UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K/A
AMENDMENT
NO.
1
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x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
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FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2006
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OR
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o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
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COMMISSION
FILE NUMBER: 000-27707
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NEXCEN
BRANDS, INC.
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(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE
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20-2783217
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer
Identification
Number)
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1330
Avenue of the Americas, New York, N.Y.
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10019-5400
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(Address
of principal executive offices)
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(Zip
Code)
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(Registrant’s
telephone number, including area code): (212)
277-1100
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, par value $.01
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The
NASDAQ Stock Market LLC
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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Indicate
by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes o No ý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No ý
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ý No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment of
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
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Accelerated
filer x
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Non-accelerated
filer o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No ý
The
aggregate market value of the voting stock held by nonaffiliates of the
registrant was $210,085,794 ($5.50 per share) as of June 30,
2006.
As
of
March 1, 2007 50,402,562 shares of the registrant’s common stock, $.01 par value
per share, were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
NEXCEN
BRANDS, INC.
FORM
10-K/A
INDEX
Explanatory
Note |
3
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PART
I
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3
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Item
1
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Business
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3
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Item
1A
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Risk
Factors
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9
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Item
1B
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Unresolved
Staff Comments
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15
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Item
2
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Properties
|
15
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Item
3
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Legal
Proceedings
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16
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Item
4
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Submission
of Matters to a Vote of Security Holders
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17
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PART
II
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19
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Item
5
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Market
for the Company’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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19
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Item
6
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Selected
Financial Data
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20
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Item
7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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21
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Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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30
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Item
8
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Financial
Statements and Supplementary Data
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31
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Item
9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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58
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Item
9A
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Controls
and Procedures
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58
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Item
9B
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Other
Information
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59
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PART
III
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59
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Item
10
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Directors
and Executive Officers of the Registrant
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59
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Item
11
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Executive
Compensation
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64
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Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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81
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Item
13
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Certain
Relationships and Related Transactions
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83
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Item
14
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Principal
Accounting Fees and Services
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84
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PART
IV
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85
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Item
15
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Exhibits,
Financial Statement Schedules
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85
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FORWARD-LOOKING
STATEMENTS
In
this
Amendment
No. 1 to the Annual Report on Form 10-K, we make statements that are
considered forward-looking statements within the meaning of the Securities
Act
of 1934, as amended. The words “anticipate,” “believe,” “estimate,” “intend,”
“may,” “will,” “expect”, and similar expressions often indicate that a statement
is a “forward-looking statement.” Statements about non-historic results also are
considered to be forward-looking statements. None of these forward-looking
statements are guarantees of future performance or events, and they are subject
to numerous risks, uncertainties and other factors. Given
the
risks, uncertainties and other factors, you should not place undue reliance
on
any forward-looking statements. Our
actual results, performance or achievements could differ materially from those
expressed in, or implied by, these forward-looking statements. Factors that
could cause or contribute to such differences include those discussed in Item
1A
of this Report under the heading “Risk Factors,” as well as elsewhere in this
Report. Forward-looking statements reflect our reasonable beliefs and
expectations as of the time we make them, and we have no obligation to update
or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
EXPLANATORY
NOTE
This
Amendment No. 1 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2006 (this “Form 10-K/A”) of NexCen Brands, Inc. (the “Company,”
“we,” “our,” or “NexCen”), which was originally filed with the Securities and
Exchange Commission on March 16, 2007, is being filed solely to include the
information required by Part III of Form 10-K pursuant to General Instruction
G(3) of Form 10-K because the Company’s definitive proxy statement for its 2007
annual meeting will be filed more than 120 days after the end of the Company’s
fiscal year. The original Form 10-K is also amended hereby to delete the
reference on the cover page thereof to the incorporation by reference of
the
definitive proxy statement in Part III of such report. In addition, as required
by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), new certifications by our principal executive officer and
principal financial officer are being filed as exhibits to this Form 10-K/A
in
Part IV, Item 15 hereof, which has been amended to include the additional
certifications.
In
accordance with Rule 12b-15 under the Exchange Act, Part III is hereby amended
and restated in its entirety as set forth below. Except as described in this
Explanatory Note, no other information in the original Form 10-K is modified
or
amended hereby, and this Form 10-K/A does not otherwise reflect events occurring
after the original filing date of March 16, 2007.
PART
I
General
Overview
NexCen
Brands engages in the acquisition and management of established consumer brands
in intellectual property-centric industries. NexCen’s goal is to be the world
leader in brand management for the 21st century. Our business is focused on
acquiring, managing and developing intellectual property, which we refer to
as
IP, and IP-centric businesses. IP-centric companies own, license or otherwise
possess rights to trademarks, trade names, copyrights, patents, trade secrets
and other intangible assets. IP that we have acquired and expect to acquire
in
the future includes trademarks, trade names, copyrights, franchise rights,
patents, trade secrets, know-how and other similar, valuable property, primarily
used in the retail and consumer branded products and franchise businesses.
In
building our IP business, we expect to focus on three vertical segments: retail
franchising, consumer branded products and quick service restaurant franchising
(which we refer to as “QSR” franchising).
We
commenced our IP business in June 2006, when we acquired UCC Capital
Corporation, which we refer to as UCC. Upon the closing of that acquisition,
Robert W. D’Loren, who was the president and chief executive officer of UCC,
became our president and chief executive officer and a member of our Board
of
Directors.
In
November 2006, we entered the retail franchising business by acquiring Athlete’s
Foot Brands, LLC, along with an affiliated company and certain related assets.
As a result of this acquisition, we are now the owner of The Athlete’s Foot
brand and related marks. The Athlete’s Foot is one of the largest athletic
footwear and apparel franchisors with over 600 retail locations in over 40
countries.
In
February 2007, we entered the consumer branded products business by acquiring
Bill Blass Holding Co., Inc. and two affiliated businesses. The Bill Blass
label
represents timeless style, modern American and is an American legacy brand
in
the fashion industry.
Also
in
February 2007, we acquired MaggieMoo’s International, LLC (“MaggieMoo’s”) and
the assets of Marble Slab Creamery, Inc. (“Marble Slab”), two well known and
established brands within the hand-mixed, premium ice cream category. With
these
acquisitions NexCen entered the QSR franchising business.
More
detailed information about The Athlete’s Foot, Bill Blass, MaggieMoo’s, and
Marble Slab acquisitions is included below under the caption “Company
Brands.”
We
are
evaluating various other potential acquisitions and are actively in discussions
to acquire additional IP-centric businesses. On March 13, 2007 we signed a
definitive agreement to acquire the Waverly brand from F. Schumacher & Co.
for $36.75 million in cash and a warrant to purchase 50,000 common
shares (to be priced at issuance). Waverly is a home
décor lifestyle brand for harmonious and tasteful decorating. We expect
to close this transaction by the end of April 2007, and intend to finance 50%
of
the purchase price with borrowings under the new credit facility entered into
on
March 12, 2007,
as
discussed under Item 7. Management
Discussion and Analysis of Financial Condition and Results of
Operations
under
the caption “Liquidity and Capital Resources”.
At
December 31, 2006, we had only one operating segment - our intellectual property
business. As we continue to acquire IP businesses, we expect to have three
segments in the future: retail franchising, consumer brand products, and quick
service restaurants. The businesses that we owned and operated in 2005 and
2004
have been sold. As a result, their results have been reclassified to
discontinued operations in our historical financial statements, and our
continuing operations in 2005 and earlier years reflect only corporate expenses
and other non-operating items.
We
own
the proprietary rights to a number of trademarks used in this Report which
are
important to our business, including The Athlete’s Foot, Bill Blass, MaggieMoo’s
and Marble Slab. We have omitted the “®” and “TM” trademark designations for
such trademarks in this Report. Nevertheless, all rights to such trademarks
named in this Report are reserved.
Our
Business
Operations
and Strategy
Our
operating strategy is to generate revenue from licensing and other commercial
arrangements with third parties who want to use the IP that we acquire. These
third parties pay us licensing and other contractual fees and royalties for
the
right to use our IP on either an exclusive or non-exclusive basis. Our
contractual arrangements may apply to a specific demographic product market,
a
specific geographic market or to multiple demographics and/or
markets.
We
expect
that licensing and other contractual fees paid to us will include a mixture
of
upfront payments, required periodic minimum payments (regardless of sales
volumes), and volume-dependent periodic royalties (based upon the number or
dollar amount of branded products and services sold). Accordingly, we expect
that our revenues will reflect both recurring and non-recurring payment
streams.
We
operate our IP business in what we call a “value net” business model. This model
does not require us to incur substantial operating or capital costs in running
our business, as we do not (and do not plan to) manufacture, warehouse or
distribute the branded products associated with the IP we acquire (or build
stores in the case of franchise operations). We intend to rely on third-party
licensees and other business partners to incur such capital costs and perform
such services. However, we will generally be involved in the marketing,
promotion and quality control of products and services that make use of our
IP
(such as trademarks and trade names that we own), and we also may provide
certain merchandising, purchasing and training support services with respect
to
franchise operations. We
believe that this business model mitigates -- or transfers to third parties
--
the risks related to working capital (i.e. inventory and receivables) and
capital expenditures. We believe that this model allows us to maintain maximum
operational and financial flexibility and positions us to succeed in today’s
competitive global economy. As a result of our business model, we rely heavily
on third parties, including licensees and franchisees, to make sales, generate
revenues and help grow our business. Such reliance involves various risks and
uncertainties, which are discussed below in Item
1A.
Risk Factors
under
the caption “Risks of Business We Acquire.”
We
intend
to leverage our brand management, marketing, and licensing expertise, costs
and
professionals across our three operating verticals. We expect that these
operating verticals will enable us to generate royalties at the wholesale and
retail level on sales of goods for brands that we acquire, through distribution
channels that we own, without the loss of sales in third-party channels. For
example, we might decide to contract with third parties to produce a “private
label” brand of socks that use our owned brand, The Athlete’s Foot, for sale in
our chain of The Athlete’s Foot franchisee stores. The manufacturer of the socks
who sells the product to the franchisees would pay us a royalty on those sales
and in turn the franchisees who sell the socks to their retail customers also
would pay us a royalty on their sales.
The
following graphic summarizes our three operating segments (retail franchising,
consumer branded products and QSR franchising) and the opportunities to
cross-leverage the operating verticals with each other. Franchise concepts
we
purchase can be sold to our existing network of master franchisees who currently
manage our franchise brands worldwide. Brands that we acquire can be sold
through third party retail channels and channels that we own and control,
allowing us to earn wholesale and retail royalties. Our objective is to create
a
flexible operating structure, control our distribution channels, and sell our
owned brands through these channels as well as third party
channels.
![](v068380_graph.jpg)
Diversification
and Growth
As
we
build a portfolio of IP-centric businesses, we expect to operate a business
model that is diversified in several ways:
|
·
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across
industries, ranging from apparel, footwear and sporting goods to
QSR and
retail franchising;
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·
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across
channels of distribution, ranging from luxury to
mass-market;
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·
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across
consumer demand categories, ranging from luxury to
mass-market;
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·
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across
licensees and franchisees, ranging from large licensees to individual
franchisees; and
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·
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across
geographies (both within the United States and internationally);
and
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·
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across
multiple demographic groups.
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We
believe that this multi-category diversification will help reduce potential
volatility in our financial results (given the varied sources of royalty
payments from franchisees and licensees of different types and in different
markets, demographics, and geographies) and may mitigate impairment
risk.
We
believe that our business model offers a three-tiered growth
opportunity:
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·
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our
businesses can grow both domestically and internationally through
organic,
and synergistic growth;
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·
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our
businesses can grow organically by expanding and extending owned
brands
into new product categories and retail channels, increasing brand
awareness and executing new licenses or selling new
franchises;
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|
·
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we
can grow through acquisition by acquiring new brands or additional
franchise systems; and
|
|
·
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our
business can grow synergystically by leveraging our three operating
verticals.
|
We
can
grow acquired brands by enabling them to sell branded products through franchise
systems that we own. Conversely, we can expand our franchise systems by allowing
them to sell additional branded products that we own or acquire. In either
case,
our objective will be to allow both our product brands and our systems to
increase their sales. In each case, we would collect additional retail and
wholesale royalties.
Development
of Our IP Business and Acquisition Strategy
We
entered the IP business when we acquired UCC in June 2006. Historically,
UCC
provided strategic advice and structured finance solutions to IP-centric
companies. At the time that we acquired UCC, UCC’s former president and chief
executive officer, Robert D’Loren, became our president and chief executive
officer, as well as a member of our board of directors. In September 2006,
we
hired David B. Meister to become our new chief financial officer, and in
December 2006 we hired Charles Zona to become our Executive Vice President,
Brand Management and Licensing. Other members of the UCC management team
assumed
management roles in our developing IP business, and at the end of 2006 we
moved
our corporate headquarters to New York City, where our IP business is
based.
Since
June 2006, we have acquired four IP-centric companies. We have also been
(and
expect to continue to be) in active discussions with other potential acquisition
candidates. Our objective is to acquire 3 to 5 businesses or significant
groups
of IP assets per year, with transaction sizes generally in excess of $50
million
total enterprise value.
We
maintain a highly disciplined pricing approach to acquisitions. Our objective
is
to acquire consumer branded products companies at transaction multiples that
range from 4.5 to 5.5 times royalties. For QSR franchise concepts, our target
range is from 3.0 to 4.5 times revenues. We believe this approach will enable
us
to make accretive acquisitions given our capital structure (using a combination
of cash on hand, shares of our common stock and borrowings under debt
facilities). For a discussion of limitations and risks associated with the
use
of our stock for acquisitions and to raise additional capital, see Item
1A. Risk Factors
under
the caption “Risks of Our Acquisition Strategy.”
Company
Brands
Acquisition
of The Athlete’s Foot.
On
November 7, 2006, our NexCen Acquisition Corp. subsidiary acquired Athlete’s
Foot Brands, LLC, along with an affiliated advertising and marketing fund,
and
certain nominal fixed assets owned by an affiliated company. The Athlete’s Foot
is an athletic footwear and apparel franchisor with 600 retail locations
in over
40 countries. The business also provides advertising and marketing support
for
the benefit of the franchisees, using a portion of the royalties it receives
from franchisees. This business operates in our retail franchising
vertical.
The
purchase price for this acquisition,
excluding contingent consideration, was $53.1 million, consisting
of approximately $42.1 million in cash and $9.2 million in our common stock
(approximately 1.4 million shares which were valued at $6.55 per share),
which
was the average closing price of our common stock for the five consecutive
days
that ended on November 6, 2006, which is the day immediately preceeding the
date
in which we closed the agreement to purchase The Athhlete’s Foot), and $1.8
million in other deal related costs. At the closing on November 7, 2006,
we also
issued to one of the sellers a three-year warrant to purchase an additional
500,000 shares of our common stock at a per share price of $6.49 (which was
the
closing price of our common stock on November 7, 2006). On March 14, 2007,
we
borrowed $26.5 million under a new $150 million senior credit facility secured
by the assets of The Athlete’s Foot. This debt facility is discussed below in
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations under
the
caption “Liquidity and Capital Resources.”
Under
the
purchase agreement for The Athlete’s Foot, we may be required to pay up to an
additional $8.5 million of cash and stock (in the same proportion as the
initial
acquisition), if the revenue and EBITDA of the acquired business (as defined
in
the purchase agreement) for the year ended December 31, 2006 equal or exceed
performance targets specified in the purchase agreement. The purchase agreement
requires a stand-alone audit of the 2006 financial results of Athletes Foot
Brands, LLC to be completed by March 31, 2007. The earn-out will be calculated
based on the 2006 audited financial results. We estimate that the contingent
consideration will be $4.0 million, and we have recorded a liability as of
December 31, 2006 to reflect this expected payment.
Acquisition
of Bill Blass.
On
February 15, 2007, our Blass Acquisition Corp. subsidiary acquired Bill Blass
Holding Co., Inc. and two affiliated businesses. The Bill Blass label represents
timeless style, modern American and is an American legacy brand. This business
operates in our consumer brands vertical.
At
the
closing, one of the Bill Blass companies executed a licensing agreement for
men’s and women’s denim with Designer License Holding Company, LLC. The new
license replaced a denim license and an active wear license that were terminated
and had been held by two companies that are affiliated with one of the prior
owners of Bill Blass.
The
initial purchase price for this acquisition was $54.6 million, consisting
of
$39.1 million in cash and $15.5 million in our common stock (approximately
2.2
million shares which were valued at $7.09 per share, which was the average
closing price of our common stock for the ten consecutive days that ended
on
December 19, 2006, which is when we signed the agreement to purchase Bill
Blass). Under the purchase agreement, the sellers will be entitled to receive
up
to an additional $16.2 million of consideration, payable in early 2008. The
additional consideration under the earn-out will be equal to the amount by
which
the royalties generated from the Bill Blass trademarks in fiscal 2007,
multiplied by 5.5, exceed $51.8 million, subject to certain adjustments.
The
total purchase price will not exceed $70.8 million. We expect to borrow
approximately $27 million under our new credit facility, which will be secured
by the assets of Bill Blass.
Acquisition
of MaggieMoo’s.
On
February 28, 2007, we acquired MaggieMoo’s International, LLC (“MaggieMoo’s”).
The initial purchase price for this acquisition was $16.1 million, consisting
of
approximately $10.8 million of cash and debt repayment, and 515,352 shares
of
our common stock (reflecting valued at $5.3 million, based on the average
closing price of our common stock for the fifteen consecutive days that ended
on
February 27, 2007, of $10.21). Under the purchase agreement, the sellers
will be
entitled to receive up to an additional $2.0 million of consideration in
the
form of an earn-out, payable on March 31, 2008. The earn-out will be based
on
the amount royalty payments earned during fiscal 2007 exceed royalty payments
earned by MaggieMoo’s during fiscal 2006, pursuant to a formula set forth in the
purchase agreement. MaggieMoo’s is the franchisor of 184 stores located in 36
states domestically. Each location features a menu of freshly made super-premium
ice creams, mix-ins, smoothies, and custom ice cream cakes. This business
operates in our QSR vertical.
Acquisition
of Marble Slab.
On
February 28, 2007, we acquired the assets of Marble Slab Creamery, Inc. (“Marble
Slab”). The purchase price of the acquisition was $21 million, consisting of $16
million of cash, and the issuance of $5.0 million of notes payable which
mature
on February 28, 2008. The notes accrue interest at an annual rate of 6% per
annum until maturity, and 8% thereafter, and are payable in cash or common
stock
priced at the time of issuance, at the Company’s option. We have deposited $5.0
million into an escrow account to collateralize the payment of these notes.
Marble Slab is the franchisor of 336 stores located in 35 states, Puerto
Rico,
Canada and the United Arab Emirates. Since 1983, each Marble Slab
Creamery has
featured homemade super-premium ice cream that is hand-rolled in freshly
baked
waffle cones. This business operates in our QSR vertical. We intend to borrow
$19 million under the new senior credit facility entered into on March 12,
2007
secured by the assets of MaggieMoo’s and Marble Slab.
We
expect
to borrow $19 million under our new senior credit facility, which will be
secured by the assets of MaggieMoo’s and Marble Slab. Assuming we borrow all of
the expected amounts for the Bill Blass, MaggieMoo’s and Marble Slab
acquisitions, our total borrowings under our new $150 million credit facility
(including the $26.5 million we borrowed for The Athlete’s Foot acquisition)
would be approximately $72.5 million. For a discussion of risks associated
with
borrowings, see Item
1A. Risk Factors
under
the caption “Risks of Our Our Current Business - Any failure to meet our debt
obligations would adversely affect our business and financial
condition.”
Competition
Our
brands are all subject to extensive competition by numerous domestic and
foreign
brands. Each of our brands has numerous competitors within each of our specific
distribution channels. Our degree of success is dependent on the image of
our
brands to consumers and our licensees' ability to design, manufacture and
sell
products bearing our brands.
In
seeking to make acquisitions of IP and IP-centric businesses, we compete
with
other companies and financial buyers (such as private equity funds). While
we
believe the number of competitors is currently limited, we expect that more
competitors will develop over time. Competitors may be larger than us, have
access to greater financial and other resources or be willing to pay higher
prices in acquisitions or assume greater acquisition-related risks. See
Item
1A. Risk Factors
under
the caption “Risks of Our Acquisition Strategy
- Competition
may negatively affect our ability to complete suitable acquisitions.”
The
Athletes Foot. Our franchisees operate in the retail athletic footwear and
apparel business which is highly competitive with relatively low barriers
to
entry. The principal competitive factors in these markets are price, quality,
selection of merchandise, reputation, store location, advertising and customer
service.
The
businesses we acquired in 2007, and businesses we acquire in the future,
are
also subject to competitive risks and pressures, including price, quality,
selection of merchandise, reputation, store location, advertising and customer
service.
Historical
Operations
Historical
Overview
Until
late 2004, we owned, acquired and operated a number of mobile and wireless
communications businesses. These businesses never became profitable, and
during
2004 we sold these businesses and started a mortgage-backed securities, or
MBS,
business. During 2004 and 2005, we assembled a leveraged portfolio of MBS
investments. However, market conditions for the MBS business changed
significantly during 2005 and into 2006, and the profitability of our leveraged
MBS portfolio declined. In light of these changing market conditions, in
late
2005 and into 2006, we began to explore additional and alternative business
strategies that we thought could help us become profitable more quickly and
create shareholder value. These efforts resulted in our decision to acquire
UCC
in June 2006. On October 31, 2006, at the 2006 Annual Meeting of Stockholders
(the “Annual Meeting”), our stockholders approved the sale of our MBS portfolio
for the purpose of discontinuing our MBS business and allocating all cash
proceeds from such sale to the growth and development of our IP business.
We
sold our MBS investments in November 2006, and since that time, we have focused
entirely on our IP business.
Holding
Company Reorganization and Name Change
Aether
Systems Inc. (“Aether Systems”), the historical entity through which we
previously conducted the Mobile Government, EMS and Transportation businesses,
was formed in January 1996. On July 12, 2005, the stockholders of Aether
Systems
approved a holding company reorganization of Aether Systems in which each
share
of Aether Systems common stock was exchanged for one share of common stock
of
Aether Holdings, Inc. (“Aether Holdings”), and Aether Systems became a wholly
owned subsidiary of Aether Holdings. The reorganization was undertaken to
implement restrictions on certain changes in the ownership of our common
stock
in an effort to protect the long-term value of our substantial net operating
loss and capital loss carry forwards (as described in further detail below).
In
recognition of the changing business strategy of the Company, on October
31,
2006, our stockholders approved a change of our Company name from Aether
Holdings to NexCen Brands. Effective November 1, 2006, we changed our “ticker”
symbol, under which our common stock is traded on the Nasdaq Global Market,
from
“AETH” to “NEXC.”
Tax
Loss Carry Forwards
As
a
result of the substantial losses incurred by our mobile and wireless
communications businesses through 2004, as of December 31, 2006, we had federal
net operating loss carry forwards of approximately $777 million that expire
on
various dates between 2011 and 2026. These
tax
loss carryforwards are generally available to offset federal income taxes.
We
expect to remain subject to certain state, local, and foreign tax obligations,
as well as to a portion of the federal alternative minimum tax, as discussed
below in Item
1A. Risk Factors
under
the caption “Risks of Our Tax Loss Carry Forwards.” In addition, we had
capital loss carry forwards of approximately $251 million that expire between
2007 and 2011. If we had an ownership change as defined in Section 382 of
the
Internal Revenue Code of 1986, as amended (“IRC”), our net operating loss
carryforwards and capital loss carry forwards generated prior to the ownership
change would be subject to annual limitations, which could reduce, eliminate,
or
defer the utilization of these losses.
Generally,
an ownership change occurs if one or more stockholders, each of whom owns
5% or
more in value of a corporation’s stock, increase or decrease their aggregate
percentage ownership by 50% or more as compared to the lowest percentage
of
stock owned by such stockholders at any time during the preceding three-year
period. For example, if a single stockholder owning 10% of our stock acquired
an
additional 50% of our stock in a three-year period, a change of ownership
would
occur. Similarly, if ten persons, none of whom owned our stock, each acquired
slightly over 5% of our stock within a three-year period (so that such persons
own, in the aggregate more than 50%) an ownership change would occur. Ownership
of stock is determined by certain constructive ownership rules which can
attribute ownership of stock owned by entities (such as estates, trusts,
corporations, and partnerships) to the ultimate indirect owner.
For
purposes of this rule, all holders who each own less than 5% of a corporation’s
stock are generally treated together as one (or, in certain cases, more than
one) 5% stockholder. Transactions in the public markets among stockholders
owning less than 5% of the equity securities generally are not included in
the
calculation. Special rules can result in the treatment of options (including
warrants) or other similar interests as having been exercised if such treatment
would result in an ownership change.
As
a
result of the holding company reorganization that we completed in 2005, as
described above under the caption “Holding Company Reorganization and Name
Change,” shares of our common stock are subject to transfer restrictions
contained in our certificate of incorporation. In general, the transfer
restrictions prohibit any person from acquiring 5% or more of our stock without
our consent. Persons who owned 5% or more of our stock prior to May 4, 2005
are
permitted to sell the shares owned as of May 4, 2005 without regard to the
transfer restrictions. Shares acquired by such persons after May 4, 2005
are
subject to the transfer restrictions. While we expect that these transfer
restrictions will help guard against a change of ownership occurring under
Section 382 and the related rules, because we are using stock as consideration
to make acquisitions, because we may decide (or need) to sell additional
shares
of our common stock in the future to raise capital for our business and because
persons who held 5% or more of our stock prior to these restrictions taking
effect can sell (and in some cases have sold) shares of our stock, we cannot
guarantee that these restrictions will prevent a change of ownership from
occurring. Our board of directors also has the right to waive the application
of
these restrictions to any transfer.
One
of
our principal business objectives is to operate profitably so that we can
realize value, in the form of tax savings, from our accumulated tax loss
carry
forwards. The Company monitors the change in shareholdings on a monthly basis
and has an outside accounting firm (other than our independent auditor) perform
a quarterly analysis to determine the cumulative percent change through the
end
of the particular quarter. Based upon a review of past changes in our ownership,
as of December 31, 2006, we do not believe that we have experienced an ownership
change (as defined under Section 382) that would result in any limitation
on our
future ability to use these net operating loss and capital loss carry forwards.
However, we can not be certain that the IRS or some other taxing authority
may
not disagree with our position and contend that we have already experienced
such
an ownership change, which would severely limit our ability to use our net
operating loss carry forwards and capital loss carry forwards to offset future
taxable income.
For
a
discussion on the risks associated with our tax loss carry forwards, please
refer to Item
1A. Risk Factors
under
the caption “Risks of Our Tax Loss Carry Forwards.”
Employees
As
of
December 31, 2006, we employed a total of 36 persons. None of our employees
is
covered by a collective bargaining agreement. We believe that our relations
with
our employees are good. As we acquire additional businesses, our employee
base
will increase.
General
Corporate Matters
Our
executive offices are located at 1330 Avenue of the Americas, 34th
Floor,
New York, NY 10019. Our telephone number is (212) 277-1100 and our fax number
is
(212) 277-1160.
Availability
of Information
We
maintain a website at www.nexcenbrands.com,
which
provides a wide variety of information on each of its brands. You may read
and
copy any materials we file with the Securities and Exchange Commission at
the
SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. For
further information concerning the SEC’s Public Reference Room, you may call the
SEC at 1-800-SEC-0330. Some of this information may also be accessed on the
SEC’s website at www.sec.gov.
We also
make available free of charge, on or through our website, our annual report
on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished to the SEC pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended
(the
“Exchange Act”) as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. We are providing the address
of
our internet website solely for the information of investors. We do not intend
the internet address to be an active link, and the contents of the website
are
not a part of this Report. We also maintain, in some cases through our
licensees, sites for each of the Company's brands and operations, www.theathletesfoot.com,
www.ucccapital.com
and
www.billblass.com.
ITEM
1A. RISK FACTORS
Investing
on our common stock involves a high degree of risk. Before making an investment
decision, you should carefully consider these risks as well as information
we
include or incorporate by reference in this prospectus. If any of the following
risks actually occur, our business, financial condition or results of operations
could be materially and adversely affected, and you may lose some or all
of your
investment.
Risks
of Our Current Business
We
have incurred significant losses throughout our history and may not be
profitable in the future.
Since
our
inception, we have incurred net losses of approximately $2.5 billion. We
only
recently began to implement our new IP-centric business strategy. There is
no
assurance that we will be able to operate this new IP business profitably
or to
report net income in the future and realize the value of our substantial
tax
loss carryforwards.
Our
IP-centric business is new, and we may not be successful in operating or
expanding it.
We
do not
have
an
established history of acquiring IP, or IP-centric businesses, and managing
IP
assets and businesses. We
began
to implement our IP-centric business in June 2006, when we acquired UCC.
Upon
the closing of that acquisition, Mr. D’Loren, who was the president and chief
executive officer of UCC, became our president and chief executive officer.
During their tenure with UCC, Mr. D’Loren and the other members of our
senior management team were involved primarily in providing
banking, finance, consulting and other advisory services to IP-centric
businesses. They did not own or manage an IP-centric business directly. As
a
result, we may encounter unanticipated difficulties or challenges as we work
to
implement our new business strategy. If we are unable to address and overcome
such difficulties or challenges, we may not be successful with our new business
strategy.
We
are dependent upon our president and chief executive officer, Robert W. D’Loren.
If we lose Mr. D’Loren’s services, we may not be able to successfully implement
our IP business strategy.
The
successful implementation of our IP business strategy will depend primarily
upon
the efforts of Mr. D’Loren, our president and chief executive officer. Mr.
D’Loren is the person primarily responsible for conceiving of and implementing
our IP business strategy. Although we have entered into an employment agreement
with Mr. D’Loren that runs through June 2009, there is no guarantee that he will
remain employed by us throughout the period. If he ceases to work with us,
or if
his services are reduced, we will need to identify and hire other qualified
executives, and we may not be successful in finding or hiring adequate
replacements. This could impede our ability to fully implement our IP business
strategy, which would harm our business and prospects.
The
market price of our common stock has been, and may continue to be, volatile,
which could reduce the market price of our common stock and, among other
things,
make it more expensive for us to complete acquisitions using our stock as
consideration.
Since
we
announced the acquisition of UCC and the hiring of Mr. D’Loren, the trading
price of our common stock has experienced significant price and volume
fluctuations. This market volatility could reduce the market price of our
common
stock, regardless of our operating performance. In addition, the trading
price
of our common stock could change significantly over short periods of time
in
response to actual or anticipated variations in our quarterly operating results,
announcements by us or by third parties on whom we rely or against whom we
compete, factors affecting the markets in which we do business or changes
in
national or regional economic conditions. If our stock price declines, we
may be
required to issue additional shares to complete acquisitions, which would
make
them more dilutive to our stockholders. The market price of our common stock
also could be reduced by general market price declines or market volatility
in
the future or future declines or volatility in the prices of stocks for
companies against whom we compete or companies in the industries in which
our
licensees compete.
We
are unlikely to become profitable unless we can identify and acquire IP and
IP-centric businesses on favorable terms.
Our
ability to achieve our business objective of becoming profitable will depend
on
our ability to identify and acquire suitable acquisitions on favorable terms,
so
that we can increase our revenues and generate net income. If we are unable
to
complete acquisitions on favorable terms, our new IP business will be very
limited and may not generate sufficient revenues to cover our expenses. There
is
no assurance that we will be able to complete any future acquisitions or
that
such transactions, if completed, will contribute positively to our operations
and financial results and condition.
We
are involved in litigation with respect to a business that we sold in
2005.
In
2005,
we sold our mobile transportation business to Geologic Solutions, Inc. Since
that time, Geologic has notified us of, and we have responded to, various
indemnification claims for alleged breaches of representations and warranties
under the asset purchase agreement pursuant to which we sold the transportation
business to Geologic. We were unable to resolve these claims with Geologic,
and
in March 2006, Geologic filed a lawsuit against us in state court in New
York.
Geologic’s claims primarily involve allegations that we did not fully disclose
certain aspects of our transportation business’ relationships with one of its
major customers and two of its major suppliers that allegedly resulted in
the
devaluation of inventory and other adverse effects to the business. Geologic
contends that it has suffered damages in excess of $30 million as a result
of
these alleged breaches. The Company believes it has meritorious defenses
to
Geologic’s claims and is vigorously defending against them. However, we cannot
predict the outcome of this litigation, and an adverse resolution of such
claims
could require us to make a significant cash payment to Geologic. In such
event,
we would record a charge against earnings, further increasing the loss on
the
sale of the transportation business, and decreasing the amount of cash we
have
available for acquisitions and operations.
Any
failure to meet our debt obligations would adversely affect our business
and
financial condition.
On
March
12, 2007, we entered into a new $150 million master loan agreement with BTMU
Capital Corporation. As of March 14, 2007, we have approximately $26.5 million
of long-term debt outstanding, and expect to draw an additional $46 million
shortly to refinance the acquisitions of Bill Blass, MaggieMoo’s and Marble
Slab. Interest rates for our master loan agreement vary based upon utilization
and whether the borrowings are at the base rate or the London Interbank Offering
Rate ("LIBOR").
Our
master loan agreement contains affirmative and negative covenants customary
for
senior secured credit facilities, including, among other things, restrictions
on
indebtedness, liens, fundamental changes, loans, acquisitions, capital
expenditures, restricted payments, transactions with affiliates, common stock
repurchases, dividends and other payment restrictions affecting subsidiaries
and
sale leaseback transactions. Our failure to comply with the financial and
other
restrictive covenants relating to our indebtedness could result in a default
under the indebtedness, which could materially adversely affect our business,
financial condition and results of operations. These restrictions may also
limit
our ability to operate our businesses and may prohibit or limit our ability
to
enhance our operations or take advantage of potential business opportunities
as
they arise.
As
a
result of our indebtedness, we will need to use a portion of our cash flow
to
pay principal and interest, which will reduce the cash available to finance
our
operations and other business activities and could limit our flexibility
in
planning for or reacting to changes in our business. The master loan agreement
may also limit our ability to obtain future financings which could negatively
impact our business, financial condition, results of operations and growth.
The
amount of our debt may also cause us to be more vulnerable to economic downturns
and adverse developments in our business.
Risks
of Our Acquisition Strategy
Competition
may negatively affect our ability to complete suitable
acquisitions.
We
believe that there are a limited number of other companies competing for
acquisitions of the type that we are seeking. However, we will face competition
for acquisitions, and competition may increase as the business strategy we
are
pursuing continues to receive publicity. Existing and future competitors
may be
larger than us and have access to greater financial and other resources.
As a
result, acquisitions may become more expensive, and we may face greater
difficulty in identifying suitable acquisition candidates on terms that we
believe will make sense. If we are unable to expand our business by completing
acquisitions on favorable terms, our financial results may be negatively
affected.
Acquisitions
involve numerous risks that we may not be able to address or overcome, and
could
result in acquisitions that negatively affect our business and financial
results.
Even
if
we are successful in completing IP-centric acquisitions, we may not be able
to
achieve or maintain profitability levels that will justify our investments
in
those acquisitions. Among other things, we may not be able to realize
anticipated benefits from our acquisitions, including various synergies and
economies of scope and scale. Each acquisition involves numerous risks, any
of
which could have a detrimental effect on our results of operations and/or
the
value of our equity. These risks include, among others:
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overpaying
for acquired assets or businesses;
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being
unable to license, market or otherwise exploit IP that we acquire
on
anticipated terms or at all;
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negative
effects on reported results of operations from acquisition-related
expenses and amortization or impairment of acquired intangibles;
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diversion
of management's attention from management of day-to-day operational
issues;
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failing
to maintain focus on, or ceasing to execute, core strategies and
business
plans as our IP portfolio grows and becomes more diversified;
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failing
to acquire or hire additional successful managers, or being unable
to
retain critical acquired managers;
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potential
adverse effects of a new acquisition on an existing business or
business
relationship; and
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underlying
risks of the businesses that we acquire, which may differ from
one
acquisition to the next, including those related to entering new
lines of
business or markets in which we have little or no prior experience.
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Our
ability to grow through the acquisition of additional IP assets and business
will depend on the availability of capital to complete
acquisitions.
We
financed the acquisitions of The Athlete’s Foot, Bill Blass, MaggieMoo’s and
Marble Slab with a combination of cash and equity, and we intend to finance
our
future IP acquisitions through a combination of available cash, bank or other
institutional financing, and issuances of equity and possibly debt securities.
As of March 14, 2007, we had approximately $39 million of cash on hand after
borrowing $26.5 million under the new senior credit facility we entered into
on
March 12, 2007. There is no assurance that we will be able to secure borrowings
in the future to fund acquisitions, either on terms that we consider reasonable
or at all. In addition, under Section 382 of the Internal Revenue Code of
1986,
as amended, we face limitations on the number of shares of equity that we
can
issue without triggering limitations on our future ability to use our
substantial accumulated tax loss carry forwards. Under certain circumstances,
these limitations (if triggered) could significantly or, under certain
circumstances, totally reduce the future value of our tax loss carry forwards
(assuming we are able to generate taxable income that would benefit from
the use
of the tax loss carry forwards).
As
a
result of these factors, we may lack access to sufficient capital to complete
acquisitions that we identify and want to complete. In such a case, our
inability to complete acquisitions could have a material adverse effect on
our
business, our financial results and the trading price of our stock.
We
operate a global business that exposes us to additional risks that may
negatively affect our results of operations and financial
condition.
Our
Athlete’s Foot franchisees operate in over 40 countries. In addition, the brands
and other IP assets that we acquire and manage are currently used, and in
the
future are expected to be used, for products and services that will be
advertised and sold in many different countries. As a result. we are subject
to
risks associated with doing business globally. We intend to continue to
pursue growth opportunities for our IP business outside the United States,
which
could expose us to greater risks. The risks associated with our IP
business outside the United States include:
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Political
and economic instability or civil unrest;
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Armed
conflict, natural disasters or terrorism;
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Health
concerns or similar issues, such as a pandemic or epidemic;
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Multiple
foreign regulatory requirements that are subject to change and
that differ
between jurisdictions;
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Changes
in trade protection laws, policies and measures, and other regulatory
requirements effecting trade and investment;
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Differences
from one country to the next in legal protections applicable to
IP assets,
including trademarks and similar assets, enforcement of such protections
and remedies available for infringements;
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Fluctuations
in foreign currency exchange rates and interest rates; and
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Adverse
consequences from changes in tax
laws.
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The
effects of these risks, individually or in the aggregate, could have a material
adverse impact on our IP business.
Risks
of Businesses We Acquire
Our
business will depend on market acceptance of the IP that we intend to acquire
such as trademarks, brands and franchise rights. We expect these markets
to be
highly competitive.
Continued
market acceptance of the IP that we intend to acquire, such as trademarks,
brands and franchise rights is critical to our future success and subject
to
great uncertainty. The consumer branded products industries on which we expect
to focus our acquisition activities are extremely competitive, both in the
United States and overseas. Accordingly, we expect that we and our future
licensees and other business partners (including franchisees) will face intense
and substantial competition with respect to marketing and expanding products
and
services under acquired IP. As a result, we may not be able to attract
licensees, franchisees and other business partners on favorable terms or
at all.
In addition, licensees and other third parties with whom we deal may not
be
successful in selling products and services that make use of our acquired
IP.
They (and we) also may not be able to expand the distribution of such products
and services into new markets.
In
general, competitive factors include quality, price, style, name recognition
and
service. In addition, the presence in the marketplace of short-lived “fads” and
the limited availability of shelf space can affect competition for many consumer
products. Changes in consumer tastes, national, regional and local economic
conditions, discretionary spending priorities, demographic trends, traffic
patterns and the type, number and location of competing products and outlets
also can affect market results. Competing trademarks and brands may have
the
backing of companies with greater financial, distribution, marketing, capital
and other resources than do us or our licensees and other business partners.
This may increase the obstacles that we and they face in competing successfully.
Among other things, we may have to spend more on advertising and marketing
or
may need to reduce the amounts that we charge licensees and other business
partners. This could have a negative impact on our business and financial
results.
Because
we expect to rely on unaffiliated third parties to market, distribute, sell
and
in some cases design products and services using IP such as trademarks and
brands that we license, the success of our business may depend upon various
factors that are beyond our control.
