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 November 26, 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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
On November 26, 2005, the issuer had outstanding 13,861,556 shares of common
stock, $.001 par value per share.
1
CENUCO, INC. AND SUBSIDIARIES
FORM 10-Q
THIRTEEN WEEKS ENDED NOVEMBER 26, 2005
INDEX
PAGE
PART I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
As of November 26, 2005 (Unaudited) and February 28, 2005 3
Consolidated Statements of Operations (Unaudited)
For the Thirteen and Thirty-Nine Weeks ended
November 26, 2005 and November 27, 2004 4
Consolidated Statement of Stockholders'/Members' Equity (Deficit)
(Unaudited) For the Thirty-Nine Weeks ended November 26, 2005 5
Consolidated Statements of Cash Flows (Unaudited)
For the Thirty-Nine Weeks ended
November 26, 2005 and November 27, 2004 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis And Results of Operations 25
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 37
PART II. - OTHER INFORMATION
Item 1 - Legal Proceedings 37
Item 2 - Exhibits 38
Signatures 38
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
November 26, 2005 February 28, 2005
----------------- -----------------
Current Assets:
Current Assets:
Cash and cash equivalents ............................ $ 4,488,488 $ 31,763
Trade receivables, net of allowance for doubtful
accounts of $586,651 at November 26, 2005 and
$547,306 at February 28, 2005 ..................... 8,300,589 8,002,867
Notes receivable, current portion .................... 93,413 -
Inventories .......................................... 16,886,032 8,725,952
Prepaid expenses and other ........................... 2,775,394 564,617
----------------- -----------------
Total current assets ................................. 32,543,916 17,325,199
Property, plant and equipment, net ................... 6,576,136 6,017,533
Goodwill ............................................. 36,501,655 -
Intangibles, net ..................................... 49,533,204 -
Notes receivable, less current portion ............... 540,467 -
Other assets, net .................................... 2,714,888 692,817
----------------- -----------------
Total assets ......................................... $ 128,410,266 $ 24,035,549
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ..................................... $ 9,179,216 $ 10,541,956
Accrued expenses ..................................... 3,229,119 2,845,485
Bridge loan .......................................... 80,000,000 -
Current portion of long-term debt .................... 43,767 8,929,540
----------------- -----------------
Total current liabilities ............................ 92,452,102 22,316,981
Long-term debt, less current portion ................. - 6,875,296
Long-term pension obligation ......................... 728,778 673,328
Other liabilities .................................... 200,000 -
----------------- -----------------
Total liabilities .................................... 93,380,880 29,865,605
Stockholders' equity:
Preferred stock, par value $.001 per share;
Authorized 1,000,000 shares; issued 2,553.6746
shares at November 26, 2005; no shares issued at
February 28, 2005 ................................. 3 -
Common stock, par value $.001 per share;
Authorized 25,000,000 shares; issued 13,861,556 shares
at November 26, 2005; no shares issued at February
28, 2005 .......................................... 13,862 -
Additional paid in capital ........................... 37,886,618 -
Accumulated deficit .................................. (2,703,634) -
Members' contribution ................................ - 2,000
Accumulated members' loss ............................ - (5,707,597)
Accumulated comprehensive loss ....................... (167,463) (124,459)
----------------- -----------------
Total stockholders' equity (deficit) ................. 35,029,386 (5,830,056)
----------------- -----------------
Total liabilities and stockholders' equity ........... $ 128,410,266 $ 24,035,549
================= =================
See accompanying notes to consolidated financial statements.
3
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Thirteen weeks ended Thirty-nine weeks ended
Nov 26, 2005 Nov 27, 2004 Nov 26, 2005 Nov 27, 2004
------------ ------------ ------------ -------------
Net sales ......................................... $ 18,376,637 $ 18,017,820 $ 52,568,486 $ 52,029,135
Costs of sales .................................... 16,748,620 16,120,394 48,648,164 45,849,398
------------ ------------ ------------ ------------
Gross profit ...................................... 1,628,017 1,897,426 3,920,322 6,179,737
Operating expenses:
Selling and marketing ............................. 965,645 854,986 2,809,510 2,871,377
General and administrative ........................ 2,961,213 1,679,597 7,029,705 4,613,929
------------ ------------ ------------ ------------
Total operating expenses .......................... 3,926,858 2,534,583 9,839,215 7,485,306
Loss from operations .............................. (2,298,841) (637,157) (5,918,893) (1,305,569)
Other income, net ................................. 2,812,398 391,287 2,884,573 446,138
Interest expense, net ............................. (737,686) (340,534) (1,503,308) (979,144)
------------ ------------ ------------ ------------
Total other/interest expense ...................... 2,074,712 50,753 1,381,265 (533,006)
------------ ------------ ------------ ------------
Loss before income taxes .......................... (224,129) (586,404) (4,537,628) (1,838,575)
Income taxes ...................................... - - - -
------------ ------------ ------------ ------------
Net loss .......................................... $ (224,129) $ (586,404) $ (4,537,628) $ (1,838,575)
============ ============ ============ ============
Basic and diluted net loss per share - common ..... $ (0.02) - $ (0.20) $ -
Basic and diluted net loss per share - preferred
(see Note 11) .................................. $ - $ (230) $ (718) $ (720)
Shares used in computing net loss per share:
Basic and diluted - common ..................... 13,833,094 - 13,765,693 -
Basic and diluted - preferred .................. 2,554 2,554 2,554 2,554
See accompanying notes to consolidated financial statements.
4
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' / MEMBERS' EQUITY (DEFICIT)
FOR THE THIRTY-NINE WEEKS ENDED NOVEMBER 26, 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 ............. - - - - - (2,703,634)
Total Comprehensive
Loss:
Conversion from
LLC to Corporation .... 2,553.7 3 - - (7,541,591) -
Exercise of warrants .... 111,000 111 110,889
Reverse acquisition
of Cenuco, Inc. ....... - - 13,750,556 13,751 45,317,320 -
------- --- ---------- ------- ----------- -----------
BALANCE AT
NOVEMBER 26, 2005 ..... 2,553.7 $ 3 13,861,556 $13,862 $37,886,618 $(2,703,634)
------- --- ---------- ------- ----------- -----------
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 ........... - - (43,004) (43,004)
Net loss to date of
recapitalization
and Merger ............ - (1,833,994) - (1,833,994)
Net loss subsequent
to Merger ............. - - - (2,703,634)
------------
Total Comprehensive
Loss: ................. (4,580,632)
------------
Conversion from
LLC to Corporation .... - 7,541,591 - 3
Exercise of warrants .... 111,000
Reverse acquisition
of Cenuco, Inc. ....... (2,000) - - 45,329,071
------------ ----------- ------------- ------------
BALANCE AT
NOVEMBER 26, 2005 ..... $ - $ - $ (167,463) $ 35,029,386
------------ ----------- ------------- ------------
See accompanying notes to consolidated financial statements.
