Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10–K/A
AMENDMENT
NO. 2
ý ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007
|
OR
|
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
COMMISSION
FILE NUMBER: 000–27707
|
|
NEXCEN
BRANDS, INC.
|
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
|
DELAWARE
|
|
20-2783217
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(IRS
Employer
Identification
Number)
|
1330
Avenue of the Americas, New York, N.Y.
|
|
10019-5400
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(Registrant’s
telephone number, including area code): (212)
277–1100
|
|
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
|
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
|
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
Common
Stock, par value $.01
|
Pink
OTC Markets, Inc.
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes o No ý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No ý
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes o No ý
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No ý
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, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
|
o
|
|
|
Accelerated
filer
|
ý
|
Non-accelerated
filer
|
o
|
|
|
Smaller
reporting company
|
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No ý
The
aggregate market value of the voting stock held by nonaffiliates of the
registrant was $28,157,525 ($0.56 per share) as of June 30, 2008.
As of
June 30, 2009, 56,951,730 shares of the registrant’s common stock, $.01 par
value per share, were outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
None.
NEXCEN
BRANDS, INC.
AMENDMENT
NO. 2 TO ANNUAL REPORT ON FORM 10-K/A
FOR
THE YEAR ENDED DECEMBER 31, 2007
INDEX
Explanatory
Note
|
i
|
|
|
|
PART
I
|
|
|
|
|
Item
1
|
Business
|
1
|
Item
1A
|
Risk
Factors
|
13
|
Item
1B
|
Unresolved
Staff Comments
|
20
|
Item
2
|
Properties
|
20
|
Item
3
|
Legal
Proceedings
|
20
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
22
|
|
|
|
PART
II
|
|
|
|
|
Item
5
|
Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
23
|
Item
6
|
Selected
Financial Data
|
26
|
Item
7
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
31
|
Item
7A
|
Quantitative
and Qualitative Disclosures About Market Risk
|
42
|
Item
8
|
Financial
Statements and Supplementary Data
|
43
|
Item
9
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
92
|
Item
9A
|
Controls
and Procedures
|
92
|
Item
9B
|
Other
Information
|
96
|
|
|
PART
III
|
|
|
|
|
Item
10
|
Directors,
Executive Officers and Corporate Governance
|
97
|
Item
11
|
Executive
Compensation
|
104
|
Item
12
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
118
|
Item
13
|
Certain
Relationships and Related Transactions, and Director
Independence
|
119
|
Item
14
|
Principal
Accounting Fees and Services
|
120
|
|
|
|
PART
IV
|
|
|
|
|
Item
15
|
Exhibits,
Financial Statement Schedules
|
122
|
Explanatory
Note
The terms “NexCen,” “we,” “us,” “our,”
and the “Company” refer to NexCen Brands, Inc. and our subsidiaries, unless
otherwise indicated by context. We also use the term NexCen Brands to refer to
NexCen Brands, Inc. alone whenever a distinction between NexCen Brands, Inc. and
our subsidiaries is required or aids in the understanding of this
filing.
As previously disclosed in a Current
Report on Form 8-K filed on May 19, 2008, in preparing our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2008, we determined that certain
aspects of a January 2008 amendment to our bank credit facility (the “January
2008 Amendment”) were not adequately discussed in our prior public filings, including
the Current Report on Form 8-K filed on January 29, 2008 or the Annual Report on Form 10-K
for the fiscal year ended December 31, 2007, which was originally filed with the
Securities and Exchange Commission on March 21, 2008 (the “Original 10-K”) and
subsequently amended by Amendment No. 1 filed on April 29, 2008 (the “First
Amendment”). We further concluded
that the effect of the January 2008 Amendment on the Company’s financial condition and
liquidity raised substantial doubt about our ability to continue as a
going concern. The Audit Committee of our Board of Directors retained
independent counsel to conduct an investigation into these matters on behalf of
the Board of Directors. Simultaneously, management, with the supervision of the
Board of Directors, commenced a comprehensive review of our financial condition
and business strategy and began taking actions to restructure our business. The
results of the Audit Committee’s investigation, as well as changes to our senior
management team, were disclosed in a Current Report on Form 8-K filed on August
19, 2008. In Part I, Item 1 – Business, and in other
applicable sections of this Amendment No. 2 to the Annual Report on Form 10-K/A
(the “Second Amendment”), we have revised the disclosure that appeared in the
Original 10-K and the First Amendment to take account of the changes that we
have made to our business, our strategy, our senior management and our bank
credit facility since the end of 2007.
Adjustments
Related to the January 2008
Amendment
The January 2008 Amendment was
entered into and went into effect in 2008 and therefore did not affect the
amounts reported in the Consolidated Financial Statements as of December 31,
2007. Nonetheless, the Original 10-K contained discussions of the January 2008 Amendment in
the Notes to the Consolidated
Financial Statements related to “Long-Term Debt” and “Subsequent Events.”
Moreover, Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) in the Original 10-K
contained discussions regarding the Company’s financial condition and liquidity.
In this Second Amendment, we have revised the disclosure that appeared in these
portions of the Original 10-K to reflect our subsequent reconsideration of the
terms of the January 2008 Amendment and their effect on the Company’s financial
condition and liquidity as of the filing date of our Original 10-K, before the
credit facility was restructured on August 15, 2008 and further amended in late
2008 and 2009. (The August 15, 2008 restructuring and the subsequent amendments
are discussed in this Second Amendment in Part II, Item 7 – MD&A under the caption, “Financial
Condition,” and in Note 9 – Long-Term Debt (As Restated)
and Note 25 – Subsequent
Events
(As Restated) to the
Consolidated Financial Statements.) We have concluded that there was substantial
doubt about our ability to continue as a going concern as of December 31, 2007.
Our Consolidated Financial Statements, however, assume that we will continue as
a going concern, and do not contain any adjustments that might result if we were
unable to continue as a going concern.
We also have restated Part II,
Item 9A – Controls and
Procedures (As Restated), to revise the assessment contained in the
Original 10-K of the effectiveness of our disclosure controls and procedures and
internal control over financial reporting as of December 31, 2007 and to provide
a discussion of our remediation efforts to date. Our management and the
Audit Committee have concluded that the Company’s failure to adequately discuss
the January 2008 Amendment in our relevant Current Report on Form 8-K and the
Original 10-K was unintentional and that material weaknesses in our internal
controls contributed to this error. Some of these material weaknesses were
previously identified in our Original 10-K, and some have been identified
subsequently. As a result,
management has revised its assessment in Item 9A of the effectiveness of
the Company’s internal control over financial reporting as of December 31,
2007.
Other
Adjustments
Management
engaged in a comprehensive review of our Original 10-K and First Amendment in
order to ensure their accuracy and completeness and to be able to provide the
certifications provided herein. Accordingly, this Second Amendment also corrects
accounting and financial reporting errors, some of which were previously
identified but not considered to be material and others of which were identified
in the restatement process. The Company has concluded that the
corrections are not material either individually or in the aggregate. The
Company’s net loss per share is not impacted by the restatement.
The
effect of all restatement adjustments on our Consolidated Statement of
Operations for the year ended December 31, 2007 is as follows:
Increase
in net loss
|
$
|
(0.
|
2)
million or 4.7%
|
A summary
of adjustments to the Company’s Consolidated Statement of Operations for the
year ended December 31, 2007 is as follows:
Increase in total
revenues
|
$
|
0.
|
3
million
|
Increase in selling, general and
administrative expenses
|
$
|
(0.
|
3)
million
|
Increase in other operating
expenses
|
$
|
(0.
|
2)
million
|
Decrease in operating
income
|
$
|
(0.
|
2)
million
|
Increase in loss from continuing
operations
|
$
|
(0.
|
3)
million
|
Increase
in net loss
|
$
|
(0.
|
2)
million
|
The
effect of all restatement adjustments on our Consolidated Balance Sheet as of
December 31, 2007 is as follows:
Increase
in total assets
|
$
|
0.
|
4
million or 0.1%
|
Increase
in total liabilities
|
$
|
0.
|
3
million or 0.2%
|
Increase
in total equity
|
$
|
0.
|
1
million or 0.1%
|
The
effect of all restatement adjustments on our Consolidated Statement of Cash
Flows as of December 31, 2007 is as follows:
|
$
|
0.
|
7
million or 17.9%
|
|
$
|
0.
|
1
million or 0.0%
|
Decrease
in net cash provided by financing activities
|
$
|
0.
|
5
million or 0.4%
|
(See Note
2 to the Consolidated Financial Statements included in Part II, Item 8 of this
Second Amendment for further explanation of the restatement of NexCen’s
Consolidated Financial Statements.)
The
effect of all restatement adjustments on the Summary Compensation Table in Part
III, Item 11 – Executive
Compensation, is as follows:
Net
decrease in “All Other Compensation” paid to Robert
D’Loren
|
$ |
|
45,056
or
56%
|
Our
management and the Audit Committee have concluded that the errors in our
Consolidated Financial Statements and in the Summary Compensation Table were
unintentional. In conjunction with the Audit Committee, we have determined that
the errors in our Consolidated Financial Statements and in the Summary
Compensation Table were a result of material weaknesses in our internal control
over financial reporting, some of which were identified in our Original
10-K.
This Second Amendment also reflects the
restatement of related information contained in the MD&A in Part I, Item 7,
as well as the following footnotes within Part II, Item 8 – Financial Statements
and Supplementary Data: Note 2 – Restatement; Notes 3(d) – Cash and Cash Equivalents (As
Restated); Note 3(e) –
Trade Receivables and
Allowance for Doubtful Accounts (As Restated); Note 6
– Property and Equipment (As
Restated); Note 7 –
Goodwill, Trademarks
and Intangible Assets (As Restated); Note 8
– Accounts Payable and Accrued
Expenses (As Restated); Note 9 – Long-Term
Debt (As
Restated); Note 10 –
Income Taxes (As
Restated); Note 12 –
Stock Based
Compensation (As Restated); Note 14(a) and 14(d) – Commitments and Contingencies (As
Restated); Note 15 –
Discontinued Operations (As
Restated); Note 16 –
Quarterly Financial
Information (As Restated) (Unaudited); Note 19 – Acquisition of Bill Blass (As
Restated); Note 20 –
Acquisitions of Marble
Slab Creamery and MaggieMoo’s (As Restated); Note 21 – Acquisition of Waverly (As
Restated); Note 22 –
Acquisition of Pretzel
Time and Pretzelmaker (As Restated); Note 23 – Pro Forma Information Related To The
Acquisitions (As Restated) (Unaudited); Note 24 – Segment Reporting (As Restated)
and Note 25 – Subsequent Events (As
Restated).
Except as specifically set forth in this
Second Amendment, the Original 10-K and the First Amendment have not been
amended or updated to reflect events occurring after December 31, 2007.
Additionally, as required by Rule
12b-15 under the
Securities Act of 1934, as amended (“Exchange Act”), this Second Amendment also includes
the certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of
2002.
The
Company will file its delayed Annual Report on Form 10-K for the fiscal year
ended December 31, 2008 and its Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 2009 and June 30, 2009 as soon as
practicable. All future filings will include restated 2007
information affected by these restatements. No other previously filed
Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q are affected by
these restatements.
FORWARD-LOOKING
STATEMENTS
In this
Second Amendment, we make statements that are considered forward-looking
statements within the meaning of the Exchange Act. 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 Second
Amendment under the heading “Risk Factors,” as well as elsewhere in this Second
Amendment. 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
ITEM
1. BUSINESS
General
Development of Business
NexCen is a strategic brand management
company that currently owns and manages a portfolio of seven franchised brands. Five of our
brands (Great American Cookies, Marble Slab Creamery, MaggieMoo’s,
Pretzel Time and
Pretzelmaker) are in the
quick service restaurant (“QSR”) industry. The other two brands (The
Athlete’s Foot and Shoebox New York) are in the retail footwear and accessories
industry. All seven
franchised brands are managed by NexCen Franchise Management, Inc. (“NFM”), a
wholly owned subsidiary of NexCen Brands.
In 2008, we narrowed our business model
to focus only on our franchised brands. Previously, we had owned and licensed
the Bill Blass consumer products brand in
the apparel industry
and the Waverly consumer products brand in
the home goods
industry. We sold the Waverly brand on
October 3, 2008 and the Bill Blass brand on December 24, 2008.
We
commenced our brand management business in June 2006 when we acquired UCC
Capital Corporation (“UCC Capital”), an investment banking firm that provided
financial advisory services, particularly to companies involved in monetizing
intellectual property assets. The founder and president of UCC Capital, Robert
D’Loren, became our chief executive officer upon completion of the acquisition
in June 2006, and other members of his team also joined our
Company. In acquiring UCC Capital, our strategy was to begin building
a brand management business by acquiring and operating businesses that own
valuable brand assets and other intellectual property and that earn revenues
primarily from the franchising or licensing of their intellectual property.
UCC Capital had worked with companies whose value was represented primarily by
their intellectual property. As described below, our franchise businesses (and
the Waverly and Bill Blass businesses that we sold in 2008) earn revenues
primarily through the licensing of their valuable brands and related
intellectual property.
In
building our portfolio of brands and their related franchising and licensing
businesses, NexCen consummated nine acquisitions in fourteen months from
November 2006 through January 2008.
|
·
|
In
November 2006, we acquired our first retail franchised brand The Athlete’s
Foot by purchasing Athlete’s Foot Brands, LLC, along with an affiliated
company and certain related assets.
|
|
·
|
In
February 2007, we acquired the Bill Blass consumer products brand by
purchasing Bill Blass Holding Co., Inc. and two affiliated licensing
businesses.
|
|
·
|
Also
in February 2007, we acquired two QSR franchised brands, MaggieMoo’s and
Marble Slab Creamery, by purchasing MaggieMoo’s International, LLC and the
assets of Marble Slab Creamery, Inc.,
respectively.
|
|
·
|
In
May 2007, we acquired another consumer products brand, Waverly, by
acquiring all of the intellectual property and license contracts related
to that brand and the related Gramercy and Village
brands.
|
|
·
|
In
August 2007, we acquired two additional QSR franchised brands, Pretzel
Time and Pretzelmaker, by purchasing substantially all of the assets of
Pretzel Time Franchising, LLC and Pretzelmaker Franchising, LLC,
respectively.
|
|
·
|
In
January 2008, we acquired the trademarks and other intellectual property
of The Shoe Box, Inc. in a joint venture with third parties in order to
franchise the Shoebox’s high-fashion footwear concept domestically and
internationally under the Shoebox New York
brand.
|
|
·
|
In
January 2008, we acquired Great American Cookies, another QSR franchised
brand, by purchasing substantially all of the assets of Great American
Cookie Company Franchising, LLC. Along with the franchising business of
Great American Cookies, we also acquired substantially all of the assets
of Great American Manufacturing, LLC, including a manufacturing facility
that produces cookie dough for, and supplies other products to,
franchisees of the Great American Cookies
brand.
|
Financial Information about Operating
Segments
We restructured our Company during 2008
to operate in only one business segment, Franchising. Prior to this
restructuring, based on our holdings and our plans to acquire additional brands,
we previously provided financial information for fiscal year 2007 in
four segments: QSR Franchising,
Retail Franchising, Consumer Branded Products and Corporate. Consistent with our
prior reports for 2007, financial information for these four business segments
is provided in the MD&A in Part II, Item 7, and in the related Consolidated
Financial Statements and footnotes in Part II, Item 8.
Narrative
Description of Business
General
Through our seven franchised brands, the
Company franchises a system of retail stores and licenses branded products that
are distributed primarily through franchised retail stores. Additionally, the
Company manufactures and supplies cookie dough and other products to our Great
American Cookies franchisees. Our franchise network, across all of our brands,
consists of approximately 1,800 retail stores in approximately
40 countries. A listing of the states in which our franchisees
operated as of December 31, 2008 is set forth below.
Total Domestic Franchised
Stores: 1334
Location
|
|
Franchised
Stores
|
|
Location
|
|
Franchised
Stores
|
Alabama
|
|
39
|
|
Missouri
|
|
24
|
Alaska
|
|
1
|
|
Montana
|
|
4
|
Arizona
|
|
14
|
|
Nebraska
|
|
5
|
Arkansas
|
|
12
|
|
Nevada
|
|
12
|
California
|
|
60
|
|
New
Hampshire
|
|
3
|
Colorado
|
|
24
|
|
New Jersey
|
|
23
|
Connecticut
|
|
19
|
|
New Mexico
|
|
1
|
Delaware
|
|
4
|
|
New York
|
|
62
|
District of
Columbia
|
|
4
|
|
North
Carolina
|
|
65
|
Florida
|
|
101
|
|
North
Dakota
|
|
4
|
Georgia
|
|
81
|
|
Ohio
|
|
31
|
Hawaii
|
|
8
|
|
Oklahoma
|
|
22
|
Idaho
|
|
3
|
|
Oregon
|
|
4
|
Illinois
|
|
44
|
|
Pennsylvania
|
|
23
|
Indiana
|
|
20
|
|
Rhode
Island
|
|
0
|
Iowa
|
|
25
|
|
South
Carolina
|
|
46
|
Kansas
|
|
11
|
|
South
Dakota
|
|
4
|
Kentucky
|
|
14
|
|
Tennessee
|
|
61
|
Louisiana
|
|
47
|
|
Texas
|
|
235
|
Maine
|
|
1
|
|
Utah
|
|
16
|
Maryland
|
|
29
|
|
Vermont
|
|
0
|
Massachusetts
|
|
10
|
|
Virginia
|
|
41
|
Michigan
|
|
25
|
|
Washington
|
|
11
|
Minnesota
|
|
8
|
|
West
Virginia
|
|
8
|
Mississippi
|
|
11
|
|
Wisconsin
|
|
9
|
|
|
|
|
Wyoming
|
|
5
|
A listing of the jurisdictions outside the United
States in which our franchisees
operated as of December 31, 2008 is set forth below.
Total International Franchised
Stores: 492
Location
|
|
Franchised
Stores
|
|
Location
|
|
Franchised
Stores
|
Antigua
|
|
1
|
|
Palau
|
|
1
|
Aruba
|
|
1
|
|
Panama
|
|
1
|
Australia
|
|
126
|
|
Peru
|
|
3
|
Bahamas
|
|
2
|
|
Philippines
|
|
9
|
Bahrain
|
|
5
|
|
Poland
|
|
39
|
Canada
|
|
95
|
|
Portugal
|
|
11
|
China
|
|
3
|
|
Puerto Rico
|
|
3
|
Curacao
|
|
1
|
|
Qatar
|
|
1
|
Denmark
|
|
1
|
|
Russia
|
|
3
|
Ecuador
|
|
5
|
|
Saipan
|
|
2
|
Guam
|
|
3
|
|
Saudi
Arabia
|
|
11
|
Guatemala
|
|
1
|
|
South Korea
|
|
38
|
India
|
|
1
|
|
Spain
|
|
3
|
Indonesia
|
|
30
|
|
St.
Kitts/Nevis
|
|
1
|
Kuwait
|
|
12
|
|
Sweden
|
|
1
|
Lebanon
|
|
1
|
|
Trinidad &
Tobago
|
|
2
|
Mexico
|
|
39
|
|
United Arab
Emirates
|
|
18
|
New Zealand
|
|
10
|
|
Venezuela
|
|
5
|
Oman
|
|
1
|
|
Vietnam
|
|
1
|
Pakistan
|
|
1
|
|
|
|
|
In 2008, international franchise revenues represented approximately
7.1% of our total franchise revenues, of
which approximately 4.0% of
total franchise revenues or 56.3% of international franchise
revenues were generated
from stores located in Australia, Canada, Kuwait and the United Arab
Emirates. For additional information about our
geographic sources of revenue, see Note 24 – Segment Reporting (As Restated) to our Consolidated Financial
Statements.
The
Franchised Brands
The
following is a brief description of each of our franchised brands.
Great
American Cookies®
Great
American Cookies was founded in Atlanta, Georgia in 1977 on the strength of an
old family chocolate chip cookie recipe. For over 30 years, Great American
Cookies has maintained the heritage and integrity of its products by producing
original cookie dough exclusively from its plant in Atlanta. Great American
Cookies is also known for its signature Cookie Cakes, signature flavors and menu
of gourmet products baked fresh in store. Great American Cookies has
approximately 300 franchised stores in the United States, Canada, Guam, and
Bahrain.