We
expect
to have limited personnel and operations. Substantially all of our earnings
are
expected to come from royalties generated from licensees, franchisees and
similar contractual relationships involving IP that we acquire. Licensees,
franchisees and other business partners are independent operators, and we
will
not exercise day-to-day control over any of them. As a result, our business
will
face a number of risks, including the following:
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We
expect that products using our IP will be manufactured by third
party
licensees, either directly or through third-party manufacturers
on a
subcontract basis. All manufacturers have limited production capacity,
and
the ones with whom we work (directly or indirectly) may not, in
all
instances, be able to satisfy manufacturing requirements for our
(and our
licensees’) products.
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We
expect to provide limited training and support to franchisees.
Consequently, franchisees may not successfully operate their businesses
in
a manner consistent with our standards and requirements, or may
not hire
and train qualified managers and other store
personnel.
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While
we will try to ensure that our licensees and other business partners
maintain a high quality of products and services that use our IP,
they may
take actions that adversely affect the value of our IP or our business
reputation.
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Our
failure to protect proprietary rights that we acquire could decrease the
value
of those assets.
We
expect
to acquire a combination of trademarks, copyrights, franchise rights, service
marks, trade secrets and similar intellectual property rights. The success
of
our IP business strategy will depend in part on our ability to license this
intellectual property for use by third parties in selling various products
and
services and developing brand and product awareness in new geographic and
product markets. Although we expect that much of our intellectual property
will
be protected by registration or other legal rules in the United States, in
some
cases registration may not be in place or available, particularly outside
of the
United States. In some cases, third parties may be using similar trademarks
or
other intellectual property in certain countries, and we may not be able
to use
certain of our intellectual property in those countries.
We
intend
to monitor on an ongoing basis unauthorized filings of registrations for
our
trademarks and other intellectual property and to rely primarily upon a
combination of trademark, copyright, know-how, trade secrets and contractual
restrictions to protect our intellectual property rights. We believe that
such
measures afford only limited protection and, accordingly, there can be no
assurance that actions taken in the past, or that we take in the future,
to
establish and protect our proprietary rights will be adequate to prevent
infringement by others, or prevent a loss of revenue or other damages. In
addition, the laws of some countries do not protect intellectual property
rights
to the same extent as the laws of the United States.
We
may be required to spend significant time and money on protecting or defending
our intellectual property rights.
We
may
from time to time be required to institute litigation to enforce legal
protections that we believe apply to intellectual property that we acquire,
including to protect our trade secrets. Such litigation could result in
substantial costs and diversion of resources and could negatively affect
our
sales, profitability and prospects, regardless of whether we are able to
successfully enforce our rights. In addition, to the extent that any of the
intellectual property we acquire is deemed to violate the proprietary rights
of
others, we could be prevented from using it, which could cause a termination
of
licensing and other commercial arrangements. This would adversely affect
our
revenues and cash flow. We also could be required to defend litigation brought
against us, which can be costly and time-consuming. It could also result
in a
judgment or monetary damages being levied against us.
The
acquisition of IP assets and IP-centric businesses will result in us recording
a
material amount of goodwill and other intangible assets on our balance sheet.
If
we are required to write down a portion of this goodwill and other intangible
assets, our financial results would be adversely affected.
As
a
result of our acquisition strategy, certain identifiable intangible assets
with
indefinite lives which meet specified accounting criteria will consist of
identifiable intangible assets and goodwill. We will not amortize goodwill.
We
may not be able to realize the full fair value of intangible assets with
indefinite lives and goodwill from our acquisitions. We will evaluate on
at
least an annual basis whether all or a portion of identifiable intangible
assets
and goodwill and intangible assets may be impaired. Any
write-down of intangible assets or goodwill resulting from future periodic
evaluations would decrease our net income, and those decreases could be
material.
Material
weaknesses in disclosure controls and procedures and internal control over
financial reporting of the businesses we acquire could adversely impact our
ability to provide timely and accurate financial
information.
The
integration of acquisitions includes ensuring that our disclosure controls
and
procedures and our internal control over financial reporting effectively
apply
to and address the operations of newly acquired businesses. While we will
make
every effort to thoroughly understand any acquired entity’s business processes,
our planning for proper integration into our company can give no assurance
that
we will not encounter operational and financial reporting difficulties impacting
our controls and procedures. As a result, we may be required to change our
disclosure controls and procedures or our internal control over financial
reporting to accommodate newly acquired operations, and we may also be required
to remediate historic weaknesses or deficiencies at acquired businesses.
Our
review and evaluation of disclosure controls and procedures and internal
controls of the companies we acquire may take time and require additional
expense, and if they are not effective on a timely basis could adversely
affect
our business and the market’s perception of our company.
Risks
of Our Tax Loss Carry Forwards
We
may not be able to realize value from our tax loss carry
forwards.
As
of
December 31, 2006,
we
had
federal net operating loss carry forwards of approximately $777 million that
expire between 2011 and 2026. In addition, we had capital loss carry forwards
of
approximately $251 million that expire between 2006 and 2011. If we had an
“ownership
change” as
defined in section 382 of the Internal Revenue Code, our net operating loss
carry forwards and capital loss carry forwards generated prior to the ownership
change would be subject to annual limitations, which could reduce, eliminate,
or
defer the utilization of these losses. Based upon a review of past changes
in
our ownership, as of December 31, 2006, we do not believe that we have
experienced an ownership change (as defined under section 382) that would
result
in any limitation on our future ability to use these net operating loss and
capital loss carry forwards. However, we can not assure you that the IRS
or some
other taxing authority may not disagree with our position and contend that
we
have already experienced such an ownership change, which would severely limit
our ability to use our net operating loss carry forwards and capital loss
carry
forwards to offset future taxable income.
Generally,
an ownership change occurs if one or more stockholders, each of whom owns
5% or
more in value of a corporation’s stock, increase or decrease their aggregate
percentage ownership by 50% or more as compared to the lowest percentage
of
stock owned by such stockholders at any time during the preceding three-year
period. For example, if a single stockholder owning 10% of our stock acquired
an
additional 50% of our stock in a three-year period, a change of ownership
would
occur. Similarly, if ten persons, none of whom owned our stock, each acquired
slightly over 5% of our stock within a three-year period (so that such persons
own, in the aggregate more than 50%) an ownership change would occur. Ownership
of stock is determined by certain constructive ownership rules which can
attribute ownership of stock owned by entities (such as estates, trusts,
corporations, and partnerships) to the ultimate indirect owner.
For
purposes of this rule, all holders who each own less than 5% of a corporation’s
stock are generally treated together as one (or, in certain cases, more than
one) 5% stockholder. Transactions in the public markets among stockholders
owning less than 5% of the equity securities generally are not included in
the
calculation. Special rules can result in the treatment of options (including
warrants) or other similar interests as having been exercised if such treatment
would result in an ownership change.
On
July
12, 2005, our stockholders approved a holding company reorganization in which
each share of what was then Aether Systems common stock was exchanged for
one
share of common stock of a new holding company (then called Aether Holdings,
and
now called NexCen Brands). As a result of this transaction, shares of our
common
stock are subject to transfer restrictions contained in our certificate of
incorporation. In general, the transfer restrictions prohibit any person
from
acquiring more than 5% of our stock without our consent. Persons who owned
5% or
more of our stock prior to May 4, 2005 are permitted to sell the shares owned
as
of May 4, 2005 without regard to the transfer restrictions. Shares acquired
by
such persons after May 4, 2005 are subject to the transfer restrictions.
While
we expect that these transfer restrictions will help guard against an ownership
change occurring under section 382 and the related rules, because we are
using
stock as consideration to make acquisitions, and because we may decide (or
need)
to sell additional shares of our common stock in the future to raise capital
for
our business and because persons who held more than 5% of our stock prior
to
these restrictions taking effect can sell (and in some cases have sold) shares
of our stock, we cannot guarantee that these restrictions will prevent a
change
of ownership from occurring.
We
may not be able to use our tax loss carry forwards because we may not generate
taxable income.
The
use
of our net operating loss carry forwards is subject to uncertainty because
it is
dependent upon the amount of taxable income we generate. Similarly, the extent
of our actual use of our capital loss carry forwards is also subject to
uncertainty because their use depends on the amount of capital gains we
generate. There can be no assurance that we will have sufficient taxable
income
(or capital gains) in future years to use the net operating loss carry forwards
or capital loss carry forwards before they expire. This is especially true
for
our capital loss carry forwards, because they expire over a shorter period
of
time than our net operating loss carry forwards.
The
IRS could challenge the amount of our tax loss carry
forwards.
The
amount of our net operating loss carry forwards and capital loss carry forwards
has not been audited or otherwise validated by the IRS. The IRS could challenge
the amount of our net operating loss carry forwards and capital loss carry
forwards, which could result in an increase in our liability for income taxes.
In addition, calculating whether an ownership change has occurred is subject
to
uncertainty, both because of the complexity and ambiguity of section 382
and
because of limitations on a publicly traded company’s knowledge as to the
ownership of, and transactions in, its securities. Therefore, we cannot assure
you that the calculation of the amount of our net loss carry forwards may
not be
changed as a result of a challenge by a governmental authority or our learning
of new information about the ownership of, and transactions in, our
securities.
We
expect to be subject to state,
local and foreign taxes, as well as the alternative minimum tax.
Our net loss carry forwards would not offset the alternative minimum tax
in its
entirety.
We
will
continue to be subject to state, local and foreign taxes. As a result of
our capital loss carry forwards and net operating loss carry forwards, we
anticipate our federal income tax liability over the next
several years will be reduced substantially. However, we expect to be
subject to the alternative minimum tax provisions of the Internal Revenue
Code
which limits the use of net operating loss carry forwards. These provisions
would result, in effect, in 10% of our alternative minimum taxable income
being
subject to the 20% alternative minimum tax assessed on corporations. This
amounts to a 2% effective tax rate on our alternative minimum taxable
income.
The
IRS may seek to impose the accumulated earnings tax on some or all of the
taxable income we retain.
We
expect
to retain all or a substantial portion of future earnings over the next several
years to finance the development and growth of our IP business. As a result,
we
may not declare or pay any significant dividends on shares of our common
stock
for an extended period. If the IRS believed we were accumulating earnings
beyond
our reasonable business needs, the IRS could seek to impose an accumulated
earnings tax, or AET, of 15% on our accumulated taxable income. We do not
believe that we will be subject to the AET due to various reasons, including
the
existence of our large deficit in accumulated earnings and profits. However,
the
IRS may disagree with us on this point, and the IRS may attempt to impose
the
AET on all or a portion of our taxable income. In such event, we would expect
to
challenge any attempt by the IRS to impose the AET on our business, but the
outcome of such a challenge is uncertain.
If
we
distributed our accumulated taxable income for each year to our stockholders
as
dividends, we would not be subject to the AET for the amounts so distributed,
but would be subject to the AET only for the amount of earnings retained.
If we
paid dividends to stockholders out of current earnings, these dividends would,
generally speaking, be eligible to be treated as “qualified dividends” for
federal income tax purposes, taxed at the current maximum federal rate of
15%,
assuming that the recipient stockholder met the various requirements under
the
Internal Revenue Code for such treatment. The maximum rate for qualified
dividends is currently projected to increase to the maximum federal income
tax
rate applicable to ordinary income (currently 35%) for tax years beginning
after
December 31, 2008 in accordance with the Jobs and Growth Tax Relief
Reconciliation Act of 2003.
Limits
on ownership of our common stock could have an adverse consequence to you
and
could limit your opportunity to receive a premium on our
stock.
As
noted
above, it is important that we avoid an ownership change under section 382
of
the Internal Revenue Code, in order to retain the ability to use our net
operating loss carry forwards and capital loss carry forwards to offset future
income. Under transfer restrictions that have been applicable to our common
stock since 2005, no one is permitted to acquire 5% or more of our stock
without
the consent of our Board of Directors. In addition, even if our Board of
Directors consented to a significant stock acquisition, a potential buyer
might
be deterred from acquiring our common stock while we still have significant
tax
losses being carried forward, because such an acquisition might trigger an
ownership change and severely impair our ability to use our tax losses against
future income. Thus, this potential tax situation could have the effect of
delaying, deferring or preventing a change in control and, therefore, could
affect adversely our shareholders’ ability to realize a premium over the then
prevailing market price for our common stock in connection with a change
in
control.
The
transfer restrictions that apply to shares of our common stock, although
designed as a protective measure to avoid an ownership change, may have the
effect of impeding or discouraging a merger, tender offer or proxy contest,
even
if such a transaction may be favorable to the interests of some or all of
our
shareholders. This effect might prevent our stockholders from realizing an
opportunity to sell all or a portion of their common stock at a premium to
the
prevailing market price.
None.
ITEM
2. PROPERTIES
As
of
December 31, 2006, we leased a total of approximately 16,450 square feet
of
office space. Our principal offices total 10,250 square feet and are located
in
New York, NY. The Athlete’s Foot office is located in Norcross, GA and totals
6,200 square feet of leased office space. In addition, we maintain a lease
for
space in Marlborough, Massachusetts that we used for the Mobile Government
business that we sold in 2005. We have sublet this office space to BIO-Key
International, Inc., the company that purchased the Mobile Government business
(“BIO-Key”). We believe that our retained facilities are adequate for the
purposes for which they are presently used and that replacement facilities
are
available at comparable cost, should the need arise.
As
we
acquire additional businesses, we expect to own or lease additional office
space. Such additions may come through assuming leases of businesses we acquire,
purchasing property owned by acquired businesses as part of the acquisitions,
or
entering into new leases either to consolidate operations in multiple locations
or to accommodate the needs of our business as it expands. We do not own
or
lease property used by our franchisees.
ITEM
3. LEGAL PROCEEDINGS
IPO
Litigation.
NexCen
is among the hundreds of defendants named in a
series of class
action lawsuits seeking damages due to alleged violations of securities
law. The case is being heard in the United States District Court for the
Southern District of New York. The court has consolidated the actions by
all of the named defendants that actually issued the securities in
question. There are approximately 310 consolidated cases before Judge
Scheindlin, including this action, under the caption In
Re
Initial Public Offerings Litigation,
Master
File 21 MC 92 (SAS).
As
to
NexCen, these actions were filed on behalf of persons and entities that acquired
the Company’s stock after its initial public offering in October 20,
1999. Among other things, the complaints claim that prospectuses, dated
October 20, 1999 and September 27, 2000 and issued by NexCen in
connection with the public offerings of common stock, allegedly contained
untrue
statements of material fact or omissions of material fact in violation of
securities laws because the prospectuses allegedly failed to disclose that
the
offerings’ underwriters had solicited and received additional and excessive
fees, commissions and benefits beyond those listed in the arrangements with
certain of their customers which were designed to maintain, distort and/or
inflate the market price of the Company’s common stock in the aftermarket.
The actions seek unspecified monetary damages and rescission. NexCen
believes the claims are without merit and is vigorously contesting these
actions.
After
initial procedural motions and the start of discovery in 2002 and 2003, the
plaintiffs voluntarily dismissed without prejudice the officer and director
defendants of each of the 310 named issuers, including NexCen. Then
in June 2003, the Plaintiff’s Executive Committee announced a proposed
settlement with the issuer-defendants, including NexCen, and the officer
and
director defendants of the issuers (the “Issuer Settlement”). A settlement
agreement was signed in 2004 and presented to the District Court for approval.
The proposed Issuer Settlement does not include the underwriter-defendants,
and
they have continued to defend the actions and have objected to the proposed
settlement. (One of the defendant-underwriters signed a memorandum of
understanding in April 2006 agreeing to a $425 million settlement of claims
against it.) Under terms of the proposed Issuer Settlement, NexCen
has a reserve of $465,000 for its estimated exposure. If the proposed
settlement is approved by the court, it is extremely unlikely
that NexCen would incur any material financial or other
liability.
The
District Court granted preliminary approval of the proposed Issuer Settlement
in
2005 and held a fairness hearing on the matter in April 2006. In December
2006,
before final action by the District Court on the proposed Issuer Settlement,
the
U.S. Court of Appeals for the Second Circuit issued a ruling vacating class
certification for certain plaintiffs in the actions against the
underwriter-defendants. A petition was filed in early 2007 seeking rehearing
of
this decision, but the Second Circuit had not acted on the petition as of
March
1, 2007. The impact of this decision on the claims against the issuer-defendants
(including NexCen)
and
on
the proposed Issuer Settlement is unclear. Since December 2006, the District
Court has stayed all proceedings in these cases pending further action by
the
Second Circuit.
Transportation
Business Sale.
On
March 13, 2006, a complaint captioned Geologic Solutions, Inc. v. Aether
Holdings, Inc. was filed against the Company in the Supreme Court for the
State
of New York, New York County. The complaint generally alleges that plaintiff
Geologic was damaged as a result of certain alleged breaches of contract
and
fraudulent inducement arising out of NexCen’s alleged misrepresentations and
failure to disclose certain information in connection with the asset purchase
agreement dated as of July 20, 2004 for the purchase and sale of our
Transportation business. The allegations in Geologic’s complaint are
substantially similar to claims Geologic made in a previous request to the
Company for indemnification. The complaint seeks monetary damages in an amount
not less than $30 million and other relief. During the second quarter of
2006,
the plaintiff agreed to substitute Aether Systems, Inc. for Aether Holdings,
Inc. as defendant in the case because Aether Systems, Inc. was the party
to the
asset purchase agreement upon which Geologic’s claims are based. We believe we
have a meritorious defense to Geologic’s claims and are vigorously defending
against this action; however, we cannot predict the outcome of this litigation,
and an adverse resolution of such claims could require us to make a significant
cash payment to Geologic. We have incurred costs in connection with the defense
of this lawsuit, which have been recorded against discontinued operations,
further increasing the loss on the sale of the Transportation segment, and
decreasing the amount of cash we have available for acquisitions and
operations.
Legacy
UCC Litigation.
UCC and
Mr. D’Loren in his capacity as president of UCC are parties along with unrelated
parties to litigation resulting from a default on a loan to The Songwriter
Collective, LLC (“TSC”), which UCC had referred to a third party. A shareholder
of TSC filed a lawsuit in the U.S. District Court for the Middle District
of
Tennessee alleging, that certain misrepresentations by TSC and its agents
(including UCC and D’Loren) induced the shareholder to contribute certain rights
to musical compositions to TSC. The lawsuit, which is captioned Tim Johnson
v.
Fortress Credit Opportunities I, L.P., et al., seeks declaratory judgment,
reformation and rescission, and monetary damages relating to the loan and
alleged loss of value on contributed assets. UCC and Mr. D’Loren have filed
cross-claims against TSC and certain TSC officers claiming indemnity. TSC
has
filed various cross and third-party claims against UCC, Mr. D’Loren and another
TSC shareholder, Annie Roboff. Roboff has filed a separate action in the
Chancery Court in Davidson County, Tennessee, which is captioned Roboff v.
Mason, et al., as well as claims in the federal court lawsuit, against UCC,
Mr.
D’Loren, TSC and the other parties. The claims include fraud and negligent
misrepresentation allegations against Mr. D’Loren, and UCC. Ms. Roboff
previously made these same claims in a lawsuit that she filed in state court
in
New York. That lawsuit was dismissed on procedural grounds, and Ms. Roboff
has
appealed the dismissal. UCC believes these claims are without merit and is
vigorously defending the actions. UCC’s insurance carrier is defending the
litigation. The litigation is in discovery and the outcome cannot be estimated
at this time; however, settlement discussions are being held. The loss, if
any, could exceed existing insurance coverage and any excess could adversely
affect our financial condition and results.
Other.
In
addition to the matters discussed above, we become involved from time to
time in
other litigation in the ordinary course of our business. As of the date of
this Report, there are no other proceedings that management considers material
to the Company.
On
October 31, 2006, the Company held its Annual Meeting, at which six proposals
were presented to the Company’s stockholders for consideration. The six matters
presented for consideration were: (1) a proposal to approve the sale of the
Company’s existing MBS portfolio for the purpose of discontinuing the Company’s
MBS business and allocating all cash proceeds from such sale to the growth
and
development of the IP business; (2) a proposal to amend the Certificate of
Incorporation to change the Company’s name to “NexCen Brands, Inc.”; (3) the
election of eight directors to hold office until the 2007 Annual Meeting
of
Stockholders or until their successors are elected and qualified; (4) a proposal
to ratify the appointment of KPMG LLP as the Company’s independent registered
public accounting firm for the fiscal year ending December 31, 2006; (5)
a
proposal to approve the adoption of the Company’s 2006 Long-Term Equity
Incentive Plan (the “2006 Plan”); and (6) a proposal to approve the adoption of
the 2006 Management Bonus Plan (the “Bonus Plan”).
The
number of issued and outstanding shares of common stock of the Company as
of
September 6, 2006, the record date established by the Company’s Board of
Directors for determining stockholder eligibility to vote at the Annual Meeting,
was 47,434,296. Computershare, the Company’s independent inspectors of election
at the Annual Meeting, certified the voting results. There were present in
person or by proxy at the Annual Meeting stockholders holding an aggregate
of
45,700,427 shares of common stock of the Company, representing approximately
96%
of the total shares eligible to vote. Set forth below are the results of
the
votes taken at the Annual Meeting.
The
proposal to proceed with the sale of the Company’s existing MBS portfolio was
approved by the stockholders by the following vote:
Votes
For:
|
Votes
Against:
|
Abstain:
|
Broker
Non-votes:
|
32,103,838
|
22,199
|
115,719
|
13,458,671
|
The
proposal to amend the Certificate of Incorporation to change the Company’s name
to “NexCen Brands, Inc.” was approved by the stockholders by the following
vote:
Votes
For:
|
Votes
Against:
|
Abstain:
|
Broker
Non-votes:
|
32,035,990
|
88,502
|
117,264
|
13,458,671 |
The
nominees for election to the Board of Directors were elected by the stockholders
by the following vote:
Name:
|
Votes
For:
|
Votes
Withheld:
|
James
T. Brady
|
41,792,081
|
3,908,346
|
Robert
W. D’Loren
|
39,221,678
|
6,478,749
|
Jack
B. Dunn IV
|
38,603,925
|
7,096,502
|
Edward
J. Mathias
|
41,794,381
|
3,906,046
|
David
S. Oros
|
39,260,172
|
6,440,255
|
Jack
Rovner
|
41,794,481
|
3,905,946
|
Truman
T. Semans
|
41,795,322
|
3,905,105
|
George
P. Stamas
|
38,901,401
|
6,799,026
|
The
proposal to ratify the appointment of KPMG LLP as the Company’s independent
registered public accounting firm for the fiscal year ending December 31,
2006
was approved by the stockholders by the following vote:
Votes
For:
|
Votes
Against:
|
Abstain:
|
Broker
Non-Votes:
|
45,203,932
|
17,993
|
478,502
|
0
|
The
proposal to approve the adoption of the 2006 Plan was approved by the
stockholders by the following vote:
Votes
For:
|
Votes
Against:
|
Abstain:
|
Broker
Non-Votes:
|
25,527,030
|
6,697,235
|
17,491
|
13,458,671
|
The
proposal to approve the adoption of the Bonus Plan was approved by the
stockholders by the following vote:
Votes
For:
|
Votes
Against:
|
Abstain:
|
Broker
Non-Votes:
|
25,437,530
|
6,213,506
|
590,720
|
13,458,671
|
PART
II
PRICE
RANGE OF COMMON STOCK
Our
common stock has been quoted on the Nasdaq Global Market under the symbol
NEXC
since November 1, 2006. Prior to that time, the symbol AETH had been used,
starting with our initial public offering on October 20, 1999. The
following table sets forth, for the periods indicated, the high and low prices
per share of the common stock as reported on the Nasdaq Global
Market.
|
|
2006
|
|
2005
|
|
QUARTER
ENDED
|
|
HIGH
|
|
LOW
|
|
HIGH
|
|
LOW
|
|
March 31
|
|
$
|
3.85
|
|
$
|
3.13
|
|
$
|
3.51
|
|
$
|
3.24
|
|
June 30
|
|
$
|
5.50
|
|
$
|
3.75
|
|
$
|
3.45
|
|
$
|
3.04
|
|
September 30
|
|
$
|
6.33
|
|
$
|
5.54
|
|
$
|
3.67
|
|
$
|
3.27
|
|
December 31
|
|
$
|
7.42
|
|
$
|
5.71
|
|
$
|
3.57
|
|
$
|
3.27
|
|
APPROXIMATE
NUMBER OF EQUITY SECURITY HOLDERS
The
number of stockholders of record of NexCen’s common stock as of
February 28, 2007 was 469.
DIVIDENDS
We
have
never declared or paid any cash dividends on our capital stock or, when we
were
organized as a limited liability company, did we make any distributions to
our
members. For the period that our accumulated tax loss carry forwards remain
available for use, we expect to retain earnings, if any, to support the
development of our business, rather than pay periodic cash dividends. Our
Board
of Directors may reconsider or change this policy in the future. Payment
of
future dividends, if any, will be at the discretion of our Board of Directors,
after taking into account such factors as it considers relevant, including
our
financial condition, the performance of our business, the perceived benefits
to
the Company and our stockholders of re-investing earnings, anticipated future
cash needs of our business, the tax consequences of retaining earnings and
the
tax consequences to the Company and its stockholders of making dividend
payments.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Plan
Category
|
|
Plan
Name
|
|
Number
of
securities
to
be
issued upon exercise
of
outstanding
options,
and
restricted
stock
|
|
Weighted-average
exercise
price of
outstanding
options,
and
restricted stock
|
|
Number
of
securities
remaining
available
for
future
issuance
under
equity
compensation
plans
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved
by
security holders
|
|
|
1999
Equity
Incentive
Plan
|
|
|
4,689,398
|
|
$
|
4.19
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Equity
Incentive
Plan
|
|
|
426,000
|
|
|
6.88
|
|
|
3,074,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved
by
security holders
|
|
|
Acquisition
Incentive
Plan
|
|
|
123,006
|
|
|
3.23
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
5,238,404
|
|
$
|
4.39
|
|
|
3,074,000
|
|
The
1999
Equity Incentive Plan (the “1999 Plan”) provides for the issuance of NexCen
common stock, pursuant to grants of stock options or restricted stock, in
an
amount equal to 20% of the Company’s outstanding shares. On September 2, 2005,
the Company filed a registration statement with the Securities and Exchange
Commission on Form S-8 registering an additional 973,866 shares under the
1999
Plan.
The
Acquisition Incentive Plan (the “2000 Plan”) was effective December 15,
2000. Grants under the 2000 Plan may be made to all employees, consultants
and
certain other service providers (other than directors and executive officers)
of
the Company. Under the 2000 Plan, NexCen’s Board of Directors has authorized the
issuance of up to 1,900,000 shares of NexCen common stock in connection with
the
grant of stock options or restricted stock. All options granted under the
2000
Plan must be nonqualified stock options. Any shares covered by an award that
are
used to pay the exercise price or any required withholding tax will become
available for re-issuance under the plan. In the event of a “change of control”
as such term is defined in the 2000 Plan, awards of restricted stock and
stock
options will become fully vested or exercisable, as applicable, to the extent
the award agreement granting such restricted stock or options provides for
such
acceleration. (Individuals receive an award agreement upon grant of an award
under the 2000 Plan.) A participant will immediately forfeit any and all
unvested options and forfeit all unvested restricted stock at the time of
termination from NexCen, unless the award agreement provides otherwise. No
participant may exercise vested options after the 90th
day from
the date of termination from NexCen, unless the award grant provides otherwise.
Effective
October 31, 2006, the Company adopted the 2006 Plan to replace the 1999 Plan
and
the 2000 Plan. The Company’s stockholders approved the adoption of the 2006 Plan
at the Annual Meeting held on October 31, 2006. The 2006 Plan is now the
sole
plan for providing stock-based compensation to eligible employees, directors
and
consultants. The 1999 Plan and the 2000 Plans will remain in existence solely
for the purpose of addressing the rights of holders of existing awards already
granted under those plans. No new awards will be granted under the 1999 Plan
and
the 2000 Plan. A total of 3.5 million shares of common stock are initially
reserved for issuance under the 2006 Plan, which represented approximately
7.4%
of NexCen’s outstanding
shares at the time of adoption.
Options
under the 2006 Plan expire after ten years and are granted at an exercise
price
no less than the fair value of the common stock on the grant date.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
following table presents shares surrendered by employees to exercise stock
options and to satisfy tax withholding obligations on vested restricted stock
and stock option exercises.
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
for Shares
|
Total
Number
of
Shares
Purchased
as
Part
of Publicly
Announced
Plans
or
Programs
|
Maximum
Number
of
Shares that
May
Yet Be
Purchased
Under
the
Plans and
Programs
|
January
1 - January 31, 2006
|
-
|
-
|
-
|
-
|
February
1 - February 28, 2006
|
-
|
-
|
-
|
-
|
March
1 - March 31, 2006
|
-
|
-
|
-
|
-
|
April
1 - April 30, 2006
|
-
|
-
|
-
|
-
|
May
1 - May 31, 2006
|
-
|
-
|
-
|
-
|
June
1 - June 30, 2006
|
85,900
|
$4.10
|
-
|
-
|
July
1 - July 31, 2006
|
-
|
-
|
-
|
-
|
August
1 - August 31, 2006
|
-
|
-
|
-
|
-
|
September
1 - September 30, 2006
|
-
|
-
|
-
|
-
|
October
1 - October 31, 2006
|
-
|
-
|
-
|
-
|
November
1 - November 30, 2006
|
-
|
-
|
-
|
-
|
December
1 - December 31, 2006
|
-
|
-
|
-
|
-
|
Total
|
85,900
|
$4.10
|
-
|
-
|
ITEM
6. SELECTED FINANCIAL DATA
The
table
that follows presents portions of our Consolidated Financial Statements and
is
not a complete presentation in accordance with U.S. generally accepted
accounting principles. You should read the following Selected Financial Data
together with our Consolidated Financial Statements and related notes and
with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included in Item 7 of this Report. The historical results presented
below are not necessarily indicative of the results to be expected for any
future fiscal year.
The
results of operations in the following Selected Financial Data, as well as
in
our Consolidated Financial Statements, present the results of our IP Segment
in
2006 in continued operations, and EMS, Transportation and Mobile Government
businesses, which we sold during 2004, and MBS which we sold in 2006, as
discontinued operations. Loss from continuing operations does not include
any
financial results of the EMS, Transportation, Mobile Government, or MBS
businesses. Our sold businesses are presented as discontinued operations
for
each of the historical periods. As a result, these results differ from what
has
been presented in the prior reporting periods.
|
|
YEAR
ENDED DECEMBER 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
|
CONSOLIDATED
STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
revenues
|
|
$
|
1,175
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Franchise
fee revenues
|
|
|
749
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
revenues
|
|
|
1,924
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
(10,413
|
)
|
|
(5,241
|
)
|
|
(14,643
|
)
|
|
(21,796
|
)
|
|
(39,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(8,489
|
)
|
|
(5,241
|
)
|
|
(14,643
|
)
|
|
(21,796
|
)
|
|
(39,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-operating income (loss)
|
|
|
3,337
|
|
|
1,690
|
|
|
(10,000
|
)
|
|
(3,900
|
)
|
|
17,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before taxes
|
|
|
(5,152
|
)
|
|
(3,551
|
)
|
|
(24,643
|
)
|
|
(25,696
|
)
|
|
(21,360
|
)
|
Income
taxes
|
|
|
(81
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss
from continuing operations
|
|
|
(5,233
|
)
|
|
(3,551
|
)
|
|
(24,643
|
)
|
|
(25,696
|
)
|
|
(21,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
(loss) from discontinued operations, net of tax
expense
(benefit) of $64, $75,and $(535) for
2006,
2003, and 2002, respectively
|
|
|
2,358
|
|
|
225
|
|
|
(44,510
|
)
|
|
(23,756
|
)
|
|
(304,062
|
)
|
Gain
(loss) on sale of discontinued operations
|
|
|
755
|
|
|
(1,194
|
)
|
|
20,825
|
|
|
—
|
|
|
—
|
|
Net
loss
|
|
$
|
(2,120
|
)
|
$
|
(4,520
|
)
|
$
|
(48,328
|
)
|
$
|
(49,452
|
)
|
$
|
(325,422
|
)
|
Net
loss per share (basic and diluted) from
continuing
operations
|
|
$
|
(0.11
|
)
|
$
|
(0.08
|
)
|
$
|
(0.57
|
)
|
$
|
(0.60
|
)
|
$
|
(0.51
|
)
|
Gain
(loss) per share (basic and diluted) on sale
of
discontinued operations
|
|
|
0.07
|
|
|
(0.02
|
)
|
|
(0.54
|
)
|
|
(0.56
|
)
|
|
(7.22
|
)
|
Net
loss per share - basic and diluted
|
|
$
|
(0.04
|
)
|
$
|
(0.10
|
)
|
$
|
(1.11
|
)
|
$
|
(1.16
|
)
|
$
|
(7.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic and diluted
|
|
|
45,636
|
|
|
44,006
|
|
|
43,713
|
|
|
42,616
|
|
|
42,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents (including restricted cash)
|
|
$
|
84,834
|
|
$
|
9,725
|
|
$
|
69,555
|
|
$
|
39,682
|
|
$
|
68,593
|
|
Investments
available for sale - discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
220,849
|
|
|
255,825
|
|
Trademarks
and goodwill
|
|
|
64,607
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mortgage-backed
securities, at fair value,
discontinued
operations
|
|
|
—
|
|
|
253,900
|
|
|
62,184
|
|
|
—
|
|
|
—
|
|
Total
assets
|
|
|
158,385
|
|
|
266,008
|
|
|
136,586
|
|
|
398,105
|
|
|
475,407
|
|
Repurchase
agreements related to
discontinued
operations
|
|
|
—
|
|
|
133,924
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
debt
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
154,942
|
|
|
154,945
|
|
Stockholders’
equity
|
|
$
|
146,613
|
|
$
|
126,387
|
|
$
|
130,590
|
|
$
|
179,301
|
|
$
|
229,398
|
|
____________________________
The
following discussion and analysis should be read in conjunction with the
Selected Financial Data in Item 6 above and our Consolidated Financial
Statements and the related notes, which appear in Item 8 of this
Report.
In
this
discussion and analysis, we explain our financial condition and results of
operations. We have organized our discussion and analysis as
follows:
|
•
|
We
provide an introduction to our financial results and
condition.
|
|
•
|
We
discuss our critical accounting policies.
|
|
•
|
We
discuss recent accounting pronouncements.
|
|
•
|
We
discuss the results of our continuing operations for the year ended
December 31, 2006, compared with results for the years ended December
31, 2005 and 2004.
|
|
•
|
We
discuss our financial condition, liquidity and capital resources
and our
contractual obligations.
|
INTRODUCTION
Our
business has undergone significant change, and consequently our financial
results and condition are difficult to compare from one year to the next.
As
discussed in Item 1, our business has changed to an IP-centric strategy.
When we
talk about our “continuing operations,” we are referring to our IP business. The
results of our prior businesses (our MBS business and our mobile and wireless
data businesses) are reported in “discontinued operations.”
Because
our IP business is relatively new and because we are building this business
initially through acquisitions, each acquisition has a material impact on
our
financial results and condition. This makes period-to-period comparisons
even
more difficult. Over time, as our group of owned businesses expands, we expect
that additional acquisitions (other than very significant acquisitions) will
have a less material impact on our results, and period-to-period comparisons
will become more meaningful.
In
reviewing our financial results and condition for the 2006, 2005 and 2004
fiscal
years, you should keep in mind the following factors with respect to our
continuing operations:
|
·
|
We
did not earn franchise or royalty revenues before November 2006,
when we
acquired The Athlete’s Foot. Accordingly, our 2006 results reflect just
seven weeks of revenue from The Athlete’s Foot business. Our results do
not reflect any other revenue for 2006 or any prior years, because
revenues from our prior businesses have been reclassified to “discontinued
operations.”
|
|
·
|
Our
operating expenses reflect the expenses of our IP business and
all other
expenses that were not directly attributable to the businesses
now
included in “discontinued operations.” This includes the costs of our
corporate staff. Accordingly, while results of our continuing operations
reflect revenues for only a small portion of 2006, they include
significant operating expenses for all of 2006 and prior
years.
|
|
·
|
We
acquired UCC in June 2006. Since that time, UCC has focused on
pursuing
acquisition and financing opportunities for our IP business. UCC
has not
generated revenue since we acquired it, but we have incurred the
operating
expenses associated with the UCC business as part of the cost of
developing our IP business. We cannot predict whether UCC will
generate
revenue in the future from providing advice to third parties, as
this is
not the focus of our business strategy. The reported loan servicing
revenue at UCC of $148,000 in 2006 was recorded in other income
because it
is not the focus of our new IP
business.
|
|
·
|
Our
financial results and condition for 2006 and prior years do not
include
any of the revenues, expenses, assets or liabilities of Bill Blass,
MaggieMoo’s or Marble Slab, as we acquired these businesses in February
2007. Our 2007 results will include the results and condition of
these
businesses, although they will only be included in our first quarter
2007
results for less than half of that quarter. If we acquire additional
businesses in 2007, our results will include those businesses only
from
and after the date on which we acquire
them.
|
|
·
|
We
have been focused primarily on acquisitions, and are only beginning
to
focus on the development of acquired businesses. Beginning in 2007,
we
expect to devote substantial attention to integrating our acquired
businesses and pursuing organic growth opportunities through both
franchising and licensing arrangements. While we do not expect
such
activities to require us to incur material additional expenses,
we cannot
predict when they will result in incremental
revenue.
|
|
·
|
Our
operating expenses are increasing as we add personnel and facilities
to
support our growing business. These additions are coming both through
our
acquisitions and through hirings we make to add needed skills or
to expand
our staff so that we can properly manage and develop our business.
In 2004
and 2005, we reduced our operating expenses significantly as we
sold
businesses and then managed a mortgage-backed securities business
that did
not require an extensive staff. In 2006, we reversed this trend,
as we
began to grow our IP business, and we expect the operating expenses
will
continue to increase in the near term as we build our IP business.
However, we expect that our value net business model will enable
us to
operate efficiently and to leverage our people and facilities across
a
broad base of operations, thereby mitigating the rate of
increase.
|
|
·
|
Our
balance sheet has changed significantly, and we expect that it
will
continue to change significantly in the near term. During 2006,
we sold
all of our MBS investments for cash and used a substantial portion
of the
cash proceeds to repay indebtedness under repurchase agreements
and to
fund a portion of the purchase prices of UCC and The Athlete’s Foot (as
well as to fund our operating losses). With these acquisitions,
we
acquired substantial IP assets and goodwill, as well as a limited
amount
of other assets and liabilities. With additional acquisitions,
we will be
using cash to pay a portion of the purchase price and we will be
acquiring
assets, particularly trademarks and goodwill, and assuming or incurring
various operating liabilities associated with the acquired businesses.
In
addition, we will be incurring indebtedness under our new credit
facility
to finance a portion of the purchase price of our acquisitions.
We expect
to borrow approximately $72.5 million under the new credit facility
to
finance a portion of the purchase prices of our acquisitions of
The
Athlete’s Foot, Bill Blass, MaggieMoo’s and Marble
Slab.
|
|
·
|
We
continue to earn interest on our cash balances. In 2007, we will
begin to
pay interest on our borrowings under our new credit facility. Interest
income and interest expense will be reported as part of “Non operating
income” on our statement of
operations.
|
|
·
|
The
number of shares we have outstanding has continued to increase
as we use
our capital stock as consideration for acquisitions. We also have
granted
a significant number of new stock options and have issued several
warrants
to purchase common stock in connection with acquisitions and as
long-term
incentives for newly hired executives and other key personnel (both
in
connection with acquisitions and as part of our efforts to build
our
management team as we expand our business). We expect to continue
to issue
stock as consideration for acquisitions and possibly to raise additional
capital for our business, subject to limitations under laws and
rules that
could affect our future use of our tax loss carry forwards. These
limitations are discussed above in Item
1. Business
under the caption “Tax Loss Carry Forwards” and also in Item
1A. Risk Factors
under the caption “Risks of Our Tax Loss Carry
Forwards.”
|
In
view
of these various factors, we expect that our financial results in 2007 will
differ significantly from our results in 2006, and our financial condition
also
will continue to change as we expand our operations and complete
acquisitions.