5
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Thirty-nine weeks ended
November 26, 2005 November 27, 2004
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... ($ 4,537,628) ($ 1,838,575)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization ................................. 970,383 723,475
Provision for bad debts ....................................... 214,971 184,305
Amortization of deferred financing costs ...................... 467,451 98,799
Gain on settlement of Seller's Note ........................... (2,500,000) -
Gain on disposal of fixed assets .............................. (32,833) -
Changes in operating assets and liabilities:
Accounts receivable ......................................... (457,722) (2,055,076)
Inventories ................................................. (8,138,441) (996,011)
Prepaid expenses and other ................................. (1,772,998) (177,014)
Other assets ................................................ (130,696) 9,000
Accounts payable ............................................ (1,458,978) 3,205,707
Accrued expenses ............................................ 206,283 (43,516)
Long-term pension obligations ............................... 55,450 89,757
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES ......................... (17,114,758) (799,149)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in cash from reverse acquistion of Cenuco ...... 6,002,887 -
Proceeds from note receivable ............................... 71,142 -
Acquisition costs ........................................... 422,837 (6,075)
Purchase of property, plant and equipment ................... (1,126,800) (486,184)
Disposal of fixed assets .................................... - 37,301
Purchase of intellectual property ........................... ($47,693,150) -
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ......................... (42,323,084) (454,958)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bridge loan proceeds ........................................ 80,000,000 -
Net (repayments) borrowings of short-term debt/revolver ..... (5,698,935) 1,832,176
Financing costs ............................................. (2,912,360) (26,849)
Repayments of long-term debt ................................ (6,843,890) (507,639)
Repayments of capital leases ................................ (718,244) (44,789)
Proceeds from exercise of warrants .......................... 111,000 -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..................... 63,937,571 1,252,899
------------ ------------
Effect of exchange rates on cash .............................. (43,004) 1,208
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... 4,456,725 -
Cash and cash equivalents at beginning of period .............. 31,763 1,827
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 4,488,488 $ 1,827
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest ...................................... $ 1,819,791 $ 866,495
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 acquired ....................................... $ 39,700,805 -
============
See accompanying notes to consolidated financial statements.
6
Cenuco, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
November 26, 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 fair value of the assets
acquired and liabilities assumed in the reverse acquisition of Cenuco. The
estimated fair value of the assets acquired less liabilities 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
------------
7
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 thirty-nine weeks ended November 26, 2005 and November 27, 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.
8
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 produced by the Company 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. Inventories
acquired in the November 16, 2005 acquisition of Playtex assets have been valued
at fair value and amounted to approximately $ 8.8 million as of November 26,
2005.
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.
9
Goodwill and Indefinite Lived Intangibles: As a result of the Merger on May 20,
2005 (see Note 1), the Company recorded goodwill of $36,501,655. Goodwill
represents the excess of cost over the fair value of identifiable net assets
acquired. As a result of the purchase of assets from Playtex on November 16,
2005 (see Note 3), the Company has made a preliminary allocation of the purchase
price to the estimated fair value of the assets acquired, which resulted in
$16.9 million being allocated to intangible assets (brand names and product
formulas), initially estimated to have indefinite lives. 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.
Amortizable Intangible Assets
SFAS 142 also requires that intangible assets with finite useful lives be
amortized over their respective estimated useful lives and reviewed for
impairment. As a result of the merger on May 20, 2005, the Company recorded
customer lists of $2,000,000 and a brand name of $473,025, with estimated useful
lives of five and fifteen years, respectively. Amortization expense of the
Company's customer list and brand name totaled $107,588 and $224,634 for the
thirteen and thirty-nine weeks ended November 26, 2005. There was no
amortization expense on these intangible assets in prior periods. For the
Playtex asset acquisition on November 16, 2005, a preliminary allocation of the
purchase price resulted in $30.4 million being allocated to customer
relationships with estimated useful lives initially estimated of up to 25 years,
to be amortized on an accelerated basis. The amortization expense recorded for
the thirteen or thirty-nine weeks ended November 26, 2005 was $33,337.
Other Assets, Net: Other short-term assets, net consist primarily of deferred
financing costs of approximately $2.7 million related to the bridge loan with a
term of six months. The deferred financing costs are being amortized on a
straight-line basis over the anticipated six-month term of the bridge loan
ending May 15, 2006. Amortization expense related to deferred financing costs
was $354,770 and $467,451, respectively, for the thirteen and thirty-nine weeks
ended November 26, 2005 and $32,709 and $98,799, respectively, for the thirteen
and thirty-nine weeks ended November 27, 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.
10
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.
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.
11
Five trade customers comprised 42% and 46% respectively of Cenuco's net sales,
(with two customers comprising approximately 34% and 38% respectively) for the
thirteen and thirty-nine weeks ended November 26, 2005. At November 26, 2005 the
same five trade customers represented 42% of receivables, with one customers
comprising 29%.
Five trade customers comprised 44% and 44% respectively of Cenuco's net sales,
(with two customers comprising approximately 35% and 36% respectively) for the
thirteen and thirty-nine weeks ended November 27, 2004. At November 27, 2004 the
same five trade customers represented 43% of receivables, with one customer
comprising 28%.
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 November 26, 2005 and February 28, 2005 has been recorded by management due
to the uncertainty that future income will be generated and the related deferred
tax assets 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.