MaggieMoo’s®
Each
MaggieMoo’s Ice Cream & Treatery features a menu of freshly made
super-premium ice creams, mix-ins, smoothies, sorbets and custom ice cream
cakes. MaggieMoo’s is known as the innovator of the ice cream cupcake and
consistently has been awarded blue ribbons by the National Ice Cream Retailers
Association for the quality of its ice creams. MaggieMoo’s is the franchisor of
approximately 170 stores located across the United States and in Puerto
Rico.
Marble Slab
Creamery®
Marble
Slab Creamery is a purveyor of super-premium hand-mixed ice cream. It was
founded in 1983 and was the innovator of the frozen slab technique. All Marble
Slab Creamery ice cream is made in small batches in franchise locations using
some of the finest ingredients from around the world and fresh dairy from local
farms. Marble Slab Creamery has an international presence with approximately 370
locations in the United States, Canada, United Kingdom, Bahrain, Kuwait,
Lebanon, and the United Arab Emirates.
Pretzelmaker® and Pretzel
Time®
Pretzelmaker
and Pretzel Time are franchised concepts that specialize in offering hand-rolled
soft pretzels, innovative soft pretzel products, dipping sauces and
beverages. The brands were founded independently of each other in
1991, united under common ownership in 1998, and beginning in 2009 will be
consolidated to become the new Pretzelmaker. Collectively, Pretzelmaker and
Pretzel Time are the second largest soft pretzel franchise in the U.S. by store
count with approximately 360 franchised stores located domestically and in
Canada, Guam, Panama and Guatemala.
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 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 franchised store
opened in 1978 in Adelaide, Australia. TAF now has approximately 560 franchised
stores in approximately 35 countries.
Shoebox New York®
The Shoebox New York concept had its
genesis from The Shoe Box, one of New York's premier women's multi-brand
retailers for high-fashion
footwear, handbags and
accessories. Established in 1954 and known for its vast product assortment and trend-setting styles
from top European and American designers, The Shoe Box garnered a dedicated
following of sophisticated women. We continue this tradition by offering
high-quality, high-fashion shoes and accessories under the Shoebox New York franchised brand in 9 stores in
the United States and 6
stores internationally in
Vietnam, South Korea and Kuwait.
Franchising
Operations
NexCen currently generates revenue from
franchising and other commercial arrangements related to our seven brands.
In connection with Great American Cookies, we also operate a cookie dough
manufacturing facility that manufactures and supplies cookie dough to our
franchisees and supplies ancillary products sold through our Great American
Cookies franchised stores. 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 Great American Cookies franchise system, we
rely on franchisees and other business partners or suppliers to produce,
warehouse and distribute branded products and incur the associated capital
costs.
Generally,
our franchise arrangements consist of the following types of agreements under
which franchisees are required to pay an initial franchise or development fee
and an on-going royalty on net sales. The royalty varies from 1% to 7%,
depending on the market and the brand. In addition, most domestic franchisees
must contribute to an advertising and marketing fund in amounts that range from
0.6-2.0% of net sales.
Domestic Development
Agreements. Our domestic franchise development agreements provide for the
development of specified number of stores for a specified brand within a defined
geographic territory. Generally, these agreements call for the development of
the stores over a specified period of time, with targeted opening dates for each
store. Our developers typically pay an initial development fee of up to $39,900
per store, depending on the franchise brand, size of territory and number of
total stores to be developed. These development fees typically are paid in part
when the agreement is executed and in part when each subsequent lease for a
store is executed or on a date specified on the development schedule, whichever
is sooner. The initial fee typically is non-refundable. Depending on the
market and the brand, limited sub-franchising rights also may be
granted.
International Development
Agreements. Our international franchise development agreements are
similar to our domestic franchise development agreements, although the
development time frames can be longer and the development fees generally are
higher. Depending on the market and the brand, limited sub-franchising rights
also may be granted.
Domestic Franchise
Agreements. Our domestic franchise agreements convey the right to operate
a specific store for a specified brand in a particular geographic territory.
Franchisees may enter into a domestic franchise agreement either singly or
pursuant to a domestic development agreement. If for a single store, our
franchisees typically pay an initial franchise fee of up to $39,900, depending
on the franchise brand, which typically is non-refundable and paid when the
agreement is executed. If pursuant to a domestic development agreement, our
franchisees typically pay a fee when a lease for a store is executed or on a
date specified on the development schedule, whichever is sooner. The fee
typically is non-refundable.
International Franchise
Agreements. The terms of our international franchise agreements are
substantially similar to those included in our domestic franchise agreements,
except that these agreements may be modified to reflect the multi-national
nature of the transaction and to comply with the requirements of applicable
local laws. Our current international franchise agreements generally are
pursuant to an international development agreement and provide for payment of a
nominal fee per store opened. In addition, the effective royalty rates may be
lower than those included in domestic franchise agreements due to the more
limited support services that we may provide to our international
franchisees.
Cobranding Agreements. We
offer a co-branding program with respect to our QSR brands whereby franchisees
are permitted to offer food products under two or more of our QSR brands. The
amount of initial franchise fees under a co-branding agreement depends on the
configuration of the co-branding arrangement (e.g., adjacent stores
offering different brands sharing a common storefront or a display case offering
a brand within a store primarily offering a different brand).
All of
our franchise agreements require that our franchisees operate stores in
accordance with our defined operating procedures, adhere to the menu or product
mix established by us, and meet applicable quality and service standards. We may
terminate the franchise rights of any franchisee that does not comply with these
standards and requirements.
In order
to provide on-going support to our franchise systems and our franchisees, in
2007, we built a centralized training, research, development and operations
center in Norcross, Georgia, which we call NexCen University. We believe NexCen
University provides our Company with the infrastructure to operate and grow our
current franchise systems and integrate additional franchise systems, all in a
cost efficient manner. The following graphic provides a summary of the services
that NexCen University provides across all of our franchise
systems:
NexCen
University allows us 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 believe that NexCen University also provides franchisees
with the tools, training and support needed to optimize their performance in the
marketplace.
Diversification
and Growth
With our
portfolio of franchised brands, we operate a business that is diversified in
several ways:
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across
multiple categories, ranging from footwear to baked goods to ice
cream;
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across
channels of distribution, ranging from mall-based stores to strip shopping
centers to stand-alone stores;
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across
consumer demand categories, ranging from premium to
mass-market;
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across
franchisees/licensees ranging from individuals to multi-unit developers to
a large publicly traded company;
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across
geographies (both within the United States and internationally);
and
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across
multiple demographic groups.
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We
believe that multi-category diversification may help reduce potential volatility
in financial results.
We
believe that our business also offers a multi-tiered growth opportunity. Our
businesses can grow both domestically and internationally through organic growth
and synergistically through cross-selling and co-branding across our multiple
franchise systems.
Our
Business Strategy
NexCen
faced a number of challenges in 2008, both internal and external. In May 2008,
we disclosed issues related to our debt structure that placed the future of the
Company in doubt. Simultaneously, the domestic and international economy and
financial markets underwent significant slowdown and volatility due to
uncertainties related to, among other factors, energy prices, availability of
credit, difficulties in the banking and financial services sectors, softness in
the housing market, severely diminished market liquidity, geopolitical
conflicts, falling consumer confidence and rising unemployment rates. Since May 2008, we have developed
a strategic plan to improve our business, in light of both the specific and
general economic/financial factors affecting our Company. Although our plan
takes into account the current and anticipated economic conditions, a longer or
more severe downturn in the economy than we have anticipated in our plan may
adversely impact our ability to successfully execute our strategy and may
adversely impact our business, financial condition and results of
operations. See Item 1A – Risk Factors, under the
captions “Risks Related to Our Financial Condition” and “Risks of Our Business,”
and Item 7 – MD&A
under the caption “Financial Condition.”
The first
phase of our two-phase strategic plan sought to address the immediate financial
and operational challenges that we faced in the following four ways: (1) divest
our non-core businesses; (2) enhance the Company’s cash flow, including by
reducing operating expenses; (3) improve our corporate infrastructure and
internal control environment; and (4) execute on initiatives to grow the
franchised brands. We believe we have made substantial progress on all of these
initiatives.
Sale of Consumer Products
Brands: Starting in late May 2008, we began a review of our strategic
alternatives. We then instituted an asset sale process in order to allow us to
exit the licensing business associated with our consumer products brands, Bill
Blass and Waverly. In the fourth quarter of 2008, we completed the sale of these
businesses, despite a difficult mergers and acquisition environment and in
advance of continuing deterioration of the market for home and apparel brands.
The sale of Waverly and Bill Blass has enabled us to streamline the Company to
focus solely on our seven franchised brands. Additionally, the divestitures
allowed us to reduce our outstanding indebtedness by approximately $33.4
million. We discuss the sale of these businesses in more detail in Note 25 –
Subsequent Events (As Restated) to our
Consolidated Financial Statements.
Improved Cash Flow:
As a
result of the comprehensive restructuring of our credit facility on August 15,
2008 and subsequent amendments in late 2008 and 2009, as well as actions taken
to restructure the Company and reduce its recurring operating expense structure,
we improved our cash flow and, in general, the Company’s financial condition. We
restructured our credit facility to defer to 2011 and thereafter much of our
principal repayment obligations and certain of our interest obligations. We also
have realized to date a meaningful reduction in interest expense in 2009 based
on (i) the Company’s reduced debt level following the sale of Waverly and Bill
Blass in late 2008 and further paid down debt in August 2009, (ii) the amendment
to the bank credit facility, as detailed below, that reduced the fixed interest
rate applicable to some of the Company’s debt, and (iii) the low variable rates
currently applicable to certain portions of our debt. We also restructured our
credit facility to provide us with monthly, rather than quarterly, cash
distributions from operating revenues that are remitted to certain “lockbox
accounts,” controlled by our lender. We use these distributions, which are net
of required debt service payments, to pay our operating expenses and for other
purposes permitted by the terms of our bank credit facility. Starting in May
2008, we also took immediate actions to reduce the Company’s recurring operating
expenses, including a headcount reduction of non-essential staff. As a result of
these changes, we have access to more cash more frequently to cover our reduced
operating expenses and to pay principal payments on our debt over a longer
period of time. We discuss our overall liquidity in Item 7 – MD&A under the
caption, “Financial Condition” and provide further detail regarding our bank
credit facility in Note 9 – Long-Term Debt (As Restated)
to our Consolidated Financial Statements.
Strengthening of Corporate
Infrastructure and Internal Control Environment: NexCen made substantial
changes to our management team and management structure; centralized and
clarified management responsibility; improved board communication and corporate
governance; made changes to and increased the number of dedicated full-time
accounting personnel; consolidated control and oversight of the Company’s legal
issues and outside counsel; and enhanced internal control policies and
procedures. We made these changes in our effort to improve the Company’s ability
to ensure compliance with our legal, financial, and regulatory requirements and
to satisfy our public reporting obligations on a timely basis. We discuss these
matters further in Item 9A - Controls and Procedures (As
Restated).
Initiatives to Grow the Franchised
Brands: In 2008, our franchisees, with our assistance, opened 97
franchised QSR and 67 franchised retail footwear and accessories
stores. Moreover, in line with our strategy to expand our franchised
stores internationally, we signed agreements for our respective brands to enter
new markets such as Bahrain, Canada, Guam, Kuwait, Lebanon, Mexico, Oman, South
Korea, St. Lucia and Vietnam. NexCen also continued a re-branding
campaign for TAF; established an online Cookie Cake ordering program at Great
American Cookies; introduced new packaging for pints and quarts at MaggieMoo’s;
launched a new in-store presentation with a new menu board program at Marble
Slab Creamery; gained the first significant national media coverage for
Pretzelmaker and Pretzel Time; and opened our first international Shoebox New
York franchised store.
In 2009,
we have moved to the second phase of our strategic plan which is to drive
revenue growth by (1) strengthening each of NexCen’s seven franchised brands;
(2) completing the integration of the franchised brands into the NFM operating
infrastructure; (3) enhancing profitability of NexCen franchisees; and (4)
leveraging NexCen University, our franchising platform. As part of this plan
and, in line with specific growth objectives for each of our franchised brands,
the Company commenced implementation of the following strategic
initiatives:
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Integrate
Pretzel Time and Pretzelmaker, thus creating the second largest pretzel
brand in the United States by market
share;
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Improve
inventory management for MaggieMoo’s franchisees to lower
operating costs;
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Execute
a rebranding and remodeling program for Marble Slab Creamery stores to
strengthen the Marble Slab Creamery
brand;
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Create
a new branding plan to update the look and feel of the Great American
Cookies brand;
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Institute
a new training platform for TAF franchisees;
and
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Further
expand the Shoebox New York brand domestically and internationally.
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With
these initiatives, the Company seeks to support our franchisees to grow our
franchised brands and ultimately to increase our revenues.
Changes to
Our Business
As discussed above, we commenced our
brand management business in June 2006, when we acquired UCC
Capital and Mr. D’Loren became the Company’s chief executive officer. Under Mr.
D’Loren’s leadership, we acquired nine brands and related licensing and
franchising businesses from November 2006 through January 2008.
We
financed these acquisitions with a combination of cash on hand, equity and
borrowings. All of the borrowings, with the exception of the borrowings used to
finance the acquisition of Great American Cookies, were pursuant to a series of note funding, security,
management and related agreements, originally entered into on March 12,
2007 (the “Original BTMUCC Credit Facility”) by BTMU Capital Corporation
(“BTMUCC”) and certain of its subsidiaries, on the one hand, and by NexCen Brands, NexCen Holding
Corp. (the “Issuer”), formerly known as NexCen Acquisition
Corp., a wholly-owned
subsidiary of NexCen Brands, and certain of our subsidiaries, on the other hand.
In
January 2008, in order to finance the acquisition of Great American Cookies, the
Company and BTMUCC entered into an amendment to the Original BTMUCC
Credit Facility (the “January 2008 Amendment”). Under the January 2008
Amendment, the Company pledged the Great American Cookies assets (including the
trademarks, franchise agreements, manufacturing facility and supply business
assets) as collateral in a legal, securitized structure that was similar to the
Original BTMUCC Credit Facility. The January 2008 Amendment allowed us to
borrow an additional $70 million and increased the maximum aggregate
amount of borrowings under the credit facility to $181 million. However, the
January 2008 Amendment increased debt service payments to BTMUCC, required a $30 million reduction in outstanding
principal amounts through prepayments out of excess cash flow
or proceeds of a refinancing by October 17,
2008, and generally
reduced the amount of cash flow available to the Company to cover operating
expenses. See Note 9 – Long-Term Debt (As Restated)
to the Consolidated Financial Statements for a more detailed discussion of the
January 2008 Amendment.
In May 2008, following the appointment of
a new chief financial officer and during the course of preparing our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2008, management conducted a
review of the Company’s prior public filings, including the disclosures related
to the January 2008 Amendment. We concluded that disclosures regarding the
accelerated-redemption feature of the January 2008 Amendment, as well as other
changes that reduced the amount of cash available to the Company for general
use, were not contained in the Original 10-K or the Current Report on Form 8-K
filed on January 29, 2008 in connection with the acquisition of Great American
Cookies. We further concluded that the January 2008 Amendment’s effect on
the Company’s financial condition and liquidity also raised substantial doubt
about our ability to continue as a going concern.
After
discussions with the Company’s independent registered public accounting firm,
management raised these matters with the Audit Committee of the Board of
Directors. On May 16, 2008, the Audit Committee retained Paul, Weiss, Rifkind,
Wharton & Garrison LLP as independent counsel to conduct an investigation
into the matters described above on the Board of Director’s behalf. To address
the financial aspects of the credit facility and NexCen’s general financial
condition, the Board of Directors formed a special Restructuring Committee,
comprised of David Oros (chairman of the board), George Stamas (a senior partner
of the law firm of Kirkland & Ellis, LLP) and James Brady (the Chairman of
the Audit Committee and a former managing partner of the Baltimore, Maryland
office of the accounting firm of Arthur Andersen LLP). The Restructuring
Committee was charged with overseeing, on behalf of the Board of Directors,
NexCen’s efforts to improve our financial condition and evaluate our
restructuring alternatives. (On May 12, 2009, the Restructuring Committee was
disbanded after the Board’s determination that this ad hoc committee was no
longer needed in light of the progress made to date by the Company in its
restructuring efforts and the reduced number of members on the
Board.)
We disclosed these matters in a
Current Report on Form 8-K filed on May 19, 2008. We also announced that our
2007 financial statements should no longer be relied upon and no reliance should
be placed upon KPMG LLP's audit report dated March 20, 2008 or its report dated
March 20, 2008 on the effectiveness of internal control over financial reporting
as of December 31, 2007, as contained in the Company's Original 10-K. In
addition, we announced that we would delay the filing of our Quarterly Report on
Form 10-Q for the quarter ended
March 31, 2008.
Class Action Litigation, Government
Investigation and NASDAQ Delisting
Following our May 19, 2008 disclosure of
the previously undisclosed terms of the January 2008 Amendment, the substantial
doubt about our ability to continue as a going concern, our inability to timely
file our periodic report and our expected restatement of our Original
10-K, four purported class action lawsuits, a
shareholder derivative lawsuit and a direct lawsuit were filed against the
Company and certain current and former officers and directors of the Company,
asserting various claims under the federal securities laws and certain state
statutory and common laws. These lawsuits are discussed below in Item 3 – Legal
Proceedings.
We voluntarily notified the
Enforcement Division of the Securities and Exchange Commission (“SEC”) of our
May 19, 2008 disclosure. The Company has been cooperating with the SEC and
voluntarily provided documents and testimony, as requested. In March
2009, we were notified that the SEC had issued an order commencing a formal
investigation on October 21, 2008.
As a
result of noncompliance with the listing requirements of The Nasdaq Stock Market (“NASDAQ”) including delays in filing our
periodic reports, our common stock
was suspended from trading on NASDAQ effective at the opening of trading on
January 13, 2009 and was delisted from NASDAQ on February 13, 2009. The
Company’s common stock began trading under the symbol NEXC.PK on the Pink OTC Markets, formerly known
as the Pink Sheets, starting on January 13, 2009.
Audit
Committee Investigation
The Audit
Committee directed independent counsel to review the events and circumstances
surrounding the January 2008 Amendment to the Original BTMUCC Credit Facility
and the public disclosures regarding that amendment.
Upon
completion of the independent counsel’s comprehensive inquiry, which included
numerous interviews and a review of relevant documents, the Audit Committee
reached the following key conclusions:
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Certain
members of the Company’s senior management (i) failed to advise the Board
of Directors of material changes in the terms of the financing of the
Great American Cookies acquisition after the Board of Directors had
approved terms previously presented to it and (ii) made serious errors
with respect to public disclosures regarding the terms of the financing
and their impact on the Company’s financial condition that were contained
in the Company’s Current Report on Form 8-K filed with the SEC on January
29, 2008 and in the Company’s Original 10-K, filed with the SEC on March
21, 2008.
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Independent
counsel did not find evidence that led it to conclude that there was an
intentional effort to keep information concerning the terms of the
financing from the Board, the Company’s independent auditing firm or the
public.
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The
Company disclosed these conclusions in our Current Report on Form 8-K filed on
August 19, 2008.
Changes to Company’s Business and
Restructuring of the Credit Facility
Starting
in May 2008, we engaged in a comprehensive review of our business strategy and
began taking actions to focus on our franchised brands, restructure our
corporate operations, reduce expenses and improve cash flow. We also suspended
all activities related to further acquisitions, although, as discussed below, in
late 2008, we completed a small acquisition of a Bill Blass licensee as part of
our process to sell the Bill Blass business.
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a.
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Reduction in
Non-Essential Staff and Reduction of Other Recurring
Expenses
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Starting
in May 2008, we took immediate actions to reduce the Company’s recurring
operating expenses, including a headcount reduction of non-essential staff. By
May 31, 2008, we reduced the staff in our New York corporate office by 8 persons
or 31% as compared to April 30, 2008. As of December 31, 2008, we further
reduced the total number of our employees throughout the Company by an
additional 21 persons, for a total reduction of 29 employees or 19% of total
staff, and reduced other recurring expenses, thereby significantly decreasing
our total monthly cash selling, general and administrative (SG&A) expenses
as compared to April 30, 2008.
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b.
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Restructuring of the
Credit Facility
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On August
15, 2008, we completed a comprehensive restructuring of the Original BTMUCC
Credit Facility and the January 2008 Amendment by entering into amended and
restated note funding, security, management and related agreements with BTMUCC
(the “Amended Credit Facility”). We subsequently completed five additional
amendments with BTMUCC on September 11, 2008, December 24, 2008, January 27,
2009, July 15, 2009 and August 6, 2009, respectively (the amendments together
with the Amended Credit Facility, the “Current Credit Facility”). The Current
Credit Facility replaced all of the agreements comprising both the Original
BTMUCC Credit Facility and the January 2008 Amendment. See Note 9 – Long-Term Debt (As Restated)
to the Consolidated Financial Statements for additional details regarding
the Current Credit Facility.
