UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 20, 2005
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CENUCO, INC.
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(Exact name of registrant as specified in its charter)
Delaware 033-25900 75-2228820
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(State or Other Jurisdiction Commission File IRS Employer
of Incorporation) Number) Identification No.)
2000 Lenox Drive, Suite 202, Lawrenceville, New Jersey 08648
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(Address of Principal Executive Offices)
609-219-0930
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(Registrant's Telephone Number, including Area Code)
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(Former Name or Former Address, If Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
|_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 140.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
EXPLANATORY NOTE
This purpose of this "amended" filing is to provide the historical financial
statements of the Business Acquired required by Section 9.01 of SEC Form 8-K
(current report), dated May 20, 2005 and filed on May 26, 2005.
This report includes the financial statements of the Business Acquired as of and
for the year ended February 28, 2005 and as of February 29, 2004 and for the
period from April 25, 2003 to February 29, 2004.
We have not included the historical financial statements of the Business
Acquired for the year ended February 28, 2003 and for the three months ended May
31, 2003 ("Stub Period"). Also not included is the Pro Forma Statement of
Operations for the year ended February 28, 2005 for the Business Acquired,
combined with the Statement of Operations for the year ended March 31, 2005 for
Cenuco, Inc.
We intend to include these statements in an additional amended filing upon
completion of the stub period audit for the period March 1,2003-May 31, 2003.
The preparation and auditing of the financial statements for the year ended
February 28, 2003 and for three months period ended May 31, 2003 has been
complicated due primarily to this period being under predecessor ownership. It
has proven even more time-consuming than had previously anticipated due in part
to locating the accounting records in addition to the supporting: invoices,
shipping and receiving documents, payroll records, inventory records, bank
statements not only for the periods in question but three additional months to
verify sales and subsequent customers payments necessary to prepare audited
statements for this period. However, these have now been located, financial
statements have been prepared, and the audit is in process.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired
Attached, as F-1 through F-26, are the historical Financial Statements of the
Business Acquired as required by Item 9.01(a) of Form 8-K/A filed on May 26,
2005.
-2-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: December 6, 2005 CENUCO, INC.
By: /s/ Joseph A. Falsetti
----------------------------
Joseph A. Falsetti
President and Chief
Executive Officer
ATTACHMENTS
F-1 through F-26. Audited Combined Financial Statements of Hermes Acquisition
Company I LLC and Subsidiaries (HACI) and Hermes Real Estate I LLC (HREI) as of
February 28, 2005 and February 29, 2004 and for the year ended February 28, 2005
and for the period from April 25, 2003 to February 29, 2004.
-3-
AUDITED COMBINED FINANCIAL STATEMENTS OF
HERMES ACQUISITION COMPANY I LLC AND SUBSIDIARIES (HACI) AND
HERMES REAL ESTATE I LLC (HREI) (D.B.A. LANDER)
AS OF FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 AND
FOR THE YEAR ENDED FEBRUARY 28, 2005 AND
FOR THE PERIOD FROM APRIL 25, 2003 TO FEBRUARY 29, 2004.
TABLE OF CONTENTS
PAGE
Independent Auditors' Report - BDO Seidman, LLP ............................ F-2
Independent Auditors' Report - KPMG LLP .................................... F-3
Combined Balance Sheets as of February 28, 2005 and February 29, 2004 ...... F-4
Combined Statements of Operations for the year ended February 28, 2005
and for the period from April 25, 2003 (inception) to February 29,2004 ..... F-5
Combined Statements of Members' Loss for the period from
April 25, 2003 (inception) to February 28, 2005 ............................ F-6
Combined Statements of Cash Flows for the year ended February 28, 2005
and for the period from April 25, 2003 (inception) to February 29, 2004 .... F-7
Notes to Combined Financial Statements ..................................... F-8
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Hermes Acquisition Company I LLC
Lawrenceville, New Jersey
We have audited the accompanying combined balance sheet of Hermes Acquisition
Company I LLC and subsidiaries and Hermes Real Estate I LLC (the "Company") as
of February 28, 2005 and the related combined statements of operations, members'
loss, and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Hermes Acquisition
Company I LLC and subsidiaries and Hermes Real Estate I LLC at February 28,
2005, and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ BDO Seidman, LLP
Woodbridge, New Jersey
August 12, 2005, except for Note 12(b) which is as of November 16, 2005
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hermes Acquisition Company I LLC:
We have audited the accompanying combined balance sheet of Hermes Acquisition
Company I LLC and subsidiaries and Hermes Real Estate I LLC (collectively d.b.a.