12
NOTE 3 - PLAYTEX ACQUISITON
On November 16, 2005, Lander US and Lander Intangibles Corporation (Lander
Intangibles), a newly formed wholly owned subsidiary of HACI, acquired several
Playtex's brands, including Baby Magic(R), Binaca(R), Mr. Bubble(R), Ogilvie(R),
Tek(R), Dentax(R), Dorothy Gray(R), Better Off(R) and Tussy(R). At the closing,
Lander US and Lander Intangibles initially paid a total cash purchase price of
$59.1 million, including $2.1 million of costs related to acquisition. The $57.0
million purchase price paid to Playtex is subject to certain post closing
adjustments dependent upon the amount of product inventory delivered to Lander
US at the closing. In December 2005, this adjustment was determined to be an
approximate $1.3 million reduction in the purchase price (to bring the total to
$57.8 million, including acquisition costs) which has been reflected as a
current receivable from Playtex in the accompanying balance sheet under the
caption prepaid expenses and other. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangibles, the Company
has made a preliminary allocation of the total purchase price to the assets
acquired based on relative fair value.
The preliminary allocation of Purchase Price is as follows:
Inventory ......................... $ 9,600,000
Property, Plant and Equipment ..... 900,000
Brand Names and Product Formulas .. 16,898,477
Customer Relationships ............ 30,419,673
------------
Total Purchase Price ........... $ 57,818,150
------------
In order to finance the acquisition of the brands from Playtex ($58.0 million),
fund financing fees ($2.8 million) for Bridge Loan, repay certain existing
indebtedness of the Company and its subsidiaries including the Seller Note and
the Financing Arrangement referred to below under Long-Term Debt (approximately
$13.8 million in total) and provide working capital for the operations of Lander
US (approximately $5.4 million), on November 16, 2005, Cenuco, Lander US, HACI
and Lander Intangibles (collectively, the "Borrowers"), entered into an $80
million Bridge Loan Term Agreement (the "Bridge Loan") with Prencen, LLC
("Prencen") and Highgate House Funds Ltd. ("Highgate"), as lenders, and Prencen,
as agent for the lenders.
The Bridge Loan bears interest at an annual rate of 5.5% above the three-month
LIBOR rate (set 2 days in advance on November 14, 2005 at 4.34%) set for the
first 90 days after the closing date of the Bridge Loan. The interest rate
margin over LIBOR shall increase by 5% per annum at the end of that 90-day
period to 10.5%. Also at the end of the 90 day period the three-month LIBOR rate
will be reset on February 12, 2006 for the next 90 days (February 15 to May 15,
2006). Upon the occurrence and during the continuance of an event of default,
the annual rate of interest will increase by 5.5% over the rate of interest
otherwise in effect. Interest accrues monthly, in arrears. The Bridge Loan is
due and payable on May 15, 2006. In addition, the Borrowers shall immediately
prepay the Bridge Loan from the proceeds of the Financing Facility (as described
below), as well as the net cash proceeds of any non-ordinary course asset sales
and 50% of the amount of any post-closing inventory adjustment in Lander's
favor. The borrowings under the Bridge Loan are secured by a first priority lien
against all assets of the Borrowers and HREI, and by a pledge of the shares in
Cenuco owned by two shareholders.
13
NOTE 4 -- INVENTORIES
Inventory consists of the following:
NOVEMBER 26, FEBRUARY 28,
2005 2005
------------ ------------
Raw materials ...... $ 3,558,027 $ 2,900,803
Finished goods ..... 13,328,005 5,825,149
------------ ------------
$ 16,886,032 $ 8,725,952
============ ============
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
NOVEMBER 26, FEBRUARY 28,
2005 2005
------------ ------------
Land .............................. $ 660,000 $ 660,000
Computer equipment and software ... 1,019,254 890,020
Furniture and fixtures ............ 254,690 252,717
Building .......................... 2,644,864 2,644,864
Machinery and equipment ........... 3,593,165 2,961,469
Dies and molds .................... 475,969 75,731
Leasehold improvements ............ 130,893 118,571
Construction in progress .......... 140,678 77,959
------------ ------------
8,919,513 7,681,331
Less accumulated depreciation
and amortization ................ (2,343,377) (1,663,798)
------------ ------------
$ 6,576,136 $ 6,017,533
============ ============
14
Depreciation and amortization expense related to property, plant and equipment
totaled $344,899 and $970,383, respectively for the thirteen and thirty-nine
weeks ended November 26, 2005 and $223,232 and $723,475, respectively, for the
thirteen and thirty-nine weeks ended November 27, 2004.
As of November 26, 2005 and February 28, 2005, machinery and equipment includes
assets under capital leases totaling $153,559. Accumulated amortization on the
capital leases totaled $35,830 and $24,314 as of November 26, 2005 and February
28, 2005, respectively. Amortization expense related to capital leases is
included in depreciation and amortization expense for the thirteen and
thirty-nine weeks ended November 26, 2005 and November 27, 2004.
NOTE 6 -- LONG-TERM DEBT
On October 10, 2005, Cenuco, (the parent of HACI following the May 2005 merger
transaction (see Note 1)), entered into agreements with Prencen and Highgate
(both of whom also participated in the Bridge Loan financing facility described
in Note 3) and Cornell Capital Partners ("Cornell") for equity and convertible
debt financing (the "Financing Facility"), to be used, among other things, as
long term financing to repay the Bridge Loan. As part of the closing of the
Playtex brands acquisition and the related Bridge Loan facility described in
Note 3, the terms of the Financing Facility were amended on November 16, 2005 to
include various modifications, included in the description below.
The Financing Facility, as amended, includes the following: (i) proceeds of an
aggregate of $11 million from the sale of shares of a new series of Cenuco
participating preferred stock, convertible, subject to certain restrictions,
into an aggregate of 3,150,652 shares of Cenuco common stock, along with the
issuance of warrants exercisable for a period of 5 years to acquire an aggregate
of 394,736 shares of common stock at an exercise price of $4.37 per share and
550,459 shares of common stock at an exercise price of $3.92 per share and (ii)
proceeds of $69 million from the issuance of a 5 year secured debenture,
convertible into common stock of Cenuco at any time, subject to certain
restrictions, at a per share conversion price of 95% of the lowest closing bid
price of the common stock for the 45 trading days preceding the date of
conversion, bearing interest at 12% per annum, along with warrants (the "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 886,877 shares of
common stock at an exercise price of $3.92 per share. The exercise price of the
Debt Warrants noted above is subject to a discount to 20% of the then current
conversion price in the event certain conditions of default are triggered under
the secured debenture.