On
September 29, 2008, the Company executed a definitive agreement with Iconix
Brand Group, Inc. for the sale of our Waverly consumer products brand for $26.0
million. We closed the sale on October 3, 2008, and we used the proceeds from
the sale, after payment of transaction expenses, to pay off all $21.3 million of
the note associated with the Waverly business. We also used the remaining sales
proceeds to pay down $2.6 million of principal of the $26.3 million note
associated with the Bill Blass business. We acquired the Waverly business in May
2007 for approximately $34 million in cash. See Note 21 to our
Consolidated Financial Statements for additional details regarding the purchase
of the Waverly business and Note 25 for additional details regarding the sale of
the Waverly business.
In order
to have greater control of the Bill Blass consumer products brand and conduct a
more comprehensive sales process, the Company, through the wholly-owned
subsidiary NexCen Fixed Asset Company, LLC, purchased Bill Blass Ltd., LLC on
July 11, 2008. Bill Blass Ltd., LLC manufactured and distributed high-end,
ready-to-wear women’s clothing pursuant to a royalty–free trademark license with
our Bill Blass licensing business (“Bill Blass Couture”). We paid nominal
consideration, excluding amounts owed by Bill Blass, Ltd., LLC to the Company,
in this transaction.
On December 24, 2008, we completed the
sale of our Bill Blass licensing business to Peacock International Holdings, LLC
for $10.0 million pursuant to an asset purchase
agreement executed on the same day. We used the proceeds of the sale, net of
certain transaction costs, to pay down a portion of the remaining principal on
the note associated with the Bill Blass
licensing business. We acquired the Bill Blass business in February 2007
for approximately $55 million in cash and stock. Because neither Peacock International
Holdings, LLC nor any other party was interested in purchasing Bill Blass
Couture, Bill Blass, Ltd. LLC filed for liquidation under Chapter 7
of the United States Bankruptcy Code on December 31, 2008. See
Note 19 to our Consolidated Financial Statements for additional details
regarding the purchase of the Bill Blass licensing business and Note 25 for
additional details regarding the sale of the Bill Blass licensing
business.
Changes in Management, Management
Structure and Corporate Governance
The
executive team that was in place in 2007 is no longer with the Company, except
for Sue J. Nam, who joined the Company on September 24, 2007 and remains the
Company’s general counsel and secretary. Kenneth J. Hall, who joined the Company
on March 25, 2008 after the filing of the Original 10-K as our chief financial
officer, was appointed our chief executive officer on August 15, 2008. Mark E.
Stanko, who joined the Company on April 30, 2008 as the chief financial officer
of NFM, was appointed the Company’s chief financial officer on November 12,
2008, while retaining his role as chief financial officer of NFM.
The
Company also clarified lines of responsibility and altered our management
structure. The chief financial officer now has responsibility for all aspects of
financial, planning, analysis and reporting, whereas the Company previously had
dual lines of responsibility for financial management. The corporate finance
function now is more closely aligned with the corporate accounting function, so
that those departments collaborate, under the direction of the chief financial
officer, in the development and maintenance of financial models, cash flow
projections, operating budgets and various analyses of financial performance. We
also completed our transition to centralized control and oversight by our
general counsel of the Company’s material legal issues and the outside counsels
working on those issues. Prior to September 2007, the Company did not have a
general counsel, and oversight of legal issues and outside counsel relationships
was dispersed among various members of senior management and was not
consolidated under the general counsel until mid-2008.
In
addition, we undertook efforts to improve our corporate governance and
communications with our Board of Directors. We now have centralized
responsibility for Board communication. The chief executive officer, in
collaboration with the general counsel and the chief financial officer, is
responsible for keeping the Board and the appropriate committees of the Board
apprised of significant financial, legal, and operational developments and for
obtaining the requisite approvals. We believe that this centralized
responsibility for Board communication will ensure that the Board and the
committees of the Board are informed of material information in a comprehensive
and timely manner. We believe that the focusing of responsibility for Board
communication materially strengthens our corporate governance and improves
communications between management and our directors.
Improvements to Disclosure
Controls and Procedures and Internal Control over Financial
Reporting
Finally,
as discussed in greater detail in Item 9A – Controls and Procedures (As
Restated), the Company completed a review and assessment of our
disclosure controls and procedures and our internal control over financial
reporting. We made changes to internal controls, policies and procedures, and
continue to make changes, with the goals of (i) facilitating the Company’s early
identification, resolution and conclusions on accounting treatment of complex or
non-routine transactions and (ii) improving the Company’s ability to produce and
report timely and accurate financial information for internal purposes, for
third parties and for our public filings.
Impact of
the 2008
Events
The
Company has spent considerable time, effort and expense in dealing with the
events of 2008 and in making changes to its business to overcome the internal
and external challenges facing the Company. Although our operations and
financial condition have been materially and adversely affected, we believe that
as a result of our actions the Company’s core business remains intact and the
Company is better positioned for future stability and growth.
Competition
Our
brands are all subject to extensive competition by numerous domestic and foreign
brands, not only for end consumers but also for management, hourly personnel,
suitable real estate sites and qualified franchisees. Each is subject to
competitive risks and pressures within its specific market and distribution
channels, including price, quality and selection of merchandise, reputation,
store location, advertising and customer service. The retail footwear and retail
food industries, in which the Company competes, are often affected by changes in
consumer tastes; national, regional or local economic conditions; currency
fluctuations; demographic trends; traffic patterns; the type, number and
location of competing footwear and food retailers and products; and disposable
purchasing power. Our success is dependent on the image of our brands to
consumers and prospective franchisees and on our franchisees' ability to sell
products under our brands. Competing brands may have the backing of companies
with greater financial and operating stability and greater distribution,
marketing, capital and other resources than we or our franchisees
have.
Trademarks
The
Company owns numerous registered trademarks and service marks. The Company
believes that many of these marks, including The Athlete’s Foot®, Great American
Cookies®, MaggieMoo’s®, Marble Slab Creamery®, Pretzel Time®, Pretzelmaker®, and
Shoebox New York® are vital to our business. Our policy is to pursue
registration of our important marks whenever feasible and to oppose vigorously
any infringements of our marks. The use of these marks by franchisees and
licensees has been authorized in franchise and license agreements. Under current
law and with proper use, the Company’s rights in our marks generally can last
indefinitely.
Seasonality
The
business associated with certain of our brands is seasonal. However, the
seasonality of our brands is complementary, so that the Company’s operations do
not experience material seasonality on an aggregate basis. For example, average
sales of our mall-based QSR’s (Great American Cookies, Pretzel Time, and
Pretzelmaker) are higher during the winter months, especially in December,
whereas average sales of our ice cream brands (MaggieMoo’s and Marble Slab
Creamery) are lower during the winter months.
Research and Development
(“R&D”)
Since
January 2008, the Company has operated a R&D facility for our Great American
Cookies brand in our cookie dough manufacturing facility in Atlanta, Georgia. In
May 2009, independent suppliers provided equipment and other resources for the
opening of a new R&D facility in the same location where we can develop new
flavors, new offerings and new formulations of our food products across all of
our QSR brands. From time to time, independent suppliers also conduct or fund
research and development activities for the benefit of our QSR brands. In
addition, we conduct consumer research to determine our end-consumer’s
preferences, trends and opinions.
Supply and
Distribution
The
Company negotiates supply and distribution agreements with a select number of
food, beverage, footwear and accessories, paper, packaging, distribution and
equipment vendors for the purpose of providing the lowest prices for our
franchisees while ensuring compliance with certain quality standards. We have
begun aggregating the purchasing power of our franchisees across our multiple
brands to leverage scale to drive savings and effectiveness in the supply and
distribution function.
Government
Regulation
Many
states and the Federal Trade Commission, as well as certain foreign countries,
require franchisors to transmit disclosure statements to potential franchisees
before granting a franchise. Additionally, some states and certain foreign
countries require us to register our franchise offering documents before we may
offer a franchise. Due to the scope of our business and the complexity of
franchise regulations, we may encounter compliance issues from time to time.
Significant delays in registering our franchise offering documents may prevent
us from selling franchises in certain jurisdictions, which may have a material
adverse effect on our business.
Local,
state and federal governments have adopted laws and regulations that affect us
and our franchisees including, but not limited to, those relating to
advertising, franchising, health, safety, environment, zoning and employment.
The Company strives to comply with all applicable existing statutory and
administrative rules and cannot predict the effect on our operations from the
issuance of additional requirements in the future.
Employees
As of
December 31, 2007, we employed a total of 107 employees. The number of our
employees fluctuated over the course of 2008 due to acquisition and disposition
of businesses, workforce reduction, hiring of personnel in the accounting
department and natural attrition. As of December 31, 2008, we employed a total
of 123 persons. We believe that our relations with our employees are good. None
of our employees as of December 31, 2007 and December 31, 2008 are covered by a
collective bargaining agreement.
Historical
Operations
Until
late 2004, the Company 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 Capital 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 business. Our
stockholders also approved a change of our Company name from Aether Holdings,
Inc. to NexCen Brands. We sold our MBS investments in November 2006, and since
that time, we have focused entirely on our brand management
business.
Tax Loss Carry-Forwards and
Limits on Ownership of Our Common Stock
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. In addition, we had capital loss carry-forwards of approximately $188
million that expire between 2008 and 2011. If we have 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.
To help
guard against a change of ownership occurring under Section 382, 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. Our
Board of Directors has the right to waive the application of these restrictions
to any transfer.
To date,
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 also have
not generated sufficient taxable income or capital gains to enable us to realize
value, in the form of tax savings, from our accumulated tax loss carry-forwards,
and there are significant uncertainties as to our ability to realize any tax
savings in the future. In addition, 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 for which the use of our tax loss
carry-forwards may be limited. We discuss income taxes in Note 10 – Income Taxes (As Restated) to our
Consolidated Financial Statements. For a discussion on the risks associated with
our tax loss carry-forwards and the limits on ownership of our common stock,
please refer to Item 1A – Risk
Factors, under the caption “Risks of Our Business.”
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 also may 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 the following
sites for each of the Company's brands and operations: www.theathletesfoot.com,
www.greatamericancookies.com,
www.maggiemoos.com,
www.marbleslab.com,
www.pretzeltime.com,
www.pretzelmaker.com,
and www.shoeboxny.com. We
are providing the address of our internet websites solely for the information of
investors. We do not intend the internet addresses to be active links, and the
contents of these websites are not incorporated into, and do not constitute a
part of, this Second Amendment.
ITEM
1A. RISK FACTORS
You
should carefully consider the following risks along with the other information
contained in this Second Amendment. 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 Second Amendment, 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
Related to Our Financial Condition
Our
substantial indebtedness may severely limit cash flow available for our
operations, and we may not be able to service our debt or obtain additional
financing, if necessary.
We are
highly leveraged. As of December 31, 2008, we had approximately $142 million of
debt outstanding with BTMUCC. See Note 9 – Long-Term Debt (As Restated)
to our Consolidated Financial Statements for additional details. Under
our Current Credit Facility, substantially all revenues earned by the Company
are remitted to “lockbox accounts,” and the terms of our Current Credit Facility
limit the amount of cash flow from operations that may be distributed to NexCen
for operating expenses, capital expenditures and other general corporate
purposes. The Current Credit Facility also prohibits us from securing any
additional borrowings without the prior written consent of BTMUCC. Thus, our
indebtedness could, among other things:
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increase
our vulnerability to general adverse economic and industry
conditions;
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require
us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, thereby reducing the availability of our
cash flow to fund working capital, capital expenditures, research and
development efforts and other general corporate
purposes;
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limit
our flexibility in planning for, or reacting to, changes in our business
and the industries in which we
operate;
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place
us at a competitive disadvantage if any of our competitors have less debt;
and
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limit
our ability to borrow additional
funds.
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We are
subject to numerous prevailing economic conditions and to financial, business,
and other factors beyond our control. As a result, we cannot provide any
assurances that we will be able to generate sufficient cash flow to service our
interest and principal payment obligations under our outstanding debt, or that
cash flow, future borrowings or equity financing will be available for the
payment or refinancing of our debt. To the extent we are not successful in
repaying or renegotiating renewals of our borrowings or in arranging new
financing, our business, results of operations and financial condition will be
materially and adversely affected.
Doubt
about our ability to continue as a going concern could adversely impact our
business, financial condition and results of operations.
Our
future success depends in large part on the support of our current and future
investors, lenders, franchisees, business partners and employees. Uncertainties
with respect to our corporate viability and financial condition may discourage
investors from purchasing our stock, lenders from providing additional capital,
current and future franchisees from renewing existing agreements or executing
new agreements with us, vendors and service providers from dealing with us
without prepayment or other credit assurances, and/or current and future
employees from committing to us, any or all of which could adversely affect our
business, financial condition and results of operations.
Any
failure to meet our debt obligations would adversely affect our business and
financial condition.
Our
Current Credit Facility contains numerous affirmative and negative covenants,
including, among other things, restrictions on indebtedness, liens, fundamental
changes, asset sales, acquisitions, capital and other expenditures, common stock
repurchases, dividends and other payments affecting subsidiaries and sale and
leaseback transactions. The Company’s failure to comply with the financial and
other restrictive covenants relating to our indebtedness could result in a
default under the indebtedness, which could then trigger among other things the
lender’s right to accelerate principal payment obligations, foreclose on
virtually all of the assets of the Company and take control of all of the
Company’s cash flow from operations. These restrictions also may 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.
We
are vulnerable to interest rate risk with respect to a substantial portion of
our debt.
As of
December 31, 2008, approximately 61% of our current aggregate debt fluctuates
with the 30-day London Interbank Offering Rate ("LIBOR"). Any
increase in LIBOR will increase our interest expense and could negatively impact
our business, liquidity and financial condition. See Item 7A – Quantitative and Qualitative
Disclosure about Market Risk, under the caption “Interest Rate
Risk.”
We
may need additional funds in the future to continue and/or improve our
operations, but we face uncertainties with respect to access to working capital
that could materially adversely impact our business, financial condition and
results of operations.
We
anticipate that cash generated from operations will provide us with sufficient
liquidity to meet the expenses related to ordinary course operations, including
our debt service obligations, for at least the next twelve months. Nonetheless,
market and economic conditions may worsen and negatively impact our franchisees
and our ability to sell new franchises. Accordingly, there can be no assurance
that our current cash on hand and cash from operations after debt service will
continue to satisfy our working capital requirements in the future. We may
require future working capital in order to operate, implement our revised
business plan and/or further improve operations. We have no committed sources of
working capital and do not know whether additional financing will be available
when needed, or, if available, that the terms will be favorable. Our Current
Credit Facility prohibits us from securing any additional borrowings without the
prior written consent of our lender and limits the amount of cash flow from
operations that may be used for operating expenses, capital expenditures, and
other general corporate purposes. The failure to satisfy our working capital
requirements will adversely affect our business, financial condition and results
of operations.
We may
seek additional funding through strategic alliances or private or public sales
of our securities. There can be no assurance, however, that we can obtain
additional funding on reasonable terms, or at all, and such funding, if
available, may significantly dilute existing shareholders and trigger an
ownership change that would limit our ability to utilize our tax loss
carry-forwards assuming we have taxable income. If we cannot obtain adequate
funds, we may need to significantly curtail our expenses, which may adversely
affect our business, financial condition and results of operations.
Our
ability to access capital markets may be constrained.
We failed
to timely file with the SEC our Quarterly Reports on Form 10-Q for periods ended
March 31, 2008, June 30, 2008, September 30, 2008, our Annual Report
on Form 10-K for the fiscal year ended December 31, 2008, and our Quarterly
Report on Form 10-Q for the period ended March 31, 2009. Until we are timely in
our filings for a period of 12 months, we will be precluded from registering any
securities with the SEC on Form S-3, the most simplified registration form used
by the SEC. In addition, we are limited under our Current Credit Facility from
raising equity in both private and public markets unless certain conditions are
met to protect our lender’s interest. As a result, our ability to access the
capital markets may be constrained, which may adversely affect our
liquidity.
Risks
Related to Our Pending Litigation and Governmental Investigations
Any
adverse outcome of the investigation being conducted by the SEC could adversely
affect our business, financial condition, results of operations and cash
flows.
In March
2009, the Company received notice that a formal investigation had been commenced
by the SEC in October 2008. We cannot predict the outcome of the investigation.
The legal costs of such investigation and any negative outcome from the
investigation could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Several
lawsuits have been filed against us involving our past public disclosures, and
the outcome of these lawsuits may have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Several
purported class action lawsuits, a shareholder derivative lawsuit and a direct
lawsuit have been filed against us, as well as certain of our former officers
and current and former directors, relating to, among other things, allegations
of violations of the securities laws. We cannot predict the outcome of these
lawsuits. Substantial damages or other monetary remedies assessed against us
could have a material adverse effect on our business, financial condition,
results of operations and cash flows, and any requirement to issue additional
stock could be dilutive. See Item 3 – Legal Proceedings, for a
discussion of these lawsuits.
We
may not have sufficient insurance to cover our liability in our pending
litigation claims and future claims due to coverage limits, as a result of
insurance carriers seeking to deny coverage of such claims, or because the
insurance carrier is unable to provide coverage, which in any case could have a
material adverse effect on our business and financial
condition.
We
maintain third party insurance coverage against various liability risks,
including securities and shareholder derivative claims, as well as other claims
that form the basis of litigation matters pending against us. While we believe
these insurance arrangements are an effective way to ensure against liability
risks, the potential liabilities associated with the litigation matters pending
against us, or that could arise in the future, could exceed the coverage
provided by such arrangements. Our insurance carriers also may seek to rescind
or deny coverage with respect to pending or future actions. In addition, our
primary insurance carrier for securities and shareholder derivative claims is
American Insurance Group, Inc., which has faced significant financial
difficulties. If we do not have sufficient coverage under our policies, or if
the insurance companies are successful in rescinding or denying coverage to us,
or if our insurance carrier is unable to provide coverage, our business,
financial condition, results of operations and cash flows would be materially
and adversely affected.
Our
potential indemnification obligations and limitations on our director and
officer liability insurance could have a material adverse effect on our
business, results of operations and financial condition.
Certain
of our present and former directors, officers and employees are the subject of
lawsuits. Under Delaware law, our bylaws and other contractual arrangements, we
may have an obligation to indemnify our current and former directors, officers
and employees in relation to completed investigations or pending and/or future
investigations and actions. Indemnification payments that we make may
be material and, in such event, would have a negative impact on our results of
operations and financial condition to the extent insurance does not cover our
costs. The insurance carriers that provide our directors’ and officers’
liability policies may seek to rescind or deny coverage with respect to pending
and future investigations and actions, or we may not have sufficient coverage
under such policies. If the insurance companies are successful in rescinding or
denying coverage to us and/or some of our current and former directors, officers
and employees, or we do not have sufficient coverage under our policies, our
business, financial condition, results of operations and cash flows may be
materially adversely affected.
The
uncertainty of the outcome of the pending litigation and the SEC investigation
may have a material adverse effect on our business.
The
uncertainty and risks of the pending litigation and the SEC investigation may
cause our stock price to be more volatile or lower than it otherwise would be
and may affect our ability to retain and/or attract franchisees, business
partners, investors and/or employees.
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 business through acquisitions. Our acquisitions may
not deliver the benefits we anticipated. Excessive expenses may result if we do
not successfully integrate the acquired businesses, or if the costs and
management resources we expend in connection with the integrations exceed our
expectations. We expect that our previous acquisitions will have a continuing,
significant impact on our business, financial condition and operating results.
The value of some of the businesses that we acquired are less than the amount we
paid, 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 acquisitions
include, among others:
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overpaying
for acquired assets or businesses;
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being
unable to license, market or otherwise exploit the assets that we acquired
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 grew and became 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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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 acquired, which differ depending on the
brand and its associated business and market, including those related to
entering new lines of business or markets in which we have little or no
prior experience.
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Our
business strategy to focus on our franchised brands may not be
successful.
The
Company’s efforts to focus on the franchise business as our core business may
not be successful and may not improve the performance of the Company. We may not
be successful in effectively executing our strategy or in generally operating or
expanding our brands or integrating them into an efficient overall business
strategy. We may not be able to retain existing or attract new investors,
franchisees, business partners and employees.