As
described above in Item
1. Business
under
the caption “Our Business -- Operations and Strategy,” our strategy is to
generate revenue from licensing and other commercial arrangements with third
parties who want to use the IP that we acquire. These third parties (including
franchisees) pay us licensing and other contractual fees and royalties for
the
right to use our IP on either an exclusive or non-exclusive basis. Our
contractual arrangements may apply to a specific product market, a specific
geographic market, or to multiple markets. Our revenue represents a relatively
small percentage of the revenue of our licensees and franchisees (typically
a 6%
royalty). Our revenue will depend upon our ability to negotiate successful
licensing and franchising arrangements for our acquired brands, our ability
to
expand our franchised business and the ability of our licensees and franchisees
to sell products and services that make use of our IP (which will entitle
us to
receive fees and royalties from them).
As
a
result of our IP business strategy, we expect that our principal assets will
be
intangible assets (the trademarks and other IP assets and associated goodwill
related to the brands and businesses that we acquire, manage and develop)
and
our people. We do not expect to have substantial tangible assets, as our
business model is not designed to require significant capital investment
in
tangible assets.
DISCONTINUED
OPERATIONS
Discontinued
operations include the net results of our MBS and our mobile and wireless
communications businesses. During 2004, in three separate transactions we
sold
our mobile and wireless data businesses, which were organized into three
operating segments -- EMS, Transportation and Mobile Government. The aggregate
sale price for these three businesses was $54.0 million in cash. In November
2006, we exited the MBS business by selling our remaining $75.5 million of
MBS
and recognized a gain of $755,000. Earlier in 2006, we sold $140 million
of our
MBS investments and used the proceeds primarily to repay indebtedness under
repurchase agreements that had been incurred to purchase MBS.
The
net
results of our discontinued operations include only those expenses directly
attributable to the businesses that have been sold and do not include any
of the
costs of our corporate staff or offices, including the costs of being a public
company. These results were materially affected by impairment charges that
we
recognized in 2004 (relating to the mobile and wireless data businesses)
and
2005 (relating to the MBS business):
|
·
|
During
2004, we reassessed the value of goodwill, intangible and certain
other
assets of our Transportation and Mobile Government operations and
ultimately recorded aggregate impairment charges of $35.6 million
during
2004. These impairment charges are included in the loss from discontinued
operations in 2004.
|
|
·
|
During
2005, as a result of changes in our business strategy, we decided
that
unrealized losses in our MBS portfolio at December 31, 2005 should
be
considered “other than temporary” impairments under Statement of
Accounting Standards 115 and needed to be charged against operating
results as of that date. As a result, we recognized the unrealized
loss of
approximately $2.1 million and wrote-off the unamortized premium
of $1.9
million, for a total other than temporary impairment charge of
approximately $4.0 million. These charges are included in the profit
from
discontinued operations in 2005.
|
|
·
|
During
2006, we exited the MBS business and recognized a gain in the fourth
quarter of 2006 of approximately $755,000 related to the sale of
our
remaining MBS investments.
|
Reported
gain or loss on the sale of these businesses includes the impact of the
impairment charges.
For
a
discussion of potential post-sale contingencies related to the Transportation
and Mobile Government businesses that could have an impact on our future
financial results and condition see Item
1A. Risk Factors
under
the caption “Risks of Our Current Business -- We are involved in litigation with
respect to a business that we sold in 2005” and Note
12 to Consolidated Financial Statements
. Other
than these contingencies (and costs that we incur in connection with efforts
to
resolve them), all of which would be reported as adjustments to gain or loss
on
sale of discontinued operations, we do not expect that discontinued operations
will have any impact on our future results or financial condition.
CRITICAL
ACCOUNTING POLICIES
Our
critical accounting policies affect the amount of income and expense we record
in each period as well as the value of our assets and liabilities and our
disclosures regarding contingent assets and liabilities. In applying these
critical accounting policies, we must make estimates and assumptions to prepare
our financial statements that, if made differently, could have a positive
or
negative effect on our financial results. We believe that our estimates and
assumptions are both reasonable and appropriate, in accordance with the
applicable accounting rules. However, estimates involve judgments with respect
to numerous factors that are difficult to predict and are beyond management’s
control. As a result, actual amounts could materially differ from
estimates.
Management
believes that the following accounting policies represent “critical accounting
policies,” which the Securities and Exchange Commission defines as those that
are most important to the portrayal of a company’s financial condition and
results of operations and require management’s most difficult, subjective, or
complex judgments, often because management must make estimates about uncertain
and changing matters.
|
·
|
Valuation
of deferred tax assets - We have deferred tax assets as a result
of years
of accumulated tax loss carry forwards. Management believes we
will
achieve profitable operations in future years that may enable us
to
recover the benefit of our deferred tax assets. However, we presently
do
not have sufficient objective evidence to support management’s belief and,
accordingly, we maintain a full valuation allowance for our net
deferred
tax assets as required by U.S. generally accepted accounting
principles.
|
|
·
|
Valuation
of trademarks, goodwill and intangible assets - Trademarks represent
the
present value of future royalty income associated with the ownership
of
each trademark. The Company expects its trademarks to contribute
to cash
flows indefinitely, and therefore will not amortize any trademarks
unless
their useful life is no longer deemed indefinite. Goodwill represents
the
excess of the acquisition cost over the fair value of the net assets
acquired and is not amortized. Goodwill is evaluated for impairment
annually, or more frequently as required in accordance with SFAS
No. 142
“Goodwill and Other Intangible Assets.” Intangible assets with estimable
useful lives are amortized over their respective estimated useful
lives
and are reviewed for impairment in accordance with SFAS No. 144
“Accounting for Impairment or Disposal of Long-Lived Assets.” We will
evaluate the fair value of trademarks and goodwill to assess potential
impairments on an annual basis, or more frequently if events or
other
circumstances indicate that we may not be able to recover the carrying
amount of the asset. We will evaluate the fair value of trademarks
and
goodwill at the reporting segment level and make that determination
based
upon future cash flow projections. Assumptions to be used in these
projections, such as forecasted growth rates, cost of capital and
multiples to determine the terminal value of the reporting segments,
will
be consistent with internal projections and operating plans. We
will
record an impairment loss when the implied fair value of the trademarks
and goodwill assigned to the reporting segment is less than the
carrying
value of the reporting segment, including trademarks and goodwill.
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets,” whenever events or changes in circumstances
indicate that the carrying values of long-lived assets (which include
our
intangible assets with determinable useful lives) may be impaired,
we will
perform an analysis to determine the recoverability of the asset’s
carrying value. These events or circumstances may include, but
are not
limited to; projected cash flows which are significantly less than
the
most recent historical cash flows; a significant loss of management
contracts without a realistic expectation of a replacement; and
economic
events which could cause significant adverse changes and uncertainty
in
business patterns. In our analysis, to determine the recoverability
of the
asset’s carrying value, we will make estimates of the undiscounted cash
flows from the expected future operations of the asset. If the
analysis
indicates that the carrying value is not recoverable from future
cash
flows, the asset will be written down to estimated fair value and
an
impairment loss will be recognized.
|
Goodwill
and trademarks acquired in a purchase business combination which are determined
to have an indefinite useful life are not amortized. We believe our business
model enables us to leverage our brand management, marketing, and licensing
expertise, costs and professionals across our three operating verticals,
increasing the value of each brand. We evaluate the estimated lives of our
identifiable intangible assets at each reporting period.
RECENT
ACCOUNTING PRONOUNCMENTS
In
June
2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,"
Accounting for Income Taxes.” FIN 48 establishes that the financial
statement effects of a tax position taken or expected to be taken in a tax
return are to be recognized in the financial statements when it is more likely
than not, based on the technical merits, that the position will be sustained
upon examination. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006, and is required to be adopted by the
Company in the first quarter of fiscal 2007. We are currently
assessing the impact that this standard will have on our consolidated results
of
operations, financial position, or cash flows.
In
September 2006, Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements,” was issued. SAB 108 expresses the staff’s view
regarding the process of quantifying financial statement misstatements. The
interpretation provides guidance on the consideration of the effects of prior
year misstatements in quantifying current year misstatements for the purpose
of
a materiality assessment. The cumulative effects of the initial application
should be reported in the carrying amounts of assets and liabilities as of
the
beginning of that fiscal year, and the offsetting adjustment should be made
to
the opening balance of the retained earnings for that year. The disclosures
should include the nature and amount of each individual error being corrected
in
the cumulative adjustment, when and how each error being corrected arose
and the
fact that the errors had previously been considered immaterial. The guidance
of
SAB 108 is effective for fiscal years beginning after November 15, 2006.
SAB 108
has not had an impact on our financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
applies to any other accounting pronouncements that require or permit fair
value
measurements. SFAS No. 157 provides a common definition of fair value as
the price that would be received to sell an asset or paid to transfer a
liability in a transaction between market participants. The new standard
also
provides guidance on the methods used to measure fair value and requires
expanded disclosures related to fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. We are currently assessing the impact that this
standard will have on our consolidated results of operations, financial
position, or cash flows.
RESULTS
OF CONTINUING OPERATIONS
Loss
From Continuing Operations
Loss
from
continuing operations of $5.2 million in 2006 increased $1.7 million, or
47% in
2006 from a loss of $3.6 million in 2005. The increase in the amount of the
loss
primarily reflects increases in selling, general and administrative costs
and
stock based compensation following the acquisition of UCC and increased
restructuring charges related to the relocation of our headquarters from
Baltimore, Maryland to New York City, partially offset by $1.9 million of
royalty and franchise revenues and increases in interest income and other
income. As discussed above, we recorded revenue for only seven weeks of 2006
(after the November 7, 2006 acquisition of The Athlete’s Foot), while we
incurred expenses for the entire year and also incurred expenses associated
with
the process of transitioning to a new senior management team (following the
completion of the UCC acquisition).
Loss
from
continuing operations of $3.6 million in 2005 decreased $21.1 million, or
86% in
2005 from a loss of $24.6 million in 2004. The reduction in the amount of
the
loss primarily reflects decreased operating costs in 2005 following the sale
of
our EMS, Transportation and Mobile Government businesses in 2004, interest
expense from subordinated notes of $7.9 million in 2004, an investment loss
of
$3.6 million in 2004, and a loss on the early extinguishment of the subordinated
notes of $2.4 million in 2004.
Royalty
and Franchise Fee Revenue
The
Company began recognizing royalty and franchise fee revenues following the
acquisition of The Athlete’s Foot in November 2006, and we recognized $1.9
million through the end of the fiscal year. Royalty revenues are recorded
as they are earned and become receivable from franchisees. Franchise
fee revenue is recognized when all initial services are performed, which is
considered to be upon the opening of the applicable franchisee store.
As
discussed above, all revenues from the MBS and the mobile and wireless
communications businesses have been reclassified to discontinued operations
and
are included in profit (loss) from discontinued operations.
Total
Operating Expenses
Operating
expenses of $10.4 million in 2006 increased $5.2 million, or 99% in 2006
from
$5.2 million in 2005. The increase primarily reflects an increase in selling,
general and administrative costs and stock based compensation following the
acquisition of UCC, and increased restructuring charges related to the
relocation of our headquarters from Baltimore, Maryland to New York City
and the
transition of our senior management team.
Operating
expenses of $5.2 million in 2005 decreased $9.4 million, or 64% in 2005 from
$14.6 million in 2004. The reduction primarily reflects decreased operating
costs in 2005 following the sale of our EMS, Transportation and Mobile
Government businesses in 2004 as we reduced our expenses consistent with
the
lower cost MBS business we were operating at the time.
Operating
expenses that are reclassed to discontinued operations were those directly
attributable to businesses that have been sold. All other costs are corporate
expenses that would have been incurred regardless of our business operations,
and therefore remain included as part of continuing operations.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses consist primarily of
compensation and personnel related costs, rent, facility related support
costs,
travel and advertising.
SG&A
expenses increased $2.5 million, or 70%, to $6.1 million in 2006 from $3.6
million in 2005. The increase primarily reflects additional costs resulting
from
our acquisitions of UCC and The Athlete’s Foot. Excluding these acquisitions,
SG&A expenses would have decreased $0.8 million. The primary drivers of the
increase relate to personnel related costs at UCC and The Athlete’s Foot which
were not owned in 2005. The personnel hired through the UCC acquisition comprise
our new executive and management team, and the majority of our corporate
staff.
SG&A
expenses decreased $4.4 million, or 55%, to $3.6 million in 2005 from $8.0
million in 2004. The decline reflects primarily the results of streamlining
our
corporate infrastructure to align it with the needs of our former MBS business
following the sale of our mobile and wireless data businesses. Of the decrease,
approximately $2.5 million was related to personnel reductions.
Professional
Fees
Professional
fees of $1,149,000, $1,444,000 and $2,808,000 in 2006, 2005 and 2004,
respectively, consist of the costs of outside professionals, primarily related
to legal
expense associated with our public reporting, disposition, compliance and
corporate finance activities and accounting fees related to auditing and
tax
services.
Depreciation
and Amortization
Depreciation
expenses arise from property and equipment purchased for use in our operations.
Amortization costs arise from intangible assets acquired in acquisitions.
Depreciation
and amortization increased $312,000, or 196%, to $471,000 in 2006 from $159,000
in 2005. The increase primarily reflects the revision of estimated useful
lives
and the resulting accelerated depreciation of assets that were located in
our
Baltimore headquarters and were taken out of service with the closing of
that
office, amortization of an intangible asset related to a non-compete agreement
with our chief executive officer, and amortization of intangibles of franchise
agreements and master development agreements related to The Athlete’s Foot
acquisition.
Depreciation
and amortization decreased $2.1 million, or 93%, to $159, 000 in 2005 from
$2.2
million in 2004. The decrease reflects primarily the impact of our transition
from our mobile and wireless data businesses to our MBS business (including
the
associated streamlining of our corporate infrastructure). This included
disposing of fixed assets that were no longer needed to support our continuing
operations.
Stock
Compensation Expense
We
adopted SFAS No. 123R, “Share-Based Payment” in the first quarter of 2006. At
that time we began to recognize compensation expense over the service period
for
the fair value of all equity based award grants issued after January 1, 2006,
as
well as expense attributable to the remaining service period for all prior
grants that had not fully vested by that date.
Stock
compensation expense of $1.6 million in 2006 reflects the adoption of SFAS
No.
123R, and the granting of 5,366,000 options and warrants to purchase shares
upon
their becoming exercisable. These options and warrants were issued to provide
long-term incentive packages to new key executives and other senior managers
that we hired in 2006, including individuals who were employed by UCC and
The
Athlete’s Foot prior to their acquisition by us. Stock compensation expense of
$76,000 and $594,000 in 2005 and 2004, respectively, represents the cost
associated with the grants of restricted stock and decreased approximately
$518,000 from 2004 to 2005. The decreases result primarily from the reduction
of
our work force and the vesting of restricted stock grants. In 2004 and 2005,
stock compensation expense was recorded using the
intrinsic-value-based method. See Note 2 to Consolidated Financial
Statements.
Interest
Income
Interest
income increased $1.1 million or 78% to $2.6 million in 2006 from $1.5 million
in 2005. Interest income decreased $2.5 million or 63% to $1.5 million in
2005
from $4.0 million in 2004. The higher amounts in 2006 and 2004 reflect interest
received on higher cash balances invested in securities other than MBS. These
were primarily investments in U.S. government securities with maturities
of less
than 12 months. In 2005, substantially all available cash was invested in
MBS
and related securities. The interest income (net of interest expense and
amortization of premiums) from such investments (approximately $3.6 million)
was
originally reported as revenue from our MBS business and is now included
in
results of discontinued operations. Total interest income in 2006, including
the
net amount earned on MBS investments, was $6.2 million.
Interest
Expense on Subordinated Notes
In
October 2004, we redeemed all of our outstanding 6% convertible subordinated
notes. Prior to that time, we incurred interest expense on these subordinated
notes which decreased by $2.5 million from 2003 to 2004 because of the
redemption of the subordinated notes in October 2004. No further interest
expense was incurred after the redemption of the notes. When we redeemed
all of
our then-outstanding 6% convertible subordinated notes at a price of 101.2%
(in
accordance with the terms of those notes), we realized a $2.4 million loss,
which consisted of a $1.9 million premium on the redemption and the recognition
of approximately $560,000 in unamortized deferred financing costs. The early
retirement of the debt resulted in a savings of $4.3 million in interest
expense
on the notes that we would have been required to pay through their maturity
in
March 2005.
Other
Income (Expense)
Other
income of $700,000 in 2006 primarily reflects $525,000 of payments received
from
a venture capital investment, which we wrote-off in 2002. We record these
payments when we receive them as the extent of future payments, if any, cannot
be readily determined. We also recorded $148,000 of loan servicing revenue
received by UCC in 2006. We expect the loan servicing activity to decrease
in
2007 and beyond as the underlying loans are paid-off.
Other
income in 2005 of $231,000 primarily represents income from the sale of fully
depreciated fixed assets (such as computer equipment and furniture) that
were
taken out of service during our restructuring efforts associated with the
transition to our MBS business. In September 2005, we received a royalty
payment
of $49,000 relating to a prior investment in a company that we acquired in
2004.
Other
expense for 2004 was approximately $60,000, primarily attributable to the
cost
of a litigation settlement.
Investment
Loss
Investment
loss was $19,000 in 2005 reflected losses realized upon the sale of all of
the
remaining long-term investments we
had in
2005 that were not
related to our MBS portfolio. The investment loss in 2004 consisted of a
$5.4
million loss on the liquidation of our investments available for sale consisting
of highly liquid U.S. Government Agency-sponsored securities. The loss was
partially offset by a gain of $1.8 million relating to the sale of other
investments.
Income
Taxes
We
recorded a current income tax expense in 2006 of $81,000. As discussed in
Note
8 to Consolidated Financial Statements,
we are
required to record a deferred tax liability with respect to acquired intangible
assets (principally The Athlete’s Foot trademark) that are amortized for tax
purposes over a definite life but not amortized under GAAP because they are
classified as indefinite-life assets. Under GAAP we are not able to offset
this
liability in our financial statements with a portion of the deferred tax
asset
created by our accumulated net tax loss carry forwards until such time as
we
have satisfied GAAP requirements that there be objective evidence of our
ability
to generate sustainable profitability from our operations. As we have a history
of losses, we have not satisfied this requirement at December 31, 2006. Even
if
we are able to report net income in 2007 and beyond, we may not satisfy this
accounting requirement over the next several quarters (and perhaps longer).
As a
result, we are likely to continue to record a deferred tax expense in our
statement of operations for at least a portion of 2007. This income tax expense
is not a cash expense, but is a GAAP requirement to record. We are able to
use
our accumulated net tax loss carry forwards in preparing our tax returns
to
reduce our current cash tax obligations. When we are permitted, under GAAP,
to
offset the deferred tax liability against the deferred tax asset resulting
from
our accumulated tax loss carry forwards, we will do so.
As
discussed in Item
1.
Business
under
the caption “Tax Loss Carry Forwards,” our net tax loss carry forwards will not
offset all state, local and foreign tax liabilities, and we also will remain
subject to alternative minimum taxes, as discussed in Item
1A. Risk Factors
under
the caption “Risks of Our Tax Loss Carry Forwards -- We expect to be subject in
the alternative minimum tax and our net loss carry forwards would not offset
this tax in its entirety.” Our state, local and foreign tax position is
discussed in Note
8 to Consolidated Financial Statements,
and the
$81,000 expense for 2006 reflects the net amount of current state, local
and
foreign taxes payable. Our continuing operations were not subject to any
alternative minimum tax in 2006. Our net loss from discontinued operations
included a net tax expense of $64,000 in 2006, as compared to $0 in 2005
and
$75,000 in 2004. This was attributable to the application of the alternative
minimum tax. If our continuing operations generate taxable income in the
future,
we expect to record current tax liabilities for state, local, foreign and
federal alternative minimum taxes, as our net tax loss carry forwards will
not
offset such tax liabilities in their entirety. We cannot yet estimate the
effective tax rate that would result from these taxes, though we expect
them to
result in a modest overall effective tax rate.
Discontinued
Operations
The
following discrete events impact the comparability of discontinued operations
from year to year:
|
·
|
During
2006, the Company exited the MBS business. The Company recognized
a gain
in the fourth quarter of 2006 of approximately $755,000 related to
the
sale of its remaining MBS investments.
|
|
·
|
Management
determined that unrealized losses in the MBS portfolio at December
31,
2005 should be considered “other than temporary” impairments under
Statement of Accounting Standards 115 and were charged against operating
results as of that date. During the fourth quarter of 2005, the Company
recognized the unrealized loss of approximately $2.1 million and
wrote-off
the unamortized premium of $1.9 million for the total other than
temporary
impairment charge of approximately 4.0 million. Prior to that time,
management had considered such unrealized losses as not “other than
temporary” and had recorded such losses in “Other Comprehensive Losses” on
the Company’s balance sheet.
|
|
·
|
In
2004, we sold our mobile and wireless data businesses, which were
organized into three operating segments. In January 2004, we sold our
EMS segment for $18.0 million in cash and a $1.0 million note (which
was
paid in full in August 2004). In September 2004 we sold our
Transportation and Mobile Government businesses for $25.0 million
in cash
and $10.0 million in cash, respectively.
|
|
·
|
During
the second quarter of 2004, we reassessed the value of the Transportation
and Mobile Government goodwill and recorded impairment charges related
to
goodwill of $12.2 million and $8.9 million, respectively. These
impairments are reflected in discontinued operations.
|
|
·
|
During
2004, we reassessed the value of the Transportation and Mobile Government
intangibles and other long-lived assets and recorded non-cash impairment
charges related to Transportation intangibles and other assets of
$3.1
million and $11.3 million, respectively and reported as discontinued
operations.
|
FINANCIAL
CONDITION
During
2006, our total assets decreased by $108 million, while our total liabilities
decreased by $128 million. These changes reflect principally the sale of
our MBS investments and the repayment of all borrowings pursuant to short-term
repurchase agreements that were incurred to purchase MBS. At December 31,
2005, our MBS portfolio totaled $253.9 million (net of the charges discussed
above under the heading “Introduction”), and our short-term, MBS-related
borrowings totaled $133.9 million. We sold all of our MBS for cash during 2006
and used a substantial portion of the proceeds to repay all of the outstanding
short-term borrowings, and to fund a portion of the purchase price of The
Athlete’s Foot and our operating costs. We had no outstanding borrowings at
December 31, 2006. The balance of the proceeds from the sale of our MBS is
held
as cash and cash equivalents and is invested as discussed below in Item 7A
Quantitative and Qualitative Disclosures About Market Risk. Our cash balance
also increased by approximately $7.9 million as a result of the expiration
of a
letter of credit that had been collateralized by a cash deposit (which was
released at the time of expiration). That cash collateral had been reflected
on
our balance sheet as “restricted cash” at December 31, 2005.
The
other
additional significant change in our balance sheet at December 31, 2006 as
compared to December 31, 2005 is the addition of $64.6 million of trademarks
and
goodwill resulting from the UCC and The Athlete’s Foot acquisitions.
Liquidity
and Capital Resources
Liquidity
refers to our ability to meet financial obligations that arise during the normal
course of business. Sources of liquidity can include cash generated by
operations, available borrowings, and proceeds from the sale of securities
or
assets. Our operations have not been profitable historically, and thus they
have
consumed, rather than generated, cash. One of our key objectives is to achieve
profitability in our IP business, so that our operations will enhance our
liquidity and increase the amount of cash we have available for investment
in
the growth and development of our business.
Our
business model does not involve significant capital asset investment (other
than
planned acquisitions of IP assets and IP-centric businesses.) Accordingly,
we do
not expect to be required to fund any material capital expenditures outside
of
our core IP acquisition program.
Although
we had more than $83 million of cash on hand at December 31, 2006, we concluded
that securing an additional source of liquidity was important to ensure our
continued ability to fund acquisitions and the expansion of our business.
Accordingly, on March 12, 2007 we entered into a new $150 million bank credit
facility, the terms of which are discussed below. We believe that the
combination of cash on hand and available borrowings under this new credit
facility will provide us with sufficient liquidity to meet current operations
and planned business growth for at least the next twelve months.
Additional
sources of liquidity, if needed, may be available through additional bank
borrowings and market sales or private placements of debt or equity securities.
We cannot assure that any such additional borrowings or sales of securities
will
be available to us (should they be needed in the future) on favorable terms
and
conditions or at all. Such sources of additional liquidity are subject to many
risks and uncertainties that are not within our control, such as changes in
the
condition of the capital markets and prevailing bank loan terms, as well as
the
trading price of our common stock. See Item
1A. Risk Factors
under
the captions “Risk of Our Current Business -- The
market price of our common stock has been, and may continue to be, volatile,
which could reduce the market price of our common stock and, among other things,
make it more expensive for us to complete acquisitions using our stock as
consideration” and“Risks
of
Our Acquisition Strategy -- Our
ability to grow through the acquisition of additional IP assets and business
will depend on the availability of capital to complete acquisitions”
for
a
discussion of risks relating to our ability to fund additional
acquisitions.
On
March
12, 2007, NexCen Acquisition Corp. (“the Issuer”) entered into a master loan
agreement with BTMU Capital Corporation. This master loan agreement provides
for
borrowings pursuant to the issuance of a single class of notes to the Issuer
and
its wholly-owned subsidiaries (“Co-Issuers”) which are jointly and severally
liable for payments required under the notes. The assets of the Issuers and
Co-Issuers are pledged as collateral security under each Note, and secure the
obligations of the Issuer and all Co-Issuers under all of the notes. The notes
are non-recourse to the Company. The pledged assets are those of the Issuer
and
Co-Issuers (mainly IP assets and the related royalties). Each note is repayable
in full after five years. The facility has no expiration date and can be
terminated by the Co-Issuers upon 30 days notice and by BTMU Capital Corportaion
by electing not to fund future advances, however, each note funding maintains
its respective maturity date. The maximum aggregate amount of borrowings that
may be outstanding at any one time under the agreement is $150 million. The
borrowing rate is LIBOR plus an interest rate margin, which ranges from 1.50%
to
3.00%. The Company may refinance all or part of the notes with no pre-payment
penalties. This allows us to refresh available borrowing capacity under the
facility, such as by completing securitization transactions involving certain
of
our acquired IP assets and using the proceeds from these transactions to repay
notes under the master loan agreement. The borrowing rate is based on 3-month
LIBOR which is a floating rate. The LIBOR rate resets every 90
days.
The
following table reflects use of net cash for operations, investing, and
financing activities:
(IN
THOUSANDS)
|
|
2006
|
|
2005
|
|
2004
|
|
Net
cash (used in) provided by operating activities
|
|
$
|
(890
|
)
|
$
|
2,128
|
|
$
|
(17,623
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
210,274
|
|
|
(195,907
|
)
|
|
202,278
|
|
Net
cash (used in) provided by financing activities
|
|
|
(126,940
|
)
|
|
134,148
|
|
|
(150,154
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
82,444
|
|
$
|
(59,631
|
)
|
$
|
34,501
|
|
Net
cash
used in operating activities was $890,000 in 2006, compared to net cash provided
by operating activities of $2.1 million and used in operating activities of
$17.6 million for 2005 and 2004, respectively. Historically, our operations
have
not been profitable. In 2005, due to a substantial reduction in operating
expenses, the operating activities from our MBS business provided net cash
in
2005. As discussed above under the heading “Introduction,” our IP business did
not generate any royalty and franchise fee revenue until November 2006, when
we
acquired The Athlete’s Foot. However, we incurred operating expenses throughout
all of 2006, as we transitioned our of the MBS business and into our IP
business.
Net
cash
provided by investing activities was $210 million in 2006, primarily reflecting
$254 million of MBS sales and principal repayments, partially offset by $43.2
million of cash used in the acquisitions of UCC and The Athlete’s Foot. Cash
used in investing activities of $196 million for 2005, primarily related to
$387
million used to purchase MBS, partially offset by $85 million of principal
repayments on our MBS and proceeds from the sale of $107 million of MBS. Net
cash provided by investing activities was $202 million for 2004, consisting
primarily of a net amount of $219 million from the purchase and sale of
investments (primarily United States Government Agency-sponsored securities).
Additionally, we used $64 million to purchase MBS and received approximately
$19
million, $23.0 million, and $9.0 million from the sale of our EMS,
Transportation and Mobile Government businesses, respectively, net of
transaction expenses, and received $2.4 million in net proceeds from the sale
of
other investments.
Net
cash
used in financing activities in 2006 of $127 million primarily reflects the
repayment of short-term repurchase agreements that were used to fund MBS
investments. Net cash provided by financing activities in 2005 of $134 million
which primarily related to the funding we received through repurchase agreements
to purchase MBS. Net cash used in financing activities of $150 million for
2004,
consisting primarily of $157 million used to redeem the remaining outstanding
6%
convertible subordinated notes. We also received approximately $4.6 million
of
cash upon the release of collateral relating to certain letters of credit that
expired in 2004.
Our
financial condition may also be affected by claims relating to the mobile and
wireless data businesses that we sold during 2004. Under the definitive purchase
agreements that we signed to affect those sales, we have agreed to indemnify
the
buyers of those businesses for certain breaches of representations and
warranties and other covenants that we provided to them with respect to the
sales of the businesses. In addition, we remain liable for the operation of
each
of the business segments prior to their dispositions. In addition, as discussed
in Note
13 to Consolidated Financial Statements,
we have
resolved one dispute with Geologic, the buyer of our Transportation business,
and have been notified by Geologic of additional significant potential indemnity
claims against us. This lawsuit also is discussed above in Item
3. Legal Proceedings.
We have
not received any indemnity claims from the buyers of our other two mobile and
wireless data businesses, and most of the indemnification provisions relating
to
the sale of our EMS business have now expired. Most of the indemnification
provisions relating to the other two businesses will continue through the first
quarter of 2007.
Contractual
Obligations
The
following table reflects our contractual commitments, including our future
minimum lease payments as of December 31, 2006:
|
|
Payments
due by period
|
|
Contractual
Obligations
|
|
|
|
Less
than
|
|
1-3
|
|
3-5
|
|
More
than
|
|
($
in thousands)
|
|
Total
|
|
1
year
|
|
years
|
|
years
|
|
5
years
|
|
Long-Term
Debt
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Capital
Lease Obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating
Leases
|
|
|
8,718
|
|
|
502
|
|
|
1,735
|
|
|
1,739
|
|
|
4,742
|
|
Purchase
Obligations
|
|
|
58,600
|
|
|
58,600
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
Long-Term Liabilities Reflected on the
Registrants
Balance Sheet under GAAP
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
67,318
|
|
$
|
59,102
|
|
$
|
1,735
|
|
$
|
1,739
|
|
$
|
4,742
|
|
The
operating lease obligations reflect real estate leases in New York City,
Norcross, Georgia, and Marlborough, Massachusetts (which we sub-lease). The
purchase obligation reflects the Company’s $54.6 million agreement related to
the Bill Blass acquisition, which occurred on February 15, 2007, and the
estimated $4.0 million contingent consideration related to The
Athlete’s Foot acquisition. We have not included contracts for maintenance
support on hardware or software that we own because we generally pay in advance
for these services and have the option of choosing whether or not to renew
these
services each year. We also have not included in this table potential contingent
liability that we may have to the buyers of our EMS, Transportation or Mobile
Government businesses, under the terms of the purchase agreements with the
buyers and we cannot readily estimate the potential amount of liabilities that
might arise in the future, if any.
Obligations
under our new master loan agreement, which we entered into and began to borrow
under in March 2007, will be included as “Long-Term Debt” in the future.
Off
Balance Sheet Arrangements
Other
than the BIO-Key lease, we do not have any off-balance sheet
arrangements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
following discussion about our market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in
these
forward-looking statements.
At
December 31, 2006, we had no outstanding borrowings or other debt. We invest
our
cash and cash equivalents in investment funds which normally conform to the
following investment strategies; investing at least 80% of assets in U.S.
Government securities and repurchase agreements for those securities, investing
in U.S. Government securities issued by entities that are chartered or sponsored
by Congress but whose securities are neither issued nor guaranteed by the U.S.
Treasury, maintaining a dollar-weighted average maturity at sixty days or less.
These investments are generally subject to the risks of changes in market
interest rates and the impact of any declines in the credit quality of an issuer
or a provider of credit support. A 10% change in interest rates would not
materially impact the returns on our excess cash balances. In general, the
Company accepts a slightly lower rate of interest on its investments in exchange
for a higher credit rating from the issuer or the guarantor of the securities
in
which the Company invests. Our primary objective in investing cash balances
is
to preserve principal and maintain liquidity, rather than to seek enhanced
investment returns.
Under
the
new bank credit agreement, we are subject to interest rate risk from the
fluctuation in LIBOR rates. At the request of our bank, we are obligated to
hedge the interest rate exposure on a certain portion of our outstanding loans.
The
Athlete’s Foot has franchisees located in countries that transact business in
currencies other than the U.S. dollar. The foreign currency is translated into
U.S dollars to determine the amount of royalties due to the Company. Because
the
franchisees are located in forty countries, the currency risk to the Company
is
well diversified and the risk of any single currency to the Company is
low.
TABLE
OF
CONTENTS
The
following financial statements required by this item are included in the Report
beginning on page 32.
Report
of Management on Internal Control over Financial Reporting
|
32
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
33
|
|
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
35
|
|
|
Consolidated
Statements of Operations and Comprehensive Loss
for
the years ended December 31, 2004, 2005, and 2006
|
36
|
|
|
Consolidated
Statements of Stockholders’ Equity for the
years
ended December 31, 2006, 2005 and 2004
|
37
|
|
|
Consolidated
Statements of Cash Flows for the years
ended
December 31, 2006, 2005 and 2004
|
38
|
|
|
Notes
to Consolidated Financial Statements
|
39
|
The
Board
of Directors and Stockholders
NexCen
Brands, Inc.
We
are
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f)
for
NexCen Brands, Inc. (the “Company”). We conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December
31, 2006 based on the framework in Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
“COSO Framework”). As noted in the COSO Framework, an internal control system,
no matter how well conceived and operated, can provide only reasonable and
not
absolute assurance to management and the Board of Directors regarding
achievement of an entity’s financial reporting objectives. Management’s
evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2006, excluded The Athlete’s Foot, which was acquired by the
Company on November 7, 2006. The Athlete’s Foot consolidated assets and
consolidated revenues comprised 2% and 100%, respectively, of the consolidated
financial statements of the Company for the year ended December 31, 2006. Based
our evaluation under the COSO Framework, we concluded that the Company’s
internal control over financial reporting was effective as of December 31,
2006. KPMG LLP, an independent registered accounting firm, has audited
management’s assessment of the effectiveness of the Company’s internal control
over financial reporting at December 31, 2006.
/s/
Robert W. D’Loren
|
|
President
and Chief Executive Officer
|
|
|
/s/
David B. Meister
|
|
Senior
Vice President and Chief Financial Officer
|
(Principal
Financial and Accounting Officer)
|
|
New
York, New York
|
March
16, 2007
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
NexCen
Brands, Inc.:
We
have
audited management's assessment, included in the accompanying Report
of Management on Internal Control over Financial Reporting, that
NexCen Brands, Inc. and subsidiaries (the Company) maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management's assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated,
in
all material respects, based on criteria established in Internal
Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Also,
in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based
on
criteria
established in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
The
Company acquired Athlete’s Foot Brands, LLC (TAF) during 2006, and management
excluded from its assessment of the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2006, TAF’s internal control
over financial reporting associated with total assets of approximately $2.8
million, which excludes the goodwill and intangible assets recorded in the
acquisition, and total revenues of approximately $1.9 million included in
the
consolidated financial statements of NexCen Brands, Inc. and subsidiaries
as of
and for the year ended December 31, 2006. Our
audit
of internal control over financial reporting of the Company also excluded
an
evaluation of the internal control over financial reporting of TAF.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of NexCen
Brands, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of operations and comprehensive loss, stockholders’
equity, and cash flows for each of the years in the three-year period ended
December 31, 2006, and our report dated March 16, 2007 expressed an unqualified
opinion on those consolidate financial statements.
KPMG
LLP
|
|
|
|
Baltimore,
Maryland
|
March
16, 2007
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
NexCen
Brands, Inc.:
We
have
audited the accompanying consolidated balance sheets of NexCen Brands, Inc.
and
subsidiaries (the Company) as of December 31, 2006 and 2005, and the related
consolidated statements of operations and comprehensive loss, stockholders’
equity, and cash flows for each of the years in the three-year period ended
December 31, 2006. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of NexCen Brands, Inc. and
subsidiaries as of December 31, 2006 and 2005, and the results of its their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO),
and our
report dated March 16, 2007 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control over financial
reporting. The Company acquired Athlete’s Foot Brands, LLC (TAF) during 2006,
and management excluded from its assessment of the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2006,
TAF’s internal control over financial reporting associated with total assets
of
approximately $2.8 million, which excludes the goodwill and intangible assets
recorded in the acquisition, and total revenues of approximately $1.9 million
included in the consolidated financial statements of NexCen Brands, Inc.
and
subsidiaries as of and for the year ended December 31, 2006. Our audit of
internal control over financial reporting of the Company also excluded an
evaluation of the internal control over financial reporting of TAF.
KPMG
LLP
|
|
Baltimore,
Maryland
|
March
16, 2007
|
NEXCEN
BRANDS, INC.
(IN
THOUSANDS, EXCEPT SHARE DATA)
|
|
DECEMBER 31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
83,536
|
|
$
|
1,092
|
|
Mortgage-backed
securities, at fair value - discontinued operations
|
|
|
—
|
|
|
253,900
|
|
Trade
receivables, net of allowances of $530 and $0
|
|
|
2,042
|
|
|
—
|
|
Interest
receivable
|
|
|
511
|
|
|
1,174
|
|
Prepaid
expenses and other current assets
|
|
|
2,210
|
|
|
954
|
|
Total
current assets
|
|
|
88,299
|
|
|
257,120
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
389
|
|
|
255
|
|
Restricted
cash
|
|
|
1,298
|
|
|
8,633
|
|
Trademarks
and goodwill
|
|
|
64,607
|
|
|
—
|
|
Intangible
assets, net of amortization
|
|
|
3,792
|
|
|
—
|
|
Total
Assets
|
|
$
|
158,385
|
|
$
|
266,008
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,235
|
|
$
|
2,797
|
|
Repurchase
agreements and sales tax liabilities - discontinued
operations
|
|
|
1,333
|
|
|
135,592
|
|
Restructuring
accruals
|
|
|
145
|
|
|
—
|
|
Other
current liabilities
|
|
|
4,524
|
|
|
175
|
|
Total
current liabilities
|
|
|
9,237
|
|
|
138,564
|
|
|
|
|
|
|
|
|
|
Other
liabilities, long term
|
|
|
2,535
|
|
|
1,057
|
|
Total
liabilities
|
|
|
11,772
|
|
|
139,621
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 1,000,000 shares
authorized;
0
shares issued and outstanding
at
December 31,
2006
and 2005, respectively
|
|
|
—
|
|
|
—
|
|
Common
stock, $0.01 par value; 1,000,000,000 shares
authorized;
47,966,085 and 44,018,946 shares issued and
outstanding
at December 31, 2006 and 2005, respectively
|
|
|
481
|
|
|
440
|
|
Additional
paid-in capital
|
|
|
2,615,742
|
|
|
2,593,085
|
|
Treasury
stock
|
|
|
(352
|
)
|
|
—
|
|
Accumulated
deficit
|
|
|
(2,469,258
|
)
|
|
(2,467,138
|
)
|
Unrealized
loss on investments available for sale
|
|
|
—
|
|
|
—
|
|
Total
stockholders’ equity
|
|
|
146,613
|
|
|
126,387
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
158,385
|
|
$
|
266,008
|
|
See
accompanying notes to consolidated financial statements.
NEXCEN
BRANDS, INC.