15
Long-term debt consists of the following:
NOVEMBER 26, FEBRUARY 28,
2005 2005
------------ ------------
Revolving line of credit loans ... $ 0 $ 8,198,935
Machinery and equipment loans .... 0 1,039,125
Real estate term loans ........... 0 1,981,618
Subordinated notes ............... 0 4,500,000
Capital leases ................... 43,767 85,158
------------ ------------
43,767 15,804,836
Less current portion ............. 43,767 8,929,540
------------ ------------
$ 0 $ 6,875,296
============ ============
In connection with the Acquisitions (occurring in 2003 - see Note 1), HACI/HREI
obtained long-term financing commitments (Financing Arrangement) from a
financial institution. As indicated in the table above and discussed further in
Note 3, all components of the Financing Arrangement were repaid in November 2005
from the proceeds of the Bridge Loan. The Financing Arrangement was 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 were available in one-year increments after the
initial term. Available borrowings were determined by a
borrowing base calculation using eligible receivables and
inventories of Lander US and Lander Canada, which were the
collateral for this facility. As of February 28, 2005 the
unused availability amounted to $567,995. Interest on
outstanding balance was payable monthly. For purposes of
classifying the outstanding debt in the February 28, 2005
balance sheets the Company has reflected $8,198,935 of
borrowings under the revolving line of credit facility as a
current liability, since it was subject to collection
lock-box arrangements and contains a subjective acceleration
clause. On November 16, 2005, the outstanding balance was
paid in full with the proceeds from the short-term Bridge
Loan and this revolving line of credit was terminated.
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 were subject to
termination upon the expiration of the revolving line of
credit and were collateralized by the machinery and
equipment of Lander US and Lander Canada. Principal payments
aggregating $20,375 plus interest were payable monthly. On
November 16, 2005, the outstanding balance of this loan was
paid in full with the proceeds from the short-term Bridge
Loan.
16
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 was subject to termination upon the
expiration of the revolving line of credit and was
collateralized by the Lander US production plant located in
Binghamton, New York. Principal payments aggregating $36,029
plus interest were payable monthly. On November 16, 2005,
the outstanding balance of this loan was paid in full with
the proceeds from the short-term Bridge Loan.
Interest rates on the Loans was at an annual interest rate of a national bank's
prime rate plus 1.25%. HACI/HREI had 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%. 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 fixed charge ratio was
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.
As part of the HACI/HREI Acquisition of the Lander US business, HACI also had
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 was subordinate to the Financing Agreement. Interest is payable quarterly
at an annual interest rate of 10%. Annual principal payments of $1,166,667 were
required under this Seller Note; however a provision permitted the Company to
defer principal payments if certain financial targets, pursuant to the Financing
Arrangement were 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 had been deferred until June 2006. Additionally,
there was a provision in the Seller Note that permitted the deferral of interest
payments in the event of non-compliance with certain covenants contained in the
Financings Arrangement. Accordingly, HACI had not paid any interest accrued on
the Seller Note from July 1, 2004. Accrued interest on the Seller Note totaled
$519,841 and $257,773 as of November16, 2005 and February 28, 2005,
respectively.
On March 16, 2005, HACI and the seller entered into Settlement and Release
Agreement whereby HACI had 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 was available to HACI up to
November 30, 2005. In exchange for being given this option, HACI, 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. On
November 16, 2005, $2,000,000 plus accrued interest of $519,201 was paid on the
Seller Note. On December 1, 2005, a final interest payment of $640 was made in
full payment of the Seller Note. The payments were made from the proceeds of the
short-term Bridge Loan. As a result of the repayment and full settlement of the
Seller Note, a gain of $2,500,000 was recorded as the full amount of the Seller
Note was retired in accordance with Settlement and Release Agreement.
17
The aggregate maturities of long-term debt are as follows:
NOVEMBER 26, 2005 FEBRUARY 28, 2005
----------------- -----------------
FY
2006 ... $ 43,767 $ 8,929,540
2007 ... 0 6,875,296
----------------- -----------------
$ 43,767 $ 15,804,836
================= =================
NOTE 7 -- INCOME TAXES
In each period presented the effective income tax rate differs from the
statutory rate of 34% primarily due to the inability to recognize tax benefits
on current losses.
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:
NOVEMBER NOVEMBER FEBRUARY FEBRUARY
26, 2005 26, 2005 28, 2005 28, 2005
CAPITAL OPERATING CAPITAL OPERATING
LEASES LEASES LEASES LEASES
-------- ----------- -------- -----------
2006 ......................... $ 12,019 $ 239,527 $ 59,944 $ 762,790
2007 ......................... 32,633 590,899 31,820 342,136
2008 ......................... 344,159 0 282,940
2009 ......................... 213,791 0 207,105
2010 ......................... 206,438 0 204,428
2011 ......................... 102,000 0 102,000
Total minimum lease payments . $ 44,652 $ 1,696,814 $ 91,764 $ 1,901,399
=========== ===========
Less amounts representing
Interest (at rates ranging
from 5.25% to 8.31%) ....... (885) (6,606)
-------- --------
Present value of net minimum
Capital lease payments ..... $ 43,767 $ 85,158
======== ========
18
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 November 26, 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. During the thirteen and thirty-nine weeks ended November
26, 2005, no options were exercised.
During the thirteen and thirty-nine weeks ended November 26, 2005, 35,000 and
111,000 warrants, respectively were exercised at an exercise price of $1 per
share.
19
The following information applies to all warrants outstanding at
November 26, 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 ........ 290,500 3.24 $ 1.00 290,500 1.00
$ 4.00 ........ 105,784 4.84 $ 4.00 105,784 4.00
$ 4.50 ........ 1,372,760 3.72 $ 4.50 1,372,760 4.50
$ 5.00 to
$ 6.50 ........ 350,000 3.84 $ 5.21 350,000 5.21
---------
2,119,044
=========
NOTE 10 - CAPITAL STRUCTURE AND NET LOSS PER COMMON SHARE
Capital Structure:
At November 26, 2005, the outstanding share capital of the Company is comprised
of: (i) 13,861,556 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.