We
may fail to reach our sales and expense projections, which may negatively impact
our business, results of operations and financial condition.
We
establish sales and expense projections each fiscal year based on a strategy of
new market development, further penetration of existing markets and tight
control over operating expenses against a backdrop of current and anticipated
economic conditions. In addition to driving our financial results, these sales
and expense projections are provided to our lender, and our progress in meeting
projections on a monthly and quarterly basis affect our ability to meet debt and
covenant obligations and negotiate any waivers and/or amendments we may need
under our Current Credit Facility. Our ability to meet our sales and expense
projections is dependent on our ability to locate and attract new franchisees
and area developers; maintain and enhance our brands; maintain satisfactory
relations with our franchisees; monitor and audit the reports and payments
received from franchisees; maintain or increase same store sales in existing
markets; achieve new store openings and control expenses – all of which are
dependent on factors both within and outside our control. Our failure to reach
our sales and expense goals, which may be exacerbated by current volatile
economic conditions, may negatively impact our business, financial condition,
results of operation and cash flow.
Our
business depends on market acceptance of our brands in highly competitive
industries.
Continued
market acceptance of our franchised brands is critical to our future success and
subject to great uncertainty. The retail footwear and retail food industries in
which we compete are extremely competitive, both in the United States and
overseas. Accordingly, we and our current and future franchisees, licensees and
other business partners face and will face intense and substantial competition
with respect to marketing and expanding products under our franchised brands. As
a result, we may not be able to attract franchisees, licensees, and other
business partners on favorable terms or at all. In addition, franchisees,
licensees and other third parties with whom we deal may not be successful in
selling products 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, selection of
merchandise, reputation, name recognition, store location, advertising and
customer service. The retail footwear and retail food industries are often
affected by changes in consumer tastes; national, regional or local economic
conditions; currency fluctuations; demographic trends; traffic patterns; the
type, number and location of competing footwear and food retailers and products;
and disposable purchasing power. Competing brands may have the
backing of companies with greater financial and operational stability and
greater distribution, marketing, capital and other resources than we or our
franchisees and other business partners have. 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 franchisees, licensees and other business partners. This could
have a negative impact on our business, financial condition, and results of
operations.
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 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 the current recession in the general economy in the
United States or the general decline in domestic consumer spending may not be
wholly mitigated by our business outside the United States, especially as the
economic downturn has become more global in nature.
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. As a result of deteriorating economic conditions, 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
franchising revenue dependent on sales volume.
Our
operating results are closely tied to the success of our franchisees, over which
we have limited control.
As a
result of our franchising programs, our operating results are dependent upon the
sales volumes and viability of our franchisees. Any significant inability of our
franchisees to operate successfully could adversely affect our operating
results, and the quality of franchised operations may be impacted by factors
that are not in our control. We provide training and support to our franchisees,
but do not exercise day-to-day control over them. 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. In addition, franchisees may not be able to find suitable sites on
which to develop stores, negotiate acceptable leases for the sites, obtain the
necessary permits or government approvals or meet construction schedules. Any of
these problems could negatively impact our business, could slow our planned
growth and negatively impact our business, results of operations and financial
condition.
The current disruptions in the
availability of financing for current and prospective franchisees may adversely
affect our business, results of operations and financial
condition.
As a
result of steep declines in the capital markets and the severe limits on credit
availability, current and prospective franchisees may not have access to the
financial or management resources that they need to open or continue operating
the units contemplated by franchise or development agreements. Our franchisees
generally depend upon financing from banks or other financial institutions in
order to construct and open new units. Especially in this tight credit
environment, financing has been difficult to obtain for some of our current and
prospective franchisees. The continued difficulties with franchisee financing
could reduce our store count, franchise fee revenues and royalty revenues, slow
our planned growth, and negatively impact our business, results of operations
and financial condition.
We depend on our franchisees to
provide timely and accurate information about their sales and operations, which
we rely upon to effectively manage the franchised
brands.
Franchisees
are contractually obligated to provide timely and accurate information regarding
their sales and operations, and we rely on this information to collect royalties
and manage the franchised brands. Most of franchisees are required to report on
a weekly basis. However, the franchise agreements for our TAF brand require
reporting on a monthly or quarterly, versus weekly, basis. This delay in
reporting reduces our visibility into the results of operations for the TAF
brand. In addition, a significant number of our franchisees are not consistently
compliant with their reporting obligations. Our inability to collect timely and
accurate information from our franchisees may adversely affect our business and
results of operation.
Significant delays in registering our
franchise offering documents may adversely affect our business, results of
operations and financial condition.
Many
states and the Federal Trade Commission, as well as certain foreign countries,
require franchisors to transmit disclosure statements to potential franchisees
before granting a franchise. Additionally, some states and certain foreign
countries require us to register our franchise offering documents before we may
offer a franchise. Due to the scope of our business and the complexity of
franchise regulations, we may encounter compliance issues from time to time.
Significant delays in registering our franchise offering documents may prevent
us from selling franchises in certain jurisdictions, which may have a material
adverse effect on our business, results of operations and financial
condition.
We operate a global business that
exposes us to additional risks that may adversely affect our business, results
of operations and financial condition.
Our
franchisees operate in approximately 40 countries. As a result, we are subject
to risks associated with doing business globally. We intend to continue to
pursue growth opportunities for our franchised brands outside the United States,
which could expose us to greater risks. The risks associated with our franchise
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;
|
|
·
|
Differences
from one country to the next in legal protections applicable to
intellectual property assets, including trademarks and similar assets,
enforcement of such protections and remedies available for
infringements;
|
|
·
|
Fluctuations
in foreign currency exchange rates and interest rates;
and
|
|
·
|
Adverse
consequences from changes in tax
laws.
|
The
effects of these risks, individually or in the aggregate, could have a material
adverse impact on our business, results of operations and financial
condition.
We
may not be able to adequately protect our intellectual property, which could
harm the value of our brands and adversely affect our business.
We
believe that our trademarks and other intellectual property rights are vital to
our success, the success of our brands and our competitive position.
Accordingly, we devote substantial resources to the development and protection
of our trademarks and other intellectual property rights. However, the actions
taken by us may be inadequate to prevent infringement or other unauthorized use
of our intellectual property by others, which may thereby dilute our brands in
the marketplace and/or diminish the value of our proprietary rights. We also may
be unable to prevent others from claiming infringement or other unauthorized use
of their trademarks and intellectual property rights by us. Our rights to our
trademarks may in some cases be subject to the common law or statutory rights of
any person who filed an application and/or began using the trademark (or
confusingly similar mark) prior to the date of our application and/or our first
use of such trademarks in the relevant territory. We cannot provide assurances
that third parties will not assert claims against our trademarks and other
intellectual property rights or that we will be able to successfully resolve
such claims, which could result in our inability to use certain trademarks or
other intellectual property in certain jurisdictions or in connection with
certain goods or services. Future actions by third parties, including
franchisees or licensees, may diminish the strength of our trademarks or other
intellectual property rights, injure the goodwill associated with our business
and decrease our competitive strength and performance. We also could incur
substantial costs to defend or pursue legal actions relating to the use of our
trademarks and other intellectual rights, which could have a material adverse
effect on our business, results of operations or financial
condition.
We
may be required to recognize additional impairment charges for goodwill,
trademarks and other intangible assets with indefinite or long
lives.
As a
result of our acquisition strategy, we recorded a material amount of trademark,
goodwill and other intangible assets with indefinite or long lives on our
balance sheet. We assess these assets as and when required by U.S. generally
accepted accounting principles (GAAP) to determine whether they are impaired.
Based on our reviews in fiscal years 2007 and 2008, we recorded no impairments
in 2007, but recorded impairments totaling approximately $242 million in 2008
with respect to our acquired assets. If market conditions continue to
deteriorate or if operating results decline unexpectedly, we may be required to
record additional impairment charges. Additional impairment charges
would reduce our reported earnings for the periods in which they are recorded.
Those reductions could be material and, in such event, would adversely affect
our financial results.
We
determined that we had material weaknesses in disclosure controls and procedures
and internal control over financial reporting. Any future material
weaknesses could adversely affect our business, our financial condition and our
ability to carry out our strategic business plan.
As
discussed in Item 9A – Controls and Procedures (As
Restated), we concluded that, as of December 31, 2007, our disclosure
controls and procedures and internal control over financial reporting were not
effective. We believe the deficiencies continued into 2008. We made
substantial changes to our management team and management structure; improved
board communication and corporate governance; made changes to and increased the
number of dedicated full-time accounting personnel; and enhanced internal
control policies and procedures. Nonetheless, if we are unsuccessful in our
effort to remedy the weaknesses in our financial reporting mechanisms and
internal controls and to maintain effective corporate governance practices, our
business, our financial condition, our ability to carry out our strategic
business plan, our ability to report our financial condition and results of
operations accurately in a timely manner, and our ability to retain the trust of
our franchisees, lender, business partners, investors, employees and
shareholders could be adversely affected.
The
time, effort and expense related to internal and external investigations,
litigation, the restatement of our Original 10-K, the completion of our other
delinquent SEC filings, and the development and implementation of improved
internal controls and procedures, may have an adverse effect on our
business.
Our
management team has spent considerable time, effort and expense in dealing with
the Audit Committee investigation, pending litigation, the SEC’s investigation,
completing the restatement of our Original 10-K and other delinquent SEC filings
and in developing and implementing accounting policies and procedures,
disclosure controls and procedures, and corporate governance policies and
procedures. This has prevented management from devoting its full attention to
our business and many of these matters may continue to distract management’s
attention in the future. The significant time, effort and expense spent have
adversely affected our operations and our financial condition, and may continue
to do so in the future.
Current
and prospective investors, franchisees, business partners, and employees may
react adversely to the restatement of our Original 10-K and our inability to
file in a timely manner all of our SEC filings.
The
restatement of our Original 10-K and our inability to file on a timely basis all
of our SEC filings has caused negative publicity about us, has resulted in the
delisting of our common stock from NASDAQ, and has, and may continue to have, a
negative impact on the market price of our common stock. In addition, the
restatement of our Original 10-K and any future delays in our SEC filings could
cause current and future investors, franchisees, business partners and employees
to lose confidence in our Company, which may affect their willingness to remain
in current relationships or enter into new relationship with us.
Our
stock trades on the over-the-counter “Pink Sheets” market, and our stock price
may be volatile.
On
January 13, 2009, as a result of noncompliance with NASDAQ listing requirements,
our common stock was suspended from trading from NASDAQ. Immediately thereafter,
our stock began trading under the symbol NEXC.PK on the Pink OTC Markets,
formerly known as the Pink Sheets. Although we plan to apply for relisting of
our stock on NASDAQ as soon as we are in compliance with the listing
requirements, we may not be successful in that effort. Our stock price has been
volatile in the past and may continue to be volatile for the foreseeable
future.
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.
Under
transfer restrictions that have been applicable to our common stock since 2005,
acquisitions of 5% or more of our stock is not permitted 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.
Our
ability to realize value from our tax loss carry-forwards is subject to
significant uncertainty.
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. However, our
ability to realize value from our tax loss carry-forwards is subject to
significant uncertainty.
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 amount of our net operating loss
carry-forwards and capital loss carry-forwards also 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.
If we
have 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 the date of this Second
Amendment, 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 stock will help guard against an
ownership change from inadvertently occurring under Section 382 and the related
rules, we cannot guarantee that these restrictions will prevent a change of
ownership from occurring 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.
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 comprised of: (1) our principal executive office
located in New York, New York, totaling 10,250 square feet; (2) a showroom for
our Waverly licensing business located in New York totaling 7,150 square feet;
(3) a showroom for our Bill Blass licensing business located in New York
totaling 11,700 square feet; and (4) a centralized facility for our franchised
brands located in Norcross, Georgia totaling approximately 20,400 square
feet.
As of
December 31, 2007, we were also obligated under a lease for space in
Marlborough, Massachusetts that we used for a communications business that we
sold in 2005. We sublet this office space to BIO-Key International, Inc., the
company that purchased the business (“BIO-Key”), and the lease expired by its
terms on August 31, 2008. In addition, in February 2007, we assumed leases for
office space in connection with our acquisitions of MaggieMoo’s and Marble Slab
Creamery. We negotiated a release from the MaggieMoo’s lease for a one-time
payment of $330,000 which was made in January 2008. We sublet the Marble Slab
Creamery office in Houston, Texas to a third party through the lease expiration
in April 2009.
As of
December 31, 2007, we did not own or lease property used by our franchisees, but
in connection with certain acquisitions we are obligated under leases and
guarantees for certain franchise location leases.
In
January 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 the January 2008 Amendment to the Original BTMUCC Credit Facility and
consequently is subject to BTMUCC’s security interest.
Notwithstanding
the sales of Waverly and Bill Blass in late 2008, we remain obligated on the
lease for the Waverly showroom, but sublet the space to third parties through
the lease expiration on February 27, 2019. We also remained obligated on a lease
for the Bill Blass showroom which expires in January 2014, but, on June 11,
2009, we assigned to a third party that lease for a one-time payment of
approximately $230,000. We assumed the lease for office space in New York
totaling 4,950 square feet in connection with our acquisition of the Bill Blass
Couture business on July 11, 2008. That lease expired as of December 31,
2008.
ITEM
3. LEGAL PROCEEDINGS
Securities Class
Action. A total of four putative securities class actions have been filed
in the United States District Court for Southern District of New York against
NexCen Brands and certain of our former officers and current director for
alleged violations of the federal securities laws. These actions are captioned:
Mark Gray v. NexCen Brands,
Inc., David S. Oros, Robert W. D’Loren & David Meister, No.
08-CV-4906 (filed on May 28, 2008); Ghiath Hammoud v. NexCen Brands,
Inc., Robert W. D’Loren, & David B. Meister, No. 08-CV-5063 (filed on
June 3, 2008); Ronald Doty v.
NexCen Brands, Inc., David S. Oros, Robert W. D’Loren & David
Meister, No. 08-CV-5172 (filed on June 5, 2008); and Frank B. Falkenstein v. NexCen
Brands, Inc., David S. Oros, Robert W. D’Loren, David Meister, No.
08-CV-6126 (filed on July 3, 2008).
Although
the formulations of the allegations differ slightly, plaintiffs allege that
defendants violated federal securities laws by misleading investors in the
Company’s public filings and statements. The complaints assert claims under
Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and
also assert that the individual defendants are liable as controlling persons
under Section 20(a) of the Exchange Act. Plaintiffs seek damages and
attorneys’ fees and costs.
On March
5, 2009, the court consolidated the actions and appointed Vincent Granatelli as
lead plaintiff and Cohen, Milstein, Hausfeld & Toll, P.L.L.C. as lead
counsel. Under the Stipulation and Order entered by the Court on June 19, 2009,
the plaintiff shall file an Amended Consolidated Complaint on or
before August 24, 2009 and the Company shall file a responsive pleading on
or before October 8, 2009, with any opposition and reply briefing due
on November 23, 2009 and December 23, 2009,
respectively.
Shareholder Derivative
Action. A federal shareholder derivative action premised on essentially
the same factual assertions as the federal securities actions also has been
filed in the United States District Court for Southern District of New York
against the directors or former directors of NexCen. This action is captioned:
Soheila Rahbari v. David Oros,
Robert W. D’Loren, James T. Brady, Paul Caine, Jack B. Dunn IV, Edward J.
Mathias, Jack Rovner, George Stamas & Marvin Traub, No. 08-CV-5843
(filed on June 27, 2008). In this action, plaintiff alleges that NexCen’s Board
of Directors breached its fiduciary duties in a variety of ways, mismanaged and
abused its control of the Company, wasted corporate assets, and unjustly
enriched itself by engaging in insider sales with the benefit of material
non-public information that was not shared with shareholders. Plaintiff further
contends that she was not required to make a demand on the Board of Directors
prior to bringing suit because such a demand would have been futile, due to the
board members’ alleged lack of independence and incapability of exercising
disinterested judgment on behalf of the shareholders. Plaintiff seeks damages,
restitution, disgorgement of profits, attorneys’ fees and costs, and
miscellaneous other relief. On November 18, 2008, the court agreed to
stay the derivative case until at least May 18, 2009, on which
date the court scheduled a status conference. After holding the
status conference on May 18, 2009, the court stayed the derivative case until
the filing of this Second Amendment and ordered plaintiff to file its amended
complaint within two weeks after the filing of this Second Amendment. On June 9,
2009, plaintiff requested transfer of the derivative case to the court presiding
over the securities class action case. This request was denied.
California
Litigation. A direct action was filed in Superior Court of California,
Marin County against NexCen Brands and certain of our former officers by a
series of limited partnerships or investment funds. The case is captioned: Willow Creek Capital Partners, L.P.,
et al. v. NexCen Brands, Inc., Case No. CV084266 (Cal. Superior Ct.,
Marin Country) (filed on August 29, 2008). Predicated on substantially similar
factual allegations as the federal securities actions, this lawsuit is brought
under California law and asserts both fraud and negligent misrepresentation
claims. Plaintiffs seek compensatory damages, punitive damages and
costs.
The
California state court action was served on NexCen on September 2, 2008.
Plaintiffs in the California action served NexCen with discovery requests on
September 19, 2008. On October 17, 2008, NexCen filed two simultaneous but
separate motions in order to limit discovery. First, NexCen filed a motion in
the United States District Court for Southern District of New York to stay
discovery in the California actions pursuant to the Securities Litigation
Uniform Standards Act of 1998. Second, NexCen filed a motion in the California
court to dismiss the California complaint on the ground of forum non conveniens, or to
stay the action in its entirety, or in the alternative to stay discovery,
pending the outcome of the federal class actions.
The
California state court held a hearing on NexCen’s motion on December 12, 2008.
At the hearing, the court issued a tentative ruling from the bench granting
defendants’ motion to stay. On December 26, 2008, the court entered a final
order staying the California action in its entirety pending resolution of the
putative class actions pending in the Southern District of New York. A case
management conference is scheduled for September 16, 2009.
SEC Investigation. We
voluntarily notified the Enforcement Division of the SEC of our May 19, 2008
disclosure. The Company has been cooperating with the SEC and voluntarily
provided documents and testimony, as requested. On or about March 17, 2009, we
were notified that the SEC had commenced a formal investigation of the Company
as of October 2008.
Legacy Aether IPO
Litigation. The Company 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 our 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 the Company 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.
After
initial procedural motions and the start of discovery in 2002 and 2003,
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 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.)
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 court on the proposed Issuer Settlement, the
United States 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 resumed, and plaintiffs filed amended complaints in the
focus cases shortly thereafter. Defendants moved to dismiss the amended
complaints. Plaintiffs filed motions for class certification in the focus
cases. Defendants filed papers opposing class
certification.
In 2008,
the Plaintiff’s Executive Committee resumed settlement discussions with the
issuer-defendants, including NexCen, and the officer and director defendants of
the issuers. The parties reached a preliminary settlement in which NexCen
would have to contribute no out-of-pocket amount to the
settlement. The parties filed their motion for preliminary approval
of the settlement on April 2, 2009, which was granted by the district court on
June 9, 2009. The court hearing on final approval is scheduled for September 10,
2009.
Legacy Aether
Litigation. 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 the Company’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 the
transportation segment of our discontinued communications business. In July
2007, the Company settled all claims with 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 also has been recorded against
discontinued operations.
Legacy UCC Capital
Litigation. UCC Capital and Mr. D’Loren, our former chief
executive officer in his capacity as president of UCC Capital, were parties
along with unrelated parties to litigation resulting from a default on a loan to
The Songwriter Collective, LLC (“TSC”), which loan UCC Capital had referred to a
third party. A shareholder of TSC filed a lawsuit in the United States District
Court for the Middle District of Tennessee, captioned Tim Johnson v. Fortress Credit
Opportunities I, L.P., et al., in which plaintiff alleged that certain
misrepresentations by TSC and its agents (including UCC Capital and Mr. D’Loren)
induced the shareholder to contribute certain rights to musical compositions to
TSC. UCC Capital 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 Capital, 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 Capital, Mr. D’Loren, TSC and the other parties. The parties reached a
global settlement on December 19, 2007, with UCC Capital 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. NexCen
Brands and our 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 our franchise systems,
occasional disputes arise between the Company and our franchisees relating to a
broad range of subjects, including, without limitation, contentions regarding
grants, transfers or terminations of franchises, territorial disputes and
delinquent payments.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON
STOCK
Our
common stock was quoted on NASDAQ under the symbol NEXC from November 1, 2006
until January 13, 2009. Prior to November
1, 2006, starting with our initial public offering on October 20, 1999, the
Company’s common stock was quoted on NASDAQ under the symbol AETH. As a result
of noncompliance with NASDAQ listing requirements, our common stock was
suspended from trading on NASDAQ effective at the opening of trading on January
13, 2009 and was delisted from NASDAQ on February 13, 2009. Starting on January
13, 2009, the Company’s common stock been traded under the symbol NEXC.PK on the
Pink OTC Markets, formerly known as the Pink Sheets.
