U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2003
Commission file number 033-25900
Cenuco, Inc.
(Formerly Virtual Academics.com, Inc.)
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(Name of Small Business Issuer in its Charter)
Delaware 75-2228820
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6421 Congress Ave, Suite 201, Boca Raton, Florida 33487
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(Address of Principal Executive Offices) (Zip Code)
(561) 994-4446
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the
Exchange Act:
None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $1,577,479
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such common equity, as of a specified date within the
past 60 days. $2,846,497 based on a price of $1.15 per share as of September 17,
2003.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of September 20, 2003, the
Registrant had 8,981,061 shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
TABLE OF CONTENTS
Page
PART I........................................................................1
Item 1. Description of Business..........................................1
Item 2. Description of Property.........................................17
Item 3. Legal Proceedings...............................................17
Item 4. Submission of Matters to a Vote of Security Holders.............17
PART II......................................................................18
Item 5. Market for Common Equity and Related Stockholder Matters........18
Item 6. Management's Discussion and Analysis or Plan of Operation.......19
Item 7. Financial Statements............................................27
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure .......................................27
PART III.....................................................................28
Item 9. Management......................................................28
Item 10. Executive Compensation..........................................29
Item 11. Security Ownership of Certain Beneficial Owners and Management..31
Item 12. Certain Relationships and Related Transactions..................32
Item 13. Exhibits and Reports on Form 8-K................................32
Item 14. Principal Accountant Fees and Services .........................33
-i-
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
Currently, Cenuco, Inc., (a Delaware corporation) and Subsidiaries (the
"Company") is engaged in two different business segments:
Through our subsidiaries, we are engaged in the online distance learning
industry with a focus on the international, mid-career adult and corporate
training markets. Our management has been engaged in this business since 1993,
through various predecessor entities (the "Predecessors"). We own and operate an
online distance learning university and nutrition academy that offers licensed
certificate and degree programs in a variety of concentrations to students in
over 80 countries worldwide. We are licensed by the State Education Departments
of the States of Alabama and Florida, respectively, and recognized by the
provincially run education agencies of China. In addition to online training, we
develop wireless applications for schools and enterprise companies. The
Company's international educational portal is located at www.barrington.edu.
Additionally, the Company has established a technology subsidiary called Cenuco,
Inc., a Florida corporation ("Cenuco"). Cenuco is a wholly-owned subsidiary that
develops wireless e-learning platform and technologies in the academic, consumer
and corporate marketplaces. We are also engaged in 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 web technology and design services, though our subsidiary.
Our executive office is located at 6421 Congress Ave, Suite 201, Boca Raton,
Florida 33487 and we have an administrative office at 801 Executive Park Drive,
Mobile, Alabama 36606.
Our reportable segments are strategic business units that offer different
products, which complement each other. They are managed separately based on the
fundamental differences in their operations. The following descriptions of our
business are broken down by segments and are discussed separately below.
DISTANCE LEARNING SEGMENT
STRATEGY
Key components of our strategy include:
Marketing Relationships with Business Entities. We have realized revenues from
continuing marketing relationships with businesses, including fortune 500
companies that reimburse employees to take educational courses. These employees
represent a small part of our current student population; however, we expect it
to be a growing part of the student population in the future.
Typically, we provide customized distance learning educational services through
our partners or to the workforce of its partners. Frequently, our corporate
partners sponsor students by paying directly or reimbursing their employees'
educational efforts.
Expand Global Enrollment and Recruitment Program. We intend to increase our
enrollment by adding to our team of representatives. The representatives are
currently based in areas characterized by what management believes to be a large
number of students, including Canada, China, Malaysia, Argentina, Spain, Japan,
Mexico, Korea, Brazil, and Venezuela.
We pay each representative a referral fee for every student enrolled in one of
our courses. We intend to continue to develop relationships with additional
representatives in geographic areas where we are not currently represented.
Expand through Acquisition. We are currently seeking to acquire traditional
educational institutions so that we may offer their traditional curricula
online. We will consider acquisitions of carefully selected Internet-based
educational institutions. While we continually evaluate certain acquisition
opportunities, we are not currently party to any definitive agreements.
1
MARKET
The United States and international education market may be divided into the
following segments:
- Kindergarten through twelfth grade (and overseas counterparts)
schools;
- Vocational and technical training schools;
- Workplace and consumer training and
- Degree-granting colleges and universities ("Higher Education").
We operate in the Higher Education and workplace and consumer training segments.
The U.S. Department of Education estimated that adults over 24 years of age
comprised approximately 6.1 million, or 39.3%, of the 15.5 million students
enrolled in Higher Education programs in 1998. Currently, the U.S. Bureau of
Census estimates that approximately 76% of students, over the age of 24, work
while attending school. The Department of Education estimates that by the year
2003, the number of adult students over the age of 24 will remain approximately
the same at 6.1 million, or 40.1%, of the 15.2 million students projected to be
enrolled in Higher Education programs. The Department of Education is also
projecting a 20% median increase in adult enrollment in degree-granting
institutions through 2011. Additionally the DOE is projecting an 18% overall
increase in Bachelor's Degrees conferred by 2010. In concert with these
statistics, the Department of Education recently stated that one third of all
adults participate in some type of continuing education. In a survey conducted
by DOE, 23% of adult students stated their continuing education was work
related, and 23% stated it was for personal development. A full 52% of Adult
Education students had some college credits, an associate's degree, or a
vocational or technical diploma. These statistics point to a growing market of
mid-career adults who are looking to continue or complete a degree program.
We serve the needs of mid-career, working adults, American and foreign, by
providing:
- Convenient access to a learning environment (primarily through our
website);
- Degree programs offered by licensed institutions that can be
completed in a reasonable amount of time for a reasonable cost;
- Programs that provide knowledge and skills with immediate practical
value in the workplace;
- Education provided by qualified faculty members with current
practical experience in fields related to the subjects they
instruct; and
- Learning resources available electronically to all students in
several languages regardless of geographical location.
We believe that the requirements of the adult working population represent a
significant market opportunity to Higher Education institutions that can offer
programs that meet these unique needs.
2
Most colleges and universities feature a more capital-intensive teaching and
learning structure characterized by:
- Dormitories, student unions and other significant plant assets to
support the needs of students;
- Fully-configured library facilities and related full-time staff;
- A high percentage of full-time tenured faculty with doctoral
degrees; and
- An emphasis on research and the related staff and facilities.
In addition, the majority of colleges and universities provide the bulk of their
educational programming from September to mid-December and from mid-January to
May. As a result, most full-time faculty members only teach during that limited
period of time. While this structure serves the needs of the full-time 18 to 24
year old student, it limits the educational opportunity for working adults who
must delay their education for up to five months during these spring, summer and
winter breaks. In addition, this structure generally requires that working
adults attend one or more courses three times a week, commute to a central site,
take work time to complete course requirements and, in undergraduate programs,
participate passively in an almost exclusively lecture-based learning format
primarily focused on a theoretical presentation of the subject matter. For the
majority of working adults, earning an undergraduate degree in this manner would
take seven to ten years. In recent years, many traditional colleges and
universities have begun offering more flexible programs for working adults,
although their focus appears to remain on 18 to 24-year old students.
OUR DISTANCE LEARNING ENTITIES AND AFFILIATIONS
We own and operate the following educational entities:
o Barrington University - Founded in 1993, Barrington is licensed by
the State of Alabama Department of Education and offers Bachelor and
Master degrees via the traditional and wireless Internet.
o Academy of Health Science and Nutrition- Founded in 2001, the
Academy is licensed by the State of Florida Department of Education
and offers certificate training in nutrition awareness via the
traditional and wireless internet. The academy mission is to educate
people in attaining optimum health through courses that offer a
clinical approach to nutrition, providing students with a strong
foundation in human health, as well as emotional health and well
being. However, the Academy is still in the development stage and
has not generated any revenue.
ACADEMIC PROGRAMS
We offer several specialty academic programs, including:
Business Administration
Management Information Systems
Criminal Justice
Computer Science
Nutrition
Innovation
Environmental Insurance
English as a second language
Business Coaching
3
TEACHING MODEL
The Company's teaching structure has the following major
characteristics:
Tuition. All of our students must pay a registration fee to cover the costs of
books, study manuals and other materials necessary for their studies. Generally,
registration fees are $450 (an additional $250 for international students) and
tuition fees range from $850 to $6,500 per program. Scholarships and discounts
are available to certain students who demonstrate financial need. Frequently,
tuition qualifies as a tax-deductible expense incurred as part of an effort to
maintain or improve job-related skills.
Curriculum. The standardized curriculum for each program is designed to provide
students with specified levels of knowledge and skills regardless of delivery
method or location. The curriculum provides for the achievement of specific
educational goals and is designed to integrate academic theory and professional
practice with a focus on application to the workplace. Although we are
responsible for academic requirements and educational goals, students and their
employers often provide input to our faculty in designing curricula, and class
projects are typically based on issues relevant to the companies and the human
resource departments of companies that employ our students.
Faculty. Faculty applicants must possess an earned master's degree from an
accredited institution and have a minimum of five years' professional experience
in a field related to the subject matter in which they seek to mentor. To help
promote quality delivery of the curricula, faculty members are required to:
o Complete an initial assessment conducted by staff and faculty;
o Complete a series of certification workshops related to grading,
teaching, oversight of study group activities, adult learning
theory, and use of the Internet;
o Participate in ongoing development activities; and
o Receive ongoing performance evaluations by students, peer faculty
and staff.
The results of these evaluations are used to establish plans to improve
individual faculty performance and to determine continued eligibility of faculty
members to instruct.
Our faculty is comprised of approximately 45 part-time persons. Most faculty
members are recruited as the result of referrals from faculty, students and
corporate contacts. All part-time faculties are contracted with on a
course-by-course basis.
Online Chat. Our students are encouraged to participate in an interactive
live-chat email center, which provides a forum for potential candidates or
students to discuss any aspect of the educational process. This feature is
available 24-hours a day, seven days a week.
Interactive Learning. Courses are designed to combine individual and group
activity with interaction between and among students and the instructor. The
curriculum requires a high level of student participation in order to enhance
the student's ability to complete the courses.
4
Learning Resources. Students and faculty members are provided with electronic
and other learning resources for their information needs. These extensive
electronic resources minimize our need for capital-intensive library facilities
and holdings.
Low Attrition Rate. Our schools currently have less than a 15% student dropout
rate, compared to a rate of more than 35% at traditional universities. We feel
that our customer service and our targeted client, the mid-career adult, are the
reasons for this success.
Academic Quality. Any student having earned a high school diploma, General
Equivalency Diploma ("GED") or international equivalent may apply to earn any of
our certificates or enter into a bachelor's degree program. Any student having
earned a Bachelor's degree or international equivalent, or registered in one of
our universities to earn their Bachelors' degree may apply to enter into any of
our master's degree program.
Admissions Standards. To gain admission to the undergraduate programs,
applicants must have a high school diploma or GED and satisfy certain minimum
grade point average, employment and age requirements. Additional requirements
may apply to individual programs. Students already in undergraduate programs
elsewhere may petition to be admitted on provisional status if they do not meet
certain admission requirements.
To gain admission to the graduate programs, students must have an undergraduate
degree from an accredited college or university or international equivalent and
satisfy minimum grade point average, work experience and employment
requirements. Additional requirements may apply to individual programs. Students
in graduate programs may petition to be admitted on provisional status if they
do not meet certain admission requirements.
Academic Accountability. We utilize an institution-wide system for the
assessment of the educational outcomes of our students. The information
generated is used to improve the quality of the curriculum, the instruction and
the teaching/learning model. Our undergraduate and graduate students complete a
comprehensive cognitive (core degree subject matter) and affective (educational,
personal and professional values) assessment prior to and upon the completion of
their core degree requirements.
Students in our programs evaluate both academic and administrative quality. This
evaluation begins with a registration survey and continues with the evaluation
of the curriculum, faculty, delivery method, instruction and administrative
services upon the conclusion of each course. The evaluation also includes a
survey of a random selection of graduates 2-3 years following their graduation.
The results provide an ongoing basis for improving our approach to teaching, our
selection of educational programs, and our instructional quality.
5
CUSTOMERS
Our customers consist of working adult students, colleges and universities,
governmental agencies and employers. The following is an approximate breakdown
of students by the level of program they are seeking, as of September 12, 2003:
Programs
Combined Bachelor's/Master's Program 12%
Master's Degree 50%
Bachelor's Degree 37%
Certificate Level 1%
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Total programs 100%
=================
Based on surveys we perform, the average age of our student is 36 years old and
approximately 65% of our students are male and 35% are female. Additionally, our
average student has some college experience and averages approximately seven
years of work experience.
MARKETING
We adhere to a multi-faceted marketing platform in attracting new clients,
including:
- traditional, offline advertising - strategic ads in key demographic
publications, including USA Today, and Black Enterprise;
- weekly bulk e-mail updates, informing both current and future
clients and students about the latest developments;
- in-house administrators, periodically calling prospective clients
to answer questions about the programs and products;
- a international network of academic recruiters - currently, working
agreements with representatives worldwide;
- Marketing relationships with businesses which reimburse employees to
take educational courses including several fortune 500 companies;
- Website optimization through our proprietary search engine ranking
techniques and applications.
Academic Web Properties:
In addition to www.cenuco.com, a Web site dedicated to the representation of all
of the Company's products, services, partners and alliances that provide
corporate training and degree-granting programs, the Company owns and/or
operates several other educational Websites. A sample of our academic websites
follows:
Barrington University (www.barrington.edu), one of the first online universities
established, is an educational site offering Bachelor's and Master's degrees
through virtual online distance learning.
The AIG Environmental Institute (www.aigenvironmentalinstitute.com) is an
e-learning platform offering condensed curriculum related to Environmental
Insurance products and available to AIG internal employees, insurance agents,
brokers and transaction attorneys. The content and access is currently available
online as well as in a wireless format.
The Academy of Health Science and Nutrition (www.nutritionacademy.com) offers
health science and nutritional certificate programs through virtual online
distance learning.
The Federation of Christian Ministries (FCM) has partnered with Barrington to
bring educational courses to the Christian communities throughout the world
www.globalministriesuniversity.org.
6
COMPETITION
General. The market for online distance learning services is intensely
competitive, rapidly evolving and subject to rapid technological change as the
market is characterized by an increasing number of entrants that have introduced
or developed products and services similar to those offered by us. We expect
competition not only to persist, but also to increase. Increased competition may
result in course price reductions, reduced margins and loss of market share.
Competitors fall into several categories, including other online distance
learning providers, traditional "snail mail" correspondence courses and
traditional universities and colleges expanding their course offerings online.