20
Net loss per share:
The following table shows how the net loss was allocated using the two-class
method (see Note 2):
For the thirteen weeks ended For the thirty-nine weeks ended
---------------------------- -------------------------------
November November November November
26, 2005 27, 2004 26, 2005 27, 2004
----------- ---------- ------------ -------------
Allocation of net loss
Basic and Diluted:
- Common Stock ............... $ (224,129) $ - $ (2,703,634) $ -
- Series A Preferred ......... - (586,404) (1,833,994) (1,838,575)
----------- ---------- ------------ -------------
Net loss ..................... $ (224,129) $ (586,404) $ (4,537,628) $ (1,838,575)
=========== ========== ============ =============
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:
Thirteen weeks ended Thirty-nine weeks ended
-------------------------- --------------------------
Nov 26, 2005 Nov 27, 2004 Nov 26, 2005 Nov 27, 2004
------------------------------------------------------
Weighted average number of Common Stock
shares - basic and diluted ............ 13,833,094 - 13,765,693 -
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 ................................ $ (0.02) $ - $ (0.20) $ -
Basic and diluted net loss per share -
Series A Preferred .................... $ - $ (230) $ (718) $ (720)
21
NOTE 11- SEGMENT AND GEOGRAPHIC INFORMATION
The results related to the Playtex acquisition are reported in HBC Division.
13 WEEKS ENDED NOVEMBER 26, 2005
DIVISION HBC WAD TOTAL
------------ ------------ -------------
Revenues ................ $ 18,362,074 $ 14,563 $ 18,376,637
Operating loss .......... (1,788,616) (510,225) (2,298,841)
Net income (loss) ....... $ 277,084 $ (501,213) $ (224,129)
39 WEEKS ENDED NOVEMBER 26, 2005
DIVISION HBC WAD TOTAL
------------ ------------ -------------
Revenues ................ $ 52,536,821 $ 31,665 $ 52,568,486
Operating loss .......... (4,847,119) (1,071,774) (5,918,893)
Net loss ................ $ (3,498,840) $ (1,038,788) $ (4,537,628)
Assets .................. $ 88,540,001 $ 39,870,265 $ 128,410,266
GEOGRAPHIC
LONG-LIVED
REVENUES ASSETS
------------ ------------
Thirteen weeks ended:
United States ................. $ 11,914,833 $ 91,954,049
Canada ........................ 4,140,767 656,946
Other foreign countries ....... 2,321,037 -
------------ ------------
Total ......................... $ 18,376,637 $ 92,610,995
============ ============
Thirty-nine weeks ended:
United States ................. $ 34,079,588
Canada ........................ 11,919,269
Other foreign countries ....... 6,569,629
------------
Total ......................... $ 52,568,486
============
22
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
$287,553 for professional fees, facility usage and reimbursable expenses for the
thirty-nine weeks ended November 26, 2005 and $547,644 for the thirty-nine weeks
ended November 27, 2004. At November 26, 2005, the Company owed THGLLP $13,986.
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. Mr.
Edward J. Doyle, a member of the Board of Directors of Cenuco (effective May 20,
2005) is a Managing Member of ZVLLC. For the thirty-nine weeks ended November
26, 2005, ZVLLC invoiced the Company for $19,078. For the thirty-nine weeks
ended November 27, 2004, ZVLLC invoiced the Company for $25,594. Effective May
20, 2005, the date of the Merger, ZVLLC ceased providing consulting services to
the Company. The balance due ZVLLC at November 26, 2005 was $0.
Mr. Kenneth D. Taylor, also a member of the Board of Directors of Cenuco, Inc.
(effective May 20, 2005) provided consulting services to the Company. For the
thirty-nine weeks ended November 26, 2005, he invoiced the Company $5,000. For
the thirty-nine weeks ended November 27, 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 November 26, 2005 was $0.
The Hermes Group LLC (THGLLC), a limited liability company, provides banking and
corporate advisory services to the Company. For the thirty-nine weeks ended
November 27, 2005, THGLLC invoiced Lander Co., Inc., a wholly owned subsidiary
of the Registrant, for $237,413, as compensation for the provision of business
advisory services. Mr. Mark I. Massad and Mr. Joseph A. Falsetti (Director and
Executive Officer of Registrant), each of whom owns beneficially 40 percent of
the Registrant's Series A Participating Preferred Stock, are members of THGLLC.
Mr. Joseph A. Falsetti did not receive any benefit from the fees invoiced for
business advisory services. As of November 26, 2005, there was a balance due to
THGLLC of $10,000.
In addition the Company paid a success fee of $1,000,000 to THGLLC in connection
with the Registrant's acquisition of certain brands and related assets from
Playtex Products, Inc.
For the thirty-nine weeks ended November 27, the Registrant paid guarantee fees
of $400,000 each to Dana Holdings, LLC ("Dana") and MarNan Holdings, LLC 2005
("MarNan) in connection with a bridge loan agreement dated November 15, 2005
between the Registrant, Prencen Lending LLC and Highgate House Funds, Ltd. (see
Note 3) one hundred percent of the ownership interests in Dana are owned
beneficially by members of the immediate family of Mr. Joseph A. Falsetti. Mr.
Mark I. Massad owns beneficially 100 percent of the ownership interests in
MarNan. Payment of such fees was approved by the unanimous vote of the Board of
Directors.
23
The Company's management believes the charges for the related party services
(listed above) and facilities are consistent with those that would be paid to
independent third parties.
NOTE 13 - SUPPLEMENTAL PRO FORMA INFORMATION
MERGER
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 thirty-nine weeks
ended November 26, 2005 and November 27, 2004.
39 weeks ended 39 weeks ended
November 26 November 27
2005 2004
---------------------------------
Net sales ................................. $ 52,608,523 $ 52,043,877
Net loss before amortization of intangibles (5,113,802) (4,492,850)
Amortization of intangible assets ......... (320,400) (320,400)
Net loss .................................. $ (5,434,202) $ (4,813,250)
Loss per common share - basic and diluted . $ (.39) $ (.35)
Weighted average shares ................... 13,765,693 13,750,556
24
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.
