Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
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, 2007
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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.
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Yes o
No x
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Indicate
by check mark if the registrant is not required to file reports
pursuant
to Section 13 or Section 15(d) of the Act.
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Yes o
No x
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Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No 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
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o
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Accelerated
filer
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x
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Non-accelerated
filer
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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 x
The
aggregate market value of the voting stock held by nonaffiliates of the
registrant was $505,033,738 ($11.14 per share) as of June 30,
2007.
As
of
March 1, 2008, 56,616,764 shares of the registrant’s common stock, $.01 par
value per share, were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The
registrant will disclose the information required under Part III, Items 10,
11,
12, 13, and 14 by (a) incorporating the information by reference from the
registrant’s definitive proxy statement or (b) filing an amendment to this Form
10-K which contains the required information no later than 120 days after the
end of the registrant’s fiscal year.
NEXCEN
BRANDS, INC.
ANNUAL
REPORT ON FORM 10-K
FOR
THE YEAR ENDED DECEMBER 31, 2007
INDEX
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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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11
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Item
1B
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Unresolved
Staff Comments
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18
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Item
2
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Properties
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18
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Item
3
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Legal
Proceedings
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19
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Item
4
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Submission
of Matters to a Vote of Security Holders
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20
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PART
II
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20
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Item
5
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Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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20
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Item
6
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Selected
Financial Data
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23
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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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25
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Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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34
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Item
8
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Financial
Statements and Supplementary Data
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35
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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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74
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Item
9A
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Controls
and Procedures
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74
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Item
9B
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Other
Information
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77
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PART
III
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77
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Item
10
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Directors,
Executive Officers and Corporate Governance
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Item
11
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Executive
Compensation
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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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Item
13
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Certain
Relationships and Related Transactions, and Director
Independence
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Item
14
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Principal
Accounting Fees and Services
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PART
IV
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78
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Item
15
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Exhibits,
Financial Statement Schedules
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78
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FORWARD-LOOKING
STATEMENTS
In
this
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.
PART
I
General
Overview
NexCen
Brands is a vertically integrated global brand management and franchising
company. Our
business is focused on managing, developing and acquiring intellectual property,
which we refer to as IP, and IP-centric businesses operating
in
three
segments: Consumer Branded Products, Retail Franchising and Quick Service
Restaurant Franchising (which we refer to as “QSR” Franchising). We
own,
license, franchise and market a growing portfolio of brands including Bill
Blass, Waverly, The Athlete's Foot, Shoebox New York, Great American Cookies,
MaggieMoo's, Marble Slab Creamery, Pretzel Time, and Pretzelmaker. We license
and franchise our brands to a network of leading retailers, manufacturers and
franchisees that includes every major segment of retail distribution from the
luxury market to the mass market in the United States and in over 50 countries
around the world. Our franchise network consists of approximately 1,900 retail
stores.
We
commenced our current 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
(“The Athlete’s Foot” or “TAF”). The Athlete’s Foot is one of the largest
athletic footwear and apparel franchisors with approximately 640 franchised
units 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 (“Bill Blass”). The
Bill Blass label represents timeless, modern American style.
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, having
a
combined total of approximately 580 franchised units. With these acquisitions
NexCen entered the QSR franchising business.
In
May
2007, we expanded our consumer branded products business by acquiring
all
of
the intellectual property and license contracts related to the Waverly brand.
Waverly
is a premier lifestyle brand with an array of licensed home furnishings
products, including fabrics, wallpapers, paint, bedding, window treatments,
and
decorative accessories.
In
August
2007, we acquired substantially all of the assets of Pretzel Time Franchising,
LLC (“Pretzel Time”) and Pretzelmaker Franchising, LLC (“Pretzelmaker”), adding
two
hand-rolled pretzel chains with approximately 380 franchised units
worldwide
to our
QSR franchising business.
In
January 2008, we acquired the trademarks
and other intellectual property of The Shoe Box, Inc. (“Shoebox”) in partnership
with the Camuto Group, a premier women's fashion footwear company. Shoebox
is a
multi-brand luxury shoe retailer based in New York with nine locations. The
partnership has begun franchising the Shoebox's luxury footwear concept
domestically and internationally under the Shoebox New York brand.
In
January 2008, we also acquired substantially
all of the assets of Great American Cookie Company Franchising, LLC and Great
American Manufacturing, LLC (collectively, “Great American Cookies”). This
transaction added another premium treat brand and approximately 300 franchised
units to our QSR portfolio.
More
detailed information about The Athlete’s Foot, Bill Blass, MaggieMoo’s, Marble
Slab, Pretzel Time, Pretzelmaker, Shoebox, Waverly and Great American Cookies
acquisitions is included below under the caption “Company
Segments.”
We
are
continuously evaluating various other potential acquisitions and are actively
exploring opportunities to acquire additional IP-centric businesses.
We
own
the proprietary rights to a number of trademarks discussed in this report which
are important to our business, including The Athlete’s Foot, Bill Blass, Great
American Cookies, MaggieMoo’s, Marble Slab, Pretzel Time, Pretzelmaker, Shoebox
New York and Waverly. 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
We
operate a brand management and franchising business in three segments: Consumer
Branded Products, Retail Franchising and QSR Franchising. We generate revenue
from licensing, franchising and other commercial arrangements with third parties
who want to use our brands and associated IP, including trademarks, trade names,
copyrights, franchise rights, patents, trade secrets, know-how and other similar
valuable property. These third parties pay us licensing, franchising 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 geographic markets.
We
receive licensing, franchising and other contractual fees that 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 sold). Accordingly, our revenues reflect
both
recurring and non-recurring payment streams.
We
operate our brand management and franchising 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 generally do not
manufacture, warehouse or distribute the branded products associated with the
IP
we acquire or build stores in the case of franchise operations. In connection
with the recent acquisition of Great American Cookies, we do operate a cookie
batter manufacturing facility, which manufactures and supplies cookie batter
to
our franchisees on a cost-plus-40% profit margin basis. The proprietary dough
that is manufactured at the facility is considered a key factor in the product
differentiation of Great American Cookies. Other than the special circumstances
of the Great American Cookies franchise system, we rely on third-party licensees
and other business partners to manufacture, warehouse and distribute branded
products and incur the associated capital cost.
We
believe that this business model mitigates much of the risks related to working
capital (i.e. inventory and receivables) and capital expenditures. We also
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 Our Business.”
We
leverage our brand management, franchising, marketing, and licensing expertise,
as well as operational costs and infrastructure across our three operating
segments. We oversee the marketing, promotion and quality control of products
and services that make use of our brands. We also provide support services
with
respect to franchise operations through our state-of-the-art training, research,
development and operations center located in Norcross, Georgia, which we call
NexCen University. The following graphic provides a summary of the services
that
NexCen University provides across all of our franchise systems.
With
NexCen University, we have consolidated the operations of all seven of our
acquired franchise systems: The Athlete’s Foot, MaggieMoo’s, Marble Slab,
Pretzel Time, Pretzelmaker, Shoebox and Great American Cookies. NexCen
University was built to provide our Company with the infrastructure to operate
and grow our current franchise systems and integrate additional franchise
systems, all in a cost efficient manner. We believe we will be able to achieve
cost savings and operational efficiencies by consolidating back office
functionalities such as IT, HR, Legal, and Accounting, as well as front end
drivers such as research and development, marketing and sales. We also believe
that NexCen University will provide franchisees with the tools and support
needed to optimize their performance in the marketplace.
Diversification
and Growth
As
we
have built a portfolio of IP-centric businesses, we operate a business 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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across
channels of distribution, ranging from luxury to
mass-market;
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across
consumer demand categories, ranging from luxury to
mass-market;
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across
licensees and franchisees, ranging from large licensees to individual
franchisees;
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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).
We
believe that our business also offers a multi-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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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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we
can grow through acquisition by acquiring new brands or additional
franchise systems; and
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our
business can grow synergistically by leveraging our three operating
segments.
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The
following graphic summarizes our three operating segments and the opportunities
to cross-leverage those segments with each other.
Franchise
concepts we purchased can be sold to our existing network of master franchisees
who currently manage our franchise brands worldwide. Brands that we acquired
can
be sold through third party retail channels and channels that we own and
control, allowing us to earn wholesale and retail royalties. For example, we
have contracted with a third party to produce women’s footwear under the Bill
Blass label for sale in our Shoebox New York franchisee stores. The manufacturer
of the Bill Blass shoes who sells the product to the franchisees will pay us
a
royalty on those sales and in turn the franchisees who sell the shoes to their
retail customers also will pay us a royalty on their sales. We believe we have
created a flexible operating structure that allows us in certain cases to
control our distribution channels and sell our owned brands through these
channels as well as third party channels.
Development
of Our Brand Management and Franchising Business
We
entered the brand management and franchising 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.
Since
June 2006, we have acquired and integrated nine IP-centric companies, fulfilling
our stated objective of acquiring 3 to 5 businesses or significant IP assets
per
year. We have also been (and expect to continue to be) in active discussions
with other potential acquisition candidates. We intend to maintain our objective
of 3 to 5 acquisitions per year in 2008 and 2009, with transaction sizes
generally in excess of $50 million total enterprise value.
We
maintain a highly disciplined pricing approach to acquisitions. We have acquired
and plan to acquire consumer branded products companies at transaction multiples
that range from 4.5 to 5.5 times royalties. For franchise concepts, our target
range has been and will be from 3.0 to 4.5 times revenues. We believe this
approach has enabled us to make accretive acquisitions, 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, as well as risks associated
with our ability to gain access to additional funding for acquisitions, see
Item
1A. Risk Factors
under
the captions “Risk of Our Business” and “Risks of Our Acquisition
Strategy.”
Company
Segments
Consumer
Branded Products
The
brands that comprise our Consumer Branded Products segment are as
follows:
Bill
Blass
Founded
by William Ralph Blass in 1970, Bill Blass defines timeless style and modern
American fashion. From its inception, the Bill Blass brand has offered modern,
sophisticated and tailored clothing. The internationally recognized Bill Blass
brand provides contemporary apparel, home furnishings, and accessories for
the
discerning consumer.
On
February 15, 2007, we acquired Bill Blass Holding Co., Inc. and two affiliated
businesses. 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, 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). To finance
the acquisition, we borrowed approximately $27 million under our BTMU Credit
Facility, which was secured by the acquired assets.
Waverly
Launched
in 1923, Waverly
is a
premier home fashion and lifestyle brand and one of the most recognized names
in
home furnishings. Its signature look is expertly translated into countless
classic styles among home furnishing products including fabrics, wall coverings,
paint, bedding, window treatments and decorative accessories. Waverly is
available through retailers and interior design showrooms in over 7,000 doors
nationwide. Its family of brands consists of Waverly, Waverly Home, Waverly
Home
Classics, Waverly Baby, Waverly Sun N Shade, Gramercy and Village.
On
May 2,
2007, we completed the acquisition of all of the intellectual property and
license contracts related to the Waverly brand products and services. The
aggregate purchase price for the assets was $34.0 million paid in cash. We
also
paid $2.75 million in cash and issued a 10-year warrant to purchase 50,000
shares of our common stock to Ellery Homestyles, LLC, an existing Waverly
licensee, to cancel the right of first refusal held by Ellery to acquire the
Waverly brand. The exercise price of the warrant is $12.43 per share, which
was
the closing price of our common stock on the day prior to the issuance of the
warrant. To finance the acquisition, we
borrowed $22 million under the BTMU Credit Facility, secured by the acquired
assets.
Retail
Franchising
The
brands that comprise our Retail Franchising segment are as follows:
The
Athlete’s Foot (TAF)
The
Athlete's Foot (TAF) is
the
world's first franchisor of athletic footwear stores and is recognized today
as
a world leader in athletic footwear franchising. Robert and David Lando opened
the first The Athlete's Foot store in 1971 in Pittsburgh, Pennsylvania. It
was
the first athletic footwear specialty store of its kind in the United States.
Soon thereafter, The Athlete's Foot began franchising domestically, with the
first store opening in Oshkosh, Wisconsin. The first international franchise
store opened in 1978 in Adelaide, Australia. TAF now has approximately 640
retail locations in over 40 countries.
On
November 7, 2006, we 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 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), 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 our
senior credit facility with BTMU Capital Corporation (the “BTMU 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.”
In
June
2007, we launched a global re-branding effort for TAF. With a mission focused
on
meeting the needs of athletes every day, we are reinvigorating the 37 year-old
brand with an innovative new modular merchandising system, new in-store design,
a modernized company logo, and a line of TAF branded apparel.
Shoebox
New York
Since
1954, Shoebox has
been
one of New York’s top multi-brand retailers for women’s luxury footwear,
handbags and accessories. Known for its vast product assortment and
trend-setting styles, the Shoebox offers women the latest fashions from top
European and American designers such as Jimmy Choo, Stuart Weitzman, D&G,
Giuseppe Zanotti, Marc Jacobs, Chloé, Casadei, Salvatore Ferragamo, and Michael
Kors.
We,
in
partnership with the Camuto Group, acquired the trademarks and other
intellectual property of The Shoe Box, Inc. on January 15, 2008 for the total
purchase price of $1.3 million. Our partnership with the Camuto Group brings
together our management experience of owning and operating The Athlete’s Foot, a
global retail footwear franchise system, with Camuto Group’s experience in
design, sourcing and branding women’s shoes. The partnership has begun
franchising the Shoebox’s luxury, multi-brand footwear concept domestically and
internationally under the Shoebox New York brand.
Quick
Service Restaurant (QSR) Franchising
The
brands that comprise our QSR Franchising segment are as follows:
MaggieMoo’s
Each
MaggieMoo’s Treatery features a menu of freshly made super-premium ice creams,
mix-ins, smoothies, sorbets and custom ice cream cakes. MaggieMoo’s has been
consistently awarded The National Ice Cream Retailers Association’s prestigious
Blue Ribbon Award for taste, texture and overall appearance of its most popular
flavors. MaggieMoo’s is the franchisor of approximately 190 stores located
across the United States.
On
February 28, 2007, we acquired MaggieMoo’s International, LLC. The initial
purchase price for this acquisition was $16.1 million, consisting of
approximately $10.8 million of cash and debt repayment and $5.3 million in
our
common stock (approximately 515,000 shares which were valued at $10.21 per
share, the average closing price our common stock for the fifteen consecutive
days that ended on February 27, 2007). Pursuant to the purchase agreement,
the
sellers will receive additional consideration in the form of an earn-out,
if
certain revenue thresholds are met for 2007, which is payable on March 31,
2008.
Marble
Slab
Marble
Slab Creamery is
a
purveyor of super-premium hand-mixed ice cream. All Marble Slab Creamery ice
cream is made in small batches in franchise locations using the finest
ingredients in the world and served in freshly baked waffle cones. Marble Slab
has an international presence with approximately 390 locations in the United
States, Canada and the United Arab Emirates.
On
February 28, 2007, we acquired the assets of Marble Slab Creamery, Inc. The
purchase price of the acquisition was $21 million, consisting of $16 million
of
cash, and the issuance of a total of $5.0 million of notes that matured and
became payable on February 28, 2008. The notes accrued interest at an annual
rate of 6% per annum until maturity, and 8% thereafter. On February 28, 2008,
we
paid the former owner of Marble Slab a total of $3,710,767 representing the
full
$3.5 million principal amount of the first note and $210,767 of accrued
interest. As permitted by the terms of the second note for $1.5 million, we
did
not pay the note or the accrued interest thereon because we asserted indemnity
claims in excess of $2 million under the asset purchase agreement. The former
owner of Marble Slab has disputed our indemnity claims. We cannot predict
whether we will be successful in collecting on our claims. Until these claims
are resolved, a total of $1,596,107 million of our cash will remain in escrow
as
collateral for payments owned under the second note, and interest will continue
to accrue on the unpaid amounts not ultimately recovered pursuant to
indemnification claims at the rate of 8% per annum.
To
finance the acquisition, we borrowed $19 million under the BTMU Credit Facility,
secured by the assets of MaggieMoo’s and Marble Slab.
Pretzel
Time and Pretzelmaker
Pretzel
Time
and
Pretzelmaker
introduced their famous soft pretzel in 1991 and have grown to become among
the
leaders in the soft pretzel category. Pretzelmaker
and
Pretzel
Time
specialize in offering steaming hot, freshly-baked, fresh twisted pretzels,
pretzel dogs, freshly squeezed lemonade and cold beverages. Pretzel Time has
approximately 190 stores located domestically and in Panama, Guatemala, Trinidad
and Jordan. Pretzelmaker stores can be found in approximately 190 locations
in
the United States, Canada and Guam.
On
August
7, 2007, we acquired substantially all of the assets of Pretzel Time
Franchising, LLC and Pretzelmaker Franchising, LLC for the purchase price of
approximately $30.0 million, consisting of $22.0 million in cash and $7.3
million in our common stock (approximately one million shares which were valued
at $7.35 per share, the closing price per share of our common stock on the
day
immediately prior to the closing date). To finance the acquisition,
we
borrowed $16 million under the BTMU Credit Facility, secured by the acquired
assets.
Great
American Cookies
Founded
in 1977 on the strength of an old family chocolate chip cookie recipe,
Great
American Cookies
has set
the standard for gourmet cookie sales in shopping centers nationwide. With
a
strategy and quality product that has propelled over 30 years of growth, Great
American Cookies now leads as the mall-based cookie system with approximately
300 franchised units primarily located in the continental United
States.
On
January 29, 2008, we acquired substantially all of the assets of Great American
Cookie Company Franchising, LLC and Great American Manufacturing, LLC for the
purchase price of approximately $93.65 million, consisting of $89 million
in cash and $4.65 million of our common stock (approximately 1.1 million shares
which were valued at $4.23 per share, the closing price per share of our common
stock the day immediately prior to the closing date. To finance the acquisition,
we
borrowed $70 million under the BTMU Credit Facility, which
was
increased from $150 million to $181 million at that time.
Our
total
borrowing to date under the BTMU Credit Facility is approximately $181 million.
Repayments of our borrowings through December 31, 2007 totaled $1.2 million.
For
a discussion of risks associated with borrowings, see Item
1A. Risk Factors
under
the caption “Risks of Our 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. Each is subject to competitive risks and pressures,
including price, quality and selection of merchandise, reputation, store
location, advertising and customer service. 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. See Item
1A. Risk Factors
under
the caption “Risks of Our Business
- Our
business depends on market acceptance of our brands in highly competitive
markets.”
In
seeking to make acquisitions of IP and IP-centric businesses, we compete with
other companies and financial buyers (such as private equity funds). 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.”
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,
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 brand management and franchising business.
We sold our MBS investments in November 2006, and since that time, we have
focused entirely on our brand management and franchising 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 predecessor businesses through
2004, as of December 31, 2007, we had federal net operating loss carry forwards
of approximately $782 million that expire on various dates between 2011 and
2026. These tax loss carry forwards 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 $188 million that expire between 2008
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 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.
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, we cannot guarantee that these restrictions
will prevent a change of ownership from occurring 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. Our Board of Directors also has the right to waive the application of
these restrictions to any transfer.
One
of
our important 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, 2007, 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 cannot 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, 2007, we employed a total of 107 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
may 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 our 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 also maintain, in some cases
through our licensees, sites for each of the Company's brands and operations,
www.theathletesfoot.com,
www.billblass.com,
www.greatamericancookies.com,
www.maggiemoos.com,
www.marbleslab.com,
www.pretzeltime.com,
www.pretzelmaker.com,
www.shoeboxny.com,
and
www.waverly.com.
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 links, and
the
contents of these websites are not incorporated into, and do not constitute
a
part of, this Report.
ITEM
1A. RISK FACTORS
You
should carefully consider the following risks along with the other information
contained in this Annual Report on Form 10-K. All of the following risks could
materially and adversely affect our business, financial condition or results
of
operations. In addition to the risks discussed below and elsewhere in this
Annual Report on 10-K, other risks and uncertainties not currently known to
us
or that we currently consider immaterial could, in the future, materially and
adversely affect our business, financial condition and financial
results.
Risks
of Our Business
Acquisitions
involve numerous risks that we may not be able to address or overcome and that
may negatively affect our business and financial results.
We
have
built our brand management and franchising business through acquisitions. Our
recent acquisitions may not deliver the value we paid or will pay for them.
Excessive expenses may result if we do not successfully integrate them, or
if
the costs and management resources we expend in connection with the integrations
exceed our expectations. We expect that our recent acquisitions, and any
acquisitions, investments or strategic alliances that we may pursue in the
future, will have a continuing, significant impact on our business, financial
condition and operating results. The value of the companies that we acquired
or
may in the future acquire may be less than the amount we paid or will pay,
and
our financial results may be adversely affected if we fail to realize
anticipated benefits from our acquisitions, including various synergies and
economies of scope and scale. Risks associated with our past and future
acquisitions include, among others:
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·
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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, amortization or impairment of acquired intangibles and
impairment of goodwill;
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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 brand portfolio grows and becomes more
diversified;
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failing
to achieve synergies across our diverse brand
portfolio;
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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;
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failing
to integrate acquired businesses with our existing businesses due
to
unanticipated costs and difficulties, which may disrupt our existing
businesses or delay or diminish our ability to realize financial
and
operational benefits from those acquisitions;
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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We
may be unable to increase profitability unless we can identify and acquire
IP
and IP-centric businesses on favorable terms.
Our
ability to achieve our business objective of increasing profitability may depend
on our ability to identify and acquire suitable acquisitions on favorable terms,
so that we can increase our revenues and our operating income. If we are unable
to complete additional acquisitions on favorable terms, the expenses associated
with our brand management and franchising business may be disproportionate
to
our revenues. 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.
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 our acquisitions of The Athlete’s Foot, Bill Blass, Great American
Cookies, MaggieMoo’s, Marble Slab, Pretzel Time, Pretzelmaker, and Waverly with
a combination of cash and equity. We intend to finance many of 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, 2008, we had approximately $19 million of cash on hand
(excluding restricted cash) after borrowing $181 million under the BTMU Credit
Facility, which we entered into on March 12, 2007 and which was amended on
January 29, 2008 to increase
the maximum amount of borrowing that may be outstanding thereunder at any one
time from $150 million to $181 million.
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 common
stock.
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 brand management and franchising business strategy.
Although
we have established a corporate structure and hired personnel with expertise
in
franchise and brand management, the successful implementation of our business
strategy remains dependent 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 brand management and franchising business
strategy. Although we have 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 term or thereafter. 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 brand
management and franchising business strategy, which would harm our business
and
prospects.