Several current and potential competitors have longer operating histories,
larger established student bases, greater name recognition, longer relationships
with students and the public and significantly greater financial, technical,
marketing and public relations' resources. Some entities, which compete directly
with us and are similar in business models, include the Apollo Group, which owns
and operates the University of Phoenix. For its year ending August 2002, the
Apollo Group reported sales over $1 billion. Apollo is the largest participant
in this industry. Our distance learning unit is able to compete due to its
platforms ease of use for users and focus on international students.
The following are some of the organizations that have certain similarities to
the Company:
Cardean University - Cardean, the online university of Unext, provides
continuing education and degree programs based on curricula and input from
leading academic institutions and experts worldwide. The vast majority of the
coursework is business related and English focused.
Jones International University - A veteran of the e-learning movement, Jones
shows considerable strength in developing new programs and degrees but has only
recently began a Spanish version of their programs and does not have the
strength internationally that the Company possesses.
Apollo Group/University of Phoenix - offers Distance Learning initiatives and
boasts the highest enrollment of any online university. With a strong parent
entity in Apollo Group, the company is the leader domestically (130,000 +
students) but has a limited international presence.
Walden University - a leader in graduate level programs for Master's and PhD
courses but fails to address the undergraduate, continuing education and
certificate focus important to many individuals and corporations. A recent
investment by Sylvan Ventures will enable the company to begin multi-language
and international efforts but they are starting late in the game.
Other competitors include those addressing the corporate training solutions
market, such as Cenquest and Quisic, as well as those providing systems to
deliver online courses through the traditional Internet, such as Blackboard,
eCollege and WebCT.
7
GOVERNMENT REGULATION
General. With the exception of state licensing regulations for our distance
learning programs as described below, we are subject to little governmental
regulation other than the securities' laws and regulations applicable to all
publicly owned companies and laws and regulations applicable to businesses
generally. Relatively few laws or regulations are currently directly applicable
to access to, or commerce on, the Internet. Due to the increasing popularity and
use of the Internet, it is likely that a number of laws and regulations may be
adopted at the local, state, national or international levels with respect to
the Internet. Any new legislation could inhibit the growth in use of the
Internet and decrease the acceptance of the Internet as a communications and
commercial medium, which could in turn decrease the demand for our services or
otherwise have a material adverse effect on our future operating performance.
Licensing. Barrington University is licensed by the State Education Department
of Alabama, which provides the basis for recognition and acceptance by
employers, other higher education institutions and governmental entities of the
degrees and credits earned by students. Barrington's license has been accepted
until June 2003. We are currently seeking additional licensure in the State of
California. Our new school, The Academy of Health Sciences and Nutrition has
been licensed as a distance learning school by the State of Florida's Department
of Education and plans to open its operations during fiscal 2003.
Accreditation. Accreditation is a system for recognizing educational
institutions and their programs for performance, integrity and quality. In the
United States, this accreditation program is recognized by the federal
government. Colleges and universities depend on accreditation in evaluating
transfers of credit and applications to graduate schools. Also, certain
scholarship grants are restricted to students attending institutions accredited
by certain associations. Our schools are currently not accredited but we have
hired an accreditation consulting firm to assist in our efforts to attain
accreditation.
WIRELESS SOLUTIONS SEGMENT
Overview
Data communications is the fastest growing segment of the communications
industry. The Internet, in particular, has emerged as one of the fastest growing
communications media in history and is dramatically changing how businesses and
individuals communicate and share information.
Traditionally, small and medium sized businesses have relied on low speed lines
for data transport. Data communications, particularly through the Internet, have
made it possible for smaller companies to compete more effectively with larger
competitors. Most companies, particularly small and medium sized businesses,
lack the expertise, capital or personnel required to install, maintain and
monitor their own web infrastructures. With the convergence of wireless
communications and Internet services, more businesses are opting for wireless
technology to meet their data and communication needs.
In recent years, the proliferation of wireless communications solutions has
extended the reach and connectivity of mobile professionals. The projected
growth of wireless data communication systems, driven by increasing connectivity
options for mobile users, should result in increased accuracy, timeliness and
convenience of information access, thereby reducing costs and improving
productivity.
8
Mobile professionals need tools that provide them with real-time access to
mission-critical information at all times. We are in the business of providing
mobile professionals with the tools they need to access data from anywhere in
the world with convenience, speed, reliability and security.
Technological advances (such as digitalization, data compression, smaller
devices) and critical regulatory decisions (to license new spectrum for cellular
telephony and other new applications) have greatly increased the availability of
wireless communications while reducing costs. The result has been dramatic
growth in the market for cellular telephones. For example, cellular telephone
subscriptions have increased from just over 2 million to more than 60 million in
the last 10 years.
Many nationally recognized experts predict strong growth within the wireless
data market.
Our wireless solutions segment, with its core proprietary (patent pending)
technology, addresses one primary market; security and surveillance. The
wireless segment offers software solutions but can also bundle hardware that
will allow real-time mobile access to mission-critical data and live video from
any Internet enabled personal digital assistant (PDA) or cellular phone, from
anywhere on the globe.
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 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, ability to communicate with
us(via Internet link), manage user accounts, and review archival video. This
total package of services and technology is currently unique in the marketplace.
Within this segment, we consider ourself a software development company,
offering vertical integrators extensibility upon their existing product lines.
By adding our technologies, integrators can take their LAN or Coaxial systems
mobile. We have distinguished ourself with this technological breakthrough, as
we believe that we are the only company offering this type of fully
military-grade, encrypted solution.
We also offers a solution to American Insurance Group (NYSE: AIG) for their
training and data access. Our Real Estate Pipeline application is contracted to
more than 50,000 Realtors in Florida and New Jersey to access MLS listings by
wireless means, which include photos and other data via an Internet enabled
handheld device.
We are now focused on the fast-growing security, surveillance and Homeland
Security markets. Our monitoring products have been listed on General Services
Administration (GSA) under contract number GS-04F-0025N. The General Services
Administration (GSA) coordinates all of the pricing for any product or service
sold to the Federal government (and in the case of Homeland Security, some state
and local governmental procurement as well). By having a GSA contract schedule
number, we have met the GSA's requirements from corporate stability, product
offering, and pricing standpoints, to sell and service all potential Federal
customers. Currently our offerings are the only mobile video monitoring
technology solutions currently available via the GSA.
Additionally, we have partnered and contracted with several expert security and
distribution firms including:
The Company has also partnered with certain fortune 500 technology companies,
manufacturers and distributors.
9
STRATEGY
Our business strategy, which is dependent upon our continuing to have sufficient
cash flow from operations and/or obtaining sufficient additional financing with
which to enhance the commercialization of existing and future products, is to be
a provider of unique technologies and information management tools by using the
expertise of our staff in application development. Currently, we have developed
several wireless applications. Our objectives for our software applications
include the following key elements:
* sell our products in many vertical markets, as the market for
wireless technologies is developing;
* build subscription base revenue streams for various industries;
* develop niche vertical markets for our wireless solutions;
* pursue marketing opportunities which allow us to develop the market
presence needed to support sales goals and to attract developers of
new products and services;
* maintain and strengthen strategic relationships with suppliers and
customers;
* focus on providing a quality product, in addition to support and
development after the sale;
* utilize expertise in management to deliver products and services in
a timely manner, control costs and manage budgets;
* pursue selective partnerships to expand our capabilities, products
and services.
Our revenues are expected to be based upon product sales, subscriptions, and
custom wireless solutions. Our revenues are dependent on the volume of sales
from the products we provide.
Revenues from sales are recognized in the period in which sales are made. Our
gross profit margin will be determined in part by our ability to estimate and
control direct costs of production and shipping and our ability to incorporate
such costs in the price charged to our distributors.
Technology Overview and Discussion
Security and surveillance is the focus of our Cenuco organization. With a
product offering of software and hardware bundles that we sell or license to
consumers and businesses. Cenuco is the only provider of security and
surveillance streaming-video monitoring via Internet enabled wireless PDAs or
cellular phones using a wide area network (WAN) and several other connection
protocols, including 802.11, GPRS, GSM, CDMA, and Satellite connections. The
technology is neither carrier nor device specific and is scalable to many
different formats and protocols, while retaining the capability of integrating
with most standard security systems.
Our wireless solutions use a hybrid of MPEG-4 technology, encapsulating 192-bit,
triple des (256-bit still in beta testing phase) encryption with MAC address
verification of live streaming video, projected over wide area networks (WAN)
via a cellular carriers' network to most Internet enabled wireless handheld
devices and cellular phones. Presently, we can provide 10 frames per second of
MPEG-4 streaming video via cellular connection. We also have products that work
over 802.11 protocols for local area networks (LAN).
The Cenuco technology portfolio includes its own Digital Video Server (DVS) with
selected digital video recorder (DVR) components and remote wireless functions
that include:
o 120 FPS recording over each platform
o 192 Bit, triple des Encryption algorithm with MAC address
verification
o Multi protocol wireless integration
o Continuous recording feed
o MPEG-4 compression
o Standard modem and Network Interface Card
o CD-rewrite
o Multi-viewing capability (multiple users, multiple locations)
o Remote playback functionality
o Remote pan-tilt-zoom (PTZ)
10
PRODUCTS
Our technological expertise resides in niche end-to-end wireless solutions for
the integration and delivery of data over any Internet enabled device. We have
developed a number of proprietary applications providing mobile video
transmission connectivity on wireless handheld devices and cellular phones
within specific market verticals and has filed two patents (software and
process) relating to this technology. Below is a sampling of some mobile
solutions and ancillary services already developed and implemented.
o The Cenuco Mobile Manager Security Digital Video Recording System TM
The Mobile Manager Security DVS system package, released in March 2003,
allows for streaming security video in real-time over wireless handheld
devices. This system integrates with existing systems and has digital
video archiving features with date and time stamps included. This
Cenuco product line targets larger corporations or businesses that
require a dedicated system for their video surveillance storage needs.
To date, we have not sold any Mobile Manager Security DVS system
packages. In addition to the upfront hardware and software purchase
price, the Company will receive annual service contracts generally from
8% to 10% of the initial sale.
o The Cenuco Mobile Video Monitor Server TM
This is the sister product to our Mobile Manager Security DVS system.
Cenuco does not want to compete with DVR companies like Sensormatic,
GE, Securitas, Panasonic, etc. Rather, we envision partnering with
these companies to integrate our wireless device video transmission
technologies into their product lines via software license and Cenuco's
SDK developer's toolkit. However, as an initial first step, the Cenuco
Mobile Video Monitor Server is simply 4-16 camera port encoder and
transmitter, taking any existing DVR's video feeds and making them
viewable via wireless handheld or cellular phones. Installation takes
less than an hour, and basically entails taking any DVR system's video
outputs and connecting them into the complementary port on the Cenuco
device. There is a tremendous amount of interest in this product, as it
takes any existing CCTV installation and makes it mobile, without any
re-engineering, re-wiring, or system rebuilding. We currently have this
system installed at the University of Miami, and are piloting with
Miami Dade Transit, GE Interlogix (healthcare division), New York Stock
Exchange, MGM Grand Hotel and Casino, and EDS. We have arranged for
leasing availability on this system line with a major national leasing
group. At present, we are training the top 15 independently owned
security integrators in the U.S., on the sale, installation, and
service of this product. SafirRosetti also has been an integral part in
the functionality specifications design, sales and marketing of the
Mobile Video Manager Server system to its Fortune 500 client base.
Additionally, Cenuco has a GSA version of the Mobile Video Manager
Server specifically designed for Homeland Security usage. We have
already been in conversations with the U.S. Department of Commerce, the
Transportation Security Administration, as well as the technology
directorate within the Department of Homeland Security. As previously
mentioned this solution is the only offering of its type on the GSA
schedule. Since launching the GSA product version in mid June of 2003,
we have received dozens of direct Request for Proposals and Request for
Quotes from multiple federal agencies. Our monitoring products have
been listed on General Services Administration (GSA) under contract
number GS-04F-0025N. The General Services Administration (GSA)
coordinates all of the pricing for any product or service sold to the
Federal government (and in the case of Homeland Security, some state
and local governmental procurement as well). By having a GSA contract
schedule number, Cenuco has met the GSA's requirements from corporate
stability, product offering, and pricing standpoints, to sell and
service all potential Federal customers. Currently Cenuco's offerings
are the only mobile video monitoring technology solutions currently
available via the GSA. To date, we have not generated revenue from this
product.
11
o The MommyTrack TM
The Mommy Track system, released in June of 2003, is a plug and play
retail sellable (shrink-wrap) system. This product enables parents,
grandparents or other family members to view their children and/or
their homes in a real-time video stream over their Internet enabled
wireless cell phone/handheld device or computer from anywhere in the
world. Currently, the product comes in two formats, which include a
color camera, a wireless base station, and software, and is wholesale
priced at volume accordingly at $299 (MSRP is $499). In addition, the
Company charges a service fee of $19.95 per month, which includes
48-hours of offsite archiving, 24/7 wireless Gateway access, 24/7
instant email support and software upgrades. The maintenance contracts
run for one year and automatically renew unless cancelled by the
customers. Cenuco offers extended monthly archiving of video for an
additional fee. The Company is currently in discussions with two of the
largest home security monitoring companies regarding offering or
integrating our technology within their existing customer base. Net
revenues from our Mommy Track product amounted to approximately $23,000
and $0 for the years ended June 30, 2003 and 2002, respectively.
o The Cenuco Mobile Video Monitor TM
The Cenuco Mobile Video Monitor system, to be released in December of
2003, is a plug and play small business version of MommyTrack. This
product enables small business owners to view their stores,
restaurants, warehouses, etc. in a real-time video stream over their
Internet enabled wireless handheld / cellular device or computer from
anywhere in the world. This product is the same core technology as
Mommy Track but with a different skin for a different application. By
utilizing the same product in different segmented verticals, we can
further expand our potential and profitability. The product will be
sold on a two-year maintenance contract, under a direct sale or lease
agreement which we have arranged with a national leasing service
company. Under leasing, Cenuco will be paid the entire two-year service
amount and product purchase price, upfront. We intend to pay out our
various commissions to resellers and integrators on a quarterly basis,
allowing us to accrue some interest on the cash float this scenario
would create. Mobile Video Monitor will be sold through LCA, Cellstar,
Barrett Xplore, SafirRosetti, SecurityOne, PEI, catalogs and others.
Additionally, we are in discussions with TYCO Fire and Security
regarding a possible integration or private label situation within
their ADT residential products. It is important to note that California
recently passed a new law (not yet implemented) requiring video
verification of a break-in prior to a police officer being dispatched
to the location. This will effect both commercial and home security
implementations. ADT has told us that this is the only solution they
have seen which would meet this requirement. To date, we have not
generated revenues from this product.
o Custom on-line Training and Education Course Development
As mentioned, Cenuco's educational subsidiary can develop custom
training and education courses through our existing development and
delivery systems. Although not a primary business, many clients with
specialty installations of our security products have begun to request
broad-based training for their large community of end-users. Cenuco
considers this service as incremental revenue. Net revenues from our
on-line training and education course development was not material.
o AIG Environmental Institute TM
The AIG Environmental Institute (TM) is a platform providing training
and relevant market information to remote users within the AIG family.