Lander, the Company) as of February 29, 2004, and the related combined
statements of operations, members' loss, and cash flows for the period from
April 25, 2003 (inception) to February 29, 2004. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Hermes Acquisition
Company I LLC and subsidiaries and Hermes Real Estate I LLC (d.b.a. Lander) as
of February 29, 2004, and the results of their operations and their cash flows
for the period from April 25, 2003 (inception) to February 29, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Philadelphia, PA
January 21, 2005
F-3
HERMES ACQUISITION COMPANY I LLC AND
SUBSIDIARIES AND HERMES REAL ESTATE I LLC
COMBINED BALANCE SHEETS
February 28, 2005 February 29, 2004
----------------- -----------------
ASSETS
------
Current Assets:
Cash ................................. $ 31,763 $ 1,827
Trade receivables, net of allowance
for doubtful accounts of $547,306 at
February 28, 2005 and $576,218 at
February 29, 2004 .................... 8,002,867 8,661,961
Inventories .......................... 8,725,952 8,567,580
Prepaid expenses and other ........... 564,617 428,231
------------ ------------
Total current assets ................. 17,325,199 17,659,599
Property, plant and equipment, net ... 6,017,533 6,520,184
Other assets, net .................... 692,817 281,476
------------ ------------
Total assets ......................... $ 24,035,549 $ 24,461,259
============ ============
LIABILITIES AND MEMBERS' LOSS
-----------------------------
Current Liabilities:
Accounts payable ..................... $ 10,541,956 $ 7,759,236
Accrued expenses ..................... 2,845,485 2,032,833
Current portion of long-tem debt ..... 8,929,540 8,203,118
------------ ------------
Total current liabilities ............ 22,316,981 17,995,187
Long-term debt, less current portion . 6,875,296 7,607,985
Long-term pension obligation ......... 673,328 673,027
------------ ------------
Total liabilities .................... 29,865,605 26,276,199
Members' loss:
Accumulated members' loss ............ (5,705,597) (1,716,835)
Accumulated other comprehensive loss . (124,459) (98,105)
------------ ------------
Total members' loss .................. (5,830,056) (1,814,940)
------------ ------------
Total liabilities and members' loss .. $ 24,035,549 $ 24,461,259
============ ============
See accompanying notes to combined financial statements
F-4
HERMES ACQUISITION COMPANY I LLC AND
SUBSIDIARIES AND HERMES REAL ESTATE I LLC
COMBINED STATEMENTS OF OPERATIONS
FOR THE PERIOD
FROM APRIL 25, 2003
FOR THE YEAR (INCEPTION)
ENDED TO
FEBRUARY 28, FEBRUARY 29,
2005 2004
------------ -------------------
Net sales ...................... $ 69,860,802 $ 55,046,015
Costs of sales ................. 62,369,597 48,243,281
------------ ------------
Gross profit ................... 7,491,205 6,802,734
Operating expenses:
Selling and marketing ......... 3,867,105 3,084,479
General and administrative ..... 6,380,096 4,913,210
------------ ------------
Total operating expenses ....... 10,247,201 7,997,689
Loss from operations ........... (2,755,996) (1,194,955)
Other income, net .............. 206,097 211,335
Interest expense ............... (1,438,863) (735,215)
------------ ------------
Total other income (expense) ... (1,232,766) (523,880)
------------ ------------
Loss before income taxes ....... (3,988,762) (1,718,835)
Income tax ..................... - -
------------ ------------
Net loss ....................... $ (3,988,762) $ (1,718,835)
============ ============
See accompanying notes to combined financial statements.
F-5
HERMES ACQUISITION COMPANY I LLC AND
SUBSIDIARIES AND HERMES REAL ESTATE I LLC
COMBINED STATEMENT OF MEMBERS' LOSS
Accumulated
Accumulated Other Total
Members' Comprehensive Members'
Loss Loss Loss
----------- ------------- -----------
BALANCE AT APRIL 25, 2003 (INCEPTION) $ - $ - $ -
Comprehensive loss:
Net loss ............................ (1,718,835) - (1,718,835)
Foreign currency translation
adjustment ......................... - (98,105) (98,105)
-----------
Comprehensive loss .................. (1,816,940)
Equity contribution ................. 2,000 - 2,000
----------- --------- -----------
BALANCE AT FEBRUARY 29, 2004 ........ (1,716,835) (98,105) (1,814,940)
-----------
Comprehensive loss:
----------- --------- -----------
Net loss ............................ (3,988,762) - (3,988,762)
Foreign currency translation
adjustment ......................... - (26,354) (26,354)
----------- --------- -----------
Comprehensive loss .................. (4,015,116)
-----------
BALANCE AT FEBRUARY 28, 2005 ........ $(5,707,597) $(124,459) $(5,830,056)
=========== ========= ===========
See accompanying notes to combined financial statements
F-6
HERMES ACQUISITION COMPANY I LLC AND
SUBSIDIARIES AND HERMES REAL ESTATE I LLC
COMBINED STATEMENTS OF CASH FLOWS
FOR THE PERIOD
FROM APRIL 25, 2003
FOR THE YEAR (INCEPTION)
ENDED TO
FEBRUARY 28, FEBRUARY 29,
2005 2004
------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................... $(3,988,762) $ (1,718,835)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization ..................... 983,807 652,942
Provision for bad debts ........................... 252,470 438,000
Amortization of deferred financing costs .......... 166,246 93,825
Changes in operating assets and liabilities,
net of acquisitions:
Trade receivables ............................... 231,980 (2,967,982)
Inventories ..................................... (158,372) 1,503,944
Prepaid expenses and other ...................... 409,097 (403,194)
Other assets .................................... (431,837) -
Accounts payable ................................ 2,782,720 3,069,223
Accrued expenses ................................ 812,652 (1,065,972)
Long-term pension obligations ................... 300 (53,698)
----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,060,301 (451,747)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred acquisition costs ...................... (422,837) -
Acquisitions, net of cash acquired .............. - (11,091,456)
Purchase of property, plant & equipment ......... (481,157) (4,103,373)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES ............. (903,994) (15,194,829)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit ... 729,158 7,469,777
Proceeds from machinery and equipment term loans - 1,467,000
Proceeds from real estate term loan ............. - 2,450,000
Proceeds from subordinated notes ................ - 4,500,000
Principal payments on long-term debt ............ (676,853) (240,374)
Equity contribution ............................. - 2,000
Deferred financing costs ........................ (93,750) -
Principal payments on capital leases ............ (58,572) -
----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (100,017) 15,648,403
----------- ------------
EFFECT OF EXCHANGE RATES ON CASH .................. (26,354) -
----------- ------------
NET INCREASE IN CASH .............................. 29,936 1,827
Cash at beginning of period ....................... 1,827 -
----------- ------------
CASH AT END OF PERIOD ............................. $ 31,763 $ 1,827
=========== ============
Supplemental disclosures of cash flow information:
Cash paid for interest ............................ $ 984,973 $ 661,927
Assets acquired under capital leases .............. - 144,860
See accompanying notes to combined financial statements
F-7
HERMES ACQUISITION COMPANY I LLC AND SUBSIDIARIES
AND HERMES REAL ESTATE I LLC
(D.B.A. LANDER)
NOTES TO COMBINED FINANCIAL STATEMENTS
FEBRUARY 28, 2005 AND FEBRUARY 29, 2004
NOTE 1 - DESCRIPTION OF BUSINESS AND SUBSEQUENT REORGANIZATION
Hermes Acquisition Company I LLC and Subsidiaries and Hermes Real Estate I LLC
(the Company) consists of Hermes Acquisition Company I LLC (HACI), a limited
liability company organized on April 25, 2003 in the State of Delaware, and its
wholly owned subsidiaries Lander Co., Inc. (Lander US) and Lander Co. Canada
Limited (Lander Canada); and Hermes Real Estate I LLC (HREI), a limited
liability corporation organized on May 22, 2003 in the State of New York to
purchase the Lander US production plant located in Binghamton, New York. The
operations and cash flows of HACI prior to the acquisition of Lander US and
Lander Canada, and the operations and cash flows of HREI prior to the
acquisition of the Lander US production plant were not material. On March 1,
2005, HREI became a wholly owned subsidiary of HACI. Prior thereto, HACI and
HREI had the same ownership.