Any
failure to meet our debt obligations would adversely affect our business and
financial condition.
On
March
12, 2007, we entered into a $150 million master loan agreement with BTMU Capital
Corporation (“BTMU”). In connection with the financing of our acquisition of
Great American Cookies on January 29, 2008, we increased
the maximum amount of borrowing that may be outstanding at any one time from
$150 million to $181 million and modified certain defined terms used in the
original loan documentation and related documents to take into account the
Company’s acquisition of real estate assets in the Great American Cookies
transaction. With the exception of these changes, the increase to the BTMU
Credit Facility is substantially on the same terms as the original credit
facility.
As
of
March 14, 2008, we have approximately $179 million of long-term debt outstanding
under the master loan agreement with BTMU. Interest rates for our master loan
agreement vary based upon changes in the debt service coverage ratio, which
is
the outstanding balance compared to operating revenue of the underlying
collateral, and based changes in 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. Although these covenants are limited to the
collateral-holding entities and do not apply to the Company itself, 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, a substantial portion of cash flow from our
operations is needed to pay principal and interest. This reduces 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.
Although the master loan agreement does not restrict our ability to obtain
future financings, it may limit our ability to do so, 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.
Our
business depends on market acceptance of our brands in highly competitive
markets.
Continued
market acceptance of our brands is critical to our future success and subject
to
great uncertainty. The retail franchising, consumer branded products and QSR
franchising business segments in which we operate and on which we expect to
focus our acquisition activities are extremely competitive, both in the United
States and overseas. Accordingly, we and our current and future licensees,
franchisees and other business partners face and will face intense and
substantial competition with respect to marketing and expanding products and
services under our brands. 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, franchisees and other third parties with whom we deal
may
not be successful in selling products and services that make use of our brands.
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, 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 we or our licensees
and other business partners do. 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.
Deterioration
of general economic conditions and declines in consumer spending can negatively
affect our business.
Our
business is sensitive to consumer spending patterns and preferences. Market
and
general economic conditions affect the level of discretionary spending on the
merchandise we, our licensees and our franchisees offer, including general
business conditions, interest rates, taxation, the availability of consumer
credit and consumer confidence in future economic conditions. Any unfavorable
occurrences in these economic conditions on a local, regional, national or
multi-national level may adversely affect our growth, sales and profitability.
Given the significance of our domestic business, the likely negative impact
of a
recession in the general economy in the United States or a general decline
in
domestic consumer spending may not be wholly mitigated by our business outside
the United States.
Many
of
our franchisees’ stores are located in shopping malls, particularly in the
United States. Our franchisees derive revenue, in part, from the high volume
of
traffic in these malls. The inability of mall "anchor"
tenants
and other area attractions to generate consumer traffic around our franchised
stores or the decline in popularity of malls as shopping destinations could
reduce our licensing and franchising revenue dependent on sales volume.
Because
we rely on unaffiliated third parties to market, distribute, sell and in some
cases design products and services using our brands under license, the success
of our business may depend upon various factors that are beyond our
control.
Substantially
all of our earnings come from royalties generated from licensees, franchisees
and similar contractual relationships involving our IP. Licensees, franchisees
and other business partners are independent operators, and we do not exercise
day-to-day control over any of them. As a result, our business faces a number
of
risks, including the following:
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Products
using our IP are generally 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
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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We
operate a global business that exposes us to additional risks that may
negatively affect our results of operations and financial
condition.
Our
franchisees operate in over 50 countries. In addition, the brands and other
IP
assets that we own 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 brand management and franchising business.
Our
failure to protect our proprietary rights could decrease the value of those
assets.
We
own a
combination of trademarks, copyrights, franchise rights, service marks, trade
secrets and similar intellectual property rights. The success of our brand
management and franchising business will depend in part on our ability to
license our 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 much of our intellectual property
is
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
monitor on an ongoing basis unauthorized use and filings for registrations
that
conflict with our trademarks and other intellectual property rights. We rely
primarily upon a combination of trademark, copyright, know-how, trade secrets
laws 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 our intellectual property, 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 our intellectual property 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 resulted in our 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, we recorded a material amount of good will
and other identifiable intangible assets with indefinite lives on our balance
sheet. 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 have made
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 have acquired 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 Acquisition Strategy
Competition
may negatively affect our ability to complete suitable
acquisitions.
We
face
competition for acquisitions. 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.
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 and difficult 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. 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. If our stock price declines, sellers of IP and IP-centric
businesses may be less willing to accept shares of our common stock as
consideration for a portion of future acquisitions. In addition, if sellers
are
willing to accept shares of our common stock, we may be required to issue
additional shares to complete acquisitions, which would make acquisitions more
dilutive to our stockholders. The volatility in the price of our common stock
may also limit our ability to pursue equity sales as a financing
strategy.
Shares
eligible for future resale by our current stockholders may depress our share
price.
We
issued
a large number of shares of our common stock and securities convertible into
common stock in connection with the acquisitions of UCC, The Athlete’s Foot,
Bill Blass, MaggieMoo’s, Waverly, Pretzel Time, Pretzelmaker and Great American
Cookies. We have agreed to register for public resale substantially all of
the
shares issued in these acquisitions. In registration statements filed with
the
SEC on September 15, 2006 and May 4, 2007, we registered the resale of
10,728,191 shares of our common stock related to the UCC, The Athlete’s Foot,
Bill Blass, MaggieMoo’s, and Waverly acquisitions. We also have a registration
statement pending with the SEC to register the resale of 3,697,671 shares of
our
common stock related to the Pretzel Time and Pretzelmaker acquisitions and
an
earn-out related to the UCC acquisition and we are required under the terms
of
our acquisition of Great American Cookies to register the resale of an
additional 1,399,290 shares of our common stock. Additionally, we may issue
shares of our common stock in future acquisitions and become obligated to
register additional shares. Although some of the shares that we registered
are
subject to contractual restrictions on resale (as we discuss in our filings),
the resale of substantial amounts of our common stock in the public markets
could have an adverse effect on the market price of our common stock. Such
an
adverse effect on the market price of our common stock would make it more
difficult for us to sell our shares in the future at prices which we deem
appropriate or to use our shares as currency for future
acquisitions.
Risks
of Our Tax Loss Carry Forwards
If
we experience an ownership change, our ability to realize value from our tax
loss carry forwards could be significantly limited.
As
of
December 31, 2007,
we
had
federal net operating loss carry forwards of approximately $782 million that
expire between 2011 and 2026. In addition, we had capital loss carry forwards
of
approximately $188 million that expire between 2008 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, 2007, 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 cannot 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.
While
we
expect that the transfer restrictions on our stockholders approved and adopted
in July 2005 will help guard against an ownership change occurring under Section
382 and the related rules, we cannot guarantee that these restrictions will
prevent a change of ownership from occurring 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
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, 2010 in accordance with the Jobs and Growth Tax Relief
Reconciliation Act of 2003, as amended by the Tax Increase Prevention and
Reconciliation Act of 2005.
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.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
As
of
December 31, 2007, we leased a total of approximately 49,500 square feet of
office space for our operations. Our principal executive office totals 10,250
square feet and is located in New York, New York. Our Waverly showroom totals
7,150 square feet, and our Bill Blass showroom totals 11,700 square feet. These
showrooms are both located in New York, New York. Our retail franchising and
QSR
brands are centralized in one facility totaling approximately 20,400 square
feet
located in Norcross, Georgia. We believe that our 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.
We
are
also obligated under 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”). In addition, we assumed leases for
office space in connection with our acquisitions of MaggieMoo’s and Marble Slab
which we no longer use. We have negotiated a settlement of the MaggieMoo’s lease
for a one-time payment of $330,000 which was made in January 2008. We have
sublet the Marble Slab office in Houston, Texas to a third party through the
lease expiration in April 2009.
On
January 29, 2008, in connection with the acquisition of Great American Cookies,
we acquired a cookie dough manufacturing facility. The facility is located
on
approximately four acres of land in Atlanta, Georgia and totals 37,400 square
feet. The acquisition of the cookie dough manufacturing facility was financed
under our BTMU Credit Facility and consequently is subject to BTMU’s security
interest.
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, but in connection with certain
acquisitions we have become obligated under guarantees for certain franchise
location leases.
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. The complaint alleges that 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 did not include the
underwriter-defendants, and they continued to defend the actions
and 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.
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 (the “Miles Decision”). Plaintiffs filed a petition
in early 2007 seeking rehearing of this decision and/or a rehearing en
banc. On April 6, 2007, the Second Circuit denied the petition for
rehearing in an opinion. After careful consideration by the parties of the
effect of the Miles Decision on the proposed settlement (i.e., whether in light
of the Miles Decision no class may be certified in these actions, even a
settlement class), plaintiffs and the issuer-defendants executed a stipulation
and proposed order terminating the proposed Issuers’ Settlement on June 22,
2007. The district court “so ordered” the stipulation and proposed order,
terminating the proposed Issuers’ Settlement shortly thereafter.
Discovery
in the actions has resumed, and plaintiffs filed amended complaints in the
focus cases shortly thereafter. Defendants have moved to dismiss the
amended complaints. Plaintiffs have also filed motions for class
certification in the focus cases. Defendants have filed papers
opposing class certification. Neither the motion to dismiss nor the
motion for class certification has been ruled upon by the Court.
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 alleged 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. In July 2007,
the
Company settled all claims with the plaintiff for a payment of $600,000. The
case has been dismissed with prejudice. The Company’s costs in connection with
the defense of this case 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.
The settlement amount has also been recorded against discontinued
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, captioned Tim
Johnson v. Fortress Credit Opportunities I, L.P., et al.,
in which
the plaintiff alleged 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. UCC and Mr. D’Loren filed cross-claims claiming
indemnity against TSC and certain TSC officers. TSC filed various cross and
third-party claims against UCC, Mr. D’Loren and another TSC shareholder, Annie
Roboff. Roboff filed a separate action in the Chancery Court in Davidson County,
Tennessee, 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 parties reached a global settlement on December 19, 2007,
with UCC contributing a total of $125,000 to the settlement amount, which amount
has been included in discontinued operations. The case has been dismissed with
prejudice.
Other.
The
Company and its subsidiaries are subject to other litigation in the ordinary
course of business, including contract, franchisee, trademark and
employment-related litigation. In the course of operating its franchise systems
and enforcing its rights under existing and former franchisee agreements, we
are
also subject to complaints, letters threatening litigation and law suits,
particularly in cases involving defaults and terminations of
franchises.
None.
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.
|
|
2007
|
|
2006
|
|
QUARTER
ENDED
|
|
HIGH
|
|
LOW
|
|
HIGH
|
|
LOW
|
|
March 31
|
|
$
|
11.04
|
|
$
|
7.42
|
|
$
|
3.85
|
|
$
|
3.13
|
|
June 30
|
|
$
|
12.98
|
|
$
|
9.98
|
|
$
|
5.50
|
|
$
|
3.75
|
|
September 30
|
|
$
|
11.41
|
|
$
|
5.56
|
|
$
|
6.33
|
|
$
|
5.54
|
|
December 31
|
|
$
|
7.37
|
|
$
|
3.89
|
|
$
|
7.42
|
|
$
|
5.71
|
|
APPROXIMATE
NUMBER OF EQUITY SECURITY HOLDERS
The
number of stockholders of record of NexCen’s common stock as of
February 29, 2008 was 352.
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
|
|
|
3,964,064
|
|
$
|
4.40
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Equity
Incentive
Plan
|
|
|
1,973,666
|
|
$
|
7.34
|
|
|
1,526,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
Acquisition
Incentive
Plan
|
|
|
89,127
|
|
$
|
2.71
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
6,026,857
|
|
$
|
5.34
|
|
|
1,526,334
|
|
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.
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
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.
Period |
|
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, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
February
1 - February 28, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
March
1 - March 31, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
April
1 - April 30, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
May
1 - May 31, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
June
1 - June 30, 2007
|
|
|
4,000
|
|
$
|
3.75
|
|
|
-
|
|
|
-
|
|
July
1 - July 31, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
August
1 - August 31, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
September
1 - September 30, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
October
1 - October 31, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
November
1 - November 30, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
December
1 - December 31, 2007
|
|
|
2,000
|
|
$
|
3.75
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
6,000
|
|
$
|
3.75
|
|
|
-
|
|
|
-
|
|
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 brand
management and franchising business as continuing operations. We began operating
this business in 2006, but we owned only one of our nine brands in 2006 (and
only for the last seven weeks of that fiscal year). In fiscal 2007, we acquired
six additional brands. We acquired two of our current nine brands in January
2008. The results of the mobile and data communications business that we sold
during 2004 and the mortgage-backed securities business that we sold in 2006
are
reported as discontinued operations. Loss from continuing operations does not
include any financial results of these discontinued operations. As a result
of
the reclassification of our former businesses to discontinued operations, these
results differ from the results that we presented in reporting periods prior
to
the fourth quarter of 2006.
|
|
YEAR
ENDED DECEMBER 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
|
CONSOLIDATED
STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
revenues
|
|
$
|
15,289
|
|
$
|
1,175
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Franchise
fee revenues
|
|
|
3,464
|
|
|
749
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Licensing
revenues
|
|
|
15,542
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
revenues
|
|
|
34,295
|
|
|
1,924
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
(32,105
|
)
|
|
(10,413
|
)
|
|
(5,241
|
)
|
|
(14,643
|
)
|
|
(21,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
2,190
|
|
|
(8,489
|
)
|
|
(5,241
|
)
|
|
(14,643
|
)
|
|
(21,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-operating income (loss)
|
|
|
(2,950
|
)
|
|
3,337
|
|
|
1,690
|
|
|
(10,000
|
)
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before taxes
|
|
|
(760
|
)
|
|
(5,152
|
)
|
|
(3,551
|
)
|
|
(24,643
|
)
|
|
(25,696
|
)
|
Income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
Current
|
|
|
(236
|
)
|
|
(81
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Deferred
|
|
|
(3,067
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss
from continuing operations
|
|
|
(4,063
|
)
|
|
(5,233
|
)
|
|
(3,551
|
)
|
|
(24,643
|
)
|
|
(25,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of tax expense of $64 and
$75 for 2006 and 2003, respectively
|
|
|
(586
|
)
|
|
2,358
|
|
|
225
|
|
|
(44,510
|
)
|
|
(23,756
|
)
|
Gain
(loss) on sale of discontinued operations
|
|
|
—
|
|
|
755
|
|
|
(1,194
|
)
|
|
20,825
|
|
|
—
|
|
Net
loss
|
|
$
|
(4,649
|
)
|
$
|
(2,120
|
)
|
$
|
(4,520
|
)
|
$
|
(48,328
|
)
|
$
|
(49,452
|
)
|
Loss
per share (basic and diluted) from continuing operations
|
|
$
|
(0.08
|
)
|
$
|
(0.11
|
)
|
$
|
(0.08
|
)
|
$
|
(0.57
|
)
|
$
|
(0.60
|
)
|
Income
(loss) per share (basic and diluted) from discontinued
operations
|
|
|
(0.01
|
|
|
0.07
|
|
|
(0.02
|
)
|
|
(0.54
|
)
|
|
(0.56
|
)
|
Net
loss per share - basic and diluted
|
|
$
|
(0.09
|
)
|
$
|
(0.04
|
)
|
$
|
(0.10
|
)
|
$
|
(1.11
|
)
|
$
|
(1.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
and diluted
|
|
|
51,889
|
|
|
45,636
|
|
|
44,006
|
|
|
43,713
|
|
|
42,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents (including restricted cash of $7 and $1 million
in 2007 and 2006, respectively)
|
|
$
|
53,275
|
|
$
|
84,834
|
|
$
|
9,725
|
|
$
|
69,555
|
|
$
|
39,682
|
|
Investments
available for sale - discontinued operations
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
220,849
|
|
Trademarks
and goodwill
|
|
$
|
278,048
|
|
$
|
64,607
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Mortgage-backed
securities, at fair value, discontinued operations
|
|
$
|
—
|
|
$
|
—
|
|
$
|
253,900
|
|
$
|
62,184
|
|
$
|
—
|
|
Total
assets
|
|
$
|
359,207
|
|
$
|
158,385
|
|
$
|
266,008
|
|
$
|
136,586
|
|
$
|
398,105
|
|
Repurchase
agreements related to discontinued operations
|
|
$
|
—
|
|
$
|
—
|
|
$
|
133,924
|
|
$
|
—
|
|
$
|
—
|
|
Total
debt
|
|
$
|
109,578
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
154,942
|
|
Stockholders’
equity
|
|
$
|
192,813
|
|
$
|
146,613
|
|
$
|
126,387
|
|
$
|
130,590
|
|
$
|
179,301
|
|
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion of the results of operations and financial condition of
NexCen Brands, Inc. should be read in conjunction with the information contained
in the Consolidated Financial Statements and related Notes, which appear in
Item
8 of this Report.
OVERVIEW
NexCen
Brands is a vertically integrated global brand management and franchising
company. Our business is focused on managing, developing and acquiring IP and
IP-centric businesses, operating in three vertical segments: consumer branded
products, retail franchising and QSR franchising. We own, license, franchise
and
market a growing portfolio of brands. We license and franchise our brands to
a
network of leading retailers, manufacturers and franchisees that includes every
major segment of retail distribution from the luxury market to the mass market
in the United States and in over 50 countries around the world. Our franchise
network consists of approximately 1,900 retail stores. We discuss our business,
our operating strategy, our three business segments and our brands in detail
in
Item 1 of this Report.
We
commenced our current business in June 2006 when we acquired UCC Capital
Corporation. 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.
We
generate revenue from licensing, franchising and other commercial arrangements
with third parties who want to use our brands and associated IP, including
trademarks, trade names, copyrights, franchise rights, patents, trade secrets,
know-how and other similar valuable property.
These
third parties pay us licensing, franchising 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 demographic and/or
geographic markets.
We
receive licensing, franchising and other contractual fees that 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 sold). Accordingly, our revenues reflect
both
recurring and non-recurring payment streams. Our revenue represents a relatively
small percentage of the revenue of our licensees and franchisees (typically
a 6%
royalty). Our revenue depends 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).
Our
principal assets are 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.
Through
March 17, 2008, we have acquired nine brands, as follows:
Brand
Management:
Consumer
Branded Products
|
·
|
Bill
Blass (acquired February 15, 2007)
|
|
|
|
|
· |
Waverly
(acquired May 2, 2007) |
Franchise
Management:
Retail
Franchising
|
·
|
The
Athlete’s Foot (acquired November 7,
2006)
|
|
·
|
Shoebox
(acquired January 15, 2008)
|
QSR
franchising
|
·
|
MaggieMoo’s
(acquired February 28, 2007)
|
|
·
|
Marble
Slab (acquired February 28, 2007)
|
|
·
|
Pretzel
Time (acquired August 7, 2007)
|
|
·
|
Pretzelmaker
(acquired August 7, 2007)
|
|
·
|
Great
American Cookies (acquired January 29,
2008)
|
Our
operating segments are discussed in
Note
23-Segment Reporting
to
our
Consolidated Financial Statements
included
in this Report. Because we owned only one brand in 2006 (and then only for
the
last seven weeks of that year) and did not operate in our current three business
segments until the first quarter of 2007, we do not include any discussion
of
period-to-period comparisons for the results of our three business segments
in
the discussion that follows.
We
are
continuously evaluating additional potential acquisitions and are actively
exploring opportunities to acquire additional IP-centric businesses. However,
as
of the date of this Report, we have not entered into any binding agreements
to
complete any additional acquisitions.
Before
transitioning to our current business, we managed a leveraged portfolio of
MBS.
We liquidated our MBS portfolio and exited that business in the fourth quarter
of 2006. We also previously owned and operated various mobile and wireless
communications businesses, which we sold in 2004. For the periods reflected
in
our financial statements, the MBS business and related assets and liabilities,
as well as anything related to our former mobile and wireless communications
businesses, are reported as discontinued operations. The results of our brand
management and franchising business are reported as our continuing
operations.
In
reviewing our results for the year ended December 31, 2007, you should keep
in
mind the following factors:
|
·
|
Comparisons
to prior periods are not yet meaningful, because we did not initiate
our
current business strategy until the second half of 2006 and did not
begin
to earn royalties or license and franchise fees until halfway through
the
fourth quarter of 2006, when we acquired The Athlete’s
Foot.
|
|
·
|
Of
the seven IP brands we owned and operated as of December 31, 2007,
we
owned only one -- The Athlete’s Foot -- for the entire year of 2007. Our
results through December 31, 2007 include Bill Blass for ten and
one half
months, MaggieMoo’s and Marble Slab for ten months, Waverly for
approximately eight months, and Pretzel Time and Pretzelmaker for
approximately five months. In addition, MaggieMoo’s and Marble Slab’s,
Pretzel Time, and Pretzelmaker, revenue streams are subject to wide
seasonal fluctuations. Consequently, our annual results are not indicative
of what we expect our results to be in future
periods.
|
|
·
|
If
we continue to acquire IP-centric businesses (as we expect to do),
future
period results will continue to change due to the inclusion of such
additional businesses. Accordingly, period-to-period fluctuations
may
continue to be significant. However, as we own a group of businesses
for a
longer period, we expect to be able to evaluate changes in our results
from those businesses owned for multiple periods (isolating the effect
on
our results of newly acquired
businesses).
|
DISCONTINUED
OPERATIONS
In
November 2006, we exited the MBS business by selling our remaining $75.5 million
of MBS investments and recognizing 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.
In 2007, we settled litigation and other claims related to the mobile and
wireless communications business we sold in 2004, which amounts were charged
to
discontinued operations. These settlements are discussed in Note
13 to our Consolidated Financial Statements.