This system was built under contract for American Insurance Group
(AIG). There are currently 300 AIG brokers and agents using the
platform, of which a small percentage access it via an Internet enabled
PDA or cellular phone. Additionally, AIG offers this platform to third
party professional support personnel (lawyers, brokers, etc.) For its
services, Cenuco receives a monthly retainer and charges an annual
12
activation fee for every user. Net revenues from AIG amounted to
approximately $93,000 and $98,000 for the years ended June 30, 2003 and
2002, respectively.
o The Real Estate Pipeline TM
The Real Estate Pipeline(TM) was developed in association with 16 MLS
groups in the State of Florida and New Jersey, which represent over
50,000 individual brokers and agents. Similar to the platform developed
for AIG, the Real Estate Pipeline allows real estate brokers access to
MLS listings through their PDA or cellular phone. Cenuco receives
monthly retainers and activation fees for its service. The Company
expects to dominate the entire Florida market by the end of 2003 and
intends to expand its associations with other MLS groups in other
states including North Carolina, Rhode Island, California, New York and
Nevada. Net revenues from our Real Estate Pipeline product amounted to
approximately $70,424 and $13,453
o Traditional and Wireless Internet Hosting
Building a presence on the Wireless Web will enable your business to
reach and market hundreds of millions of consumers. A wireless-website
allows businesses to harness the power of the wireless Internet and to
reach unlimited customers anytime, from anywhere. It is the most
powerful tool that takes minimal expense to create and maintain.
Imagine, all the people using wireless devices having the ability to
find the right business, secure information, and then make purchases
(m-commerce) from their wireless devices. In addition, we offer
traditional web hosting to our clients. Net revenue from our hosting
services was not material.
We are currently building applications in the following new vertical
markets:
o Insurance Industry
o Medical Industry
o Sports Information
MARKETING AND DISTRIBUTION
Our strategy is to become a dominant provider of wireless data applications and
information management solutions by using management's expertise and knowledge
of information management; aggressively promoting our products through direct
sales, advertising, Internet branding and trade show marketing, and forming
strategic alliances with key industry leaders. We seek to maximize our recurring
revenues by providing monthly ISP and wireless services for our applications. We
also plan to enter new domestic and foreign markets by expanding into other
vertical and horizontal markets, increasing the number of our channel partner
relationships and fostering new strategic alliances.
Keys to meeting our strategic marketing objectives include the following:
Build critical mass: We must build a branding strategy through aggressive
promotion of our vertical market based applications. This can be done through
advertisements in various trade specific magazines and websites. Our plans to
participate at several trade shows where representatives can demonstrate our
products and services. Our marketing strategy includes press releases on new
developments.
Develop the market for existing and new products: Our initial focus is to meet
the needs of the mobile professional. We will focus on the professional who
understands the value of real time information and the ability to share that
information with their clients, colleagues and offices in a timely manner.
Expand into new industries: Management believes that it can apply our
information management solutions and wireless applications in any market,
including, but not limited to financial, insurance, construction, industrial and
legal. Additionally, the products are easily adaptable to horizontal markets
including traditional industrial businesses, manufacturing and distribution, and
consumer applications.
13
Pursue channel partners and strategic acquisitions: We intend to market our
products through channel partners who share our goals and values, direct
marketing efforts and traditional marketing.
Develop our customer base and strengthen our brands through enhanced sales and
marketing promotions: We intend to be aggressive in our marketing mix by
promoting our products.
Develop an in-house marketing communications and customer support program: Our
marketing staff has developed marketing and sales literature along with
demonstration tools that support both direct sales and customer support. Our
websites are scheduled to be constantly updated to show most recent developments
and partnerships.
We will strive to offer the best customer service possible by providing
solutions and answers in a timely fashion.
Maintain and strengthen our strategic relationships with suppliers: Building a
successful business requires strategic initiatives that will provide potential
customers, help to enter into new and targeted markets, develop and affirm
credibility in the market place, generate name recognition, align with reputable
and well known or established companies with significant customer bases, and
enlist technologies that supplement existing or in-house technology and
applications.
Strategic positioning and planning are critical for a successful business,
whether a startup or for an established company. In order to accomplish these
goals, strategic partnerships provide critical supplementation of existing
products, services or technologies. These partnerships and strategic positioning
enable us to provide robust and successful applications at a faster rate to meet
market and customer expectations. Building this strategic positioning and moving
to create these partnerships is a key to success for a mobile application
developer.
We utilize the Internet as an inexpensive and efficient method reach prospective
wireless solutions customers and increase the Company's distribution channels.
We have developed our website to draw attention to the various products the
Company sells. Product information, testimonials, and media clips of the
products from news sources like The Wall Street Journal, Fox News, NBC News, ABC
News, Entrepreneur Magazine and others, are available on the site allowing
prospective customers to learn more about the Company's wireless products and
how to obtain them. The site also alerts customers to new products and news of
existing ones.
Aside from its website, we have also developed literature featuring product
information marketing literature, product packaging and sales kits to be used by
retailers. We have also developed trial systems for the desktop client, which
will allow potential customers to sample the remote viewing service offering on
a desktop computer or compatible wireless device. This demonstration trial is
licensed for seven days, creating a definitive timeline for the continuation of
the sales process.
The company also intends on attending numerous tradeshows as both an exhibitor
and attendee. Through our partnership with Nokia and Microsoft, we also have
opportunities to reside within their "partner pavilions" at little cost, at some
of the most major technology shows like Comdex, CES, CeBIT, and the Homeland
Security Technology Forum.
We have also developed a comprehensive advertising and promotional program,
which includes standard display advertising, 90-second infomercial, advitorial,
radio spot, and co-operative marketing programs. We are in discussions with
ClearChannel communications regarding on-air promotions in selected markets
(product give-aways, at no cost for airtime). Additionally, we have partnered
with ANSA products group, one of the largest high-end baby bottle manufacturers
globally. Under this program, Cenuco's MommyTrack product information cards will
be inserted into 2,000,000 bottles to be distributed by ANSA. These bottles have
already started to appear in CVS, Walgreens, Eckards, Target, and numerous
additional national chains.
14
Through our Public Relations programs, we have the ability to get the MommyTrack
product featured on television via Oprah, Today, CNN, product placement within
television programming, and general matter television news stories. Currently,
we also have over 20 print journalists who want to review the MommyTrack
product, so that publication dates will meet with the Christmas shopping cycle.
Assuming all reviews occur, we will achieve over 20,000,000 impressions with
consumers by combining the circulation of all interested publications.
Our collaboration with Nokia has provided us access to cutting-edge wireless
technology and next generation devices. We are currently the preferred solutions
developer and reseller of Nokia's industry-leading wireless gateway for North
and South America. This robust WAP gateway is expansive enough to provide
wireless service to all of our clients. We introduced a variety of custom
applications for Nokia devices at Nokia's booth at both the Citrix 2001 show in
Orlando, Florida and Comdex 2001 in Las Vegas- the world's largest computer and
technology exposition.
We have partnered with several State Multiple Listing Service (MLS)
organizations, representing nearly 45,000 realtors in Florida. As partners of
organized real estate professional groups, the company subscribes to a strict
code of ethics and has access to numerous services and programs. Educational
programs and seminars help members gain new skills and professional
designations. Regular meetings provide opportunities for networking. In addition
to these programs, the associations offer its members a variety of business
tools from the Multiple Listing Service, market statistics, and publications
with current real estate information to training in cutting-edge technology. We
have joined this organization to help in the development of the Real Estate
Pipeline(TM) application. We currently have agreements with 16 MLS organizations
in the States of Florida and New Jersey to access property information.
COMPETITION
We face competition from large, well-established companies with considerably
greater financial, marketing, sales and technical resources than those available
to us. Additionally, many of our present and potential competitors have
capabilities that may allow such competitors to offer their products at prices
which may compete with our products. Our products could be made uneconomical by
the introduction of new products, changes affecting the cost of packaging and
shipping, or marketing or pricing actions by one or more of our competitors. Our
business, financial condition or results of operations could be materially
adversely affected by one or more of such developments. There can be no
assurance that we will be able to compete successfully against current or future
competitors or that competition will not have a material adverse effect on our
business, financial condition or results of operations.
The principal competitive factors for the industry are brand recognition, ease
of use, comprehensiveness of product offerings, customization to the consumer,
quality and focused value-added services. To our knowledge, there is currently
no other supplier of wireless video monitoring services in the market today
covering both 802.11 and cellular connectivity, combined with our
military-grade, dual compressed encryption systems with MAC address verification
of wireless clients; therefore, our offerings extend the market to a new
dimension of "true mobility".
The few companies that claim to offer remote monitoring access via a handheld
device currently use JPEG Push. The technology format used is JPEG still images,
which are pushed to an Internet enabled handheld device via only 802.11
protocols at a limited frame rate. Note, this type of technology is not a
streaming video format. It also requires the user to be "on-premises" for
connectivity. The moment the user leaves the facility, connectivity is lost. The
user is actually sent still images at a giving a very limited illusion of video
streaming. The predominant drawback to JPEG push is that only a certain amount
of still images can be sent at one time, ultimately leading to a refresh rate,
or lapses in viewing and poor video quality. During this refresh, an expanded
amount of viewing time will be lost. Moreover, all current wireless solutions
are based on 802.11b or other RF wireless local area network (WLAN) technology.
Cenuco's technology allows for true full-motion MPEG video, delivered to
handheld clients via 802.11x as well as CDMA, GSM, and SATCOM protocols. This
means the user can be literally anywhere in the world and still be connected to
the "on-premises" location.
15
SOURCES AND AVAILABILITY OF RAW MATERIALS
The materials and equipment needed to produce our software products are widely
available from numerous third parties. No shortage of materials is expected in
the foreseeable future.
DEPENDENCE ON ONE OR FEW CUSTOMERS
We will rely heavily on our customers' preferences to best determine the
products which will be produced. The commercial success of our products will
depend on our ability to predict the type of product that will appeal to a broad
spectrum of the populous and will be affordable. Although we plan to test market
our products prior to their release, there can be no assurance that we will be
able to predict the appeal of our products before production.
RESEARCH AND DEVELOPMENT
We believe that research and development is an important factor in our future
growth. The software industry and data storage and transmission are closely
linked to the latest technological advances. Therefore, we must continually
invest in the technology to provide the best quality product to the public and
to effectively compete with other companies in the industry. No assurance can be
made that we will have sufficient funds to purchase technological advances as
they become available. Additionally, due to the rapid advance rate at which
technology advances, our equipment may be outdated quickly, preventing or
impeding us from realizing its full potential profits.
PATENTS, COPYRIGHTS AND TRADEMARKS
We intend to protect our original intellectual property with patents, copyrights
and/or trademarks as appropriate. Currently, certain products are protected by
trademarks and patents are pending for our security product line.
GOVERNMENTAL REGULATION
Federal
We intend to utilize the Internet for transmission of data across state lines.
Presently, the FCC and other federal government agencies do not regulate
companies that provide these services. Notwithstanding the current state of the
rules, the FCC's potential jurisdiction over the Internet is broad because the
Internet relies on wire and radio communications facilities and services over
which these regulatory authorities have long-standing authority.
State
We are not currently subject to any state regulation with respect to its
Internet related services. However, there can be no assurances that we will not
be subject to such regulations in the future. Additionally, we are not aware of
any pending legislation that would have a material adverse effect on our
operations.
Effect of Probable Governmental Regulation on the Business
As we expand our efforts to develop new products and services, we will have to
remain attentive to relevant federal and state regulations. We intend to comply
fully with all laws and regulations, and the constraints of federal and state
restrictions could impact the success of our efforts.
As our services are available over the Internet in multiple states and foreign
countries, these jurisdictions may claim that we are required to qualify to do
business as a foreign corporation in each such state and foreign country. New
legislation or the application of laws and regulations from jurisdictions in
this area could have a detrimental effect upon our business.
16
Due to the increasing popularity and use of the Internet, it is possible that
additional laws and regulations may be adopted with respect to the Internet,
covering issues such as content, privacy, access to adult content by minors,
pricing, bulk e-mail (spam), encryption standards, consumer protection,
electronic commerce, taxation, copyright infringement and other intellectual
property issues. We cannot predict the impact, if any, that future regulatory
changes or developments may have on our business, financial condition, or
results of operation. Changes in the regulatory environment relating to the
Internet access industry, including regulatory changes that directly or
indirectly affect telecommunication costs or increase the likelihood or scope of
competition from regional data service providers or others, could increase our
operating costs, limit its ability to offer services and reduce the demand for
our services.
Cost and Effects of Compliance with Environmental Laws
Our business is not subject to regulation under the state and federal laws
regarding environmental protection and hazardous substances control. We are
unaware of any bills currently pending in Congress which could change the
application of such laws so that they would affect us.
We believe that the suite of services we are currently developing are
diversified enough to meet the demands of any size client. Rather than limit our
targeted market and services to strictly mid-to-large size companies, we have
decided to offer affordable wireless services and solutions to any size client
seeking to go wireless.
EMPLOYEES
As of September 15, 2003, we had approximately 15 full-time employees. None of
our employees are represented by a labor union. We have not experienced any work
stoppages and generally believe that our relationship with our employees is
good.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate headquarters are located at 6421 Congress Avenue, Suite 201, Boca
Raton, Florida. This facility consists of approximately 6,200 square feet of
office space, leased from a non-affiliated third party at an annual rent of
approximately $78,000. The leases expire in July 2005.
The headquarters of our subsidiary, Barrington University, are located at 801
Executive Park Dr., Mobile, Alabama. This facility consists of approximately
1,500 square feet of office space, leased from a non-affiliated third party at
an annual rate of approximately $11,000. The lease expires in April 2004.
All of the foregoing facilities are in good condition and are adequate for
currently anticipated needs. We believe that in the event that the leases with
respect to any of the aforementioned facilities should not be renewed,
alternative space will be available at comparable rates.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the company faces litigation in the ordinary course of
business. Currently we are not involved with any litigation which will have a
material adverse effect on our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since January 4, 2000 until December 17, 2002, our common stock had been traded
in the over-the-counter market and quoted on the OTC Bulletin Board under the
symbol "VADC.OB". On December 17, 2002, the Company changed its symbol to
"CNUO.OB". The reported high and low sale prices for the common stock are shown
below for the periods indicated. The prices reflect inter-dealer prices, without
retail mark-up, markdown or commissions, and may not always represent actual
transactions.