The Company's principal business activity is the manufacture and distribution of
health, beauty and oral-care products, primarily throughout the United States
and Canada.
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.
The following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the effective date of the acquisition by HACI:
F-8
Current assets ................................................... $16,662,185
Property, plant, and equipment ................................... 4,020,599
-----------
Total assets acquired ........................................ 20,682,784
-----------
Current liabilities .............................................. 7,755,374
Long-term debt ................................................... 13,416
Long-term pension obligations .................................... 726,725
-----------
Total liabilities assumed .................................... 8,495,515
-----------
Estimated fair value of net assets acquired .................. 12,187,269
Excess of fair value of net assets acquired over purchase price .. 1,095,813
-----------
Purchase price of net assets ................................. $11,091,456
===========
The 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.
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 HACI. 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.
Following the Merger, Cenuco'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. 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.
F-9
For financial reporting purposes, the Merger was treated as a recapitalization
of HACI followed by the reverse acquisition of Cenuco by HACI for a purchase
price equivalent to the total market value of Cenuco stock outstanding prior to
the Merger (approximately $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 fiscal year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, estimated useful
lives and realization of property, plant and equipment, 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. Actual results could differ from these estimates.
BASIS OF COMBINATION: The accompanying combined financial statements include the
accounts of HACI and its wholly owned subsidiaries and of HREI. All intercompany
accounts have been eliminated in combination.
ACCOUNTS RECEIVABLE: Trade accounts receivable are recorded at the invoiced
amount and do not bear interest. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. If the financial condition of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required, which would increase our
operating costs.
INVENTORIES: Inventories are stated at the lower of cost or market, with cost
determined using the first-in, first-out (FIFO) method. Inventories consist of
raw materials used to manufacture the Company's health, beauty and oral care
products, as well as, finished goods that consist of the Company's product lines
sold to its customers. The Company writes down inventory for estimated excess
and discontinued products equal to the difference between cost and estimated
market value based upon assumptions about future demand and market conditions.
Excess and discontinued product inventory could arise due to numerous factors,
including but not limited to, the competitive nature of the market and product
demand by consumers. If market conditions are less favorable than those
anticipated by management, additional write-downs may be required, including
provisions to reduce inventory to net realizable value.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost
less accumulated depreciation and amortization. The costs of major additions and
improvements are capitalized and maintenance and repairs that do not improve or
extend the life of the respective assets are charged to operations as incurred.
F-10
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. Property, plant and equipment related to the acquisitions are
recorded at their estimated fair value, reduced by the excess of the fair value
of net assets acquired over the purchase price (see Note 1).
IMPAIRMENT OF LONG-LIVED ASSETS: Accounting for the impairment of long-lived
assets, including property, plant and equipment, requires that long-lived assets
and certain identifiable intangibles to be held and used or disposed of by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Under such
circumstances, the accounting principles require that such assets be reported at
the lower of their carrying amount or fair value less costs to sell.
Accordingly, when events or circumstances indicate that long-lived assets may be
impaired, the Company estimates the assets' future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future undiscounted cash flows is less than the carrying amount of the
asset, an impairment loss is recognized based on the excess of the carrying
amount over the fair value of the asset.
OTHER ASSETS, NET: Other assets, net at February 28, 2005 consist of deferred
acquisition costs of $422,837 that primarily relate to costs associated with the
reverse acquisition of Cenuco (see Note 1) and deferred financing costs that are
being amortized using the straight-line method over the expected term of the
revolving line of credit (see Note 5). Net deferred financing costs included in
other assets totaled $208,980 at February 28, 2005 and $281,476 at February 29,
2004. Amortization expense related to deferred financing costs was $166,246 for
the year ended February 28, 2005 and $93,825 for the period from April 25, 2003
(inception) to February 29, 2004.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts reported in the
accompanying balance sheet for accounts receivable, accounts payable and accrued
expenses approximate fair value due to the short-term nature of these accounts.
The carrying amount for debt (see Note 5) approximates fair value because the
debt is subject to short-term variable interest rates that were reflective of
market rates of interest.
REVENUE RECOGNITION: 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. The Company
records reductions to revenue for estimated returns based on historical
experience. If future returns are less than historical experience, reduction in
estimated reserves would increase revenue. Alternatively, should returns exceed
historical experience, additional allowances would be required, which would
reduce revenue.