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, and 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 is developing
plans to
achieve profitable operations in future years that may enable us
to
recover the benefit of our deferred tax assets. 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 unit 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 units,
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 unit is less than the carrying
value of the reporting unit, 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 reporting units, increasing the
value of each brand. We evaluate the estimated lives of our identifiable
intangible assets at each reporting period.
|
·
|
Valuation
of stock-based compensation - Under the provisions of SFAS 123R,
share-based compensation cost is measured at the grant date, based
on the
calculated fair value of the award, and is recognized as an expense
over
the employee’s requisite service period (generally the vesting period of
the equity grant). SFAS No. 123R also requires the related
excess tax benefit received upon exercise of stock options or vesting
of
restricted stock, if any, to be reflected in the statement of cash
flows
as a financing activity rather than an operating activity.
|
We
used
the Black-Scholes option pricing model to value the compensation expense
associated with our stock option awards under SFAS 123R. In addition,
we estimated forfeitures when recognizing compensation expense associated with
our stock options, and adjusted our estimate of forfeitures when they were
expected to differ. Key input assumptions used to estimate the fair
value of stock options included the market value of the underlying shares at
the
date of grant, the exercise price of the award, the expected option term, the
expected volatility (based on historical volatility) of our stock over the
option’s expected term, the risk-free interest rate over the option’s expected
term, and the expected annual dividend yield, if any.
|
·
|
Valuation
of Allowance for Doubtful Accounts - We maintain an allowance for
doubtful
accounts for estimated losses resulting from the inability of our
customers to make required payments. In evaluating the collectability
of
accounts receivable, we consider a number of factors, including the
age of
the accounts, changes in status of the customers’ financial condition and
other relevant factors. Estimates of uncollectible amounts are revised
each period, and changes are recorded in the period they become
known.
|
RECENT
ACCOUNTING PRONOUNCMENTS
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, and cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial
Liabilities.”
SFAS
No. 159 permits entities to choose to measure most financial instruments and
certain other items at fair value that are currently required to be measured
at
historical costs. Adoption of SFAS No. 159 is optional. We currently do not
expect to adopt SFAS No. 159.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.”
Under
SFAS No. 141(R), acquiring entities will recognize assets acquired and
liabilities assumed in connection with business combinations at fair market
value with limited exception. Among its provisions, SFAS No. 141(R) requires
that: (a) acquisition costs will generally be expensed as incurred and not
capitalized, (b) contingent consideration will be recognized at estimated fair
value at the time of acquisition, and (c) noncontrolling interests will be
valued at the fair value at the acquisition date. SFAS No. 141(R) is effective
for annual periods beginning on or after December 15, 2008. We are currently
assessing the impact this statement will have on our consolidated results of
operations, financial position, and cash flows.
In
December 2007, The FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements- An Amendment of ARB No.
51.”
SFAS No.
160 provides that noncontrolling interests in a subsidiary (minority interests)
are to be recorded as a component of equity, separate from the parent’s equity.
SFAS No. 160 also provides for changes in the way minority interest expense
is
recorded in the income statement, and will require expanded disclosure regarding
the interests of the parent and its noncontrolling interest. SFAS No. 160 is
effective for years and interim periods beginning on or after December 15,
2008.
We are currently assessing the impact this statement will have on our
consolidated results of operations, financial position, and cash
flows.
RESULTS
OF CONTINUING OPERATIONS
Loss
from Continuing Operations before Income Taxes
Loss
from
continuing operations before income taxes of $760,000 in 2007 improved by $4.4
million, or 85% in 2007, from a loss of $5.2 million in 2006, reflecting the
implementation of our brand management and franchising business. No revenues
were earned in the first ten months of 2006 in connection with our new
business.
Loss
from
continuing operations before income taxes of $5.2 million in 2006 increased
$1.6
million, or 45% 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).
Royalty,
Licensing and Franchise Fee Revenue
We
recognized $34.3 million in revenues during the fiscal year 2007, as a result
of
owning our seven brands compared to $1.9 million in revenues for 2006 when
we
owned only one brand for seven weeks. Of the $34.3 million in revenues
recognized in 2007, $15.3 million related to franchising royalties, $15.5
million related to licensing, and $3.5 million related to franchise fees. In
2006, $1.2 million in revenues was from royalties and $749,000 was from
franchise fees. Royalty and licensing 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 generally considered to be upon
the
opening of the applicable franchisee store. Our revenues, especially those
derived from our QSR franchisees, are subject to seasonal
fluctuations.
As
discussed above, all revenues from the MBS and the mobile and wireless
communications businesses that we have sold have been reclassified to
discontinued operations and are included in income (loss) from discontinued
operations.
Total
Operating Expenses
Operating
expenses of $32.1 million in 2007 increased by $21.7 million, or 208% in 2007,
from $10.4 million in 2006. The increase reflects an increase in selling,
general and administrative costs and stock based compensation resulting from
the
acquisitions of the brands we own.
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.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses consist primarily of
compensation, stock compensation expense and personnel related costs, rent,
facility related support costs, travel and advertising.
Corporate
SG&A expenses increased $5.7 million, or 79%, to $13.0 million in 2007 from
$7.3 million in 2006. The increase primarily reflects additional costs resulting
from the hiring of corporate staff to support our acquisition activity, stock
compensation expense and growth of the Company. In accordance with accounting
rules, included in corporate SG&A expense for 2007 is $408,000 of state tax
expense. This is included in SG&A because it is a tax based on capital and
not income. Additionally, we recorded SG&A expenses for our brands of $14.4
million, an increase of $13.9 million from $453,000 in 2006. Of the $14.4
million of brand related SG&A expenses in 2007, $4.8 million related to our
QSR segment, $5.6 million related to our retail franchising segment, and
$4.0
million related to our consumer branded products segment. Personnel employed
by
the Company increased from 36 employees to 107 employees as of December 31,
2007
as a result of our acquisitions.
SG&A
expenses increased $4.1 million, or 112%, to $7.7 million in 2006 from $3.6
million in 2005. The increase primarily reflects additional costs resulting
from
our acquisitions of UCC, The Athlete’s Foot, and stock compensation expense.
Excluding these acquisitions, SG&A expenses would have decreased $800,000.
The primary drivers of the increase relate to personnel related costs at UCC
and
The Athlete’s Foot which we did not own in 2005. The personnel hired through the
UCC acquisition comprise our new executive and management team, and the majority
of our corporate staff.
Stock
Compensation Expense
We
adopted SFAS No. 123R,“Share-Based Payment” in the first quarter of
2006. Accordingly, 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 based compensation
expense is included in Corporate SG&A expenses.
Stock
based compensation expense of $4.2 million in 2007 reflects the expense
associated with option and warrant grants. The increase results from the
granting of a total of approximately 7.1 million options and warrants in 2007
and 2006. Substantially all of the options granted in 2006 were granted from
June through the end of the year, so a significant reason for the increase
in
stock compensation expense in 2007 over 2006 was because the options were
outstanding for a full year in 2007 and only a portion of the year in 2006.
These options and warrants were issued to provide long-term incentive packages
to new key executives and other senior managers that we hired in 2007 and 2006,
including individuals who were employed by UCC, The Athlete’s Foot, Bill Blass,
Marble Slab, and Waverly prior to their acquisition by us and warrants to the
sellers of The Athlete’s Foot, Bill Blass, Maggie Moo’s, Waverly, Pretzel Time
and Pretzelmaker. Stock compensation expense of $1.6 million and $76,000 in
2006
and 2005, respectively, represents the cost associated with the grants of
restricted stock and increased approximately $1.5 million from 2005 to 2006.
In
2005, stock compensation expense was recorded using the intrinsic-value method.
See Note
2 to
our
Consolidated Financial Statements.
Professional
Fees
Corporate
professional fees of $1.6 million, $1.1 million and $1.4 million in 2007, 2006
and 2005, respectively, represent the costs of outside professionals, primarily
related to legal
expenses associated with our public reporting, compliance, and corporate finance
activities, and accounting fees related to auditing and tax services.
Professional fees related to our brands of $1.6 million in 2007, include
accounting fees and legal expenses associated with franchising activities,
trademark and copyright maintenance. The increase in professional fees reflects
the increased costs of compliance and auditing associated with the growth of
the
Company and the integration of acquisitions.
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 $1.1 million, or 243%, to $1.6 million in 2007 from
$471,000 in 2006. The increase primarily reflects the amortization of intangible
assets related to a non-compete agreement with our chief executive officer,
and
amortization of intangibles of franchise agreements, license agreements, and
master development agreements related to the TAF, Bill Blass, Marble Slab,
MaggieMoo’s, Waverly, and Pretzel Time and Pretzelmaker
acquisitions.
Interest
Income
Interest
income decreased $537,000, or 20%, to $2.1 million in 2007 from $2.6 million
in
2006, which primarily reflects the change in our cash balances. Interest income
increased $1.1 million or 78% to $2.6 million in 2006 from $1.5 million in
2005.
The amounts recognized in each year reflect interest earned on our cash
balances. In part of 2006 and in all of 2005, most of our available cash was
invested in MBS, and earnings on such investments are reported as part of the
results of discontinued operations.
Interest
Expense
Interest
expense increased $5.1 million to $5.1 million in 2007 reflecting interest
expense incurred in connection with our borrowings under the BTMU Credit
Facility (See
Note 8 to
our
Consolidated Financial Statements),
and
$186,000 of imputed interest related to a long-term agreement liability
assumed with The Athlete’s Foot acquisition, which expires in 2028. We had no
outstanding borrowings under the BTMU Credit Facility prior to 2007.
Other
Income (Expense)
Other
income of $318,000 for the 2007 decreased $382,000 from 2006, and primarily
reflects loan servicing revenue. The Company acquired UCC in June 2006, and
UCC
services a portfolio of loans. As a result, the Company’s operating results for
the second half of 2006 and all of 2007 include loan servicing revenue derived
from loans initiated and/or serviced by UCC. We expect the loan servicing
activity to continue to decrease throughout 2008 and beyond as the underlying
loans are repaid. Other income in 2007 also includes recoveries of $49,000
received from a venture capital investment, which had been written off in 2002.
We record these recoveries as we receive them as the extent of future payments,
if any, cannot be readily determined. 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 also recorded $148,000 of loan servicing revenue
received by UCC in 2006. We expect the loan servicing activity to decrease
over
time as the underlying loans are paid-off.
Minority
Interest
Minority
interest expense of $269,000 for 2007 represents approximately 10% of the after
tax net income attributable to the Bill Blass business which is owned 90% by
NexCen Acquisition Corp. and 10% by Designer Equity Holdings, LLC, an entity
controlled by a licensee of the Bill Blass trademark. We acquired Bill Blass
in
2007.
Income
Taxes
We
recorded a current income tax expense in 2007 of $236,000. This reflects
approximately $231,000 of foreign taxes withheld on franchise royalties received
from franchisees located outside of the United States in accordance with
tax
treaties between the U.S. and the respective foreign countries, $43,000 of
state
income tax expense and a credit for a federal tax refund of $38,000. The
combined federal and state deferred tax expense of $3.1 million for 2007
results
primarily from timing differences relating to the amortization of trademarks.
Trademarks are amortized over fifteen years for tax purposes. However, under
U.S. generally accepted accounting principles (GAAP), there is no amortization
for book purposes. The Company is not permitted to offset this deferred tax
expense against its deferred tax assets that it accumulated under tax loss
carry
forwards because the deferred tax expense relates to an indefinite-lived
asset
that is not anticipated to reverse in the same period. The Company expects
that
it will continue to record a significant deferred tax expense in future years
but that cash paid for income taxes for 2007 and in future years will be
lower
due to the amortization of trademarks for tax purposes, interest expense
and the
availability of net operating loss carry forwards. The Company anticipates
that
it will only pay foreign taxes withheld at the source, which are based on
gross
revenue, and certain state and local income taxes. Current tax expense reflects
the Company’s expectation of its cash tax obligations for 2007.
Under
GAAP, we are not able to offset our deferred tax liabilities relating to
amortization differences with our deferred tax assets attributable primarily
to
our tax loss carry forwards until such time as we have satisfied GAAP
requirements that there be objective evidence of our ability to generate
sustainable taxable income from our operations. As we have a history of losses,
we have not satisfied this requirement as of December 31, 2007. Even if we
are
able to report net income in 2008 and beyond, we may not satisfy this accounting
requirement over the next several quarters (and perhaps longer) since continued
amortization of trademarks in future periods may generate additional tax losses.
As a result, we are likely to continue to record a deferred tax expense in
our
statement of operations for 2008. This income tax expense is not a cash expense,
but is required to be recorded under GAAP. We are able to use our accumulated
net tax loss carry forwards in preparing our tax returns to reduce or eliminate
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 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
9 to
our
Consolidated Financial Statements,
and the
$236,000 expense for 2007 reflects primarily the net amount of current state,
local and foreign taxes incurred in 2007. Our continuing operations were not
subject to any alternative minimum tax in 2007. 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.
Our
income (loss) from discontinued operations included no net tax expense in 2005
or 2007, as there was a net loss in those years, and a net tax expense of
$64,000 in 2006, when there was net income. This net tax expense was
attributable to the application of the alternative minimum tax.
Discontinued
Operations
During
2007, net losses from discontinued operations of $(586,000), or $0.01 per share,
reflects settlement costs, legal fees and other costs of $508,000 incurred
in
connection with litigation related to the Transportation business sale,
partially offset by the reversal of $647,000 in sales tax liabilities where
the
statute of limitations has expired and includes tax settlements with three
states related to income tax and voluntary disclosure events, related to our
former mobile and wireless communications business. In 2007, the Company
recorded settlements in the amount of $600,000 relating to the Transportation
business sale and $125,000 relating to the UCC litigation, both of which are
discussed in
Note
13 to
our
Consolidated Financial Statements.
FINANCIAL
CONDITION
During
2007 our total assets increased by $201 million, while our total liabilities
increased by $152 million. These changes reflect the additional trademarks
and
goodwill acquired in the acquisitions of Bill Blass, MaggieMoo’s, Marble Slab,
Waverly, Pretzel Time and Pretzelmaker Brands, offset by a decrease in cash
which was utilized for the acquisitions. In addition, we borrowed $110.8 in
2007
secured by the assets of The Athlete’s Foot, Bill Blass, Waverly, MaggieMoo’s,
Marble Slab, Pretzel Time and Pretzelmaker under our BTMU Credit Facility,
which
is described in
Note
8 to
our
Condensed Consolidated Financial Statements.
These
borrowings increased both our cash on hand and our indebtedness.
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, 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
acquisitions of additional IP assets and IP-centric businesses.) Accordingly,
we
do not expect to be required to fund any material capital expenditures outside
of our acquisition program.
As
of
December 31, 2007, we had available cash on hand of approximately $46
million. We used approximately $22 million of this balance in connection with
the acquisition of Great American Cookies in January 2008. We were able to
increase our BTMU Credit Facility to $181 million (as discussed below) to
finance the remainder of the acquisition costs. We anticipate that cash on
hand
and cash generated from operations will provide us with sufficient liquidity
to
meet the expenses of operations, including our debt service obligations, for
at
least the next twelve months. As discussed below, additional sources of capital
will be needed to fund additional acquisitions, even taking into account
anticipated cash flows from operations.
Although
we had more than $83 million of cash on hand as of 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 $150 million bank
credit facility with BTMU, the terms of which are discussed in
Note
8 to
our
Consolidated Financial Statements.
As
noted above, we increased this facility to $181 million in January 2008.
We
expect
that additional sources of capital will be needed to fund future acquisitions.
Such additional capital 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 Acquisition Strategy -- 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 “Risk of Our
Business -- 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.”
The
following table reflects use of net cash for operations, investing, and
financing activities:
(IN
THOUSANDS)
|
|
2007
|
|
2006
|
|
2005
|
|
Net
cash (used in) provided by operating activities
|
|
$
|
(4,149
|
)
|
$
|
(890
|
)
|
$
|
2,128
|
|
Net
cash (used in) provided by investing activities
|
|
|
(146,106
|
)
|
|
217,609
|
|
|
(195,708
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
113,064
|
|
|
(134,275
|
)
|
|
133,949
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
$
|
(37,191
|
)
|
$
|
82,444
|
|
$
|
(59,631
|
)
|
Net
cash
used in operating activities was $4.1 million in 2007, compared to net cash
used
in operating activities of $890,000 and net cash provided by operating
activities of $2.1 million for 2006 and 2005, respectively. The cash used in
operating activities in 2007 is primarily a result of the increase in accounts
receivable and prepaid expenses and other assets reflecting growth in the
businesses we acquired. The cash used in and provided by operating activities
in
2006 and 2005 reflected the results of our discontinued operations and our
corporate expenses (primarily in 2006 and entirely in 2005). In 2006, we owned
UCC for six months and The Athlete’s Foot for seven weeks.
Net
cash
used in investing activities was $146 million in 2007, primarily results from
the acquisitions of Bill Blass, Marble Slab, MaggieMoo’s, Waverly, Pretzel Time,
and Pretzelmaker. Net cash provided by investing activities of $218 million
for
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. Net 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 financing activities in 2007 of $113 million primarily reflects
borrowing on the BTMU Credit Facility
which is
discussed in
Note
8 to
our
Consolidated Financial Statements,
as well
as the funds received by the Company from the sale of minority interest in
Bill
Blass Jeans, LLC as discussed in
Note
18 to
our
Consolidated Financial Statements.
Net cash
used in financing activities in 2006 of $134 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.
Contractual
Obligations
The
following table reflects our contractual commitments, including our future
minimum lease payments as of December 31, 2007:
|
|
Payments
due by period
|
|
|
|
|
|
Less
than
|
|
1-3
|
|
3-5
|
|
More
than
|
|
|
|
Total
|
|
1
year
|
|
years
|
|
years
|
|
5
years
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
$
|
109,578
|
|
$
|
6,340
|
|
$
|
30,017
|
|
$
|
65,856
|
|
$
|
7,365
|
|
Capital
Lease Obligations
|
|
|
48
|
|
|
27
|
|
|
21
|
|
|
-
|
|
|
-
|
|
Operating
Leases
|
|
|
16,303
|
|
|
1,821
|
|
|
3,679
|
|
|
3,731
|
|
|
7,072
|
|
Purchase
Obligations
|
|
|
5,627
|
|
|
5,627
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under
GAAP
|
|
|
3,815
|
|
|
1,562
|
|
|
869
|
|
|
|
|
|
|
|
Total
|
|
$
|
135,371
|
|
$
|
15,377
|
|
$
|
34,586
|
|
$
|
69,636
|
|
$
|
15,772
|
|
Long-Term
Debt relates to the outstanding borrowings under the BTMU Credit Facility
(see
Note 8 to
our
Consolidated Financial Statements).
Operating lease obligations includes primarily our real estate leases for our
corporate headquarters, our Bill Blass and Waverly showrooms located in New
York
City and our Norcross, Georgia franchise management facility. We also remain
obligated under certain leases for facilities we no longer use in Houston,
Texas
and Marlborough, Massachusetts (both of which we sub-lease). Purchase
obligations represents consideration payable related to the acquisition of
Marble Slab, which amount will be paid from restricted cash on hand and
consideration payable pursuant to an earn-out provision with respect to the
acquisition of MaggieMoo’s in the
amount of
$526,581. Other long-term liabilities include: (a) the expected net present
value of guaranteed lease obligations we assumed in connection with our
acquisition of MaggieMoo’s, related to the leases of franchisees that we
guarantee, and (b) the net present value of a long- term compensation
arrangement with a former franchisee of TAF. 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.
Off
Balance Sheet Arrangements
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,
advertising 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 2%, and
repayment by MSF with no penalty, at any time. As of December 31, 2007 and
2006,
the Company had receivable balances of $1.3 million and $350,000 from MSF,
respectively. The company does not consolidate this fund under FASB
interpretation No. 46(R) –“Variable
Interest
Entities”.
ITEM
7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
Company is exposed to certain market risks, which exist as part of our ongoing
business operations. 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.
Interest
Rate Risk
The
Company is exposed to changes in interest rates primarily as a result of its
borrowing and investing activities used to maintain liquidity and fund business
operations. The nature and amount of the Company's long-term and short-term
debt
can be expected to vary as a result of future business requirements, market
conditions and other factors. As of December 31, 2007, the Company had
outstanding borrowings of $110 million under its BTMU Credit Facility, secured
by the assets of The Athlete’s Foot, Bill Blass, MaggieMoo’s, Marble Slab,
Waverly, Pretzel Time and Pretzelmaker brands. The interest rate on these
borrowings is based on three month LIBOR rates plus a margin, which can increase
or decrease depending on our debt service coverage ratio. The Company is subject
to interest rate risk from fluctuations in the LIBOR rate. Although LIBOR rates
fluctuate on a daily basis, our debt resets every 90 days. As of December 31,
2006, we had no outstanding borrowings or other debt. If our bank requests
it,
we will be obligated to hedge the interest rate exposure on our outstanding
loans.
Because
our BTMU Credit Facility is a variable rate debt, interest rate changes
generally do not affect the market value of such debt but do impact the amount
of our interest payments and, therefore, our future earnings and cash flows,
assuming other factors are held constant. Holding other variables constant,
including levels of indebtedness and our debt service coverage ratio, a one
percentage point increase in interest rates on our variable debt would have
had
an estimated impact on pre-tax earnings and cash flows for the next year of
approximately $1.1 million.
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.
Foreign
Exchange Rate Risk
The
Company is exposed to fluctuations in foreign currency due to its international
franchisees. Several of the brands we own have franchisees or licensees 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. Although we have franchisees and licensees
throughout the world for our various brands, our primary foreign currency
exchange exposure involves the Australian dollar, as approximately one-third
of
our international stores for The Athlete’s Foot as of December 31, 2007, are
located in Australia. However, because more than two-thirds of The Athlete’s
Foot revenue is generated from domestic franchisees, and because most of the
Company’s other franchisees and licensees are concentrated in the United States,
the overall exposure to foreign exchange gains and losses is not expected to
have a material impact on the consolidated results of operations.
TABLE
OF
CONTENTS
The
following financial statements required by this item are included in the Report
beginning on page 35.
Report
of Independent Registered Public Accounting Firm
|
|
36
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
|
37
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006,
and 2005
|
|
38
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31,
2007, 2006 and 2005
|
|
39
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006
and 2005
|
|
40
|
Notes
to Consolidated Financial Statements
|
|
41
|
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, 2007 and 2006, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2007. 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, 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 Company’s internal control over financial
reporting as of December 31, 2007, 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 20, 2008 expressed an adverse opinion on the
effectiveness of the Company’s internal control over financial reporting.