High ($) Low ($)
-------- -------
Fiscal 2003
First Quarter (7/1/02-9/30/02) 0.71 0.42
Second Quarter (10/01/02-12/31/02) 2.02 0.45
Third Quarter (1/01/03-3/31/03) 1.90 0.85
Fourth Quarter (4/01/03-6/30/03) 1.64 0.82
Fiscal 2002
First Quarter (7/1/01-9/30/01) 2.70 0.85
Second Quarter (10/01/01-12/31/01) 0.94 0.35
Third Quarter (1/01/02-3/31/02) 0.76 0.35
Fourth Quarter (4/01/02-6/30/02) 0.77 0.32
As of September 15, 2003, there were approximately 950 record owners of our
common stock.
To date, we have not paid any cash dividends on our Common Stock and have no
intention of paying dividends in the foreseeable future. The payment of
dividends, if any, in the future is within the discretion of our Board of
Directors and will depend upon our earnings, capital requirements and financial
condition and other relevant factors. Our ability to pay dividends in the future
may also be dependent upon relevant provisions of Delaware corporate law.
THE APPLICATION OF THE "PENNY STOCK REGULATION" COULD HARM THE MARKET PRICE OF
OUR COMMON STOCK
Our common stock currently trades on the OTC Bulletin Board. Since our common
stock continues to trade below $5.00 per share, our common stock is considered a
"penny stock" and is subject to SEC rules and regulations, which impose
limitations upon the manner in which our shares can be publicly traded.
These regulations require the delivery, prior to any transaction involving a
penny stock, of a disclosure schedule explaining the penny stock market and the
associated risks. Under these regulations, certain brokers who recommend such
securities to persons other than established customers or certain accredited
investors must make a special written suitability determination regarding such a
purchaser and receive such purchaser's written agreement to a transaction prior
to sale. These regulations have the effect of limiting the trading activity of
our common stock and reducing the liquidity of an investment in our common
stock.
Stockholders should be aware that, according to the Securities and Exchange
Commission Release No. 34-29093, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. These patterns include:
- Control of the market for the security by one or a few broker-dealers
that are often related to the promoter or issuer;
- Manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases;
- "Boiler room" practices involving high pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
- Excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
- The wholesale dumping of the same securities by promoters and broker
- dealers after prices have been manipulated to a desired level, along
with the inevitable collapse of those prices with consequent investor
losses.
18
Furthermore, the "penny stock" designation may adversely affect the development
of any public market for the Company's shares of common stock or, if such a
market develops, its continuation. Broker-dealers are required to personally
determine whether an investment in "penny stock" is suitable for customers.
Penny stocks are securities (i) with a price of less than five dollars per
share; (ii) that are not traded on a "recognized" national exchange; (iii) whose
prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed
stocks must still meet requirement (i) above); or (iv) of an issuer with net
tangible assets less than $2,000,000 (if the issuer has been in continuous
operation for at least three years) or $5,000,000 (if in continuous operation
for less than three years), or with average annual revenues of less than
$6,000,000 for the last three years.
Section 15(g) of the Exchange Act, and Rule 15g-2 of the Commission require
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document before effecting any transaction in a
penny stock for the investor's account. Potential investors in the Company's
common stock are urged to obtain and read such disclosure carefully before
purchasing any shares that are deemed to be "penny stock."
Rule 15g-9 of the Commission requires broker-dealers in penny stocks to approve
the account of any investor for transactions in such stocks before selling any
penny stock to that investor. This procedure requires the broker-dealer to (i)
obtain from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for the Company's stockholders to resell their shares to third parties
or to otherwise dispose of them.
FUTURE SALES OF LARGE AMOUNTS OF COMMON STOCK COULD ADVERSELY EFFECT THE MARKET
PRICE OF OUR COMMON STOCK AND OUR ABILITY TO RAISE CAPITAL.
Future sales of our common stock by existing stockholders pursuant to Rule 144
under the Securities Act of 1933, or following the exercise of future option
grants, could adversely affect the market price of our common stock. Our
directors and executive officers and their family members are not under lockup
letters or other forms of restriction on the sale of their common stock. The
issuance of any or all of these additional shares upon exercise of options will
dilute the voting power of our current stockholders on corporate matters and, as
a result, may cause the market price of our common stock to decrease. Further,
sales of a large number of shares of common stock in the public market could
adversely affect the market price of the common stock and could materially
impair our future ability to generate funds through sales of common stock or
other equity securities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
On December 11th, 2002, the Board of Directors of Virtual Academics.Com, Inc.
recommended and approved the change of its name to Cenuco, Inc. to better
reflect our business direction and operation. Effective December 17, 2002, a
majority of our shareholders approved of the name change. Reflecting the
changing focus of our business, we plan to accelerate the development of our
suite of fully integrative wireless solutions for the Security, Real Estate and
Insurance markets.
19
The change in name signifies the focus on our development of wireless
applications, while maintaining our market presence in the distance-learning
sector. We will continue to expand our online distance- learning programs,
including the AIG Environmental Institute, the Innovation Institute, Barrington
University and the Academy of Health Science and Nutrition.
The development and cultivation of wireless applications will now serve as the
focal point for our initiatives. Already, the wireless subsidiary has produced
viable solutions for the real estate and security markets. In addition, we
launched our line of wireless video monitoring solutions, MommyTrack(TM) and
CenVid(TM). Both products offer the world's first truly mobile surveillance
monitoring solution for the consumer and business market.
Through our subsidiaries, we are engaged in the online distance learning
business with a focus on the international, second-career adult and corporate
training markets. We currently operate our main school, Barrington University,
from Mobile, Alabama, where the State of Alabama Department of Education, Code
of Alabama, Title 16-46-1 through 10, licenses the school. We offer degrees and
training programs to students in over 80 countries and in multiple languages.
The programs are "virtual" in their delivery format and can be completed from a
laptop, home computer or through a wireless device.
In addition to degree completion programs, we are focusing on training corporate
personnel, continuing education (CE) courses and wireless technology for
education, which we believe is a major growth area.
We are currently developing affordable wireless platforms to provide companies
with quality training services for their employees. Our staff works directly
with Human Resource departments to ensure the training is scalable and
applicable to their employees' needs. Our technology provides seamless
information to all employees, regardless if they are in the home, office or out
in the field.
We have released other wireless application products that are currently being
used in the Security, Real Estate and insurance industries. The software
applications are compatible with most existing wireless devices. We expect to
release several academic and training solutions in fiscal 2003.
We have received full approval for Sallie Mae funding for our students that
qualify for Sallie Mae loans. Sallie Mae has been providing funds for
educational loans. Sallie Mae currently owns or manages student loans for more
than seven million borrowers and is the nation's leading provider of educational
loans.
We operate in two reportable business segments - (1) the online distance
learning industry, and (2) the development and sales of wireless solutions and
web services. The latter segment includes development of business-to-business
and business-to-consumer wireless applications, and state of the art web
technology and design services. Our reportable segments are strategic business
units that offer different products. They are managed separately based on the
fundamental differences in their operations and are discussed separately below.
SEASONALITY IN RESULTS OF OPERATIONS
We experience seasonality in our results of operations from our online
distance-learning segment primarily as a result of changes in the level of
student enrollments and course completion. While we enroll students throughout
the year, December and January average enrollments and course completion and
related revenues generally are lower than other quarters due to seasonal breaks
in December and January. Accordingly, costs and expenses historically increase
as a percentage of tuition and other net revenues as a result of certain fixed
costs not significantly affected by the seasonal second quarter declines in net
revenues.
We experience a seasonal increase in new enrollments in August of each year when
most other colleges and universities begin their fall semesters. As a result,
instructional costs and services and selling and promotional expenses
historically increase as a percentage of tuition and other net revenues in the
fourth quarter due to increased costs in preparation for the August peak
enrollments.
20
RESULTS OF OPERATIONS (continued)
YEAR ENDED JUNE 30, 2003 COMPARED TO THE YEAR ENDED JUNE 30, 2002
CONSOLIDATED RESULTS
The following discussion relates to our consolidated results of operations.
Further discussion and analysis of operating results is follows and is discussed
by segment.
Revenues
For fiscal 2003, we had a 49% decrease in earned revenues to $1,577,479 from
$3,099,498 for fiscal 2002.
Cost of Equipment Sales
For the year ended June 30, 2003 and 2002, we incurred cost of sales related to
the sale of equipment of $157,656 and $67,835, respectively.
Instruction and Educational Support
Instruction and educational support expenses related to our online
distant-learning segment. For the year ended June 30 2003, instructional and
educational support expenses decreased by 63% to $99,956 or 8.5% of net revenues
as compared to $272,729 or 9.4% of net revenues for the year ended June 30,
2002.
Selling and Promotion
Selling and promotion expense consists primarily of recruiting fees,
advertising, trade show expense, and travel. For the year ended June 30, 2003,
selling and promotion expenses decreased by 25.7% to $353,403 or 22.4% of net
revenues as compared to $475,758 or 15.4% of net revenues for the year ended
June 30, 2002.
General and Administrative Expenses
General and administrative expenses, which includes salaries, professional fees,
rent, travel and entertainment, insurance, bad debt, and other expenses, were
$2,056,669 for the year ended June 30, 2003 as compared to $2,478,582 for the
year ended June 30, 2002. This amounted to 130.4% of net revenues for the year
ended June 30, 2003 as compared to 80% for the year ended June 30, 2002.
Interest Income
Interest income was $18,921 for the year ended June 30, 2003 as compared to
$31,875 for the year ended June 30, 2002, a decrease of $25,274
Income Taxes
Deferred tax assets and liabilities are provided for significant income and
expense items recognized in different years for tax and financial reporting
purposes. As of June 30, 2002, we did not record a valuation allowance on the
deferred tax assets because the Company's ability to realize these benefits was
"more likely than not". The deferred tax asset was reported in the accompanying
balance sheet at June 30, 2002. As of June 30, 2003, the net deferred taxes have
been fully offset by a valuation allowance since the Company cannot currently
conclude that it is more likely than not that the benefits will be realized. The
net operating loss carryforward for income tax purposes of approximately
$950,000 expires beginning in 2017. Internal Revenue Code Section 382 places a
limitation on the amount of taxable income that can be offset by carryforwards
after a change in control (generally greater than a 50% change in ownership). In
connection with the recording of a valuation allowance on our deferred tax
asset, we recorded deferred tax expense of $153,156.
21
RESULTS OF OPERATIONS (continued)
YEAR ENDED JUNE 30, 2003 COMPARED TO THE YEAR ENDED JUNE 30, 2002
Online Distance Learning Segment
Revenues
For fiscal 2003, we had a 59% decrease in earned revenues to $1,181,718 from
$2,889,579 for fiscal 2002. The decrease in revenues is due primarily to a
decrease in the number of students that have registered for our programs. We
have decreased our marketing efforts and have been focusing on our wireless
segment. Additionally, our students completed their courses at a slower rate
than expected. Unearned revenue represents the portion of tuition revenue
invoiced but not earned and is reflected as a liability in the accompanying
consolidated balance sheets. Since we will recognize tuition and registration
revenue based on the number of courses actually completed in each student's
course of study, student course completion efforts, if successful, are extremely
beneficial to operating results. During the year ended June 30, 2003, we
experienced a general slowdown in course completion by our students, which had
an adverse effect on our revenue. We have recently increased our marketing
efforts and expect student enrollment to increase in the second quarter of
fiscal 2004.
Tuition refunds are based on the date that the student cancels and the policy is
as follows: If the student withdraws within 5 calendar days after midnight of
the day the student signs the Enrollment Agreement (Full Refund Period) the
student will receive a full refund with no further obligation. If the student
cancels after the Full Refund Period but before the school receives the first
completed lesson, the student will be charged a registration fee of $150 and the
student will receive a full refund less the registration fee charge. If the
student cancels after the school receives the first completed lesson, the
student's tuition obligation will be their registration fee plus a portion of
the remaining tuition as defined below.
Percentage of Course Completed Amount of Tuition Obligated
------------------------------ ---------------------------
10% of less 10% of tuition
Between 11% - 25% 25% of tuition
Between 26% - 50% 50% of tuition
Over 50%. Obligated for full tuition.
When a student withdraws, we write off the remaining tuition receivable balance
against the remaining unearned revenue balance and recorded a net increase or
decrease to net revenues. The effect on net revenues was approximately a
decrease of $70,000 for the year ended June 30, 2003.
Expenses
Instruction and Educational Support
Instruction and educational support expenses consist primarily of student
supplies such as textbooks as well as course development fees, credit card fees,
computer related expenses, and printing fees. For the year ended June 30 2003,
instructional and educational support expenses decreased by 63% to $99,956 or
8.5% of net revenues as compared to $272,729 or 9.4% of net revenues for the
year ended June 30, 2002. The decrease in instructional and educational support
expenses and the related percentages was mainly attributable to the fact that we
have enrolled fewer students in the current period and we are able to purchase
text books from a new supplier at reduced prices. Accordingly, student supply
expense was $42,835 or 3.6% of revenues for the year ended June 30, 2003 as
compared to $139,692 or 4.8% of revenue for the year ended June 30, 2002.
Printing and reproduction costs decreased to $18,271 for the year ended June 30,
2003 as compared to $28,896 for the year ended June 30, 2002. Computer and
internet expenses decreased to $8,879 for the year ended June 30, 2003 as
compared to $61,836 for the year ended June 30, 2002 due to a decreased need for
development and maintenance of our websites related to our online university.
22
Additionally, we incurred costs associated with course development for the year
ended June 30, 2003 of $11,592 as compared to $12,260 for the year ended June
30, 2002.
Selling and Promotion
Selling and promotion expense consists primarily of recruiting fees, advertising
and travel. For the year ended June 30, 2003, selling and promotion expenses
decreased by 62.7% to $137,224 or 11.6% of net revenues as compared to $367,800
or 12.7% of net revenues for the year ended June 30, 2002. The decrease in
selling and promotion expenses is attributable to the shift in our selling and
promotion efforts to our wireless solutions segment. For the year ended June 30.
2003, advertising expense amounted to $97,977 as compared to $126,893 for the
year ended June 30, 2002. Additionally, our recruiting fees decreased to $28,186
for year ended June 30, 2003 from $209,106 for the year ended June 30, 2002. The
decrease is attributable to our decreased use of recruiters to obtain students
and a general slow-down in new students. We are currently running advertisements
in various national publications and newspapers in order to attract more
students. We expect our advertising budget to increase through the end of fiscal
2004.