Amounts billed to customers related to shipping and handling are classified as
revenues. The cost of shipping products to the customer is recognized at the
time the products are shipped and is included in cost of sales.
F-11
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 year-end exchange rates. Revenues and
expenses have been translated at average exchange rates for the related period.
Net translation gains and losses are included in accumulated other comprehensive
loss, which is a separate component of members' loss, until there is a sale or
liquidation of the underlying foreign investment. Foreign currency gains and
losses resulting from transactions are included in the combined statement of
operations.
CONCENTRATION OF CREDIT RISK: The Company provides credit to its customers in
the normal course of business and does not require collateral. 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.
Five trade customers comprised 46% of the Company's net sales for the year ended
February 28, 2005, with one customer comprising 25% and a second comprising 13%.
At February 28, 2005 the same five trade customers comprised 51% of trade
receivables, with one customer comprising 32% and the other four at less than
10% each.
Five trade customers comprised 58% of the Company's net sales, with two
customers comprising more than 10%, for the period from April 25, 2003
(inception) to February 29, 2004. These same five trade customers represented
49% of receivables, with three of the customers comprising more than 10% each,
at February 29, 2004.
OTHER INCOME: Other income consists primarily of Lander Canada's foreign
exchange gains related to debt denominated in U.S. dollars.
INCOME TAXES: As a limited liability corporation, the Company has elected to be
treated as a corporation for income tax purposes. 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 assessing 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 valuation allowance at
February 28, 2005 and February 29, 2004 has been recorded by management to
offset related net deferred tax assets, due to the uncertainty that future
income will be realized.
F-12
RECENT ACCOUNTING PRONOUNCEMENTS:
In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 151, "Inventory Costs - an amendment of Accounting Research Bulletin No. 43"
("SFAS 151"), which is the result of the FASB's efforts to converge U.S.
accounting standards for inventories with International Accounting Standards.
SFAS 151 requires idle facility expenses, freight, handling costs and wasted
material (spoilage) costs to be recognized as current period charges. SFAS 151
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities, with
unfavorable fixed production overhead cost variances to be charged to operations
currently and favorable fixed production overhead cost variances to be included
in the cost of conversion. SFAS 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005, but earlier adoption is
permitted. The Company has elected to adopt the provisions of SFAS 151 effective
March 1, 2005. Based on the Company's internal projections and assessments, the
Company currently believes there will be no material impact on its results of
operations from the adoption of SFAS 151. However, if actual results are
materially less than the Company's projections and expectations and as a result
of production levels are less than the range of normal capacity, certain
provisions of SFAS 151 may have a material impact on the Company's results of
operations. Such impact will only be determinable based on the actual facts and
circumstances.
NOTE 3 - INVENTORIES
Inventories consisted of the following:
February 28, 2005 February 29, 2004
----------------- -----------------
Raw materials .................... $ 2,900,803 $ 2,562,611
Finished goods ................... 5,825,149 6,004,969
----------- -----------
$ 8,725,952 $ 8,567,580
=========== ===========
F-13
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
February 28, 2005 February 29, 2004
----------------- -----------------
Land ............................. $ 660,000 $ 660,000
Computer equipment and software .. 890,020 853,447
Furniture and fixtures ........... 252,717 214,167
Building ......................... 2,644,864 2,644,864
Machinery and equipment .......... 2,961,469 2,518,469
Dies and molds ................... 75,731 76,650
Leasehold improvements ........... 118,571 113,434
Construction in progress ......... 77,959 127,542
----------- -----------
7,681,331 7,208,573
Less accumulated depreciation
and amortization ................ (1,663,798) (688,389)
----------- -----------
$ 6,017,533 $ 6,520,184
=========== ===========
Depreciation and amortization expense related to property, plant and equipment
totaled $983,807 for the year ended February 28, 2005 and $652,942 for the
period from April 25, 2003 (inception) to February 29, 2004.
As of February 28, 2005 and February 29, 2004, machinery and equipment includes
assets under capital leases totaling $153,559 and $206,564, respectively, net of
accumulated amortization of $24,314 and $8,958, respectively. Amortization
expense related to capital leases is included in depreciation and amortization
expense.
Independent appraisals were obtained to determine the estimated fair value of
substantially all property, plant, and equipment acquired as of May 31, 2003.
The fair values were reduced by the excess of fair value of net assets acquired
over the purchase price of $1,095,813.
F-14
NOTE 5 - LONG-TERM DEBT
Long-term debt consisted of the following:
February 28, 2005 February 29, 2004
----------------- -----------------
Revolving line of credit loans ... $ 8,198,935 $ 7,469,777
Machinery and equipment term loans 1,039,125 1,283,625
Real estate term loan ............ 1,981,618 2,413,971
Subordinated note ................ 4,500,000 4,500,000
Capital leases ................... 85,158 143,730
----------- -----------
15,804,836 15,811,103
Less current portion ............. (8,929,540) (8,203,118)
----------- -----------
$ 6,875,296 $ 7,607,985
=========== ===========
In connection with the Acquisitions, the Company obtained long-term financing
commitments (the "Financing Arrangement") from a financial institution comprised
of the following (collectively, the "Loans"):
o Revolving line of credit facility of $11,000,000 with a three-year term
expiring in June 2006. Annual renewals of the facility are available in
one-year increments after the initial term. Available borrowings are
determined by a borrowing base calculation using eligible trade
receivables and inventories of Lander US and Lander Canada, which are the
collateral for this facility. As of February 28, 2005, unused availability
under the borrowing base calculation amounted to $567,995. Interest on the
outstanding balance is payable monthly. For purposes of classifying the
outstanding debt in the balance sheets, the Company has reflected
borrowings under the revolving line of credit facility as a current
liability, since it is subject to collection lock-box arrangements and
contains a subjective acceleration clause.