New
York,
New York
March
20,
2008
(IN
THOUSANDS, EXCEPT SHARE DATA)
|
|
DECEMBER
31,
|
|
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
46,345
|
|
$
|
83,536
|
|
Trade
receivables, net of allowances of $1,173 and $530
|
|
|
7,098
|
|
|
2,042
|
|
Other
receivables
|
|
|
2,685
|
|
|
511
|
|
Restricted
cash
|
|
|
5,274
|
|
|
—
|
|
Prepaid
expenses and other current assets
|
|
|
3,871
|
|
|
2,210
|
|
Total
current assets
|
|
|
65,273
|
|
|
88,299
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
4,200
|
|
|
389
|
|
Goodwill
|
|
|
67,224
|
|
|
15,607
|
|
Trademarks
|
|
|
210,824
|
|
|
49,000
|
|
Other
intangible assets, net of amortization
|
|
|
7,546
|
|
|
3,792
|
|
Deferred
financing costs, net and other assets
|
|
|
2,484
|
|
|
—
|
|
Restricted
cash
|
|
|
1,656
|
|
|
1,298
|
|
Total
Assets
|
|
$
|
359,207
|
|
$ |
158,385 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
7,871
|
|
$
|
3,235
|
|
Repurchase
agreements and sales tax liabilities - discontinued
operations
|
|
|
—
|
|
|
1,333
|
|
Restructuring
accruals
|
|
|
13
|
|
|
145
|
|
Deferred
revenue
|
|
|
3,976
|
|
|
40
|
|
Current
portion of long-term debt
|
|
|
6,340
|
|
|
—
|
|
Acquisition
related liabilities
|
|
|
7,173
|
|
|
4,484
|
|
Total
current liabilities
|
|
|
25,373
|
|
|
9,237
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
103,238
|
|
|
—
|
|
Deferred
tax liability
|
|
|
27,719
|
|
|
218
|
|
Acquisition
related liabilities
|
|
|
3,785
|
|
|
—
|
|
Other
long-term liabilities
|
|
|
3,239
|
|
|
2,317
|
|
Total
liabilities
|
|
|
163,354
|
|
|
11,772
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
3,040
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 1,000,000 shares authorized; 0 shares issued
and
outstanding as of December 31, 2007 and 2006, respectively
|
|
|
—
|
|
|
—
|
|
Common
stock, $0.01 par value; 1,000,000,000 shares authorized; 55,517,475
and
47,966,085 shares issued and outstanding as of December 31, 2007
and 2006,
respectively
|
|
|
557
|
|
|
481
|
|
Additional
paid-in capital
|
|
|
2,667,920
|
|
|
2,615,742
|
|
Treasury
stock
|
|
|
(1,757
|
)
|
|
(352
|
)
|
Accumulated
deficit
|
|
|
(2,473,907
|
)
|
|
(2,469,258
|
)
|
Total
stockholders’ equity
|
|
|
192,813
|
|
|
146,613
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
359,207
|
|
$
|
158,385
|
|
See
accompanying notes to consolidated financial statements.
NEXCEN
BRANDS, INC.
(IN
THOUSANDS, EXCEPT PER SHARE DATA)
|
|
YEAR
ENDED DECEMBER 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
Royalty
revenues
|
|
$
|
15,289
|
|
$
|
1,175
|
|
$
|
—
|
|
Licensing
revenues
|
|
|
15,542
|
|
|
—
|
|
|
—
|
|
Franchise
fee revenues
|
|
|
3,464
|
|
|
749
|
|
|
—
|
|
Total
revenues
|
|
|
34,295
|
|
|
1,924
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
Brands
|
|
|
(14,352
|
)
|
|
(453
|
)
|
|
—
|
|
Corporate
|
|
|
(12,977
|
)
|
|
(7,261
|
)
|
|
(3,645
|
)
|
Professional
fees:
|
|
|
|
|
|
|
|
|
|
|
Brands
|
|
|
(1,605
|
)
|
|
(115
|
)
|
|
—
|
|
Corporate
|
|
|
(1,552
|
)
|
|
(1,034
|
)
|
|
(1,444
|
)
|
Depreciation
and amortization
|
|
|
(1,619
|
)
|
|
(471
|
)
|
|
(159
|
)
|
Restructuring
charges
|
|
|
—
|
|
|
(1,079
|
)
|
|
7
|
|
Total
operating expenses
|
|
|
(32,105
|
)
|
|
(10,413
|
)
|
|
(5,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
2,190
|
|
|
(8,489
|
)
|
|
(5,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,100
|
|
|
2,637
|
|
|
1,478
|
|
Interest
expense
|
|
|
(5,099
|
)
|
|
—
|
|
|
—
|
|
Other
income , net
|
|
|
318
|
|
|
700
|
|
|
231
|
|
Minority
interest
|
|
|
(269
|
)
|
|
—
|
|
|
—
|
|
Investment
loss, net
|
|
|
—
|
|
|
—
|
|
|
(19
|
)
|
Total
non-operating income (expense)
|
|
|
(2,950
|
)
|
|
3,337
|
|
|
1,690
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(760
|
)
|
|
(5,152
|
)
|
|
(3,551
|
)
|
Income
taxes:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(236
|
)
|
|
(81
|
)
|
|
—
|
|
Deferred
|
|
|
(3,067
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(4,063
|
)
|
|
(5,233
|
)
|
|
(3,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of tax expense of $64 for
2006
|
|
|
(586
|
)
|
|
2,358
|
|
|
225
|
|
Gain
(loss) on sale of discontinued operations
|
|
|
—
|
|
|
755
|
|
|
(1,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,649
|
)
|
$
|
(2,120
|
)
|
$
|
(4,520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share (basic and diluted) from continuing operations
|
|
$
|
(0.08
|
)
|
$
|
(0.11
|
)
|
$
|
(0.08
|
)
|
Income
(loss) per share (basic and diluted) from discontinued
operations
|
|
|
(0.01
|
)
|
|
0.07
|
|
|
(0.02
|
)
|
Net
loss per share - basic and diluted
|
|
$
|
(0.09
|
)
|
$
|
(0.04
|
)
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic and diluted
|
|
|
51,889
|
|
|
45,636
|
|
|
44,006
|
|
See
accompanying notes to consolidated financial statements.
NEXCEN
BRANDS, INC.
(IN
THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
UNREALIZED
|
|
|
|
|
|
|
|
|
|
ADDITIONAL
|
|
|
|
|
|
GAIN
|
|
|
|
|
|
PREFERRED
|
|
COMMON
|
|
PAID-IN
|
|
ACCUMULATED
|
|
TREASURY
|
|
(LOSS)
ON
|
|
|
|
|
|
STOCK
|
|
STOCK
|
|
CAPITAL
|
|
DEFICIT
|
|
STOCK
|
|
INVESTMENT
|
|
TOTAL
|
|
Balance
as of December 31, 2004
|
|
$
|
-
|
|
$
|
440
|
|
$
|
2,592,977
|
|
$
|
(2,462,611
|
)
|
$
|
-
|
|
$
|
(216
|
)
|
$
|
130,590
|
|
Exercise
of options and warrants
|
|
|
-
|
|
|
-
|
|
|
32
|
|
|
(7
|
)
|
|
-
|
|
|
-
|
|
|
25
|
|
Stock
based compensation
|
|
|
-
|
|
|
-
|
|
|
76
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
76
|
|
Unrealized
gain on investments available for sale
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
216
|
|
|
216
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,520
|
)
|
|
-
|
|
|
-
|
|
|
(4,520
|
)
|
Balance
as of December 31, 2005
|
|
|
-
|
|
|
440
|
|
|
2,593,085
|
|
|
(2,467,138
|
)
|
|
-
|
|
|
-
|
|
|
126,387
|
|
Exercise
of options and warrants
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
Stock
based compensation
|
|
|
-
|
|
|
-
|
|
|
3,177
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,177
|
|
Common
stock issued
|
|
|
-
|
|
|
41
|
|
|
19,479
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
19,520
|
|
Common
stock repurchased
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(352
|
)
|
|
-
|
|
|
(352
|
)
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,120
|
)
|
|
-
|
|
|
-
|
|
|
(2,120
|
)
|
Balance
as of December 31, 2006
|
|
|
-
|
|
|
481
|
|
|
2,615,742
|
|
|
(2,469,258
|
)
|
|
(352
|
)
|
|
-
|
|
|
146,613
|
|
Surrender
of shares from cashless exercise of warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,405
|
)
|
|
-
|
|
|
(1,405
|
)
|
Exercise
of options and warrants
|
|
|
-
|
|
|
16
|
|
|
4,702
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,718
|
|
Stock
based compensation
|
|
|
-
|
|
|
-
|
|
|
4,335
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,335
|
|
Common
stock issued
|
|
|
-
|
|
|
60
|
|
|
43,141
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
43,201
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,649
|
)
|
|
-
|
|
|
-
|
|
|
(4,649
|
)
|
Balance
as of December 31, 2007
|
|
$
|
-
|
|
$
|
557
|
|
$
|
2,667,920
|
|
$
|
(2,473,907
|
)
|
$
|
(1,757
|
)
|
$
|
-
|
|
$
|
192,813
|
|
See
accompanying notes to consolidated financial statements.
NEXCEN
BRANDS, INC.
(IN
THOUSANDS)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Revised
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$
|
(4,063
|
)
|
$
|
(5,233
|
)
|
$
|
(3,551
|
)
|
Adjustments
to reconcile net loss from continuing operations to net cash (used
in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,619
|
|
|
471
|
|
|
159
|
|
Deferred
income taxes
|
|
|
3,067
|
|
|
—
|
|
|
—
|
|
Stock
based compensation
|
|
|
4,215
|
|
|
1,632
|
|
|
76
|
|
Minority
interest
|
|
|
269
|
|
|
—
|
|
|
—
|
|
Amortization
of loan fees
|
|
|
309
|
|
|
—
|
|
|
—
|
|
Realized
losses on long term investments
|
|
|
—
|
|
|
—
|
|
|
19
|
|
Amortization
of mortgage premiums
|
|
|
—
|
|
|
—
|
|
|
670
|
|
Changes
in assets and liabilities, net of acquired assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
(Increase)
in trade receivables, net of allowances
|
|
|
(4,719
|
)
|
|
(791
|
)
|
|
—
|
|
(Increase)
decrease in prepaid expenses and other assets
|
|
|
(1,333
|
)
|
|
(1,096
|
)
|
|
3,112
|
|
(Increase)
decrease in interest and other receivables
|
|
|
(1,039
|
)
|
|
663
|
|
|
(818
|
)
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
219
|
|
|
(249
|
)
|
|
903
|
|
Increase
(decrease) in restructuring accruals and other liabilities
|
|
|
—
|
|
|
314
|
|
|
(1,202
|
)
|
(Decrease)
in deferred revenue
|
|
|
(1,478
|
)
|
|
—
|
|
|
—
|
|
Cash
(used in) provided by discontinued operations for operating
activities
|
|
|
(1,215
|
)
|
|
3,399
|
|
|
2,760
|
|
Net
cash (used in) provided by operating activities
|
|
|
(4,149
|
)
|
|
(890
|
)
|
|
2,128
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in restricted cash
|
|
|
(5,632 |
) |
|
7,335 |
|
|
199 |
|
Purchases
of property and equipment
|
|
|
(3,905
|
)
|
|
(151
|
)
|
|
(47
|
)
|
Acquisitions,
net of cash acquired
|
|
|
(136,569
|
)
|
|
(43,189
|
)
|
|
—
|
|
Sales
and maturities of investments available for sale
|
|
|
—
|
|
|
—
|
|
|
45
|
|
Cash
provided by (used in) discontinued operations in investing
activities
|
|
|
—
|
|
|
253,614
|
|
|
(195,905
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
(146,106
|
)
|
|
217,609
|
|
|
(195,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of minority interest
|
|
|
2,771
|
|
|
—
|
|
|
—
|
|
Proceeds
from debt borrowings
|
|
|
110,801
|
|
|
—
|
|
|
—
|
|
Financing
costs
|
|
|
(2,598
|
)
|
|
—
|
|
|
—
|
|
Principal
payments on debt
|
|
|
(1,223
|
)
|
|
—
|
|
|
—
|
|
Exercise
of options and warrants
|
|
|
3,313
|
|
|
1
|
|
|
25
|
|
Purchase
of treasury stock
|
|
|
—
|
|
|
(352
|
)
|
|
—
|
|
Cash
(used in) provided by discontinued operations in financing
activities
|
|
|
—
|
|
|
(133,924
|
)
|
|
133,924
|
|
Net
cash provided by (used in) financing activities
|
|
|
113,064
|
|
|
(134,275
|
|
|
133,949
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(37,191
|
)
|
|
82,444
|
|
|
(59,631
|
|
Cash
and cash equivalents, at beginning of period
|
|
|
83,536
|
|
|
1,092
|
|
|
60,723
|
|
Cash
and cash equivalents, at end of period
|
|
$
|
46,345
|
|
$
|
83,536
|
|
$
|
1,092
|
|
See
accompanying notes to consolidated financial statements
NEXCEN
BRANDS, INC.
(1) |
ORGANIZATION
AND DESCRIPTION OF THE
BUSINESS
|
NexCen
Brands, Inc. (“NexCen” or the “Company”) is a vertically integrated global brand
management and franchising company. Our
business is focused on managing, developing and acquiring intellectual property,
which we refer to as IP, and IP-centric businesses operating
in
three
segments: Consumer Branded Products, Retail Franchising and Quick Service
Restaurant Franchising (which we refer to as “QSR” Franchising). We generate
revenue from licensing, franchising and other commercial arrangements with
third
parties who want to use our brands and associated IP, including trademarks,
trade names, copyrights, franchise rights, patents, trade secrets, know-how
and
other similar, valuable property. These third parties pay us licensing,
franchising 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.
The
licensing, franchising and other contractual fees paid to us 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 sold). Accordingly, our revenues reflect
both
recurring and non-recurring payment streams.
We
commenced our current 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.
The Athlete’s Foot is one of the largest athletic footwear and apparel
franchisors with approximately 640 franchised units 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, modern American style.
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, having
a
combined total of approximately 580 franchised units. With these acquisitions
NexCen entered the QSR franchising business.
In
May
2007, we expanded our consumer branded products business by acquiring
all
of
the intellectual property and license contracts related to the Waverly brand.
Waverly
is a premier lifestyle brand with an array of licensed home furnishings
products, including fabrics, wallpapers, paint, bedding, window treatments,
and
decorative accessories.
In
August
2007, we acquired substantially all of the assets of Pretzel Time Franchising,
LLC (“Pretzel Time”) and Pretzelmaker Franchising, LLC (“Pretzelmaker”), adding
two
hand-rolled pretzel chains with approximately 380 franchised units
worldwide
to our
QSR franchising business.
In
January 2008, we acquired the trademarks
and other intellectual property of The Shoe Box, Inc. (“Shoebox” in partnership
with the Camuto Group, a premier women's fashion footwear company. Shoebox
is a
multi-brand luxury shoe retailer based in New York with nine locations. The
companies have begun franchising Shoebox's luxury footwear concept domestically
and internationally under the Shoebox New York brand.
In
January 2008, we acquired substantially
all of the assets of Great American Cookie Company Franchising, LLC and Great
American Manufacturing, LLC (collectively, “Great American Cookies”). This
transaction added another premium treat brand and 300 franchised units to our
QSR portfolio.
(2) |
BASIS
OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
|
BASIS
OF PRESENTATION:
(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. The consolidated financial
statements do not include the accounts or operations of certain brand and
marketing funds. (See Note 2 (m)).
(b)
RECLASSIFICATIONS AND REVISIONS
Certain
2006 and 2005 amounts have been reclassified to conform to the current year
presentation. All 2006 and 2005 activity related to our mortgage-backed
securities (“MBS”) business has been classified as discontinued operations. None
of these reclassifications had a material effect on the Company’s consolidated
financial statements.
For
the
years ended December 31, 2006 and 2005 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. The company also reclassified changes in restricted
cash as cashflows from investing activities.
(c)
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,
accrued revenues, 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.
SIGNIFICANT
ACCOUNTING POLICIES:
(d)
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,
2007
|
|
DECEMBER 31,
2006
|
|
Cash
|
|
$
|
12,540
|
|
$
|
10,694
|
|
Money
market accounts
|
|
|
33,805
|
|
|
72,842
|
|
Total
|
|
$
|
46,345
|
|
$
|
83,536
|
|
The
cash
balance as of December 31, 2007, includes approximately $7 million of cash
received from franchisees and licensees that is being held in trust in
accordance with the terms of our BTMU Credit Facility (See Note
8 -
Long-Term Debt).
These
funds are applied to the quarterly payments of principal and interest on the
BTMU debt and the excess is released to the Company for general corporate
purposes.
(e)
TRADE
RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade
receivables consist of amounts the Company expects to collect from franchisees
for royalties and franchise fees, and from licensees for license fees, net
of
allowance for doubtful accounts of $1,173,000 and $530,000, as of December
31,
2007 and 2006, respectively. The Company provides a reserve for uncollectible
amounts based on its assessment of individual accounts. Cash flows related
to
net changes in trade receivable balances are classified as increases or
decreases in trade receivables in the consolidated statement of cash
flows.
Details
of activity in the allowance for doubtful accounts for each year ended December
31, is as follows:
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
(in
thousands)
|
|
|
Balance
|
|
|
Acquisitions
|
|
|
Additions
|
|
|
|
|
|
Balance
|
|
2005
|
|
$
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
2006
|
|
|
-
|
|
|
530
|
|
|
-
|
|
|
-
|
|
|
530
|
|
2007
|
|
|
530
|
|
|
158
|
|
|
485
|
|
|
-
|
|
|
1,173
|
|
(f)
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. The carrying amount of the company’s long term debt
approximates its fair value since the interest rate adjusts to market rates
on a
quarterly basis.
(g)
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 ten 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.
(h)
TRADEMARKS, GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
represents the excess of costs over the fair value of assets related to acquired
businesses, and trademarks represents the value of future royalty income
associated with the ownership of The Athlete’s Foot, Bill Blass, Marble Slab,
MaggieMoo’s, Waverly, Pretzel Time and Pretzelmaker trademarks. Other
identifiable intangible assets include the value of non-compete agreements
of
key executives, and franchise agreements and master development agreements
of
acquired businesses that are being amortized on a straight-line basis over
a
period ranging from one to twenty years. Intangible assets with estimable useful
lives are amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144. Goodwill and trademarks acquired in a purchase business
combination determined to have an indefinite useful life are not amortized,
but
instead are 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 trademarks to determine if facts and
circumstances have changed, requiring a re-evaluation of the estimated life
of
the trademarks.
In
accordance with the requirements of SFAS 142, goodwill has been assigned
to
reporting units for purposes of impairment testing. Our reporting units are
our
operating segments: retail franchising, quick service restaurants, consumer
branded products, and corporate.
Costs
incurred in connection with our BTMU Credit Facility (See Note
8 - Long Term Debt) are
being
amortized over the term of the loan using the effective interest method.
The
Company assesses the recoverability of other intangible assets subject
to
amortization in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”
(“SFAS 144”).
(i)
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.
(j)
STOCK
BASED COMPENSATION
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. See Note
11, Stock Based Compensation,
for the
assumptions used to calculate the stock compensation expense under the
fair-value method shown above.
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
for the year ended December 31, 2005:
(in
thousands)
|
|
2005
|
|
Net
loss from continuing operations, as reported
|
|
$
|
(3,551
|
)
|
Add
stock-based employee compensation expense included in reported net
loss
|
|
|
76
|
|
Deduct
total stock-based employee compensation expense determined under
fair-value method for all awards
|
|
|
(526
|
)
|
|
|
|
|
|
Pro
forma net loss from continuing operations
|
|
$
|
(4,001
|
)
|
|
|
|
|
|
Pro
forma net loss per share from continuing operations
|
|
$
|
(0.09
|
)
|
Weighted
average shares outstanding - basic
|
|
|
44,006
|
|
See
Note
11, Stock Based Compensation,
for the
assumptions used to calculate the stock compensation expense under the
fair-value method shown above.
(k)
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 4.2 million, 7.2 million and 1.9 million shares of the
Company’s common stock during 2007, 2006, and 2005, respectively, have been
excluded from the calculation of diluted net loss per share because their
inclusion would be anti-dilutive.
(l)
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 generally
considered to be upon the opening of the franchisee’s store. Revenues from
license agreements are recognized in accordance with the terms of the underlying
licenses.
(m)
ADVERTISING
Advertising
and marketing costs paid by the Company in connection with its consumer
brands segment are expensed as incurred. Advertising expense was $2.8 million
for the year ended December 31, 2007, our first full year of brand operations.
The Company receives advertising contributions from licensees of its consumer
brands, generally as a percentage of sales, to defray part or all of the
advertising expense relating to consumer brands. Contributions from licensees
were $1.1 million, $0 and $0 for the years ended December 31, 2007, 2006 and
2005.
The
Company maintains advertising funds in connection with its retail franchising
and QSR segments. The funds are received from franchisees and are based upon
a
percentage of sales as stipulated in the franchise agreements. These funds
are
owned by the company, but used exclusively for marketing of the respective
franchised brands. The company has determined the funds are variable interest
entities, as defined by FASB
Interpretation No. 46(R) - “Variable Interest Entities”.
The
company is not the primary beneficiary of these variable interest entities
and
therefore these funds are excluded from the consolidated financial statements.
Contributions received by these funds totaled approximately $2.2 million
for the
year ended December 31, 2007. As of December 31, 2007 the company has advanced
approximately $1.3 million to one of the marketing funds, the amount will
be
recovered from future contributions by the franchisees of the
company.
(n)
RECENT ACCOUNTING PRONOUNCEMENTS
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.
In
February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
Amendment of FASB Statement No. 115.” SFAS
No.
159 permits entities to choose to measure most financial instruments and certain
items at fair value that are currently required to be measured at historical
costs. Adoption of SFAS No. 159 is optional. We currently do not expect to
adopt
SFAS No. 159.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.”
Under
SFAS No. 141(R), acquiring entities will recognize assets acquired and
liabilities assumed in connection with business combinations at fair market
value with limited exception. Among its provisions, SFAS No. 141(R) requires
that: (a) acquisition costs will generally be expensed as incurred and not
capitalized, (b) contingent consideration will be recognized at estimated fair
value at the time of acquisition, (c) noncontrolling interests will be valued
at
fair value at the acquisition date. SFAS No. 141(R) is effective for annual
periods beginning on or after December 15, 2008. We are currently assessing
the
impact that this standard will have on our consolidated results of operations,
financial position, or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements- An Amendment of ARB No.
51.”
SFAS No.
160 provides that noncontrolling interests in a subsidiary (minority interests)
are to be recorded as a component of equity, separate from the parent’s equity.
SFAS No. 160 also provides for changes in the way minority interest expense
is
recorded in the income statement, and will require expanded disclosure regarding
the interests of the parent and its noncontrolling interest. SFAS No. 160 is
effective for years and interim periods beginning on or after December 15,
2008.