(IN
THOUSANDS, EXCEPT PER SHARE DATA)
|
|
YEAR
ENDED DECEMBER 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Royalty
revenues
|
|
$
|
1,175
|
|
$
|
—
|
|
$
|
—
|
|
Franchise
fee revenues
|
|
|
749
|
|
|
—
|
|
|
—
|
|
Total
revenues
|
|
|
1,924
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
(6,082
|
)
|
|
(3,569
|
)
|
|
(7,975
|
)
|
Professional
fees
|
|
|
(1,149
|
)
|
|
(1,444
|
)
|
|
(2,808
|
)
|
Depreciation
and amortization
|
|
|
(471
|
)
|
|
(159
|
)
|
|
(2,212
|
)
|
Stock
based compensation
|
|
|
(1,632
|
)
|
|
(76
|
)
|
|
(594
|
)
|
Restructuring
charges
|
|
|
(1,079
|
)
|
|
7
|
|
|
(1,054
|
)
|
Total
operating expenses
|
|
|
(10,413
|
)
|
|
(5,241
|
)
|
|
(14,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(8,489
|
)
|
|
(5,241
|
)
|
|
(14,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense)
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,637
|
|
|
1,478
|
|
|
3,955
|
|
Interest
expense from subordinated notes
|
|
|
—
|
|
|
—
|
|
|
(7,917
|
)
|
Other
income (expense)
|
|
|
700
|
|
|
231
|
|
|
(60
|
)
|
Loss
on early extinguishment of subordinated notes
|
|
|
—
|
|
|
—
|
|
|
(2,419
|
)
|
Investment
loss, net
|
|
|
—
|
|
|
(19
|
)
|
|
(3,559
|
)
|
Total
non-operating income (expense)
|
|
|
3,337
|
|
|
1,690
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(5,152
|
)
|
|
(3,551
|
)
|
|
(24,643
|
)
|
Income
taxes
|
|
|
(81
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(5,233
|
)
|
|
(3,551
|
)
|
|
(24,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations,
net
of tax expense of $64 for 2006 and $75 for 2004
|
|
|
2,358
|
|
|
225
|
|
|
(44,510
|
)
|
Gain
(loss) on sale of discontinued operations
|
|
|
755
|
|
|
(1,194
|
)
|
|
20,825
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(2,120
|
)
|
|
(4,520
|
)
|
|
(48,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
—
|
|
|
(3,830
|
)
|
Unrealized
holding gain on investments available for sale
|
|
|
—
|
|
|
—
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(2,120
|
)
|
$
|
(4,520
|
)
|
$
|
(52,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share (basic and diluted) from continuing operations
|
|
$
|
(0.11
|
)
|
$
|
(0.08
|
)
|
$
|
(0.57
|
)
|
Income
(loss) per share (basic and diluted) from
discontinued
operations
|
|
|
0.07
|
|
|
(0.02
|
)
|
|
(0.54
|
)
|
Net
loss per share - basic and diluted
|
|
$
|
(0.04
|
)
|
$
|
(0.10
|
)
|
$
|
(1.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding -basic and diluted
|
|
|
45,636
|
|
|
44,006
|
|
|
43,713
|
|
See
accompanying notes to consolidated financial statements.
NEXCEN
BRANDS, INC.
(IN
THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
FOREIGN
|
|
UNREALIZED
|
|
|
|
|
|
|
|
|
|
ADDITIONAL
|
|
ACCUM-
|
|
|
|
CURRENCY
|
|
GAIN
|
|
|
|
|
|
PREFERRED
|
|
COMMON
|
|
PAID-IN
|
|
ULATED
|
|
TREASURY
|
|
TRANSLATION
|
|
(LOSS)
ON
|
|
|
|
|
|
STOCK
|
|
STOCK
|
|
CAPITAL
|
|
DEFICIT
|
|
STOCK
|
|
ADJUSTMENT
|
|
INVESTMENT
|
|
TOTAL
|
|
Balance
at
December
31, 2003
|
|
$
|
-
|
|
$
|
429
|
|
$
|
2,589,608
|
|
$
|
(2,414,283
|
)
|
$
|
-
|
|
$
|
3,830
|
|
$
|
(283
|
)
|
$
|
179,301
|
|
Exercise
of options
and
warrants
|
|
|
-
|
|
|
11
|
|
|
1,952
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,963
|
|
Option
and warrant expense
|
|
|
-
|
|
|
-
|
|
|
1,417
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,417
|
|
Unrealized
gain on
investments
available
for sale
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
67
|
|
|
67
|
|
Foreign
currency translation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,830
|
)
|
|
-
|
|
|
(3,830
|
)
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(48,328
|
)
|
|
-
|
|
|
|
|
|
-
|
|
|
(48,328
|
)
|
Balance
at
December
31, 2004
|
|
$
|
-
|
|
$
|
440
|
|
$
|
2,592,977
|
|
$
|
(2,462,611
|
)
|
$
|
-
|
|
$
|
-
|
|
$
|
(216
|
)
|
$
|
130,590
|
|
Exercise
of
options
and warrants
|
|
|
-
|
|
|
-
|
|
|
32
|
|
|
(7
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25
|
|
Option
and
warrant
expense
|
|
|
-
|
|
|
-
|
|
|
76
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
76
|
|
Unrealized
gain on
investments
available
for
sale
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
216
|
|
|
216
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,520
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,520
|
)
|
Balance
at
December
31, 2005
|
|
$
|
-
|
|
$
|
440
|
|
$
|
2,593,085
|
|
$
|
(2,467,138
|
)
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
126,387
|
|
Exercise
of options
and
warrants
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
Option
and
warrant
expense
|
|
|
-
|
|
|
-
|
|
|
3,177
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,177
|
|
Common
stock
issued
|
|
|
-
|
|
|
41
|
|
|
19,479
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
19,520
|
|
Common
stock
repurchased
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(352
|
)
|
|
-
|
|
|
-
|
|
|
(352
|
)
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,120
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,120
|
)
|
Balance
at
December
31, 2006
|
|
$
|
-
|
|
$
|
481
|
|
$
|
2,615,742
|
|
$
|
(2,469,258
|
)
|
$
|
(352
|
)
|
$
|
-
|
|
$
|
-
|
|
$
|
146,613
|
|
See
accompanying notes to consolidated financial statements.
NEXCEN
BRANDS, INC.
(IN
THOUSANDS)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
Revised
|
|
Revised
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$
|
(5,233
|
)
|
$
|
(3,551
|
)
|
$
|
(24,643
|
)
|
Adjustments
to reconcile net loss from
continuing
operations to net cash (used in)
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
471
|
|
|
159
|
|
|
2,212
|
|
Amortization
of loan fees
|
|
|
—
|
|
|
—
|
|
|
840
|
|
Amortization
of mortgage premiums
|
|
|
—
|
|
|
670
|
|
|
22
|
|
Stock
based compensation
|
|
|
1,632
|
|
|
76
|
|
|
594
|
|
Gain
on disposal of assets
|
|
|
—
|
|
|
—
|
|
|
(80
|
)
|
Realized
losses on long term investments
|
|
|
—
|
|
|
19
|
|
|
3,559
|
|
Loss
on early extinguishment of subordinated notes
|
|
|
—
|
|
|
—
|
|
|
2,419
|
|
Changes
in assets and liabilities, net of
acquired
assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
(Increase)
in trade receivables, net of allowances
|
|
|
(791
|
)
|
|
—
|
|
|
—
|
|
(Increase)
decrease in prepaid expenses
and
other assets
|
|
|
(1,096
|
)
|
|
3,112
|
|
|
(513
|
)
|
Decrease
(increase) in interest receivable
|
|
|
663
|
|
|
(818
|
)
|
|
1,211
|
|
(Decrease)
increase in accounts payable, accrued
expenses,
accrued
employee compensation and
benefits
and accrued interest payable
|
|
|
(249
|
)
|
|
903
|
|
|
(4,128
|
)
|
Increase
(decrease) in restructuring accruals
and
other liabilities
|
|
|
314
|
|
|
(1,202
|
)
|
|
836
|
|
Cash
provided by discontinued
operations
for
operating activities
|
|
|
3,399
|
|
|
2,760
|
|
|
48
|
|
Net
cash (used in) provided by operating activities
|
|
|
(890
|
)
|
|
2,128
|
|
|
(17,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Sales
and maturities of investments available for sale
|
|
|
—
|
|
|
45
|
|
|
1,171,641
|
|
Purchases
of investments available for sale
|
|
|
—
|
|
|
—
|
|
|
(952,791
|
)
|
Purchases
of property and equipment
|
|
|
(151
|
)
|
|
(47
|
)
|
|
(331
|
)
|
Proceeds
from the sale of property and equipment
|
|
|
—
|
|
|
—
|
|
|
93
|
|
Sale
of long-term investments
|
|
|
—
|
|
|
—
|
|
|
2,396
|
|
Acquisitions,
net of cash acquired
|
|
|
(43,189
|
)
|
|
—
|
|
|
—
|
|
Cash
provided by (used in) discontinued
operations
in investing activities
|
|
|
253,614
|
|
|
(195,905
|
)
|
|
(18,730
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
210,274
|
|
|
(195,907
|
)
|
|
202,278
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Repayment
of notes payable including redemption
of
convertible debt
|
|
|
—
|
|
|
—
|
|
|
(156,771
|
)
|
(Increase)
decrease in restricted cash
|
|
|
7,335
|
|
|
199
|
|
|
4,628
|
|
Exercise
of options and warrants
|
|
|
1
|
|
|
25
|
|
|
1,989
|
|
Purchase
of treasury stock
|
|
|
(352
|
)
|
|
—
|
|
|
—
|
|
Cash
(used in) provided by discontinued operations in financing
activities
|
|
|
(133,924
|
)
|
|
133,924
|
|
|
—
|
|
Net
cash (used in) provided by financing activities
|
|
|
(126,940
|
)
|
|
134,148
|
|
|
(150,154
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
82,444
|
|
|
(59,631
|
)
|
|
34,501
|
|
Cash
and cash equivalents, at beginning of period
|
|
|
1,092
|
|
|
60,723
|
|
|
26,222
|
|
Cash
and cash equivalents, at end of period
|
|
$
|
83,536
|
|
$
|
1,092
|
|
$
|
60,723
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for interest
|
|
$
|
1,403
|
|
$
|
5,387
|
|
$
|
9,500
|
|
Supplemental
disclosure of non-cash investing and financing activities:
In
June
2006 and in connection with the acquisition of a business, the Company issued
2.5 million shares of common stock, 440,000 warrants and options to acquire
106,236 shares of common stock with an aggregate fair value of approximately
$11
million. In November 2006 and in connection with the acquisition of a business,
the Company issued 1.4 million shares of common stock, and 500,000 warrants
with
an aggregate fair value of approximately $9.8 million.
In
2004,
the Company incurred unrealized holding gains (losses) associated with its
investments available for sale totaling $67,000. These amounts have been
reported as increases (decreases) in stockholders’ equity. See accompanying
notes to Consolidated Financial Statements.
See
accompanying notes to consolidated financial statements
NEXCEN
BRANDS, INC.
(1) ORGANIZATION,
DESCRIPTION OF THE BUSINESS, AND BASIS OF PRESENTATION
NexCen
engages in the acquisition and management of established consumer brands in
intellectual property-centric industries. NexCen’s goal is to be the world
leader in brand management for the 21st century. Our business is focused on
acquiring, managing and developing intellectual property, which we refer to
as
IP, and IP-centric businesses. IP that we have acquired and expect to acquire
in
the future includes trademarks, trade names, copyrights, franchise rights,
patents, trade secrets, know-how and other similar, valuable property, primarily
used in the retail and consumer branded products and franchise businesses.
In
building our IP business, we expect to focus on three vertical segments: retail
franchising, consumer branded products and quick service restaurant franchising
(which we refer to as “QSR” franchising).
We
commenced our IP business in June 2006, when we acquired UCC Capital
Corporation, which we refer to as UCC. In November 2006, we entered the retail
franchising business by acquiring Athletes Foot Brands, LLC, an affiliated
company and certain related assets. As a result of this acquisition, we are
now
the owner of The Athlete’s Footâ
brand
and related marks. The Athlete’s Foot is an athletic footwear and apparel
franchisor with 600 retail locations in over 40 countries.
In
February 2007, we entered the consumer branded products business by acquiring
Bill Blass Holding Co., Inc. and two affiliated businesses. The Bill Blass
label
represents timeless style and is an American legacy brand in the fashion
industry.
In
February 2007, we acquired MaggieMoo’s International, LLC (“MaggieMoo’s”) and
the assets of Marble Slab Creamery, Inc. (“Marble Slab”), two well known and
established brands within the hand-mixed premium ice cream category. These
acquisitions mark NexCen’s entry into the QSR franchising sector. We are
actively in discussions to acquire additional IP-centric
businesses.
On
March
13, 2007 we signed a definitive agreement to acquire the Waverly brand from
F.
Schumacher & Co. for $36.75 million in cash and a warrant to purchase
50,000 common shares (to be priced at issuance). Waverly is a home
décor lifestyle brand for harmonious and tasteful decorating. We expect
to close this transaction by the end of April 2007, and intend to finance 50%
of
the purchase price with borrowings under the new credit facility entered into
on
March 12, 2007.
At
December 31, 2006, we had only one operating segment - our intellectual property
business. As we continue to acquire IP businesses, we expect to have three
segments in the future including: retail franchising, consumer brand products,
and quick service restaurants.
Our
operating strategy is to generate revenue from licensing and other commercial
arrangements with third parties who want to use the IP that we acquire. These
third parties will pay us licensing and other contractual fees and royalties
for
the right to use our IP on either an exclusive or non-exclusive basis. Our
contractual arrangements may apply to a specific product market, a specific
geographic market or to multiple markets.
We
expect
that licensing and other contractual fees paid to us will include a mixture
of
upfront payments, required periodic minimum payments (regardless of sales
volumes), and volume-dependent periodic royalties (based upon the number or
dollar amount of branded products and services sold). Accordingly, we expect
that our revenues will reflect both recurring and non-recurring payment
streams.
(2)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RELATED TO CONTINUING
OPERATIONS
The
following accounting principles have been used by management in the preparation
of the Company’s Consolidated Financial Statements in accordance with U.S.
generally accepted accounting principles:
(a)
PRINCIPLES OF CONSOLIDATION
The
Consolidated Financial Statements include the accounts of the Company and its
majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
(b)
CASH
AND CASH EQUIVALENTS
Cash
equivalents include all highly liquid investments purchased with original
maturities of three months or less. Cash and cash equivalents consisted of
the
following:
(in
thousands)
|
|
DECEMBER 31,
2006
|
|
DECEMBER 31,
2005
|
|
Cash
|
|
$
|
10,694
|
|
$
|
832
|
|
Money
market accounts
|
|
|
72,842
|
|
|
222
|
|
U.S.
Government Agency-sponsored securities
|
|
|
—
|
|
|
38
|
|
Total
|
|
$
|
83,536
|
|
$
|
1,092
|
|
(c)
PROPERTY AND EQUIPMENT
Property
and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which range
from three to seven years. The costs of leasehold improvements are capitalized
and amortized using the straight-line method over the shorter of the lease
term
or the estimated useful life of the asset.
In
accordance with SFAS No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets,”
long-lived assets, such as property, plant, and equipment are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented on the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.
(d)
INCOME TAXES
The
Company recognizes income taxes using the asset and liability method, in
accordance with SFAS No. 109, Accounting
for Income Taxes.
Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The
effect of a tax rate change on deferred tax assets and liabilities is recognized
as income in the period that includes the enactment date. In assessing the
likelihood of realization of deferred tax assets, the Company considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during periods in which
these temporary differences become deductible.
(e)
STOCK
OPTIONS AND WARRANTS
Prior
to
January 1, 2006, the Company accounted for equity-based employee compensation
arrangements in accordance with the provisions of Accounting Principle Board
Opinion No. 25, “Accounting
for Stock Issued to Employees,”
(“APB
No. 25”) and related interpretations including FIN 44 “Accounting
for Certain Transactions Involving Stock Compensation.”
Under
APB No. 25, compensation expense was based upon the difference, if any, on
the
date of grant, between the fair value of the Company’s stock and the exercise
price referred to as the intrinsic-value-based method. Statement of Financial
Accounting Standards No. 123, “Accounting
for Stock Based Compensation” (“SFAS
No. 123”) established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As was allowed by SFAS No. 123, the Company had elected to apply the
intrinsic-value-based method of accounting described above, and had adopted
only
the disclosure requirements of SFAS No. 123 and Statement of Financial
Accounting Standards No. 148, “Accounting
for Stock-based Compensation Transition and Disclosure.”
As
of
January 1, 2006 the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based
Payments”
(“SFAS
No. 123R”). SFAS No. 123R requires that new share-based payments, such as grants
of stock options, restricted shares, warrants, and stock appreciation rights,
be
measured at fair value and reported as expense in a company’s financial
statements over the requisite service period. For existing share-based payment
awards granted prior to January 1, 2006, the Company has recognized, in current
earnings, compensation expense over the remaining service period, if any, based
on the grant date fair value of those awards as calculated for disclosure under
SFAS No. 123. However, in accordance with SFAS No. 123R, the Company no longer
recognizes forfeitures as they occur, rather, forfeitures are estimated in
calculating the fair value of each award.
The
following table illustrates the effect on net loss from continuing operations
if
the fair-value method had been applied to all outstanding and unvested awards
in
each of the years ended December 31, 2005, and 2004:
(in
thousands)
|
|
2005
|
|
2004
|
|
Net
loss from continuing operations, as reported
|
|
$
|
(3,551
|
)
|
$
|
(24,643
|
)
|
Add
stock-based employee compensation expense
included
in reported net loss
|
|
|
76
|
|
|
594
|
|
Deduct
total stock-based employee compensation expense
determined
under fair-value method for all awards
|
|
|
(526
|
)
|
|
(1,568
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net loss from continuing operations
|
|
$
|
(4,001
|
)
|
$
|
(25,617
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net loss per share from continuing operations
|
|
$
|
(0.09
|
)
|
$
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
|
44,006
|
|
|
43,713
|
|
See
Note
10, Stock Options and Warrants, for the assumptions used to calculate the
stock
compensation expense under the fair-value method shown above.
(f)
EARNINGS PER SHARE
The
Company computes net income (loss) per share in accordance with SFAS No. 128,
“Earnings
Per Share.”
Under
the provisions of SFAS No. 128, basic net income (loss) per share is computed
by
dividing net income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per
share
is computed by dividing the net income (loss) for the period by the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. As the Company has had a net loss in each of the periods
presented, basic and diluted net loss per share are the same. Options and
warrants to purchase 7.2 million, 1.9 million and 2.1 million shares of the
Company’s common stock during 2006, 2005, and 2004, respectively, have been
excluded from the calculation of diluted net loss per share because their
inclusion would be anti-dilutive.
(g)
USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with U.S.
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 dates of the consolidated
financial statements and the reported amounts of income and expenses during
the
reporting period. Actual results could differ from those estimates. Estimates
are used in accounting for, among other things, valuation of goodwill and
intangible assets and estimated useful lives of identifiable intangible assets,
guarantees, depreciation, restructuring accruals, valuation of deferred tax
assets and contingencies. Estimates and assumptions are reviewed periodically
and the effects of revisions are reflected in the consolidated financial
statements in the period they are determined to be necessary.
(h)
RECLASSIFICATIONS
Certain
fiscal year 2005 and 2004 amounts have been reclassified to conform to the
current year presentation. None of these reclassifications had a material effect
on the Company’s Consolidated Financial Statements.
(i)
REVISED CASH FLOWS
For
the
years ended December 31, 2006, 2005, and 2004, the Company has separately
disclosed the operating, investing and financing portions of the cash flows
attributed to its discontinued operations, which in prior periods were reported
on a combined basis as a single amount.
(j)
RECENT ACCOUNTING PRONOUNCEMENTS
In
June
2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,"
Accounting for Income Taxes.” FIN 48 establishes that the financial
statement effects of a tax position taken or expected to be taken in a tax
return are to be recognized in the financial statements when it is more likely
than not, based on the technical merits, that the position will be sustained
upon examination. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006, and is required to be adopted by the
Company in the first quarter of fiscal 2007. We are currently
assessing the impact that this standard will have on our consolidated results
of
operations, financial position, or cash flows.
In
September 2006, Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements,” was issued. SAB 108 expresses the staff’s view
regarding the process of quantifying financial statement misstatements. The
interpretation provides guidance on the consideration of the effects of prior
year misstatements in quantifying current year misstatements for the purpose
of
a materiality assessment. The cumulative effects of the initial application
should be reported in the carrying amounts of assets and liabilities as of
the
beginning of that fiscal year, and the offsetting adjustment should be made
to
the opening balance of the retained earnings for that year. The disclosures
should include the nature and amount of each individual error being corrected
in
the cumulative adjustment, when and how each error being corrected arose and
the
fact that the errors had previously been considered immaterial. The guidance
of
SAB 108 is effective for fiscal years beginning after November 15, 2006. SAB
108
has not had an impact on the Company’s financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
applies to any other accounting pronouncements that require or permit fair
value
measurements. SFAS No. 157 provides a common definition of fair value as
the price that would be received to sell an asset or paid to transfer a
liability in a transaction between market participants. The new standard
also provides guidance on the methods used to measure fair value and requires
expanded disclosures related to fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. We are currently assessing the impact that this
standard will have on our consolidated results of operations, financial
position, or cash flows.
(k)
REVENUE RECOGNITION
Royalties
from franchise operations are recorded as franchise revenues as the fees are
earned and become receivable from franchisees. Franchise fee income is
recognized when all initial required services are performed, which is considered
to be upon the opening of the franchisee’s store.
(l)
GOODWILL, TRADEMARKS, AND INTANGIBLE ASSETS
Goodwill
represents the excess of costs over the fair value of assets related to the
UCC
and The Athlete’s Foot acquisitions, and trademarks represents the value of
future royalty income associated with the ownership of The Athlete’s Foot
trademark. Identifiable intangible assets include the value of non-compete
agreements of key executives, and franchise agreements and master development
agreements of The Athlete’s Foot, and are amortized on a straight-line basis
over five and twenty years, respectively. Goodwill and trademarks acquired
in a
purchase business combination are determined to have an indefinite useful life
are not amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142, “Goodwill
and Other Intangible Assets.”
At
each reporting period, we assess The Athletes Foot trademark to determine if
facts and circumstances changed, requiring a re-evaluation of the estimated
life
of the trademarks. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144.
(m)
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
carrying amounts of the Company’s financial instruments, which included cash
equivalents, restricted cash, accounts receivable, accounts payable, and accrued
expenses, approximate their fair value due to the relatively short duration
of
the instruments.
(n)
TRADE
RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade
receivables at The Athlete’s Foot consist of amounts the Company expects to
collect from franchisees for royalties and franchise fees, net of allowance
for
doubtful accounts of $530,000 as of December 31, 2006. The Company provides
a reserve for uncollectible amounts based on its assessment of individual
accounts. Trade receivables are not collateralized. Cash flows related to trade
receivable activity are classified as increases or decreases in trade
receivables on the consolidated statement of cash flows.
(3)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RELATED TO DISCONTINUED
OPERATIONS
The
following additional accounting principles have been used by management in
the
preparation of the Company’s Consolidated Financial Statements and relate
principally to the Company’s discontinued operations:
(a)
INVESTMENTS AVAILABLE FOR SALE INCLUDING MORTGAGE-BACKED SECURITIES
(“MBS”)
Investments
available-for-sale consisted of highly liquid investments in U.S. Government
Agency-sponsored mortgaged-backed securities with original maturities greater
than one year.
The
Company invested in MBS representing interests in or obligations backed by
pools
of mortgage loans. Acquisitions of MBS were recorded on the trade date.
Purchases of newly issued MBS were recorded when all significant uncertainties
regarding the characteristics of the securities were removed. Realized gains
and
losses on sales of MBS were determined on the specific identification
basis.
(b)
REPURCHASE AGREEMENTS
The
Company financed the acquisition of its MBS through the use of repurchase
agreements with the MBS serving as collateral. Generally, the Company’s
borrowings were fixed rate repurchase agreements with original maturities of
28
days.
(c)
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
carrying amounts of the Company’s financial instruments, which included cash
equivalents, restricted cash, accounts receivable, accounts payable, and accrued
expenses, approximate their fair value due to the relatively short duration
of
the instruments.
(d)
OTHER
COMPREHENSIVE INCOME (LOSS)
For
the
year ended December 31, 2004, other comprehensive income (loss) consists of
unrealized gains (losses) on investments available for sale and MBS; and foreign
currency translation adjustments. For 2004, the Company’s foreign currency
translation loss was recognized through the sale of the foreign operations.
During 2005, the Company determined that the impairments on the MBS portfolio
were “other than temporary” and the losses were recognized in
earnings.
(4)
PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
|
ESTIMATED
USEFUL
|
|
|
DECEMBER 31,
|
|
(in
thousands)
|
|
|
LIVES
|
|
|
2006
|
|
|
2005
|
|
Furniture
and fixtures
|
|
|
7
- 10 Years
|
|
$
|
206
|
|
$
|
31
|
|
Computer
and equipment
|
|
|
3
- 5 Years
|
|
|
126
|
|
|
35
|
|
Software
|
|
|
3
Years
|
|
|
112
|
|
|
62
|
|
Leasehold
improvements
|
|
|
Term
of Lease
|
|
|
393
|
|
|
303
|
|
Total
property and equipment
|
|
|
|
|
$
|
837
|
|
$
|
431
|
|
Less
accumulated depreciation
|
|
|
|
|
|
(448
|
)
|
|
(176
|
)
|
Property
and equipment net of
accumulated
depreciation
|
|
|
|
|
$
|
389
|
|
$
|
255
|
|
Depreciation
expense of property and equipment was $272,000, $159,000 and $2.2 million for
2006, 2005 and 2004, respectively. The Company recognizes rent expense on a
straight-line basis over the lease period based upon the aggregate lease
payments over the lease period. The lease period is determined as the original
lease term without renewals, unless and until the exercise of lease renewal
options is reasonably assured, and also includes any period provided by the
landlord as a “free rent” period. Aggregate lease payments include all rental
payments specified in the contract, including contractual rent increases.
(5)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following:
|
|
DECEMBER 31,
|
|
(in
thousands)
|
|
2006
|
|
2005
|
|
Professional
fees
|
|
$
|
2,681
|
|
$
|
762
|
|
Taxes
other than payroll and income
|
|
|
116
|
|
|
112
|
|
Escrow
account
|
|
|
40
|
|
|
1,000
|
|
Other
|
|
|
398
|
|
|
923
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,235
|
|
$
|
2,797
|
|
(6)
RESTRUCTURING CHARGES
After
the
acquisition of UCC, the Company relocated its principal corporate office from
Baltimore, Maryland to New York City. As a result, certain reductions in
staffing occurred in 2006. Upon termination of employment, the Baltimore
employees became eligible for separation benefits, including severance payments.
Restructuring charges in prior years related to separation agreements of
subsidiaries are classified as discontinued operations.
A
rollforward of the restructuring accrual is as follows:
(in
thousands)
|
|
Employee
Separation
Benefits
|
|
Facility
Closure
Costs
and
Other
|
|
Total
|
|
2005
Restructuring:
|
|
|
|
|
|
|
|
Restructuring
liability as of December 31, 2004
|
|
$
|
68
|
|
$
|
191
|
|
$
|
259
|
|
Adjustments
|
|
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
Cash
payments
|
|
|
(68
|
)
|
|
(184
|
)
|
|
(252
|
)
|
Restructuring
liability as of December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Restructuring:
|
|
|
|
|
|
|
|
|
|
|
Charges
to continuing operations
|
|
|
895
|
|
|
—
|
|
|
895
|
|
Cash
payments and other
|
|
|
(750
|
)
|
|
—
|
|
|
(750
|
)
|
Restructuring
liability as of December 31, 2006
|
|
$
|
145
|
|
$
|
|
|
$
|
145
|
|
(7)
DEBT
The
Company had no debt or repurchase agreements at December 31, 2006.
The
Company financed the acquisition of its MBS through the use of repurchase
agreements with the MBS serving as collateral. At December 31, 2005, all of
the
Company’s borrowings were fixed rate repurchase agreements with original
maturities of 28 days. The following table provides selected information on
the
Company’s repurchase agreements at December 31, 2005.
(Dollars
in thousands)
|
|
Amount
|
|
Weighted
average
rate
|
|
Counterparty
|
|
|
|
|
|
Daiwa
Securities of America
|
|
$
|
37,867
|
|
|
4.35
|
%
|
Countrywide
Securities Corporation
|
|
|
33,823
|
|
|
4.35
|
%
|
UBS
Financial Services, Inc.
|
|
|
62,234
|
|
|
4.34
|
%
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
133,924
|
|
|
4.35
|
%
|
On
October 4, 2004, the Company repurchased the remainder of its outstanding
6% subordinated notes due March 2005 for a price of 101.2%. The total
repurchase payment was $157.1 million, consisting of $154.9 million in
principal, a $1.9 million redemption premium and approximately $310,000 in
accrued interest. In connection with the repurchase, the Company recorded a
$2.4
million charge which is presented in the Consolidated Statements of Operations
and Comprehensive Loss as “Loss on early extinguishment of subordinated notes.”
The charge consisted of the $1.9 million redemption premium and a non-cash
charge of approximately $560,000 related to the recognition of unamortized
deferred financing costs.
(8)
INCOME TAXES
(in
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Federal
|
|
$
|
196
|
|
$
|
-
|
|
$
|
-
|
|
State
and Local
|
|
|
(152
|
)
|
|
-
|
|
|
-
|
|
Foreign
|
|
|
37
|
|
|
-
|
|
|
-
|
|
Total
income tax expense
|
|
$
|
81
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
81
|
|
$
|
-
|
|
$
|
-
|
|
Deferred
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
Income Tax Expense
|
|
$
|
81
|
|
$
|
-
|
|
$
|
-
|
|
A
reconciliation of the difference between the effective income tax rate and
the
statutory federal income tax rate for continuing operations is as
follows:
|
|
2006
|
|
2005
|
|
2004
|
|
U.S.
Statutory Federal Rate
|
|
|
-35.00
|
%
|
|
-35.00
|
%
|
|
-35.00
|
%
|
Increase/(decrease)
resulting from:
|
|
|
|
|
|
|
|
|
|
|
State
taxes, net of federal benefit
|
|
|
-3.25
|
%
|
|
0
|
%
|
|
0
|
%
|
Changes
in valuation allowance
|
|
|
43.83
|
%
|
|
-136.40
|
%
|
|
27.90
|
%
|
Other
|
|
|
-4.01
|
%
|
|
171.40
|
%
|
|
7.10
|
%
|
Effective
Tax Rate
|
|
|
1.57
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts reflected for tax purposes. The following summarizes the significant
components of the Company’s deferred tax assets and liabilities at December
31:
(in
thousands)
|
|
2006
|
|
2005
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
325,524
|
|
$
|
325,851
|
|
Investments
|
|
|
6,119
|
|
|
7,796
|
|
Capital
loss carryforwards
|
|
|
105,570
|
|
|
120,892
|
|
Tax
credit carryforwards
|
|
|
4,150
|
|
|
4,150
|
|
AMT
Tax credit carryforwards
|
|
|
63
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
134
|
|
|
40
|
|
Stock-based
compensation
|
|
|
1,135
|
|
|
-
|
|
Other
|
|
|
1,057
|
|
|
1,366
|
|
Gross
Deferred Tax Asset
|
|
$
|
443,752
|
|
$
|
460,095
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities
|
|
|
|
|
|
|
|
Amortization
|
|
$
|
(782
|
)
|
$
|
-
|
|
Other
|
|
|
- |
|
|
- |
|
Gross
Deferred Tax Liability
|
|
$
|
(782
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
$
|
(443,188
|
)
|
$
|
(460,095
|
)
|
Net
Deferred Tax Asset/(Liability)
|
|
$
|
(218
|
)
|
$
|
-
|
|
The
deferred tax liability of $218,000 at December 31, 2006, is primarily the result
of the difference in accounting for the Company’s Athlete’s Foot trademark,
which is amortized over 15 years for tax purposes but not amortized for book
purposes. This net deferred tax liability cannot be offset against the Company’s
deferred tax assets under U.S. generally accepted accounting principles since
it
relates to an indefinite-lived asset and is not anticipated to reverse in the
same period. The Company’s strategy to acquire intellectual property may result
in assets being recorded as indefinite lived intangibles. In future periods,
the
Company may record additional net deferred tax liabilities that will result
in
deferred income tax expense being recorded in the Company’s statement of
operations. As
part
of the UCC acquisition, the Company established a net state deferred tax
liability which enabled the Company to benefit current year state net operating
losses. This deferred tax benefit fully offset the deferred tax expense related
to the indefinite-lived assets described above. As a result, the Company did
not
have deferred tax expense during 2006.
The
valuation allowance for deferred tax assets decreased by $16.9 million and
by
$4.5 million in 2006 and 2005, respectively. During 2006, the Company’s deferred
tax assets and related valuation allowance decreased primarily due to expiration
of certain capital loss carryforwards. In assessing the realizability of
deferred assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized for
financial statement purposes. The ultimate realization of deferred tax assets
is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based upon the Company’s
historical operating performance and the reported cumulative net losses to
date,
the
Company presently does not have sufficient objective evidence to support the
recovery of its deferred tax assets. Accordingly, the Company has provided
a
full valuation allowance for its net deferred tax assets as required by U.S.
generally accepted accounting principles.
Approximately
$361.7 million of the valuation allowance for deferred tax assets as of December
31, 2006 will be allocated to “Income Tax Benefit” in the consolidated
statements of operations and comprehensive loss upon realization. The remaining
portion of the valuation allowance will be allocated to “Additional Paid-In
Capital.”
At
December 31, 2006, the Company has federal net operating loss carryforwards
of approximately $777 million which expire at various dates between 2011 and
2026. To the extent net operating loss carryforwards relate to stock-based
compensation, the tax benefits will be credited to Additional paid-in capital
when realized. The Company has capital loss carryforwards of approximately
$251
million which expire at various dates between 2007 and 2011. In addition, the
Company has federal tax credit carryforwards of approximately $4.2 million
which
expire at various dates between 2020 and 2022. In the event of future changes
in
common stock ownership above a certain threshold, the future realization of
net
operating loss carryforwards, capital loss carryforwards and certain other
tax
credits would become subject to limitation under the Internal Revenue Code.
Also, included in the amounts above are federal net operating losses acquired
with the close of the UCC Capital merger. The utilization of UCC Capital
acquired assets will be subject to certain annual limitations as required under
Internal Revenue Code Section 382.
For
Aether Systems, the historical operating entity, the Company recorded deferred
tax assets using the federal and gross state statutory tax rate versus a state
tax rate net of federal tax benefit. This method was adopted due to substantial
accumulated operating and capital losses (Tax Attributes) generated under the
Company’s historical business strategies and management’s belief that the
Company may not generate sufficient future taxable income, apportioned to the
State where the Tax Attributes were generated, to realize the federal tax
benefit on the state income taxes. In June 2006, with the acquisition of UCC
Capital, the Company commenced its new business strategy, acquiring, managing
and developing intellectual property. At December 31, 2006, the Company has
recorded deferred taxes related to IP acquisitions, which include The Athlete’s
Foot and UCC Capital, using the federal statutory tax rate plus the state
statutory tax rate, “net of federal tax benefit.” The historical Tax Attributes
remaining from Aether Systems continue to be recorded using a gross state
statutory tax rate.
(9)
BENEFIT PLANS
The
Company has a defined contribution plan under Section 401(k) of the
Internal Revenue Code that provide for voluntary employee contributions of
1 to
15 percent of compensation for substantially all employees. The Company
contributed the following amounts to the plans for the years ended
December 31, 2004, 2005 and 2006, respectively:
(in
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Continuing
operations
|
|
$
|
60
|
|
$
|
60
|
|
$
|
69
|
|
Discontinued
operations
|
|
|
—
|
|
|
—
|
|
|
318
|
|
Total
employer contributions
|
|
$
|
60
|
|
$
|
60
|
|
$
|
387
|
|
As
a
result of the merger with UCC, the Company has a second defined contribution
plan under Section 401(k); however, the Company did not contribute any
amounts to the plan in 2006. The Company’s long term plan is to have one defined
contribution plan under Section 401(k) for all of its entities.
(10)
STOCK OPTIONS AND WARRANTS
In
September 1999, the Company adopted the 1999 Equity Incentive Plan, as
amended on September 2, 2005, (as amended, the “1999 Plan”). Under the 1999
Plan, the Company had the ability to grant options and restricted stock for
employees, directors, and service providers equaling up to 20% of the
outstanding shares of common stock of the Company. Options under the 1999 Plan
generally expire after ten years and normally vest over a period of up to four
years. Options were granted at an exercise price equal to the fair value of
the
common stock on the grant date.
Effective
December 15, 2000, the Company adopted the Acquisition Incentive Plan (the
“2000 Plan”) to provide options or direct grants to all employees (other than
directors and officers of the Company and any eligible affiliates) and other
service providers of the Company and its related companies, without shareholder
approval. Under the 2000 Plan, the Company had the ability to grant 1.9
million options. Options were granted at an exercise price equal to the fair
value of the common stock on the grant date.
Effective
October 31, 2006, the Company adopted the 2006 Equity Incentive Plan (the “2006
Plan”) to replace the 1999 Plan and the 2000 Plan. The Company’s stockholders
approved the adoption of the 2006 Plan at the 2006 Annual Stockholders’ Meeting
on October 31, 2006. The 2006 Plan is now the sole plan for issuing
stock-based compensation to eligible employees, directors and consultants.
The
1999 Plan and the 2000 Plans will remain in existence solely for the purpose
of
addressing the rights of holders of existing awards already granted under those
plans prior to the adoption of the 2006 plan. No new awards will be granted
under the 1999 Plan and the 2000 Plan. A total of 3.5 million shares of common
stock are initially reserved for issuance under the 2006 Plan, which represented
approximately 7.4% of NexCen’s outstanding shares at the time of adoption.
Options under the 2006 Plan expire after ten years and are granted at an
exercise price no less than the fair value of the common stock on the grant
date.
Total
stock-based compensation expense was $1,632,000, $76,000 and $594,000 for the
twelve months ended December 31, 2006, 2005, and 2004, respectively. The Company
had issued 43,225 shares of restricted stock in 2002 to certain employees.
All
shares of restricted stock granted in 2002 were fully vested by the end of
first
half of 2005. The costs of these restricted shares were included in stock-based
compensation expense as of December 31, 2005. The Board of Directors authorized
issuance of 250,000 shares of restricted stock to three of its senior officers
during the first quarter of 2006, which were subsequently issued in the second
quarter of 2006. Following this grant, 100,000 of these restricted shares vested
on June 6, 2006 with a fair value of $410,000. The remaining 150,000 restricted
shares have a three year vesting period that commenced on May 5, 2006. The
holders of these restricted stock grants surrendered a total of 86,000 shares
of
common stock to us in satisfaction of their minimum withholding tax obligations
arising from these grants. We recorded the shares surrendered to us as treasury
stock. An additional 20,000 restricted shares were granted to non-officer
employees in the second quarter of 2006, of which 15,000 vested in the fourth
quarter of 2006, and 5,000 vested in the first quarter of 2007.
The
total
income tax benefit recognized in the income statement for stock-based
compensation arrangements was $0 for the years ended December 31, 2006,
2005, and 2004, respectively. There was no capitalized stock-based compensation
cost incurred during the years ended December 31, 2006, 2005, and 2004.
The
per
share weighted-average value of options granted by the Company during 2006,
2005
and 2004 were $4.31, $3.30 and $3.60, respectively. The fair value of each
stock
option award is estimated on the date of grant using the Black-Scholes option
pricing model. The amounts for each year were calculated based on an expected
option life of five years and volatility of 70.0 percent for 2004, an expected
option life of five years and volatility rates from 16.8 percent to 30.2 percent
for 2005, and an expected option life of three to six years and volatility
rates
from 26.9 percent to 35.2 percent for 2006.
In
addition, the calculations assumed risk-free interest rates from 2.80 percent
to
3.81 percent in 2004, 3.72 percent to 4.35 percent in 2005 and 4.59 percent
to
5.10 percent in 2006. Historically, the Company has never distributed dividends
to its stockholders, therefore no expected dividend assumptions were factored
into our fair value calculation.
Through
December 31, 2006, the Company estimated expected terms of three to six years
for all options. Due to the significant changes in the Company’s business over
the past three years, the Company has elected to use the “simplified” method, as
defined in the Securities and Exchange Commission’s Staff Accounting Bulletin
No.107 (“SAB No. 107”), to estimate expected term for stock options granted
after December 31, 2005. The simplified method allows companies to estimate
an
expected term by using the vesting term plus the original contractual term
divided by two. The Company will discontinue the use of the simplified method
for stock option grants no later than December 31, 2007 as required by SAB
No.