25
For accounting purposes, HACI is considered the acquirer in a reverse
acquisition transaction and consequently the Merger has been 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 consists of two business divisions, (1)
Health & Beauty Care (HBC) and (2) Wireless Application Development (WAD).
On November 16, 2005, the HBC division utilizing Lander US and Lander
Intangibles Corporation (Lander Intangibles), a newly formed wholly owned
subsidiary of HACI, acquired several of the brands of Playtex Products, Inc.
("Playtex") including Baby Magic(R), Binaca(R), Mr. Bubble(R), Ogilvie(R),
Tek(R), Dentax(R), Dorothy Gray(R), Better Off(R) and Tussy(R) (the Playtex
Acquisition).
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. In addition, effective November
16, 2005, several brands acquired from Playtex were added to the brand
portfolio. Playtex is one of the country's leading health and beauty care
companies. The acquisition of these Playtex brands created commercial,
operational and distribution synergies with the Company's existing manufacturing
and distribution infrastructure. Management believes that the Company's existing
manufacturing and distribution infrastructure has capacity for increased volume
and is capable of integrating the acquired brands into our existing line of
product offerings. The Playtex brands are positioned in product categories where
Lander already has an established and significant "extreme value" leadership
position. Management believes that combining the Playtex and Lander brands will
enable us to take advantage of the trend among extreme value retailers to sell
premium brand name products, and for traditional food, drug and mass market
retailers, to add value brands into their stores.
Prior to the Playtex Acquisition, the Company distributed 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. Subsequent to the Playtex Acquisition, the Company
estimates it will distribute an additional 40 million units annually. This
increases total Company annual units to an estimated 160 million on a global
basis.
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.
26
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 29% of the business conducted in the
U.S. and approximately 32% of the Canadian private label business. Other major
customers include Dollar Tree, Family Dollar, Kmart, Bargain Wholesale and
Shopper's Drug Mart. Subsequent to the Playtex brands acquisition on November
16, 2005, Lander has gained access to several additional customers, among the
most significant are Toys R Us and Target. 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
The business of selling health and beauty aids in personal care categories is
highly competitive. These markets include numerous manufacturers, distributors,
marketers and retailers that actively compete for consumers' business both in
the United States and abroad.
27
The principal competitors of Lander include Alberto-Culver Company, Church &
Dwight Co., Inc., Colgate-Palmolive Company, Johnson & Johnson and The Proctor &
Gamble Company. All of these competitors are larger and have substantially
greater resources than Lander, and may therefore have the ability to spend more
aggressively on advertising and marketing and to respond more effectively to
changing business and economic conditions than we do. If this were to occur, our
sales, operating results and profitability would be adversely affected.
Lander competes on the basis of numerous factors, including brand name
recognition (in the value segment), product quality, performance, price and
product availability at retail stores. Merchandising and packaging, the timing
of new product introductions and line extensions also have a significant impact
on customers' buying decisions and, as a result, on Lander's sales. The
structure and quality of the sales force and broker network, as well as
consumption of Lander's products, affects in-store position, wall display space
and inventory levels in retail outlets. If Lander is not able to maintain or
improve the inventory levels and in-store positioning of its products in retail
stores, Lander's sales and operating results will be adversely affected.
Lander's markets also are highly sensitive to the introduction of new products,
which may rapidly capture a significant share of the market. An increase in the
amount of product introductions by Lander's competitors could have a material
adverse effect on Lander's sales, operating results and profitability.
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.
28
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
MobileMonitor(sm) 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 November 26, 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.
29
THIRTEEN WEEKS ENDED NOVEMBER 26, 2005 COMPARED TO THE THIRTEEN WEEKS ENDED
NOVEMBER 27, 2004
GENERAL
The brand portfolio has grown through acquisition of well-recognized brands from
a larger consumer products company, which at the time of acquisition were
considered "non-core" by their previous owner and did not benefit from the focus
of senior level management or strong marketing and sales support. After
acquiring a brand, the focus is to increase its sales, market share and
distribution in both existing and new channels. This growth will be driven by
new marketing and sales strategies, improved packaging and formulations,
innovative new products and line extensions.
REVENUES
Consolidated net revenues for the thirteen weeks ended November 26, 2005
increased $359,000 (+2.0%) when compared to net revenues for the thirteen weeks
ended November 27, 2004. This quarter's volume was favorably impacted by the
closing of the Playtex Acquisition, which resulted in an additional $1,310,000
in revenue this quarter.
US revenues from the core Lander branded products increased during the quarter
by $1,225,000 (+9.7%). Included in this increase are sales of Lander Extreme
Value products, which grew by $650,000 (+6.7%) with 11 of the top accounts
achieving growth of $732,000 (+35%) this quarter vs. the prior year. The growth
can be attributed primarily to two factors, (1) Lander's ability to supply while
others were experiencing shortages in key products, and (2) anticipation of
pricing actions following the increases in petroleum based products. In
addition, the higher margin Premium Value products division grew in revenues by
$575,000 (+20%), with a key element in this growth being the addition of Lander
essentials Foam Bath and Lander essentials Lotions in over 5,000 locations.
Offsetting this US revenue growth from the core Lander branded products, is a
reduction of $1,681,000 attributed to the termination of a prior year's
marketing and administrative services agreement for the sale of licensed
products and other various declines in revenue totaling approximately $246,000.
This licensing agreement and corresponding revenues terminated with the
licensor's bankruptcy filing and cessation of business during the first quarter
of the current fiscal year.
Trade sale revenues derived from the Canadian subsidiary were down $249,000
(-5.7%) this quarter versus the same period last year as a result of lower sales
in both the extreme value and private label segments.
GROSS PROFIT
Consolidated gross profit decreased by $0.3 million for the thirteen weeks ended
November 26, 2005 from $1.9 million for the thirteen weeks ended November 27,
2004. The Playtex Acquisition resulted in an overall increase in gross profit by
$0.1 million for the quarter after accounting for and in accordance with SFAS
No. 142 the Company recorded the inventory acquired at the fair market value,
which negatively impacted gross profit in the quarter by $0.5 million This
accounting will continue to impact gross profit in the fourth quarter. The
impact of a favorable mix of $0.1 million resulted from higher sales of Lander
Essentials premium value products. Inflationary increases resulting from rising
oil prices impacted commodity pricing resulting in higher raw material prices
for surfactants, mineral oil and bottles negatively impacted the quarter by $0.3
million. Higher oil prices and the mix in sales between accounts negatively
impacted freight by $0.2 million.