We are currently assessing the impact that this standard will have on our
consolidated results of operations, financial condition, or 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)
During
2005, the Company determined that the impairments on the MBS portfolio were
“other than temporary” and the losses were recognized in earnings.
(4)
SUPPLEMENTAL CASH FLOW INFORMATION
Interest
paid for the years ended December 31, 2007, 2006 and 2005 was $2,748, $1,403
and
$5,387 (in thousands), respectively.
Taxes
paid for the years ended December 31, 2007, 2006 and 2005 were $697, $0, and
$0,
(in thousands) respectively.
Significant
non-cash investing and financing activities are as follows:
For
the
year ended December 31, 2007, the Company issued 5,923,732 shares of its common
stock and warrants to acquire 50,000 shares of common stock with an aggregate
value of $43.2 million in connection with brand acquisitions.
In
June
2006 and in connection with the acquisition of a business, the Company issued
2.5 million shares of common stock, warrants and options to acquire 440,000
and
106,236 shares of common stock respectively 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 warrants to purchase 500,000 shares, respectively with an aggregate
fair value of approximately $9.8 million.
(5)
PROPERTY AND EQUIPMENT
Property
and equipment consists of the following (in thousands):
|
|
|
ESTIMATED
|
|
|
|
|
|
|
|
|
|
|
USEFUL
|
|
|
DECEMBER
31,
|
|
|
|
|
LIVES
|
|
|
2007
|
|
|
2006
|
|
Furniture
and fixtures
|
|
|
7
- 10 Years
|
|
$
|
792
|
|
$
|
206
|
|
Computer
and equipment
|
|
|
3
- 5 Years
|
|
|
908
|
|
|
126
|
|
Software
|
|
|
3
Years
|
|
|
486
|
|
|
112
|
|
Leasehold
improvements
|
|
|
Term
of Lease
|
|
|
2,939
|
|
|
393
|
|
Total
property and equipment
|
|
|
|
|
|
5,125
|
|
|
837
|
|
Less
accumulated depreciation
|
|
|
|
|
|
(925
|
)
|
|
(448
|
)
|
Property
and equipment, net of accumulated
|
|
|
|
|
|
|
|
|
|
|
depreciation
|
|
|
|
|
$
|
4,200
|
|
$
|
389
|
|
Depreciation
expense of property and equipment was $477,000, $272,000 and $159,000 in 2007,
2006 and 2005, respectively. The Company recognizes rent expense on a
straight-line basis over the lease period based upon the aggregate lease
payments. 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.
(6)
GOODWILL, TRADEMARKS, AND INTANGIBLE ASSETS
The
net
carrying value of goodwill is as follows (in
thousands):
|
|
|
DECEMBER
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
UCC
|
|
$
|
37,311
|
|
$
|
10,135
|
|
The
Athlete's Foot
|
|
|
2,546
|
|
|
5,472
|
|
Bill
Blass
|
|
|
19,578
|
|
|
-
|
|
Marble
Slab
|
|
|
2,121
|
|
|
-
|
|
MaggieMoo's
|
|
|
4,666
|
|
|
-
|
|
Pretzel
Time
|
|
|
401
|
|
|
-
|
|
Pretzelmaker
|
|
|
601
|
|
|
-
|
|
Total
|
|
$
|
67,224
|
|
$
|
15,607
|
|
The
decrease in the net carrying amount of goodwill for The Athlete’s Foot is
related to the reversal of an accrual relating to additional consideration
under
the TAF purchase agreement which was not paid as discussed in Note
17 Acquisition
of The Athlete’s Foot.
The
increase in goodwill for UCC resulted from contingent consideration paid in
September 2007 in accordance with the terms of the UCC merger agreement
discussed in Note
16 Acquisition of UCC.
Trademarks
acquired by entity are as follows (in thousands):
|
|
DECEMBER
31,
|
|
|
|
2007
|
|
2006
|
|
The
Athlete's Foot
|
|
$
|
49,000
|
|
$
|
49,000
|
|
Bill
Blass
|
|
|
58,800
|
|
|
-
|
|
Waverly |
|
|
36,907
|
|
|
-
|
|
Marble
Slab |
|
|
22,117 |
|
|
-
|
|
MaggieMoo's
|
|
|
16,500
|
|
|
-
|
|
Pretzel
Time
|
|
|
17,000
|
|
|
-
|
|
Pretzelmaker
|
|
|
10,500
|
|
|
-
|
|
Total
|
|
$
|
210,824
|
|
$
|
49,000
|
|
The
increase in trademarks from December 31, 2006 is a result of the Bill Blass,
Marble Slab, MaggieMoo’s, Waverly, Pretzel Time and Pretzelmaker acquisitions
during 2007. Trademarks have an indefinite life and are analyzed for impairment
on an annual basis or more frequently if events or circumstances indicate that
the asset may be impaired.
Other
intangible assets are as follows (in thousands):
|
|
DECEMBER
31,
|
|
|
|
2007
|
|
2006
|
|
UCC
|
|
$
|
1,370
|
|
$
|
1,370
|
|
The
Athlete's Foot
|
|
|
2,600
|
|
|
2,600
|
|
Bill
Blass
|
|
|
779
|
|
|
-
|
|
Waverly
|
|
|
433
|
|
|
-
|
|
Marble
Slab
|
|
|
1,229
|
|
|
-
|
|
MaggieMoo's
|
|
|
654
|
|
|
-
|
|
Pretzel
Time
|
|
|
1,012
|
|
|
-
|
|
Pretzelmaker
|
|
|
788
|
|
|
-
|
|
Total
Other Intangible Assets
|
|
|
8,865
|
|
|
3,970
|
|
Less:
Accumulated Amortization
|
|
|
(1,319
|
)
|
|
(178
|
)
|
Other
Intangible Assets, net
|
|
$
|
7,546
|
|
$
|
3,792
|
|
Other
intangible assets is comprised of non-compete agreements of key executives
and
others, franchise agreements, license agreements and master development
agreements, and are being amortized generally on a straight-line basis over
a
period ranging from one to twenty years. Total amortization expense recorded
by
the Company for the years ended December 31, 2007, 2006 and 2005 was $1,141,000,
$178,000 and $-0-, respectively.
Trademarks,
Goodwill, and Other Intangible Assets by reportable segment is as
follows:
|
|
Goodwill
|
|
Trademarks
|
|
Other
Intangibles
|
|
Total
|
|
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Corporate
|
|
$
|
37,311
|
|
$
|
10,135
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,370
|
|
$
|
1,370
|
|
$
|
38,681
|
|
$
|
11,505
|
|
Retail
franchising
|
|
|
2,546
|
|
|
5,472
|
|
|
49,000
|
|
|
49,000
|
|
|
2,600
|
|
|
2,600
|
|
|
54,146
|
|
|
57,072
|
|
Consumer
branded products
|
|
|
19,578
|
|
|
-
|
|
|
95,707
|
|
|
-
|
|
|
1,212
|
|
|
-
|
|
|
116,497
|
|
|
-
|
|
Quick
service restaurants
|
|
|
7,789
|
|
|
-
|
|
|
66,117
|
|
|
-
|
|
|
3,683
|
|
|
-
|
|
|
77,589
|
|
|
-
|
|
Total
|
|
|
67,224
|
|
|
15,607
|
|
|
210,824
|
|
|
49,000
|
|
|
8,865
|
|
|
3,970
|
|
|
286,913
|
|
|
68,577
|
|
Less
accumulated amortization
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,319 |
|
|
178 |
|
|
1,319 |
|
|
178 |
|
Total
|
|
$
|
67,224
|
|
$
|
15,607
|
|
$
|
210,824
|
|
$
|
49,000
|
|
$
|
7,546 |
|
$
|
3,792 |
|
$
|
285,594 |
|
$
|
68,399 |
|
The
following table presents the future amortization expense expected to be
recognized over the amortization period of the other intangible assets
outstanding as of December 31, 2007 (in thousands):
|
|
Weighted
Average Amortization
Period
|
|
Year
Ending December 31,
|
|
|
|
(Years)
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UCC
|
|
|
3.0
|
|
$
|
502
|
|
$
|
209
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Franchising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Athlete's Foot
|
|
|
20.0
|
|
|
130
|
|
|
130
|
|
|
130
|
|
|
130
|
|
|
130
|
|
|
1,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
branded products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Blass
|
|
|
4.2
|
|
|
237
|
|
|
237
|
|
|
99
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Waverly
|
|
|
4.6
|
|
|
102
|
|
|
102
|
|
|
102
|
|
|
63
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
339 |
|
|
339 |
|
|
201 |
|
|
63 |
|
|
-
|
|
|
-
|
|
Quick
service restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marble
Slab
|
|
|
20.0
|
|
|
56
|
|
|
56
|
|
|
56
|
|
|
56
|
|
|
56
|
|
|
905
|
|
MaggieMoo’s
|
|
|
20.0
|
|
|
35
|
|
|
35
|
|
|
35
|
|
|
35
|
|
|
35
|
|
|
450
|
|
Pretzel
Time
|
|
|
4.8
|
|
|
202
|
|
|
202
|
|
|
202
|
|
|
202
|
|
|
112
|
|
|
0 |
|
Pretzelmaker
|
|
|
4.8
|
|
|
162
|
|
|
162
|
|
|
162
|
|
|
162
|
|
|
67
|
|
|
0 |
|
|
|
|
|
|
|
455 |
|
|
455 |
|
|
455 |
|
|
455 |
|
|
270 |
|
|
1,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Amortization
|
|
|
|
|
$
|
1,426
|
|
$
|
1,133
|
|
$
|
786
|
|
$
|
648
|
|
$
|
400
|
|
$
|
3,153
|
|
(7)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following (in thousands):
|
|
DECEMBER
31,
|
|
|
|
2007
|
|
2006
|
|
Accounts
payable
|
|
$
|
1,806
|
|
$
|
1,418
|
|
Accrued
interest payable
|
|
|
1,925
|
|
|
-
|
|
Accrued
professional fees
|
|
|
860
|
|
|
-
|
|
Deferred
rent - current portion
|
|
|
85
|
|
|
-
|
|
Accrued
compensation and benefits
|
|
|
531
|
|
|
484
|
|
Refundable
franchise fees and gift cards
|
|
|
811
|
|
|
-
|
|
Discontinued
operations
|
|
|
991
|
|
|
1,333
|
|
Accrued
acquisition costs
|
|
|
382
|
|
|
|
|
All
other
|
|
|
480
|
|
|
-
|
|
Total
|
|
$
|
7,871
|
|
$
|
3,235
|
|
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 follow (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
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Restructuring:
|
|
|
|
|
|
|
|
|
|
|
Cash
payments and other
|
|
|
(132
|
)
|
|
—
|
|
|
(132
|
)
|
Restructuring
liability as of December 31, 2007
|
|
$
|
13
|
|
|
—
|
|
$
|
13
|
|
On
March
12, 2007, NexCen Acquisition Corp. (“the Issuer”), a wholly owned subsidiary of
the Company, 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 Issuer and Co-Issuers, which consist of
the
respective IP assets and the related royalty revenues and trade receivables,
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 NexCen Brands, Inc. Each note is repayable in full after five
years. Substantially all revenues earned by the company are remitted to “lockbox
accounts” that have been established in connection with the agreement (See Note
2(d)). The facility has no expiration date and can be terminated by the
Co-Issuers upon thirty days notice and by BTMU Capital Corporation by electing
not to fund future advances; however, each note funding maintains its respective
maturity date. The agreement provides for certain restrictions on the Issuer
and
Co-Issuers, including limitations on payment of dividends and expenditures
on
fixed assets. The maximum aggregate amount of borrowings that may be outstanding
at any one time under the agreement is $150 million. In January, 2008, this
limit was increased to $181 million when we acquired Great American Cookie.
The
borrowing rate is LIBOR plus an interest rate margin, which ranges from 1.50%
to
3.00%. However, a portion of the notes relating to Great American Cookies for
$35 million is priced at LIBOR plus 3.50%. 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.
In
2007,
we borrowed a total of $110.8 million under the BTMU Credit Facility. The
borrowings are secured by the assets of The Athlete’s Foot, Bill Blass, Waverly,
Pretzel Time and Pretzelmaker Brands, and MaggieMoo’s and Marble Slab brands.
The Company paid borrowing fees of $1.3 million, and incurred aggregate
transaction costs including borrowing fees and other direct costs of $2.6
million, which are being amortized over five years.
As
of
December 31, 2007, outstanding borrowings under the credit facility totaled
$109.6 million at initial floating borrowing rates approximating 8.0%. The
rate
will reset each quarter based upon a measurement of debt leverage to cash flow
ratio. Interest expense recorded by the Company for the years ended December
31,
2007 and 2006 was approximately $5.0 million and $-0- respectively.
The
aggregate maturities of long-term debt for each of the five years subsequent
to
December 31, 2007 are as follows (in thousands):
(in
thousands)
|
|
|
TAF
|
|
|
Bill
Blass
|
|
|
Pretzel
Time
|
|
|
Pretzelmaker
|
|
|
Waverly
|
|
|
Marble
Slab
|
|
|
MaggieMoo's
|
|
|
Total
|
|
2008
|
|
$ |
1,972
|
|
$ |
2,032
|
|
$ |
350
|
|
$ |
233
|
|
$ |
1,235
|
|
$ |
314
|
|
$ |
204
|
|
$
|
6,340
|
|
2009
|
|
|
3,466
|
|
|
3,569
|
|
|
1,100
|
|
|
733
|
|
|
2,717
|
|
|
1,088
|
|
|
710
|
|
|
13,383
|
|
2010
|
|
|
4,078
|
|
|
4,201
|
|
|
1,422
|
|
|
948
|
|
|
3,337
|
|
|
1,604
|
|
|
1,046
|
|
|
16,636
|
|
2011
|
|
|
4,857
|
|
|
5,003
|
|
|
1,538
|
|
|
1,025
|
|
|
3,786
|
|
|
1,802
|
|
|
1,175
|
|
|
19,186
|
|
2012
|
|
|
11,657
|
|
|
12,011
|
|
|
5,190
|
|
|
3,461
|
|
|
10,657
|
|
|
2,234
|
|
|
1,457
|
|
|
46,667
|
|
Thereafter
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,458
|
|
|
2,908
|
|
|
7,366
|
|
Total
|
|
$
|
26,030
|
|
$
|
26,816
|
|
$
|
9,600
|
|
$
|
6,400
|
|
$
|
21,732
|
|
$
|
11,500
|
|
$
|
7,500
|
|
$
|
109,578
|
|
|
(b)
|
Direct
and Guaranteed Lease
Obligations
|
The
Company accounts for certain guarantees in accordance with FASB Interpretation
No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB statements
No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34”
(“FIN
45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its
financial statements about its obligations under guarantees issued. FIN 45
also
clarifies that a guarantor is required to recognize at inception of a guarantee,
a liability for the fair value of certain obligations undertaken.
As
discussed in Note 19 to the Consolidated Financial Statements,
during 2007, the Company assumed certain guarantees for leases related to
franchised MaggieMoo’s locations. In general, these lease guarantees are
contingent guarantees which become direct obligations of the Company if a
franchisee defaults on its lease agreement.
Each
lease guarantee was analyzed and the fair value was determined based on the
facts and circumstances of the lease and franchisee performance. All
of
the lease guarantees were treated as assumed liabilities at the time of
acquisition of Maggie Moo’s and as a result are included in the purchase price
of the acquisition.
The
Company has also assumed direct lease obligations with respect to nine
company-owned and operated MaggieMoo’s stores.
The
Company has determined the fair value of the liabilities and recorded the
carrying amounts as of December 31, as follows:
(in
thousands)
|
|
DECEMBER
31,
|
|
|
|
2007
|
|
2006
|
|
Assumed
lease obligations
|
|
$
|
1,023
|
|
$
|
-
|
|
Assumed
lease guarantees
|
|
|
1,354
|
|
|
-
|
|
Total
|
|
$
|
2,377
|
|
$
|
-
|
|
|
|
DECEMBER
31,
|
|
|
|
2007
|
|
2006
|
|
Current
|
|
$
|
1,546
|
|
$
|
-
|
|
Long
Term
|
|
|
831
|
|
|
-
|
|
Total
|
|
$
|
2,377
|
|
$
|
-
|
|
The
guaranteed and direct lease obligations are included in acquisition related
liabilities in the accompanying balance sheet. At December 31, 2007, the
maximum
potential amount of undiscounted future payments the company could be required
to make is approximately $4.1 million. The company may mitigate its exposure
to
these guarantees in cases where the primary lessors of the property have
also
personally guaranteed the lease obligations, by finding new franchisees to
perform on the leases, or by negotiating directly with landlords to settle
the amounts due.
The
guaranteed and direct lease obligations are expected to mature as follows:
2008
-
$1,546,
2009 -
$817,
2010 -
$14, (in
thousands).
(9)
INCOME TAXES
(in
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Federal
|
|
$
|
2,866
|
|
$
|
196
|
|
$
|
-
|
|
State
and Local
|
|
|
183
|
|
|
(152
|
)
|
|
-
|
|
Foreign
|
|
|
254
|
|
|
37
|
|
|
-
|
|
Total
income tax expense
|
|
$
|
3,303
|
|
$
|
81
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
236
|
|
$
|
81
|
|
$
|
-
|
|
Deferred
|
|
|
3,067
|
|
|
-
|
|
|
-
|
|
Total
Income Tax Expense
|
|
$
|
3,303
|
|
$
|
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:
|
|
2007
|
|
2006
|
|
2004
|
|
U.S.
Statutory Federal Rate
|
|
|
(35
|
)%
|
|
(35
|
)%
|
|
(35
|
)%
|
Increase/(decrease)
resulting from:
|
|
|
|
|
|
|
|
|
|
|
State
taxes, net of federal benefit
|
|
|
(98
|
)%
|
|
(3
|
)%
|
|
|
|
Changes
in valuation allowance
|
|
|
548
|
%
|
|
43
|
%
|
|
(136
|
)%
|
Other
|
|
|
20
|
%
|
|
(4
|
)%
|
|
171
|
%
|
Effective
Tax Rate
|
|
|
435
|
%
|
|
1
|
%
|
|
0
|
%
|
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 as of December
31:
(in
thousands)
|
|
2007
|
|
2006
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
Federal
Net Operating Loss Carryforwards
|
|
|
273,906
|
|
|
271,876
|
|
State
Net Operating Loss Carryforwards
|
|
|
35,554
|
|
|
34,906
|
|
Investments
|
|
|
5,762
|
|
|
5,762
|
|
Capital
Loss Carryforwards
|
|
|
74,520
|
|
|
99,412
|
|
Tax
Credit Carryforwards
|
|
|
4,150
|
|
|
4,150
|
|
AMT
Tax credit Carryforwards
|
|
|
25
|
|
|
63
|
|
Depreciation
and Amortization
|
|
|
145
|
|
|
127
|
|
Stock-based
compensation
|
|
|
2,448
|
|
|
1,093
|
|
Other
|
|
|
909
|
|
|
1,001
|
|
Gross
Deferred Tax Asset
|
|
|
397,419
|
|
|
418,390
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities:
|
|
|
|
|
|
|
|
Basis
difference of assets acquired
|
|
|
(24,441
|
)
|
|
-
|
|
Amortization
of intangibles
|
|
|
(3,511
|
)
|
|
(782
|
)
|
Gross
Deferred Tax Liability
|
|
|
(27,952
|
)
|
|
(782
|
)
|
|
|
|
|
|
|
|
|
Valuation
Allowance
|
|
|
(397,186
|
)
|
|
(417,826
|
)
|
Net
Deferred Tax Asset/(Liability)
|
|
|
(27,719
|
)
|
|
(218
|
)
|
In
accordance with the provisions of Financial Accounting Standards Board Statement
No. 109, “Accounting
for Income Taxes”
and
related guidance thereto (“SFAS No. 109”), the Company records a non-cash
deferred tax expense as a result of differences in accounting for certain
intangible assets for book and tax purposes. These intangible assets, which
are
indefinite lived assets for book purposes, are being amortized for tax purposes
over a fifteen year period. As a result, the basis of these assets for income
tax purposes will be different from the carrying value for financial reporting
purposes. For the year ended 2007, the Company was required to record a total
deferred tax expense of $3.1 million with respect to these differences. The
Company currently anticipates that it will likely record additional net deferred
tax liabilities that will result from deferred income tax expense being recorded
in the Company’s statement of operations in future periods.
SFAS
No.
109 also provides that the Company must provide a full valuation allowance
against its deferred tax assets for financial reporting purposes. The deferred
tax liability resulting from timing differences discussed above cannot be offset
against the Company’s deferred tax assets under US GAAP since the deferred tax
liability relates to indefinite lived assets and is not anticipated to reverse
in the same period. These assets, which consist principally of $782 million
of
federal tax loss carry forwards that expire at various dates through 2026,
total
approximately $397 million and are available to reduce or eliminate the
Company’s taxable income in calculating the amount of income tax actually paid.
In addition, the Company is not permitted, in its statement of operations,
to
record a benefit relating to the deferred tax assets which would offset the
deferred tax expense. However, the deferred tax assets remain available to
the
Company to reduce taxable income for tax purposes, subject to time and other
limitations contained in the Internal Revenue Code and related regulations.
Consequently, the Company anticipates it will pay little or no current federal
income tax, other than alternative minimum taxes, and will be subject to certain
state and local taxes.
The
valuation allowance for deferred tax assets decreased by $20.6 million and
$16.9
million in 2007 and 2006, respectively. During 2007, the Company’s deferred tax
assets and related valuation allowance decreased primarily due to expiration
of
certain capital loss carry forwards. 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, as well
as
amortization expense relating to intangible assets that will be deductible
in
computing taxable income in future years, 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.
Approximately
$330 million of the valuation allowance for deferred tax assets as of December
31, 2007 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.”
To
the
extent net operating loss carry forwards relate to stock-based compensation,
the
tax benefits will be credited to Additional paid-in capital when realized.
The
Company has capital loss carry forwards of approximately $188 million which
expire at various dates between 2008 and 2011. In addition, the Company has
federal tax credit carry forwards 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 carry forwards, capital loss carry forwards 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.