The
following table sets forth, for the periods indicated, the high and low prices
per share of the common stock as reported on NASDAQ for 2008, 2007 and
2006.
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
QUARTER ENDED
|
|
HIGH
|
|
|
LOW
|
|
|
HIGH
|
|
|
LOW
|
|
|
HIGH
|
|
|
LOW
|
|
March
31
|
|
$ |
4.82 |
|
|
$ |
2.83 |
|
|
$ |
11.04 |
|
|
$ |
7.42 |
|
|
$ |
3.85 |
|
|
$ |
3.13 |
|
June
30
|
|
$ |
3.49 |
|
|
$ |
0.41 |
|
|
$ |
12.98 |
|
|
$ |
9.98 |
|
|
$ |
5.50 |
|
|
$ |
3.75 |
|
September
30
|
|
$ |
0.67 |
|
|
$ |
0.24 |
|
|
$ |
11.41 |
|
|
$ |
5.56 |
|
|
$ |
6.33 |
|
|
$ |
5.54 |
|
December
31
|
|
$ |
0.30 |
|
|
$ |
0.07 |
|
|
$ |
7.37 |
|
|
$ |
3.89 |
|
|
$ |
7.42 |
|
|
$ |
5.71 |
|
APPROXIMATE NUMBER OF EQUITY
SECURITY HOLDERS
As of
June 30, 2009, the approximate number of stockholders of record of NexCen’s
common stock was 248.
DIVIDENDS
We have
never declared or paid any cash dividends on our common stock. For the
foreseeable future, we expect to utilize earnings, if any, to reduce our
indebtedness, rather than pay periodic cash dividends.
SECURITIES AUTHORIZED FOR
ISSUANCE UNDER EQUITY COMPENSATION PLANS
The
following table sets forth, as of December 31, 2007, information concerning
compensation plans under which our securities are authorized for issuance. The
table does not reflect grants, awards, exercises, terminations or expirations
since that date.
Plan Category
|
|
Plan Name
|
|
Number of
securities
to
be issued upon
exercise
of outstanding
options,
and
restricted stock
|
|
Weighted-average
exercise price of
outstanding
options,
and restricted stock
|
|
Number of
securities
remaining
available for
future
issuance under
equity
compensation
plans
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
1999
Equity Incentive Plan
|
|
|
|
$
|
4.31
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
$
|
5.29
|
|
1,526,334
|
The 1999
Plan
In
September 1999, the Company adopted the 1999 Equity Incentive Plan, as amended
on September 5, 2005 (the “1999 Plan”). It was approved by the Company’s sole
stockholder prior to the Company’s initial public offering on October 20,
1999. The 1999 Plan provided for the issuance of NexCen common stock, pursuant
to grants of stock options or restricted stock, in an amount that adjusted
automatically to equal 20% of the Company’s outstanding shares. On September 2,
2005, the Company filed a registration statement with the SEC on Form S-8
registering an additional 973,866 shares under the 1999 Plan. A participant
immediately forfeits any and all unvested options and forfeits all unvested
restricted stock at the time of separation from NexCen, unless the award
agreement provides otherwise. No participant is permitted to exercise vested
options after the 90th day
from the date of termination from NexCen, unless the award grant provides
otherwise.
The 2000
Plan
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), consultants and certain other service providers of the
Company and our related affiliates, without shareholder approval. NexCen’s Board
of Directors authorized the issuance of up to 1,900,000 shares of NexCen common
stock under the 2000 Plan, in connection with the grant of stock options or
restricted stock. All options granted under the 2000 Plan were required to be
nonqualified stock options.
The 2006
Plan
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 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 remain in existence solely for the purpose of addressing the rights of
holders of existing awards already granted under those plans. No new awards have
been or will be granted under the 1999 Plan and the 2000
Plan.
A total
of 3.5 million shares of common stock were 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 from date of grant and are granted at an exercise price no less than the
fair value of the common stock on the grant date. In the event of a
“change of control” as such term is defined in the 2006 Plan, awards of
restricted stock and stock options became fully vested or exercisable, as
applicable, to the extent the award agreement granting such restricted stock or
options provides for such acceleration. A participant immediately forfeits any
and all unvested options and forfeits all unvested restricted stock at the time
of separation from NexCen, unless the award agreement provides otherwise. No
participant is permitted to exercise vested options after the 90th day
from the date of termination from NexCen, unless the award grant provides
otherwise.
Stock Option Cancellation
Program
On
November 12, 2008, in light of the dwindling number of shares available for
future issuance under the 2006 Plan, the Company instituted a stock option
cancellation program for vested or unvested stock options issued under the 2006
Plan for certain eligible directors and employees (the “Stock Option
Cancellation Program”). The Stock Option Cancellation Program was a voluntary,
non-incentivized program. The Company provided no remuneration or consideration
of any kind for the cancellation of stock options. In addition, to ensure that
the program was in no way coercive or perceived to be coercive, we limited it to
directors and executives at the level of vice president or above. As of December
31, 2008, the Company recaptured 856,666 options through this
program.
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 during the period covered by this Second
Amendment.
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 (As Restated)
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 (GAAP). You should read the following Selected Financial
Data together with our Consolidated Financial Statements and related notes and
with our MD&A included in Item 7 of this Second Amendment. The financial
data for 2007 was restated as described in MD&A and in Note 2 to the
Consolidated Financial Statements. The financial data for prior years have not
changed.
Our
Selected Financial Data and our Consolidated Financial Statements assume that we
will continue as a going concern, and do not contain any adjustments that might
result if we were unable to continue as a going concern. However, based on the effect of the January 2008
Amendment on the Company’s financial condition and liquidity before the credit
facility was restructured on August 15, 2008, we have concluded that there was
substantial doubt about our ability to continue as a going concern as of
December 31, 2007.
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 business as continuing operations. The results of the mobile and data
communications business that we sold during 2004 and the mortgage-backed
securities (MBS) business that we sold in 2006 are reported as discontinued
operations. We began operating the brand management business in 2006, but we
owned only one brand, TAF, in 2006 (and only for the last seven weeks of that
fiscal year). In fiscal 2007, we acquired six additional brands, namely, Bill
Blass, Marble Slab Creamery, MaggieMoo’s, Waverly, Pretzel Time and
Pretzelmaker. We then acquired the Great American Cookies brand and an interest
in the Shoebox New York brand, respectively, in January 2008. We sold
the Bill Blass brand in December 2008 and the Waverly brand in October 2008. As
a result of the reclassification of our former MBS business to discontinued
operations as of December 31, 2006, the results presented in these Selected
Financial Data differ from the results that we presented in reporting periods
prior to the fourth quarter of 2006. In addition, as a result of the
reclassification of our Bill Blass and Waverly businesses to discontinued
operations during the year ended December 31, 2008, the results presented in
these Selected Financial Data also will differ from the results that we will
present in reporting periods after the fourth quarter of 2007. Accordingly, the historical results
presented below are not indicative of the results to be expected for any future
fiscal year.
|
|
Year Ended December 31,
|
|
|
|
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
|
|
|
|
2007 (As
Restated)1
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
revenues
|
|
$ |
15,722 |
|
|
$ |
1,175 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Licensing
revenues
|
|
|
15,399 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Franchise fee
revenues
|
|
|
3,447 |
|
|
|
749 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Corporate revenues
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
revenues
|
|
|
34,568 |
|
|
|
1,924 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brands
|
|
|
(14,651 |
) |
|
|
(453 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Corporate
|
|
|
(12,991 |
) |
|
|
(7,261 |
) |
|
|
(3,645 |
) |
|
|
(8,569 |
) |
|
|
(16,707 |
) |
Professional
fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brands
|
|
|
(1,696 |
) |
|
|
(115 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Corporate
|
|
|
(1,606 |
) |
|
|
(1,034 |
) |
|
|
(1,444 |
) |
|
|
(2,808 |
) |
|
|
|
|
Depreciation and
amortization
|
|
|
(1,660 |
) |
|
|
(471 |
) |
|
|
(159 |
) |
|
|
(2,212 |
) |
|
|
(2,672 |
) |
Restructuring
charges
|
|
|
- |
|
|
|
(1,079 |
) |
|
|
7 |
|
|
|
(1,054 |
) |
|
|
(306 |
) |
Impairment of other
assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,367 |
) |
Other
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(744 |
) |
Total operating
expenses
|
|
|
(32,604 |
) |
|
|
(10,413 |
) |
|
|
(5,241 |
) |
|
|
(14,643 |
) |
|
|
(21,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)
|
|
|
1,964 |
|
|
|
(8,489 |
) |
|
|
(5,241 |
) |
|
|
(14,643 |
) |
|
|
(21,796 |
) |
(Selected
Financial Data - Continued)
Non-operating income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,115 |
|
|
|
2,637 |
|
|
|
1,478 |
|
|
|
3,955 |
|
|
|
6,037 |
|
Interest
expense
|
|
|
(5,116 |
) |
|
|
- |
|
|
|
- |
|
|
|
(7,917 |
) |
|
|
(10,427 |
) |
Other income,
net
|
|
|
288 |
|
|
|
700 |
|
|
|
231 |
|
|
|
(60 |
) |
|
|
(97 |
) |
Minority
interest
|
|
|
(269 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loss on early extinguishment of
subordinated notes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,419 |
) |
|
|
- |
|
Investment gain (loss),
net
|
|
|
- |
|
|
|
- |
|
|
|
(19 |
) |
|
|
(3,559 |
) |
|
|
587 |
|
Total non-operating income
(expense)
|
|
|
(2,982 |
) |
|
|
3,337 |
|
|
|
1,690 |
|
|
|
(10,000 |
) |
|
|
(3,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(1,018 |
) |
|
|
(5,152 |
) |
|
|
(3,551 |
) |
|
|
(24,643 |
) |
|
|
(25,696 |
) |
Income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(283 |
) |
|
|
(81 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Deferred
|
|
|
(3,019 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations
|
|
|
(4,320 |
) |
|
|
(5,233 |
) |
|
|
(3,551 |
) |
|
|
(24,643 |
) |
|
|
(25,696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations, net of tax expense of $64 and $75 for 2006 and 2003,
respectively
|
|
|
(548 |
) |
|
|
2,358 |
|
|
|
225 |
|
|
|
(44,510 |
) |
|
|
(23,756 |
) |
Gain (loss) on sale of
discontinued operations
|
|
|
- |
|
|
|
755 |
|
|
|
(1,194 |
) |
|
|
20,825 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(4,868 |
) |
|
$ |
(2,120 |
) |
|
$ |
(4,520 |
) |
|
$ |
(48,328 |
) |
|
$ |
(49,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,830 |
) |
|
|
108 |
|
Unrealized holding gain (loss) on
investments available for sale
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
67 |
|
|
|
(1,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$ |
(4,868 |
) |
|
$ |
(2,120 |
) |
|
$ |
(4,520 |
) |
|
$ |
(52,091 |
) |
|
$ |
(51,101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
(1) See Note 2 of Notes to Consolidated
Financial Statements for an explanation of the restatement.
|
|
Year Ended December 31,
|
|
|
|
(IN THOUSANDS)
|
|
CONSOLIDATED BALANCE SHEET DATA:
|
|
2007 (As
Restated)1
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & cash
equivalents
|
|
$ |
46,569 |
|
|
$ |
83,536 |
|
|
$ |
1,092 |
|
|
$ |
60,723 |
|
|
$ |
26,222 |
|
Mortgage-backed securities, at
fair value - discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
253,900 |
|
|
|
62,184 |
|
|
|
- |
|
Accounts receivable, net of
allowances
|
|
|
7,201 |
|
|
|
2,042 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Other
receivables
|
|
|
2,677 |
|
|
|
511 |
|
|
|
1,174 |
|
|
|
356 |
|
|
|
1,567 |
|
Restricted
cash
|
|
|
5,174 |
|
|
|
- |
|
|
|
- |
|
|
|
8,832 |
|
|
|
|
|
Prepaid expenses and other current
assets
|
|
|
3,867 |
|
|
|
2,210 |
|
|
|
954 |
|
|
|
4,124 |
|
|
|
1,173 |
|
Total current
assets
|
|
|
65,488 |
|
|
|
88,299 |
|
|
|
257,120 |
|
|
|
136,219 |
|
|
|
28,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
|
4,225 |
|
|
|
389 |
|
|
|
255 |
|
|
|
367 |
|
|
|
2,608 |
|
Goodwill
|
|
|
66,441
|
|
|
|
15,607 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Trademarks
|
|
|
211,308 |
|
|
|
49,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other intangible assets, net of
amortization
|
|
|
7,565 |
|
|
|
3,792 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Deferred financing costs, net of
other assets
|
|
|
2,927 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Investments available for
sale
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
220,849 |
|
Net assets from discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
127,633 |
|
Other
assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,593 |
|
Restricted
cash
|
|
|
1,656 |
|
|
|
1,298 |
|
|
|
8,633 |
|
|
|
- |
|
|
|
13,460 |
|
Total
Assets
|
|
$ |
359,610
|
|
|
$ |
158,385 |
|
|
$ |
266,008 |
|
|
$ |
136,586 |
|
|
$ |
398,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$ |
8,689 |
|
|
$ |
3,235 |
|
|
$ |
2,972 |
|
|
$ |
5,737 |
|
|
$ |
7,808 |
|
Repurchase agreements and sales
tax liabilities - discontinued operations
|
|
|
- |
|
|
|
1,333 |
|
|
|
135,592 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
accruals
|
|
|
13 |
|
|
|
145 |
|
|
|
- |
|
|
|
259 |
|
|
|
1,407 |
|
Deferred
revenue
|
|
|
4,033 |
|
|
|
40 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Current portion of long-term
debt
|
|
|
6,340 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Acquisition related
liabilities
|
|
|
7,360 |
|
|
|
4,484 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total current
liabilities
|
|
|
26,435 |
|
|
|
9,237 |
|
|
|
138,564 |
|
|
|
5,996 |
|
|
|
9,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
103,238 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
154,912 |
|
Deferred tax
liability
|
|
|
26,607
|
|
|
|
218 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Acquisition related
liabilities
|
|
|
3,915 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net liabilities from discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
54,604 |
|
Other long-term
liabilities
|
|
|
3,412 |
|
|
|
2,317 |
|
|
|
1,057 |
|
|
|
- |
|
|
|
73 |
|
Total
liabilities
|
|
|
163,607 |
|
|
|
11,772 |
|
|
|
139,621 |
|
|
|
5,996 |
|
|
|
218,804 |
|
Minority
Interest
|
|
|
3,040 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock
|
|
|
557 |
|
|
|
481 |
|
|
|
440 |
|
|
|
440 |
|
|
|
429 |
|
Additional paid-in
capital
|
|
|
2,668,289 |
|
|
|
2,615,742 |
|
|
|
2,593,085 |
|
|
|
2,592,977 |
|
|
|
2,589,608 |
|
Treasury
stock
|
|
|
(1,757 |
) |
|
|
(352 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Foreign currency translation
adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,830 |
|
Unrealized loss on investments
available for sale
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(216 |
) |
|
|
(283 |
) |
Accumulated
deficit
|
|
|
(2,474,126 |
) |
|
|
(2,469,258 |
) |
|
|
(2,467,138 |
) |
|
|
(2,462,611 |
) |
|
|
(2,414,283 |
) |
Stockholders'
equity
|
|
|
192,963 |
|
|
|
146,613 |
|
|
|
126,387 |
|
|
|
130,590 |
|
|
|
179,301 |
|
Total liabilities and
stockholders' equity
|
|
$ |
359,610 |
|
|
$ |
158,385 |
|
|
$ |
266,008 |
|
|
$ |
136,586 |
|
|
$ |
398,105 |
|
|
(1) See Note 2 of Notes to
Consolidated Financial Statements for an explanation of the
restatement.
|
The following table presents the effects
of the restatement of Selected Financial Data as of and for the year ended
December 31, 2007. See Note 2 of Notes to Consolidated Financial Statements for
further explanation of the restatement.
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
(IN THOUSANDS,
EXCEPT FOR PER
SHARE AMOUNTS)
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
revenues
|
|
$ |
15,289 |
|
|
$ |
433 |
|
|
$ |
15,722 |
|
|
$ |
1,175 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Licensing
revenues
|
|
|
15,542 |
|
|
|
(143 |
) |
|
|
15,399 |
|
|
|
749 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Franchise fee
revenues
|
|
|
3,464 |
|
|
|
(17 |
) |
|
|
3,447 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
revenues
|
|
|
34,295 |
|
|
|
273 |
|
|
|
34,568 |
|
|
|
1,924 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
(32,105 |
) |
|
|
(499 |
) |
|
|
(32,604 |
) |
|
|
(10,413 |
) |
|
|
(5,241 |
) |
|
|
(14,643 |
) |
|
|
(21,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
2,190 |
|
|
|
(226 |
) |
|
|
1,964 |
|
|
|
(8,489 |
) |
|
|
(5,241 |
) |
|
|
(14,643 |
) |
|
|
(21,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating
expense
|
|
|
(2,950 |
) |
|
|
(32 |
) |
|
|
(2,982 |
) |
|
|
3,337 |
|
|
|
1,690 |
|
|
|
(10,000 |
) |
|
|
(3,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes:
|
|
|
(760 |
) |
|
|
(258 |
) |
|
|
(1,018 |
) |
|
|
(5,152 |
) |
|
|
(3,551 |
) |
|
|
(24,643 |
) |
|
|
(25,696 |
) |
Income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(236 |
) |
|
|
(47 |
) |
|
|
(283 |
) |
|
|
(81 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Deferred
|
|
|
(3,067 |
) |
|
|
48 |
|
|
|
(3,019 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations
|
|
|
(4,063 |
) |
|
|
(257 |
) |
|
|
(4,320 |
) |
|
|
(5,233 |
) |
|
|
(3,551 |
) |
|
|
(24,643 |
) |
|
|
(25,696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations, net of tax (benefit) or expense of ($38), $64 and $75 for 2007, 2006 and 2003,
respectively
|
|
|
(586 |
) |
|
|
38 |
|
|
|
(548 |
) |
|
|
2,358 |
|
|
|
225 |
|
|
|
(44,510 |
) |
|
|
(23,756 |
) |
Gain (loss) on sale of
discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
755 |
|
|
|
(1,194 |
) |
|
|
20,825 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(4,649 |
) |
|
$ |
(219 |
) |
|
$ |
(4,868 |
) |
|
$ |
(2,120 |
) |
|
$ |
(4,520 |
) |
|
$ |
(48,328 |
) |
|
$ |
(49,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share (basic and diluted)
from continuing operations
|
|
$ |
(0.08 |
) |
|
$ |
- |
|
|
$ |
(0.08 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.60 |
) |
Income (loss) per share (basic and
diluted) from discontinued operations
|
|
|
(0.01 |
) |
|
|
- |
|
|
|
(0.01 |
) |
|
|
0.07 |
|
|
|
(0.02 |
) |
|
|
(0.54 |
) |
|
|
(0.56 |
) |
Net loss per share - basic and
diluted
|
|
$ |
(0.09 |
) |
|
$ |
- |
|
|
$ |
(0.09 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.10 |
) |
|
$ |
(1.11 |
) |
|
$ |
(1.16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding - basic and diluted
|
|
|
51,889 |
|
|
|
- |
|
|
|
51,889 |
|
|
|
45,636 |
|
|
|
44,006 |
|
|
|
43,713 |
|
|
|
42,616 |
|
CONSOLIDATED BALANCE SHEET
DATA:
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
|
2004
|
|
|
2003
|
(IN THOUSANDS)
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(including restricted cash of $7 and $1 million in 2007 and 2006,
respectively)
|
|
$ |
53,275 |
|
|
$ |
124 |
|
|
$ |
53,399 |
|
|
$ |
84,834 |
|
|
$ |
9,725 |
|
|
$ |
69,555 |
|
|
$ |
39,682 |
|
Investments available for sale -
discontinued operations
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
220,849 |
|
Trademarks and
goodwill
|
|
$ |
278,048 |
|
|
$ |
(299 |
) |
|
$ |
277,749
|
|
|
$ |
64,607 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Mortgage-backed securities, at
fair value, discontinued operations
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
253,900 |
|
|
$ |
62,184 |
|
|
$ |
- |
|
Total
assets
|
|
$ |
359,207 |
|
|
$ |
403 |
|
|
$ |
359,610
|
|
|
$ |
158,385 |
|
|
$ |
266,008 |
|
|
$ |
136,586 |
|
|
$ |
398,105 |
|
Repurchase agreements related to
discontinued operations
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
133,924 |
|
|
$ |
- |
|
|
$ |
- |
|
Total debt
|
|
$ |
109,578 |
|
|
$ |
- |
|
|
$ |
109,578 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
154,942 |
|
Total
liabilities |
|
$ |
163,354
|
|
|
$ |
253 |
|
|
$ |
163,607 |
|
|
$ |
11,772 |
|
|
$ |
139,621 |
|
|
$ |
5,996 |
|
|
$ |
218,804 |
|
Stockholders'
equity
|
|
$ |
192,813 |
|
|
$ |
150 |
|
|
$ |
192,963 |
|
|
$ |
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 should be read in conjunction with the
information contained in the Consolidated Financial Statements and related Notes, which
appear in Item 8 of this Second Amendment.