o Machinery and equipment term loans with initial principal amounts
aggregating $1,467,000 have six-year amortization terms expiring in June
2009. Such loans are subject to termination upon the expiration of the
revolving line of credit and are collateralized by the machinery and
equipment of Lander US and Lander Canada. Principal payments aggregating
$20,375 plus interest are payable monthly.
o Real estate term loan with initial principal amount of $2,450,000 has a
six-year amortization term expiring in December 2009. Such loan is subject
to termination upon the expiration of the revolving line of credit and is
collateralized by the Lander US production plant located in Binghamton,
New York. Principal payments aggregating $36,029 plus interest are payable
monthly.
F-15
The interest rates on the Loans bear an annual interest rate of a national
bank's prime rate (5.25% at February 28, 2005) plus 1.25%. The Company has the
option of converting all or a portion of the Loans outstanding to an annual
interest rate of the one-, two- or three-month London Inter-Bank Offered Rate
("LIBOR") plus 3.75%. As of February 28, 2005, the one-, two- and three-month
LIBOR rates were 2.72%, 2.80%, and 2.92%, respectively. Accordingly, the
interest rate on the Loans was 6.50% at February 28, 2005. As of February 29,
2004, the national bank prime rate was 4% and the one-, two-, and three-month
LIBOR rates were 1.09%, 1.11%, and 1.12%, respectively. The interest rate on the
Loans was 5.25% at February 29, 2004. To date, the Company has not exercised the
option of converting the prime rate to LIBOR.
The Loans contain financial and non-financial covenants including a limitation
on capital expenditures during any fiscal year and maintaining, on a monthly
basis, a fixed charge coverage ratio. The fixed charge coverage ratio is
calculated by dividing earnings before interest, depreciation and amortization
less any unfunded capital expenditures and improvements by fixed charges. Fixed
charges include interest expense, capital lease obligations, principal payments
on indebtedness and payments for income tax obligations.
The Company was not in compliance with the fixed charge coverage ratio and the
limitation on capital expenditures during various periods in fiscal 2004 and
fiscal 2005 and subsequent periods. In June and December 2004, the Financing
Arrangement was amended and the events of noncompliance were waived by the
financial institution. As part of the second amendment to the Financing
Arrangement, the fixed charge coverage ratio was revised and the fiscal-year
capital expenditure limitation was increased to $1,250,000. Subsequently, the
Company failed to comply with the revised fixed charge coverage ratio and
certain non-financial covenants for the months January through May 2005. In July
2005, the Financing Arrangement was amended and these events of noncompliance
were waived by the financial institution. As part of this third amendment to the
Financing Arrangement, the fixed charge coverage ratio was revised to 1.0 to 1.0
commencing with the month ended June 30, 2005 and continuing on an accumulated
basis until June 30, 2006 when such calculation shall be made on a rolling
twelve-month basis. Additionally, under this third amendment, the fixed charge
coverage ratio covenant requirement is only triggered when availability under
the revolving line of credit is less than $2,000,000.
As part of the Company's acquisition of the Lander US business, the Company also
has long-term financing from the seller in the form of a $4,500,000 subordinated
note ("Seller Note") with a three-year term expiring in June 2006. The Seller
Note is subordinate to the Financing Arrangement. Interest is payable quarterly
at an annual interest rate of 10%. Annual principal payments of $1,166,667 are
required under the terms of this Seller Note; however, a provision permits the
Company to defer principal payments if certain financial targets, pursuant to
the Financing Arrangement, are not achieved by the Company as of fiscal
year-end. As a result of the Company not achieving these financial targets in
fiscal 2004 and 2005, principal payments due in June 2004 and June 2005 have
been deferred until June 2006. Additionally, there is a provision in the Seller
Note that permits the Company to defer interest payments to the seller in the
event of noncompliance with certain financial covenants contained in the
Financing Arrangement. Accordingly, the Company has not paid any interest
accrued on the Seller Note subsequent to July 1, 2004. Accrued interest on the
Seller Note totaled $297,964 as of February 28, 2005.
F-16
On March 16, 2005, HACI and the seller of Lander US and Lander Canada entered
into Settlement and Release Agreement whereby the Company has the option to pay
$2,000,000, plus interest at 10%, to satisfy the $4,500,000 principal amount of
the Seller Note. In addition, the Company would be required to pay interest
accrued on the $4,500,000 Seller Note from July 1, 2004 through March 16, 2005
and interest on the $2,000,000 from March 17, 2005 through the date of payment.
Such option is available to the Company up to November 30, 2005 (see Notes 12(a)
and 12 (b)). In exchange for this option, the Company has agreed to release the
seller from certain claims against and indemnifications of the seller under the
agreement for the purchase of Lander US and Lander Canada.
The aggregate maturities of long-term debt for each fiscal year ending February
28 are as follows:
2006 .............. $ 8,929,540
2007 .............. 6,875,296
-----------
$15,804,836
===========
NOTE 6 - PENSION AND 401(K) PLANS
Pension Plans:
--------------
The Company has two non-contributory defined benefit pension plans (the "Plans")
that cover substantially all employees in the United States ("US") and Canada.
It is the Company's policy to fund, at a minimum, pension contributions as
required by the Employee Retirement Income Security Act of 1974 ("ERISA") each
year. On May 1, 2004 the US Plan was frozen and no longer available to new
employees for participation.
At February 28, 2005, the US Plan assets consisted of fixed return contracts.