107. The Company used historical data to estimate volatility based on the
expected term of the options and for stock option forfeitures. The Company
used
the five-year US Treasury daily yield curve rates for the risk-free interest
rate.
A
summary
of stock options and restricted shares granted under the 2006 Plan, 1999 Plan,
and the 2000 Plan for January 1, 2004 through December 31, 2006, warrants issued
by the Company outside of such plans for January 1, 2004 through December 31,
2006, and changes during each twelve month period is presented below:
|
|
2004
|
|
2005
|
|
2006
|
|
(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
|
NUMBER
OF SHARES
|
|
WEIGHTED
AVERAGE EXERCISE PRICE (PER SHARE)
|
|
NUMBER
OF SHARES
|
|
WEIGHTED
AVERAGE EXERCISE PRICE (PER SHARE)
|
|
NUMBER
OF SHARES
|
|
WEIGHTED
AVERAGE EXERCISE PRICE (PER SHARE)
|
|
Outstanding
at beginning of year
|
|
|
5,112
|
|
$
|
8.25
|
|
|
2,146
|
|
$
|
3.98
|
|
|
1,949
|
|
$
|
3.52
|
|
Granted
|
|
|
127
|
|
$
|
3.60
|
|
|
5
|
|
$
|
3.30
|
|
|
5,366
|
|
$
|
4.31
|
|
Exercised
|
|
|
(1,035
|
)
|
$
|
4.66
|
|
|
(38
|
)
|
$
|
0.49
|
|
|
(120
|
)
|
$
|
(0.10
|
)
|
Canceled
|
|
|
(2,058
|
)
|
$
|
16.02
|
|
|
(164
|
)
|
$
|
10.29
|
|
|
(21
|
)
|
$
|
(0.83
|
)
|
Outstanding
at end of year
|
|
|
2,146
|
|
$
|
3.98
|
|
|
1,949
|
|
$
|
3.52
|
|
|
7,174
|
|
$
|
4.17
|
|
Exercisable
at year-end
|
|
|
1,689
|
|
$
|
4.19
|
|
|
1,771
|
|
$
|
3.57
|
|
|
2,616
|
|
$
|
3.57
|
|
The
total
number of options and warrants issued by the Company since January 1, 2004
includes the following:
|
·
|
Options
to acquire approximately 3,375,000 shares of Company common stock
and
warrants to acquire 125,000 shares of Company common stock, which
were
issued to UCC employees on June 6, 2006 in connection with the acquisition
of UCC.
|
|
·
|
In
connection with the acquisition of UCC, the Company compensated its
financial advisor for the transaction, Jefferies & Company, Inc.,
through the payment of a fee of $77,000 and the issuance of warrants
exercisable through June 2009 to purchase 440,000 shares of Company
common
stock at an exercise price of $3.19 per
share.
|
|
·
|
On
October 31, 2006 the compensation committee approved the issuance
of
175,000 non-qualified options to members of its Board of Directors.
|
|
·
|
On
November 7, 2006, in connection with the acquisition of The Athlete’s
Foot, the Company issued warrants exercisable through November 7,
2009 to
purchase 500,000 shares of Company common stock at an exercise price
of
$6.49.
|
|
·
|
The
Company has granted options as part of its long-term incentive plan
to
employees hired following the Company’s relocation to New York.
|
The
total
intrinsic value of stock options exercised during the twelve months ended
December 31, 2006 and 2005 was $529,000 and $110,000, respectively. Cash
received during 2006 and 2005 from share options exercised under the share-based
payment plans was $12,000 and $19,000, respectively. Total shares
exercised were 120,000 in 2006, of which 115,000 were related to restricted
shares. These
shares were not included in the calculation of the weighted average exercise
price.
The
table
above includes warrants to purchase 870,416 shares of Company common stock
granted prior to 2004. The total number of warrants outstanding at December
31,
2006 is 1,935,416.
Number
of shares and warrants are in thousands
|
|
|
2006
Plan
|
|
1999
Plan
|
|
2000
Plan
|
|
Warrants
|
|
Total
|
|
|
|
Number
of Shares
|
|
Weighted
Average Grant Date Fair Value
|
|
Number
of Shares
|
|
Weighted
Average Grant Date Fair Value
|
|
Number
of Shares
|
|
Weighted
Average Grant Date Fair Value
|
|
Number
of Warrants
|
|
Weighted
Average Grant Date Fair Value
|
|
Number
of Shares & Warrants
|
|
Weighted
Average Grant Date Fair Value
|
|
January
1, 2006
|
|
|
-
|
|
$
|
-
|
|
|
178
|
|
$
|
1.93
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
178
|
|
$
|
1.93
|
|
Granted
|
|
|
426
|
|
|
2.19
|
|
|
3,669
|
|
|
1.36
|
|
|
206
|
|
|
2.99
|
|
|
1,065
|
|
|
1.31
|
|
|
5,366
|
|
|
1.48
|
|
Vested
|
|
|
-
|
|
|
-
|
|
|
(225
|
)
|
|
2.43
|
|
|
(101
|
)
|
|
3.55
|
|
|
(940
|
)
|
|
1.32
|
|
|
(1,266
|
)
|
|
1.69
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
(3
|
)
|
|
0.99
|
|
|
(18
|
)
|
|
3.27
|
|
|
-
|
|
|
-
|
|
|
(21
|
)
|
|
2.92
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
December
31, 2006
|
|
|
426
|
|
$
|
2.19
|
|
|
3,619
|
|
$
|
1.32
|
|
|
87
|
|
$
|
2.28
|
|
|
125
|
|
$
|
1.20
|
|
|
4,257
|
|
$
|
1.43
|
|
The
following table includes information on fully vested stock options and stock
options outstanding for each equity incentive plan as of December 31, 2006,
and
on fully vested warrants and warrants outstanding as of December 31,
2006:
|
|
2006
LT Plan
|
|
1999 Plan
|
|
2000 Plan
|
|
Warrants
|
|
Total
|
|
|
|
Stock
Options
Outstanding
|
|
Stock
Options
Currently
Vested
|
|
Stock
Options
Outstanding
|
|
Stock
Options
Currently
Vested
|
|
Stock
Options
Outstanding
|
|
Stock
Options
Currently
Vested
|
|
Warrants
Outstanding
|
|
Warrants
Currently Vested
|
|
Stock
Options
& Warrants Outstanding
|
|
Stock
Options & Warrants Currently Vested
|
|
Number
(in
thousands)
|
|
|
426
|
|
|
—
|
|
|
4,689
|
|
|
1,071
|
|
|
123
|
|
|
36
|
|
|
1,936
|
|
|
1,810
|
|
|
7,174
|
|
|
2,917
|
|
Weighted
average
exercise
price
|
|
$
|
6.88
|
|
|
—
|
|
$
|
4.19
|
|
|
4.69
|
|
|
3.23
|
|
|
2.43
|
|
|
3.60
|
|
|
3.57
|
|
|
4.17
|
|
|
3.97
|
|
Aggregate
Intrinsic
value
|
|
|
148
|
|
|
—
|
|
|
15,117
|
|
|
3,571
|
|
|
492
|
|
|
173
|
|
|
7,018
|
|
|
6,627
|
|
|
22,775
|
|
|
10,371
|
|
Weighted
average
remaining
contractual
term
|
|
|
9.9
years
|
|
|
—
|
|
|
8.3
years
|
|
|
4.4
years
|
|
|
9.1
years
|
|
|
8.7
years
|
|
|
3.0
years
|
|
|
2.6
years
|
|
|
7.0
years
|
|
|
3.3
years
|
|
(11)
RELATED PARTY TRANSACTIONS
The
Company receives legal services from Kirkland & Ellis LLP, which
is considered a related party because a partner at that firm
is a member of the Company’s Board of Directors. For the years ended
December 31, 2006, 2005 and 2004 expenses related to Kirkland &
Ellis LLP were approximately $1.7 million, $640,000, and $2.1 million,
respectively. For the years ended December 31, 2006 and 2005, the Company
had outstanding payables due to Kirkland & Ellis LLP of approximately
$492,000 and $45,000, respectively.
Through
February 2005, the Company received benefit coordination services
from Huber Oros, which was considered a related party because an
owner of Huber Oros is related to a member of the Company’s senior management
who also serves on the Company’s Board of Directors. During February 2005, Huber
Oros was acquired by an unrelated entity and the individual who is a related
party did not retain any continuing ownership interest in the acquiring entity.
For the years ended December 31, 2006, 2005, and 2004, expenses related to
Huber Oros were approximately $0, $7,000 and $108,000 respectively. As of
December 31, 2006 and 2005, there were no outstanding payables due to Huber
Oros.
FTI
Consulting, Inc. (FTI) provided due diligence services totaling approximately
$15,000 in connection with the acquisition of UCC. Two members of NexCen’s Board
of Directors serve as Directors of FTI, with one also serving as President
and
Chief Executive Officer for FTI Consulting, Inc. For
the
year ended December 31, 2006, the Company had no outstanding payables due to
FTI
Consulting, Inc.
Athletes
Foot Marketing Support Fund, LLC (“MSF”), is an entity which is funded by the
domestic franchisees of The Athletes Foot to provide domestic marketing and
promotional services on behalf of the franchisees. On an as needed basis, the
Company advances funds to MSF under a loan agreement. The terms of the loan
agreement include a borrowing rate of prime plus two percent, and repayment
by
MSF with no penalty, at any time. At December 31, 2006, the Company had a
receivable balance of $350,000 from MSF.
(12)
COMMITMENTS AND CONTINGENCIES
(a)
LEGAL
PROCEEDINGS
IPO
Litigation.
NexCen
is among the hundreds of defendants named in a series of class action
lawsuits seeking damages due to alleged violations of securities law. The
case is being heard in the United States District Court for the Southern
District of New York. The court has consolidated the actions by all of the
named defendants that actually issued the securities in question. There
are approximately 310 consolidated cases before Judge Scheindlin, including
this
action, under the caption In
Re
Initial Public Offerings Litigation,
Master
File 21 MC 92 (SAS).
As
to
NexCen, these actions were filed on behalf of persons and entities that acquired
the Company’s stock after its initial public offering in October 20,
1999. Among other things, the complaints claim that prospectuses, dated
October 20, 1999 and September 27, 2000 and issued by NexCen in
connection with the public offerings of common stock, allegedly contained untrue
statements of material fact or omissions of material fact in violation of
securities laws because the prospectuses allegedly failed to disclose that
the
offerings’ underwriters had solicited and received additional and excessive
fees, commissions and benefits beyond those listed in the arrangements with
certain of their customers which were designed to maintain, distort and/or
inflate the market price of the Company’s common stock in the aftermarket.
The actions seek unspecified monetary damages and rescission. NexCen
believes the claims are without merit and is vigorously contesting these
actions.
After
initial procedural motions and the start of discovery in 2002 and 2003, the
plaintiffs voluntarily dismissed without prejudice the officer and director
defendants of each of the 310 named issuers, including NexCen. Then
in June 2003, the Plaintiff’s Executive Committee announced a proposed
settlement with the issuer-defendants, including NexCen, and the officer and
director defendants of the issuers (the “Issuer Settlement”). A settlement
agreement was signed in 2004 and presented to the District Court for approval.
The proposed Issuer Settlement does not include the underwriter-defendants,
and
they have continued to defend the actions and have objected to the proposed
settlement. (One of the defendant-underwriters signed a memorandum of
understanding in April 2006 agreeing to a $425 million settlement of claims
against it.) Under terms of the proposed Issuer Settlement, NexCen
has a reserve of $465,000 for its estimated exposure. If the proposed
settlement is approved by the court, it is extremely unlikely
that NexCen would incur any material financial or other
liability.
The
District Court granted preliminary approval of the proposed Issuer Settlement
in
2005 and held a fairness hearing on the matter in April 2006. In December 2006,
before final action by the District Court on the proposed Issuer Settlement,
the
U.S. Court of Appeals for the Second Circuit issued a ruling vacating class
certification for certain plaintiffs in the actions against the
underwriter-defendants. A petition was filed in early 2007 seeking rehearing
of
this decision, but the Second Circuit had not acted on the petition as of March
1, 2007. The impact of this decision on the claims against the issuer-defendants
and on the proposed Issuer Settlement is unclear. Since December 2006, the
District Court has stayed all proceedings in these cases pending further action
by the Second Circuit.
Transportation
Business Sale.
On March
13, 2006, a complaint captioned Geologic Solutions, Inc., v. Aether Holdings,
Inc. was filed against the Company in the Supreme Court for the State of New
York, New York County. The complaint generally alleges that plaintiff Geologic
was damaged as a result of certain alleged breaches of contract and fraudulent
inducement arising out of NexCen’s alleged misrepresentations and failure to
disclose certain information in connection with the asset purchase agreement
dated as of July 20, 2004 for the purchase and sale of our Transportation
business. The allegations in Geologic’s complaint are substantially similar to
claims Geologic made in a previous request to the Company for indemnification.
The complaint seeks monetary damages in an amount not less than $30 million
and
other relief. During the second quarter of 2006, the plaintiff agreed to
substitute Aether Systems, Inc. for Aether Holdings, Inc. as defendant in the
case because Aether Systems, Inc. was the party to the asset purchase agreement
upon which Geologic’s claims are based. The Company believes it has a
meritorious defense to Geologic’s claims and is vigorously defending against
this action; however, we cannot predict the outcome of this litigation, and
an
adverse resolution of such claims could require us to make a significant cash
payment to Geologic. The Company has incurred costs in connection with the
defense of this lawsuit, which have been recorded against discontinued
operations, further increasing the loss on the sale of the Transportation
segment, and decreasing the amount of cash we have available for acquisitions
and operations.
Legacy
UCC Litigation.
UCC and
Mr. D’Loren in his capacity as president of UCC are parties along with unrelated
parties to litigation resulting from a default on a loan to The Songwriter
Collective, LLC (“TSC”), which UCC had referred to a third party. A shareholder
of TSC filed a lawsuit in the U.S. District Court for the Middle District of
Tennessee alleging, that certain misrepresentations by TSC and its agents
(including UCC and D’Loren) induced the shareholder to contribute certain rights
to musical compositions to TSC. The lawsuit, which is captioned Tim Johnson
v.
Fortress Credit Opportunities I, L.P., et al., seeks declaratory judgment,
reformation and rescission, and monetary damages relating to the loan and
alleged loss of value on contributed assets. UCC and Mr. D’Loren have filed
cross-claims against TSC and certain TSC officers claiming indemnity. TSC has
filed various cross and third-party claims against UCC, Mr. D’Loren and another
TSC shareholder, Annie Roboff. Roboff has filed a separate action in the
Chancery Court in Davidson County, Tennessee, which is captioned Roboff v.
Mason, et al., as well as claims in the federal court lawsuit, against UCC,
Mr.
D’Loren, TSC and the other parties. The claims include fraud and negligent
misrepresentation allegations against Mr. D’Loren, and UCC. Ms. Roboff
previously made these same claims in a lawsuit that she filed in state court
in
New York. That lawsuit was dismissed on procedural grounds, and Ms. Roboff
has
appealed the dismissal. UCC believes these claims are without merit and is
vigorously defending the actions. UCC’s insurance carrier is defending the
litigation. The litigation is in discovery and the outcome cannot be estimated
at this time; however, settlement discussions are being held. The loss, if
any, could exceed existing insurance coverage and any excess could adversely
affect our financial condition and results.
(b)
LEASES
The
Company is obligated under noncancelable operating leases for office space
that
expire at various dates through 2008. Future minimum lease payments under
noncancelable operating leases and related sublease rent commitments as of
December 31, 2006 are as follows:
Operating
Leases ($ in 000's)
|
|
Payments
due by period
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
Gross
lease commitments
|
|
$
|
1,865,277
|
|
$
|
1,748,385
|
|
$
|
895,056
|
|
$
|
888,572
|
|
$
|
850,752
|
|
$
|
4,742,364
|
|
less:
sub-leases
|
|
|
(1,363,023
|
)
|
|
(907,967
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Lease
commitments, net
|
|
$
|
502,254
|
|
$
|
840,418
|
|
$
|
895,056
|
|
$
|
888,572
|
|
$
|
850,752
|
|
$
|
4,742,364
|
|
Rent
expense from continuing operations under operating leases was approximately
$398,000, $158,000, and $454,000 for the years ended December 31, 2006,
2005 and 2004, respectively.
The
subleased payments shown above are related to the Mobile Government headquarters
lease in Massachusetts, which the Company has subleased to the buyer of that
business, BIO-Key International, Inc., and to Northlight Financial LLC who
rents
space in the Company’s New York headquarters.
(c)
RESTRICTED CASH
Restricted
cash of $1,298,000 includes funds held in money market accounts as security
for
outstanding letters of credit established for the facility leases of the Mobile
Government headquarters in Massachusetts, and the Company’s headquarters in New
York. At December 31, 2005, the Company had restricted cash of $8.6
million, $749,000 was related to the Massachusetts facility lease, and a $7.9
million letter of credit collateralizing a sales agreement between BIO-key
International, Inc. (BIO-Key), whom the Mobile Government business was sold
to,
and Hamilton County, Ohio. The letter of credit provided assurance of
performance by BIO-Key under the sales agreement. The letter of credit expired
on December 31, 2006.
(13)
DISCONTINUED OPERATIONS
From
our
formation in 1996 until 2004, we owned, acquired and operated a number of mobile
and wireless communications businesses. These businesses never became
profitable, and during 2004 we sold these businesses and started a
mortgage-backed securities, or MBS, business. During 2005, we assembled a
leveraged portfolio of investments in MBS. However, market conditions for the
MBS business changed significantly during this period, and the profitability
of
our leveraged MBS portfolio declined. We sold our MBS investments in November
2006, and since that time, we have focused entirely on our IP
business.
During
2006, the Company discontinued and sold its MBS segment, generating a gain
of
$755,000 on the sale. Income from discontinued operations in 2006 of $2.4
million was primarily generated by the MBS segment.
During
2005, we recognized additional losses rlated to the sales of our businesses
which were sold in 2004. Income from discontinued operations in 2005 reflects
$225,000 of income from our MBS business.
During
2004, the Company discontinued and sold its EMS, Transportation and Mobile
Government segments, recognizing net gains on the sales of $20.8 million. Loss
from discontinued operations of $44.5 million includes net operating losses
in
our Transportation, Mobile Government, EMS and MBS businesses. Also during
2004,
the Company recorded goodwill and asset impairment charges of $35.6 million
related to the Transportation and Mobile Government businesses.
EMS
Sale
On
January 13, 2004, the Company sold the EMS segment to TeleCommunication
Systems, Inc.
We
may be
required to indemnify TCS under the asset purchase agreement for certain
breaches of representations and warranties and other covenants that we gave
to
TCS with respect to the sale of our EMS segment. This liability is limited
to
$7.6 million, other than in the case of fraud and with respect to a small number
of specific representations, such as those relating to taxes owed for periods
prior to the closing of the sale of the EMS segment. In addition, we remain
fully liable for any claims that may arise relating to our operation of the
EMS
business prior to the date on which TCS acquired that business from us,
including any liability arising from our past sales of the blackberry devices
manufactured by Research In Motion (“RIM”).Recently, the US Court of Appeals
ruled that RIM violated 16 patents owned by intellectual property holding
company NTP, Inc. (“NTP”). The case was remanded on February 24, 2006 to the
District Court to determine whether or not RIM should be enjoined selling the
violating products. It has been reported that the parties have since reached
a
settlement agreement.
Transportation
Sale
On
September 17, 2004, the Company sold its Transportation segment to Geologic
Solutions, Inc. (f/k/a Slingshot Acquisition Corporation (“Geologic”), an
affiliate of Platinum Equity Capital Partners L.P., pursuant to an asset
purchase agreement (the “Asset Purchase Agreement”), for $25.0 million in
cash.
During
the fourth quarter of 2004 and in January 2005, the Company and Geologic advised
each other of significant disagreements over both the working capital adjustment
and the cash true up. The Company claimed that it was owed approximately $1
million, and Geologic contended that it was owed approximately $8.1 million.
The
parties had periodic discussions during 2005 but were unable to resolve their
differences. Under the terms of the Asset Purchase Agreement, if not resolved
by
agreement, the parties were required to submit the disputed matters to binding
arbitration before an independent accounting firm. Near the end of the third
quarter, to avoid the expense and uncertainty of an arbitration proceeding,
the
Company agreed to settle the working capital adjustment and the cash true-up
by
paying $235,000 to Geologic. On October 14, 2005, the parties entered into
a
settlement agreement to reflect this resolution, and the Company paid the
settlement amount to Geologic on October 17, 2005. As a result of this
settlement, as of the end of the third quarter, the Company wrote off $738,000
in amounts due from Geologic that had been recorded as an asset on its balance
sheet and recorded an additional expense of $235,000. These amounts are included
in loss from discontinued operations for the third quarter.
Also,
during the third quarter, Geologic notified the Company of, and the Company
responded to, various indemnification claims for alleged breaches of
representations and warranties under the Asset Purchase Agreement. The parties
have been unable to resolve their disagreement over Geologic’s claim for
indemnification and on March 13, 2006, Geologic filed a lawsuit against the
Company in the Supreme Court of the State of New York. Geologic’s claims
generally involve allegations that the Company failed to provide full disclosure
regarding certain aspects of the Transportation segment’s business relationships
with one of its major customers and two of its major suppliers. Geologic
contends that it had suffered damages in excess of $30 million as a result
of
these alleged breaches. Although the Company cannot predict the outcome of
this
litigation, the Company believes that the indemnification claims are without
merit and intends to vigorously defend against them. If the Company were
unsuccessful in defending against the claims by Geologic, results could have
a
material adverse effect on the Company’s business, financial results and
financial condition.
(14)
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
March
31,
|
|
June
30,
|
|
September
30,
|
|
December
31,
|
|
In
thousands, except per share amounts
|
|
2006
|
|
2006
|
|
2006
|
|
2006
|
|
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,924
|
|
Operating
expenses
|
|
|
(872
|
)
|
|
(2,831
|
)
|
|
(2,568
|
)
|
|
(4,142
|
)
|
Operating
loss
|
|
|
(872
|
)
|
|
(2,831
|
)
|
|
(2,568
|
)
|
|
(2,218
|
)
|
Non
operating income
|
|
|
320
|
|
|
671
|
|
|
1,202
|
|
|
1,144
|
|
Loss
from continuing operations
before
income taxes
|
|
|
(552
|
)
|
|
(2,160
|
)
|
|
(1,366
|
)
|
|
(1,074
|
)
|
Income
taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(81
|
)
|
Loss
from continuing operations
|
|
|
(552
|
)
|
|
(2,160
|
)
|
|
(1,366
|
)
|
|
(1,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
419
|
|
|
640
|
|
|
544
|
|
|
1,510
|
|
Net
(loss) income
|
|
$
|
(133
|
)
|
$
|
(1,520
|
)
|
$
|
(822
|
)
|
$
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations per
common
share - basic and diluted
|
|
$
|
(0.01
|
)
|
$
|
(0.05
|
)
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
Loss
from discontinued operations per
common
share - basic and diluted
|
|
|
0.01
|
|
|
0.02
|
|
|
0.01
|
|
|
0.03
|
|
Net
(loss) income per common
share
- basic and diluted
|
|
$
|
(0.00
|
)
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
outstanding
- basic
|
|
|
44,019
|
|
|
44,721
|
|
|
46,534
|
|
|
47,234
|
|
Weighted
average shares
outstanding
- diluted
|
|
|
44,019
|
|
|
44,721
|
|
|
46,534
|
|
|
49,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
March
31,
|
|
June
30,
|
|
September
30,
|
|
December
31,
|
|
|
|
2005
|
|
2005
|
|
2005
|
|
2005
|
|
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating
expenses
|
|
|
(1,859
|
)
|
|
(1,307
|
)
|
|
(1,065
|
)
|
|
(1,010
|
)
|
Operating
loss
|
|
|
(1,859
|
)
|
|
(1,307
|
)
|
|
(1,065
|
)
|
|
(1,010
|
)
|
Non
operating income
|
|
|
662
|
|
|
331
|
|
|
450
|
|
|
247
|
|
Loss
from continuing operations
before
income taxes
|
|
|
(1,197
|
)
|
|
(976
|
)
|
|
(615
|
)
|
|
(763
|
)
|
Income
taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Loss
from continuing operations
|
|
|
(1,197
|
)
|
|
(976
|
)
|
|
(615
|
)
|
|
(763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
539
|
|
|
1,754
|
|
|
(220
|
)
|
|
(3,042
|
)
|
Net
(loss) income
|
|
$
|
(658
|
)
|
$
|
778
|
|
$
|
(835
|
)
|
$
|
(3,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
per
common share - basic and diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
Income
(loss) from discontinued operations
per
common share - basic and diluted
|
|
|
0.01
|
|
|
0.04
|
|
|
(0.00
|
)
|
|
(0.07
|
)
|
Net
(loss) income per common
share
- basic and diluted
|
|
$
|
(0.01
|
)
|
$
|
0.02
|
|
$
|
(0.02
|
)
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
43,991
|
|
|
44,009
|
|
|
44,019
|
|
|
44,019
|
|
Weighted
average shares outstanding - diluted
|
|
|
43,991
|
|
|
44,591
|
|
|
44,019
|
|
|
44,019
|
|
(15)
ACQUISITION OF UCC
On
June
6, 2006, NexCen acquired UCC for 2.5 million shares of common stock, plus the
right to contingent consideration of up to an additional 2.5 million shares
of
common stock and up to $10 million in cash if future performance targets are
met
within five years (or such shorter period as provided in the merger agreement)
as follows:
|
·
|
an
additional 900,000 shares of Company common stock and $3,333,333
will be
payable if (i) the 30-day average price of NexCen common stock is
at least
$6.00 per share and (ii) the Company’s annualized Adjusted EBITDA (as
defined in the Merger Agreement) is least $10
million;
|
|
·
|
an
additional 800,000 shares of Company common stock and $3,333,333
in cash
will be payable if (i) the 30-day average price is at least $8 per
share
and (ii) the Company’s annualized Adjusted EBITDA is at least $20 million;
and
|
|
·
|
an
additional 800,000 shares of Company common stock and $3,333,334
in cash
will be payable if (i) the 30-day average price is at least $10 per
share
and (ii) the Company’s annualized Adjusted EBITDA is at least $30
million.
|
As
of
December 31, 2006, none of these performance targets have been met, and it
is
uncertain as to if and when these targets will be met. In addition, the
contingent consideration will become payable in full (1) if the average price
of
the Company’s stock is $10 per share for 90 consecutive trading days and the
Company’s annualized Adjusted EBITDA is $10 million or (2) upon a change of
control of the Company (as defined in the merger agreement). The stock price
targets are subject to adjustment as set forth in the merger agreement. The
merger agreement requires the escrow of 900,000 shares of the contingently
issuable common stock. These shares will not be included in our outstanding
share count or weighted average outstanding shares until the contingency has
been resolved.
UCC’s
results of operations subsequent to the date of acquisition are included in
the
Consolidated Statement of Operations. The Company allocated the purchase price
of the assets acquired and liabilities assumed at the estimated fair values
at
the acquisition date. The recorded goodwill will not be deductible for tax
purposes. The total purchase price in the following table does not include
amounts for the contingent consideration because it is not considered probable
that some or all of this consideration will be paid. If additional consideration
is paid, the amounts will be recorded as additional goodwill.
Purchase
price (in thousands) :
|
|
|
|
Stock
consideration (2.5 million shares at $4.10)
|
|
$
|
10,250
|
|
Options
and warrants issued
|
|
|
827
|
|
Direct
acquisition costs
|
|
|
1,816
|
|
Repayment
of UCC debt
|
|
|
1,493
|
|
Less:
cash acquired
|
|
|
(12
|
)
|
Total
purchase price
|
|
$
|
14,374
|
|
|
|
|
|
|
Allocation
of purchase price (in
thousands):
|
|
|
|
|
Current
assets
|
|
$
|
7
|
|
Other
assets
|
|
|
175
|
|
Property
and equipment
|
|
|
111
|
|
Goodwill
|
|
|
10,135
|
|
Intangible
assets
|
|
|
4,634
|
|
Total
assets acquired
|
|
|
15,062
|
|
Current
liabilities
|
|
|
688
|
|
Total
liabilities assumed
|
|
|
688
|
|
Net
assets acquired
|
|
$
|
14,374
|
|
At
the
time of the merger, each outstanding option to purchase UCC Capital Corp. common
stock granted under UCC Capital Corp.’s 2003 Amended and Restated Stock Option
Plan was converted into an option to purchase NexCen’s common stock using an
exchange ratio as described in the merger agreement. The fair value of these
options totaled $159,000. In addition, in connection with closing of the merger,
the Company was obligated to compensate its financial advisor for the
transaction, Jefferies & Company, Inc., a cash fee of approximately $77,000
and the issuance of warrants to purchase 440,000 shares of Company common stock
with an exercise price of $3.19 per share. The fair value of such warrants
totaled $668,000. The aggregate fair value of the replacement options and
warrants issued to Jefferies & Company is included as a component of the
purchase price.
Intangible
assets consist of a non-compete agreement with an estimated useful life of
five
years, and executory contracts including $2.2 million related to a contract
right to receive an advisory fee following the expected consummation of a
business combination between two unrelated companies, which were settled in
2006.
In
2006,
the Company recorded $10.1 million of goodwill related to the UCC acquisition,
which has been determined to have an indefinite useful life and will not
be
amortized, but will be tested for impairment on an annual basis. The Company
also recorded a $1.37 million intangible asset for a non-compete agreement
with
our Chief Executive Officer, that is being amortized on a straight-line basis
over five years. As of December 31, 2006, the net balance of this intangible
asset is $1.21 million. We expect to record related amortization on this
asset
of $274,000 in 2007 through 2010, and $118,000 in 2011.
(16)
ACQUISITION OF THE ATHLETE’S FOOT
On
November 7, 2006, our NexCen Acquisition Corp. subsidiary acquired Athlete’s
Foot Brands, LLC, along with an affiliated advertising and marketing fund,
and
certain nominal fixed assets owned by an affiliated company. The Athlete’s Foot
is an athletic footwear and apparel franchisor with 600 retail locations in
over
40 countries. The business also provides advertising and marketing support
for
the benefit of the franchisees, using a portion of the royalties it receives
from franchisees. This business operates in our retail franchising vertical.
The
purchase price for this acquisition, excluding contingent
consideration, was $53.1 million, consisting of approximately $42.1 million
in cash and $9.2 million in our common stock (approximately 1.4 million shares
which were valued at $6.55 per share), and $1.8 million in other deal related
costs. At the closing on November 7, 2006, we also issued to one of the sellers
a three-year warrant to purchase an additional 500,000 shares of our common
stock at a per share price of $6.49. On March 12, 2007, we borrowed $26.5
million under a new senior credit facility secured by the assets of The Athletes
Foot. Under the purchase agreement, we may be required to pay up to an
additional $8.5 million of cash and stock (in the same proportion as the initial
acquisition), if the revenue and EBITDA of the acquired business (as defined
in
the purchase agreement) for the year ended December 31, 2006 equal or exceed
performance targets specified in the purchase agreement. The purchase agreement
requires a stand-alone audit of the 2006 financial results of Athletes Foot
Brands, LLC to be completed by March 31, 2007. The amount of contingent
consideration will be calculated based on the 2006 audited financial results.
Based on available information, the Company estimates the contingent
consideration will be $4.0 million, and has recorded a liability as of December
31, 2006, which will be paid in the same proportion of cash and common stock
as
the initial consideration.
Brands
results of operations subsequent to the date of acquisition are included in
the
Consolidated Statement of Operations. The Company allocated the purchase price
of the assets acquired and liabilities assumed at the estimated fair values
at
the acquisition date.
Purchase
price (in thousands):
|
|
|
|
Stock
consideration (1.4 million shares)
|
|
$
|
9,257
|
|
Cash
payments
|
|
|
40,710
|
|
Contingent
consideration
|
|
|
4,000
|
|
Direct
acquisition costs
|
|
|
1,201
|
|
Seller
warrant issued
|
|
|
572
|
|
Settlement
of executory contracts & other items
|
|
|
1,349
|
|
Total
purchase price
|
|
$
|
57,089
|
|
|
|
|
|
|
Allocation
of purchase price (in thousands):
|
|
|
|
|
Cash
|
|
$
|
162
|
|
Franchise
and master development agreements
|
|
|
2,600
|
|
Trademarks
|
|
|
49,000
|
|
Goodwill
|
|
|
5,472
|
|
Operating
receivables, net
|
|
|
1,251
|
|
Property
and equipment
|
|
|
95
|
|
Total
assets acquired
|
|
|
58,580
|
|
Total
liabilities assumed
|
|
|
1,491
|
|
Net
assets acquired
|
|
$
|
57,089
|
|
Franchise
and master development agreements are considered intangible assets and are
amortized on a straight-line basis over twenty years. Trademarks represent
the
present value of future royalty income associated with the ownership of The
Athlete’s Foot trademark. Goodwill represents the excess of costs over the fair
value of assets acquired. Goodwill and trademarks acquired in a purchase
business combination are determined to have an indefinite useful life, and
accordingly, are not amortized, but instead tested for impairment at least
annually. Total liabilities assumed include an obligation under a franchisee
consulting agreement in which we are obligated to pay $200,000 per year through
2028. The net present value of this liability is $1.45 million. As payments
are
made, the variance between the payments and liability reduction will be recorded
as interest expense.
Prior
to
this acquisition, there were executory contracts between UCC and Athlete’s Foot
Brands, LLC. UCC provided financial advisory services to Athlete’s Foot Brands,
LLC. UCC earned advisory and loan servicing revenues during the course of the
arrangement, which terminated with the acquisition. The estimated fair value
of
these agreements was recorded when we acquired UCC and the amounts were included
in intangible assets. The settlement of these agreements was recorded in
purchase accounting at fair value without recognition of any amounts in our
statement of operations.
As
the
purchase of Athlete’s Foot Brands, LLC was a material acquisition, we are
providing the pro forma financial information set forth below, which presents
the combined results as if our acquisitions had occurred on January 1, 2005.
This pro forma information is not necessarily indicative of the results that
actually would have occurred nor does it intend to indicate future operating
results.
|
|
Year
Ended
|
|
Year
Ended
|
|
(in
thousands - except
|
|
December
31, 2006
|
|
December
31, 2005
|
|
per
share amounts)
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
Pro
forma royalties and franchise fees
|
|
$
|
9,925
|
|
$
|
9,832
|
|
Pro
forma net income
|
|
$
|
2,683
|
|
$
|
32,548
|
|
Pro
forma diluted earnings per share
|
|
$
|
0.06
|
|
$
|
0.71
|
|
In
2006,
the Company recorded $5.5 million of goodwill related to the Athlete’s Foot
Brands, LLC acquisition, and a $49.0 million trademark representing the value
of
future royalty income associated with the ownership of The Athlete’s Foot
trademark, which have been determined to have indefinite useful lives and
will
not be amortized, but will be tested for impairment on an annual basis. The
Company also recorded a $2.6 million intangible asset for franchise agreements
and master development agreements of The Athlete’s Foot, which is being
amortized on a straight-line basis over twenty years. As of December 31,
2006,
the net balance of this intangible asset is $2.58 million. We expect to record
related amortization on this asset of $130,000 in 2007 through 2011, and
$1.9
million thereafter.
(17)
SEGMENT REPORTING
At
December 31, 2006, we had only one operating segment - our intellectual property
business. All of our revenue was royalty and franchise fee revenue generated
by
The Athlete’s Foot. In 2006, approximately 53% of this revenue was generated in
the U.S. As we continue to acquire IP businesses, we expect to have three
segments in the future including: retail franchising, consumer brand products,
and quick service restaurants.
In
2005
and 2004 we only had corporate costs, all other activity is included in
discontinued operations.
(18)
SUBSEQUENT EVENTS
Acquisition
of Bill Blass.
On
February 15, 2007, our Blass Acquisition Corp. subsidiary acquired Bill Blass
Holding Co., Inc. and two affiliated businesses. The Bill Blass label represents
timeless style, modern American and is an American legacy brand. This business
operates in our consumer branded products (apparel) vertical.
At
the
closing, one of the Bill Blass companies executed a licensing agreement for
men’s and women’s denim with Designer License Holding Company, LLC. The new
license replaced a denim license and an activewear license that were terminated
and had been held by two companies that are affiliated with one of the prior
owners of Bill Blass.
The
initial purchase price for this acquisition was $54.6 million, consisting of
$39.1 million in cash and $15.5 million in our common stock (approximately
2.2
million shares which were valued at $7.09 per share, which was the average
closing price of our common stock for the ten consecutive days that ended on
December 19, 2006, which is when we signed the agreement to purchase Bill
Blass). Under the purchase agreement, the sellers will be entitled to receive
up
to an additional $16.2 million of consideration, payable in early 2008. The
additional consideration under the earn-out will be equal to the amount by
which
the royalties generated from the Bill Blass trademarks in fiscal 2007,
multiplied by 5.5, exceed $51.8 million, subject to certain adjustments. The
total purchase price will not exceed $70.8 million.
Acquisition
of MaggieMoo’s.
On
February 28, 2007, we acquired MaggieMoo’s International, LLC (“MaggieMoo’s”).
The initial purchase price for this acquisition was $16.1 million, consisting
of
approximately $10.8 million of cash and debt repayment, and 515,352 shares
of
our common stock (valued at $5.3 million, reflecting the average closing price
of our common stock for the fifteen consecutive days that ended on February
27,
2007, of $10.21). Under the purchase agreement, the sellers will be entitled
to
receive up to an additional $2.0 million of consideration in the form of an
earn-out, payable on March 31, 2008. The earn-out will be based on the amount
royalty payments earned during fiscal 2007 exceed royalty payments earned by
MaggieMoo’s during fiscal 2006, pursuant to a formula set forth in the purchase
agreement. MaggieMoo’s is the franchisor of 184 stores located in 36 states
domestically. Each location features a menu of freshly made super-premium ice
creams, mix-ins, smoothies, and custom ice cream cakes. This business operates
in our QSR vertical.
Acquisition
of the Assets of Marble Slab Creamery, Inc.
Also
on
February 28, 2007, we acquired the assets of Marble Slab Creamery, Inc. (“Marble
Slab”). The purchase price of the acquisition was $21 million, consisting of $16
million of cash, and the issuance of $5.0 million of notes payable which mature
on February 28, 2008. The notes accrue interest at an annual rate of 6% per
annum until maturity, and 8% thereafter, and are payable in cash or common
stock
priced at the time of issuance, at the Company’s option. We have deposited $5.0
million into an escrow account to collateralize the payment of these notes.
Marble Slab is the franchisor of 336 stores located in 35 states, Puerto Rico,
Canada and the United Arab Emirates. Since 1983, each Marble Slab
Creamery has
featured homemade super-premium ice cream that is hand-rolled in freshly baked
waffle cones. This business operates in our QSR vertical.
Entry
into Bank Credit Facility
On
March
12, 2007, NexCen Acquisition Corp. (“the Issuer”) entered into a master loan
agreement with BTMU Capital Corporation. This master loan agreement provides
for
borrowings pursuant to the issuance of a single class of notes to the Issuer
and
its wholly-owned subsidiaries (“Co-Issuers”) which are jointly and severally
liable for payments required under the notes. The assets of the Issuers and
Co-Issuers are pledged as collateral; security under each Note, and secure
the
obligations of the Issuer and all Co-Issuers under all of the notes. The notes
are non-recourse to the Company. The pledged assets are those of the Issuer
and
Co-Issuers (mainly IP assets and the related royalties). Each note is repayable
in full after five years. The facility has no expiration date and can be
terminated by the Co-Issuers upon 30 days notice and by BTMU Capital Corporation
by electing not to fund future advances, however, each note funding maintains
its respective maturity date. The maximum aggregate amount of borrowings that
may be outstanding at any one time under the agreement is $150 million. The
borrowing rate is LIBOR plus an interest rate margin, which ranges from 1.50%
to
3.00%. The Company may refinance all or part of the notes with no pre-payment
penalties. This allows us to refresh available borrowing capacity under the
facility, such as by completing securitization transactions involving certain
of
our acquired IP assets and using the proceeds from these transactions to repay
notes under the master loan agreement. The borrowing rate is based on 3-month
LIBOR which is a floating rate. The LIBOR rate resets every 90
days.