RESTATEMENT OF CONSOLIDATED FINANCIAL
STATEMENTS
As previously reported, in May 2008
we determined that certain
aspects of the January 2008 Amendment to the Original BTMUCC Credit Facility,
which provided NexCen with financing for our acquisition of the Great American
Cookies business, were not
adequately
discussed in our prior
public filings. We further concluded that the effect of the January 2008
Amendment on the Company’s
financial condition and liquidity raised substantial doubt about our
ability to continue as a going concern. The Audit Committee of our Board of
Directors retained independent counsel to conduct an investigation into these
matters on behalf of the Board of Directors. Simultaneously, management, with
the supervision of the Board of Directors, commenced a comprehensive review of
our financial condition and business strategy and began taking actions to
restructure our business. Upon conclusion of the investigation, the Company
developed a plan to remediate the circumstances that contributed to these
matters and implemented numerous management, corporate governance and internal
control enhancements.
Adjustments
Related to the January 2008
Amendment
The January 2008 Amendment was entered
into and went into effect in 2008 and therefore did not affect the amounts
reported in the Consolidated Financial Statements as of December 31, 2007.
Nonetheless, the Original 10-K contained discussions of the January 2008
Amendment in the Notes to the Consolidated Financial Statements related to
“Long-Term Debt” and “Subsequent Events.” Moreover, the MD&A in the Original
10-K contained discussions regarding the Company’s financial condition and
liquidity. In this Second Amendment, we have revised the disclosure that
appeared in these portions of the Original 10-K to reflect our subsequent
reconsideration of the terms of the January 2008 Amendment and their effect on
the Company’s financial condition and liquidity as of the filing date of our
Original 10-K, before the credit facility was restructured on August 15, 2008
and further amended in late 2008 and 2009. (The August 15, 2008 restructuring
and the subsequent amendments are discussed in this MD&A under the caption
“Financial Condition,” in Note 9 – Long-Term Debt (As Restated)
and Note 25 – Subsequent Events (As Restated)
to the Consolidated Financial Statements.) We have concluded that there was
substantial doubt about our ability to continue as a going concern as of
December 31, 2007. Our Consolidated Financial Statements, however, assume that
we will continue as a going concern, and do not contain any adjustments that
might result if we were unable to continue as a going
concern.
We also have restated Part II,
Item 9A – Controls and
Procedures (As Restated), to revise the assessment contained in the
Original 10-K of the effectiveness of our disclosure controls and procedures and
internal control over financial reporting as of December 31, 2007 and to provide
a discussion of our remediation efforts to date. Our management and the
Audit Committee have concluded that the Company’s failure to adequately discuss
the January 2008 Amendment in our relevant Current Report on Form 8-K and the
Original 10-K was unintentional and that material weaknesses in our internal
control contributed to this error. Some of these material weaknesses were
previously identified in our Original 10-K, and some have been identified
subsequently. As a result,
management has revised its assessment in Item 9A of the effectiveness of
the Company’s internal control over financial reporting as of December 31,
2007.
Other
Adjustments
Management
engaged in a comprehensive review of our Original 10-K and First Amendment in
order to ensure their accuracy and completeness and to be able to provide the
certifications provided herein. Accordingly, this Second Amendment also corrects
accounting and financial reporting errors, some of which were previously
identified but not considered to be material and others of which were identified
in the restatement process. The Company has concluded that the corrections are
not material either individually or in the aggregate. The Company’s net loss per
share is not impacted by the restatement.
The
effect of all restatement adjustments on our Consolidated Statements of
Operations for the year ended December 31, 2007 is as follows:
Increase
in net loss
|
$
|
(0.
|
2)
million or 4.7%
|
A summary
of adjustments to the Company’s Consolidated Statement of Operations for the
year ended December 31, 2007 is as follows:
Increase in total
revenues
|
$
|
0.
|
3
million
|
Increase in selling, general and
administrative expenses
|
$
|
(0.
|
3)
million
|
Increase in other operating
expenses
|
$
|
(0.
|
2)
million
|
Decrease in operating
income
|
$
|
(0.
|
2)
million
|
Increase in loss from continuing
operations
|
$
|
(0.
|
3)
million
|
Increase
in net loss
|
$
|
(0.
|
2)
million
|
The
effect of all restatement adjustments on our Consolidated Balance Sheet as of
December 31, 2007 is as follows:
Increase
in total assets
|
$
|
0.
|
4
million or 0.1%
|
Increase
in total liabilities
|
$
|
0.
|
3
million or 0.2%
|
Increase
in total equity
|
$
|
0.
|
1
million or 0.1%
|
The
effect of all restatement adjustments on our Consolidated Statement of Cash
Flows as of December 31, 2007 is as follows:
|
$
|
0.
|
7
million or 17.9%
|
|
$
|
0.
|
1
million or 0.0%
|
Decrease
in net cash provided by financing activities
|
$
|
0.
|
5
million or 0.4%
|
(See Note
2 to the Consolidated Financial Statements included in Part II, Item 8 of this
Second Amendment for further explanation of the restatement of NexCen’s
Consolidated Financial Statements.)
Our
management and the Audit Committee have concluded that the errors in our
Consolidated Financial Statements were unintentional. In conjunction with the
Audit Committee, we have determined that the errors in our Consolidated
Financial Statements and in the Summary Compensation Table were a result of
material weaknesses in our internal control, some of which were identified in
our Original 10-K. We note that the greatest percentage changes, although not
material, are related to the Company’s accounting for accrued liabilities, a
material weakness in our internal control over financial reporting identified in
our Original 10-K. See further explanation of the material weaknesses and our
remediation efforts in Part II, Item 9A – Controls and Procedures (As
Restated), of this Second Amendment.
OVERVIEW
As
discussed in detail in Item 1– Business, we commenced our
brand management business in June 2006, when we acquired UCC Capital, an
investment banking firm that provided financial advisory services, particularly
to companies involved in monetizing intellectual property assets. In acquiring
UCC Capital, our strategy was to begin building a brand management business by
acquiring and operating businesses that own valuable brand assets and other
intellectual property and that earn revenues primarily from the franchising or
licensing of their intellectual property. In 2007, we earned revenues primarily
through the licensing of our valuable brands and related intellectual property
to third parties. These third
parties paid us licensing, franchising and other contractual fees and royalties
for the right to use our intellectual property on either an exclusive or
non-exclusive basis. We received licensing, franchising and other contractual
fees that included 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 reflected both recurring and non-recurring payment
streams.
Our principal assets are, and were
as of December 31, 2007, intangible assets (the trademarks and other
intellectual assets and associated goodwill related to the brands and businesses
that we acquired, manage and develop) and our people. We did not have
substantial tangible assets, as our business model was not designed to require
significant capital investment in tangible assets.
Through the date of the Original 10-K,
we had acquired nine brands, as follows:
QSR
Franchising
|
·
|
MaggieMoo’s (acquired February 28,
2007)
|
|
·
|
Marble Slab Creamery (acquired February 28,
2007)
|
|
·
|
Pretzel Time (acquired August 7,
2007)
|
|
·
|
Pretzelmaker (acquired August 7,
2007)
|
|
·
|
Great American Cookies (acquired January 29, 2008)
|
Retail
Franchising
|
·
|
The Athlete’s Foot (acquired
November 7, 2006)
|
|
·
|
Shoebox New York (joint venture interest
acquired January 15, 2008)
|
Consumer
Branded Products
|
·
|
Bill Blass (acquired February 15,
2007 and subsequently
sold on December 24, 2008)
|
|
·
|
Waverly (acquired May 2, 2007 and
subsequently sold on October 3,
2008)
|
Our
operating segments as of December 31, 2007 are discussed in Note 24 – Segment Reporting (As Restated) to our
Consolidated Financial Statements included in this Second Amendment. Based on
our brand holdings, as of December 31, 2007, and our plans to acquire additional
brands, we previously provided financial information for fiscal years 2007 in
four segments: QSR Franchising, Retail Franchising, Consumer Branded Products
and Corporate. Because we owned only one brand in 2006 (and then only for the
last seven weeks of that year) and did not operate in four business segments
until the first quarter of 2007, we do not include any discussion of
period-to-period comparisons for the results of the four business segments in
the discussion that follows. As previously discussed, we restructured
our Company in 2008 to operate in only one business segment,
Franchising.
Before transitioning to our brand
management 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
business are reported as our continuing operations for purposes of this Second
Amendment.
In reviewing our results for the fiscal
year ended December 31, 2007, you should keep in mind the following
factors:
|
·
|
Comparisons to prior periods are
not meaningful, because we did not initiate our current brand management business 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
TAF.
|
|
·
|
The MD&A discussion is based
on the brands that we owned as of December 31, 2007. Additionally, of
the intellectual property brands we owned and operated as of
December 31, 2007, we owned only one — TAF — for the entire year of 2007.
Our results through December 31, 2007 include Bill Blass, MaggieMoo’s and
Marble Slab Creamery for approximately ten months, Waverly for
approximately eight months, and Pretzel Time and Pretzelmaker for
approximately five months. In addition, MaggieMoo’s, Marble Slab Creamery,
Pretzel Time and Pretzelmaker revenue streams are subject to seasonal
fluctuations.
|
|
·
|
In future periods, because we
disposed of the Bill Blass and Waverly businesses that comprised our
Consumer Branded Products segment, those businesses will be reported as
discontinued operations. Our franchising business, which now
constitutes our only segment, will be reported as continuing
operations.
|
DISCONTINUED
OPERATIONS AS OF DECEMBER 31, 2007
In November 2006, we exited the MBS
business by selling our remaining $75.5 million of MBS investments from which we
recognized a gain of $755,000. Earlier in 2006, we sold $140 million of our MBS
investments and used the proceeds primarily to repay indebtedness under
repurchase agreements that had been incurred to purchase our MBS portfolio. In
2007, we settled litigation and other claims related to the mobile and wireless
communications businesses we sold in 2004, which amounts were charged to
discontinued operations. These settlements are discussed in Note 14 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, which, 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 United States generally accepted accounting
principles. 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 SEC
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. The ultimate realization of
deferred tax assets is primarily dependent upon the generation of future
taxable income during periods in which those temporary differences become
deductible. We presently do not have sufficient
objective evidence that the Company will generate
future taxable income. Accordingly, we maintain a full
valuation allowance for our net deferred tax assets. We adopted the provisions of FASB
Interpretation No, 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”), effective January 1,
2007. FIN 48 creates a single model to address accounting for uncertainty
in tax positions and clarifies accounting for income taxes by prescribing
a minimum recognition threshold that a tax position is required to meet
before being recognized in the financial
statements.
|
|
·
|
Valuation of goodwill, trademarks and intangible assets -
The Company accounts for recorded goodwill and other intangible
assets in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 142,
“Goodwill and Other
Intangible Assets.” This standard classifies
intangible assets into three categories: (1) goodwill; (2) intangible assets with
indefinite lives not subject to amortization; and (3) intangible assets
with definite lives subject to amortization. In
accordance with SFAS No. 142, we do not amortize goodwill and
indefinite-lived intangible assets. We evaluate the remaining useful
life of an intangible asset that is not being amortized each reporting
period to determine whether events and circumstances continue to support
an indefinite useful life. If an intangible asset that is not being
amortized is subsequently determined to have a finite useful life, we
amortize the intangible asset prospectively over its estimated remaining
useful life. Amortizable intangible assets are amortized on a
straight-line basis.
|
In
accordance with the requirements of SFAS No. 142, goodwill has been assigned to
reporting units for purposes of impairment testing. Our reporting units are our
operating segments in 2007. We evaluate goodwill for impairment on an annual
basis or more often if an event occurs or circumstances change that indicate
impairment might exist. Goodwill impairment tests consist of a comparison
of each reporting unit’s fair value with its carrying value. Fair value is
the price a willing buyer would pay for a reporting unit, which we estimate
using multiple valuation techniques. These include an income approach, based
upon discounted expected future cash flows from operations, and a market
approach, based upon business enterprise multiples of comparable
companies. The discount rate used is our estimate of the required rate of
return that a third-party buyer would expect to receive when purchasing from us
a business that constitutes a reporting unit. We believe the discount rate
is commensurate with the risks and uncertainty inherent in the forecasted cash
flows.
If the
carrying value of a reporting unit exceeds its fair value, goodwill is written
down to its implied fair value. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all of its
assets and liabilities other than goodwill. The remaining value, after the fair
value of the reporting unit has been allocated to the identifiable assets, is
the implied fair value of goodwill.
No
impairment charges related to goodwill were recorded in 2007. During 2008, we
evaluated our goodwill for impairment at multiple time periods based
upon the existence of indicators of impairment. As of December 31, 2008, all of
the Company’s recorded goodwill has been written off.
In
accordance with SFAS No. 144, “Accounting
for Impairment or Disposal of Long-Lived Assets,”
for indefinite-lived intangible assets, our impairment test consists of a
comparison of the fair value of an intangible asset with its carrying
amount. Fair value is an estimate of the price a willing buyer would pay
for the intangible asset and is generally estimated by discounting the expected
future cash flows associated with the intangible asset. Similar to
goodwill, we evaluate indefinite lived assets for impairment on an annual basis
or more often if an event occurs or circumstances change that indicate
impairment might exist. No impairment charges related to indefinite-lived
intangibles were recorded in 2007. However, impairment charges were recorded in
the second and third quarters of 2008.
Our
definite-lived intangible assets are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of the intangible
asset may not be recoverable. An intangible asset that is deemed impaired
is written down to its estimated fair value, which is generally based on
replacement cost. For purposes of our impairment analysis, we update the
costs that were initially used to value the definite-lived intangible asset to
reflect our current estimates and assumptions over the asset’s future remaining
life. No impairment charges related to definite-lived intangible assets were
recorded in 2007. However, impairment charges related to definite-lived
intangibles were recorded in the second and third quarters of 2008.
We
discuss impairments in more detail in Note 25 – Subsequent Events (As
Restated) to the Consolidated Financial Statements.
|
·
|
Valuation of stock-based
compensation – Under the provisions of SFAS No.
123R “Share-Based
Payment,” 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 No. 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.
The impact of adopting SFAS
No. 157 is immaterial to the Company’s Consolidated Financial
Statements.
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. The Company did not adopt SFAS No.
159.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations.” Under
Statement SFAS No. 141R, 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. 141R 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. 141R is effective for
annual periods beginning on or after December 15, 2008. SFAS No. 141R will
impact the Company’s accounting for future acquisitions, if
any.
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.
The Company adopted SFAS No. 160 as of January 1, 2009. SFAS No. 160 will impact
the presentation and disclosure of minority interest, if any, in the Company's
Consolidated Financial Statements.
In April
2008, the FASB issued FSP No. 142-3, "Determination of the Useful Life of
Intangible Assets." FSP No. 142-3 will improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142
and the period of expected cash flows used to measure the fair value of the
asset under SFAS No. 141R, and other U.S. generally accepted accounting
principles. FSP No. 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company has adopted this standard as of January 1, 2009.
The impact of adopting FSP No. 142-3 is expected to be immaterial to the
Company’s Consolidated Financial Statements.
In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with U.S. generally accepted accounting principles. SFAS
No. 162 is effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to Auditing Interpretations
("AU") Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.” The Company will adopt this standard when
effective.
RESULTS OF
CONTINUING OPERATIONS FOR YEARS ENDED DECEMBER 31, 2007, 2006 AND
2005
Loss from Continuing Operations before
Income Taxes
Loss from continuing operations before
income taxes was approximately $1.0 million (as restated) in 2007, decreasing by
$4.2 million, or 80%, from a loss of $5.2 million in 2006. Our 2007 operating
results reflect the implementation of our brand management business. No revenues
were earned in the first ten months of 2006 in connection with our brand
management 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 SG&A costs and stock based compensation
following the acquisition of UCC Capital 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 from continuing operations for only seven weeks of 2006 (after
the November 7, 2006 acquisition of TAF), 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 Capital acquisition).
Royalty, Licensing and Franchise Fee
Revenues
We recognized $34.6 million (as
restated) in revenues in 2007 as compared to $1.9 million in revenues for 2006.
The increase in revenues reflects full-year operating revenues for TAF and
partial year operating revenues for Bill Blass (acquired in February 2007),
Waverly (acquired in and May 2007), MaggieMoo’s (acquired in
February 2007), Marble Slab Creamery (acquired in February 2007), Pretzel Time
(acquired in August 2007) and Pretzel Maker (acquired in August 2007), compared
to our ownership of only TAF in 2006 for a total of seven weeks. Of the $34.6
million (as restated) in revenues recognized in 2007, $15.7 million (as
restated) related to royalty revenues, $3.5 million (as restated) related to
franchise fees, and $15.4 million (as restated) related to licensing revenues.
In 2006, $1.2 million in revenues were from royalty revenues 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 store under a single-store
franchise agreement or upon the opening of the first store under a multi-store
development agreement.
As discussed above, all revenues from
the MBS and the mobile and wireless communications businesses that we sold have
been reclassified to discontinued operations and are included in income (loss)
from discontinued operations. As a result, we do not compare revenue
in 2006 to 2005.
Total Operating
Expenses
Operating expenses of $32.6 million (as restated) in 2007 reflect an increase of
$22.2 million, or 213%, from $10.4 million in 2006. The
increase in operating expenses is primarily due to a $19.9 million increase in SG&A expenses, a $2.2 million increase in professional fees,
a $1.2 million increase in depreciation and amortization, all reflecting the impact of the
acquisitions we made in 2007, partially offset by a $1.1 million decrease in
restructuring charges from 2006 related to the relocation of our headquarters
from Baltimore, Maryland to New York City and the transition of our senior
management team.
Operating expenses of $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 SG&A costs and stock based
compensation following the acquisition of UCC Capital, and increased
restructuring charges.
Selling, General and Administrative
Expenses
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 (as restated) 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 based on a capital tax and
not income tax. Additionally, we recorded SG&A
expenses for our brands of $14.7 million (as restated), an increase of $14.2 million from $0.5 million in 2006. Of the $14.7 million (as restated) of brand related SG&A expenses in
2007, $5.0 million related to our QSR segment,
$5.7 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 Capital, TAF, 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 Capital and TAF
which we did not own in 2005. The personnel hired through the UCC Capital
acquisition comprised the new executive and management team and the majority of
our corporate staff as of December 31, 2007.
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 $4.3 million (as restated) in 2007, an increase of
$2.7 million as compared to an expense of $1.6 million in 2006, reflects the
expense associated with granting options and warrants to purchase shares. 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, therefore the
increase in stock compensation expense in 2007 over 2006 was due to the options
being 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 executives and other senior managers that we hired in
2007 and 2006, including individuals who were employed by UCC Capital, TAF, Bill
Blass, Marble Slab Creamery, and Waverly prior to their acquisition by us and
warrants to the sellers of TAF, Bill Blass, MaggieMoo’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 3 to our Consolidated Financial Statements.
Corporate professional fees of $1.6
million (as restated), $1.0 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 $1.7 million (as restated) in 2007, an increase of approximately $1.6
million from 2006, 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
$1.2 million (as restated), or 252%, to $1.7 million in 2007 from $0.5 million
in 2006. The increase primarily reflects the
amortization of intangible assets related to a non-compete agreement with our
former chief executive officer, and amortization of intangibles of franchise
agreements, license agreements, and master development agreements related to the
TAF, Bill Blass, Marble Slab Creamery, MaggieMoo’s, Waverly, Pretzel Time and
Pretzelmaker acquisitions.