The Canadian Plan assets consisted primarily of stocks, bonds and US Treasury
Bills. The pension liabilities and their related costs are computed in
accordance with the laws of the US and Canada and the appropriate actuarial
practices.
Net periodic pension costs of the defined benefit pension plans covering the
year ended February 28, 2005 were as follows:
US Canada Total
-- ------ -----
Service costs on benefits earned during
the year ............................... $ 80,544 $ 183,379 $ 263,923
Interest cost on projected benefit
obligation ............................. 99,262 156,446 255,708
Expected return on plan assets .......... (99,100) (147,411) (246,511)
--------- --------- ---------
Net periodic pension cost ............... $ 80,706 $ 192,414 $ 273,120
========= ========= =========
The present value of benefit obligations and funded status of the Plans as
computed by the actuaries as of February 28, 2005 were as follows:
F-17
US Canada Total
-- ------ -----
Projected benefit obligation ...... $(1,847,272) $(2,605,331) $(4,452,603)
Plan assets at fair value ......... 1,589,586 2,105,121 3,694,707
----------- ----------- -----------
Funded status ................. (257,686) (500,210) (757,896)
Unrecognized net gain ............. - (171,638) (171,638)
----------- ----------- -----------
Net pension liability ......... $ (257,686) $ (671,848) $ (929,534)
=========== =========== ===========
As of February 28, 2005, the accumulated benefit obligation was $1,847,272 for
the US Plan and $2,305,779 for the Canadian Plan.
Amounts recognized in the combined balance sheet as of February 28, 2005 consist
of:
US Canada Total
-- ------ -----
Current portion of accrued benefit
liability, included in accrued expenses $(120,000) $(136,206) $(256,206)
Long term portion of accrued benefit
liability, included in other long term
liabilities ............................ (137,686) (535,642) (673,328)
--------- --------- ---------
Net amount recognized ................... $(257,686) $(671,848) $(929,534)
========= ========= =========
Weighted-average assumptions used in developing the projected benefit obligation
and net cost as of and for the year ended February 28, 2005 were as follows:
US Canada
-- ------
Discount rate ........................... 5.75% 5.25%
Rate of increase in compensation ........ 0% 3.00%
Rate of return on plan assets ........... 6.50% 7.00%
The expected long-term rate of return is based on the portfolio as a whole and
not on the sum of the returns on individual asset categories. The return is
based exclusively on historical returns, without adjustments.
Plans' Assets
-------------
The weighted-average asset allocation of the US and Canadian pension benefits
were as follows:
March 31,2005 March 31, 2004
-------------- --------------
US Canada US Canada
-- ------ -- ------
Equity Securities ....................... 0% 60% 0% 65%
Debt securities ......................... 100% 25% 100% 25%
Cash 0% 15% 0% 10%
---- ------ ---- ------
Total ................................... 100% 100% 100% 100%
==== ====== ==== ======
F-18
The Company's investment policies and strategies for the pension plans utilize
target allocations for the individual asset categories. The Company's investment
goals are to maximize returns subject to specific risk management policies.
Cash Flows
----------
For the US Plan the benefits expected to be paid in each year ending February 28
2006-2010 are $33,695, $39,240, $44,444, $60,504, and $75,368, respectively. The
aggregate benefits expected to be paid in the five years from 2011-2015 are
$509,778.
For the Canadian Plan the benefits expected to be paid in each year ending
February 28, 2006-2010 are $375,740, $112,224, $69,400, $156,343 and $209,866,
respectively. The aggregate benefits to be paid in the five years from 2011-2015
are $1,756,822.
The expected benefits are based on the same assumptions used to measure the
Company's benefit obligation at February 28 and include estimated future
employee service.
Following is a rollforward of the projected benefit obligation and the plan
assets for fiscal 2005:
US Canada Total
-- ------ -----
Benefit obligation at
February 29, 2004 ............... $ 1,822,198 $ 2,389,595 $ 4,211,793
Service cost ...................... 80,544 183,379 263,923
Interest cost ..................... 99,262 156,446 255,708
Actuarial (gain) /loss ............ (41,221) 148,534 107,313
Benefits paid ..................... (113,511) (272,623) (386,134)
----------- ----------- -----------
Benefit obligation at
February 28, 2005 ............... $ 1,847,272 $ 2,605,331 $ 4,452,603
=========== =========== ===========
Fair value of plan assets at
February 29, 2004 ............... $ 1,506,631 $ 1,930,805 $ 3,437,436
Actual return on plan assets ...... 65,379 172,816 238,195
Employer contributions ............ 131,087 205,732 336,819
Plan participant contributions - 68,391 68,391
Benefits paid ..................... (113,511) (272,623) (386,134)
----------- ----------- -----------
Fair value of plan assets at
February 28, 2005 ............... $ 1,589,586 $ 2,105,121 $ 3,694,707
=========== =========== ===========
F-19
Net periodic pension costs of the defined benefit pension plans covering the
period April 25, 2003 (inception) to February 29, 2004 were as follows:
US Canada Total
-- ------ -----
Service costs on benefits earned during
the period ............................. $ 68,401 $ 119,071 $ 187,472
Interest cost on projected benefit
obligation ............................. 73,719 99,885 173,604
Expected return on plan assets .......... (70,047) (84,483) (152,282)
--------- --------- ---------
Net periodic pension cost ............... $ 72,073 $ 134,473 $ 206,546
========= ========= =========
During the period April 25, 2003 to February 29, 2004, the Company contributed
$94,976 to the US Plan and $162,080 to the Canadian Plan. For the same period,
benefit payments made amounted to $34,908 for the US Plan and $33,829 for the
Canadian Plan. The present value of benefit obligations and funded status of the
Plans as computed by the actuaries as of February 29, 2004 were as follows:
US Canada Total
-- ------ -----
Projected benefit obligation ...... $(1,822,198) $(2,389,595) $(4,211,793)
Plan assets at fair value ......... 1,506,631 1,930,805 3,437,436
----------- ----------- -----------
Funded status ................. (315,567) (458,790) (774,357)
Unrecognized net gain ............. - (158,146) (158,146)
----------- ----------- -----------
Net liability ................. $ (315,567) $ (616,936) $ (932,503)
=========== =========== ===========
As of February 29, 2004, the accumulated benefit obligation was $1,822,198 for
the US Plan and $2,389,595 for the Canadian Plan. Amounts recognized in the
combined balance sheet as of February 29, 2004 consist of:
US Canada Total
-- ------ -----
Current portion of accrued benefit
liability, included in accrued expenses $(128,524) $(172,014) $(300,538)
Long term portion of accrued benefit
liability, included in other long term
liabilities ............................ $(187,043) $(485,984) $(673,027)
--------- --------- ---------
Net amount recognized ................... $(315,567) $(657,998) $(973,565)
========= ========= =========
Weighted-average assumptions used in developing the projected benefit obligation
and net cost for the period from April 25, 2003 (inception) to February 29, 2004
were as follows:
US Canada
-- ------
Discount rate ........................... 5.75% 5.75%
Rate of increase in compensation ........ 0% 3.00%
Rate of return on plan assets ........... 6.50% 7.00%
F-20
The expected long- term rate of return is based on the portfolio as a whole and
not on the sum of the returns on individual asset categories. The return is
based exclusively on historical returns, without adjustments.