30
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses amounted to $3.9 million for the thirteen
weeks ended November 26, 2005 compared to $2.5 million for the thirteen weeks
ended November 27, 2004. The increase of $1.4 million is due to the selling and
administrative costs of Cenuco's WAD division which contributed $0.5 million of
incremental cost this quarter, in conjunction with $0.4 million one time costs
for outside legal, professional and audit fees associated with the filing of the
8-K/A on December 19, 2005. Sales and marketing expenses are $0.1 million above
prior year related to incremental expenses associated with the launch of Lander
Premium value business division. The balance of the $0.4 million increase
pertains to incremental salary, benefits and professional fees related to being
a public versus private entity.
OTHER INCOME
Other income of $2.8 million for the thirteen weeks ended November 26, 2005
represents an increase of $2.4 over the thirteen weeks ended November 27, 2004.
The primary reason for the increase is related to a one-time gain of $2.5
million on extinguishment of debt.
THIRTY-NINE WEEKS ENDED NOVEMBER 26, 2005 COMPARED TO THE THIRTY-NINE WEEKS
ENDED NOVEMBER 27, 2004
REVENUES
Consolidated year to date net revenues through November 26, 2005 increased by
$540,000 (+1.0%) when compared to year to date net revenues through November 27,
2004. Overall US sales from the Lander products were up $1,222,000 (+3.2%),
driven by a $4,362,000 (+56%) growth in the strategically important Lander
Premium Value business division. Offsetting this growth, however, was a volume
decline of $2,150,000 associated with the loss from the aforementioned
termination of the prior year's marketing and administrative services agreement
for the sale of licensed products along with a decline of $3,140,000 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.
Revenue was favorably impacted by the closing of the Playtex Acquisition, which
resulted in an additional $1,310,000 year to date.
31
Year to date trade sales from the Canadian subsidiary increased $158,000 (+1.3%)
driven mainly by sales increase in the lower margin extreme value segment of the
business.
GROSS PROFIT
Consolidated gross profit declined to $3.9 million for the thirty-nine weeks
ended November 26, 2005 from $6.2 million for the thirty-nine weeks ended
November 27, 2004; a decline of $2.3 million. The Playtex Acquisition resulted
in an overall increase in gross profit by $0.1 million year to date after
accounting for and in accordance with SFAS No. 142 the Company recorded the
inventory acquired at fair market value, which negatively impacted gross profit
year to date by $0.5 million. This accounting will continue to impact gross
profit in the fourth quarter. This was offset with a favorable mix of $0.2
million due to higher sales of Lander Essentials premium value products. 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, which resulted in higher raw material
prices for surfactants, mineral oil, bottles and caps, which combined with
incremental freight expense negatively impacted gross profit by $2.5 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 $9.8 million for the thirty-nine
weeks ended November 26, 2005 compared to $7.5 million for the thirty-nine weeks
ended November 27, 2004; an increase of $2.3 million. Selling and administrative
costs of Cenuco's WAD division added $1.1 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 $0.8 million. Furthermore
there were one time costs of $0.4 million for outside legal, professional and
audit fees associated with the filing of the 8-K/A on December 19, 2005.
OTHER INCOME
Other income of $2.9 million for the thirty-nine weeks ended November 26, 2005
represents an increase of $2.4 over the thirty-nine weeks ended November 27,
2004. The primary reason for the increase is related to a one-time gain of $2.5
million pertaining to the early extinguishment of debt.
32
OTHER FINANCIAL ITEMS
LIQUIDITY AND CAPITAL RESOURCES
Bridge Loan
The Company entered into a bridge loan of $80 million on November 16, 2005
maturing on May 15, 2006 with interest at LIBOR plus 5.5% for the first 90 days
and LIBOR plus 10.5% for the next 90 days. The funds were used to acquire brands
from Playtex, pay fees related to brand purchases and bridge loan, retire all
other funded debt (including the revolver) and to provide working capital for
the Company.
On November 26, 2005, the amount available from the bridge loan was $4,488,488.
On February 28, 2005, the amount available from the retired revolver was
$567,995.
The Company expects to refinance the bridge loan on a long term basis under the
terms of a long term facility with Prencen, LLC ("Prencen"), Highgate House
Funds Ltd. ("Highgate"), and Cornell Capital Partners ("Cornell") for equity and
convertible debt financing (the "Financing Facility"). The Financing Facility
includes the following: (i) proceeds of an aggregate of $11 million from the
sale of shares of a new series of Cenuco participating preferred stock,
convertible, subject to certain restrictions, into an aggregate of 3,150,652
shares of Cenuco common stock, along with the issuance of warrants exercisable
for a period of 5 years to acquire an aggregate of 394,736 shares of common
stock at an exercise price of $4.37 per share and 550,459 shares of common stock
at an exercise price of $3.92 per share and (ii) proceeds of $69 million from
the issuance of a 5 year secured debenture, convertible into common stock of
Cenuco at any time, subject to certain restrictions, at a per share conversion
price of 95% of the lowest closing bid price of the common stock for the 45
trading days preceding the date of conversion, bearing interest at 12% per
annum, along with warrants (the "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 886,877 shares of common stock at an exercise price of $3.92 per
share. The exercise price of the Debt Warrants noted above is subject to a
discount to 20% of the then current conversion price in the event certain
conditions of default are triggered under the secured debenture.
CASH FLOW - THIRTY-NINE WEEKS ENDED NOVEMBER 26, 2005 AND NOVEMBER 27, 2004
Net cash used in operating activities was $17.1 million and $0.8 million,
respectively for the thirty-nine weeks ended November 26, 2005 and November 27,
2004. For the thirty-nine weeks ended November 26, 2005, the primary factor
contributing to negative operating cash flow related to the acquisition of
inventory of $9.6 million from Playtex. Other major contributors consisted of
the net loss of $4.5 million less non-cash expenses of $1.7 millionand a
decrease in accounts payable of $1.5 million. For the thirty-nine weeks ended
November 27, 2004, the major contributors to negative operating cash flow was a
net income loss of $1.9 million, less non-cash expenses of $1.0 million, an
increase in accounts payable of $3.2 million, offset by increases in trade
receivables, inventory and prepaid assets of $3.2 million.