Interest Income
Interest income of $2.1 million (as
restated) in 2007, a decrease of $0.5 million, or 20%, from $2.6 million in
2006, primarily reflects the interest earned on 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 in the results of
discontinued operations.
Interest Expense
Interest expense was $5.1 million (as
restated) in 2007 reflecting interest incurred in connection with our borrowings
under the Original BTMUCC Credit Facility (see Note 9 – Long-Term Debt (As
Restated) to our Consolidated Financial
Statements), and $186,000 of imputed interest
related to a long-term agreement liability assumed with the TAF acquisition,
which expires in 2028. We had no outstanding borrowings under the Original
BTMUCC Credit Facility prior to 2007. The Company did not incur interest expense
in 2006 or 2005.
Other income of $288,000 (as restated)
in 2007, a decrease of $412,000 from $700,000 in 2006, primarily reflects loan
servicing revenue. The Company acquired UCC Capital in June 2006, and UCC
Capital serviced 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 Capital. 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 Capital in 2006. The loan servicing activity ceased in 2008 as the
underlying loans were repaid.
Minority Interest
Minority interest expense of $269,000
for 2007 represents approximately 10% of the after tax net income attributable
to the Bill Blass licensing business which was owned 90% by NexCen Holding Corp.
and 10% by Designer Equity Holdings, LLC (“DEHC”). DEHC is an affiliate
of Designer License Holding, LLC,
a licensee of the Bill Blass trademark. We acquired the Bill Blass licensing
business in February 2007. In February 2008, the Company repurchased one
half of DEHC’s minority interest in Bill Blass Jeans. In December 2008, the Company sold the
Bill Blass licensing business. See Note 25 – Subsequent Events
(As Restated) to the
Consolidated Financial Statements for additional
information.
Income Taxes
We
recorded a current income tax expense in 2007 of $283,000 (as restated). This
reflects approximately $255,000 (as restated) of foreign taxes withheld on
franchise royalties received from franchisees located outside of the United
States in accordance with tax treaties between the United States and the
respective foreign countries, and $28,000 (as restated) of state income tax
expense. The combined federal and state deferred tax expense of $3.0 million (as
restated) for 2007 results primarily from timing differences relating to the
amortization of trademarks. Trademarks are amortized over fifteen years for tax
purposes. However, under GAAP, there is no amortization for book
purposes. The Company is not permitted to offset this deferred tax expense
against the deferred tax assets that we accumulated 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 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 we will be subject to foreign taxes
withheld at the source, which are based on gross revenue, and certain state and
local income taxes.
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 exists 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 or as of December
31, 2008. Even if we are able to report net income in 2009 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. Deferred income tax expense is not a cash
expense, but is required to be recorded under GAAP to reflect tax assets or
liabilities resulting from timing differences in determining net income and
taxable income 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 and Limits on Ownership
of Our Common Stock,” our
net tax loss carry-forwards also may not offset state, local and foreign tax
liabilities, and we may remain subject to federal alternative minimum taxes. Our state, local and foreign tax
position is discussed in Note 10 to our Consolidated Financial
Statements, and the
$283,000 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 may not offset all of such tax liabilities. 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 as there was a net loss in
that year, a net tax expense of $64,000 in 2006
attributable to the application of the alternative minimum tax, and a net tax benefit of $38,000 in
2007 resulting from a refund relating to prior years.
Discontinued
Operations
During 2007, net losses from
discontinued operations of $548,000 (as restated), or a loss of $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 businesses. In 2007, the Company
recorded settlements in the amount of $600,000 relating to the transportation
business sale and $125,000 relating to a legacy UCC Capital litigation, both of
which are discussed in Note 13 to our Consolidated Financial
Statements.
FINANCIAL
CONDITION
Historic Sources and Uses of
Cash
Since 2005, our primary sources of
funding have been cash flows from operations and borrowings under long-term debt
agreements. Funds were used for working capital requirements, capital
expenditures and business acquisitions.
Although we had $83.5 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
the Original BTMUCC Credit Facility for a total of $150 million, the terms of
which are discussed in Note 9
– Long-Term Debt (As
Restated) to our Consolidated Financial
Statements.
The following table reflects use of net
cash for operations, investing, and financing activities:
(IN THOUSANDS)
|
|
2007 (As Restated)
|
|
|
2006
|
|
|
2005
|
|
Net
cash (used in) provided by operating activities
|
|
$ |
(3,407
|
) |
|
$ |
(890
|
) |
|
$ |
2,128 |
|
Net
cash (used in) provided by investing activities
|
|
|
(146,173
|
) |
|
|
217,609 |
|
|
|
(195,708
|
) |
Net
cash provided by (used in) financing activities
|
|
|
112,613 |
|
|
|
(134,275
|
) |
|
|
133,949 |
|
Net
(decrease) increase in cash and cash equivalents
|
|
$ |
(36,967
|
) |
|
$ |
82,444 |
|
|
$ |
(59,631
|
) |
Net cash used in operating activities
was $3.4 million (as restated) 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 increases in trade receivables, 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 Capital for six
months and TAF for seven weeks.
Net cash used in investing activities
was $146.2 million (as restated) in 2007 and primarily resulting from the
acquisitions of Bill Blass, Marble Slab Creamery, MaggieMoo’s, Waverly, Pretzel
Time, and Pretzelmaker. Net cash provided by investing activities of
$217.6 million for 2006, primarily reflects $253.6 million of MBS sales and
principal repayments, partially offset by $43.2 million of cash used in the
acquisitions of UCC Capital and TAF. Net cash used in investing activities of
$195.7 million for 2005, primarily related to $387.4 million used to purchase
MBS, partially offset by $84.8 million of principal repayments on our MBS and
proceeds from the sale of $107.0 million of MBS.
Net cash
provided by financing activities in 2007 of $112.6 million (as restated)
primarily reflects borrowing on the Original BTMUCC Credit Facility which is discussed in Note
9 – Long-Term Debt (As
Restated) 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 19 to our
Consolidated Financial Statements. Net cash used in financing activities in 2006
of $134.3 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 $133.9 million primarily related to the funding
we received through repurchase agreements to purchase MBS.
As of December 31, 2007, we had
available cash and cash equivalents on hand of approximately $46.6 million (as
restated).
In
January 2008, we used approximately $20.0 million of this balance in connection
with the acquisition of Great American Cookies. For the remaining
purchase price, the Company and BTMUCC entered into the January 2008 Amendment.
As discussed in detail in Note 9 – Long-Term Debt (As Restated)
to our Consolidated Financial Statements, the January 2008 Amendment allowed us
to borrow an additional $70 million but increased debt service payments to
BTMUCC and reduced the amount of cash flow available to the Company to cover
operating expenses. Specifically, the amendment required $35 million of the
principal amount of the additional borrowings to be reduced to $5 million by
October 17, 2008. The increased debt service obligations and the accelerated
redemption feature of the January 2008 Amendment raised significant concerns
about the Company’s liquidity and capital resources and led us to believe that
there was substantial doubt about the Company’s ability to continue as a going
concern. Based on preliminary projections as of May 2008, the Company expected
that, without changes to the terms of the January 2008 Amendment or other
measures that would have enhanced our liquidity, the Company would have faced a
cash shortfall of approximately $7-10 million by October 2008 and also would
have needed additional cash to make the required principal payment on October
17, 2008 then estimated to be approximately $21 million. As discussed
immediately below, the Company took several steps to restructure the Original
BTMUCC Credit Facility and the January 2008 Amendment to address the Company’s
financial position and specifically the liquidity concerns associated with the
January 2008 Amendment.
Current Liquidity and Capital
Resources
As a
result of the August 15, 2008 comprehensive restructuring of the Original BTMUCC
Credit Facility and the January 2008 Amendment and subsequent amendments in 2008
and 2009, as well as actions taken to restructure the Company and reduce our
recurring operating expenses, we improved our cash flow and, in general, the
Company’s financial condition. Under the Current Credit Facility, we deferred to
2011 and thereafter much of our principal repayment obligations and certain of
our interest obligations. We also anticipate a meaningful reduction in interest
expense in 2009 based on (i) the Company’s reduced debt level following the
sales of Waverly and Bill Blass in late 2008 and the further paydown of debt in
August 2009 (ii) the amendment to the bank credit facility in early 2009 that
reduced the fixed interest rate applicable to certain Company debt, and (iii)
the low variable rates currently applicable to other portions of our debt. We
also restructured our credit facility to provide us with monthly, rather than
quarterly, cash distributions from our operating revenues that are held in
lock-box accounts until distributed pursuant to the terms of the Current Credit
Facility. We use these distributions, which are net of required debt service
payments, to pay our operating expenses and for other purposes permitted by the
terms of our Current Credit Facility. Any excess monies after paying operating
expenses and capital expenses permitted under the Current Credit Facility are
required to be applied to pay down the outstanding principal under our Current
Credit Facility. Starting in May 2008, we also took immediate actions to reduce
the Company’s recurring operating expenses, including a headcount reduction of
non-essential staff, thereby significantly decreasing our monthly cash SG&A
expenses as compared to April 30, 2008. As a result of these changes, we have
access to more cash more frequently to cover our reduced recurring operating
expenses and pay principal payments on our debt. See Note 9 – Long-Term Debt (As Restated)
to the Consolidated Financial Statements for details regarding our Current
Credit Facility.
As of
December 31, 2008, we had approximately $8.3 million cash on hand. We
anticipate that cash generated from operations will provide us with sufficient
liquidity to meet the expenses related to ordinary course operations, including
our debt service obligations, for at least the next twelve months. Nonetheless,
market and economic conditions may worsen and negatively impact our franchisees
and our ability to sell new franchises. As a result, our financial condition and
liquidity as of December 31, 2008 raise substantial doubt about our ability to
continue as a going concern. We are highly leveraged; we have no additional
borrowing capacity under the Current Credit Facility; and the cash generated by
operations is subject to lock-box restrictions. Accordingly, we continue to have
uncertainty with respect to our ability to meet non-ordinary course expenses or
expenses beyond certain total limits, which are not permitted to be paid out of
cash generated from operations under the terms of the Current Credit Facility,
but instead must be paid out of cash on hand. If we are not able to generate
sufficient cash from operations to pay our debt service obligations and all of
our expenses, we would defer, reduce or eliminate our expenditures, which may
negatively impact our operations. Alternatively, we would seek to restructure or
refinance our debt, but there can be no guarantee that BTMUCC would agree to any
further restructuring or refinancing plans.
Our Current Credit Facility also
contains numerous affirmative and negative covenants, including, among
other things, restrictions on indebtedness, liens, fundamental changes, asset
sales, acquisitions, capital and other expenditures, common stock repurchases,
dividends and other payments affecting subsidiaries, and sale and leaseback
transactions. The Company’s failure to comply with the financial and other
restrictive covenants could result in a default under our Current Credit
Facility, which could then trigger among other things BTMUCC’s right to
accelerate all payment obligations, foreclose on virtually all of the assets of
the Company and take control of all of the Company’s cash flow from operations.
(See Note 9 – Long-Term Debt
(As Restated) to the Consolidated Financial Statements for details
regarding the security structure of the debt.) In addition, our Current Credit Facility contains
provisions whereby our lender has the right to accelerate all principal payment
obligations upon a “material adverse change,” which is broadly defined as
the occurrence of any event
or condition that, individually or in the aggregate, has had, is having or could
reasonably be expected to have a material adverse effect on (i) the
collectability of interest and principal on the debt, (ii) the value or
collectability of the assets securing the debt, (iii) the business, financial
condition, or operations of the Company or its subsidiaries, individually or
taken as a whole, (iv) the ability of the Company or its subsidiaries to perform
its respective obligations under the loan agreements, (v) the validity or
enforceability of any of the loan documents, and (iv) the lender’s ability to
foreclose or otherwise enforce its interest in any of the assets securitizing
the debt. To date, BTMUCC
has not invoked the “material adverse change” provision or otherwise sought
acceleration of our principal payment obligations.
We
believe that we have a good relationship with our lender, and the Company has
received waivers and/or amendments from BTMUCC (without concessions from the
Company) since the restructuring of the debt in August 2008, including reduction
of interest rates, deferral of scheduled principal payment obligations and
certain interest payments, waiver and extension of time related to the
obligations to issue dilutive warrants, allowance of certain payments to be
excluded from debt service obligations, as well as relief from debt coverage
ratio requirements, certain capital and operating expenditure limits, certain
loan-to-value ratio requirements, certain free cash flow margin requirements,
and the requirement to provide financial statements by certain deadlines. In
light of these amendments and waivers, we believe it is unlikely that the
Company will need to seek additional material waivers or amendments or otherwise
default on our Current Credit Facility through June 30,
2010.
Contractual
Obligations
The
following table reflects our contractual commitments, including our future
minimum lease payments as of December 31, 2007. The only adjustment that
this chart reflects from the chart included in the Original 10-K is in the
amount of an earn-out associated with the acquisition of MaggieMoo’s, which is
included in Purchase Obligations (restated).
|
|
Payments due by period (in thousands)
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More
than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
Years
|
|
|
Years
|
|
|
5 years
|
|
Long-Term
Debt(a)
|
|
$ |
109,578 |
|
|
$ |
6,340 |
|
|
$ |
30,017 |
|
|
$ |
65,856 |
|
|
$ |
7,365 |
|
Capital
Lease Obligations(b)
|
|
|
48 |
|
|
|
27 |
|
|
|
21 |
|
|
|
- |
|
|
|
- |
|
Operating
Leases (c)
|
|
|
16,303 |
|
|
|
1,821 |
|
|
|
3,679 |
|
|
|
3,731 |
|
|
|
7,072 |
|
Purchase
Obligations (Restated) (d)
|
|
|
5,970 |
|
|
|
5,970 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under
GAAP (e)
|
|
|
3,815 |
|
|
|
1,562 |
|
|
|
869 |
|
|
|
49 |
|
|
|
1,335 |
|
Total
|
|
$ |
135,714 |
|
|
$ |
15,720 |
|
|
$ |
34,586 |
|
|
$ |
69,636 |
|
|
$ |
15,772 |
|
|
(a)
|
Amounts
included in this chart are based on long-term indebtedness as of December
31, 2007, which relates to the outstanding borrowings under the Original
BTMUCC Credit Facility. We entered into the January 2008 Amendment
increasing our indebtedness by $70 million, then comprehensively
restructured the facility in August 2008, partially paid down the facility
with the proceeds from the sales of the Bill Blass and Waverly businesses
in late 2008 and further paid down debt in August 2009, and entered into
amendments to the facility in late 2008 and 2009, all of which impacted
our long-term debt obligations. See Note 9 – Long-Term Debt (As
Restated) to our Consolidated Financial
Statements. Accordingly, the amounts shown above do not reflect
events subsequent to December 31, 2007, which have increased our payment
obligations and altered maturities. See Note 9 – Long-Term Debt (As
Restated) under the caption “Subsequent Events” for details
regarding the amount and maturity dates of our outstanding indebtedness
under the Current Credit
Facility.
|
|
(b)
|
Capital
Lease Obligations includes primarily a lease for computer hardware assumed
pursuant to the MaggieMoo’s
acquisition.
|
|
(c)
|
Operating
lease obligations includes primarily our real estate leases for our
corporate headquarters, our Bill Blass showroom located in New York City
(for which we remained obligated until we assigned the lease on June 11,
2009), our Waverly showroom located in New York City (which we have
subleased through the lease expiration) and our Norcross, Georgia
franchise management facility. We also remained obligated as of December
31, 2007 under certain leases for facilities we no longer use in Houston,
Texas (which we subleased through the lease expiration) and Marlborough,
Massachusetts (which we subleased and which lease expired by its terms on
August 31, 2008). See Item 2 – Properties for
additional information.
|
|
(d)
|
Purchase
obligations represent cash consideration in the amount of (i) $5.0 million
(in the form of two promissory notes excluding interest) payable on
February 29, 2008 with respect to the acquisition of Marble Slab Creamery,
(ii) approximately $840,000 (restated) pursuant to an earn-out provision
with respect to the acquisition of MaggieMoo’s, payable on March 31, 2008
and (iii) $130,000 of MaggieMoo’s initial cash consideration held back for
certain potential post-acquisition adjustments, payable on March 31, 2008.
With respect to the Marble Slab Creamery purchase obligation, $4.75
million of the $5.0 million (excluding interest) of previously unpaid
consideration was paid in 2008 pursuant to a settlement agreement as a
full and final resolution of the disputes between the parties. The
earn-out with respect to the acquisition of MaggieMoo’s has not yet been
paid due to on-going disputes between the parties. The MaggieMoo’s
earn-out was previously calculated at $526,581 but has been revised as a
result of the adjustments to our Consolidated Financial Statements which
affected the earn-out calculation. The $130,000 of MaggieMoo’s deferred
cash consideration was paid in March 2009.
|
|
(e)
|
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
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
The
Company maintains advertising funds in connection with our franchised brands
(“Marketing Funds”). The Marketing Funds are funded by franchisees pursuant to
franchise agreements. These Marketing Funds are considered separate legal
entities from the Company and are used exclusively for marketing of the
respective franchised brands. Athletes Foot Marketing Support Fund, LLC (“TAF
MSF”) is a Marketing Fund for the TAF brand. Historically, on an as needed
basis, the Company advanced funds to the TAF MSF under a loan agreement. The
terms of the loan agreement include a borrowing rate of prime (on the date of
the loan) plus 2%, and repayment by the TAF MSF with no penalty, at any time. As
of December 31, 2007 and 2006, the Company had receivable balances of $1.4
million and $350,000 from the TAF MSF, respectively. The Company does not
consolidate this or other Marketing Funds under FIN-46(R) –“Variable Interest Entities.”
For further discussion of Marketing Funds, see Note 3(m) to our
Consolidated Financial Statements.
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
Our
primary exposure to market risk is to changes in interest rates on our long-term
debt. As of December 31, 2008, the Company had outstanding borrowings of $142.2
million with BTMUCC in three separate tranches: (1) approximately $86.3 million
of Class A Franchise Notes, (2) approximately $41.7 of Class B Franchise Notes
and (3) $14.2 million of a Deficiency Note. On August 6, 2008, the Company paid
down $5 million of the Class B Franchise Notes. (For additional information
regarding the debt as of December 31, 2008 and as of the date of this Second
Amendment, see Note 9 – Long-Term Debt (As Restated)
and Note 25 – Subsequent
Events (As Restated) to the Consolidated Financial Statements.) The Class
B Franchise Notes and the Deficiency Note both bear a fixed interest rate.
However, the Class A Franchise Notes, representing approximately 61% of the
outstanding debt, bear interest at LIBOR plus 3.75% per year through July 31,
2011 and then LIBOR plus 5% per year thereafter until maturity on July 31,
2013. Although LIBOR rates fluctuate on a daily basis, our LIBOR rate
resets monthly on the 15th day of
each month.
We are
subject to interest rate risk on our rate-sensitive financing to the extent
interest rates change. Our fixed and variable rate debt as of December 31, 2008
and 2007 is shown in the following table (in millions).
|
|
As of December 31,
|
|
|
|
2008
|
|
|
% of
Total
|
|
|
2007
|
|
|
% of
Total
|
|
Fixed
Rate Debt
|
|
$ |
55.9 |
|
|
|
39 |
% |
|
-
|
|
|
|
0 |
% |
Variable
Rate Debt
|
|
|
86.3 |
|
|
|
61 |
% |
|
$ |
109.6 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
$ |
142.2 |
|
|
|
100 |
% |
|
$ |
109.6 |
|
|
|
100 |
% |
The
estimated fair value of the Company’s long-term debt as of December 31, 2008 was
approximately $101 million. As of December 31, 2007, the estimated
fair value of debt approximated the carrying value.
A change
in LIBOR can have material impact on our interest expense and cash flows. Based
upon the principal balance as of December 31, 2008, a 1% increase in LIBOR would
result in additional $0.9 million in interest expense per year, while a 1%
decrease in LIBOR would reduce interest expense per year by $0.9 million
interest per year. We did not in 2007 or 2008, and do not currently, utilize any
type of derivative instruments to manage interest rate risk. If our lender
requests it, however, we will be obligated to hedge the interest rate exposure
on our outstanding debt if LIBOR exceeds 3.5%.