On
March
14, 2007, we borrowed $26.5 million under the new credit facility, secured
by
the assets of The Athlete’s Foot. In 2007, we intend to incur additional debt
secured by the assets of Bill Blass, MaggieMoo’s and Marble Slab under the new
credit facility.
Other.
On
March
13, 2007 we signed a definitive purchase agreement to acquire the Waverly
brand
from F. Schumacher & Co. (“Schumacher”) for $34.0 million in cash. We also
agreed to pay $2.75 million in cash and issue a 10-year warrant to purchase
50,000 shares of our common stock to Ellery Homestyles, LLC, an existing
Waverly
licensee, in satisfaction of a right of first refusal held by Ellerly to
acquire
the Waverly brand. The warrant will be priced at the market price on the
date of
issuance. Waverly is a home décor lifestyle brand for harmonious and tasteful
decorating. The purchase agreement contains customary representations,
warranties and covenants. Subject to limited exceptions, the representations
and
warranties of Schumacher will survive the closing for 12 months. Specified
fundamental representations, such as sufficiency of assets and title to assets,
will survive indefinitely. Indemnification claims by us for breaches of
representations and warranties are
generally capped at the purchase price and are subject to a $150,000 threshold.
The closing is subject to the satisfaction of customary conditions for a
transaction of this type.
We
expect
to close this transaction by the end of April 2007.
None.
Evaluation
of Disclosure Controls and Procedures
We
have
established disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries,
is
made known to the officers who certify the Company’s financial reports and to
other members of senior management and the Board of Directors.
As
required by Rule 13a-15(b) under the Securities and Exchange Act of 1934, as
amended (the “Exchange Act”), management carried out an evaluation, with the
participation of the Company’s chief financial officer and chief executive
officer, of the effectiveness of the Company’s disclosure controls and
procedures, as of December 31, 2006. Based on their evaluation as of
December 31, 2006, the chief executive officer and chief financial officer
of the Company have concluded that the Company’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act)
are effective to ensure that the information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Under the supervision and with the participation of management,
including our chief executive officer and chief financial officer, we conducted
an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the
“COSO Framework”). As noted in the COSO Framework, an internal control system,
no matter how well conceived and operated, can provide only reasonable assurance
to management and the Board of Directors regarding achievement of an entity’s
objectives. Management’s evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2006, excluded The Athlete’s Foot,
which was acquired by the Company on November 7, 2006. The Athlete’s Foot
consolidated assets and consolidated revenues comprised 2% and 100%,
respectively, of the consolidated financial statements of the Company for the
year ended December 31, 2006. Based on the evaluation under the COSO Framework,
our management concluded that our internal control over financial reporting
was
effective as of December 31, 2006. Our report is included in Item 8 of this
Report. Our management’s assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2006 has been audited by KPMG
LLP, an independent registered public accounting firm, as stated in their report
which is also included in Item 8 of this Report.
Changes
in Internal Control Over Financial Reporting and Disclosure Controls and
Procedures
During
the year ended December 31, 2006, no change occurred in the Company’s internal
control over financial reporting that materially affected, or is likely to
materially affect, the Company’s internal control over financial reporting. Our
chief financial officer and corporate controller both left the Company in 2006,
and were replaced, after a transition period during which the former chief
financial officer and controller worked together with both the new chief
financial officer and the new controller. Both the new chief financial officer
and the new corporate controller have prior experience serving as financial
officers of publicly traded SEC reporting companies. We acquired The Athlete’s
Foot in November 2006 and Bill Blass, MaggieMoo’s and Marble Slab in February
2007. We are in the process of incorporating The Athlete’s Foot, Bill Blass,
MaggieMoo’s and Marble Slab financial reporting processes with and into our
existing system of financial reporting controls. The Company’s internal control
over financial reporting will likely be materially affected by incorporating
appropriate internal controls over financial reporting to account for these
acquisitions.
None.
PART
III
Directors
and Executive Officers of the Registrant
The
following table shows, as of April 30, 2007, the names and ages of NexCen’s
directors and executive officers. Each director will continue in office until
the next annual meeting or until his earlier resignation, removal or death.
As
we have previously reported, Mr. Semans plans to retire from the board of
directors prior to the next annual meeting of stockholders and Mr. Oros plans
to
step down as Chairman before the end of this year.
Name
|
|
Age
|
|
Position
|
David
S. Oros
|
|
47
|
|
Chairman
of the Board
|
Robert
W. D’Loren
|
|
49
|
|
Director,
President, and Chief Executive Officer
|
David
B. Meister
|
|
49
|
|
Senior
Vice President and Chief Financial Officer
|
James
Haran*
|
|
46
|
|
Executive
Vice President, M&A and Operations
|
Charles
A. Zona
|
|
57
|
|
Executive
Vice President, Brand Management and Licensing
|
James
T. Brady
|
|
66
|
|
Director
|
Jack
B. Dunn IV
|
|
56
|
|
Director
|
Edward
J. Mathias
|
|
65
|
|
Director
|
Jack
Rovner
|
|
52
|
|
Director
|
Truman
T. Semans
|
|
80
|
|
Director
|
George
P. Stamas
|
|
56
|
|
Director
|
*Mr.
Haran will be an executive officer effective as of May 1, 2007. Accordingly,
the
disclosure regarding Mr. Haran for the fiscal year ended December 31, 2006
is
being provided solely for informational purposes.
David
S. Oros founded
the Company in 1996, and currently serves as our chairman. From 1996 until
June
2006, Mr. Oros served as our Chief Executive Officer. From 1994 until 1996,
Mr.
Oros was President of NexGen Technologies, L.L.C., a wireless software
development company that contributed all of its assets to the Company. From
1992
until 1994, he was President of the Wireless Data Group at Westinghouse
Electric. Prior to that, from 1982 until 1992 Mr. Oros was at Westinghouse
Electric directing internal research and managing large programs in advanced
airborne radar design and development. Mr. Oros received a B.S. in mathematics
and physics from the University of Maryland, and holds a U.S. patent for
a
multi-function radar system. Mr. Oros currently serves on the board of directors
for Smart Video™
d/b/a
uVuMobile,
the
University of Maryland School of Nursing, the Baltimore’s Port Discovery
Children’s Museum, and on the board of trustees for the University of Maryland
Baltimore Foundation, Inc. Mr. Oros is also a managing partner for Global
Domain
Partners, LLC.
Robert
W. D'Loren
was
elected a director and appointed Chief executive officerof the Company on
June
6, 2006. He was appointed President on August 9, 2006. Prior to that, he
served
as President and chief
executive officer of
UCC
Capital Corporation, where he pioneered intellectual property and whole company
securitization finance and was responsible for developing many of the structures
and credit enhancement products currently being utilized in the market today.
Prior to forming UCC, Mr. D'Loren served as President and Chief Operating
Officer of CAK Universal Credit Corporation, an intellectual property finance
company. From 1985 to 1997, Mr. D'Loren founded and served as President and
chief
executive officer of
the
D'Loren Organization, a real estate investment, lending, and restructuring
firm
responsible for aggregate transactions in excess of $2 billion. Prior to
that,
Mr. D'Loren served as an asset manager for Fosterlane Management where he
managed $1.8 billion of Class A commercial real estate assets, and previously
served as a manager with Deloitte & Touche. Mr. D'Loren has served as a
director or board advisor to Business Loan Express, The Athlete's Foot, Bike
Athletic Company, Bill Blass Ltd., Candies Inc., Iconix Brand Group, and
currently serves on the board of The Longaberger Company.
David
B. Meister
has
served as Senior Vice President and Chief Financial Officer since joining
the
Company on September 12, 2006. In his role, Mr. Meister is responsible for
all
financial functions of the company, along with treasury management, investor
relations, human resources and information technology. Prior to his appointment,
he worked with the company as a consultant since July 2006. Before joining
the
company, Mr. Meister served as Chief Financial Officer and Senior Vice President
of Barrington Broadcasting Corporation and Double O Radio Corporation from
January 2005 until June 2006. From 2002 through December 2004, Mr. Meister
was
Vice President of Buccino & Associates, a turnaround consulting and crisis
management firm, and from 1999 to 2001, Mr. Meister served as Senior Vice
President - Finance and Operations of eChips, Inc., a joint venture of four
Fortune 500 companies in the electronic components industry. Mr. Meister
began
his career with Ernst & Young, LLP, and then spent 10 years at Reliance
Group Holdings Inc. and Telemundo Group, Inc., a company he helped to launch.
Mr. Meister earned his BA in Political Science from the University of Rochester
and an MBA from the William E. Simon Graduate School of Business Administration
at the University of Rochester. Mr. Meister is a Certified Public
Accountant.
James
Haran
joined
the Company on June 6, 2006 as Executive Vice President of M&A. Prior to
joining NexCen, Mr. Haran served for nine years as the Chief Credit Officer
of
UCC Capital Corporation. Mr. Haran has a broad range of business experience
in
structured finance, M&A and consulting. For the past eight years his focus
has been on maximizing value and creating leveraged opportunities for IP
centric
companies and assets. These industries include apparel and footwear,
franchising, and entertainment. Mr. Haran played a key role in the BCBG Max
Azria transaction, winner of the Institutional Investor's Securitization
News
2004 Deal of the Year Award. Prior to joining UCC, Mr. Haran was a Partner
at
Sidney Yoskowitz and Company P.C., a regional diversified certified public
accounting firm. During his tenure, which began in 1987, his focus was on
real
estate and financial services companies. Mr. Haran served his clients on
an
array of strategic and operational levels. Mr. Haran is a Certified Public
Accountant and holds a Bachelor of Science degree from State University of
New
York, at Plattsburgh.
Charles
A. Zona
joined
the Company on December 11, 2006 as Executive Vice President of Brand Management
and Licensing. Prior to joining the Company, Mr. Zona was a licensing consultant
for three years for clients such as The J. Peterman Company, Chris-Craft
Boats
and XOR. Before that, he served as the Senior Vice President of Consumer
Products for The National Football League Properties where he was responsible
for developing a new consumer products (apparel, hardlines and accessories)
licensing business model. Preceding his position with the NFL, he served
as
President of Salant Menswear Group which included Perry Ellis Dress
Furnishings/Accessories and Private Label denim. Earlier, he served, for
nine
years, as President of Nautica Dress Furnishings/State of Maine Menswear
Division. Mr. Zona began a 19-year career in retail at Stern Brothers Department
Stores and Bambergers that concluded as a Senior Vice President at Lord and
Taylor. He holds a BS degree in Industrial Relations from Seton Hall
University.
James
T. Brady
was
elected director of the Company on June 28, 2002. Mr. Brady has served as
the
Managing Director - Mid-Atlantic, for Ballantrae International, Ltd., a
management consulting firm, since 2000 and was an independent business
consultant from May 1998 until 2000. From May 1995 to May 1998, Mr. Brady
was
the Secretary of the Maryland Department of Business and Economic Development.
Prior to May 1995, Mr. Brady was a managing partner with Arthur Andersen
LLP in
Baltimore, Maryland. Mr. Brady is a director of McCormick & Company, Inc.,
Constellation Energy Group and T. Rowe Price Group. Mr. Brady received a
B.A.
from Iona College.
Jack
B. Dunn IV
was
elected director of the Company on June 28, 2002. Since October 1995, Mr.
Dunn
has been Chief executive officerof FTI Consulting, Inc, a multi-disciplined
consulting firm with practices in the areas of financial restructuring,
corporate finance, forensic accounting, litigation consulting and economic
consulting. He joined FTI in 1992 as Executive Vice President and Chief
Financial Officer and has served as a director of FTI since May 1992 and
as
chairman of the board from December 1998 to September 2004. Mr. Dunn is a
director of Pepco Holdings, Inc., a public utility company, and is a limited
partner of the Baltimore Orioles. Prior to joining FTI, he was a member of
the
board of directors and a managing director of Legg Mason Wood Walker, Inc.
and
directed its Baltimore corporate finance and investment banking activities.
He
received a B.A. from Princeton University and a J.D. from the University
of
Maryland Law School.
Edward
J. Mathias
was
elected director of the Company on June 28, 2002. Mr. Mathias has been a
managing director of The Carlyle Group, a Washington, D.C. based private
merchant bank, since 1994. Mr. Mathias served as a managing director of T.
Rowe
Price Associates, Inc., an investment management firm, from 1971 to 1993.
He
received a B.A. from the University of Pennsylvania and an M.B.A. from Harvard
University.
Jack
Rovner
was
elected director of the
Company
on
October 31, 2006. Mr. Rover has built a solid track record as one of the
music
industry's most bankable "turn-around" men. He has led the venerable RCA
Record
label, co-founded Vector Recordings and has partnered to lead Vector Management
- one of the most successful artist management and independent labels in
the
industry. Preceding his work at RCA and Vector, Mr. Rovner was senior vice
president of Marketing at BMG North America and reported directly to the
chairman of BMG Worldwide and directed marketing efforts for company-owned
properties. As senior vice president of Arista Records from 1991 to 1994,
he
oversaw all brand marketing which yielded record-breaking sales for artists
Whitney Houston and Kenny G. Mr. Rovner's career began at Columbia Records.
From
1981 until his departure in 1991 from the office of Vice President of Marketing,
he worked on all creative marketing aspects for Bruce Springsteen's Grammy
Award
winning recording Born
in the USA,
as well
as projects for The Rolling Stones, Wynton Marsalis, and Pink Floyd. Mr.
Rovner
developed his passion for brand marketing and music while a student at the
University of Iowa, where he was awarded a B.A. in Communication
Studies.
Truman
T. Semans
was
appointed director of the Company by board resolution on September 19, 2002.
Mr.
Semans is founder and since 1993 has been Vice Chairman of Brown Investment
Advisory & Trust Company, or Brown Advisory, a full-service firm providing
investment advisory services to families and individuals of substantial wealth.
Prior to founding Brown Advisory, Mr. Semans joined Alex. Brown & Sons in
August 1974 as general partner, and was a member of the executive committee,
the
Vice Chairman of the Board and a member of the Executive and Organization
Committee. He graduated from Princeton University and attended the University
of
Virginia Law School.
George
P. Stamas
was
elected a director of the Company on October 20, 1999. Since January 2002,
Mr.
Stamas has been a senior partner with the law firm of Kirkland and Ellis
LLP.
Also, since November 2001, Mr. Stamas has been a venture partner with New
Enterprise Associates. From December 1999 until December 2001, Mr. Stamas
served
as the vice chairman of the board and managing director of Deutsche Banc
Alex.
Brown (now Deutsche Bank Securities). Mr. Stamas is counsel to, and a limited
partner of, the Baltimore Orioles baseball team and also of Lincoln Holdings,
which holds interests in the Washington Wizards and Washington Capitals.
Mr.
Stamas also serves on the board of directors of FTI Consulting, Inc. He received
a B.S. in economics from the Wharton School of the University of Pennsylvania
and a J.D. from the University of Maryland Law School.
Election
of Officers
Our
board
elects our officers on an annual basis, and our officers serve until their
successors are duly elected and qualified. No family relationships exist
among
any of our officers or directors.
Election
of Directors
Our
board
of directors is currently comprised of eight directors. At each annual meeting
of stockholders, the successors to the directors then serving are elected
to
serve from the time of their election and qualification until the next annual
meeting following their election or until their successors have been duly
elected and qualified, or until their earlier death, resignation or removal.
All
of our current directors have been elected to serve until the annual meeting
of
stockholders to be held in 2007.
Mr.
Rovner was introduced to the board of directors through Mr. D’Loren and was
subsequently elected to the board at the Company’s 2006 annual meeting. Under
the terms of the agreement by which the Company acquired UCC, the Company
granted Mr. D’Loren a one-time right to nominate two persons to the board of
directors, provided that such nominees were approved by the Nominating Committee
of the board of directors and satisfied the prerequisite requirements for
independence. Mr. Rover was one of those two nominees.
Corporate
Governance
Committees
of the Board of Directors
Our
bylaws authorize our board of directors to appoint one or more committees,
each
consisting of one or more directors. The board of directors currently has
four
standing committees: an Audit Committee, a Nominating Committee, a Governance
Committee and a Compensation Committee, each of which has adopted written
charters which are all currently available on our website.
Audit
Committee
The
Audit
Committee’s responsibilities include:
·
|
appointing,
replacing, overseeing and compensating the work of a firm to serve
as the
registered independent public accounting firm to audit the Company's
financial statements;
|
·
|
discussing
the scope and results of the audit with the independent registered
public
accounting firm and reviewing with management and the independent
registered public accounting firm the Company's interim and year-end
operating results;
|
·
|
considering
the adequacy of the Company's internal accounting controls and audit
procedures;
|
·
|
reviewing
and approving, as appropriate, related party transactions for potential
conflict of interest situations;
|
·
|
approving
(or, as permitted, pre-approving) all audit and non-audit services
to be
performed by the independent registered public accounting firm;
and
|
·
|
providing
an avenue of communication among the independent auditors, management,
employees and the board.
|
The
Audit
Committee currently consists of Messrs. Brady, Semans and Mathias, with Mr.
Brady serving as its chairman. The board of directors has determined that
the
members of the Audit Committee satisfy the “independence” and “financial
literacy” requirements for audit committee members as set forth by the SEC and
as adopted in the Nasdaq listing standards.
The
board
of directors has also determined that Mr. Brady is an audit committee financial
expert, as defined by Item 407 of Regulation S-K and as required by Nasdaq
Rule
4350(d), and is independent of management, as defined by Rule 10A-3(b)(1)
of the
Securities Exchange Act of 1934, as amended and Nasdaq Rule 4200(a)(15) and
as
required by Nasdaq Rule 4350(d). We believe Mr. Brady is qualified to be
an
“audit committee financial expert” because he has the following attributes: (i)
an understanding of generally accepted accounting principles, or GAAP, and
financial statements, (ii) the ability to assess the general application
of such
principles in connection with accounting for estimates, accruals and reserves,
(iii) experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of issues that
can
reasonably be expected to be raised by NexCen’s financial statements, and
experience actively supervising one or more persons engaged in such activities,
(iv) an understanding of internal controls over financial reporting and (v)
an
understanding of audit committee functions. Mr. Brady has acquired these
attributes by means of having held various positions that provided the relevant
experience, including 33 years with Arthur Andersen (including twenty years
as
an audit partner) and membership on the audit committees of several public
companies since 1998. Mr. Brady also serves on the audit committees of three
other public companies, but the board of directors has determined that such
service does not affect his independence, responsibilities or duties as a
member
of the Audit Committee.
As
a
result of Mr. Semans’ March 2007 announcement of his intention to retire from
the board of directors in the near future, the Nominating Committee is reviewing
candidates for election to the board of directors who are qualified to serve,
and interested in serving, on the Audit Committee. Mr. Semans has agreed
to
remain on the board of directors until a suitable replacement is found and
has
joined the board of directors and the Audit Committee.
Nominating
Committee
The
Nominating Committee's responsibilities include:
·
|
identifying,
evaluating and recommending nominees to serve on the board of directors
and committees of the board of directors;
|
·
|
conducting
searches for appropriate directors and evaluating the performance
of the
board of directors and of individual directors;
and
|
·
|
screening
and recommending to the board of directors individuals qualified
to become
the chief executive officer of the Company or to become senior executive
officers of the Company.
|
The
members of the Nominating Committee are Messrs. Dunn, Brady and Mathias.
Mr.
Dunn currently serves as its chairperson.
Governance
Committee
The
Governance Committee’s responsibilities include:
·
|
assessing
the policies, procedures and performance of the board of directors
and its
committees;
|
·
|
developing,
evaluating and recommending to the board of directors any changes
or
updates to the Company’s Code of Ethics or Senior Financial Officers Code
of Ethical Conduct;
|
·
|
making
such other recommendations to the board of directors regarding affairs
relating to the directors and senior officers of the Company as the
Governance Committee deems appropriate;
|
·
|
developing
and recommending to the board of directors corporate governance principles
applicable to the Company; and
|
·
|
taking
a leadership role in shaping the corporate governance of the
Company.
|
The
members of the Governance Committee are Messrs. Dunn,
Brady, Mathias, Rovner, Semans and Stamas.
Compensation
Committee
The
Compensation Committee's responsibilities include:
·
|
setting
the chief executive officer's compensation based on the achievement
of
corporate objectives;
|
·
|
reviewing
and recommending approval of the compensation of the Company's other
executive officers;
|
·
|
administering
our stock option and stock incentive
plans;
|
·
|
reviewing
and making recommendations to the board
of directors
with respect to the Company’s overall compensation objectives, policies
and practices, including with respect to incentive compensation and
equity
plans; and
|
·
|
evaluating
the chief executive officer's performance in light of corporate
objectives.
|
The
members of the Compensation Committee are Messrs. Mathias, Dunn and Rovner,
with
Mr. Mathias currently serving as its chairperson.
Compensation
Committee Interlocks and Insider Participation
None
of
the members of our Compensation Committee is or has ever been an officer
or
employee of NexCen or any of its subsidiaries. None of our executive officers
serve as a member of the board of directors or a compensation committee of
any
entity that has one or more executive officers serving on our board of directors
or our Compensation Committee.
Director
Independence
Each
of
our directors, other than Messrs. Oros, D’Loren and Stamas, qualifies as
“independent” in accordance with the published listing requirements of Nasdaq
Global Market. The Nasdaq Global Market independence definition includes
a
series of objective tests, such as, that the director is not an employee
of the
company and has not engaged in various types of business dealings with the
company. Our board of directors has not adopted any supplemental independence
standards. However, as required by Nasdaq Global Market rules, the board
of
directors has made a subjective determination with respect to each director
as
to whether any relationships exist which, in the opinion of the board of
directors, would interfere with the exercise of independent judgment by that
director in carrying out the responsibilities of a director, regardless of
whether the director otherwise satisfies the published independence standards
of
the Nasdaq Global Market. In making these determinations, the directors reviewed
and discussed information provided by the directors and management with regard
to each director’s business and personal activities as they relate to NexCen and
NexCen’s management. Messrs. Oros and D’Loren are employed by the Company, and,
as such, neither qualifies as an independent director under the Nasdaq Global
Market standards. The board of directors further also determined that Mr.
Stamas
should not be considered an independent director in view of the business
relationship between the company and Kirkland & Ellis LLP, which is the
Company’s primary outside counsel and of which Mr. Stamas is a partner.
Mr.
Stamas’ business relationship with the Company is described in Item 13 under the
caption “Certain Relationships and Related Party Transactions.”
The
board of directors made this decision despite the fact that this business
relationship does not cause Mr. Stamas to be deemed non-independent under
the
Nasdaq Global Market standards. As a result, Mr. Stamas does not serve on
any of
the Company’s standing committees, other than the Governance Committee. All
members of the Audit Committee, Compensation Committee and Nominating Committee
are independent directors.
In
connection with the independence determination for Mr. Dunn, the directors
considered that in 2006, FTI
Consulting, Inc. (FTI) provided due diligence services to the Company totaling
approximately $15,000 in connection with the acquisition of UCC. Since 1992,
Mr.
Dunn has served as a director of FTI, and as its President and Chief Executive
Officer. The
board
of directors has determined that Mr. Dunn should be considered an independent
director in view of the fact that the services were immaterial to FTI and
of a
one-time nature. The board of directors intends to continue to monitor any
relationships that the directors have with the Company’s service providers.
Other than the consulting services provided by FTI, the board of directors
did
not consider and was not aware of any other transactions, relationships or
arrangements that would effect the determination of our directors’ independence
under the Nasdaq Global Market standards.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our officers (as defined in regulations
issued by the SEC) and directors, and persons who own more than ten percent
of
our common stock, to file with the SEC initial reports of ownership and reports
of changes in ownership of our common stock (including options and warrants
to
acquire common stock). Officers, directors and greater than ten percent
stockholders are required by SEC regulation to furnish us with copies of
all
Section 16(a) forms they file.
Based
solely on a review of the copies of such reports of ownership received by
us and
certifications from our executive officers and directors, we believe that
during
fiscal year 2006 all filing requirements applicable to our executive officers,
directors and such greater than ten percent stockholders were complied with
on a
timely basis, except for a late report on Form 4 by each of Messrs. Oros
and
Reymann filed on May 16, 2006 and May 18, 2006 reporting the grant of 150,000
and 50,000 shares of restricted stock made to Messrs. Oros and Reymann,
respectively, on May 5, 2006 under our 1999 Equity Incentive Plan.
Corporate
Governance Policies
We
have
adopted a general code of ethics for our business. We have also adopted a
code
of ethical conduct that applies solely to our principal executive officer,
principal financial officer, principal accounting officer, controller and
persons performing similar functions. The board of directors is responsible
for
reviewing and authorizing waivers from both the code of ethics and code of
ethical conduct for senior financial officers, and we will file any waivers
from, or amendments to, these codes on our website at www.nexcenbrands.com,
the
content of which website is not incorporated by reference into or considered
a
part of this document. In 2006 no waivers were reviewed or authorized. Both
the
general code of ethics and the code of ethical conduct for senior financial
officers, as well as the charters for our Audit, Nominating, Governance and
Compensation Committees, are available on our website. This information is
also
available in print upon written request to our corporate secretary at the
address of our corporate headquarters office in New York City. We have not
adopted any formal, written governance policies or principles.
ITEM
11. EXECUTIVE COMPENSATION
Compensation
Discussion and Analysis
Overview
and Objectives
In
2006,
we transformed our company by exiting the mortgage-backed securities business
that we had operated since 2004 to focus on a new intellectual property
business. As part of this transformation, we transitioned to a new senior
management team. As a result of these activities, our compensation programs
and
policies for our named executives in 2006 had several different
objectives:
·
|
Provide
reasonable financial incentives for outgoing managers to remain in
place
for a period of time to effect an orderly transition of the management
of
the business;
|
·
|
Provide
reasonable severance packages for outgoing managers, through a combination
of current cash payments, continued benefits and long-term equity
awards,
in recognition of their long-standing service to the Company and
their
significant contributions to identifying and initiating the new
intellectual property business strategy;
and
|
·
|
Provide
new senior managers with a combination of current compensation and
long-term opportunities sufficient to attract outstanding senior
executives and provide them with incentives to (1) build and manage
our
business so that we become profitable and (2) create substantial
value for
our stockholders over the long term.
|
We
began
the business and management transition during 2006 and are continuing to
develop
our compensation programs and policies in 2007, as we build both our business
and our senior management team. As a result, we expect that we may make material
adjustments and refinements to our compensation policies and programs in
2007.
Our
current compensation programs are intended to reward our named executives
for
growing our business profitably. They also are intended to encourage the
retention of executives who contribute significantly to improved business
performance, overall growth and increased stockholder value. The components
of
our compensation programs for named executives include salary, annual bonus,
equity incentive compensation and benefits.
We
have
paid salaries that are at or slightly below the median level in the marketplace,
reflecting our goal of conserving cash as we acquire businesses and seek
to
build a profitable operation. To enable us to attract and retain superior
individuals, however, we have offered generous performance-based annual bonus
opportunities and equity incentive awards. In the case of our chief executive
officer, on whom our business is dependent, we have agreed to a compensation
package that, by component and in the aggregate, based upon our review of
relevant market information, will be at the top of the marketplace if certain
performance levels are achieved. We believe that this compensation package
was
necessary to attract and retain our chief executive officer.
Process
for Determining Compensation
General.
Our
Compensation Committee plays an integral role in shaping the Company’s overall
compensation objectives, policies and practices. The Compensation Committee
is
responsible for, among other things, reviewing and recommending approval
of the
compensation of our executive officers; administering our equity incentive
and
stock option plans; reviewing and making recommendations to the board of
directors with respect to incentive compensation and equity incentive and
stock
option plans, and evaluating our chief executive officer's performance in
light
of corporate objectives, and setting our chief executive officer's compensation
based on the achievement of corporate objectives.
We
rely
on our judgment in making compensation decisions, based upon a review of
the
Company’s performance, the executive’s performance and responsibilities, the
Company’s and the executive’s achievement of business objectives, plans and
specified goals, and the executive’s contributions to the development of the
Company’s business and its long-term prospects for growth and success. We take
into account information about market levels of compensation provided by
our
compensation consultant, Towers Perrin, in setting compensation levels and
programs for new executives. Towers Perrin uses information from relevant
published compensation surveys, as well as public filings for similar peer
companies. We also consider a named executive’s current and past compensation
levels in determining whether to make any discretionary awards or any
adjustments to compensation of a continuing executive. In this process, our
objective is to keep annual salaries at or below median levels, but to provide
annual bonus opportunities and equity incentive awards that offer opportunities
to earn overall compensation above median levels, if the Company and the
executive deliver superior performance.
In
general, we have not developed or adhered to any strict formulas in setting
compensation or in establishing compensation packages. We expect that over
time,
the annual salaries of the named executive officers will be less than 50%
of
each person’s overall annual compensation and a significantly smaller portion of
such compensation over a period of years, taking into account the value of
incentive equity awards. In 2006, because we did not pay any annual bonuses
to
the named executives who are continuing with the Company, and because none
of
their incentive equity awards had vested, salaries represented a large
proportion of their overall annual compensation. We expect that this will
change
in future years.
Participation
of the Chief Executive Officer and
Other Executives.
We do
not currently have a human resources department. Our chief executive officer
participates in discussions with the Compensation Committee regarding
compensation decisions about all named executives other than himself. Except
for
the chief executive officer, no other named executive participates directly
in
discussions with the Compensation Committee about compensation matters, although
they do discuss these matters with the chief financial officer. We expect
to
rely heavily on the recommendations of the chief executive officer on these
matters, particularly with respect to the allocation of the annual bonus
pool.
Role
of the Compensation Consultant.
To
assist the Compensation Committee in fulfilling its responsibilities, the
Compensation Committee has retained an independent compensation consultant,
Towers Perrin. The consultant reports directly to the Compensation Committee.
Other than the work Towers Perrin performs for the Compensation Committee
and
the board of directors, Towers Perrin has not provided any consulting services
to NexCen or its executive officers.
In
assisting the Compensation Committee, Towers Perrin presents the committee
with
peer group benchmarking data and information about other relevant market
practices and trends, and makes recommendations to the Compensation Committee
regarding target levels for various elements of total compensation for executive
officers and directors of the Company. Towers
Perrin’s recommendations are presented to and considered by the Compensation
Committee in their deliberations on compensation matters.
In
2006
Towers Perrin was retained by the Compensation Committee to provide a
compensation study to benchmark and assist in the development of the
compensation packages for Mr. D’Loren and Mr. Haran. The compensation study
evaluated the reasonableness of the base salary, annual bonus and stock option
grants proposed for Mr. D’Loren employment as our new chief executive officer in
comparison to the competitive market. The compensation study was presented
to
the Compensation Committee and the board of directors and was considered
by each
in their deliberations and discussions on Mr. D’Loren’s compensation
package.
For
2007,
Towers Perrin has been retained by the Compensation Committee to assist in
a
review of executive officer and director compensation. In the 2007 review,
Towers
Perrin obtained peer group benchmarking data primarily from a group of companies
with revenue of $30 to $200 million regardless of industry, and
secondly from a group of companies that have a similar business strategy
to us,
regardless of revenue size. While the data may not result in a statistical
random sampling, we believe it will provide valuable data regarding the
compensation levels and practices of peer companies with whom we compete
for key
executive talent.
Equity
Grant Practices.
The
exercise price of each stock option awarded to our senior executives under
our
long-term incentive plan is the closing price of NexCen common stock on the
date
of grant, which is the date on which the option (including all of its material
terms) is approved by the Compensation Committee. The Compensation Committee
is
required to approve all grants of all awards under our long-term incentive
plan.
Our board of directors previously had delegated to our chief executive officer,
acting as a board committee of one, the authority to make grants of up to
40,000
shares per individual pursuant to our long-term incentive plans, subject
to his
duty to report periodically to the Compensation Committee on awards granted
by
him. In October 2006, we terminated that authority after concluding that
the
Compensation Committee should consider and decide on all incentive equity
awards.
We
have
not granted incentive equity awards on a regular annual basis in the last
several years. Until 2006, we had not granted any incentive equity awards
to our
named executive officers since 2002. We have typically granted stock options
to
new employees when they begin working for the Company. These grants are usually
made after the date on which employment commences because our Compensation
Committee has been unable to meet in time to approve a grant on an earlier
date.
We are currently considering the adoption of a policy to specify particular
dates on which equity incentive awards would be granted. Such dates would
take
into account the dates on which we expect to announce quarterly earnings
and
would be intended to avoid the grant of any stock options in advance of the
public announcement of material information about the Company. It has been
our
policy not to grant stock options in advance of public announcements of material
information. Our long-term incentive plan does not permit the re-pricing
of
options.
In
the
past, we have made periodic grants of restricted stock. In 2006, as an incentive
for our then-current named executives to identify and implement a new business
strategy for the Company, we granted a total of 150,000 shares of restricted
stock to our former chief executive officer (who is now our Chairman) and,
50,000 shares of restricted stock to our former chief financial officer.
Vesting
of those shares was subject to the acquisition of a business (or businesses)
that would serve as the foundation for a new business strategy for our Company.
In the case of our former chief financial officer, his 50,000 shares vested
when
we acquired UCC. In the case of our former chief executive officer, his 150,000
shares will vest in three 50,000 share amounts in each of June 2007, June
2008
and June 2009 (the first three anniversaries of the date on which we acquired
UCC). We have not made other restricted stock awards recently, and we are
currently evaluating whether to award restricted stock, stock options or
a
combination of the two in future incentive equity awards. Our decision will
take
into account tax, economic, and employee incentive aspects of the different
award types.
2006
Option Exercise Extension Program.
As part
of our transformation to a new IP-centric business model, we transitioned
management of the Company to a new senior management team and relocated our
corporate office to New York City (from Baltimore). At the end of 2006, we
closed the Baltimore office, and a number of historic employees (including
certain officers) left the Company. Some changes to the composition of our
board
of directors also began to occur, in response to the changes in our
business.
Our
employees and directors held certain vested options that had been issued
under
our equity incentive plans. Pursuant to these plans and the customary option
grant agreements that had been used historically, option holders typically
have
90 days following the termination of employment, or the termination of the
service relationship (in the case of a director), with the Company to exercise
vested stock options, after which time such options would be forfeited
automatically. Upon review of the situation, and taking into account the
unusual
corporate transformation the Company was undergoing and the long-standing
and
dedicated service of the small group of remaining employees, the Compensation
Committee determined that it was appropriate to provide employees and directors
with a one-time opportunity to elect to extend the post-employment or
post-service exercise period of vested options
The
Compensation Committee adopted an option extension program, consistent with
Section 409A of the Internal Revenue Code, pursuant to which existing employees
and directors of the Company were given a one-time opportunity to propose
to the
Compensation Committee, prior to December 31, 2006, an extension schedule
for
their vested options, which would govern their ability to exercise vested
options after ceasing to be employed by the Company or ceasing to be a director
of the Company. The Compensation Committee recommended this program to the
board
of directors, which approved the parameters of the program, and the details
of
the program were communicated to the Company’s six employees and eight
directors.
Four
of
the Company’s employees, including one named executive officer (Mr. Reymann) and
one of the Company’s directors (Mr. Beese) proposed option extension schedules
to the Compensation Committee. (Mr. Reymann left the Company in mid-December
2006 and stepped down as an executive officer in September 2006, and Mr.
Beese
resigned as a director in October 2006.) The Compensation Committee reviewed
the
proposed schedules and, after consultation with its outside professional
advisors, concluded that the proposed schedules were consistent with the
requirements of the overall program, as adopted by the board of directors,
and
were consistent with the requirements of Section 409A. As a result of this
option extension program, approximately 300,000 vested options that would
have
expired in 2006 and early 2007 were extended for periods of between one and
five
years. In each case, a person’s option extension arrangement identifies a future
calendar year (defined as January 1 of such year through the last day of
that
same calendar year) in which such options may be exercised, with options
not
exercised during the year expiring at the earlier of the end of that particular
calendar year or ten years from the date of the original option grant. The
option extension program allows for different exercise periods for different
options. So, for example, a person with 1,000 vested options who adopted
an
extension schedule may be entitled to exercise 250 of those options within
90
days of leaving the Company, 500 options during calendar year 2008 and 250
options during calendar year 2009 (assuming the applicable options do not
expire
before the end of the applicable extended option period).
The
purpose of this extension program was to provide long-standing employees
and
directors with an opportunity to realize additional value from their existing
long-term equity incentive grants as partial compensation for their service
to
the Company and in recognition of the fact that their departure from the
Company
was not voluntary, was due to changes in the Company’s business (rather than any
dissatisfaction with their performance) and represented a change (since the
time
of award grant) in both the Company’s and the employee’s (or the director’s)
expectation regarding the potential value of the long-term incentive awards.
In
2006, the Company recorded charges of $82,000 and $37,000 to restructuring
charges and stock based compensation, respectively, related to the extension
program.
The
Company has since changed the terms of its standard option grant to directors.
Such grants now provide that once vested, options awarded to directors are
exercisable at any time until their expiration date (which is typically ten
years from the grant date), regardless of when the director ceases to serve
as a
director of the Company (as long as such departure is after the vesting date
of
the granted options).
Share
Ownership Guidelines.
We do
not currently have any requirements for any of our executive officers or
other
employees to own specified amounts of NexCen common stock. As a result of
his
prior ownership of UCC, our chief executive officer currently owns approximately
2.4 million shares of our common stock, which he received as consideration
for
his interest in UCC when we purchased UCC in 2006. Our chief executive officer
also currently holds a warrant to acquire 125,000 shares of our common stock
and
options to acquire approximately 2.7 million shares of our common
stock.
Compensation
Deduction Limit.
Section
162(m) of the Internal Revenue Code generally limits the compensation that
a
corporation can deduct for payments to a chief executive officer and the
four
other most highly compensated executive officers to $1 million per officer
per
year. However, compensation that is “performance-based,” as defined by Section
162(m), is exempt from this limitation on deductibility. In general,
compensation attributable to the exercise of stock options granted with an
exercise price at or above the market price of the underlying stock at the
time
of the grant qualify as performance-based compensation. In 2006, we did not
pay
our chief executive officer or our four other most highly compensated executive
officers compensation in excess of $1 million (excluding compensation in
respect
of exercised options that we believe qualifies as performance-based
compensation).
We
expect
to award annual bonuses over the next several years under our 2006 Management
Bonus Plan. The
2006
Management Bonus Plan is designed so that amounts paid thereunder can qualify
as
performance-based compensation under Section 162(m) where the Compensation
Committee sets performance targets for eligible participants and such targets
are met. Tax rules require the Company to obtain
stockholder approval of the material terms of performance-based compensation
plans, such as the 2006 Management Bonus Plan. We obtained stockholder approval
of the 2006 Management Bonus Plan in October 2006.
The
Compensation Committee may award compensation that is not exempt from the
limitations on deductibility under section 162(m) where it believes such
compensation is in the best interests of NexCen and its stockholders, balancing
tax efficiency with long-term strategic goals. In this regard, the Compensation
Committee may take into account the impact of the Company’s net tax loss carry
forwards on the Company’s status as a taxpayer. If the Company generates taxable
earnings, its net tax loss carry forwards are expected to be available to
offset
most of the federal (and in some cases, state) income taxes that the Company
would otherwise be required to pay. Accordingly, the loss of compensation
deductions under certain circumstances may not be material to the Company;
however, the Compensation Committee will still consider whether there would
be
material benefits to paying non-deductible compensation in such
circumstances.
For
fiscal 2007, the Compensation Committee has decided not to adopt performance
or
award targets under the 2006 Management Bonus Plan. Accordingly, any bonus
payments awarded under the 2006 Management Bonus Plan will not qualify as
“performance based” compensation under Section 162(m). In reaching this
decision, the Compensation Committee took the following factors into
account:
·
|
Because
of the substantial recent changes to the Company’s business, the large
number of recent acquisitions, and the fact that the new business
has not
yet been operated for a full fiscal year, the Compensation Committee
did
not believe it could identify reliable and appropriate performance
targets
for 2007 that would ensure an appropriate award of incentive
compensation;
|
·
|
Because
the total bonus pool available under the 2006 Management Bonus Plan
is
capped at 5% of the Company’s net income in the applicable fiscal year,
and because the largest portion of that pool that can be awarded
to any
one person is 50% (which is the specified award percentage for Mr.