The
Company adopted the provisions of Financial Standards Accounting Board
Interpretation No. 48, “Accounting
for Income Taxes”
(“FIN
48”) an interpretation of SFAS No. 109 on January 1, 2007. The Interpretation
prescribes recognition threshold and measurement parameters for the financial
statement recognition and measurement of tax positions taken or expected to
be
taken in the Company’s tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not to be sustained upon examination by taxing
authorities. The amount recognized is measured as the largest amount of benefit
that has a greater than 50% likelihood of being realized upon ultimate
settlement. At the adoption date of January 1, 2007 and as of December 31,
2007,
the Company had approximately $25 million of unrecognized tax benefits. If
recognized, the unrecognized tax benefits would be subject to a valuation
allowance and would not affect our effective tax rate. There are no significant
increases or decreases to unrecognized tax benefits anticipated within the
next
twelve months. As a result of adopting FIN 48, the Company’s net amount of
assets and liabilities recognized in the condensed consolidated balance sheet
did not change. Therefore, the Company was not required to record a cumulative
effect adjustment relating to the adoption.
The
Company’s practice is to recognize interest and/or penalties related to
uncertain tax positions in income tax expense. The Company had no accrued
interest or penalties as of December 31, 2007 and December 31, 2006. The Company
is subject to U.S. federal income tax, as well as income tax of multiple state
and local jurisdictions. Tax returns for all years after 2004 are subject to
future examination by tax authorities.
(10)
BENEFIT PLANS
As
a
result of its merger with UCC and its acquisition of Maggie Moo’s, the Company
currently maintains three defined contribution plans under Section 401(k)
of the Internal Revenue Code that provide for voluntary employee contributions
of 1% to 15% of compensation for substantially all employees. The Company may,
but is not obligated to, make profit sharing contributions under the terms
of
the plans. The Company contributed $60,000 each year to the plans for the years
ended December 31, 2006 and 2005 and $0 for the year ended December 31,
2007.
(11)
STOCK BASED COMPENSATION
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.
A
summary
of stock options and restricted shares granted under the 2006 Plan, 1999 Plan,
and the 2000 Plan from January 1, 2005 through December 31, 2007, warrants
issued by the Company outside of such plans from January 1, 2005 through
December 31, 2007, and changes during each twelve month period is presented
below:
|
|
2005
|
|
2006
|
|
2007
|
|
(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
|
|
|
2,146
|
|
$
|
3.98
|
|
|
1,949
|
|
$
|
3.52
|
|
|
7,174
|
|
$
|
4.17
|
|
Granted
|
|
|
5
|
|
$
|
3.30
|
|
|
5,366
|
|
$
|
4.31
|
|
|
1,733
|
|
$
|
7.72
|
|
Exercised
|
|
|
(38
|
)
|
$
|
0.49
|
|
|
(120
|
)
|
$
|
(.10
|
) |
|
(1,732
|
)
|
$
|
2.72
|
|
Cancelled
|
|
|
(164
|
)
|
$
|
10.29
|
|
|
(21
|
)
|
$
|
(.83
|
) |
|
(
181
|
)
|
$
|
5.83
|
|
Outstanding
at end of year
|
|
|
1,949
|
|
$
|
3.52
|
|
|
7,174
|
|
$
|
4.17
|
|
|
6,994
|
|
$
|
5.37
|
|
Exercisable
at year-end
|
|
|
1,771
|
|
$
|
3.57
|
|
|
2,616
|
|
$
|
3.57
|
|
|
2,723
|
|
$
|
5.13
|
|
A
summary
of stock option activity under the 2006 Plan, 1999 Plan, the 2000 Plan and
warrants outstanding as of December 31, 2007 and changes during the year ended
is presented below:
|
|
2006
Plan
|
|
1999
Plan
|
|
2000
Plan
|
|
Warrants
|
|
Total
|
|
|
|
Number
of Shares (in thousands)
|
|
Weighted
- Average Exercise Price
|
|
Number
of Shares (in thousands)
|
|
Weighted
- Average Exercise Price
|
|
Number
of Shares (in thousands)
|
|
Weighted
- Average Exercise Price
|
|
Number
of Shares (in thousands)
|
|
Weighted
- Average Exercise Price
|
|
Number
of Shares (in thousands)
|
|
Weighted
- Average Exercise Price
|
|
Outstanding
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2007
|
|
|
426
|
|
$
|
6.88
|
|
|
4,689
|
|
$
|
4.19
|
|
|
123
|
|
$
|
3.23
|
|
|
1,936
|
|
$
|
3.60
|
|
|
7,174
|
|
$
|
4.17
|
|
Granted
|
|
|
1,550
|
|
|
7.47
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
183
|
|
|
9.86
|
|
|
1,733
|
|
|
7.72
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
622
|
|
|
3.00
|
|
|
8
|
|
|
0.99
|
|
|
1,102
|
|
|
2.58
|
|
|
1,732
|
|
|
2.72
|
|
Forfeited
|
|
|
3
|
|
|
8.57
|
|
|
152
|
|
|
5.81
|
|
|
26
|
|
|
5.65
|
|
|
-
|
|
|
-
|
|
|
181
|
|
|
5.83
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
1,973
|
|
$
|
7.34
|
|
|
3,915
|
|
$
|
4.31
|
|
|
89
|
|
$
|
2.71
|
|
|
1,017
|
|
$
|
5.85
|
|
|
6,994
|
|
$
|
5.37
|
|
A
summary
of the status of the Company’s outstanding grants of options, restricted stock
and warrants that remain subject to vesting as of December 31, 2007, and changes
during the year then ended is presented below:
|
|
2006
Plan
|
|
1999
Plan
|
|
2000
Plan
|
|
Warrants
|
|
Total
|
|
|
|
Number
of Shares (in thousands)
|
|
Weighted
- Average Grant Date Fair Value
|
|
Number
of Shares (in thousands)
|
|
Weighted
- Average Grant Date Fair Value
|
|
Number
of Shares (in thousands)
|
|
Weighted
- Average Grant Date Fair Value
|
|
Number
of Shares (in thousands)
|
|
Weighted
- Average Grant Date Fair Value
|
|
Number
of Shares (in thousands)
|
|
Weighted
- Average Grant Date Fair Value
|
|
Non-Vested
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2007
|
|
|
426
|
|
$
|
2.19
|
|
|
3,619
|
|
$
|
1.32
|
|
|
87
|
|
$
|
2.28
|
|
|
125
|
|
$
|
1.20
|
|
|
4,257
|
|
$
|
1.43
|
|
Granted
|
|
|
1,550
|
|
|
3.88
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
183
|
|
|
4.17
|
|
|
1,733
|
|
|
3.91
|
|
Vested
|
|
|
358
|
|
|
2.54
|
|
|
1,206
|
|
|
1.32
|
|
|
34
|
|
|
2.67
|
|
|
92
|
|
|
1.75
|
|
|
1,690
|
|
|
1.63
|
|
Forfeited
|
|
|
3
|
|
|
2.87
|
|
|
-
|
|
|
-
|
|
|
26
|
|
|
1.78
|
|
|
-
|
|
|
-
|
|
|
29
|
|
|
1.87
|
|
Non-Vested
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
1,615
|
|
$
|
3.74
|
|
|
2,413
|
|
$
|
1.32
|
|
|
27
|
|
$
|
2.08
|
|
|
216
|
|
$
|
3.48
|
|
|
4,271
|
|
$
|
2.35
|
|
The
following table includes information on fully vested stock options, stock
options outstanding for each plan, fully vested warrants and warrants
outstanding as of December 31, 2007:
|
|
2006
Plan
|
|
1999
Plan
|
|
2000
Plan
|
|
Warrants
|
|
Total
|
|
|
|
Stock
Options Outstanding
|
|
Stock
Options Currently Exercisable and Vested
|
|
Stock
Options Outstanding
|
|
Stock
Options Currently Exercisable and Vested
|
|
Stock
Options Outstanding
|
|
Stock
Options Currently Exercisable and Vested
|
|
Stock
Options Outstanding
|
|
Stock
Options Currently Exercisable and Vested
|
|
Stock
Options Outstanding
|
|
Stock
Options
Currently Exercisable and Vested
|
|
Number
(in thousands)
|
|
|
1,973
|
|
|
359
|
|
|
3,915
|
|
|
1,503
|
|
|
89
|
|
|
62
|
|
|
1,017
|
|
|
799
|
|
|
6,994
|
|
|
2,723
|
|
Weighted-average
exercise price
|
|
$
|
7.34
|
|
|
6.24
|
|
|
4.31
|
|
|
4.76
|
|
|
2.71
|
|
|
2.63
|
|
|
5.85
|
|
|
5.52
|
|
|
5.37
|
|
|
5.13
|
|
Aggregate
intrinsicvalue (in thousands)
|
|
|
25
|
|
|
14
|
|
|
3,378
|
|
|
1,282
|
|
|
190
|
|
|
138
|
|
|
723
|
|
|
661
|
|
|
4,316
|
|
|
2,095
|
|
Weighted-average
remaining contractual term
|
|
|
9.50
|
|
|
9.16
|
|
|
7.79
|
|
|
6.74
|
|
|
7.88
|
|
|
7.83
|
|
|
3.92
|
|
|
2.57
|
|
|
7.71
|
|
|
5.86
|
|
In
2006,
the Board of Directors authorized issuance of 250,000 shares of restricted
stock
to three of its senior officers. On June 6, 2006, 100,000 of these restricted
shares vested with a fair value of $410,000. The remaining 150,000 restricted
shares vest over three years beginning on May 5, 2007. The holders of these
restricted stock grants surrendered a total of 86,000 shares of common stock
to
us in satisfaction of their minimum federal withholding tax obligations arising
from these grants. We recorded the shares surrendered to us as treasury stock.
An additional 20,000 of restricted shares were granted to non-officer employees
in 2006, of which 15,000 vested in the fourth quarter of 2006, and 5,000 vested
in the first quarter of 2007.
Total
stock-based compensation expense was approximately $4.2 million, $1.6 million
and $76,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
The
total
unrecognized compensation cost related to non-vested share-based compensation
agreements granted under all stock option plans as of December 31, 2007 is
approximately $7.2 million. The cost is expected to be recognized over the
vesting period of approximately 2 years.
The
total
income tax benefit recognized in the income statement for stock-based
compensation arrangements was $0 for the years ended December 31, 2007,
2006, and 2005, respectively. There was no capitalized stock-based compensation
cost incurred during the years ended December 31, 2007, 2006, and 2005.
The
per
share weighted-average value of options granted by the Company during 2007,
2006
and 2005 were $7.47, $4.31 and $3.30, respectively. The fair value of each
stock
option award is estimated on the date of grant using the Black-Scholes option
pricing model. The fair values for each year were calculated using an expected
option life of five years and volatility rates ranging from 16.8% to 30.2%
for
2005, and an expected option life of three to six years and volatility rates
ranging from 26.9% to 35.2% for 2006, and an expected option life of three
to
six years and volatility rates ranging from 23.65% to 56.85% for
2007.
In
addition, the calculations assumed risk-free interest rates ranging from 3.72%
to 4.35% in 2005, 4.59% to 5.10% in 2006 and 3.45% to 4.92% in 2007.
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, 2007, the Company has 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 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.
The
total
number of options and warrants issued by the Company since January 1, 2005
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 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.
|
|
·
|
On
January 24, 2007, as part of bonuses distributed to employees for
the year
ended December 31, 2006, the Company issued options to employees
exercisable through January 24, 2017 to purchase 51,500 shares of
Company
common stock at an exercise price of
$8.95.
|
|
·
|
On
February 15, 2007, in connection with the acquisition of Bill Blass,
the
Company issued warrants exercisable through February 15, 2017 to
purchase
400,000 shares of Company common stock at exercise prices of $8.89.
The
vesting of these warrants is contingent upon Blass meeting three
earnings
targets on September 30, 2008, December 31, 2009, and December 31,
2010.
As of September 30, 2007, the first earnings target is the only one
that
has been deemed probable; therefore, the Company has only deemed
the first
tranche of 133,333 shares as outstanding. On February 21, 2007, the
Company issued options exercisable through February 21, 2017 to purchase
5,000 shares of the Company common stock to an employee of Bill Blass
at
an exercise price of $10.90 per share.
|
|
·
|
On
May 2, 2007, in connection with the acquisition of Waverly, the Company
issued warrants exercisable through May 2, 2017 to purchase 50,000
shares
of Company common stock at exercise prices of $12.43. These
warrants were immediately vested upon issuance. The warrant was priced
at
the market price on the date of grant and the related compensation
expense
has been included in the purchase price allocation.
|
|
·
|
During
the three months ended June 30,
2007, in connection with their employment with the Company, the Company
issued 107,500 options to employees exercisable through June 21,
2017 at
exercise prices ranging from $11.61 to $12.87 per share. Additionally,
the
Company granted approximately 29,000 options to a member of the Board
of
Directors exercisable through May 4, 2017 at an exercise price of
$12.19
per share.
|
|
·
|
During
the three months ended September 30, 2007, the Company issued options
to
purchase 305,000 common shares to employees which are exercisable
through
September 24, 2017 at exercise prices ranging from $7.26 to $10.00
per
share. Additionally, the Company granted 775,000 options to members
of the
Board of Directors exercisable through September 6, 2017 at exercise
prices of $6.90 per share.
|
|
·
|
During
the three months ended December 31, 2007, the Company issued options
to
purchase 100,000 common shares to the spokesperson of its Waverly
brand which are exercisable through December 6, 2017 at an exercise
price of $4.70 per share.
|
|
·
|
During
the three months ended December 31, 2007, the Company issued options
to
purchase 178,000 common shares to employees which are exercisable
through
December 31, 2017 at exercise prices ranging from $4.70 to $4.84
per
share.
|
The
total
intrinsic value of stock options exercised during the twelve months ended
December 31, 2007 and 2006 was $9,503,000 and $529,000, respectively. Cash
received during 2007 and 2006 from share options and warrants exercised under
the share-based payment plans was $3,313,000 and $12,000, respectively.
Total shares exercised were 1,732,336 in 2007, of which 1,102,916 were related
to warrants.
The
total
number of warrants outstanding as of December 31, 2007 is
1,015,833.
In
2007,
1.7 million options were exercised. Net proceeds from exercise of the options
totaled $3.3 million. The company issues new shares upon share option
exercise.
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, 2007, 2006 and 2005 fees billed by Kirkland & Ellis LLP
were approximately $1.3 million, $1.7 million, and $640,000, respectively.
For
the years ended December 31, 2007 and 2006, the Company had outstanding
payables due to Kirkland & Ellis LLP of approximately $121,000 and $492,000,
respectively.
The
Company has an active agreement with Marvin Traub Associates, Inc., an entity
owned by Mr. Traub (a member of the Board of Directors), to help the Company
identify, approach, and negotiate a deal with a premier U.S. based big box
retail chain so that such retailer might joint venture with, or purchase a
license from, the Company to open MaggieMoo's ice cream locations within their
stores. In July 2007, Marvin Traub Associates, Inc. received a one-time retainer
fee of $25,000 upon the agreement's execution. If the Company is successful
in
consummating a relationship with a third party, Marvin Traub Associates, Inc.
will receive an additional $100,000 success fee.
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.
Designer
License Holdings Co., LLC (“DLHC”) is a licensee of the Bill Blass
brand. The owner of DLHC is also an owner of Design Equity Holding
Company, LLC (“DEHC”) which owns 10% of Bill Blass Jeans, LLC at December
31, 2007. As a licensee of Bill Blass, DLHC’s contract provides for payment
of a minimum annual royalty of $5 million to the Company.
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 2%, and repayment by MSF with
no penalty, at any time. As of December 31, 2007 and 2006, the Company had
receivable balances of $1.3 million and $350,000 from MSF, respectively. The
company recorded interest income earned from the fund in the amount of
$85,000.
(13)
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. The complaint alleges that 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 did not include the
underwriter-defendants, and they continued to defend the actions
and 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 had a reserve of
$465,000 for its estimated exposure.
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 (the “Miles Decision”). Plaintiffs filed a petition
in early 2007 seeking rehearing of this decision and/or a rehearing en
banc. On April 6, 2007, the Second Circuit denied the petition for
rehearing in an opinion. After careful consideration by the parties of the
effect of the Miles Decision on the proposed settlement (i.e., whether in light
of the Miles Decision no class may be certified in these actions, even a
settlement class), plaintiffs and the issuer-defendants executed a stipulation
and proposed order terminating the proposed Issuers’ Settlement on June 22,
2007. The district court “so ordered” the stipulation and proposed order,
terminating the proposed Issuers’ Settlement shortly thereafter.
Discovery
in the actions has resumed, and plaintiffs filed amended complaints in the
focus cases shortly thereafter. Defendants have moved to dismiss the
amended complaints. Plaintiffs have also filed motions for class
certification in the focus cases. Defendants have filed papers
opposing class certification. Neither the motion to dismiss nor the
motion for class certification has been ruled upon by the
Court.
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 alleged 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. In July 2007,
the
Company settled all claims with the plaintiff for a payment of $600,000. The
case has been dismissed with prejudice. The Company’s costs in connection with
the defense of this case 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.
The settlement amount has also been recorded against discontinued
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, captioned Tim
Johnson v. Fortress Credit Opportunities I, L.P., et al.,
in which
the plaintiff alleged 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. UCC and Mr. D’Loren filed cross-claims claiming
indemnity against TSC and certain TSC officers. TSC filed various cross and
third-party claims against UCC, Mr. D’Loren and another TSC shareholder, Annie
Roboff. Roboff filed a separate action in the Chancery Court in Davidson County,
Tennessee, 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 parties reached a global settlement on December 19, 2007,
with UCC contributing a total of $125,000 to the settlement amount, which amount
has been included in discontinued operations. The case has been dismissed with
prejudice.
Other.
The
Company and its subsidiaries are subject to other litigation in the ordinary
course of business, including contract, franchisee, trademark and
employment-related litigation. In the course of operating its franchise systems
and enforcing its rights under existing and former franchisee agreements, we
are
also subject to complaints, letters threatening litigation and law suits,
particularly in cases involving defaults and terminations of
franchises
(b)
OPERATING LEASES
The
Company is obligated under noncancelable operating leases for office space
that
expire at various dates through 2017. Future minimum lease payments under
noncancelable operating leases and related sublease rent commitments as of
December 31, 2007 are as follows:
Operating
Leases (in 000's)
|
|
For
the Year Ending December 31,
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Gross
lease commitments
|
|
$
|
2,715
|
|
$
|
1,856
|
|
$
|
1,823
|
|
$
|
1,839
|
|
$
|
1,892
|
|
$
|
7,072
|
|
less:
sub-leases
|
|
|
894
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Lease
commitments, net
|
|
$
|
1,821
|
|
$
|
1,856
|
|
$
|
1,823
|
|
$
|
1,839
|
|
$
|
1,892
|
|
$
|
7,072
|
|
Rent
expense from continuing operations under operating leases was approximately
$1,670,000, $398,000, and $158,000 for the years ended December 31, 2007,
2006 and 2005, 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.
The
company has recorded aggregate rent credits totaling $1.1 million which amount
represents the value of rent concessions and tenant improvements provided by
the
lessors. These amounts will be amortized to rent expense on a straight-line
basis over the lives of the respective leases.
(c)
OTHER
Bill
Blass Holding Co., Inc. and subsidiaries have been selected for audit by the
Internal Revenue Service for the years ended December 31, 2005 and February
15,
2007.
The
Company has received a preliminary assessment of $653,000 for unpaid
communications services tax by the State of Florida relating to the
discontinued mobile and wireless communications business of Aether
Systems, Inc. The Company has filed an informal protest against this assessment,
claiming errors in the calculation of the assessment. The Company has
accrued current liabilities of approximately $425,000 for legacy tax
assessments. The Company anticipates a negotiated settlement to this assessment.
(d)
RESTRICTED CASH
Restricted
cash of $5.3 million as of December 31, 2007 includes funds held in escrow
related to the Marble Slab acquisition. $3.5 million of this amount was paid
on
February 28, 2008 and $1.5 million was held back to secure indemnity claims
made
by the company. Long term restricted cash of $1.8 million includes security
deposits relating to letters of credit which secure the facility leases of
Bill
Blass, our facility lease in Norcross, Georgia and the Company’s headquarters in
New York City, as well as a security deposit held by the Company for a sub-lease
with the buyer of a former business owned by the Company.
As
of
December 31, 2006, the Company had restricted cash of $1.3 million relating
to
funds held in money market accounts as security for outstanding letters of
credit established for the facility leases of a facility in Massachusetts
formerly used by one of the businesses we sold in 2004 (which the Company
sub
leases), and the Company’s headquarters in New York City.
(14)
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 entire MBS investments
portfolio in November 2006, and since that time, we have focused entirely on
our
IP business.
During
2007, we settled various legal and other claims relating to our discontinued
businesses resulting in a net loss from discontinued operations of $586,000.
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 related 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.
(15)
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)
|
|
2007
|
|
2007
|
|
2007
|
|
2007
|
|
Revenues
|
|
$
|
3,885
|
|
$
|
8,852
|
|
$
|
11,329
|
|
$
|
10,229
|
|
Operating
expenses
|
|
|
(5,161
|
)
|
|
(7,865
|
)
|
|
(8,725
|
)
|
|
(10,354
|
)
|
Operating
income (loss)
|
|
|
(1,276
|
)
|
|
987
|
|
|
2,604
|
|
|
(125
|
)
|
Non
operating income (expense)
|
|
|
631
|
|
|
(560
|
)
|
|
(1,264
|
)
|
|
(1,757
|
)
|
Income
(loss) from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
before income taxes
|
|
|
(645
|
)
|
|
427
|
|
|
1,340
|
|
|
(1,882
|
)
|
Income
taxes
|
|
|
-
|
|
|
(217
|
)
|
|
(1,253
|
)
|
|
(1,833
|
)
|
Income
(loss) from continuing operations
|
|
|
(645
|
)
|
|
210
|
|
|
87
|
|
|
(3,715
|
)
|
Income
(loss) from discontinued operations
|
|
|
447
|
|
|
(895
|
)
|
|
(6
|
)
|
|
(132
|
)
|
Net
(loss) income
|
|
$
|
(198
|
)
|
$
|
(685
|
)
|
$
|
81
|
|
$
|
(3,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
share - basic and diluted
|
|
$
|
(0.01
|
)
|
$
|
-
|
|
$
|
-
|
|
$
|
(0.07
|
)
|
Income (loss)
from discontinued operations per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
share - basic and diluted
|
|
$
|
0.01
|
|
$
|
(0.01
|
)
|
$
|
-
|
|
$
|
-
|
|
Net
(loss) income per common share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
and diluted
|
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
$
|
-
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
49,159
|
|
|
50,824
|
|
|
52,384
|
|
|
55,116
|
|
Weighted
average shares outstanding - diluted
|
|
|
49,159
|
|
|
54,465
|
|
|
54,250
|
|
|
55,116
|
|
|
|
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
|
)
|
Income 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
|
|
(16)
ACQUISITION OF UCC
On
June
6, 2006, NexCen acquired UCC for 2.5 million shares of common stock, plus the
right to contingent consideration (in the form of an earn-out) of up to an
additional 2.5 million shares of common stock and up to $10 million in cash
if
future performance targets were met following the closing.