Following is a rollforward of the projected benefit obligation and the plan
assets for the period from June 1, 2003 through February 29, 2004:
US Canada Total
-- ------ -----
Benefit obligation at June 1, 2003 ... $ 1,719,806 $ 2,117,688 $ 3,837,494
Service cost ......................... 68,401 119,071 187,472
Interest cost ........................ 73,719 99,885 173,604
Actuarial gain and other ............. - 86,780 86,780
Benefits paid ........................ (39,728) (33,829) (73,557)
----------- ----------- -----------
Benefit obligation at
February 29, 2004 .................. $ 1,822,198 $ 2,389,595 $ 4,211,793
=========== =========== ===========
Fair value of plan assets at
June 1, 2003 ....................... $ 1,384,787 $ 1,486,821 $ 2,871,608
Actual return on plan assets ......... 66,596 243,957 310,553
Other ................................ - 26,625 26,625
Employer contributions ............... 94,976 162,080 257,056
Plan participant contributions ....... - 45,151 45,151
Benefits paid ........................ (39,728) (33,829) (73,557)
----------- ----------- -----------
Fair value of plan assets at
February 29, 2004 .................. $ 1,506,631 $ 1,930,805 $ 3,437,436
=========== =========== ===========
401(k) Plan:
------------
The Company also has a defined contribution plan under Section 401(k) of the
Internal Revenue Code for all United States employees. Employees can elect to
contribute up to certain maximum percentages of their weekly gross pay. The
Company matches are discretionary. The Company had no discretionary matches for
the period from April 25, 2003 (inception) to February 28, 2005.
NOTE 7 - INCOME TAXES
As a result of the net operating loss incurred for the year ended February 28,
2005 and the period from April 25, 2003 (inception) to February 29, 2004, there
is no income tax provision in the accompanying financial statements. Due to the
uncertainty that future taxable income will be generated during the periods in
which the Company's deferred tax assets become deductible, management has
applied a full valuation allowance to the net deferred tax assets at February
28, 2005 and February 29, 2004.
F-21
Pre-tax loss for the year ended February 28, 2005 and for the period from April
25, 2003 (inception) to February 29, 2004 was as follows:
2005 2004
---- ----
United States $3,963,260 $ 1,815,455
Foreign $ 25,502 $ (96,620)
---------- -----------
$3,988,762 $ 1,718,835
========== ===========
The significant components of the Company's net deferred tax assets at February
28, 2005 and February 29, 2004 are as follows:
Deferred tax assets (liabilities):
February 28, February 29,
2005 2004
---- ----
Accounts receivable ............................ $ 170,000 $ 190,475
Inventory ...................................... 183,000 73,845
Fixed asset depreciation and amortization ...... (212,000) 105,588
Accrued expenses and other ..................... 348,000 218,829
Net operating loss carry forward ............... 2,164,000 642,127
----------- -----------
Total deferred tax assets ............. 2,653,000 1,230,864
Valuation allowance ............................ (2,653,000) (1,230,864)
----------- -----------
Net deferred tax assets ............... $ - $ -
=========== ===========
Lander US has a net operating loss carry forward of approximately $5,524,000
($4,928,000 for U.S. income tax purposes) which will begin to expire in 2024.
The Lander Canada net operating loss carry forward of approximately U.S.
$700,000 will begin to expire in 2011.
A reconciliation summary of the differences between the statutory federal rate
and the Company's effective tax rate for the year ended February 28, 2005 and
the period from April 25, 2003 (inception) to February 29, 2004 is as follows:
U.S. federal statutory tax rate ........................... (34)%
State income taxes, less federal benefit .................. (5)
Earnings of foreign subsidiary taxed at different rates ... 39
-----
Change in valuation allowance ............................. 0 %
=====
NOTE 8 - MEMBERS' LOSS
HACI and HREI each have the same six equity participants with the same two
members each owning a 40% interest and four members each owning a 5% interest.
The Company was formed under the laws of the State of Delaware as a limited
liability corporation and has one class of member with voting rights
commensurate with ownership interests.