Net cash used in investing activities amounted to $42.3 million for the
thirty-nine weeks ended November 26, 2005 compared to $0.5 million for the
thirty-nine weeks ended November 27, 2004. For the thirty-nine weeks ended
November 26, 2005, the major activities consisted of cash received of $6.3
million from reverse acquisition of Cenuco, $1.2 million for capital equipment
and $47.7 million for the purchase of intangible assets from Playtex. For the
thirty-nine weeks ended November 27, 2004, cash of $$0.5 million was expended
for capital equipment.
Net cash provided by financing activities for the thirty-nine weeks ended
November 26, 2005 amounted to $63.9 million compared to cash provided by
financing activities for the thirteen weeks ended November 27, 2004 of $1.3
million. The majority of the activity relates to the bridge loan (see Notes 3
and 6) and borrowings and or repayments under the Company's line of credit and
other long-term debt payments.
AT NOVEMBER 26, 2005 CENUCO HAD CASH AND CASH EQUIVALENTS OF $4.5 MILLION.
MANAGEMENT BELIEVES THIS AND OTHER FINANCING SOURCES AVAILABLE TO THE COMPANY
PROVIDE 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
$287,553 for professional fees, facility usage and reimbursable expenses for the
thirty-nine weeks ended November 26, 2005 and $547,644 for the thirty-nine weeks
ended November 27, 2004. At November 26, 2005, the Company owed THGLLP $13,986.
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.
33
Zephyr Ventures LLC (ZVLLC) provided consulting services to the Company. Mr.
Edward J. Doyle, a member of the Board of Directors of Cenuco (effective May 20,
2005) is a Managing Member of ZVLLC. For the thirty-nine weeks ended November
26, 2005, ZVLLC invoiced the Company for $19,078. For the thirty-nine weeks
ended November 27, 2004, ZVLLC invoiced the Company for $25,594. Effective May
20, 2005, the date of the Merger, ZVLLC ceased providing consulting services to
the Company. The balance due ZVLLC at November 26, 2005 was $0.
Mr. Kenneth D. Taylor, also a member of the Board of Directors of Cenuco, Inc.
(effective May 20, 2005) provided consulting services to the Company. For the
thirty-nine weeks ended November 26, 2005, he invoiced the Company $5,000. For
the thirty-nine weeks ended November 27, 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 November 26, 2005 was $0.
The Hermes Group LLC (THGLLC), a limited liability company, provides banking and
corporate advisory services to the Company. For the thirty-nine weeks ended
November 27, 2005, THGLLC invoiced Lander Co., Inc., a wholly owned subsidiary
of the Registrant, for $237,413, as compensation for the provision of business
advisory services. Mr. Mark I. Massad and Mr. Joseph A. Falsetti (Director and
Executive Officer of Registrant), each of whom owns beneficially 40 percent of
the Registrant's Series A Participating Preferred Stock, are members of THGLLC.
Mr. Joseph A. Falsetti did not receive any benefit from the fees invoiced for
business advisory services. As of November 26, 2005, there was a balance due to
THGLLC of $10,000.
In addition the Company paid a success fee of $1,000,000 to THGLLC in connection
with the Registrant's acquisition of certain brands and related assets from
Playtex Products, Inc.
For the thirty-nine weeks ended November 27, the Registrant paid guarantee fees
of $400,000 each to Dana Holdings, LLC ("Dana") and MarNan Holdings, LLC 2005
("MarNan) in connection with a bridge loan agreement dated November 15, 2005
between the Registrant, Prencen Lending LLC and Highgate House Funds, Ltd. (see
Note 3) one hundred percent of the ownership interests in Dana are owned
beneficially by members of the immediate family of Mr. Joseph A. Falsetti. Mr.
Mark I. Massad owns beneficially 100 percent of the ownership interests in
MarNan. Payment of such fees was approved by the unanimous vote of the Board of
Directors.
The Company's management believes the charges for the related party services
(listed above) and facilities are consistent with those that would be paid to
independent third parties.
34
RISK FACTORS
Cenuco's top five customers accounted for approximately 42% and 46%,
respectively of consolidated net revenues for the thirteen and thirty-nine weeks
ended November 26, 2005. Trade accounts receivable from these customers
represented approximately 42% of net consolidated receivables at November 26,
2005. Wal-Mart Stores Inc. accounted for approximately 24% and 30%, respectively
of consolidated net revenues for the thirteen and thirty-nine weeks ended
November 26, 2005. Dollar Tree Stores Inc accounted for approximately 9% and 8%,
respectively of net consolidated revenues for the thirteen and thirty-nine weeks
ended November 26, 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.
35
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.
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:
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:
NOVEMBER NOVEMBER FEBRUARY FEBRUARY
26, 2005 26, 2005 28, 2005 28, 2005
CAPITAL OPERATING CAPITAL OPERATING
LEASES LEASES LEASES LEASES
-------- ----------- -------- -----------
2006 ......................... $ 12,019 $ 239,527 $ 59,944 $ 762,790
2007 ......................... 32,633 590,899 31,820 342,136
2008 ......................... 0 344,159 0 282,940
2009 ......................... 0 213,791 0 207,105
2010 ......................... 0 206,438 0 204,428
2011 ......................... 0 102,000 0 102,000
-------- ----------- -------- -----------
Total minimum lease payments . $ 44,652 $ 1,696,814 $ 91,764 $ 1,901,399
=========== ===========
Less amounts representing
Interest (at rates ranging
from 5.25% to 8.31% ........ (885) (6,606)
-------- --------
Present value of net minimum
Capital lease payments ..... $ 43,767 $ 85,158
======== ========
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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 $22 million. An average 2% unfavorable
price increase related to the price of oil and other related inflationary raw
materials could cost the Company approximately $440,000.
The Company has also evaluated its exposure to fluctuations in interest rates.
$80.0 million is currently outstanding under the bridge loan, with a term of May
15, 2006. An increase of one percent in the interest rates would increase
interest expense by approximately $200,000 per quarter. The 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.
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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: January 17, 2006
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