On
September 5, 2007, the Board of Directors determined that based on the Company’s
stock performance and an adjusted annualized earnings calculation (based on
the
financial statements included in the Quarterly Report on Form 10-Q for the
period ended June 30, 2007), all performance targets had been satisfied. As
a
result, the former UCC securityholders received the contingent consideration
of
2.5 million shares of common stock (900,000 of which had been held in an escrow
account) and $10 million in cash in September 2007.
The
Company allocated the initial purchase price of the assets acquired and
liabilities assumed at the estimated fair values at the acquisition date. The
contingent consideration was recorded as additional goodwill at the fair value
of the consideration on the date approved by the Board of Directors. The
contingent consideration included a cash payment of $10 million and the issuance
of 2.5 million shares of common stock valued at $6.87 per share (which is the
average share price for the 5 day period beginning two days prior to the
approval date and ending two days after) totaling approximately $27.2 million.
The recorded goodwill will not be deductible for tax purposes.
(17)
ACQUISITION OF THE ATHLETE’S FOOT
On
November 7, 2006, the Company, through its subsidiary NexCen Acquisition Corp.,
acquired Athlete’s Foot Brands, LLC, along with an affiliated advertising and
marketing fund, and certain nominal fixed assets owned by an affiliated company.
This business operates in our retail franchising segment. 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 the BTMU Credit Facility secured
by the assets of The Athlete’s Foot. The purchase agreement required a
stand-alone audit of the 2006 financial results of Athlete’s Foot Brands, LLC to
determine the amount of contingent consideration to be paid to the sellers.
Based on the 2006 financial results of TAF, no contingent consideration was
earned and therefore none was paid.
Prior
to
this acquisition, there were executory contracts between UCC and TAF. UCC
provided financial advisory services to TAF. 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.
The
Company allocated the initial purchase price of the assets and liabilities
assumed at the estimated fair values resulting in goodwill of approximately
$5.5
million, trademarks of $49 million, and franchise and master development
agreements valued at approximately $2.6 million. At December 31, 2007, goodwill
had decreased to approximately $2.5 million. The reduction in initial goodwill
is principally attributable to the reversal of the contingent consideration
that
will not be paid. The recorded goodwill and trademarks are deductible for tax
purposes.
(18)
ACQUISITION OF BILL BLASS
On
February 15, 2007 the Company, through its subsidiary Blass Acquisition Corp.,
completed the purchase of all of the outstanding equity interests of Bill
Blass
Holding Co., Inc. and two affiliated businesses (collectively, “Bill Blass”).
This business operates in our consumer brands segment. The purchase price for
the Bill Blass acquisition included
initial
consideration of $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). For financial reporting purposes, and in accordance with
SFAS 141 and related guidance thereto, the value of shares issued as
consideration in connection with the stock purchase agreement is determined
by
multiplying the number of shares issued by the average closing quoted market
price of the shares for the five day period beginning two days prior to the
effective date (the date that principal terms of the acquisition were agreed
to
and announced) of the stock purchase agreement and ending two days after the
effective date, or $7.11. Under the terms of the stock purchase agreement,
the
former stockholders may be entitled to additional consideration of up to $16.2
million provided certain financial goals relating to the business of Blass
are
achieved. The contingent consideration is payable in cash or stock at the option
of the Company.
Immediately
following the acquisition, the Company formed the subsidiary Bill Blass Jeans,
LLC (“Jeans”) and contributed its ownership of Bill Blass International, LLC to
Jeans. The Company then sold a 10% minority interest in Jeans to Designer Equity
Holding Company LLC (“DEHC”), an affiliate of Designer License Holding, LLC, for
initial cash consideration of $2.7 million and a subscribed interest of $2.7
million which together represent approximately 10% of the aggregate purchase
price of Bill Blass (the “Minority Sale”). In addition, the Company issued a
warrant to DEHC to purchase up to 400,000 shares of the Company’s stock at a per
share exercise price of $8.89, provided certain financial goals are
achieved.
The
Company allocated the purchase price of the assets acquired and liabilities
assumed at the estimated fair values at the acquisition date. The goodwill
and
trademarks are not deductible for tax purposes.
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
Cash
payments
|
|
$
|
39,060
|
|
Stock
consideration
|
|
|
15,593
|
|
Direct
acquisition costs
|
|
|
1,253
|
|
Total
purchase price
|
|
$
|
55,906
|
|
|
|
|
|
|
Allocation
of purchase price:
|
|
|
|
|
Trademarks
|
|
$
|
58,800
|
|
Goodwill
|
|
|
19,578
|
|
License
agreements
|
|
|
779
|
|
Assets
acquired
|
|
|
2,302
|
|
Total
assets acquired
|
|
|
81,459
|
|
Total
liabilities assumed
|
|
|
(25,553
|
)
|
Net
assets acquired
|
|
$
|
55,906
|
|
The
preliminary allocation of purchase price was revised to reflect deferred tax
liabilities assumed in connection with the acquisition in the amount of
approximately $24 million, which amount was recorded as additional
goodwill.
The
preliminary allocation of the purchase price was also revised to reflect final
valuations of the Bill Blass trademarks, which resulted in an increase to
identified intangibles of approximately $13 million, which amount was credited
togoodwill.
Prior
to
this acquisition, there were executory contracts between UCC and Bill Blass.
UCC
provided financial advisory services to Bill Blass. 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.
Blass’
results of operations are included in the Condensed Consolidated Statements
of
Operations beginning from February 15, 2007 (the date of
acquisition).
(19)
ACQUISITIONS OF MARBLE SLAB AND MAGGIEMOO’S
Marble
Slab. On
February 28, 2007, the Company completed the purchase of substantially all
of
the assets of Marble Slab used or intended for use in connection with the
operation of the Marble Slab franchising system. This business operates in
our
QSR segment. The initial consideration of $21 million consisted of cash of
$16
million, a promissory note in the principal amount of $3.5 million, and a second
promissory note in the principal amount of $1.5 million. The notes accrue
interest at the annual rate of 6% per annum until maturity, which is twelve
months from the date of issuance. The Company paid the first promissory note
in
the amount of $3.5 million plus accrued interest in cash on February 29, 2008.
The Company claimed certain amounts related to indemnification claims against
the second promissory note in the principal amount of $1.5 million. The entire
amount of the $1.5 million note plus interest is being held in an escrow account
pending resolution of the indemnification claims.
The
Company allocated the purchase price of the Marble Slab assets acquired and
liabilities assumed at the estimated fair values at the acquisition date. The
recorded goodwill and trademarks are deductible for tax purposes.
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
Cash
payments and promissory notes
|
|
$
|
21,000
|
|
Direct
acquisition costs
|
|
|
933
|
|
Total
purchase price
|
|
$
|
21,933
|
|
|
|
|
|
|
Allocation
of purchase price:
|
Trademarks
|
|
$
|
22,117
|
|
Goodwill
|
|
|
2,121
|
|
Franchise
agreements
|
|
|
1,229
|
|
Assets
acquired
|
|
|
384
|
|
Total
assets acquired
|
|
|
25,851
|
|
Total
liabilities assumed
|
|
|
(3,918
|
)
|
Net
assets acquired
|
|
$
|
21,933
|
|
The
preliminary allocation of purchase price has been revised to reflect the final
valuations of identified intangibles, whih increased by approximately $1
million, which amount was recorded as additonal goodwill.
Marble
Slab results of operations are included in the Condensed Consolidated Statements
of Operations beginning from February 28, 2007, the date of acquisition.
MaggieMoo’s. On
February 28, 2007, MM Acquisition Sub, LLC, a Delaware limited liability
company
and wholly owned subsidiary of the Company was merged with and into MaggieMoo's,
and MaggieMoo's became a wholly owned subsidiary of the Company (the “Merger”).
This business operates in our QSR segment. The sellers received initial
consideration of approximately $15.9 million, after purchase adjustments
of
$216,000, consisting of cash of approximately $10.5 million and 234,242 shares
of common stock of the Company, with an aggregate value of approximately
$2.4
million (based on the
average closing quoted market price of the shares for the 15 consecutive
trading
days ending on (and including)
the
trading day prior to the date of the merger agreement, or $10.21). For
financial reporting purposes, and in accordance with SFAS No. 141 and related
guidance thereto, the value of shares issued as consideration in connection
with
the merger agreement is determined by multiplying the number of shares issued
by
the average closing quoted market price of the shares for the 5 day period
beginning two days prior to the date of the closing of the Merger and ending
two
days after the date of the closing of the Merger, or $10.51. Included in
the
initial consideration
is
approximately $3 million of stock and cash, in the same proportion as the
ratio
of stock and cash included in the initial consideration, which is being
held back by the Company for two years to satisfy potential post-closing
purchase price adjustments and indemnity claims. The sellers will receive
additional consideration in the form of an earn-out, if certain revenue
threshholds are met for 2007, which is payable on March 31, 2008.
The
Company allocated the purchase price of the MaggieMoo’s assets acquired and
liabilities assumed at the estimated fair values at the acquisition date. The
recorded goodwill and trademarks are deductible for tax purposes.
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
Cash
payments
|
|
$
|
10,492
|
|
Stock
consideration
|
|
|
2,462
|
|
Initial
consideration payable
|
|
|
2,954
|
|
Direct
acquisition costs
|
|
|
587
|
|
Total
purchase price
|
|
$
|
16,495
|
|
|
|
|
|
|
Allocation
of purchase price:
|
|
|
|
|
Trademarks
|
|
$
|
16,500
|
|
Goodwill
|
|
|
4,666
|
|
Franchise
agreements
|
|
|
654
|
|
Assets
acquired
|
|
|
1,294
|
|
Total
assets acquired
|
|
|
23,114
|
|
Total
liabilities assumed
|
|
|
(6,619
|
)
|
Net
assets acquired
|
|
$
|
16,495
|
|
The
original allocation of purchase price has been adjusted to reflect a net
increase of approximately $4.0 million which primarily relates to lease
guarantees of $2 million, deferred revenues of $622,000 and other
liabilities assumed in connection with the acquisition and, consequently,
goodwill has been adjusted to reflect this increase.
MaggieMoo’s
results of operations are included in the Condensed Consolidated Statements
of
Operations beginning from February 28, 2007 (the date of acquisition).
(20)
ACQUISITION OF WAVERLY
On
May 2,
2007, the Company through its wholly owned subsidiary WV IP Holdings, LLC,
completed the acquisition of intellectual property assets including primarily
trademarks, copyrights, and license agreements relating to the Waverly, Gramercy
and Village brands pursuant to an asset purchase agreement with F.
Schumacher & Co. (“Schumacher”)
for cash consideration of approximately $34 million. At the closing, the Company
also acquired all of the rights, title and interests of Ellery Homestyles,
LLC
(“Ellery”), a licensee of the Waverly brand used in connection with the
manufacture and sale of home products, under a Right of First Refusal Agreement
(“ROFR”) between Waverly Brand Acquisition LLC (an affiliate of Ellery) and
Schumacher dated January 3, 2006 for cash consideration of $2.75 million and
a
warrant to purchase 50,000 shares of the Company’s common stock. The exercise
price of the warrant is equal to $12.43, which was the closing price of the
Company’s common stock on the day prior to the issuance of the warrant. As of
December 31, 2007 a determination and allocation of the final purchase price
has
not yet been made, since legal and related costs of transferring trademarks
has
not been finalized.
The
Company allocated the purchase price of the assets acquired at the estimated
fair values at the acquisition date. The goodwill and trademarks are deductible
for tax purposes. The Company did not assume any liabilities in connection
with
the acquired assets.
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
Cash
payments
|
|
$
|
36,775
|
|
Warrants
|
|
|
110
|
|
Direct
acquisition costs
|
|
|
454
|
|
Total
purchase price
|
|
$
|
37,339
|
|
|
|
|
|
|
Allocation
of purchase price:
|
|
|
|
|
Trademarks
|
|
$
|
36,906
|
|
License
agreements
|
|
|
433
|
|
Assets
acquired
|
|
$
|
37,339
|
|
The
original purchase price has been increased by $239,000 to include additional
acquisition costs. Consequently, the original amount allocated to goodwill
has
been increased.
Waverly
results of operations are included in the Condensed Consolidated Statements
of
Operations beginning from May 2, 2007 (the date of acquisition).
(21)
ACQUISITION OF PRETZEL TIME AND PRETZELMAKER
On
August
7, 2007, the Company purchased the trademarks, franchise agreements and related
intellectual property, of Pretzel Time Franchising, LLC (“Pretzel Time”) and
Pretzelmaker Franchising, LLC (“Pretzelmaker”, and together with Pretzel Time
the “Pretzel Time and Pretzelmaker Brands”), from Mrs. Fields Famous Brands,
LLC, for $30.3 million. Pretzel Time and Pretzelmaker are franchise concepts
that offer freshly made soft baked hot pretzels, pretzel bites, pretzel wrapped
hot dogs and similar products and assorted beverages and are mainly located
in
shopping malls and shopping centers throughout the United States.
The
purchase price consists of cash of approximately $22.0 million and the issuance
of approximately 1 million shares of common stock with an approximate value
of
$7.3 million based on the Company’s closing stock price immediately prior to the
acquisition. In accordance with SFAS No. 141, “Business
Combinations,”
the
Company recorded the value of stock issued based on the five day average of
the
Company’s closing stock price beginning two days before the acquisition and
ending two days after, or $7.99. No other assets were acquired, and no
liabilities were assumed, in connection with the acquisition. The Company
allocated the purchase price of the assets acquired at the estimated fair values
at the acquisition date based on independent valuations. The goodwill and
trademarks will be amortized for tax purposes.
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
Cash
payments
|
|
$
|
21,999
|
|
Stock
consideration
|
|
|
7,972
|
|
Direct
acquisition costs
|
|
|
331
|
|
Total
purchase price
|
|
$
|
30,302
|
|
|
|
|
|
|
Allocation
of purchase price:
|
|
|
|
|
Trademarks
|
|
$
|
27,500
|
|
Franchise
agreements
|
|
|
740
|
|
Non-compete
agreement
|
|
|
1,060
|
|
Goodwill
|
|
|
1,002
|
|
Assets
acquired
|
|
$
|
30,302
|
|
As
of
December 31, 2007 a determination and allocation of the purchase price has
not
yet been finalized.
The
results of operations of the Pretzel Time and Pretzelmaker Brands are included
in the Condensed Consolidated Statements of Operations beginning from August
7,
2007(the date of acquisition).
(22)
PRO FORMA INFORMATION RELATED TO THE ACQUISITIONS
(Unaudited)
As
the
purchases of Bill Blass, MaggieMoo’s, Marble Slab, Waverly and the Pretzel Time
and Pretzelmaker Brands were material acquisitions, we are providing the
pro
forma financial information set forth below, which presents the consolidated
results as if the acquisitions had all occurred on January 1, 2006. The
financial information presented for TAF for the three months and year ended
2007
is based on actual results since we owned TAF for all of 2007. The financial
information for Bill Blass, MaggieMoo’s, Marble Slab, Waverly, and Pretzel Time
and Pretzelmaker for the three months ended December 31, 2007 is also based
on
actual information since those brands were all acquired prior to September
30,
2007. All of the other financial information for the three months and year
ended
December 31, 2006 and 2007 are based on the results of the brands prior to
our
ownership and include pro forma adjustments to interest, depreciation and
income
taxes in order to conform to current operations. 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.
|
|
Three
Months Ended December 31,
|
|
Year
Ended December 31,
|
|
(in
thousands except per share amounts)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
TAF
|
|
$
|
2,523
|
|
$
|
3,076
|
|
$
|
8,678
|
|
$
|
9,410
|
|
Bill
Blass
|
|
|
2,526
|
|
|
2,090
|
|
|
10,215
|
|
|
9,523
|
|
MaggieMoo's
|
|
|
385
|
|
|
1,137
|
|
|
3,243
|
|
|
4,583
|
|
Marble
Slab
|
|
|
875
|
|
|
1,064
|
|
|
5,281
|
|
|
5,469
|
|
Waverly
|
|
|
1,985
|
|
|
1,327
|
|
|
8,825
|
|
|
6,314
|
|
Pretzel
Time
|
|
|
1,199
|
|
|
1,194
|
|
|
4,527
|
|
|
3,761
|
|
Pretzelmaker
|
|
|
736
|
|
|
732
|
|
|
2,357
|
|
|
2,508
|
|
Total
pro forma revenues
|
|
$
|
10,229
|
|
$
|
10,620
|
|
$
|
43,126
|
|
$
|
41,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAF
|
|
$
|
328
|
|
$
|
1,700
|
|
$
|
2,648
|
|
$
|
4,550
|
|
Bill
Blass
|
|
|
2,085
|
|
|
1,625
|
|
|
7,604
|
|
|
6,329
|
|
MaggieMoo's
|
|
|
(283
|
)
|
|
(17
|
)
|
|
387
|
|
|
(2,188
|
)
|
Marble
Slab
|
|
|
16
|
|
|
(208
|
)
|
|
1,353
|
|
|
1,123
|
|
Waverly
|
|
|
940
|
|
|
535
|
|
|
4,832
|
|
|
2,519
|
|
Pretzel
Time
|
|
|
1,091
|
|
|
853
|
|
|
2,987
|
|
|
2,471
|
|
Pretzelmaker
|
|
|
638
|
|
|
523
|
|
|
1,665
|
|
|
1,648
|
|
Total
pro forma operating income
|
|
$
|
4,815
|
|
$
|
5,011
|
|
$
|
21,476
|
|
$
|
16,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAF
|
|
$
|
(252
|
)
|
$
|
906
|
|
$
|
736
|
|
$
|
2,305
|
|
Bill
Blass
|
|
|
1,550
|
|
|
961
|
|
|
5,779
|
|
|
4,379
|
|
MaggieMoo's
|
|
|
(368
|
)
|
|
(102
|
)
|
|
302
|
|
|
(2,273
|
)
|
Marble
Slab
|
|
|
(112
|
)
|
|
(336
|
)
|
|
1,227
|
|
|
997
|
|
Waverly
|
|
|
510
|
|
|
86
|
|
|
3,866
|
|
|
1,420
|
|
Pretzel
Time
|
|
|
884
|
|
|
643
|
|
|
2,729
|
|
|
2,212
|
|
Pretzelmaker
|
|
|
481
|
|
|
370
|
|
|
1,479
|
|
|
1,460
|
|
Total
|
|
$
|
2,693
|
|
$
|
$2,528
|
|
$
|
16,118
|
|
$
|
10,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and other non-allocated expenses
|
|
|
(2,647
|
)
|
|
(1,708
|
)
|
|
(8,579
|
)
|
|
(4,702
|
)
|
Income
taxes
|
|
|
(2,241
|
)
|
|
(370
|
)
|
|
(3,711
|
)
|
|
(370
|
)
|
Stock
based compensation
|
|
|
(1,520
|
)
|
|
(548
|
)
|
|
(4,215
|
)
|
|
(1,632
|
)
|
Total
pro forma net income (loss)
|
|
$
|
(3,715
|
)
|
$
|
(98
|
)
|
$
|
(387
|
)
|
$
|
3,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income (loss) per share - basic
|
|
$
|
(0.07
|
)
|
$
|
-
|
|
$
|
(0.01
|
)
|
$
|
0.08
|
|
Pro
forma net income (loss) per share - diluted
|
|
$
|
(0.07
|
)
|
$
|
-
|
|
$
|
(0.01
|
)
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding-basic
|
|
|
55,116
|
|
|
47,234
|
|
|
51,889
|
|
|
45,636
|
|
Weighted-average
shares outstanding-diluted
|
|
|
55,116
|
|
|
47,234
|
|
|
51,889
|
|
|
46,371
|
|
These
amounts include the historical results of the businesses we acquired. We
do not
intend to assume their historical overhead costs in our corporate structure.
As
discussed in Note
17,
Acquisition
of The Athlete’s Foot,
TAF was
acquired in the prior year on November 7, 2006.
(23)
SEGMENT REPORTING
NexCen
Brands is a vertically integrated global brand management and franchising
company.
The
Company operates three segments: consumer branded products, retail franchising
and quick service restaurants. The Company's reportable operating segments
have
been determined in accordance with the Company's internal management structure.
