarter. $14.0 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.
PART II. Other Information
Item 1. Legal Proceedings - WAD division:
Raymond Anthony Joao is the owner of United States Patents Nos.
6,587,046, 6,542,076 and 6,549,130 (the "Patents") which cover
apparatuses and methods for transmitting video information to remote
devices and/or over the Internet. In order to facilitate business
discussions, Cenuco and Joao entered into a
"Confidentiality/Non-Disclosure Agreement", dated November 4, 2004 (the
"Agreement"). On February 1, 2005, Joao commenced an action against
Cenuco in Federal District Court, Southern District of New York,
alleging that Cenuco infringes the Patents (Joao v. Cenuco, Inc., 05
Civ. 1037 (CM) (MDF)). Cenuco timely answered the complaint denying
infringement, filed a motion to dismiss complaint based on the
Agreement and filed a counterclaim based on the Agreement.
Subsequently, the Court denied Cenuco's motion to dismiss the complaint
(376 F. Supp. 2d 380) and Cenuco's counterclaim (October 3, 2005, Order
and Decision not published at this time). This matter remains open for
a trial on the merits.
After consulting with counsel, management believes that the Patents are
invalid and hence infringement is not possible. Management believes
that Joao's action is without merit, and that the chances of Joao
prevailing are remote.
There is no other pending material litigation to which Cenuco is a
party or to which any of its properties are 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: Joseph A. Falsetti, President & CEO
/s/ Joseph A. Falsetti
By: Brian J. Geiger, Chief Financial Officer
/s/ Brian J. Geiger
Date: October 17, 2005