General and Administrative Expenses
General and administrative expenses, which includes salaries, professional fees,
rent, travel and entertainment, insurance, bad debt, and other expenses, were
$941,729 for the year ended June 30, 2003 as compared to $2,110,141 for the year
ended June 30, 2002. This amounted to 79.7% of net revenues for the year ended
June 30, 2003 as compared to 73% for the year ended June 30, 2002. The decrease
was primarily due to the following factors:
The cost of professional fees decreased to $69,747 for the year ended June 30,
2003 as compared to $294,797 for the year ended June 30, 2002. During the year
ended June 30, 2002, we incurred additional costs associated with the filing of
a registration statement with the Securities and Exchange Commission and
incurred legal expenses in connection with the dismissal of a lawsuit. For the
year ended June 30, 2003, salaries were $239,134 as compared to salaries of
$665,893 for the year ended June 30, 2002. The decrease in salaries was
attributable to the allocation of administrative and executive salaries to our
wireless segment, where we have concentrated a significant part of our resources
and efforts. Additionally, we experienced a decrease in postage and delivery,
telephone expenses, rent, payroll taxes, and office expenses due to a decrease
in student activity and increased allocations of our overhead expenses to our
wireless segment. We incurred bad debt expense of $161,435 for the year ended
June 30, 2003 as compared to $514,933 for the year ended June 30, 2002,
resulting from student inactivity.
Interest Income
Interest income was $9,632 for the year ended June 30, 2003 as compared to
$34,906 for the year ended June 30, 2002, a decrease of $25,274 due to the fact
that cash was transferred to our wireless segment. We currently invest our
excess cash balances in primarily two interest-bearing accounts with two
financial institutions.
Wireless and Web Solutions Segment
For the year ended June 30, 2003 and 2002, we had net revenues of $395,761 and
$209,919, respectively, which consisted of the following:
Fiscal 2003 Fiscal 2002
----------- -----------
Equipment Sales ...................... $191,786 $ 70,353
Wireless Solutions and Web Services .. 179,563 137,751
Other ................................ 24,412 1,815
-------- --------
$395,761 $209,919
======== ========
For the year ended June 30, 2003 and 2002, we incurred cost of sales related to
the sale of equipment of $157,656 and $67,835, respectively.
23
For the year ended June 30, 2003 and 2002, we incurred research and development
expenses from the development of our new products of $64,742 and $0,
respectively.
For the year ended June 30, 2003, selling and promotion expenses amounted to
$216,179, which included $27,132 in commission expense, $5,721 in advertising
expense, $99,570 of trade show expense, printing and reproduction expense of
$31,146, travel expenses of $52,610. For the year ended June 30, 2002, selling
and promotion expenses amounted to $107,958, which included $77,019 in
commission expense, advertising expense of $17,747, printing and reproduction
expense of $6,811, travel expenses of $6,381.
For the year ended June 30, 2003, we incurred $1,114,940 of general and
administrative expenses, which included salaries expense of $578,899, consulting
expense of $98,203, computer and internet related expenses of $33,038, rent
expense of $42,772, professional fees of $58,207, postage and delivery of
$36,862, payroll taxes of $39,327, and other operating expenses. For the year
ended June, 2002, we incurred $368,441 of general and administrative expenses,
which included salaries of $174,917, consulting expense of $4,800, computer and
internet related expenses of $16,908, rent expense of $8,420, professional fees
of $7,395, payroll taxes of $11,547, licensing fees of $78,272 and other
expenses. For the year ended June 30, 2003, salaries were $578,899 as compared
to $174,917 for the year ended June 30, 2002. This reflected a growth in the
number of employees during the year ended June 30, 2003 as a result of the
growth that we are experiencing and new development projects as well as the
allocation of administrative and executive salaries to our wireless segment.
Additionally, since we began our wireless segment in November 2001, amounts for
the year ended June 30, 2002 do not reflect the entire period.
For the year ended June 30, 2003 and 2002, interest income was $9,289 and
$4,446, respectively. We currently invest our excess cash balances in primarily
two interest-bearing accounts with two financial institutions.
Summary of Consolidated Results
Net income (loss)
As a result of the foregoing factors, we recognized a net loss of $(1,289,182)
or $(.15) per common share on a consolidated basis for the year ended June 30,
2003 as compared to a net loss of $(124,179) or $(.01) per common share for the
year ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, we had $996,702 in cash and equivalents on hand to meet our
obligations.
During the year ended June 30, 2003, we invested substantial time and resources
developing and evaluating products and opportunities for our wireless solutions
segment. We will continue to develop new wireless solutions for both of our
segments and may consider acquisitions, business combinations, or start up
proposals, which could be advantageous to our product lines or business plans,
although the Company expects to be profitable in the future there can be no
assurance.
Net cash used in operations was $459,548 for the year ended June 30, 2003 as
compared to net cash used in operations of $214,238 for the year ended June 30,
2002. We used additional cash funds for salaries and expenses related to the
development of our wireless security products and a significant decrease in
revenues. We feel that with expected positive cash flow, our current cash
balance is sufficient to sustain our operations over the ensuing 12-month
period, including the expected growth during this period.
Net cash used in investing activities for the year ended June 30, 2003 was
$73,601 as compared to $31,117 for the year ended June 30, 2002 and related to
the acquisition of property and equipment. During the year ended June 30, 2003,
we acquired computer equipment to be used in the development of our wireless
solutions.
24
We currently have no material commitments for capital expenditures. Our future
growth is dependent on our ability to raise capital for expansion, and to seek
additional revenue sources. We have adequate cash funds to meet our operating
needs through fiscal 2004. However, if we decide to pursue any acquisition
opportunities or other expansion opportunities, we may need to raise additional
capital, although there can be no assurance such capital- raising activities
would be successful.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 1 to the
audited financial statements included in this Annual Report on Form 10-KSB for
the year ended June 30, 2003. We believe that the application of these policies
on a consistent basis enables us to provide useful and reliable financial
information about our operating results and financial condition.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
We account for stock transactions in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." In accordance with Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," we adopted the pro forma disclosure requirements of SFAS 123.
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 web technology
and design services, the Company recognizes revenue as services are performed or
on a pro rata basis over the contract term.
We recognize tuition and registration revenue based on the number of courses
actually completed in each student's course of study. For example, if a student
completes three out of his nine required courses, the Company will recognize 33%
of the tuition regardless of the amount of time that the student has taken to
fulfill these requirements. Tuition refunds are based on the date that the
student cancels and the policy is as follows: If the student withdraws within 5
calendar days after midnight of the day the student signs the Enrollment
Agreement (Full Refund Period) the student will receive a full refund with no
further obligation.
If the student cancels after the Full Refund Period but before the school
receives the first completed lesson, the student will be charged a registration
fee of $150 and the student will receive a full refund less the registration fee
charge. If the student cancels after the school receives the first completed
lesson, the student's tuition obligation will be their registration fee plus a
portion of the remaining tuition as defined below.
Percentage of Course Completed Amount of Tuition Obligated
------------------------------ ---------------------------
10% of less 10% of tuition
Between 11% - 25% 25% of tuition
Between 26% - 50% 50% of tuition
Over 50%... Obligated for full tuition.
When a student withdraws, we write off the remaining tuition receivable balance
against the remaining unearned revenue balance and recorded a net increase or
decrease to net revenues. The effect on net revenues was approximately a
decrease of $70,000 for the year ended June 30, 2003.
25
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several new
accounting pronouncements:
Statement No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146")
addresses the recognition, measurement, and reporting of cost that are
associated with exit and disposal activities that are currently accounted for
pursuant to the guidelines set forth in EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to exit an Activity
(including Certain Cost Incurred in a Restructuring)," cost related to
terminating a contract that is not a capital lease and one-time benefit
arrangements received by employees who are involuntarily terminated - nullifying
the guidance under EITF 94-3. Under SFAS 146, the cost associated with an exit
or disposal activity is recognized in the periods in which it is incurred rather
than at the date the Company committed to the exit plan. This statement is
effective for exit or disposal activities initiated after December 31, 2002 with
earlier application encouraged. The adoption of SFAS 146 did not have a material
impact on the Company's financial position, results of operations or liquidity.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
Statement 148 provides alternative methods of transition to Statement 123's fair
value method of accounting for stock-based employee compensation. It also amends
the disclosure provisions of Statement 123 and APB Opinion No. 28, Interim
Financial Reporting, to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. Statement 148's amendment of the
transition and annual disclosure requirements of Statement's 123 are effective
for fiscal years ending after December 15, 2002. Statement 148's amendment of
the disclosure requirements of Opinion 28 is effective for interim periods
beginning after December 15, 2002. The adoption of the disclosure provisions of
Statement 148 did not have a material impact on the Company's consolidated
financial condition or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of this pronouncement does not have a material effect on the
earnings or financial position of the Company.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires that if an entity
has a controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46 requires
that its provisions are effective immediately for all arrangements entered into
after January 31, 2003. The Company does not have any variable interest entities
created after January 31, 2003. For those arrangements entered into prior to
January 31, 2003, the FIN 46 provisions are required to be adopted at the
beginning of the first interim or annual period beginning after June 15, 2003.
The Company has not identified any variable interest entities to date and will
continue to evaluate whether it has variable interest entities that will have a
significant impact on its consolidated balance sheet and results of operations.
26
In January 2003, the EITF finalized a consensus on Issue No. 02-16, "Accounting
by a Customer (Including a Reseller) for Cash Consideration Received from a
Vendor." The Task Force concluded that cash consideration in excess of specific
identifiable costs, including sales incentives, allowances, discounts, coupons,
rebates and price reductions, when meeting certain criteria, constitute a
reduction in vendor price, and should therefore be reflected as a reduction in
cost of sales when the related merchandise is sold. The EITF concluded that this
literature should be applied to new arrangements, including modifications of
existing arrangements, entered into after December 31, 2002. We adopted EITF
02-16 as of January 1, 2003. The adoption of EITF 02-16 had an immaterial impact
on our consolidated financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective for the first interim period beginning
after June 15, 2003, with certain exceptions. We plan to adopt SFAS No. 150 in
the first quarter of Fiscal 2004. We do not expect the adoption of SFAS No. 150
to have a significant impact on our consolidated financial position or results
of operations.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this report are included, commencing on
page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 8A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of the Chief Executive Officer
and Principal Accounting Officer, of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")). Based on this evaluation, the Chief Executive
Officer and Principal Accounting Officer concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. There was no
change in the Company's internal control over financial reporting during the
Company's most recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following individuals comprise our management team:
Steven M. Bettinger, 32 years old, has served as our Chief Executive Officer,
President and Director since 1999. Mr. Bettinger also founded Barrington
University in 1993, and also and serves as an executive officer and director of
Continuing Care.com, a Web portal developer for senior living and the senior
service industry, Funturnet Inc., a children's educational software company,
Plantation Financial Group, an investment banking firm located in South Florida
and Centaur, a financial advisors organization to the E-learning market. Mr.
Bettinger received his B.S. in Business Administration from Syracuse University.
Steven Bettinger is Robert Bettinger's son.
Robert K. Bettinger, 66 years old, has served as the Chairman of our Board of
Directors since 1993. Mr. Bettinger is also the President of Barrington
University, our primary internet school. Mr. Bettinger was also the founder of
Certified Tax Returns USA.com, and on-line tax preparation business which he
operated from June 1998 until its sale of October 1999. Mr. Bettinger graduated
with an education degree from Long Island University and attended Teacher's
College at Columbia University. Mr. Bettinger was a teacher, counselor and
administrator in the New York City public school system from 1960 to 1977.
Robert Bettinger is Steve Bettinger's father.
Andrew Lockwood, 35 years old, has served as a director since April 2000. Since
December 2002, Mr. Lockwood has been the principal owner of Black Acre Mortgage,
Inc., a mortgage brokerage firm located in Plantation, Florida. Additionally, in
2002 Mr. Lockwood became a partner and owner in Plantation Financial Group,
Inc., an investment banking firm located in South Florida. Prior to joining
Plantation Financial Group, since September 2001, he had served as President of
the Shochet division of BlueStone Capital Corp., a New York based investment
broker and financial services firm that acquired certain assets of Shochet
Securities, Inc. in August 2001. From April 2000 to August 2001, Mr. Lockwood
has served as Executive Vice President--Business Development and General Counsel
of Shochet Holding Corp., a publicly traded financial services company based in
South Florida. From April 1999 to April 2000, Mr. Lockwood was employed as an
attorney in the corporate and securities department of Atlas Pearlman, P.A., a
law firm located in Fort Lauderdale, Florida. From 1996 to March 1999, Mr.
Lockwood was employed as an attorney in the corporate securities department of
Graubard, Mollen & Miller, a law firm located in New York City. Mr. Lockwood
received his J.D. from St. John's University School of Law and his B.A. from
Wesleyan University. Mr. Lockwood is a member in good standing of each of the
New York and Florida Bar Associations.
Jack P. Phelan, 53 years old, has served as a director since March 2000. Since
June 1998, Mr. Phelan served as President of Helios International Asset
Management, a registered investment advisor located in Boca Raton, Florida. From
January 1995 to June 1998, Mr. Phelan served as President of Nicholson/Kenny
Capital Management, an investment management firm located in Boca Raton,
Florida. Mr. Phelan is a member of the Association of Investment Management
Research, the New York Society of Security Analysis, the Financial Analysts
Society of South Florida, the International Society of Financial Analysts and
the International Association for Financial Planning. Mr. Phelan is also a
member of MENSA and the International Society of Philosophical Enquiry.
Jordan Serlin, 32 years old, became Chief Operating Officer in July of 2003. He
served on the Cenuco Advisory Board since March of 2003. Most recently, Mr.
Serlin served as CEO, Americas for United Kingdom based Tenestra, Ltd. Tenestra
was a leading global developer of component hardware and software for digital
and embedded wireless closed circuit television security surveillance systems.
Clients and projects included: British Customs, BMW, Pepcor Intl., British
Petroleum, and the United States Transportation and Security Administration. Mr.
Serlin spearheaded the successful sale of Tenestra's core technologies to
General Electric's security subsidiary in late 2002. Mr. Serlin previously
served as the chief marketing executive for FortuneCity, an online services
provider. He was part of the management team which took that firm to its $90
million IPO in 1998 on the German NeurMarkt. He currently serves on the advisory
boards of Sessions.edu, the Calyx Group, and the Brainstorm Venture Group, and
28
Cualinet. He currently or previously served as a Director on the boards of :
LookNbuy, Qool.com, Electronic Hollywood, and Tenestra USA.
Robert Picow, 40 years old, has served as a director since July of 2003. In
1982, Mr. Picow founded Allied Distributors, a small electronics distributorship
based in Philadelphia. In 1986, Allied Communications was formed and the company
focused on cellular telephones and related products. Allied Communications
became one of the leaders in this field and Mr. Picow served as C.E.O. until its
merger 1n 1996 with Brightpoint, a publicly traded communications company. Mr.
Picow served as Vice Chairman and a Director at Brightpoint until 1997. Robert
served as a Director of S.B.A. Communications for a two-year term and is now a
director of Streicher Mobile Fueling (fuel) and Fundamental Management
Corporation a private fund management company. Mr. Picow also serves on the
Board of Trustees of the Children's Place at Home Safe a Palm Beach based
charity.