The following tables set forth the Company's financial performance by reportable
operating segment.
|
|
Year
Ended December 31,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
Franchise
management
|
|
|
|
|
|
|
|
Retail
franchising
|
|
$
|
8,678
|
|
$
|
1,924
|
|
$
|
-
|
|
Quick
service restaurants
|
|
|
10,493
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
19,171
|
|
|
1,924
|
|
|
|
|
Brand
management
|
|
|
|
|
|
|
|
|
|
|
Consumer
branded products
|
|
|
15,124
|
|
|
-
|
|
|
-
|
|
Total
revenues
|
|
$
|
34,295
|
|
$
|
1,924
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
Franchise
management
|
|
|
|
|
|
|
|
|
|
|
Retail
franchising
|
|
$
|
2,670
|
|
$
|
1,326
|
|
$
|
-
|
|
Quick
service restaurants
|
|
|
4,532
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
7,202
|
|
|
1,326
|
|
|
-
|
|
Brand
management
|
|
|
|
|
|
|
|
|
|
|
Consumer
branded products
|
|
|
10,389
|
|
|
-
|
|
|
-
|
|
Total
Brands
|
|
|
17,591
|
|
|
1,326
|
|
|
-
|
|
Corporate
and unallocated expenses
|
|
|
(15,401
|
)
|
|
(9,815
|
)
|
|
(5,241
|
)
|
Total
operating income (loss)
|
|
$
|
2,190
|
|
$
|
(8,489
|
)
|
$
|
(5,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA:
|
|
|
|
|
|
|
|
|
|
|
Franchise
management
|
|
|
|
|
|
|
|
|
|
|
Retail
franchising
|
|
$
|
2,923
|
|
$
|
1,356
|
|
$
|
-
|
|
Quick
service restaurants
|
|
|
4,819
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
7,742
|
|
|
1,356
|
|
|
-
|
|
Brand
management
|
|
|
|
|
|
|
|
|
|
|
Consumer
branded products
|
|
|
10,692
|
|
|
-
|
|
|
-
|
|
Total
Brands
|
|
|
18,434
|
|
|
1,356
|
|
|
-
|
|
Corporate
and unallocated expenses
|
|
|
(10,092
|
)
|
|
(3,326
|
)
|
|
(3,323
|
)
|
Total
Adjusted EBITDA
|
|
|
8,342
|
|
|
(1,970
|
)
|
|
(3,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
to
operating income:
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
(318
|
)
|
|
(3,337
|
)
|
|
(1,690
|
)
|
Stock
compensation expense
|
|
|
(4,215
|
)
|
|
(1,632
|
)
|
|
(76
|
)
|
Depreciation
and amortization
|
|
|
(1,619
|
)
|
|
(471
|
)
|
|
(159
|
)
|
Restructuring
charges
|
|
|
-
|
|
|
(1,079
|
)
|
|
7
|
|
Total
operating income (loss)
|
|
$
|
2,190
|
|
$
|
(8,489
|
)
|
$
|
(5,241
|
)
|
|
|
December
31,
|
|
December
31,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
Franchise
management:
|
|
|
|
|
|
Retail
franchising
|
|
$
|
59,010
|
|
$
|
|
|
Quick
service restaurants
|
|
|
86,900
|
|
|
- |
|
Total
|
|
|
145,910
|
|
|
59,937
|
|
Brand
management
|
|
|
|
|
|
|
|
Consumer
branded products
|
|
|
126,608
|
|
|
-
|
|
Total
brands
|
|
|
272,518
|
|
|
59,937
|
|
Corporate
|
|
|
86,689
|
|
|
98,448
|
|
Total
assets
|
|
$
|
359,207
|
|
$
|
158,385
|
|
|
|
|
|
|
|
|
|
Current
and long-term debt:
|
|
|
|
|
|
|
|
Franchise
management
|
|
|
|
|
|
|
|
Retail
franchising
|
|
$
|
26,030
|
|
$
|
-
|
|
Quick
service restaurants
|
|
|
35,000
|
|
|
-
|
|
Total
|
|
|
61,030
|
|
|
-
|
|
Brand
Management
|
|
|
|
|
|
|
|
Consumer
branded products
|
|
|
48,548
|
|
|
-
|
|
Total
brands
|
|
|
109,578
|
|
|
-
|
|
Corporate
|
|
|
-
|
|
|
-
|
|
Total
current and long-term debt
|
|
$
|
109,578
|
|
$
|
-
|
|
Our
retail franchising and quick-service restaurant segments earn revenues from
franchising locations to independent operators who pay franchise fees and
royalties determined as a percentage of retail sales. Our franchising operators
are based in our Norcross, GA facility. Our consumer branded products segment
earns revenue from licensing the Bill Blass and Waverly brands to third party
wholesalers and retailers who pay royalties determined as the greater of minimum
guarantees of percentage of net sales as defined. Most of our revenues are
earned from franchisees and licensees operating in the United States.
Approximately 11% of our income for 2007 was earned internationally, and 69%
of
the total revenue earned from international sources was earned in our retail
franchising segment.
As
of
December 31, 2006, we had only one operating segment - our retail franchising
segment. All of our royalty and franchise fee revenue was generated by The
Athlete’s Foot. In 2006 approximately 53% of this revenue was generated in the
United States.
In
2005,
we only had corporate costs; all other activity is included in discontinued
operations.
(24)
SUBSEQUENT EVENTS (unaudited)
(1) |
In
January 2008, we acquired the trademarks
and other intellectual property of The Shoe Box, Inc. (“Shoebox”) in
partnership with the Camuto Group, a premier women's fashion footwear
company
for the total purchase price of $1.30 million.
Shoebox is a multi-brand luxury shoe retailer based in New York.
The
companies have begun franchising Shoebox's luxury footwear concept
domestically and internationally under the Shoebox New York
brand.
|
(2) |
In
January 2008, we acquired substantially
all of the assets of Great American Cookie Company Franchising, LLC
and
Great American Manufacturing, LLC (collectively, “Great American Cookies”)
for the purchase price of approximately $94.4 million, consisting
of
$89 million
in cash and 1,099,290 shares of the Company’s common stock (valued at
$4.23 per share which was the closing price of one share of the Company’s
common stock on January 28, 2008. The cash portion of $89 million
was
funded with $70 million borrowed on the BTMU Credit Facility (see
(3)
below) and cash on hand. This transaction added another premium treat
brand and 300 franchised units to our QSR portfolio. 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 and trademarks are deductible for tax purposes.
|
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
Cash
payments
|
|
$
|
89,000
|
|
Stock
consideration
|
|
|
4,650
|
|
Direct
acquisition costs
|
|
|
750
|
|
Total
purchase price
|
|
$
|
94,400
|
|
|
|
|
|
|
Allocation
of purchase price:
|
|
|
|
|
Trademarks
|
|
$
|
43,500
|
|
Goodwill
|
|
|
47,420
|
|
Franchise
agreements
|
|
|
590
|
|
Assets
acquired
|
|
|
2,890
|
|
Total
assets acquired
|
|
|
94,400
|
|
Total
liabilities assumed
|
|
|
-
|
|
Net
assets acquired
|
|
$
|
94,400
|
|
(3) |
In
January 2008, the Company amended its existing bank credit facility,
originally entered into on March 12, 2007 pursuant to a security
agreement
and a note funding agreement with BTMU Capital Corporation. The amendment
to the Original Loan Documentation and related documents increases
the
maximum amount of borrowing that may be outstanding thereunder at
any one
time from $150 million to $181 million and modifies as a consequence
of
the Company’s acquisition of real estate assets, certain defined terms
used in the Original Loan Documentation and related documents. With
the
exception of these changes, the Amendment contains substantially
the same
terms as the Original Loan
Documentation.
|
Also,
in
January 2008, as partial consideration for the amendments to the bank credit
facility, the Company issued to BTMU a warrant to purchase 200,000 shares
of the
Company’s common stock at an exercise price of $0.01 per share. BTMU may
exercise the warrant in full or in part at any time from the date of issuance
through January 29, 2018. If the shares underlying the warrant are not
registered for resale on or before May 1, 2008, the Company may be obligated
to
pay BTMU an amount equal to $4.23 (the closing price of one share of the
Company’s common stock on January 28, 2008) multiplied by 200,000, less the
aggregate exercise price of the warrant.
(4) |
In
February, 2008, we repurchased a 5% interest in Bill Blass Jeans,
LLC from
Designer License Holding Co., LLC for $1.25 million at
cost.
|
ITEM
9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
(a)
Evaluation of Disclosure and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports that we file or submit under
the
Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,
summarized, and reported within the specified time periods and that such
information is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, we recognize that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship
of
possible controls and procedures.
As
required by Rule 13a-15(b) of the Exchange Act, management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
carried out an evaluation of the effectiveness of the design and operation
of
our disclosure controls and procedures, as of December 31, 2007. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of that date, the Company’s disclosure controls and procedures were not
effective because of the material weaknesses in our internal control over
financial reporting, which are discussed below. However, we performed additional
analyses and procedures in order to conclude that, despite the material
weaknesses, the consolidated financial statements included in the Annual Report
on Form 10-K fairly present, in all material respects, the Company’s
consolidated financial position, results of operations and cash flows as of
the
dates, and for the periods, presented therein.
(b)
Management’s Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the Exchange
Act. Our internal control system is designed to provide reasonable assurance
to
our management and Board of Directors regarding the preparation and fair
presentation of published 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 and procedures may deteriorate.
Management
has assessed the effectiveness of our internal control over financial reporting
as of December 31, 2007, using the criteria set forth by the Committee of
Sponsoring Organizations ("COSO") of the Treadway Commission in Internal
Control-Integrated Framework.
Based
on this assessment, management has concluded that the Company did not maintain
effective control over financial reporting as of December 31, 2007 due to the
material weaknesses discussed below.
A
material weakness is a control deficiency, or a combination of control
deficiencies, in internal control over financial reporting such that there
is
a
reasonable possibility that a material misstatement to the annual or interim
financial statements could occur and not be prevented or detected on a timely
basis.
Management identified the following material weaknesses in internal control
over
financial reporting as of December 31, 2007:
The
Company did not maintain a sufficient number of accounting and financial
reporting personnel. As a result, the Company’s monitoring activities were not
effective at identifying deficiencies in the operation of financial controls
on
a timely basis. In addition, the Company did not maintain a sufficient number
of
personnel with an appropriate level of technical expertise in U.S. generally
accepted accounting principles (US GAAP). As a result, the Company’s policies
and procedures were not effective to ensure the identification of financial
reporting risks arising from complex and non-routine transactions. These
material weaknesses resulted in errors in the Company’s preliminary 2007
financial statements.
The
design and implementation of the Company’s controls over the completeness and
accuracy of accrued liabilities were not effective as of December 31, 2007.
Specifically, the design of the Company’s policies, procedures and control
activities were not adequate to ensure that costs incurred at period end, but
not yet invoiced by third party suppliers and contractors, are appropriately
recognized in the Company’s financial statements. This material weakness
resulted in errors in the Company’s preliminary 2007 financial
statements.
Our
consolidated financial statements as of and for the year ended December 31,
2007
have been audited by KPMG LLP, our independent registered public accounting
firm, in accordance with the standards of the Public Company Accounting
Oversight Board (United States). KPMG LLP has also audited our internal control
over financial reporting as of December 31, 2007, as stated in its attestation
report included in this Item 9A(e)
(c)
Remediation of Material Weakness
The
identified material weaknesses are a result of the Company’s rapid growth
through acquisitions, the impact of the integration of accounting and financial
reporting functions for the Company’s franchise management business, and
turnover in the Company’s accounting and financial reporting staff. To remediate
these weaknesses, the Company has commenced efforts to replace certain
accounting and financial reporting personnel and hire additional personnel
with
greater technical expertise in US GAAP and greater experience with public
company financial reporting. The Company also plans to enhance and strengthen
its written accounting and reporting policies pertaining to accrued
liabilities and will
train employees with respect to the new policies.
(d)
Changes in Internal Control over Financial Reporting
During
the quarter ended December 31, 2007, 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,
except as follows:
We
completed the centralization of the accounting and financial reporting functions
of our franchising segment (other than the businesses we acquired in January
2008). Because the businesses that we acquired were privately held companies,
we
implemented additional controls to ensure that the operations and financial
reporting processes are compliant with the regulatory and accounting
requirements of a publicly traded company. Such additional controls included
processes related to the timing of revenue recognition. In the judgment of
management, the implementation of these controls constitute a change that
materially affected, or is likely to affect, our internal control over financial
reporting.
We
are
continuing to incorporate the accounting and financial reporting processes
of
the businesses we acquired during 2007 with and into our existing system of
internal control over financial reporting. Our internal control over financial
reporting likely will be materially affected in the future by implementing
appropriate internal control to account for these and other
acquisitions.
(e)
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
NexCen
Brands, Inc.:
We
have
audited NexCen Brands, Inc. and subsidiaries’ (the Company) internal control
over financial reporting as of December 31, 2007, 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, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting (Item 9A(b)).
Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists,
and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included 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.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. The following
material weaknesses have been identified and included in management's
assessment: the Company did not maintain a sufficient number of accounting
and
financial reporting personnel; the Company’s personnel did not have an
appropriate level of technical expertise in U.S. generally accepted accounting
principles (US GAAP); the design and implementation of the Company’s controls
over the completeness and accuracy of accrued liabilities
were not effective as of December 31, 2007.
The
Company acquired Bill Blass Holding, Co., Inc., MaggieMoo’s International, LLC,
Marble Slab Creamery, Inc., the Waverly, Gramercy, and Village Brands, Pretzel
Time Franchising, LLC and Pretzelmaker Franchising, LLC (“acquired entities”)
during 2007, and management excluded from its assessment of the effectiveness
of
the Company’s internal control over financial reporting as of December 31, 2007,
the acquired entities’ internal control over financial reporting associated with
total assets of $203.2 million (of which $193.1 million represents goodwill
and
intangible assets included within the scope of the assessment) and total
revenues of $25.6 million included in the consolidated financial statements
of
NexCen Brands, Inc. and subsidiaries as of and for the year ended December
31,
2007. Our audit of internal control over financial reporting of the Company
also
excluded an evaluation of the internal control over financial reporting of
the
acquired entities.
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, 2007 and 2006 and the related
consolidated statement of operations, stockholders’ equity and cash flows for
each of the years in the three-year period ended December 31, 2007. The material
weaknesses were considered in determining the nature, timing, and extent
of
audit tests applied in our audit of the 2007 consolidated financial statements,
and this report does not affect our report dated March 20, 2008, which expressed
an unqualified opinion on those consolidated financial statements.
In
our
opinion, because of the effect of the aforementioned material weaknesses
on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of December
31, 2007, based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
New
York,
New York
March
20,
2008
ITEM
9(B). OTHER INFORMATION
None.
PART
III
Item
10
is omitted by the Company in accordance with General Instruction G to Form
10-K.
The Company will disclose the information required under this item either by
(a)
incorporating the information by reference from the Company’s definitive proxy
statement or (b) filing an amendment to this Form 10-K which contains the
required information no later than 120 days after the end of the Company’s
fiscal year.
Item
11
is omitted by the Company in accordance with General Instruction G to Form
10-K.
The Company will disclose the information required under this item either by
(a)
incorporating the information by reference from the Company’s definitive proxy
statement or (b) filing an amendment to this Form 10-K which contains the
required information no later than 120 days after the end of the Company’s
fiscal year.
Item
12
is omitted by the Company in accordance with General Instruction G to Form
10-K.
The Company will disclose the information required under this item either by
(a)
incorporating the information by reference from the Company’s definitive proxy
statement or (b) filing an amendment to this Form 10-K which contains the
required information no later than 120 days after the end of the Company’s
fiscal year.
Item
13
is omitted by the Company in accordance with General Instruction G to Form
10-K.
The Company will disclose the information required under this item either by
(a)
incorporating the information by reference from the Company’s definitive proxy
statement or (b) filing an amendment to this Form 10-K which contains the
required information no later than 120 days after the end of the Company’s
fiscal year.
Item
14
is omitted by the Company in accordance with General Instruction G to Form
10-K.
The Company will disclose the information required under this item either by
(a)
incorporating the information by reference from the Company’s definitive proxy
statement or (b) filing an amendment to this Form 10-K which contains the
required information no later than 120 days after the end of the Company’s
fiscal year.
FINANCIAL
STATEMENTS AND SCHEDULES
The
following financial statements required by this item are included in the Report
beginning on page 35.
Report
of Independent Registered Public Accounting Firm
|
|
36
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
|
37
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006,
and 2005
|
|
38
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31,
2007, 2006 and 2005
|
|
39
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006
and 2005
|
|
40
|
Notes
to Consolidated Financial Statements
|
|
41
|
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)
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*2.2
|
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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)
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|
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|
*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)
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|
|
|
*2.4
|
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Agreement
and Plan of Merger dated February 14, 2007, by and among NexCen Brands,
Inc., MM Acquisition Sub, LLC, MaggieMoo’s International, LLC, Stuart
Olsten, Jonathan Jameson, and the Securityholders’ Representative.
(Designated as Exhibit 2.1 to the Form 8−K filed on February 21,
2007)
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*2.5
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Asset
Purchase Agreement dated February 14, 2007, by and among NexCen Brands,
Inc., NexCen Acquisition Corp., and Marble Slab Creamery, Inc. (Designated
as Exhibit 2.2 to the Form 8−K filed on February 21,
2007)
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*2.6
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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)
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*2.7
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Asset
Purchase Agreement dated August 7, 2007, by and among NexCen Asset
Acquisition, LLC, Pretzel Time Franchising, LLC, Pretzelmaker Franchising,
LLC and Mrs. Fields Famous Brands, LLC dated August 7, 2007. (Designated
as Exhibit 2.1 to the Form 8-K filed on August 9, 2007)
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*3.1
|
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Certificate
of Incorporation of NexCen Brands, Inc. (Designated as Exhibit 3.1
to the
Form 10-Q filed on August 5, 2005)
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*3.2
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Certificate
of Amendment of Certificate of Incorporation of NexCen Brands, Inc.
(Designated as Exhibit 3.1 to the Form 8-K filed on November 1,
2006)
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*3.3
|
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Amended
and Restated By-laws of NexCen Brands, Inc. (Designated as Exhibit
3.1 to
the Form 8-K filed on March 7, 2008)
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*4.1
|
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Form
of Common Stock Certificate. (Designated as Exhibit 4.3 to the Form
S-8
filed on December 1, 2006)
|
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|
*4.2
|
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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)
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*4.3
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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)
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*4.4
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Registration
Rights Agreement dated February 15, 2007, by and among NexCen Brands,
Inc., Haresh Tharani, Mahesh Tharani, Michael Groveman and Designer
Equity
Holding Company, LLC. (Designated as Exhibit 4.2 to the Form 8-K
filed on
February 21, 2007)
|
*4.5
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Registration
Rights Agreement dated February 28, 2007, by and among NexCen Brands,
Inc.
and the holders of the outstanding limited liability company interests
of
MaggieMoo’s International, LLC. (Designated as Exhibit 4.1 to the Form 8-K
filed on March 6, 2007)
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*4.6
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Registration
Rights Agreement dated August 7, 2007, by and among NexCen Brands,
Inc.,
Pretzelmaker Franchising, LLC, and Pretzel Time Franchising, LLC.
(Designated as Exhibit 4.1 to the Form 8−K filed on August 8,
2007)
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*+4.7
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Stock
Purchase Warrant dated June 5, 2006, issued to Robert D’Loren. (Designated
as Exhibit 10.2 to the Form 8−K filed on June 7, 2006)
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*4.8
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Stock
Purchase Warrant dated June 5, 2006, issued to Jefferies & Company,
Inc. (Designated as Exhibit 10.3 to the Form 8−K filed on June 7,
2006)
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*+4.9
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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)
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*4.10
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Common
Stock Warrant dated November 7, 2006, issued to Robert Corliss.
(Designated as Exhibit 4.1 to the Form 8−K filed on November 14,
2006)
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*4.11
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Common
Stock Warrant dated February 15, 2007, issued to Designer Equity
Holding
Company, LLC. (Designated as Exhibit 4.1 to the Form 8-K filed on
February
21, 2007)
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*4.12
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Common
Stock Warrant dated May 2, 2007, issued by NexCen Brands, Inc. to
Ellery
Homestyles, LLC. (Designated as Exhibit 4.1 to the Form 8-K filed
on May
8, 2007)
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*4.13
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Promissory
Note in the principal amount of $1,500,000 issued by NexCen Brands,
Inc.
to Marble Slab Creamery, Inc. (Designated as Exhibit 4.2 to the Form
8-K
filed on March 6, 2007)
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*4.14
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Promissory
Note in the principal amount of $3,500,000 issued by NexCen Brands,
Inc.
to Marble Slab Creamery, Inc. (Designated as Exhibit 4.3 to the Form
8-K
filed on March 6, 2007)
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*9.1
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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)
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*9.2
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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)
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*9.3
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Voting
Agreement dated February 15, 2007, by and between NexCen Brands,
Inc. and
Haresh Tharani, Mahesh Tharani, and Michael Groveman. (Designated
as
Exhibit 9.1 to the Form 8-K filed on February 21, 2007)
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*9.4
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Voting
Agreement dated February 28, 2007, by and among NexCen Brands, Inc.,
Stuart Olsten and Jonathan Jameson. (Designated as Exhibit 9.1 to
the Form
8-K filed on March 6, 2007)
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*9.5
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Voting
Agreement dated August 7, 2007, by and among NexCen Brands, Inc.,
Pretzelmaker Franchising, LLC, and Pretzel Time Franchising, LLC.
(Designated as Exhibit 9.1 to the Form 8−K filed on August 8,
2007)
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*+10.1
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2006
Management Bonus Plan. (Designated as Exhibit 10.4 to the Form 8−K filed
on June 7, 2006)
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*+10.2
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2006
Long-Term Equity Incentive Plan. (Designated as Exhibit 10.1 to the
Form
8−K filed on November 1, 2006)
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*+10.3
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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)
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*+10.4
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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)
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*+10.5
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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)
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*+10.6
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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)
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*+10.7
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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)
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*+10.8
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Employment
Agreement dated August 29, 2007, by and between NexCen Brands, Inc.
and
Sue Nam. (Designated as Exhibit 10.1 to the Form 10-Q filed on November
9,
2007)
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*10.9
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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)
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*10.10
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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)
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*10.11
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Engagement
Agreement dated July 2007, by and between NexCen Brands, Inc. and
Marvin
Traub Associates, Inc. (Designated as Exhibit 10.1 to the Form 10-Q
filed
on August 9, 2007)
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21.1
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Subsidiaries
of NexCen Brands, Inc.
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23.1
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Consent
of KPMG LLP
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31.1
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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
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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.
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**32.1
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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 of this Annual Report
on Form 10-K or as a separate disclosure document.
+
Management contract or compensatory plan or arrangement.
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 to be signed
on
its behalf by the undersigned, thereunto duly authorized on March 21,
2008.
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NEXCEN
BRANDS, INC.
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By:
|
/s/
Robert W. D’Loren
|
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ROBERT
W. D’LOREN
|
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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
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TITLE
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DATE
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/s/
David S. Oros
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Chairman
of the Board
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March
21, 2008.
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DAVID
S. OROS
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/s/
Robert W. D’Loren
|
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Director,
President, and
|
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March
21, 2008.
|
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ROBERT
W. D’LOREN
|
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Chief
Executive Officer
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/s/
David B. Meister
|
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Senior
Vice President and Chief Financial Officer, and
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March
21, 2008.
|
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DAVID
B. MEISTER
|
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Principal
Financial and Accounting Officer
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/s/
Jack Rovner
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Director
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March
21, 2008.
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JACK
ROVNER
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/s/
James T. Brady
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Director
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March
21, 2008.
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JAMES
T. BRADY
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/s/
George P. Stamas
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Director
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March
21, 2008.
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GEORGE
P. STAMAS
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/s/
Jack B. Dunn, IV
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Director
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March
21, 2008.
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JACK
B. DUNN, IV
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/s/
Edward J. Mathias
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Director
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March
21, 2008.
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EDWARD
J. MATHIAS
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/s/
Marvin Traub
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Director
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March
21, 2008.
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MARVIN
TRAUB
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/s/
Paul Caine
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Director
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March
21, 2008.
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PAUL
CAINE
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