D’Loren), the Compensation Committee does not expect that any awards
for
2007 that may be made under the 2006 Management Bonus Plan will be
sufficient to result in any one individual receiving 2007 compensation
that is not performance-based in excess of $1 million;
and
|
·
|
Should
any covered individual end up receiving 2007 compensation that is
not
performance-based in excess of $1 million, the amount above $1 million
is
likely to be minimal and should not affect the Company’s liability for
2007 federal income taxes.
|
The
Compensation Committee plans in future years (after fiscal 2007) to structure
awards under the 2006 Management Bonus Plan so that they qualify as
“performance-based” compensation under Section 162(m). For fiscal 2007, however
the Compensation Committee will retain discretion to make aggregate awards
up to
the full amount of the bonus pool (5% of fiscal 2007 net income) based upon
a
review of both the Company’s and the eligible executive’s performance in fiscal
2007. To the extent the Compensation Committee identifies eligible individuals
and any target award levels in advance; these will be publicly disclosed
as
required by applicable SEC rules.
Elements
of Compensation
For
2006,
the principal components of compensation for our named executive officers
consisted of:
·
|
Perquisites
and other personal benefits; and
|
These
principal elements have been chosen to create a flexible package that can
reward
both our short and long-term performance, while providing the executive with
a
competitive compensation package. In 2006, we changed our business strategy
to
focus on a new IP-centric business model. As part of our transformation,
we
installed a new senior management team. Other than for the chief executive
officer for whom we negotiated a detailed employment arrangement in connection
with the acquisition of UCC, a company that he controlled and which gave
us the
platform for our new strategy, we have not yet formulated formal long-term
compensation policies and approaches. We expect to develop a comprehensive
program in 2007 now that we have completed several acquisitions consistent
with
our new business strategy which have established the foundation of our new
IP
business. We believe that this foundation will begin to give us the necessary
insight to understand the critical elements to our financial and operational
success for which we can set appropriate metrics for short and long-term
compensation. (Our new long-term compensation policies and approaches will
apply
both to the named executive officers and more generally to our employee base.)
For continuing executives other than the chief executive officer, agreements
were negotiated in 2006 that included competitive base salaries, discretionary
bonus opportunities, basic benefit packages, and modest severance arrangements
as required to attract the new executives and were based on negotiations
between
the new executive, on the one hand, and the chief executive officer and the
Compensation Committee, on the other.
Base
salary.
We
provide named executive officers and other employees with a base salary to
compensate them for basic services rendered during the fiscal year. Initial
base
salary ranges for our named executive officers were determined for each
executive based on negotiations between the new executive, on the one hand,
and
the Company, on the other.
For
2007,
Towers Perrin has been retained by the Compensation Committee to assist in
a
review of executive officer compensation. During its review of base salaries
for
executives, the Compensation Committee will consider:
·
|
Market
data provided by our outside consultant, Towers
Perrin;
|
·
|
Internal
review of the executive’s compensation, both individually and relative to
other executive officers; and
|
·
|
Individual
performance of the executive.
|
Until
a
formal long-term compensation policy and approach is adopted, the Compensation
Committee expects to review salary levels at least annually, as well as upon
a
promotion or other change in job responsibility. Merit based increases to
salaries, if any, will be based on the Compensation Committee’s review and
overall assessment of an individual’s performance.
Equity-based
awards.
We
provide equity-based compensation to promote our long-term growth and
profitability. Equity-based awards not only provide directors, executive
officers, and employees with incentives to maximize stockholder value and
otherwise contribute to our long-term success, but they also allow us to
attract, retain and reward the best available individual for positions of
responsibility.
Awards
of
stock options and restricted stock are made under our 2006 Equity Incentive
Plan, which was approved by our stockholders in October 2006. Prior to October
2006, equity-based awards were made under two prior long-term incentive plans.
With adoption of the 2006 Equity Incentive Plan, no further awards will be
issued under these older plans. Shares of restricted stock are issued subject
to
a vesting schedule and cannot be sold until and to the extent the shares
have
vested. Stock options are issued at an exercise price of no less than fair
market value on the date of grant and are subject to vesting requirements,
which
may include time-based vesting, performance-based vesting, or both.
Historically, we have not issued any options subject to performance-based
vesting. In 2006, we awarded restricted stock to our former chief executive
officer and chief financial officer, and awarded stock options to the three
current named executive officers and Mr. Haran in connection with their
employment agreements. The Compensation Committee administers the 2006 Equity
Incentive Plan and has not delegated any grant authority.
Cash
bonuses. We
provide cash bonus compensation to motivate, reward and retain key executives.
Under the 2006 Management Bonus Plan bonuses are paid out of a pool determined
to be 5% of the Company’s net income. The chief executive officer has a
contractual right to 50% of this pool and the other half is allocated to
senior
executives based on performance achievements determined by the chief executive
officer and the Compensation Committee. The Company reported net loss for
2006
and as a result there was no bonus pool for 2006.
Perquisites
and other personal benefits.
We
provide certain executive officers with perquisites and other personal benefits
that we and the Compensation Committee believe are reasonable and consistent
with our overall compensation program to better enable us to attract and
retain
superior employees for key positions. Perquisites are generally granted as
part
of our executive recruitment and retention efforts. During 2006, our chief
executive officer received a limited amount of perquisites and other personal
benefits that we paid on his behalf. These perquisites and other personal
benefits included, among other things:
·
|
Payments
of life and disability insurance
premiums;
|
Other
Compensation. In
addition to the compensation discussed above, we also provide our named
executive officers with customary employee benefits, available to all employees,
including health, disability and life insurance. In 2006, we matched
contributions made by our former chief executive officer and chief financial
officer (Messrs. Oros and Reymann) pursuant to a 401(k) plan. The other named
executive’s contributions were not matched as they participated under a
different 401(k) plan. In
general, these benefits are substantially the same as those available to
all of
our employees.
Compensation
for Outgoing Named Executives in 2006
Our
long-time chief executive officer and chief financial officer relinquished
their
positions with NexCen in 2006, although our chief executive officer has
continued as Chairman of the Company. We did not make any changes to their
base
salaries in 2006, and we did not award them any annual cash bonuses in 2006.
We
concluded that in light of the performance of the MBS business and our
expectation that a management transition would occur once we identified and
implemented a new or additional business strategy, no change in current
compensation was warranted. However, in early 2006 we began to discuss with
each
of them potential changes to their respective employment agreements that
we
believe would provide them with reasonable severance arrangements and incentives
to remain with the Company during what we expected would likely be a period
of
business and management transition. We finalized the amendments in early
May
2006 and, at the same time, granted them shares of restricted stock, as
discussed below. The amendments are described below under the caption
“Employment Agreements.”
These
revised employment agreements and restricted stock grants were intended to
achieve several objectives:
·
|
reward
them for their long-standing service and contributions to the Company,
|
·
|
provide
them with a significant incentive to carry out a successful change
in the
Company’s business strategy,
|
·
|
encourage
them to be supportive of a change in the senior management of the
Company,
and
|
·
|
offer
them a reasonable severance package that we concluded was consistent
with
market practice and appropriate in light of their service to the
Company
and the Company’s situation.
|
Compensation
of Our Former Chief Executive Officer.
In 2006, Mr. Oros’ annual salary remained at $200,000, which is the same as it
has been since 1999. He was not awarded any cash bonus in 2006.
In
June
2006, Mr. Oros relinquished his position as chief executive officer, remaining
as Chairman. Under the terms of his amended employment agreement, we requested
that he also continue as an employee, to provide advice and guidance to our
new
chief executive officer and to assist him with the management and business
transition processes. Mr. Oros has continued to receive his annual salary
of
$200,000 during this period. The amended employment agreement also provides
for
a revised termination and severance arrangement. If we subsequently terminate
Mr. Oros’ employment without “Cause” (as defined in his existing employment
agreement) or because of his death or “Disability” (as defined in his existing
employment agreement), he will receive a lump-sum severance
payment equal to $600,000, less the aggregate amount of salary paid to him
since
June 2006. In such event, Mr. Oros also is entitled to continue receiving
group
health and medical benefits for up to three years following termination of
his
employment.
The
purpose of this amended contractual arrangement was to provide Mr. Oros with
a
severance package – in the
form of
continuing salary or a lump-sum departure payment, at the Company’s
option –
equal to three years of annual salary, plus continuing insurance benefits
for
three years. In exchange for this severance arrangement, Mr. Oros agreed
to
abide by a non-competition covenant. Mr. Oros was the chief executive officer
of
the Company from its inception in 1996 until June 2006, and we concluded
that a
reasonable severance arrangement was appropriate in light of his years of
dedicated service to the Company. We believe that the severance arrangement
is
appropriate as compared to severance arrangements provided to chief executives
of companies similar to NexCen and is reasonable under the circumstances,
taking
into account NexCen’s size, stage of development and financial resources and Mr.
Oros’ contributions to the Company over an extended period of time.
In
2006,
as discussed above, Mr. Oros also received a grant of 150,000 shares of
restricted stock, which will vest in three increments of 50,000 shares in
each
of June 2007, June 2008 and June 2009, subject to accelerated vesting under
certain circumstances as described below under the heading “Employment
Agreements.” In October 2006, Mr. Oros was granted 25,000 stock options priced
at $6.77 per share, which was the closing price of NexCen’s common stock on that
date. The options will vest in full in October 2007, if Mr. Oros remains
employed by the Company at such time. Each of the non-management directors
also
received a grant of 25,000 stock options on this same day, at the same per
share
price and with the same vesting terms. The board of directors decided to
award
these options to Mr. Oros, despite the fact that he was an employee of the
Company at the time, because he had ceased to serve as a member of the senior
executive management team (as his continuing positions were as Chairman and
as a
non-executive adviser to the senior management team) and would not be entitled
to receive any annual bonuses or long-term incentive awards that might be
paid
to senior executives. On March 23, 2007, the Company announced that Mr. Oros
plans to step down as Chairman by the end of the year, but will remain as
a
director and an employee.
Compensation
of Our Former Chief Financial Officer.
In 2006,
Mr. Reymann’s annual salary remained at $180,000, which is the same as it has
been since 2002. He was not awarded any cash bonus in 2006.
In
September 2006, Mr. Reymann stepped down as chief financial officer. He remained
with the Company to assist in a management transition through mid-December
2006.
Under the terms of an amended employment agreement that we negotiated with
Mr.
Reymann in 2006, upon his departure from the Company, he received a lump-sum
severance payment of $360,000, plus continued group health and medical benefits
for two years. In addition, all of Mr. Reymann’s options were vested as of the
date his employment with the Company ended. See “Outstanding Equity Awards at
Fiscal Year-End Table” for details of Mr. Reymann’s stock options.
We
amended Mr. Reymann’s employment agreement in 2006 to provide for this severance
package (equivalent to two years of annual salary plus continuing insurance
benefits for two years) and to provide him with accelerated option vesting
in
light of his many years of dedicated service to the Company. He served as
the
Company’s chief financial officer since 1998. In exchange for the severance
arrangement, Mr. Reymann agreed to abide by a non-competition covenant. We
believe that the severance arrangement is appropriate as compared to severance
arrangements provided to senior executives of companies similar to NexCen
and is
reasonable under the circumstances, taking into account NexCen’s size, stage of
development and financial resources and Mr. Reymann’s contributions to the
Company over an extended period of time.
In
2006,
as discussed above, Mr. Reymann also received a grant of 50,000 shares of
restricted stock. All of these shares vested in June 2006, when we acquired
UCC.
Compensation
for Non-Management Directors.
Non-management directors’ compensation is set by the board of directors at the
recommendation of the Compensation Committee. Non-management directors’
compensation is designed to fairly pay directors for work required in a company
of our size and scope and to align directors’ interests with the long-term
interest of our stockholders. Non-management directors’ compensation is
comprised of cash compensation and equity compensation.
In
March
2006, the board of directors approved increases in the compensation payable
to
non-management directors. The compensation includes an annual retainer of
$20,000 and a fee of $1,500 for each board meeting attended. In 2006, upon
the
recommendation of the Compensation Committee, non-management directors were
granted 25,000 nonqualified options to purchase shares of our common stock.
In
their deliberations, the Compensation Committee was advised by management
and
Towers Perrin that the proposed option grants were consistent with the market
generally and the practices of comparable companies. Prior to the grant in
2006,
no options had been granted to our directors since 2002.
In
addition to board retainer and attendance fees, the chairperson of each board
committee (other than the Audit Committee) receives an additional retainer
of
$2,500. The chairperson of the Audit Committee receives a $12,500 annual
retainer. Audit Committee members also receive a fee of $2,500 for each Audit
Committee meeting they attend.
For
2007,
Towers Perrin has been retained by the Compensation Committee to assist in
a
review of director compensation. During its review of director compensation,
the
Compensation Committee will consider market data provided by our outside
consultant, Towers Perrin, and an internal review of compensation payable
to
non-management directors for a company of our size and scope.
Compensation
Committee Report
The
Compensation Committee has reviewed the Compensation Discussion and Analysis
and
discussed that Analysis with management. Based on its review and its discussions
with management, the Committee has recommended to our board of directors
that
the Compensation Discussion and Analysis be included in the Company’s Annual
Report on Form 10-K/A for 2006 and the Company’s 2007 proxy statement. This
Report is provided by the following independent directors, who comprise the
Compensation Committee:
Edward
J. Mathias (Chairman)
Jack
B. Dunn IV
Jack
Rovner
Summary
Compensation Table
The
table
below summarizes the total compensation paid to or earned by each of our
named
executive officers, including our former chief executive officer, our former
chief financial officer and Mr. Haran for the fiscal year ended December
31,
2006.
Since
we
reported net loss for fiscal year ended December 31, 2006, our named executive
officers, including our former chief executive officer, our former chief
financial officer and Mr. Haran, were not entitled to receive payments which
would be characterized as “Non-Equity Incentive Plan Compensation” pursuant to
our 2006 Management Bonus Plan. Additionally, the board of directors did
not
award any payments which would be characterized as “Bonus” payments. We also
have no defined benefit plans, actuarial plans, or non-qualified deferred
compensation plans.
Name
and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
Change
in Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
All
Other Compensation
($)
|
|
Total
($)
|
|
(1)
|
|
|
|
(2)
|
|
|
|
(3)
|
|
(4)
|
|
|
|
|
|
(5)
|
|
|
|
Robert
W. D’Loren
Chief
Executive Officer
|
|
|
2006
|
|
$
|
427,083
|
|
|
-
|
|
|
-
|
|
$
|
701,406
|
|
|
-
|
|
|
-
|
|
$
|
40,162
|
|
$
|
1,168,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
B. Meister
Chief
Financial Officer
|
|
|
2006
|
|
$
|
69,375
|
|
|
-
|
|
|
-
|
|
$
|
40,671
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
110,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Haran
Executive Vice President
|
|
|
2006
|
|
$
|
338,542
|
|
|
-
|
|
|
-
|
|
$
|
145,117
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
483,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
Zona
Executive
Vice President
|
|
|
2006
|
|
$
|
18,182
|
|
|
-
|
|
|
-
|
|
$
|
10,994
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
29,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Oros
Chairman
& Former Chief Executive Officer
|
|
|
2006
|
|
$
|
207,692
|
|
|
-
|
|
$
|
111,502
|
|
$
|
37,020
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
356,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Reymann
Former
Chief Financial Officer
|
|
|
2006
|
|
$
|
180,000
|
|
|
-
|
|
$
|
205,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
376,443
|
|
$
|
761,443
|
|
(1)
|
Mr.
D’Loren, Mr. Meister and Mr. Zona became named executive officers
on June
6, 2006, September 12, 2006 and December 11, 2006, respectively.
Mr.
Reymann ceased to be a named executive officers on September 12,
2006. Mr.
Oros remains an executive Chairman of the Company while Mr. Reymann
remained as an employee to assist in management transition through
mid-December 2006. Mr. Haran became an employee of the Company
on June 6,
2006.
|
|
|
(2)
|
The
amounts included for Mr. D’Loren, Mr. Meister, Mr. Haran and Mr. Zona is
based on a base salary of $750,000, $225,000, $375,000 and $300,000,
respectively, pro rated from their start dates of June 6, 2006,
September
12, 2006, June 6, 2006 and December 11, 2006, respectively. Mr.
Meister’s
amount does not include $29,000 which was paid to Mr. Meister for
services
as a consultant with the Company from July 2006 until September
2006. The
amount for Mr. Haran includes a deferred bonus of $125,000 from
UCC
Capital that the Company assumed upon the acquisition. The amount
included
for Mr. Oros and Mr. Reymann is based on a base salary of $200,000
and
$180,000, respectively. The amount for Mr. Oros includes an additional
$7,692 which arose when the company changed payroll systems and
trued-up
the payroll to coincide with the calendar year end of December
31,
2006.
|
|
|
(3)
|
In
2006, Messrs. Oros and Reymann received restricted stock as part
of their
agreements to transition the company to a new management
team.
|
|
|
(4)
|
For
the year ended December 31, 2006, Messrs. D’Loren, Meister, Haran and Zona
received option awards pursuant to the the terms of their employment
agreements. Mr. Oros’ option awards include the options
received as part of a stock option grant to purchase 25,000 shares
given to all directors except Mr. D’Loren on October 31, 2006.
|
|
|
(5)
|
For
2006, Mr. D’Loren received a total of $40,162 in all other compensation
which included insurance premiums for life and long term disability
of
$28,830, car expenses of $9,842 and club dues of $1,490. For David
Reymann
the amount represents a severance payment of two years salary that
was
payable to him under his employment agreement because of a Trigger
Event
(as discussed below in “Employment Agreements” under the caption
“Employment Agreements for Former Chief Executive Officer and Former
Chief
Financial Officer”) that occurred in 2006 and accrued vacation
benefits.
|
Grants
of Plan-Based Awards Table
During
fiscal year ended December 31, 2006, we granted stock options and restricted
stock awards to our named executive officers, Mr. Haran and our former chief
executive officer and former chief financial officer under our long-term
equity
incentive plans. Information
with respect to each of these awards on a grant-by-grant basis is set forth
in
the table below. All of our stock options were granted with an exercise price
equal to the fair market value of our common stock on the date of grant.
Under
our long-term equityincentive
plans, air market value is defined as the closing sale price of our common
stock
on the date of grant.
|
|
Estimated
Future Payouts
Under
Non-Equity
Incentive
Plan Awards
|
Estimated
Future Payouts
Under
Equity Incentive
Plan
Awards
|
All
Other
Stock
Awards:
Number
of
Shares
of
Stock
or
Units
(#)
|
All
Other
Option
Awards:
Number
of
Securities
Underlying
Options
(#)(1)
|
Exercise
or
Base
Price
of
Option
Awards
($/Sh)
($)
|
Closing
Price
of
Common
Stock
Units
on
Date
of
Grant
($)
|
Grant
Date
Fair
Value
of
Stock
and
Option
Awards
|
Name
|
Grant
Date
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Threshold
(#)
|
Target
(#)
|
Maximum
(#)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
W. D’Loren
|
06/06/06
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,811,976
|
$4.10
|
$4.10
|
$3,388,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
B. Meister
|
09/12/06
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
200,000
|
$6.08
|
$6.08
|
$369,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Haran
|
06/06/06
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
581,788
|
$4.10
|
$4.10
|
$701,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
Zona
|
12/11/06
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
250,000
|
$6.96
|
$6.96
|
$528,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Oros (2)
|
05/05/06
|
-
|
-
|
-
|
-
|
-
|
-
|
150,000
|
-
|
$0.00
|
$4.10
|
$480,769
|
|
10/31/06
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
25,000
|
$6.77
|
$6.77
|
$57,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Reymann (3)
|
05/05/06
|
-
|
-
|
-
|
-
|
-
|
-
|
50,000
|
-
|
$0.00
|
$4.10
|
$205,000
|
(1)
|
Mr.
D’Loren’s amount includes a warrant to purchase 125,000 shares that has
the same terms as the options. The warrant was not granted under
our
long-term equity incentive plans.
|
|
|
(2)
|
Mr.
Oros was granted 150,000 shares of restricted stock on May 5, 2006.
This
award was initially approved in March 2006, but final terms were
not
agreed and the shares were not awarded until May 5. Mr. Oros’ shares vest
in three equal annual installments of 50,000 shares on each of
the first
three anniversaries of June 6, 2006, which was the date on which
we
acquired UCC, and which our board of directors determined was a
“Trigger
Event” (as defined in Mr. Oros’ restricted stock grant agreement) that
initiated the three-year vesting. However, vesting remains subject
to Mr.
Oros’ continued employment on each vesting date.
|
|
|
(3)
|
Mr.
Reymann was granted 50,000 shares of restricted stock on May 5,
2006. This
award was initially approved in March 2006, but final terms were
not
agreed and the shares were not awarded until May 5. The shares
vested in
full on June 6, 2006, which was the date on which we acquired UCC,
and
which our board of directors determined was a “Trigger Event” (as defined
in Mr. Reymann’s restricted stock grant
agreement).
|
Outstanding
Equity Awards at Fiscal Year-End Table
The
following table sets forth information with respect to outstanding equity-based
awards at December 31, 2006 for our named executive officers, Mr. Haran and
our
former chief executive officer and former chief financial officer.
|
|
|
Stock
Awards
|
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
on Exercise Price
($)
|
Option
Expiration
Date
|
|
Number
of
Shares
or
Units
of Stock
That
Have
Not
Vested
(#)
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)
|
|
|
|
|
|
|
|
|
|
|
|
Robert
W. D’Loren
|
-
|
2,811,976
(1)
|
-
|
4.10
|
06/05/2016
|
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
David
B. Meister
|
-
|
200,000
(2)
|
-
|
6.08
|
09/11/2016
|
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
James
Haran
|
|
581,788
(3)
|
|
4.10
|
06/05/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
Zona
|
-
|
250,000
(4)
|
-
|
6.96
|
12/10/2016
|
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
David
Oros
|
100,000
12,600
18,000
-
-
655,000
157,500
|
-
-
-
-
25,000
(5)
-
-
|
-
-
-
-
-
-
-
|
2.95
16.00
8.54
-
6.77
1.60
4.00
|
06/27/2012
10/24/2009
07/24/2011
-
10/30/2016
06/21/2009
08/31/2009
|
|
-
150,000
(6)
-
-
|
1,084,500
(7)
-
-
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
David
Reymann
|
32,500
50,000
30,000
|
-
-
-
-
-
|
-
-
-
-
-
|
8.00
8.54
3.75
1.60
1.49
|
12/31/2008
12/31/2008
12/31/2007
12/31/2007
12/31/2007
|
|
-
|
-
|
-
|
-
|
(1)
|
Includes
a warrant to purchase 125,000 shares which has the same terms as
the
options. The warrant and the options vest in equal amounts on the
three
anniversaries of grant: June 2007, June 2008 and June 2009. For
additional
information with respect to accelerated vesting of this award,
see
“Employment Agreements - Robert W. D’Loren.”
|
|
|
(2)
|
Options
vest in equal amounts on the three anniversaries of grant: September
2007,
September 2008 and September 2009. For additional information with
respect
to accelerated vesting of this award, see “Employment Agreements - David
B. Meister.”
|
|
|
(3)
|
Options
vest in equal amounts on the three anniversaries of grant: June
2007, June
2008 and June 2009. For additional information with respect to
accelerated
vesting of this award, see “Employment Agreements - James
Haran.”
|
|
|
(4)
|
Options
vest in equal amounts on the three anniversaries of grant: December
2007,
December 2008 and December 2009. For additional information with
respect
to accelerated vesting of this award, see “Employment Agreements - Charles
A. Zona.
|
|
|
(5)
|
Options
vest in full on October 31, 2007.
|
|
|
(6)
|
The
restricted stock vests in three equal annual installments of 50,000
shares
on each of the first three anniversaries of June 6, 2006, subject
to Mr.
Oros’ continued employment with the Company on each vesting date. For
additional information with respect to accelerated vesting of this
award,
see “Employment Agreements - David S. Oros.”
|
|
|
(7)
|
This
represents the 150,000 shares subject to vesting multiplied times
our
stock price on December 31, 2006.
|
|
|
(8)
|
Exercised
on February 20, 2007.
|
(9)
|
Exercised
on April 16, 2007.
|
Option
Exercises and Stock Vested Table
The
following table sets forth certain information regarding exercise of options
and
vesting of restricted stock held by the named executive officers, Mr. Haran
and
our former chief executive officer and former chief financial officer during
the
year ended December 31, 2006.
|
Option
Awards
|
Stock
Awards
|
Name
|
Number
of Shares
Acquired
on Exercise
(#)
|
Value
Realized
on
Exercise
($)
|
Number
of Shares
Acquired
on Vesting
(#)
|
Value
Realized
On
Vesting
($)
(1)
|
|
|
|
|
|
Robert
W. D’Loren
|
-
|
-
|
-
|
-
|
|
|
|
|
|
David
B. Meister
|
-
|
-
|
-
|
-
|
|
|
|
|
|
James
Haran
|
-
|
-
|
-
|
-
|
|
|
|
|
|
Charles
Zona
|
-
|
-
|
-
|
-
|
|
|
|
|
|
David
Oros
|
-
|
-
|
-
|
-
|
|
|
|
|
|
David
Reymann
|
-
|
-
|
50,000
|
$205,000
|
(1)
|
Included
in this column is the aggregate dollar amount realized by the named
executive officer upon exercise of the restricted stock. The amount
is
calculated at the closing stock price on the date of exercise multiplied
by the number of shares exercised and acquired.
|
Compensation
for Continuing Named Executives in 2006
We
discuss here the compensation of those individuals who were named executive
officers at December 31, 2006, all of whom remain with the Company at the
date
of this Report. For each continuing named executive officer, we negotiated
employment agreements prior to their hire in 2006. In each case, we provide
competitive base salaries, discretionary bonus opportunities, basic benefit
packages and modest severance arrangements. The overall philosophy of our
compensation policy is reflected in each agreement. See the section captioned
“Employment Agreements” for more in-depth information. The compensation of our
former chief executive officer (who is now our Chairman) and our former chief
financial officer are discussed above.
Compensation
for Chief Executive Officer.
In 2006,
the compensation of Mr. D’Loren, the president and chief executive officer was
based on his employment agreement entered into on June 6, 2006. In
determining the salary and other forms of compensation for Mr. D’Loren, the
Compensation Committee retained a compensation consultant, Towers Perrin,
to
assist in the development of Mr. D’Loren’s compensation package. As discussed
above in “Role of the Compensation Consultant” Towers Perrin provided the
Compensation Committee with a compensation study to benchmark the compensation
package for Mr. D’Loren. The compensation study evaluated the reasonableness of
the base salary, annual bonus and stock option grants proposed for Mr. D’Loren
in comparison to the competitive market for which we competed for Mr. D’Loren’s
services. The compensation study indicated that initial overall compensation
levels fell between the 50th and 75th percentile of the competitive market.
In
year three (of the three year employment agreement), the study found that
overall compensation levels fell between the 75th and 90th percentile of
the
competitive market. The Compensation Committee and the board of directors
favored a package weighted toward incentive based compensation, which was
believed to tie more directly than base to increases in stockholder value.
The
Compensation Committee and board of directors also took into consideration
Mr.
D’Loren’s substantial experience and in particular his performance in the
intellectual property industry. The Compensation Committee and board of
directors also gave significant weight to the responsibilities of Mr. D’Loren,
including his expected role to implement the new IP strategy through sourcing
and successfully integrating. The Compensation Committee and board of directors
believes that Mr. D’Loren’s compensation package as our principal executive
officer reflects appropriate incentives for significant performance during
2007
and future years in building the company.
Compensation
for executive officers.
Compensation of our other executive officers has been determined based on
recommendations made by the chief executive officer to the Compensation
Committee. The objective of our compensation program is to attract and retain
talented executives. As mentioned above, the Company will be more fully
developing its compensation programs in 2007 to reflect the growth and change
in
the company’s business.
Compensation
amounts for named executive officers are determined according to the position
of
the named executive officer. Relatively greater emphasis is typically placed
on
the equity-based components of compensation so as to put a greater portion
of
total pay based on company and individual performance. We believe the
combination of a base compensation lower than median, coupled with an
opportunity to significantly enhance overall individual compensation if
individual and company performance will yield an attractive compensation
program
that facilitates our recruitment and retention of talented
executives.
Post-termination
compensation.
We have
entered into employment agreements with each of the named executive officers.
Each of these agreements provides for certain payments and other benefits
if the
executive's employment terminates under certain circumstances, including,
in the
event of a “change of control”. See sections captioned “Employment Agreements"
and “Potential Payments Upon Termination or Change of Control” for a description
of the severance and change of control benefits.
Employment
Agreements
Employment
Agreements for Continuing Named Executives in 2006
Robert
W. D’Loren
Simultaneous
with the acquisition of UCC in June 2006, we entered into an employment
agreement with Mr. D’Loren. Pursuant to the terms of Mr. D’Loren’s employment
agreement, Mr. D’Loren will receive an initial annual base salary of $750,000,
subject to periodic review and upward adjustment, as well as various perquisites
and benefits, including a monthly car allowance. For each calendar year during
the term of the employment agreement, Mr. D’Loren will be entitled to receive an
incentive bonus equal to 50% of amounts awarded under the 2006 Management
Bonus
Plan (the “Annual Bonus”). No Annual Bonus was paid in 2006. Unless otherwise
agreed, the Annual Bonus will be payable 50% percent in cash and 50% in
restricted shares of NexCen’s common stock that will vest in three equal
installments over three years following the date of their issuance.
On
June
6, 2006, as specified in Mr. D’Loren’s employment agreement, we granted Mr.
D’Loren options to purchase an aggregate of 2,686,976 shares of our common
stock
under the terms of the Company’s 1999 Equity Incentive Plan. See
“Outstanding Equity Awards at Fiscal Year-End” table for details of Mr.
D’Loren’s stock options.
Under
Mr. D’Loren’s employment agreement, if Mr. D’Loren’s employment with NexCen is
terminated without “Cause” (as defined in Mr. D’Loren’s employment agreement),
or if he resigns for “Good Reason” (as defined in Mr. D’Loren’s employment
agreement), or if a Change of Control (as defined in Mr. D’Loren’s employment
agreement) occurs, all unvested options and restricted shares issued to Mr.
D’Loren pursuant to the 2006 Management Bonus Plan will vest
immediately.
In
addition, in accordance with the terms of Mr. D’Loren’s employment agreement, we
issued to Mr. D’Loren a ten-year warrant to purchase 125,000 shares of our
common stock, at an exercise price of $4.10 per share. The terms, including
regular and accelerated vesting, of the warrant are identical to those of
the
option grant he received at closing.
The
initial term of Mr. D’Loren’s employment agreement is three years, and it renews
automatically for successive one-year periods beginning June 6, 2009, unless
either party provides at least 90 days’ advance written notice of a decision not
to renew. If we do not renew Mr. D’Loren’s employment agreement at the end of
any term, Mr. D’Loren will be entitled to receive his then current base salary
for two years. If (i) we terminate Mr. D’Loren’s employment without “Cause” or
(ii) Mr. D’Loren terminates his employment for Good Reason, he will be entitled
to receive a severance package consisting of (1) any earned but unpaid base
salary through the date of employment termination and any declared but unpaid
annual bonus and (2) an amount equal to his Base Salary (at the rate then
in
effect) for the greater of the remainder of the initial three-year term or
two
years. The severance will be payable over a six-month period or such shorter
period as is required to comply with Section 409A of the Internal Revenue
Code
and applicable regulations adopted thereunder. Mr. D’Loren also will be entitled
to continue to participate in NexCen’s group medical plan on the same basis as
he previously participated or receive payment of, or reimbursement for, COBRA
premiums (or, if COBRA coverage is not available, reimbursement of premiums
paid
for other medical insurance in an amount not to exceed the COBRA premium)
for a
two-year period following termination, subject to termination of this
arrangement if a successor employer provides him with health insurance
coverage.
If
Mr.
D’Loren’s employment is terminated without Cause (or if he resigns for Good
Reason) within one year of a Change of Control (as defined in Mr. D’Loren’s
employment agreement), he will be entitled to receive the same severance
as
described above for termination without Cause or resignation for Good Reason,
except that instead of the amount described in clause (2) of the prior
paragraph, Mr. D’Loren will be entitled to receive an amount equal $100 less
than three times the sum of (i) Mr. D’Loren’s base salary (at the rate in effect
on the date of termination) and (ii) the Annual Bonus (which, for this purpose,
will be deemed to equal the product of (A) the percentage of the 2006 Management
Bonus Plan that Mr. D’Loren was awarded in the most recently completed fiscal
year, multiplied by (B) four times the net income reported by NexCen in the
last
complete fiscal quarter prior to the effective date of termination of Mr.
D’Loren’s employment). However, if the severance payment owed to Mr. D’Loren,
plus any other payments or benefits, either cash or non-cash, that Mr. D’Loren
has the right to receive from NexCen would constitute an “excess parachute
payment” (as defined in Section 280G of the Internal Revenue Code of 1986), then
his severance will be reduced to the largest amount that will not result
in
receipt by Mr. D’Loren of an “excess parachute payment.”
During
the term of employment and for two years thereafter, or one year if Mr.
D’Loren’s employment is terminated without Cause or if he resigns for Good
Reason, Mr. D’Loren has agreed not to compete with NexCen. In addition, for two
years following the term of employment, Mr. D’Loren has agreed not to solicit
any customer or supplier to cease doing business with NexCen, or to solicit
or
hire any employee of NexCen or any of its subsidiaries.
David
B. Meister
In
September 2006, Mr. Meister joined the Company as Senior Vice President,
Chief
Financial Officer, Treasurer and Secretary.
Pursuant
to the terms of the employment agreement, Mr. Meister will receive an initial
annual base salary of $225,000, subject to periodic review and upward
adjustment, as well as customary employee perquisites and benefits. For each
calendar year during the term of the employment agreement, Mr. Meister will
be
entitled to receive a performance-based bonus pursuant to the 2006 Management
Bonus Plan based on achieving annual performance goals recommended by the
Chief
Executive Officer and subject to review and confirmation by the Compensation
Committee or board of directors.
On
September 12, 2006, as contemplated by the employment agreement, Mr. Meister
was
granted options to purchase an aggregate of 200,000 shares of the Company’s
common stock under the terms of the Company’s 1999 Equity Incentive Plan.
See
“Outstanding Equity Awards at Fiscal Year-End” table for details of Mr.
Meister’s stock options.
Under
Mr. Meister’s employment agreement, if his employment with the Company is
terminated without “Cause” (as defined in the employment agreement), or if he
resigns for “Good Reason” (as defined in the employment agreement), or if a
Change of Control (as defined in the employment agreement) occurs, all unvested
options will immediately vest and become fully exercisable.
The
initial term of the employment agreement is three years, and it renews
automatically for successive one-year periods beginning September 12, 2009,
unless either party provides at least 90 days’ advance written notice of a
decision not to renew. If (i) the Company terminates Mr. Meister’s employment
without “Cause” or does not renew the employment agreement at the end of any
term or (ii) Mr. Meister terminates his employment for Good Reason, he will
be
entitled to receive a severance package consisting of (1) any earned but
unpaid
base salary through the date of employment termination and any declared but
unpaid annual bonus and (2) an amount equal to his base salary (at the rate
then
in effect) for one year. The severance will be payable over a six-month period
or such shorter period required to comply with Section 409A of the Internal
Revenue Code and applicable regulations adopted thereunder. He also will
be
entitled to continue to participate in the Company’s group medical plan on the
same basis as he previously participated or receive payment of, or reimbursement
for, COBRA premiums (or, if COBRA coverage is not available, reimbursement
of
premiums paid for other medical insurance in an amount not to exceed the
COBRA
premium) for a one-year period following termination, subject to termination
of
this arrangement if a successor employer provides him with health insurance
coverage.
If
Mr.
Meister’s employment is terminated without Cause or if he resigns for Good
Reason within a year of a Change of Control (as defined in the employment
agreement), he will be entitled to receive the same severance as described in
the preceding paragraph, however, the amount of severance will be increased
to
equal $100 less than two times the sum of (i) Mr. Meister’s base salary (at the
rate in effect on the date of termination) and (ii) the annual bonus paid
to Mr.
Meister in the year prior to such Change in Control. However, if the severance
payment owed to Mr. Meister would constitute an “excess parachute payment” (as
defined in Section 280G of the Internal Revenue Code of 1986), then his
severance will be reduced to the largest amount that will not result in receipt
by the Mr. Meister of an “excess parachute payment.”
During
the term of employment and for two years thereafter, or one year if Mr.
Meister’s employment is terminated without Cause or if he resigns for Good
Reason, Mr. Meister has agreed not to compete with the Company. In addition,
for
two years following the term of employment, Mr. Meister has agreed not to
solicit, induce or attempt to induce any customer or supplier to cease doing
business with the Company, to solicit or hire any employee of the Company
or any
of its subsidiaries or in any way interfere with the relationship between
any
customers, suppliers, licensee, employee or business relation of the Company
and
the Company.
James
Haran
Simultaneous
with the acquisition of UCC in June 2006, we entered into an employment
agreement with Mr. Haran. Pursuant to the terms of Mr. Haran’s employment
agreement, Mr. Haran will receive an initial annual base salary of $375,000,
subject to periodic review and upward adjustment. For each calendar year
during
the term of the employment agreement, Mr. Haran will be entitled to receive
an
incentive under the 2006 Management Bonus Plan (the “Annual Bonus”). No Annual
Bonus was paid in 2006.
On
June
6, 2006, as specified in Mr. Haran’s employment agreement, we granted Mr. Haran
options to purchase an aggregate of 581,788 shares of our common stock under
the
terms of the Company’s 1999 Equity Incentive Plan. See
“Outstanding Equity Awards at Fiscal Year-End” table for details of Mr.
Haran’s stock
options.
Under
Mr. Haran’s employment agreement, if Mr. Haran’s employment with NexCen is
terminated without “Cause” (as defined in Mr. Haran’s employment agreement), or
if he resigns for “Good Reason” (as defined in Mr. Haran’s employment
agreement), or if a Change of Control (as defined in Mr. Haran’s employment
agreement) occurs, all unvested options issued to Mr. Haran pursuant to the
employment agreement will vest immediately.
The
initial term of Mr. Haran’s employment agreement is three years, and it renews
automatically for successive one-year periods beginning June 6, 2009, unless
either party provides at least 30 days’ advance written notice of a decision not
to renew. If we do not renew Mr. Haran’s employment agreement at the end of any
term, Mr. Haran will be entitled to receive his then current base salary
for
18-months. If (i) we terminate Mr. Haran’s employment without “Cause” or (ii)
Mr. Haran terminates his employment for Good Reason, he will be entitled
to
receive a severance package consisting of (1) any earned but unpaid base
salary
through the date of employment termination and any declared but unpaid annual
bonus and (2) an amount equal to his Base Salary (at the rate then in effect)
for 18-months. The severance will be payable over a six-month period or such
shorter period as is required to comply with Section 409A of the Internal
Revenue Code and applicable regulations adopted thereunder. Mr. Haran also
will
be entitled to continue to participate in NexCen’s group medical plan on the
same basis as he previously participated or receive payment of, or reimbursement
for, COBRA premiums (or, if COBRA coverage is not available, reimbursement
of
premiums paid for other medical insurance in an amount not to exceed the
COBRA
premium) for a one year period following termination, subject to termination
of
this arrangement if a successor employer provides him with health insurance
coverage.
If
Mr.
Haran’s employment is terminated without Cause (or if he resigns for Good
Reason) within one year of a Change of Control (as defined in Mr. Haran’s
employment agreement), he will be entitled to receive the same severance
as
described above for termination without Cause or resignation for Good Reason,
except that instead of the amount described in clause (2) of the prior
paragraph, Mr. Haran will be entitled to receive an amount equal $100 less
than
two times the sum of (i) Mr. Mr. Haran’s base salary (at the rate in effect on
the date of termination) and (ii) the Annual Bonus, if declared, in the year
prior to the Change of Control. However, if the severance payment owed to
Mr.
Haran, plus any other payments or benefits, either cash or non-cash, that
Mr.
Haran has the right to receive from NexCen would constitute an “excess parachute
payment” (as defined in Section 280G of the Internal Revenue Code of 1986), then
his severance will be reduced to the largest amount that will not result
in
receipt by Mr. Haran of an “excess parachute payment.”
During
the term of employment and for two years thereafter, or one year if Mr. Haran’s
employment is terminated without Cause or if he resigns for Good Reason,
Mr.