Directors are elected at each annual meeting of stockholders and hold office
until the next annual meeting of stockholders. Executive officers are elected by
and serve at the discretion of the Board of Directors. The Board of Directors
held 5 meetings during Fiscal 2002 and consented to approximately 5 corporate
resolutions. We do not have an audit committee. The entire Board of Directors
serves as the audit committee. Because of the small size of the Company and the
risk attendant to a small public company, we are currently unable to attract an
audit committee financial expert to our Board of Directors. There are no other
committees of the Board of Directors.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth information relating to the compensation we paid
during the past two fiscal years to: (i) the President and Chief Executive
Officer; and (ii) each other executive officer who earned more than $100,000
during Fiscal 2003 and 2002 (the "Named Executive Officers").
Annual Compensation Long-Term Compensation
-------------------------------------------------- ---------------------------------------
Restricted Securities
Other Annual Stock Underlying
Name and Principal Fiscal Salary Bonus Compensation Awards Options All Other
Position Year ($) ($) ($) ($) SAR (#) Compensation
------------------------ ------ -------- ---------- ------------ ---------- ---------- ------------
Steven M. Bettinger, 2003 $250,000 $82,000(1) $ - $42,000(2) 100,000 -0-
President and Chief
Executive Officer 2002 $239,615 $15,000(4) $ - $35,000(3) 100,000 -0-
Robert K. Bettinger,
Chairman of the Board 2003 $ - $82,000(1) $73,000(5) $42,000(2) 100,000 -0-
and Principal Accounting
Officer 2002 $ - $15,000(4) $57,600(5) $35,000(3) 100,000 -0-
(1) Represents the issuance of 100,000 shares of common stock to Steven
Bettinger and Robert Bettinger, respectively, at a fair market value of
$0.82 on the date of issuance.
(2) Represents value of 100,000 stock options granted to Steven Bettinger and
Robert Bettinger, respectively, at an exercise price of $.42.
(3) Represents value of 100,000 stock options granted to Steven Bettinger and
Robert Bettinger at an exercise price of $.35.
(4) Represents the issuance of 42,857 shares of common stock to Steven
Bettinger and Robert Bettinger, respectively, at a fair market value of
$.35 on the date of issuance.
(5) Represents amounts paid to a consulting company majority-owned by our
Chairman of the Board and Secretary, The consulting company that renders
Internet consulting services to the Company
29
EMPLOYMENT AGREEMENTS
We were a party to an employment agreement with Steven M. Bettinger, our
President and Chief Executive Officer, which was entered into December 1, 1999
for a term of two years. The employment agreement provided for an annual salary
of $150,000, and a bonus determined in the sole discretion of our Board of
Directors. Effective January 1, 2001, the Board of Directors approved a new two
year employment agreement, which provides an increase in salary for Mr.
Bettinger to $250,000 per year and a bonus to be determined in the sole
discretion of our Board of Directors. In connection with the employment
agreements mentioned herein, Mr. Steven M. Bettinger was granted options under
the 2000 Plan to purchase an aggregate total of 400,000 (100,000 each year)
shares of common stock in fiscal 2003, 2002, 2001 and fiscal 2000 at an exercise
price equal to the fair value market value on the date of grant.
These options vest 1/3 per year beginning one year from the date of grant. The
employment agreement entitles Mr. Bettinger to receive options to purchase
100,000 shares of our common stock each year of employment at fair value on the
date of grant. The employment agreement provides for automatic 12-month renewals
unless the employment agreement is terminated by us or Mr. Bettinger with 30
days prior written notice. We intend to renew this employment agreement.
We were a party to an employment agreement with Robert K. Bettinger, our
Chairman of the Board of Directors and Secretary, which was entered into
December 1, 1999 for a period of two years. The employment agreement provided
for an annual salary of $10,800 and a bonus determined in the sole discretion of
our Board of Directors. Effective January 1, 2001, our Board of Directors
approved a new two year employment agreement, which provides for an increase in
salary for Robert Bettinger to $85,000 per year and a bonus to be determined in
the sole discretion of the Company's Board of Directors. In connection with the
employment agreements mentioned herein, Mr. Robert K. Bettinger was granted
options under the 2000 Plan to purchase an aggregate total of 300,000 shares
(100,000 each year) of common stock in fiscal 2002, 2001 and 2000 at an exercise
price equal to the fair market value on the date of grant. The options vest 1/3
per year beginning one year from the date of grant. The employment agreement
entitles Mr. Robert K. Bettinger to receive options to purchase 100,000 shares
of our common stock each year of employment at fair value on the date of grant.
The employment agreement provides for automatic 12-month renewals unless the
employment agreement is terminated by us or Mr. Bettinger with 30 days prior
written notice. In April 2002, the parties agreed to terminate the employment
agreement in favor of a consulting relationship. Mr. Bettinger continues to
serve as the Chairman of our Board of Directors. Additionally, the Company
continues to grant to Mr. Bettinger options under the 2000 Plan to purchase a
total of 100,000 shares of common stock in fiscal 2003 at an exercise price
equal to the fair market value on the date of grant.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
options made during Fiscal 2003 to the Named Executive Officers.
% of Total
Number of Shares Options Granted Exercise or
Underlying Options to Employees in Base Price Expiration
Granted (#) Fiscal Year ($/Sh) Date
------------------ --------------- ----------- -----------
Steven M. Bettinger 100,000 40.0% $0.42 August 2012
Robert K. Bettinger 100,000 40.0% $0.42 August 2012
30
STOCK OPTIONS HELD AT END OF FISCAL 2003
The following table indicates the total number and value of exercisable and
unexercisable stock options held by Named Executive Officers as of June 30,
2003.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End(#) at Fiscal Year-End($)(1)
----------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
------------------- ----------- ------------- ----------- -------------
Steven M. Bettinger 100,000 200,000 $123,000 $246,000
Robert K. Bettinger 100,000 200,000 $123,000 $246,000
--------
(1) Based on the OTC Bulletin Board last sales price for our common stock on
September 12, 2003 in the amount of $1.23 per common share.
2000 PERFORMANCE EQUITY PLAN
On February 1, 2000, we adopted and implemented the 2000 Plan. The purpose of
the 2000 Plan is to advance our interests by providing an additional incentive
to attract and retain qualified and competent persons as employees, officers,
directors and consultants upon whose efforts and judgment our success is largely
dependent. The 2000 Plan was effective as of February 1, 2000, and, unless
sooner terminated by our Board of Directors in accordance with the terms
thereof, shall terminate on February 1, 2010. The number of shares of common
stock that may be issued upon the exercise of options granted under the 2000
Plan is 1,000,000. As of June 30, 2003, options to purchase a total of 926,000
shares had been granted pursuant to the 2000 Plan, all of which are outstanding
and 374,000 of which are exercisable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides certain information regarding our common stock
beneficially owned as of September 15, 2003 by:
o each person who is known by us to own beneficially 5% or more of our
common stock; each of our executive officers and directors; and
o all of our executive officers and directors as a group.
In accordance with SEC rules, options or warrants not exercisable within 60 days
of this report are not considered part of the holder's beneficial ownership. As
of September 20, 2003, there were 8,981,061 shares of common stock outstanding.
Unless otherwise stated, the address for the beneficial shareholder is 6421
Congress Ave., Suite 201, Boca Raton, Florida 33487.
Name and Address of Number of Shares of Common
the Beneficial Owner Stock Beneficially Owned Percentage %
-------------------------------------------------------------------------------
Steven M. Bettinger ............ 2,912,857 32.43
Robert K. Bettinger ............ 1,512,857 16.84
Andrew Lockwood ................ 20,000 0
Jack Phelan .................... 23,333 0
Gilder Funding Corp.
12000 N. Bayshore Drive,
Suite 210,
North Miami, FL 33181 ....... 1,532,355 (1) 17.01
Bonnie Snyder
207 E. 74 Street
New York, NY 10021 ........... 504,444 (2) 5.61
-------------------------------------------------------------------------------
All executive officers and
Directors as a group (4 persons) 4,469,047 49.76%
-------------------------------------------------------------------------------
(1) Gilder Funding Corp. holdings include beneficial ownership of 897,610 shares
of common stock owned by Private Trust Corp., New Amsterdam Investment Trust and
Warren & Marianne Gilbert.
(2) Bonnie Snyder's holdings include beneficial ownership of 95,000 shares of
common stock owned by Barbara Snyder, her mother.
31
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Robert Bettinger is the majority shareholder of a consulting company
that renders Internet consulting services to us. During the years ended June 30,
2003 and 2002, fees paid to the consulting company amounted to $73,000 and
$57,600, respectively.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Registrant's Certificate of Incorporation(1)
3.2 Registrant's Amended and Restated Bylaws(1)
10.1 2000 Performance Equity Plan *(1)
10.2 Employment Agreement between the Registrant and Steven M.
Bettinger(2)
10.3 Employment Agreement between the Registrant and Robert K.
Bettinger(2)
21.1 Subsidiaries of the Registrant (2)
31.1 Certification of Chief Executive Officer in accordance with 18
U.S.C. Section 1350, as adopted by Section 302 of the
Sarbanes-Oxley Act of 2002 (3)
31.2 Certification of Principal Financial Officer in accordance
with 18 U.S.C. Section 1350, as adopted by Section 302 of the
Sarbanes-Oxley Act of 2002 (3)
32.1 Certification of Chief Executive Officer in accordance with 18
U.S.C. Section 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002 (3)
32.2 Certification of Principal Financial Officer in accordance
with 18 U.S.C. Section 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002 (3)
__________
* Management Compensation Plan or Arrangement
(1) Incorporated herein by reference to the comparable exhibits
filed with Registrant's Form 10-KSB for the fiscal year ended
June 30, 2000.
(2) Incorporated herein by reference to the comparable exhibits
filed with Registrant's Form 10-KSB for the fiscal year ended
June 30, 2001.
(3) Filed herewith
(b) Reports on 8-K
None
32
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed by the Company's auditors for professional services
rendered in connection with the audit of the Company's annual consolidated
financial statements for fiscal 2003 and 2002 and reviews of the consolidated
financial statements included in the Company's Forms 10-KSB for fiscal 2003 and
2002 were approximately $47,000 and $44,000, respectively.
AUDIT-RELATED FEES
For fiscal 2003 and 2002, the Company's auditors billed for service related to
an SB-2 registration filing with the SEC in the amount of $19,700. The Company's
auditors did not bill any additional fees for assurance and related services
that are reasonably related to the performance of the audit or review of the
Company's financial statements and are not reported under "Audit Fees" above.
TAX FEES
The aggregate fees billed by the Company's auditors for professional services
for tax compliance, tax advice, and tax planning were $0 and $0 for fiscal 2003
and 2002, respectively.
ALL OTHER FEES
The aggregate fees billed by the Company's auditors for all other non-audit
services rendered to the Company, such as attending meetings and other
miscellaneous financial consulting, in fiscal 2003 and 2002 were $0 and $0,
respectively.
33
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the registrant caused this report to be signed on its behalf by the
undersigned and duly authorized on September 30, 2003.
Cenuco, Inc.
By: /s/ Steven M. Bettinger
------------------------
Steven M. Bettinger
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the date
indicated above.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Steven M. Bettinger Chief Executive Officer September 30, 2003
----------------------- President and Director
Steven M. Bettinger
/s/ Robert K. Bettinger Chairman of the Board and September 30, 2003
----------------------- Principal Accounting Officer
Robert K. Bettinger
/s/ Andrew Lockwood Director September 30, 2003
-----------------------
Andrew Lockwood
/s/ Jack P. Phelan Director September 30, 2003
-----------------------
Jack P. Phelan
34
Cenuco, Inc. and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
CONTENTS
Report of Independent Certified Public Accountants...........................F-2
Consolidated Financial Statements:
Consolidated Balance Sheets..............................................F-3
Consolidated Statements of Operations....................................F-4
Consolidated Statement of Changes in Stockholders' Equity................F-5
Consolidated Statements of Cash Flows....................................F-6
Notes to Consolidated Financial Statements...........................F-7 to F-20
F-1
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Cenuco, Inc. (formerly Virtual Academics.com, Inc.)