F-22
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company has various noncancelable operating leases for manufacturing and
office facilities. Rent expense totaled $680,640 and $620,328 in fiscal 2005 and
the period from April 25, 2003 (inception) to February 29, 2004, respectively,
of which $407,069 and $410,580, respectively, is included in cost of goods sold.
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 were as follows at February 28, 2005:
Capital leases Operating leases
-------------- ----------------
2006 ...................................... $ 59,944 $ 762,790
2007 ...................................... 31,820 342,136
2008 ...................................... - 282,940
2009 ...................................... - 207,105
2010 ...................................... - 204,428
Thereafter ................................ - 102,000
-------- ----------
Total minimum lease payments .............. 91,764 $1,901,399
==========
Less amount representing interest (at
rates ranging from 5.25% to 8.31%) ....... (6,606)
--------
Present value of net minimum capital
lease payments ........................... $ 85,158
========
The Company is subject to certain claims and litigation in the normal course of
business. Management believes, after consulting with legal counsel, that the
ultimate liability resulting from these matters will not materially affect the
combined results of operations or financial position of the Company.
NOTE 10 - GEOGRAPHIC INFORMATION
As of and for the period ended February 28, 2005:
LONG-LIVED
REVENUES ASSETS
-------- ------
United States ................. $45,954,190 $ 6,150,610
Canada ........................ 15,310,361 559,740
Other foreign countries ....... 8,596,251 -
----------- -----------
Total ......................... $69,860,802 $ 6,710,350
=========== ===========
F-23
As of February 29, 2004 and for the period from April 25, 2003 (inception) to
February 29, 2004:
LONG-LIVED
REVENUES ASSETS
-------- ------
United States ................. $35,082,786 $ 6,243,008
Canada ........................ 13,358,400 558,652
Other foreign countries ....... 6,604,829 -
----------- -----------
Total ......................... $55,046,015 $ 6,801,660
=========== ===========
NOTE 11 - RELATED PARTY TRANSACTIONS
The Hermes Group LLP ("THGLLP"), a certified public accounting firm, provided
various professional services and facilities usage to the Company during the
year ended February 28, 2005 and for the period from April 25, 2003 (inception)
to February 29, 2004. THGLLP also paid expenses on behalf of HACI. THGLLP
invoiced the Company a total of $523,933 and $258,596, respectively, for
professional fees, facilities usage and reimbursable expenses for the year ended
February 28, 2005 and for the period from April 25, 2003 (inception) to February
29, 2004. At February 28, 2005 and February 29, 2004 the Company owed THGLLP
$28,341 and $0, respectively and such amounts are reflected in accrued expenses.
A Managing Member of the Company is a founding Partner in THGLLP. THGLLP ceased
providing facilities to the Company in June 2005.
Zephyr Ventures LLC ("ZVLLC") provided consulting services to the Company during
fiscal 2005 and for the period from April 25, 2003 (inception) to February 29,
2004 for fees totaling $28,485 and $154,142 respectively. A Managing Member of
the Company is also a Managing Member of ZVLLC. There was no balance due to
ZVLLC at February 28, 2005 or February 29, 2004.
The Company's management believes the charges for the above related party
services are consistent with those that would be paid to independent third
parties.
NOTE 12 - SUBSEQUENT EVENTS
12(a) On March 16, 2005, HACI and the Former Owner, through May 2003, of Lander
US and Lander Canada (Former Owner) entered into a Settlement and Release
Agreement whereby the Company has the option to pay $2,000,000, plus interest at
10%, to satisfy the $4,500,000 principal amount of the Seller Note. In addition,
the Company 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 initially
available until August 31, 2005. Prior to expiration the Former Owner agreed to
extend the option to November 30, 2005 (see Notes 5 and 12 (b)).
F-24
12(b) On October 10, 2005, Cenuco, (the parent of HACI following the May 2005
merger transaction (see Note 1)), entered into agreements with Prencen, LLC
("Prencen"), Highgate House Funds Ltd ("Highgate") and Cornell Capital Partners
("Cornell") for equity and convertible debt financing (the "Financing
Facility"), to be used, among other tings, as long term financing in connection
with the acquisition of several brands from Playtex Products, Inc. ("Playtex").
The Financing Facility included a $100 million standby equity subscription
facility. As part of the closing of the Playtex brands acquisition and related
bridge financing (described below), the terms of the Financing Facility were
amended on November 16, 2005 to include various modifications, including the
termination of the standby equity subscription facility. The revised terms of
the Financing Facility are also described below.
Lander US and Lander Intangibles Corporation (Lander Intangibles), a newly
formed wholly owned subsidiary of HACI, entered into an Asset Purchase Agreement
(the "Asset Purchase Agreement") with Playtex Products, Inc. and certain of its
subsidiaries (collectively, "Playtex"), to acquire several of 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) in a transaction that
closed on November 16, 2005. At the closing, Lander US and Lander Intangibles
paid Playtex a cash purchase price of $57 million. The purchase price is subject
to certain post closing adjustments dependent upon the product inventory
conveyed to Lander US at the closing.
In order to finance the acquisition of the brands from Playtex ($57 million,
prior to post closing inventory adjustment), pay certain expenses associated
with the transaction and related financings (approximately $3.8 million), repay
certain existing indebtedness of the Company and its subsidiaries including the
Seller Note and the Financing Arrangement referred to in Note 5, above
(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 and 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 (4.40% as of November 16, 2005) 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 a rate of LIBOR
plus 10.5%. 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 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.
F-25
In connection with Bridge Loan, the agreements relating to the Financing
Facility were amended and restated in certain material respects. 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. The standby
equity subscription facility described above has been terminated.
Proceeds of the Bridge Loan were also used to repay the Seller Note and the
Financing Arrangement referred to in Note 5.
F-26