Haran’s has agreed not to compete with NexCen. In addition, for two years
following the term of employment, Mr. Haran has agreed not to solicit any
customer or supplier to cease doing business with NexCen, or to solicit or
hire
any employee of NexCen or any of its subsidiaries.
Charles
A. Zona
In
December 2006, Mr. Zona joined the Company as Executive
Vice President, Brand Management and Licensing.
Prior to
his appointment, Mr. Zona worked with the Company as a consultant since November
2006.
Pursuant
to the terms of the employment agreement, Mr. Zona will receive an initial
annual base salary of $300,000, subject to annual review and upward adjustments
(but not decreases), as
well
as customary employee perquisites and benefits.
Mr.
Zona will also be eligible to receive a performance-based bonus pursuant
to the 2006 Management Bonus Plan
based on
achieving annual performance goals recommended by the President and Chief
Executive Officer and subject to review and confirmation by the Compensation
Committee or board of directors.
On
December 11, 2006, as contemplated by the employment agreement, Mr. Zona
was
granted options to purchase a total of 250,000 shares of the Company’s common
stock pursuant to the terms of the Company’s 2006 Equity Incentive Plan. See
“Outstanding Equity Awards at Fiscal Year-End” table for details of Mr. Zona’s
stock options. Under Mr. Zona’s employment agreement, if his employment with the
Company is terminated without “Cause” (as defined in the employment agreement),
or if he resigns for “Good Reason” (as defined in the employment agreement), or
if a Change of Control (as defined in the employment agreement) occurs, all
unvested options will immediately vest and become fully
exercisable.
The
initial term of the employment agreement is three years, and it renews
automatically for one-year periods, unless either party gives the other party
90
days prior written notice of a decision not to renew. If the Company terminates
Mr. Zona’s employment (i) without Cause, or (ii) if Mr. Zona resigns for Good
Reason, or (iii) if the Company fails to renew the term, Mr. Zona will be
entitled to receive (1) any unpaid base salary including any declared but
unpaid
annual bonus and (2) an amount equal to his base salary (at the rate then
in
effect) for a six-month period. Mr. Zona also will be entitled to continue
to
participate in the Company’s group medical plan on the same basis as he
previously participated or receive payment of, or reimbursement for, COBRA
premiums for a one-year period following his termination, subject to termination
of coverage if a successor employer provides him with health
insurance.
Notwithstanding
the foregoing, if Mr. Zona’s employment is terminated within one year following
a Change of Control by the Company without Cause or by Mr. Zona with Good
Reason, Mr. Zona shall be entitled to receive the same severance as described
in
the preceding paragraph, however, the amount of severance will be changed
to an
amount equal to $100 less then two times the sum of (i) Mr. Zona’s base salary
(at the rate then in effect) and (ii) the annual bonus paid to Mr. Zona in
the
year prior to such Change in Control. However, if the lump sum severance
owed to
Mr. Zona would constitute an “excess parachute payment” (as defined in Section
280G of the Internal Revenue Code of 1986), then his severance will be reduced
to the largest amount that will not result in receipt by Mr. Zona of an “excess
parachute payment.”
During
the term of employment and for one year thereafter, or six months if Mr.
Zona’s
employment is terminated without Cause or if he resigns for Good Reason,
Mr.
Zona has agreed not to compete with the Company. In addition, for one year
following the term of employment, Mr. Zona has agreed not (i) to solicit,
induce
or attempt to induce any customer, supplier, licensee, or other business
relation of the Company or any of its subsidiaries to cease doing business
with
the Company or any of its subsidiaries, (ii) to solicit, induce or attempt
to
induce any employee of the Company or any of its subsidiaries to terminate
such
employee’s employment with the Company or (iii) in any way interfere with the
relationship between any customer, supplier, licensee, employee or business
relation and the Company or any of its subsidiaries.
Employment
Agreements for Former Chief Executive Officer and Former Chief Financial
Officer
David
S. Oros
On
May 5,
2006, we entered into a new employment agreement with Mr. Oros to provide
for
Mr. Oros’ continued part-time employment by NexCen if he ceased to serve as
NexCen’s chief executive officer following the occurrence of a “Trigger Event”
(as such term is defined in his restricted stock grant agreement). As a result
of the acquisition of UCC in June 2006, the board of directors determined
that a
Trigger Event had occurred. As a result, Mr. Oros is continuing employment
with
us for up to a three-year period at a base salary of $200,000 per year. Under
the terms of this arrangement, Mr. Oros is not required to devote more than
250
hours per year to NexCen. In addition, if, at any time, Mr. Oros’ employment is
terminated by NexCen without “Cause” (as defined in his existing employment
agreement) or because of his death or “Disability” (as defined in his existing
employment agreement), he will receive a lump-sum severance payment equal
to
$600,000, less any salary paid to him since June 2006. In the event of such
a
termination, Mr. Oros also is entitled to continue receiving group health
and
medical benefits for up to three years following termination of his employment.
Severance payments are to be paid on a schedule that complies with the
requirements of Section 409A of the Internal Revenue Code of
1986,
as
amended. In the amendment, Mr. Oros also has agreed to a non-competition
covenant.
On
May 5,
2006, we also granted 150,000 shares of restricted stock to Mr. Oros, which
is
governed by the terms of his restricted stock grant agreement. This grant
was
made pursuant to the NexCen’s 1999 Equity Incentive Plan. Mr. Oros’ shares vest
in three equal annual installments of 50,000 shares on each of the first
three
anniversaries on the date of the Trigger Event that occurred in June 2006,
subject to Mr. Oros’ continued employment with NexCen on each vesting date. In
addition, all otherwise unvested restricted shares will vest on an accelerated
basis upon the occurrence of a “Change of Control” (as defined in the 1999
Equity Incentive Plan), or upon termination of employment by NexCen without
“Cause,” death or “Disability,” or upon resignation for “Good Reason” (with all
such terms as defined in the restricted stock grant agreement). Any shares
that
are unvested on May 5, 2013 will be forfeited, and unvested shares also will
be
forfeited upon a termination by NexCen of employment for “Cause” or resignation
without “Good Reason.”
David
C. Reymann
On
May 5,
2006, we entered into a new employment agreement with Mr. Reymann to provide
that all of his outstanding unvested options and restricted stock would vest
automatically upon the occurrence of a Trigger Event, which occurred upon
the
acquisition of UCC in June 2006. In addition, Mr. Reymann’s severance
arrangement was revised so that if his employment is terminated by NexCen
without “Cause” (as defined in his existing employment agreement), his Death or
Disability (as defined in his existing employment agreement) or if he terminated
his employment for “Good Reason” (as defined in the amendment), he would be
entitled to receive a lump-sum severance payment equal to the greater of
(a)
two-times his then-current annual salary or (b) $360,000. In such event,
Mr.
Reymann also would be entitled to continue receiving group health and medical
benefits for two years following termination of his employment. Severance
payments are to be paid on a schedule that complies with the requirements
of
Section 409A of the Internal Revenue Code of 1986, as amended. In the amendment,
Mr. Reymann also agreed to extend the duration of the non-competition and
non-solicitation covenants in his existing employment agreement from one
to two
years following termination of his employment with NexCen. Upon the hiring
of
Mr. Meister as Chief Financial Officer in September 2006, Mr. Reymann became
a
financial officer of the company and continued to provide services to the
company on a transitional basis until December 15, 2006. At the end of the
transition period, Mr. Reymann received the severance benefits described
above
based on his right to terminate for “Good Reason” as a result of no longer
serving as the Company’s chief financial officer.
On
May 5,
2006, we also granted 50,000 shares of restricted stock to Mr. Reymann which
vested upon the Company’s acquisition of UCC on June 6, 2006. See “Grants of
Plan-Based Awards” table for details of Mr. Reymann’s restricted stock
grant.
Potential
Payments Upon Termination or Change-of-Control
As
noted
above under “Employment Agreements,” we have entered into employment agreements
with each of our named executive officers and Mr. Haran. These agreements
provide for certain payments and other benefits if a named executive officer’s
or Mr. Haran’s employment with us is terminated under circumstances specified in
his agreement, including a “Change of Control” of the Company. A named executive
officer’s rights upon the termination of his or her employment will depend upon
the circumstances of the termination.
The
receipt of the payments and benefits to the named executive officers and
Mr.
Haran under their employment agreements are generally conditioned upon their
complying with customary non-solicitation, non-competition, confidentiality,
non-interference and non-disparagement provisions. By the terms of such
agreements, the executives acknowledge that a breach of some or all of the
covenants described herein will entitle us to injunctive relief restraining
the
commission or continuance of any such breach, in addition to any other available
remedies.
The
following table provides the term of such covenants following the termination
of
employment as it relates to each named executive officer, Mr. Haran and our
former chief executive officer:
Covenant
|
Robert
D’Loren
|
David
B. Meister
|
James
Haran
|
Charles
Zona
|
David
Oros
|
|
|
|
|
|
|
Confidentiality
|
Employment
term and
thereafter
|
Employment
term and
thereafter
|
Employment
term and
thereafter
|
Employment
term and
thereafter
|
Indefinitely
|
|
|
|
|
|
|
Non-solicitation
|
Employment
term and
24
months
thereafter
|
Employment
term and
24
months
thereafter
|
Employment
term and
24
months
thereafter
|
Employment
term and
12
months
thereafter
|
Employment
term and
6
months
thereafter
|
|
|
|
|
|
|
Non-competition
|
Employment
term and
24
months
thereafter
|
Employment
term and
24
months
thereafter
|
Employment
term and
24
months
thereafter
|
Employment
term and
12
months
thereafter
|
Employment
term and
6
months
thereafter
|
|
|
|
|
|
|
Non-interference
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
|
|
|
|
|
|
Non-disparagement
|
Indefinitely
|
Indefinitely
|
Indefinitely
|
Indefinitely
|
N/A
|
Termination
Payments (Other than in Connection with a
Change-of-Control)
The
table
below includes a description and the amount of estimated payments and benefits
that would be provided by us (or our successor) to each of the named executive
officers, Mr. Haran and our former chief executive officer under each employment
agreement, assuming that a termination circumstance occurred as of December
31,
2006 and a “Change of Control” had not occurred. See “Employment Agreements”
included above for additional details for the named executive officers, Mr.
Haran and our former chief executive officer.
|
|
Estimated
Amount of Termination Payment to:
|
Termination
Event
|
Type
of Payment
|
Robert
D’Loren
|
David
B. Meister
|
James
Haran
|
Charles
Zona
|
David
Oros
|
Termination
for Cause, death or disability
|
Payment
of accrued but unused
vacation
time
|
$28,835
|
$5,240
|
$10,091
|
-
|
$18,269
|
|
|
|
|
|
|
|
Termination
without Cause or by
executive
for Good Reason
|
Lump
Sum Severance Payment
|
$1,812,500
|
$225,000
|
$562,500
|
$150,000
|
$483,333
|
|
|
|
|
|
|
|
Termination
without Cause or by
executive
for Good Reason
|
Pro
rata portion
of
Bonuses (1)
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Death,
termination without Cause, or
termination
by executive for Good Reason
|
Continued
coverage under medical,
dental,
hospitalization and life
insurance
plans (2)
|
$80,065
|
$11,202
|
$11,202
|
$11,202
|
$27,073
|
(1)
|
The
bonuses payable upon a termination event are based on the actual
bonus
paid in the prior year. Since no bonuses were paid in the prior
year, no
amount is shown here.
|
(2)
|
Calculated
at current insurance premium rates in effect at December 31, 2006
for the
period of time of the benefit:
Robert
D’Loren - 2 years
David
Meister - 1 year
James
Haran - 1 year
Charles
Zona - 1 year
David
Oros - approximately 2.5 years
|
Termination
in Connection with a Change of Control
The
employment agreements with each of Messrs. D’Loren, Meister, Haran and Zona
provide that, if, within twelve months following a “Change of Control,” their
employment is terminated without “Cause” or they terminate their employment for
“Good Reason” as all such terms are defined in each employment agreement, we are
obligated to make a lump-sum severance payment. A “Change of Control” is defined
in each employment agreement by reference to our 1999 Equity Incentive Plan,
which is defined to include a change in majority of our board of directors,
consummation of certain mergers, the sale of all or substantially all of
our
assets or the acquisition of at least 80% of the undiluted total voting power
of
our then-outstanding securities. In addition, if within 12 months following
a
change of control, our named executive officers or Mr. Haran are terminated
without “Cause” or they terminate their employment for “Good Reason,” then all
unvested stock options, shares of restricted stock and other equity awards
shall
vest immediately, and remain exercisable for the lesser of 180 days after
termination and the remaining term of the applicable grant. See “Employment
Agreements” included above for additional details regarding Change of Control
payments.
For
Mr.
D’Loren, the severance payment is equal to $100 less than three times the sum
of
Mr. D’Loren’s base salary plus a bonus amount calculated as the percentage of
the bonus pool that Mr. D’Loren received in the prior fiscal year multiplied
times five percent of the annualized net income for the quarter immediately
preceding the executive’s separation. For each of Messrs. Meister, Haran and
Zona, the separation amount is calculated the same as for Mr. D’Loren, except
that the amount is multiplied times two. For each of our named executive
officers and Mr. Haran, in the event that the foregoing calculation, together
with all other can and non-cash amounts that the executive has the right
to
receive from us would result in the severance payment being treated as an
“excess parachute payment” within the meaning of Section 280G of the Internal
Revenue Code, then the payment is reduced automatically to the largest amount
that will not result in the payment being treated as an “excess parachute
payment.” Since this formula is intended to avoid the lump sum being treated as
a parachute payment subject to an excise tax under the tax code. Accordingly,
we
do not provide for any “gross-up” payments to cover federal excise taxes in the
event that the severance payments were treated as a parachute
payment.
The
employment agreement with Mr. Oros’ provides that if Mr. Oros’ employment is
terminated without “Cause” (as defined in his existing employment agreement), he
will receive a lump-sum severance payment equal to $600,000, less any salary
paid to him since June 2006. In the event of such a termination, Mr. Oros
also
is entitled to continue receiving group health and medical benefits for up
to
three years following termination of his employment.
The
following table quantifies the estimated maximum amount of payments and benefits
under our employment agreements and agreements relating to awards granted
under
our equity incentive and stock option plans to which the named executive
officers would be entitled upon termination of employment if we terminated
their
employment without cause on December 31, 2006, assuming a Change of Control
occurred on that date. We have assumed that these payments would not result
in
the aggregate severance payments being treated as an “excess parachute payment,”
so we therefore have not reduced the aggregate amount calculated under the
base
formula.
Name
|
|
Cash
Severance
Payment
($)
|
|
Continuation
of
Medical/Welfare
Benefits (Present Value)
($)(1)
|
|
Value
of Accelerated
Vesting
of Equity
Awards
($)(2)
|
|
Total
Termination
Benefits
($)
|
|
Robert
W. D’Loren
|
|
$
|
2,249,900
|
|
$
|
70,518
|
|
$
|
2,745,308
|
|
$
|
5,065,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
B. Meister
|
|
$
|
449,900
|
|
$
|
10,479
|
|
$
|
332,806
|
|
$
|
793,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Haran
|
|
$
|
749,900
|
|
$
|
10,479
|
|
$
|
567,995
|
|
$
|
1,328,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
Zona
|
|
$
|
599,900
|
|
$
|
10,479
|
|
$
|
518,947
|
|
$
|
1,129,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Oros
|
|
$
|
483,333
|
|
$
|
27,073
|
|
$
|
426,545
|
|
$
|
936,951
|
|
(1)
|
Calculated
at the present value of insurance premiums to be paid over the
benefit
period.
|
|
|
(2)
|
This
amount represents the unamortized portion of the expense related
to each
respective named executive officer’s and Mr. Haran’s equity awards as of
December 31, 2006.
|
Director
Compensation
The
following table sets forth compensation information for 2006 for each member
of
our board of directors who is not also an employee. Directors who are employees
(Messrs. D’Loren and Oros) do not receive additional compensation for serving on
the board. See “Summary Compensation” table and “Grants of Plan-Based Awards”
table for disclosures related to Messrs. D’Loren and Oros.
Name
|
|
Fees
Earned
or
Paid
in
Cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive
Plan Compensation
($)
|
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
James
T. Brady
|
|
$
|
54,500
(1
|
)
|
|
-
|
|
$
|
37,020
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
91,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack
B. Dunn, IV
|
|
$
|
33,000
(2
|
)
|
|
-
|
|
$
|
37,020
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
70,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward
J. Mathias
|
|
$
|
30,000
(3
|
)
|
|
-
|
|
$
|
37,020
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
67,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack
Rovner
|
|
$
|
8,000
(4
|
)
|
|
-
|
|
$
|
10,642
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
18,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truman
T. Semans
|
|
$
|
42,000
(5
|
)
|
|
-
|
|
$
|
10,642
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
52,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George
P. Stamas
|
|
$
|
27,500
(6
|
)
|
|
-
|
|
$
|
37,020
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
64,520
|
|
The
grants of non-qualified options to purchase 25,000 shares given to the
non-management directors in 2006 had a grant date fair value of $57,713
each.
(1)
|
Includes
a $20,000 annual retainer, $10,500 in board attendance fees, a
$12,500
retainer as chairman of the Audit Committee and $11,500 in Audit
Committee
meeting fees. Mr. Brady has been the chairman and a member of the
Audit
Committee throughout the fiscal year ended December 31,
2006.
|
|
|
(2)
|
Includes
a $20,000 annual retainer, $10,500 in board attendance fees and
a $2,500
retainer as chairman of the Nominating Committee. Mr. Dunn has
been the
chairman of the Nominating Committee throughout the fiscal year
ended
December 31, 2006.
|
|
|
(3)
|
Includes
a $20,000 annual retainer, $7,500 in board attendance fees and
a $2,500
retainer as chairman of the Compensation Committee. Mr. Mathias
has been
the chairman of the Compensation Committee throughout the fiscal
year
ended December 31, 2006 and a member of the Audit Committee since
October
31, 2006. Mr. Mathias’ amount does not include any Audit Committee meeting
fees.
|
|
|
(4)
|
Includes
$3,000 in board attendance fees. Mr. Rover was elected to the board
of
directors on October 31, 2006 and consequently was paid $5,000
which
represents a pro rata amount of the $20,000 annual retainer for
services
provided in November and December of 2006.
|
|
|
(5)
|
Includes
a $20,000 annual retainer, $10,500 in board attendance fees and
$11,500 in
Audit Committee meeting fees. Mr. Semans has been a member of the
Audit
Committee throughout the fiscal year ended December 31,
2006.
|
|
|
(6)
|
Includes
a $20,000 annual retainer and $7,500 in board attendance
fees.
|
The
following table sets forth certain information with respect to beneficial
ownership of our common stock as of April 20, 2007, as to:
·
|
each
of our directors and named executive officers
individually;
|
·
|
all
our directors and executive officers as a group;
and
|
·
|
each
other person (or group of affiliated persons) known by us to own
beneficially more than 5% of our outstanding common
stock.
|
For
the
purposes of calculating percentage ownership as of April 20, 2007, 50,525,395
shares were issued and outstanding and, for any individual who beneficially
owns
shares of restricted stock that will vest or shares represented by options
that
are or will become exercisable within 60 days of April, 20, 2007, those shares
are treated as if outstanding for that person, but not for any other person.
In
preparing the following table, we relied upon statements filed with the SEC
by
beneficial owners of more than 5% of the outstanding shares of our common
stock
pursuant to Section 13(d) or 13(g) of the Exchange Act, unless we knew or
had
reason to believe that the information contained in such statements was not
complete or accurate, in which case we relied upon information which we
considered to be accurate and complete. Unless otherwise indicated, the address
of each of the individuals and entities named below is: c/o NexCen Brands,
Inc.,
1330 Avenue of the Americas, 34th Floor, New York, NY 10019.
|
|
|
Beneficial
Ownership
of
Shares
|
|
Name
and Address -
|
|
|
Number
|
|
|
Percent
|
|
Directors
and executive officers:
|
|
|
|
|
|
|
|
David
S. Oros (1)
|
|
|
2,397,868
|
|
|
4.52
|
%
|
Robert
W. D’Loren (2)
|
|
|
3,318,754
|
|
|
6.25
|
%
|
James
Haran (3)
|
|
|
539,027
|
|
|
1.02
|
%
|
David
B. Meister
|
|
|
-
|
|
|
*
|
|
David
C. Reymann (4)
|
|
|
184,296
|
|
|
*
|
|
Charles
A. Zona
|
|
|
-
|
|
|
*
|
|
James
T. Brady (5)
|
|
|
102,500
|
|
|
*
|
|
Jack
B. Dunn IV (5)
|
|
|
100,000
|
|
|
*
|
|
Edward
J. Mathias (6)
|
|
|
156,700
|
|
|
*
|
|
Jack
Rovner
|
|
|
25,000
|
|
|
*
|
|
Truman
T. Semans (7)
|
|
|
30,000
|
|
|
*
|
|
George
P. Stamas (8)
|
|
|
146,868
|
|
|
*
|
|
|
|
|
|
|
|
|
|
All
directors and named executive officers as a group (11
Persons)
|
|
|
7,001,013
|
|
|
13.19
|
%
|
|
|
|
|
|
|
|
|
5%
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telcom-ATI
Investors, LLC (9)
211
N. Union St., Suite 300
Alexandria,
VA 22314
|
|
|
2,902,027
|
|
|
5.47
|
%
|
(1)
|
Includes
exercisable warrants to purchase 812,500 shares of the Company’s common
stock, 50,000 shares of restricted stock that will become exercisable
within 60 days of April 20, 2007, and exercisable options to purchase
130,600 shares of the Company’s common stock. Includes 216,989 shares of
the Company’s common stock owned by NexGen Technologies, L.L.C. over which
Mr. Oros exercises voting and investment control by virtue of his
position
as managing member of NexGen. Excludes 900,000 shares of common
stock held
in escrow on behalf of the former UCC security holders as earn-out
consideration pursuant to a merger agreement over which Mr. Oros
exercises
voting control by virtue of a proxy granted to him.
|
(2)
|
Includes
578,941 shares
of the Company’s common stock owned
by Mr. D’Loren, of which 102,666 shares are held in escrow to satisfy
indemnification claims made by the Company against former stockholders
of
UCC Capital Corp. and UCC Consulting Corp, collectively “UCC”) and 153,249
shares
held
in escrow until such time (if any) as future performance targets
provided
in the UCC merger agreement are satisfied. Includes options to
purchase
937,235 shares of common stock that will become exercisable within
60 days
of April 20, 2007. Excludes
268,654 shares of common stock owned by the Robert D’Loren Family Trust
dated March 29, 2002 (the “Trust”), the beneficiaries of which are two
minor children of Mr. D’Loren. The Trust is irrevocable, the trustee is
not a member of Mr. D’Loren’s immediate family, and the trustee has
independent authority to vote and dispose of the shares held by
the Trust.
Excludes 96,715 shares of the Company’s common stock owned by the Trust
and held in escrow and that until and unless earned are subject
to
forfeiture if certain performance targets as outlined in the UCC
merger
agreement are not met. Mr. D’Loren expressly disclaims beneficial
ownership of all shares owned by the Trust. Includes 1,325,359
shares of
the Company’s common stock owned by D’Loren Realty, LLC (“Realty”) for
which Mr. D’Loren is the sole Member-Manager and possesses full voting and
dispositive power. Includes 477,129 shares of common stock owned
by Realty
and held in escrow and that until and unless earned are subject
to
forfeiture if certain performance targets as outlined in the UCC
merger
agreement are not met. Excludes 1,413,423 shares of common stock
held in
escrow on behalf of Athlete’s Foot Marketing Associates, LLC to secure
indemnification obligations pursuant to a purchase agreement over
which
Mr. D’Loren exercise voting control by virtue of a proxy granted to
him.
|
(3)
|
Includes
options to purchase 193,929 shares of common stock that will become
exercisable within 60 days of April 20, 2007.
|
(4)
|
Includes
exercisable options to purchase 112,500 shares of common
stock.
|
(5)
|
Includes
exercisable options to purchase 100,000 shares of common
stock.
|
(6)
|
Includes
exercisable options to purchase 100,000 shares of common stock,
19,000
shares of common stock held indirectly in a retirement account
and 4,700
shares of common stock held as custodian for Ellen
Mathias.
|
(7)
|
Includes
30,000 shares of common stock held jointly by Mr. Semans and his
wife.
|
(8)
|
Includes
exercisable options to purchase 135,600 shares of common
stock.
|
(9)
|
Based
solely on reports filed with the SEC as of February 8, 2005. Includes
2,154,338 shares beneficially owned by CCM Master Qualified Fund,
L.L.C.,
(“CCM”), Coghill Capital Management, L.L.C., (“Coghill Management”), which
serves as the investment manager of CCM, and Clint D. Coghill who
is the
managing member of Coghill Management.
|
|
|
Securities
Authorized for Issuance Under Equity Compensation
Plans
See
Item
5 of Part II of this Form 10-K/A for information regarding securities authorized
for issuance under equity compensation plans.
Certain
Relationships and Related Party Transactions
We
have
engaged in the following transactions or there are currently proposed
transactions with the following persons:
|
•
|
directors
or executive officers;
|
|
•
|
beneficial
owners of 5% or more of NexCen’s common
stock;
|
|
•
|
immediate
family members of the above; and
|
|
•
|
entities
in which the above persons have substantial
interests.
|
The
Company receives legal services from Kirkland & Ellis LLP, which is
considered a related party because a partner at that firm, George P. Stamas,
is
a member of the Company’s board of directors. For the years ended December 31,
2006, 2005 and 2004 expenses related to Kirkland & Ellis LLP were
approximately $1.7 million, $640,000, and $2.1 million, respectively. For
the
years ended December 31, 2006 and 2005, the Company had outstanding payables
due
to Kirkland & Ellis LLP of approximately $492,000 and $45,000,
respectively.
Procedures
for Approval of Related Party Transactions
The
Company’s Code of Ethics, applicable to all directors, officers, and employees,
sets forth policies to address potential related party transactions. If a
director or officer believes any
material transaction or relationship could reasonably be expected to give
rise
to a conflict of interest,
the
director or officer must disclose the potential conflict to the Company’s Audit
Committee. The Audit Committee, pursuant to its charter, reviews and
pre-approves all potential conflicts of interest and all related party
transactions.
Director
Independence
See
Item
10 of Part III of this Form 10-K/A for information regarding director
independence.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit
Fees
The
aggregate fees for professional services rendered for NexCen by KPMG LLP,
NexCen’s independent auditor, for the years ended December 31, 2006 and 2005
were:
|
|
2006
|
|
2005
|
|
Audit
Fees
|
|
$
|
310,000
|
|
$
|
223,000
|
|
Audit-Related
Fees
|
|
126,264
|
|
—
|
|
Tax
Fees
|
|
|
76,544
|
|
|
28,300
|
|
Total
Fees
|
|
$
|
512,808
|
|
$
|
251,300
|
|
“Audit
Fees” include time billed to NexCen for professional services rendered for the
annual audit for NexCen’s consolidated financial statements, the quarterly
reviews of the consolidated financial statements for fiscal years 2006 and
2005
and the audit with respect to management’s assessment of the effectiveness of
internal control over financial reporting as of December 31, 2006 and 2005
and
the effectiveness of internal control over financial reporting as of December
31, 2006 and 2005.
The
aggregate amount billed for all tax fees for the years ended December 31,
2006
and 2005 (see chart above under heading “Tax Fees”) principally covered tax
planning, tax consulting and tax compliance services provided to
NexCen.
“Audit
Related Fees” include professional services performed by KPMG, LLP related to
the UCC and The Athlete’s Foot acquisitions, and Form 8-K and Form S-3 filings
with the SEC.
NexCen
does not use its independent auditor as its internal auditor nor does it
have an
internal auditor.
No
other
professional services were rendered or fees were billed by KPMG for the most
recent fiscal year or for the year ending December 31, 2006 and
2005.
The
audit
committee has adopted policies and procedures for the pre-approval of the
above
fees. All requests for services to be provided by KPMG are submitted to the
audit committee. Requests for all non-audit related services require
pre-approval from the entire audit committee. A schedule of approved services
is
then reviewed and approved by the entire audit committee at each audit committee
meeting.
FINANCIAL
STATEMENTS AND SCHEDULES
The
following financial statements required by this item are included in the Report
beginning on page 32.
Report
of Management on Internal Control over Financial Reporting
|
32
|
Reports
of Independent Registered Public Accounting Firm
|
33
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
35
|
Consolidated
Statements of Operations and Comprehensive
Loss
for the years ended December 31, 2006, 2005, and 2004
|
36
|
Consolidated
Statements of Stockholders’ Equity for the years
ended
December 31, 2006, 2005 and 2004
|
37
|
Consolidated
Statements of Cash Flows for the years ended
December 31,
2006, 2005 and 2004
|
38
|
Notes
to Consolidated Financial Statements
|
39
|
All
other
schedules are omitted because they are not applicable or the required
information is shown in the Audited Consolidated Financial Statements or the
notes thereto.
EXHIBITS
The
following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the SEC.
Exhibit
Index
*2.1
|
|
Agreement
and Plan of Merger dated June 5, 2006, by and among UCC Capital Corp.,
UCC
Consulting Corp., UCC Servicing, LLC, Aether Holdings, Inc., AHINV
Acquisition Corp., the holders of UCC Shares identified therein and
Robert
W. D’Loren, as the Security holders’ Representative. (Designated as
Exhibit 2.1 to the Form 8−K filed on June 7, 2006)
|
|
|
|
*2.2
|
|
Equity
Interest and Asset Purchase Agreement dated August 21, 2006, by and
among,
Aether Holdings, Inc., NexCen Franchise Brands, Inc., NexCen Franchise
Management, Inc., Athlete’s Foot Marketing Associates, LLC, Athlete’s Foot
Brands, LLC, Robert J. Corliss, Donald Camacho, Timothy Brannon and
Martin
Amschler. (Designated as Exhibit 2.1 to the Form 8−K filed on August 22,
2006)
|
|
|
|
*2.3
|
|
Stock
Purchase Agreement dated December 19, 2006, by and among, NexCen
Brands,
Inc., Blass Acquisition Corp., Haresh T. Tharani, Mahesh T. Tharani
and
Michael Groveman, Bill Blass Holding Co., Inc., Bill Blass International
LLC and Bill Blass Licensing Co., Inc. (Designated as Exhibit 2.1
to the
Form 8−K filed on December 21, 2006)
|
|
|
|
*2.4
|
|
Asset
Purchase Agreement dated March 13, 2007, by and among NexCen Brands,
Inc.,
WV IP Holdings, LLC and F. Schumacher & Co. (Designated as Exhibit 2.4
to the Form 10-K filed on March 16, 2007)
|
|
|
|
*3.1
|
|
Certificate
of Incorporation of NexCen Brands, Inc. (Designated as Exhibit 3.1
to the
Form 10-Q filed on August 5, 2005)
|
|
|
|
*3.2
|
|
Certificate
of Amendment of Certificate of Incorporation dated October 31, 2006.
(Designated as Exhibit 3.1 to the Form 8−K filed on November 1,
2006)
|
|
|
|
*3.3
|
|
By-laws
of Aether Holdings, Inc. (Designated as Exhibit 3.2 to Form 10-Q
filed on
August 5, 2005)
|
|
|
|
*4.1
|
|
Form
of Common Stock Certificate (Designated as Exhibit 4.3 to the Form
S-8
filed on December 1, 2006)
|
|
|
|
*9.1
|
|
Voting
Agreement dated November 7, 2006, by and between NexCen Brands, Inc.
and
Robert Corliss. (Designated as Exhibit 9.1 to the Form 8−K filed on
November 14, 2006)
|
|
|
|
*9.2
|
|
Voting
Agreement dated November 7, 2006, by and between NexCen Brands, Inc.
and
Athlete’s Foot Marketing Associates, LLC. (Designated as Exhibit 9.2 to
the Form 8−K filed on November 14, 2006)
|
|
|
|
*10.1
|
|
Letter
Agreement dated January 23, 2006, by and among Aether Systems, Inc.
and
BIO−key International, Inc. (Designated as Exhibit 10.1 to the Form 8−K
filed on January 27, 2006)
|
|
|
|
*10.2
|
|
Amendment
No. 1 to the Secured Subordinated Promissory Note dated January 23,
2006,
payable to Aether Systems, Inc by BIO−key International, Inc. (Designated
as Exhibit 10.2 to the Form 8−K filed on January 27,
2006)
|
|
|
|
*10.3
|
|
Amendment
No. 1 to Employment Agreement dated May 5, 2006, by and between Aether
Holdings, Inc. and David Oros. (Designated as Exhibit 10.3 to the
Form
10−Q filed on May 10, 2006)
|
*10.4
|
|
Amendment
No. 1 to Employment Agreement dated May 5, 2006, by and between Aether
Holdings, Inc. and David Reymann. (Designated as Exhibit 10.4 to
the Form
10−Q filed on May 10, 2006)
|
|
|
|
*10.5
|
|
Restricted
Stock Grant Agreement dated May 5, 2006, by and between Aether Holdings,
Inc. and David Oros. (Designated as Exhibit 10.5 to the Form 10−Q filed on
May 10, 2006)
|
|
|
|
*10.6
|
|
Restricted
Stock Grant Agreement dated May 5, 2006, by and between Aether Holdings,
Inc. and David Reymann. (Designated as Exhibit 10.6 to the Form 10−Q filed
on May 10, 2006)
|
|
|
|
*10.7
|
|
Employment
Agreement dated as of June 5, 2006, by and between Aether Holdings,
Inc.
and Robert W. D’Loren. (Designated as Exhibit 10.1 to the Form 8−K filed
on June 7, 2006)
|
|
|
|
*10.8
|
|
Stock
Purchase Warrant issued to Robert D’Loren, dated June 5, 2006. (Designated
as Exhibit 10.2 to the Form 8−K filed on June 7, 2006)
|
|
|
|
*10.9
|
|
Stock
Purchase Warrant issued to Jefferies & Company, Inc., dated June 5,
2006. (Designated as Exhibit 10.3 to the Form 8−K filed on June 7,
2006)
|
|
|
|
*10.10
|
|
2006
Management Bonus Plan. (Designated as Exhibit 10.4 to the Form 8−K filed
on June 7, 2006)
|
|
|
|
*10.11
|
|
Stock
Option Grant Agreement by and between Aether Holdings, Inc. and Robert
W.
D’Loren. (Designated as Exhibit 10.5 to the Form 8−K filed on June 7,
2006)
|
|
|
|
*10.12
|
|
Registration
Rights Agreement dated as of June 5, 2006, by and among Aether Holdings,
Inc. and the stockholders listed on Exhibit A thereto. (Designated
as
Exhibit 10.6 to the Form 8−K filed on June 7, 2006)
|
|
|
|
*10.13
|
|
Employment
Agreement dated as of September 12, 2006, by and between Aether Holdings,
Inc. and David B. Meister. (Designated as Exhibit 10.1 to the Form
8−K
dated September 13, 2006)
|
|
|
|
*10.14
|
|
2006
Long-Term Equity Incentive Plan. (Designated as Exhibit 10.1 to the
Form
8−K filed on November 1, 2006)
|
|
|
|
*10.15
|
|
Form
of 2006 Long-Term Equity Incentive Plan Director Stock Option Award
Agreement (Designated as Exhibit 10.15 to the Form 10-K filed
on March 16, 2007)
|
|
|
|
*10.16
|
|
Form
of 2006 Long-Term Equity Incentive Plan Employee/Management Stock
Option
Award Agreement (Designated as Exhibit 10.16 to the Form 10-K
filed on March 16, 2007)
|
|
|
|
*10.17
|
|
Addendum
to Stock Option Agreement dated October 31, 2006, by and between
Aether
Holdings, Inc. and J. Carter Beese, Jr. (Designated as Exhibit 10.3
to the
Form 8−K filed on November 1, 2006)
|
|
|
|
*10.18
|
|
Employment
Agreement dated December 11, 2006, by and between NexCen Brands,
Inc. and
Charles A. Zona. (Designated as Exhibit 10.1 to the Form 8−K filed on
December 13, 2006)
|
|
|
|
*10.19
|
|
Security
Agreement dated March 12, 2007, by and among NexCen Acquisition Corp.,
the
subsidiary borrowers parties thereto and BTMU Capital Corporation.
(Designated as Exhibit 10.19 to the Form 10-K filed on March 16,
2007)
|
|
|
|
*10.20
|
|
Note
Funding Agreement dated March 12, 2007, by and among NexCen Acquisition
Corp., the subsidiary borrowers parties thereto, Victory Receivables
Corporation and BTMU Capital Corporation. (Designated as
Exhibit 10.20 to the Form 10-K filed on March 16,
2007)
|
|
|
|
*10.21
|
|
Common
Stock Warrant dated November 7, 2006, issued by NexCen Brands, Inc.
to
Robert Corliss. (Designated as Exhibit 4.1 to the Form 8−K filed on
November 14, 2006)
|
|
|
|
*10.22
|
|
Registration
Rights Agreement dated November 7, 2006, by and among NexCen Brands,
Inc.,
Robert Corliss and Athlete’s Foot Marketing Associates, LLC. (Designated
as Exhibit 4.2 to the Form 8−K filed on November 14,
2006)
|
|
|
|
*10.23 |
|
Addendum
to Stock Option Agreement dated December 28, 2006, by and between
NexCen Brands, Inc. and David Reymann. (Designated as
Exhibit 10.23 to the Form 10-K filed on March 16,
2007)
|
|
|
|
10.24 |
|
Employment
Agreement
dated as of June 6, 2006, by and between Aether Holdings, Inc.
and James Haran. |
|
|
|
*21.1
|
|
Subsidiaries
of NexCen Brands, Inc. (Designated as Exhibit 21.1 to the Form 10-K
filed on March 16, 2007)
|
|
|
|
23.1
|
|
Consent
of KPMG LLP
|
|
|
|
31.1
|
|
Certification
pursuant to 17 C.F.R § 240.15d−14 (a), as adopted pursuant to Section 302
of the Sarbanes−Oxley Act of 2002 for Robert W.
D’Loren.
|
|
|
|
31.2
|
|
Certification
pursuant to 17 C.F.R § 240.15d−14 (a), as adopted pursuant to Section 302
of the Sarbanes−Oxley Act of 2002 for David B. Meister.
|
|
|
|
**32.1
|
|
Certifications
pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes−Oxley Act of 2002 for Robert W. D’Loren and David B.
Meister.
|
_________________________
*Incorporated
by reference
**
These
certifications are being furnished solely pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and are not being filed as part this Amendment
No. 1 to the Annual Report on Form 10-K or as a separate disclosure
document.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report on Form 10-K/A to be signed
on its behalf by the undersigned, thereunto duly authorized on April 30,
2007.
|
NEXCEN
BRANDS, INC.
|
|
|
|
|
|
By:
|
/s/
Robert W. D’Loren
|
|
|
|
ROBERT
W. D’LOREN
|
|
|
|
President
and Chief Executive Officer
|
|
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 dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
|
|
/s/
David S. Oros
|
|
Chairman
of the Board
|
|
April
30, 2007
|
|
DAVID
S. OROS
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Robert W. D’Loren
|
|
Director,
President, and
|
|
April
30, 2007
|
|
ROBERT
W. D’LOREN
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
/s/
David B. Meister
|
|
Senior
Vice President and Chief Financial Officer, and
|
|
April
30, 2007
|
|
DAVID
B. MEISTER
|
|
Principal
Financial and Accounting Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jack Rovner
|
|
Director
|
|
April
30, 2007
|
|
JACK
ROVNER
|
|
|
|
|
|
|
|
|
|
|
|
/s/
James T. Brady
|
|
Director
|
|
April
30, 2007
|
|
JAMES
T. BRADY
|
|
|
|
|
|
|
|
|
|
|
|
/s/
George P. Stamas
|
|
Director
|
|
April
30, 2007
|
|
GEORGE
P. STAMAS
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jack B. Dunn, IV
|
|
Director
|
|
April
30, 2007
|
|
JACK
B. DUNN, IV
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Edward J. Mathias
|
|
Director
|
|
April
30, 2007
|
|
EDWARD
J. MATHIAS
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Truman T. Semans
|
|
Director
|
|
April
30, 2007
|
|
TRUMAN
T. SEMANS
|
|
|
|
|
|