We have audited the accompanying consolidated balance sheets of Cenuco, Inc. and
Subsidiaries (formerly Virtual Academics.com, Inc.) (the "Company") as of June
30, 2003 and 2002 and the related consolidated statements of operations,
stockholders' equity and cash flows for the two years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cenuco, Inc. and
Subsidiaries (formerly Virtual Academics.com, Inc.) at June 30, 2003 and 2002,
and the consolidated results of their operations and their consolidated cash
flows for the two years ended June 30, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Miami, Florida
August 27, 2003
F-2
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, June 30,
2003 2002
----------- -----------
CURRENT ASSETS:
Cash and Cash Equivalents ........................................ $ 295,088 $ 1,529,851
Short-term Investment ............................................ 701,614 -
Tuition Receivable - current (Net of Allowance for Doubtful
Accounts of $108,000 and $152,000, respectively) ............... 870,261 1,303,766
Accounts Receivable (Net of Allowance for Doubtful Accounts
of $9,027 and $0, respectively) ................................ 19,262 28,413
Inventories ...................................................... 32,814 107,293
Prepaid Recruiting Fees .......................................... 45,852 94,975
Other Current Assets ............................................. 28,122 38,554
----------- -----------
Total Current Assets ......................................... 1,993,013 3,102,852
----------- -----------
PROPERTY AND EQUIPMENT:
Computer Equipment and Software .................................. 170,225 100,391
Furniture, Fixtures and Office Equipment ......................... 50,699 46,932
Leasehold Improvements ........................................... 3,051 3,051
----------- -----------
223,975 150,374
Less: Accumulated Depreciation ................................... (98,646) (60,619)
----------- -----------
Total Property and Equipment ................................. 125,329 89,755
----------- -----------
OTHER ASSETS:
Tuition Receivable - non-current (Net of Allowance for Doubtful
Accounts of $346,000 and $296,000, respectively) ............... 542,310 1,040,965
Prepaid Recruiting Fees .......................................... 36,121 15,065
Deferred Tax Asset ............................................... - 153,156
Security Deposits ................................................ 8,642 8,642
----------- -----------
Total Other Assets ........................................... 587,073 1,217,828
----------- -----------
Total Assets ................................................. $ 2,705,415 $ 4,410,435
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable ................................................. $ 21,762 $ 31,730
Unearned Revenues ................................................ 984,396 1,659,627
Accrued Recruiting Fees .......................................... 20,544 95,492
Other Accrued Expenses ........................................... 90,695 71,293
----------- -----------
Total Current Liabilities .................................... 1,117,397 1,858,142
----------- -----------
NON-CURRENT LIABILITIES:
Unearned Revenues ................................................ 1,528,502 1,467,475
Accrued Recruiting Fees .......................................... 16,184 15,147
----------- -----------
Total Non-Current Liabilities ................................ 1,544,686 1,482,622
----------- -----------
Total Liabilities ............................................ 2,662,083 3,340,764
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock ($.001 Par Value; 1,000,000 Shares Authorized)
No Shares Issued and Outstanding) .............................. - -
Common Stock ($.001 Par Value; 10,000,000 Shares Authorized;
8,981,061 and 8,701,467 Shares Issued and Outstanding at
June 30, 2003 and June 30, 2002, respectively) ................. 8,981 8,701
Additional Paid-in Capital ....................................... 1,671,827 1,383,264
Accumulated Deficit .............................................. (1,611,476) (322,294)
Deferred Compensation ............................................ (26,000) -
----------- -----------
Total Stockholders' Equity ................................... 43,332 1,069,671
----------- -----------
Total Liabilities and Stockholders' Equity ................... $ 2,705,415 $ 4,410,435
=========== ===========
See accompanying notes to consolidated financial statements
F-3
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
June 30,
---------------------------
2003 2002
----------- -----------
NET REVENUES:
Tuition and Tuition-related ................ $ 1,181,718 $ 2,889,579
Wireless Products and Services ............. 395,761 209,919
----------- -----------
NET REVENUES ................................... 1,577,479 3,099,498
----------- -----------
COSTS AND EXPENSES:
Cost of Equipment Sales .................... 157,656 67,835
Instructional and Educational Support ...... 99,956 272,729
Research and Development ................... 64,742 -
Selling and Promotion ...................... 353,403 475,758
General and Administrative ................. 2,056,669 2,478,582
----------- -----------
Total Operating Expenses ............... 2,732,426 3,294,904
----------- -----------
LOSS FROM OPERATIONS ........................... (1,154,947) (195,406)
OTHER INCOME:
Interest Income ............................ 18,921 39,352
----------- -----------
LOSS BEFORE INCOME TAXES ....................... (1,136,026) (156,054)
INCOME TAX BENEFIT (EXPENSE):
Deferred Income Tax ........................ (153,156) 31,875
----------- -----------
Total Income Tax Benefit (Expense) ..... (153,156) 31,875
----------- -----------
NET LOSS ....................................... $(1,289,182) $ (124,179)
=========== ===========
BASIC AND DILUTED:
Net Loss Per Common Share
- Basic and Diluted ...................... $ (0.15) $ (0.01)
=========== ===========
Weighted Common Shares Outstanding
- Basic and Diliuted ..................... 8,767,481 8,654,120
=========== ===========
See accompanying notes to consolidated financial statements
F-4
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended June 30, 2003 and 2002
Common Stock $.001 Par Additional Total
------------------------- Paid-in Accumulated Deferred Stockholders'
Shares Amount Capital Deficit Compensation Equity
----------- ----------- ----------- ----------- ----------- -----------
Balance at
June 30, 2001 ..... 8,604,617 $ 8,604 $ 1,346,944 $ (198,115) $ - $ 1,157,433
Net Loss ........... - - - (124,179) - (124,179)
Common Stock
Issued as Year
end Bonus ......... 85,714 86 29,914 - - 30,000
Issuance of
Stock as
Compensation
to Consultants .... 6,136 6 4,560 - - 4,566
Issuance of
Stock as
Compensation
to Employee ....... 5,000 5 1,846 - - 1,851
----------- ----------- ----------- ----------- ----------- -----------
Balance at
June 30, 2002 ..... 8,701,467 8,701 1,383,264 (322,294) - 1,069,671
Net Loss ........... - - - (1,289,182) - (1,289,182)
Common Stock
Issued for Services 279,594 280 236,563 - - 236,843
Common Stock
options granted ... - - 52,000 - (26,000) 26,000
----------- ----------- ----------- ----------- ----------- -----------
Balance at
June 30, 2003 ..... 8,981,061 $ 8,981 $ 1,671,827 $(1,611,476) $ (26,000) $ 43,332
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements
F-5
CENUCO, INC. AND SUBSIDIAIRES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
June 30,
----------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss .......................................... $(1,289,182) $ (124,179)
Adjustments to Reconcile Net Loss to Net Cash Flows
Used in Operating Activities:
Depreciation ............................... 38,027 27,972
Non-cash Compensation ...................... 262,843 31,917
Deferred Income Taxes ...................... 153,156 (38,475)
Provision for Doubtful Accounts ............ 14,993 82,644
(Increase) Decrease in:
Tuition Receivable ....................... 477,946 828,359
Accounts Receivable ...................... 124 -
Inventories .............................. 74,479 (107,293)
Prepaid Recruiting Fees .................. 49,123 50,043
Other Current Assets ..................... 10,432 (12,724)
Other Assets:
Tuition Receivable - Non-current ......... 448,248 (785,044)
Prepaid Recruiting Fees - Non-current .... (21,056) 1,446
Security Deposits ........................ - (701)
Increase (Decrease) in:
Accounts Payable ........................ (9,968) 16,338
Unearned Revenues ....................... (1,483,812) (1,255,051)
Accrued Recruiting Fees ................. (74,948) 6,174
Other Accrued Expenses .................. 19,402 (62,081)
Other Liabilities:
Unearned Revenues - Non-current ......... 869,608 1,130,556
Accrued Recruiting Fees - Non-current ... 1,037 (4,139)
----------- -----------
Net Cash Flows Used in Operating Activities ........... (459,548) (214,238)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investment ............................. (701,614) -
Acquisition of Property and Equipment ............. (73,601) (31,117)
----------- -----------
Net Cash Flows Used in Investing Activities ........... (775,215) (31,117)
----------- -----------
Net Decrease in Cash and Cash Equivalents ............. (1,234,763) (245,355)
Cash and Cash Equivalents - Beginning of Year ......... 1,529,851 1,775,206
----------- -----------
Cash and Cash Equivalents - End of Year ............... $ 295,088 $ 1,529,851
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ........................................... $ - $ -
=========== ===========
Income Taxes ....................................... $ - $ -
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for debt ...................... $ - $ 4,500
=========== ===========
See accompanying notes to consolidated financial statements
F-6
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
NOTE A - ORGANIZATION
Cenuco, Inc. and Subsidiaries (the "Company") (a Delaware Corporation) is
engaged in the online distance learning industry with a focus on the
international, mid-career adult and corporate training markets. The Company
operates an online distance learning university and nutrition academy that
offers licensed certificate and degree programs in a variety of concentrations
to students in over 80 countries worldwide. The Company's businesses are
primarily conducted under the names of Barrington University (the "School"),
Cenuco and the Academy of Health Science and Nutrition (the "Academy"). The
Company's administrative and sales office is located in Boca Raton, Florida and
Mobile, Alabama.
The Alabama Department of Education licenses the School and the Florida
Department of Education licenses the Academy. There are also arrangements with
several international universities that confer dual degrees and certificates
with the School whereas, based on the School's approval of the curriculum, a
degree will be issued by the School upon completion of the students' studies at
an international university.
Additionally, the Company established a technology subsidiary called Cenuco,
Inc., a Florida corporation ("Cenuco"). Cenuco is a wholly-owned subsidiary that
develops wireless e-learning platform and technologies in the academic, consumer
and corporate marketplaces. We are also engaged in 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 web technology and design services, though our subsidiary.
On December 17, 2002, the Company changed its name to Cenuco, Inc. The Board of
Directors of Virtual Academics.Com, Inc. recommended and the majority of the
shareholders approved the change of its name to Cenuco, Inc. to better reflect
its business direction and operation. Reflecting the changing focus of its
business, the Company has accelerated the development of its suite of fully
integrated wireless solutions for the Security, Real Estate and Insurance
markets.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All significant intercompany
accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments purchased with a maturity of three months or less and money
market accounts to be cash equivalents.
F-7
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
MANAGEMENT ESTIMATES
The preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Examples are the provision for doubtful
accounts, unearned revenue, and prepaid and accrued recruiting fees. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, short-term tuition receivables
and accounts payable approximate fair value due to the short term maturities of
these instruments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated economic lives of the
assets, which are from five to seven years. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation expense was $38,027 and $27,972 for the years ended June
30, 2003 and 2002, respectively.
INVENTORIES
Inventories, consisting of security cameras and equipment, are stated at the
lower of cost or market utilizing the first-in, first-out method.
STOCK-BASED COMPENSATION
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.
(continued)
F-8
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
SHORT-TERM INVESTMENT
Short-term investment includes a certificate of deposit with a maturity of
greater than three months.
REVENUE RECOGNITION
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 web technology
and design services, the Company recognizes revenue as services are performed or
products are delivered.
The Company recognizes tuition and registration revenue based on the number of
courses actually completed in each student's course of study. For example, if a
student completes three out of his nine required courses, the Company will
recognize 33% of the tuition regardless of the amount of time that the student
has taken to fulfill these requirements.
Tuition refunds are based on the date that the student cancels and the policy is
as follows: If the student withdraws within 5 calendar days after midnight of
the day the student signs the Enrollment Agreement (Full Refund Period) the
student will receive a full refund with no further obligation. If the student
cancels after the Full Refund Period but before the school receives the first
completed lesson, the student will be charged a registration fee of $150 and the
student will receive a full refund less the registration fee charge. If the
student cancels after the school receives the first completed lesson, the
student's tuition obligation will be their registration fee plus a portion of
the remaining tuition as defined below.
Percentage of Course Completed Amount of Tuition Obligated
------------------------------ ---------------------------
10% of less 10% of tuition
Between 11% - 25% 25% of tuition
Between 26% - 50% 50% of tuition
Over 50% Obligated for full tuition.
When a student withdraws, the Company writes off the remaining tuition
receivable balance against the remaining unearned revenue balance and records a
net increase or decrease to net revenues.
ADVERTISING
Advertising is expensed as incurred. Advertising expenses for the years ended
June 30, 2003 and 2002 totaled $103,698 and $144,640, respectively.
(continued)
F-9
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
TUITION RECEIVABLE
The Company, in the ordinary course of business finances the tuition, without
interest, over a period of up to twenty-four months. Because a significant part
of the tuition is deferred, the Company does not impute interest with respect to
receivables that mature in more than one year. Tuition receivables are stated at
the amount of unpaid principal, reduced by an allowance for receivable loan
losses. Provisions for estimated losses on student receivables are charged to
income in amounts sufficient to maintain the allowance at a level considered
adequate to cover the losses of tuition receivables based upon historical
trends, economic conditions and other information.
RECRUITING FEES
Students learn about the School via the Internet or are recruited through a
worldwide network of recruiters. Recruiters are paid recruiting fees upon
receipt of tuition payment by the student. Recruiting fees are accrued for the
tuition due the Company, and prepaid for the revenue that has been deferred. The
Company amortizes recruiting fees using the same method as the Company
recognizes the related tuition revenue and is based on the number of courses
actually completed in each student's course of study.
RESEARCH AND DEVELOPMENT
Expenditures for software research and development are expensed as incurred.
Such costs are required to be expensed until the point that technological
feasibility of the software is established. Technological feasibility is
determined after a working model has been completed. The Company's software
research and development costs primarily relate to software development during
the period prior to technological feasibility and are expensed as incurred.
During fiscal 2003 and 2002, no software development costs were capitalized.
INCOME TAXES
Income taxes are accounted for under the asset and liability method of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes ("SFAS
109"). Under SFAS 109 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. 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. Under SFAS
109, 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.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
(continued)
F-10
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
EARNINGS (LOSS) PER COMMON SHARE
Basic net earnings (loss) per share equals net earnings (loss) divided by the
weighted average shares outstanding during the year. The computation of diluted
net earnings per share does not include dilutive common stock equivalents in the
weighted average shares outstanding as they would be antidilutive. The
reconciliation between the computations is as follows:
Net Loss Basic Shares Basic EPS
------------- ------------ ---------
2003 ......... $ (1,289,182) 8,767,481 $ (.15)
2002 ......... $ (124,179) 8,654,120 $ (.01)
Not included in basic shares are stock options of 1,126,000 and 891,000 because
they are anti-dilutive in 2003 and 2002, respectively.
The exercise prices of all options granted by the Company equal the market price
at the dates of grant. No compensation expense has been recognized. Had
compensation cost for the stock option plan been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS 123,
"Accounting for Stock Based Compensation", the Company's net loss and loss per
share would have been changed to the pro forma amounts indicated below for the
year ended June 30, 2003 and 2002:
2003 2002
---- ----
Net earnings
As reported ............ $ (1,289,182) $ (124,179)
Pro forma .............. (1,388,502) (184,459)
Basic earnings per share
As reported ............ (.15) (.01)
Pro forma .............. (.16) (.02)
The above pro forma disclosures may not be representative of the effects on
reported net earnings for future years as options vest over several years and
the Company may continue to grant options to employees.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants:
2003 2002
---- ----
Dividend yield ............. 0% 0%
Expected volatility range .. 71% to 81% 218% percent
Risk-free interest rate .... 4.50% 4.50%
Expected holding periods ... 5 years 5 years
(continued)
F-11
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several new
accounting pronouncements:
Statement No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146")
addresses the recognition, measurement, and reporting of cost that are
associated with exit and disposal activities that are currently accounted for
pursuant to the guidelines set forth in EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to exit an Activity
(including Certain Cost Incurred in a Restructuring)," cost related to
terminating a contract that is not a capital lease and one-time benefit
arrangements received by employees who are involuntarily terminated - nullifying
the guidance under EITF 94-3. Under SFAS 146, the cost associated with an exit
or disposal activity is recognized in the periods in which it is incurred rather
than at the date the Company committed to the exit plan. The adoption of SFAS
146 did not have a material impact on the Company's financial position, results
of operations or liquidity.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
Statement 148 provides alternative methods of transition to Statement 123's fair
value method of accounting for stock-based employee compensation. It also amends
the disclosure provisions of Statement 123 and APB Opinion No. 28, Interim
Financial Reporting, to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. Statement 148's amendment of the
transition and annual disclosure requirements of Statement's 123 are effective
for fiscal years ending after December 15, 2002. The adoption of the disclosure
provisions of Statement 148 did not have a material impact on the Company's
consolidated financial condition or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The adoption of this pronouncement does not
have a material effect on the earnings or financial position of the Company.
(continued)
F-12
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
RECENT PRONOUNCEMENTS - continued
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires that if an entity
has a controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46 requires
that its provisions are effective immediately for all arrangements entered into
after January 31, 2003. The Company does not have any variable interest entities
created after January 31, 2003. For those arrangements entered into prior to
January 31, 2003, the FIN 46 provisions are required to be adopted at the
beginning of the first interim or annual period beginning after June 15, 2003.
The Company has not identified any variable interest entities to date and will
continue to evaluate whether it has variable interest entities that will have a
significant impact on its consolidated balance sheet and results of operations.
In January 2003, the EITF finalized a consensus on Issue No. 02-16, "Accounting
by a Customer (Including a Reseller) for Cash Consideration Received from a
Vendor." The Task Force concluded that cash consideration in excess of specific
identifiable costs, including sales incentives, allowances, discounts, coupons,
rebates and price reductions, when meeting certain criteria, constitute a
reduction in vendor price, and should therefore be reflected as a reduction in
cost of sales when the related merchandise is sold. The EITF concluded that this
literature should be applied to new arrangements, including modifications of
existing arrangements, entered into after December 31, 2002. We adopted EITF
02-16 as of January 1, 2003. The adoption of EITF 02-16 had an immaterial impact
on our consolidated financial position and results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective for the first interim period beginning
after June 15, 2003, with certain exceptions. We plan to adopt SFAS No. 150 in
the first quarter of Fiscal 2004. We do not expect the adoption of SFAS No. 150
to have a significant impact on our consolidated financial position or results
of operations.
RECLASSIFICATIONS
Certain prior periods' balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported results of operations or stockholders' equity (deficit).
(continued)
F-13
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE C - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with two of its executive
officers for a 24-month period ending January 1, 2003, subject to automatic
renewals of 12-month terms unless terminated by the Company or the employee with
30-days' prior written notice. In addition to an annual salary of $220,000 and
$85,000 for the President and Chief Executive Officer and the Chairman of the
Board and Secretary, respectively, the agreements entitle the officers to
receive options to purchase 100,000 shares of common stock of the Company each
year of employment at fair market value. These options, a total of 200,000
options each for fiscal 2003 and 2002, were issued under the Company's stock
option plan (see Note D). These options vest 1/3 per year, beginning one year
from the date of grant. The agreements also provide for the receipt of an annual
bonus at the discretion of the Board of Directors. During fiscal 2003, the
Company's President and Chairman of the Board each received a discretionary
bonus of 100,000 shares of common stock (See Note D).
LITIGATION
The Trade School Review Association had filed complaints against certain schools
that are licensed by local state education departments outside California and on
July 3, 2001, it filed against Barrington University in the Superior Court for
the State of California for the County of San Diego. The association alleged in
its complaint that the Company violated California's Private Postsecondary and
Vocational Education Reform Act of 1989, California's false advertising statutes
and California's Consumer Legal Remedies Act and sought an injunction against
unlawful practices, disgorgement of profits, restitution and attorneys' fees,
all in unspecified amounts. In April 2002, the court dismissed this case with
Prejudice. The Company recorded a legal settlement fee of $80,000 in fiscal
2002, which is included in general and administrative expenses. Under the term
of the settlement, the Company must use its best efforts to obtain approval by
February 2003 from the California Bureau for Private Postsecondary and
Vocational Education to offer educational instruction to California students. If
the Company fails to obtain this approval and can not convince a mediator that
it used its best efforts, the Company must pay $100,000. As of June 2003, the
Company used its best efforts to obtain this approval and has not obtained the
approval. The Company believes it has used it best efforts to obtain this
approval and does not believe it has to pay the $100,000 contingently due under
the settlement agreement.
From time to time, the Company faces litigation in the ordinary course of
business. Currently the Company is not involved with any litigation which will
have a material adverse effect on its financial condition.
(continued)
F-14
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE C - COMMITMENTS AND CONTINGENCIES - Continued
LEASES
The Company leases its Florida and Alabama offices under leases that expire
through July 2005. The office lease agreements have certain escalation clauses
and renewal options. Future minimum rental payments required under this
operating lease is as follows:
Period Ended June 30, 2004 $ 87,388
Period Ended June 30, 2005 80,951
Period Ended June 30, 2006 7,016
Rent expense for the twelve-month periods ended June 30, 2003 and 2002 was
$89,288 and $83,435, respectively.
NOTE D - STOCKHOLDERS' EQUITY
STOCK OPTIONS
On February 1, 2000, the Company adopted a stock option plan (the "2000
Performance Equity Plan"). A majority of the shareholders of the Company
approved the Plan. The plan provides options exercisable for a maximum of
1,000,000 shares of common stock to be granted. Both incentive and nonqualified
stock options may be granted under the Plan.
The exercise price of options granted pursuant to this plan is determined by a
committee but may not be less than 100% of the fair market value on the day of
grant. For holders of 10% or more of the combined voting power of all classes of
the Company's stock, options may not be granted at less than 110% of the fair
value of the common stock at the date of grant and the option may not exceed 5
years. There were no options exercised during the fiscal years 2003 and 2002.
There were 275,000 and 0 options forfeited during fiscal 2003 and fiscal 2002,
respectively. The exercise prices of all options granted by the Company equal
the market price at the dates of grant. No compensation expense has been
recognized.
A summary of the status of the Company's outstanding stock options as of June
30, 2003 and 2002 and changes during the year ending on that date is as follows:
(continued)
F-15
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE D - STOCKHOLDERS' EQUITY - Continued
STOCK OPTIONS - continued
Weighted
Average
Exercise
Shares Price
---------- --------
Outstanding at June 30, 2001 ......... 671,000 $ 1.51
Granted .............................. 220,000 .35
Exercised ............................ - -
Forfeited ............................ - -
---------- -------
Outstanding at June 30, 2002 ......... 891,000 $ 1.23
Granted .............................. 310,000 .57
Exercised ............................ - -
Forfeited ............................ (275,000) (2.30)
---------- -------
Outstanding at June 30, 2003 ......... 926,000 $ 0.70
========== =======
Options exercisable at end of year ... 374,000 $ 0.92
========== =======
Weighted-average fair value of
options granted during the year 2003 2002
---------- --------
$ 0.57 $ 0.35
The following information applies to options outstanding at June 30, 2003 and
2002:
2003
----
Options Outstanding Options Exercisable
-------------------------- ---------------------
Weighted -
Average Weighted - Weighted -
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price
------------------------ ------- ------------ ---------- ------- ----------
$2.50 to $2.65 70,000 6.86 $ 2.51 70,000 2.51
$.55 to $2.12 346,000 7.49 $ 0.66 230,667 0.66
$0.35 220,000 8.48 $ 0.35 73,333 0.35
$0.42 240,000 9.17 $ 0.42 - 0.42
$1.55 50,000 9.52 $ 1.55 - 1.55
2002
----
Options Outstanding Options Exercisable
-------------------------- ---------------------
Weighted -
Average Weighted - Weighted -
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life Price Shares Price
------------------------ ------- ------------ ---------- ------- ----------
$2.50 to $2.65 310,000 7.86 $ 2.51 206,667 2.51
$.55 to $2.12 361,000 8.49 $ .66 120,333 .66
$.35 220,000 9.48 $ .35 - .35
(continued)
F-16
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE D - STOCKHOLDERS' EQUITY - Continued
STOCK OPTIONS - continued
The exercise price of all options granted by the Company equals the market price
at the date of grant. Accordingly, no compensation expense has been recognized
on options granted to employees and directors.
On December 19, 2001, the Company granted options to purchase 20,000 shares of
common stock to non-employee directors. The options expire on December 19, 2011
and are exercisable at $.35 per share, which was the fair market value of the
common stock at the grant date. Accordingly, under APB 25, no compensation
expense was recognized.
On December 19, 2001, the Company granted options to purchase 200,000 shares of
common stock to certain employees of the Company. The options are exercisable at
$.35 per share, which was the fair market value of the common stock at the grant
date. Accordingly, under APB 25, no compensation expense was recognized.
On August 29, 2002, the Company granted options to purchase 240,000 shares of
common stock to certain employees of the Company of which 20,000 was cancelled
during fiscal 2003. The options are exercisable at $.42 per share, which was the
fair market value of the common stock at the grant date. Accordingly, under APB
25, no compensation expense was recognized.
On August 29, 2002, the Company granted options to purchase 20,000 shares of
common stock to non-employee directors. The options expire on August 29, 2012
and are exercisable at $.42 per share, which was the fair market value of the
common stock at the grant date. Accordingly, under APB 25, no compensation
expense was recognized.
On January 7, 2003, the Company granted options to purchase 10,000 shares of
common stock to an employee of the Company. The options are exercisable at $1.55
per share, which was the fair market value of the common stock at the grant
date. Accordingly, under APB 25, no compensation expense was recognized.
On January 7, 2003, the Company granted options to purchase 40,000 shares of
common stock to consultants for serviced rendered and to be rendered through
December 2003. The options expire on January 7, 2013 and are exercisable at
$1.55 per share, which was the fair market value of the common stock at the
grant date. These options were valued using the Black-Scholes pricing method at
a fair value of $1.30 per option. Accordingly, the Company recorded consulting
expense of $26,000 and deferred compensation of $26,000 that will be amortized
over the service period.
(continued)
F-17
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE D - STOCKHOLDERS' EQUITY - Continued
COMMON STOCK
On December 31, 2002, the Board of Directors authorized the issuance of 85,714
shares of common stock to employees as a year-end bonus. The shares were valued
at $.35 per share or an aggregate of $30,000, which was charged to compensation
expense at the grant date.
On January 15, 2002, the Company issued 5,956 shares of common stock to a
consultant to settle debt of $4,500, which was outstanding as of December 31,
2001 for services previously rendered.
During April 2002, the Company issued 180 shares of common stock to a consultant
for services rendered. The shares were valued at $.37 per share or an aggregate
of $67, which was charged to consulting expense.
During April 2002, the Company issued 5,000 shares of common stock to an
employee for services rendered. The shares were valued at $.37 per share or an
aggregate of $1,851, which was charged to compensation expense.
On December 3, 2002, the Company issued 13,290 shares of common stock to
consultants for services rendered. Such shares were valued at their market value
on the date of issuance at $1.39 per share. Accordingly, the Company recorded
consulting expense of $18,474 related to the consulting services.
On April 11, 2003, the Company issued an aggregate of 200,000 shares of common
stock to its President and to its Chairman of the Board as a discretionary
bonus. Such shares were valued at their market value on the date of issuance at
$.82 per share. Accordingly, the Company recorded non-cash compensation of
$164,000 related to this bonus.
On April 11, 2003, the Company issued 66,304 shares of common stock to
directors, and consultants for services rendered. Such shares were valued at
their market value on the date of issuance at $.82 per share. Accordingly, the
Company recorded non-cash compensation of $24,600 and consulting expense of
$29,769 related to the services performed.
NOTE E - INCOME TAXES
Deferred tax assets and liabilities are provided for significant income and
expense items recognized in different years for tax and financial reporting
purposes. Temporary differences, which give rise to a net deferred tax asset is
as follows:
(continued)
F-18
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE E - INCOME TAXES - Continued
2003 2002
--------- ---------
Deferred tax benefits (liability) - current
Allowance for doubtful accounts ...... $ 175,940 $ 105,854
Deferred tax benefits - noncurrent
Depreciation ......................... - 472
Net operating loss carryforward ...... 361,000 46,830
--------- ---------
Total deferred tax assets ........ 536,940 153,156
Less: Valuation allowance ................ (536,940) -
--------- ---------
$ - $ 153,156
========= =========
As of June 30, 2002, the Company did not record a valuation allowance on the
deferred tax assets because the Company's ability to realize these benefits was
"more likely than not". The deferred tax asset was reported in the accompanying
balance sheet at June 30, 2002. As a result of continuing losses in the wireless
segment, the net deferred taxes have been fully offset by a valuation allowance
at June 30, 2003 since the Company cannot currently conclude that it is more
likely than not that the benefits will be realized. The net operating loss
carryforward for income tax purposes of approximately $950,000 expires beginning
in 2017. Internal Revenue Code Section 382 places a limitation on the amount of
taxable income that can be offset by carryforwards after a change in control
(generally greater than a 50% change in ownership).
The table below summarizes the differences between the Company's effective tax
rate and the statutory federal rate as follows for fiscal 2003 and 2002:
2003 2002
--------- ---------
Computed "expected" tax expense (benefit) . (34.0%) (34.0%)
State income taxes ........................ (4.0%) -
Other permanent differences ............... 8.0% 3.0 %
Change in valuation allowance ............. 43.5% -
--------- ---------
Effective tax rate ........................ 13.5% (20.5%)
========= =========
The valuation allowance at June 30, 2003 was $536,940. The increase during 2003
was $536,940.
NOTE F - RELATED PARTY TRANSACTIONS
The Company's Chairman of the Board and Secretary, is the majority shareholder
of a consulting company that renders Internet consulting services to the
Company. During the years ended June 30, 2003 and 2002, fees paid to the
consulting company amounted to approximately $73,000 and $57,600, respectively,
and are included as part of administrative expenses.
(continued)
F-19
Cenuco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2003 and 2002
NOTE G - SEGMENT INFORMATION
In fiscal 2003 and 2002, the Company operates in two reportable business
segments - (1) the online distance learning industry and (2) the development and
sales of wireless solutions and web services. The online distant learning
segment provides internet education to student internationally. The latter
segment includes development of business-to- business and business-to-consumer
wireless applications, and state of the art web technology and design services.
The Company's reportable segments are strategic business units that offer
different products, which compliment each other. They are managed separately
based on the fundamental differences in their operations. Information with
respect to these reportable business segments for the year ended June 30, 2003
and 2002 is as follows:
For the Year Ended June 30,
2003 2002
----------- -----------
Net
Sales:
Online distance learning ....................... $ 1,181,718 $ 2,889,579
Wireless solutions ............................. 395,761 209,919
----------- -----------
Total net sales ........................ 1,577,479 3,099,498
----------- -----------
Costs and Operating Expenses:
Online distance learning ....................... 1,148,746 2,723,150
Wireless solutions ............................. 1,545,653 465,510
----------- -----------
Total Costs and Operating Expenses: .... 2,694,399 3,188,660
----------- -----------
Depreciation:
Online distance learning .................... 30,163 27,520
Wireless solutions .......................... 7,864 452
----------- -----------
Total Depreciation ..................... 38,027 27,972
----------- -----------
Amortization:
Online distance learning .................... - -
Wireless solutions .......................... - 78,272
----------- -----------
Total Amortization ..................... - 78,272
----------- -----------
Interest Income:
Online distance learning .................... 9,632 34,906
Wireless solutions .......................... 9,289 4,446
----------- -----------
Total Interest Income .................. 18,921 39,352
----------- -----------
Net Income (Loss):
Online distance learning .................... (140,715) 205,690
Wireless solutions .......................... (1,148,467) (329,869)
----------- -----------
Total Net Income (Loss): ............... $(1,289,182) $ (124,179)
=========== ===========
Total Assets:
Online distance learning .................... 1,675,150 3,800,961
Wireless solutions .......................... 1,030,265 609,474
----------- -----------
$ 2,705,415 $ 4,410,435
=========== ===========
F-20