Foreign
Exchange Rate Risk
The
Company is exposed to fluctuations in foreign currency on a limited basis due to
our international franchisees that transact business in currencies other than
the U.S. dollar. However, the overall exposure to foreign exchange gains and
losses is not expected to have a material impact on the consolidated results of
operations. Because international development fees and store opening fees are
paid in U.S. dollars, our primary foreign currency exchange exposure involves
continuing royalty revenue from our international franchisees, which as of
December 31, 2008 was approximately $3.0 million or 6.4% of our total
revenues.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF
CONTENTS
Reports
of Independent Registered Public Accounting Firm
|
44
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
45
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006,
and 2005
|
46
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31,
2007, 2006 and 2005
|
47
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006
and 2005
|
48
|
Notes
to Consolidated Financial Statements
|
49
|
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.
As
discussed in Note 2 to the consolidated financial statements, the consolidated
financial statements as of and for the year ended December 31, 2007, have been
restated.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company faces certain liquidity
uncertainties that raise substantial doubt about its ability to continue as a
going concern. Management’s plans in regard to these matters are
described in Note 3. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
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, except for the
material weakness related to the management structure lacking sufficient clarity
as to the roles and responsibilities of senior management that is identified in
Management’s Report on Internal Control over Financial Reporting (as restated),
as to which the date is August 11, 2009, expressed an adverse opinion on the
effectiveness of the Company’s internal control over financial
reporting.
/s/ KPMG
LLP
New York,
New York
March 20,
2008, except for Note 2, as to which the date is August 11,
2009
NEXCEN
BRANDS, INC.
CONSOLIDATED
BALANCE SHEETS
(IN
THOUSANDS, EXCEPT SHARE DATA)
|
|
DECEMBER 31,
|
|
|
|
2007 (As Restated (A))
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
46,569 |
|
|
$ |
83,536 |
|
Trade
receivables, net of allowances of $1,401 and $530
|
|
|
7,201 |
|
|
|
2,042 |
|
Other
receivables
|
|
|
2,677 |
|
|
|
511 |
|
Restricted
cash
|
|
|
5,174 |
|
|
|
— |
|
Prepaid
expenses and other current assets
|
|
|
3,867 |
|
|
|
2,210 |
|
Total
current assets
|
|
|
65,488 |
|
|
|
88,299 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
4,225 |
|
|
|
389 |
|
Goodwill
|
|
|
66,441 |
|
|
|
15,607 |
|
Trademarks
|
|
|
211,308 |
|
|
|
49,000 |
|
Other
intangible assets, net of amortization
|
|
|
7,565 |
|
|
|
3,792 |
|
Deferred
financing costs, net and other assets
|
|
|
2,927 |
|
|
|
— |
|
Restricted
cash
|
|
|
1,656 |
|
|
|
1,298 |
|
Total
Assets
|
|
$ |
359,610 |
|
|
$ |
158,385 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
8,689 |
|
|
$ |
3,235 |
|
Repurchase agreements and sales
tax liabilities - discontinued operations
|
|
|
— |
|
|
|
1,333 |
|
Restructuring
accruals
|
|
|
13 |
|
|
|
145 |
|
Deferred
revenue
|
|
|
4,033 |
|
|
|
40 |
|
Current
portion of long-term debt
|
|
|
6,340 |
|
|
|
— |
|
Acquisition
related liabilities
|
|
|
7,360 |
|
|
|
4,484 |
|
Total
current liabilities
|
|
|
26,435 |
|
|
|
9,237 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
103,238 |
|
|
|
— |
|
Deferred
tax liability
|
|
|
26,607 |
|
|
|
218 |
|
Acquisition
related liabilities
|
|
|
3,915 |
|
|
|
— |
|
Other
long-term liabilities
|
|
|
3,412 |
|
|
|
2,317 |
|
Total
liabilities
|
|
|
163,607 |
|
|
|
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
|
|
|
2,668,289 |
|
|
|
2,615,742 |
|
Treasury
stock
|
|
|
(1,757
|
) |
|
|
(352
|
) |
Accumulated
deficit
|
|
|
(2,474,126
|
) |
|
|
(2,469,258 |
) |
Total
stockholders’ equity
|
|
|
192,963 |
|
|
|
146,613 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
359,610 |
|
|
$ |
158,385 |
|
(A)
|
Restated
as described in Note 2 of the Consolidated Financial
Statements.
|
See
accompanying notes to consolidated financial statements.
NEXCEN
BRANDS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN
THOUSANDS, EXCEPT PER SHARE DATA)
|
|
YEAR ENDED DECEMBER 31,
|
|
|
|
2007 (As Restated (A))
|
|
|
2006
|
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Royalty
revenues
|
|
$ |
15,722 |
|
|
$ |
1,175 |
|
|
$ |
— |
|
Licensing
revenues
|
|
|
15,399 |
|
|
|
— |
|
|
|
— |
|
Franchise
fee revenues
|
|
|
3,447 |
|
|
|
749 |
|
|
|
— |
|
Total
revenues
|
|
|
34,568 |
|
|
|
1,924 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Brands
|
|
|
(14,651
|
) |
|
|
(453
|
) |
|
|
— |
|
Corporate
|
|
|
(12,991
|
) |
|
|
(7,261
|
) |
|
|
(3,645
|
) |
Professional
fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Brands
|
|
|
(1,696
|
) |
|
|
(115
|
) |
|
|
— |
|
Corporate
|
|
|
(1,606
|
) |
|
|
(1,034
|
) |
|
|
(1,444
|
) |
Depreciation
and amortization
|
|
|
(1,660
|
) |
|
|
(471
|
) |
|
|
(159
|
) |
Restructuring
charges
|
|
|
— |
|
|
|
(1,079
|
) |
|
|
7 |
|
Total
operating expenses
|
|
|
(32,604
|
) |
|
|
(10,413
|
) |
|
|
(5,241
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
1,964 |
|
|
|
(8,489
|
) |
|
|
(5,241
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,115 |
|
|
|
2,637 |
|
|
|
1,478 |
|
Interest
expense
|
|
|
(5,116
|
) |
|
|
— |
|
|
|
— |
|
Other
income, net
|
|
|
288 |
|
|
|
700 |
|
|
|
231 |
|
Minority
interest
|
|
|
(269
|
) |
|
|
— |
|
|
|
— |
|
Investment
loss, net
|
|
|
— |
|
|
|
— |
|
|
|
(19
|
) |
Total
non-operating income (expense)
|
|
|
(2,982
|
) |
|
|
3,337 |
|
|
|
1,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(1,018
|
) |
|
|
(5,152
|
) |
|
|
(3,551
|
) |
Income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(283
|
) |
|
|
(81
|
) |
|
|
— |
|
Deferred
|
|
|
(3,019
|
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(4,320
|
) |
|
|
(5,233
|
) |
|
|
(3,551
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of tax expense of $64 for
2006
|
|
|
(548 |
) |
|
|
2,358 |
|
|
|
225 |
|
Gain
(loss) on sale of discontinued operations
|
|
|
— |
|
|
|
755 |
|
|
|
(1,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(4,868
|
) |
|
$ |
(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 |
|
(A)
|
Restated
as described in Note 2 of the Consolidated Financial
Statements.
|
See
accompanying notes to consolidated financial statements.
NEXCEN
BRANDS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(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 |
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,520 |
) |
|
|
- |
|
|
|
- |
|
|
|
(4,520 |
) |
Unrealized
gain on investments available for sale
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
216 |
|
|
|
216 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,304 |
|
Exercise
of options and warrants
|
|
|
- |
|
|
|
- |
|
|
|
32 |
|
|
|
(7 |
) |
|
|
- |
|
|
|
- |
|
|
|
25 |
|
Stock
based compensation
|
|
|
- |
|
|
|
- |
|
|
|
76 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
76 |
|
Balance
as of December 31, 2005
|
|
|
- |
|
|
|
440 |
|
|
|
2,593,085 |
|
|
|
(2,467,138 |
) |
|
|
- |
|
|
|
- |
|
|
|
126,387 |
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,120 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,120 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,120 |
) |
Exercise
of options and warrants
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
Common
stock issued
|
|
|
- |
|
|
|
41 |
|
|
|
19,479 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19,520 |
|
Common
stock repurchased
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(352 |
) |
|
|
- |
|
|
|
(352 |
) |
Stock
based compensation
|
|
|
- |
|
|
|
- |
|
|
|
3,177 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,177 |
|
Balance
as of December 31, 2006
|
|
|
- |
|
|
|
481 |
|
|
|
2,615,742 |
|
|
|
(2,469,258 |
) |
|
|
(352 |
) |
|
|
- |
|
|
|
146,613 |
|
Net
loss (As Restated (A))
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,868 |
) |
|
|
- |
|
|
|
- |
|
|
|
(4,868 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,868 |
) |
Surrender
of shares from cashless exercise of warrants
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,405 |
) |
|
|
- |
|
|
|
(1,405 |
) |
Common
stock issued
|
|
|
- |
|
|
|
60 |
|
|
|
43,141 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
43,201 |
|
Exercise
of options and warrants
|
|
|
- |
|
|
|
16 |
|
|
|
4,702 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,718 |
|
Stock
based compensation (As Restated (A))
|
|
|
- |
|
|
|
- |
|
|
|
4,704 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,704 |
|
Balance
as of December 31, 2007 (As Restated (A))
|
|
$ |
- |
|
|
$ |
557 |
|
|
$ |
2,668,289 |
|
|
$ |
(2,474,126 |
) |
|
$ |
(1,757 |
) |
|
$ |
- |
|
|
$ |
192,963 |
|
(A)
|
Restated
as described in Note 2 of the Consolidated Financial
Statements.
|
See
accompanying notes to consolidated financial statements.
NEXCEN
BRANDS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(IN
THOUSANDS)
|
|
2007
(As Restated (A))
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$ |
(4,320 |
) |
|
$ |
(5,233 |
) |
|
$ |
(3,551 |
) |
Adjustments
to reconcile net loss from continuing operations to net cash
(used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,660
|
|
|
|
471
|
|
|
|
159
|
|
Deferred
income taxes
|
|
|
3,019 |
|
|
|
— |
|
|
|
—
|
|
Stock
based compensation
|
|
|
4,287
|
|
|
|
1,632
|
|
|
|
76
|
|
Minority
interest
|
|
|
269 |
|
|
|
—
|
|
|
|
— |
|
Amortization
of loan fees
|
|
|
319 |
|
|
|
— |
|
|
|
— |
|
Other
non-cash expenses
|
|
|
27 |
|
|
|
— |
|
|
|
— |
|
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
|
|
|
(4,822 |
) |
|
|
(791 |
) |
|
|
— |
|
(Increase)
decrease in prepaid expenses and other assets
|
|
|
(1,331 |
) |
|
|
(1,096 |
) |
|
|
3,112 |
|
(Increase)
decrease in interest and other receivables
|
|
|
(1,029 |
) |
|
|
663 |
|
|
|
(818 |
) |
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
1,076 |
|
|
|
(249 |
) |
|
|
903 |
|
Increase
(decrease) in restructuring accruals and other liabilities
|
|
|
—
|
|
|
|
314 |
|
|
|
(1,202 |
) |
(Decrease)
in deferred revenue
|
|
|
(1,385 |
) |
|
|
— |
|
|
|
— |
|
Cash
(used in) provided by discontinued operations for operating
activities
|
|
|
(1,177 |
) |
|
|
3,399 |
|
|
|
2,760 |
|
Net
cash (used in) provided by operating activities
|
|
|
(3,407 |
) |
|
|
(890 |
) |
|
|
2,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in restricted cash
|
|
|
(5,532 |
) |
|
|
7,335 |
|
|
|
199 |
|
Purchase
of trademarks, including registration costs
|
|
|
(123 |
) |
|
|
— |
|
|
|
— |
|
Purchases
of property and equipment
|
|
|
(3,930 |
) |
|
|
(151 |
) |
|
|
(47 |
) |
Acquisitions,
net of cash acquired
|
|
|
(136,588 |
) |
|
|
(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
|
|
|
(146,173 |
) |
|
|
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
|
|
|
(3,049 |
) |
|
|
—
|
|
|
|
— |
|
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
|
|
|
112,613 |
|
|
|
(134,275 |
) |
|
|
133,949
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(36,967 |
) |
|
|
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
|
|
$ |
46,569 |
|
|
$ |
83,536 |
|
|
$ |
1,092 |
|
(A)
|
Restated
as described in Note 2 of the Consolidated Financial
Statements.
|
See
accompanying notes to consolidated financial statements
NEXCEN
BRANDS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
|
ORGANIZATION
AND DESCRIPTION OF THE BUSINESS
|
NexCen is
a strategic brand management company. We commenced our brand management business
in June 2006 when we acquired UCC Capital, an investment banking firm that
provided financial advisory services, particularly to companies involved in
monetizing intellectual property assets. In acquiring UCC Capital, our strategy
was to begin building a brand management business by acquiring and operating
businesses that own valuable brand assets and other intellectual property and
that earn revenues primarily from the franchising or licensing of their
intellectual property.
In 2007,
our franchise and licensing businesses earned revenues primarily through the
licensing of their valuable brands and related intellectual property to third
parties. These third parties paid us licensing, franchising and other
contractual fees and royalties for the right to use our intellectual property on
either an exclusive or non-exclusive basis. In 2007, we received licensing,
franchising and other contractual fees that included 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 reflected both recurring and
non-recurring payment streams.
Our
principal assets are, and were as of December 31, 2007, intangible assets (the
trademarks and other intellectual property assets and associated goodwill
related to the brands and businesses that we acquire, manage and develop) and
our people. We did not have substantial tangible assets, as our business model
was not designed to require significant capital investment in tangible
assets.
Through
the date of the Original 10-K, we had acquired nine brands, as
follows:
QSR
Franchising
|
·
|
MaggieMoo’s
(acquired February 28, 2007)
|
|
·
|
Marble
Slab Creamery (acquired February 28,
2007)
|
|
·
|
Pretzel
Time (acquired August 7, 2007)
|
|
·
|
Pretzelmaker
(acquired August 7, 2007)
|
|
·
|
Great
American Cookies (acquired January 29,
2008)
|
Retail
Franchising
|
·
|
The
Athlete’s Foot (TAF) (acquired November 7,
2006)
|
|
·
|
Shoebox New
York (joint venture interest acquired January 15,
2008)
|
Consumer Branded
Products
|
·
|
Bill
Blass (acquired February 15, 2007 and subsequently sold on December 24,
2008)
|
|
·
|
Waverly
(acquired May 2, 2007 and subsequently sold on October 3,
2008)
|
Based on
our brand holdings as of December 31, 2007 and our plans to acquire additional
brands, we previously provided financial information for fiscal year 2007 in
four segments: QSR Franchising, Retail Franchising, Consumer Branded Products
and Corporate. We restructured our Company in 2008 to operate in a
single business segment: Franchising.
(2)
RESTATEMENT
Adjustments Related to the
January 2008
Amendment
The
Company’s previously issued financial statements are being restated as a result
of our determination that certain aspects of the January 2008 Amendment to the
Original BTMUCC Credit Facility, which provided NexCen with financing for our
acquisition of the Great American Cookies business, were not adequately
discussed in our prior public filings. The January 2008 Amendment was entered
into and went into effect in 2008 and therefore did not affect the amounts
reported in the Consolidated Financial Statements as of December 31, 2007.
Nonetheless, the Original 10-K contained discussions of the January 2008
Amendment in the Notes to the Consolidated Financial Statements related to
“Long-Term Debt” and “Subsequent Events.” We have revised the disclosure that
appeared in these portions of the Original 10-K to reflect our subsequent
reconsideration of the terms of the January 2008 Amendment and their effect on
the Company’s financial condition and liquidity as of the filing date of our
Original 10-K, before the credit facility was restructured on August 15, 2008
and further amended in late 2008 and 2009. We also have concluded that there was
substantial doubt about our ability to continue as a going concern as of
December 31, 2007. As a result, Note 3 – Basis of Presentation, Note 9
– Long-Term Debt and
Note 25 – Subsequent
Events, have been restated.
Other
Adjustments
The
Company also has revised its previously issued financial statements to correct
certain errors, some of which were previously identified but not recorded
because they were considered immaterial and others of which were identified in
the restatement process. The Company has concluded that these adjustments are
not material either individually or in the aggregate. The Company’s net loss per
share is not impacted by the restatement.
The
effect of all restatement adjustments on our Consolidated Statement of
Operations for the year ended December 31, 2007 is as follows:
Increase
in net loss
|
$
|
(0.
|
2)
million or 4.7%
|
A summary
of adjustments to the Company’s Consolidated Statement of Operations for the
year ended December 31, 2007 is as follows:
Increase in total
revenues
|
$
|
0.
|
3
million
|
Increase in selling, general and
administrative expenses
|
$
|
(0.
|
3)
million
|
Increase in other operating
expenses
|
$
|
(0.
|
2)
million
|
Decrease in operating
income
|
$
|
(0.
|
2)
million
|
Increase in loss from continuing
operations
|
$
|
(0.
|
3)
million
|
Increase
in net loss
|
$
|
(0.
|
2)
million
|
The
effect of all restatement adjustments on our Consolidated Balance Sheet as of
December 31, 2007 is as follows:
Increase
in total assets
|
$
|
0.
|
4
million or 0.1%
|
Increase
in total liabilities
|
$
|
0.
|
3
million or 0.2%
|
Increase
in total equity
|
$
|
0.
|
1
million or 0.1%
|
The
effect of all restatement adjustments on our Consolidated Statement of Cash
Flows as of December 31, 2007 is as follows:
|
$
|
0.
|
7
million or 17.9%
|
|
$
|
0.
|
1
million or 0.0%
|
Decrease
in net cash provided by financing activities
|
$
|
0.
|
5
million or 0.4%
|
The
restatement reflects corrections of errors in accounting with respect to the
Consolidated Statement of Operations, Consolidated Balance Sheet, and
Consolidated Statement of Cash Flows line items listed below:
|
|
Year ended December 31, 2007
|
|
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
(IN
THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Royalty
revenues
|
|
$ |
15,289 |
|
|
$ |
433 |
|
|
$ |
15,722 |
|
Licensing
revenues
|
|
|
15,542 |
|
|
|
(143 |
) |
|
|
15,399 |
|
Franchise
fee revenues
|
|
|
3,464 |
|
|
|
(17 |
) |
|
|
3,447 |
|
Corporate
revenues
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
revenues
|
|
|
34,295 |
|
|
|
273 |
|
|
|
34,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Brands
|
|
|
(14,352 |
) |
|
|
(299 |
) |
|
|
(14,651 |
) |
Corporate
|
|
|
(12,977 |
) |
|
|
(14 |
) |
|
|
(12,991 |
) |
Professional
fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Brands
|
|
|
(1,605 |
) |
|
|
(91 |
) |
|
|
(1,696 |
) |
Corporate
|
|
|
(1,552 |
) |
|
|
(54 |
) |
|
|
(1,606 |
) |
Depreciation
and amortization
|
|
|
(1,619 |
) |
|
|
(41 |
) |
|
|
(1,660 |
) |
Total
operating expenses
|
|
|
(32,105 |
) |
|
|
(499 |
) |
|
|
(32,604 |
) |
Operating
income
|
|
|
2,190 |
|
|
|
(226 |
) |
|
|
1,964 |
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,100 |
|
|
|
15 |
|
|
|
2,115 |
|
Interest
expense
|
|
|
(5,099 |
) |
|
|
(17 |
) |
|
|
(5,116 |
) |
Other
income, net
|
|
|
318 |
|
|
|
(30 |
) |
|
|
288 |
|
Minority
interest
|
|
|
(269 |
) |
|
|
- |
|
|
|
(269 |
) |
Total
non-operating income (expense)
|
|
|
(2,950 |
) |
|
|
(32 |
) |
|
|
(2,982 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(760 |
) |
|
|
(258 |
) |
|
|
(1,018 |
) |
Income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(236 |
) |
|
|
(47 |
) |
|
|
(283 |
) |
Deferred
|
|
|
(3,067 |
) |
|
|
48 |
|
|
|
(3,019 |
) |
Total
income taxes
|
|
|
(3,303 |
) |
|
|
1 |
|
|
|
(3,302 |
) |
Loss
from continuing operations
|
|
|
(4,063 |
) |
|
|
(257 |
) |
|
|
(4,320 |
) |
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
(586 |
) |
|
|
38 |
|
|
|
(548 |
) |
Net
loss
|
|
$ |
(4,649 |
) |
|
$ |
(219 |
) |
|
$ |
(4,868 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share (basic and diluted) from continuing operations
|
|
$ |
(0.08 |
) |
|
$ |
- |
|
|
$ |
(0.08 |
) |
Income
(loss) per share (basic and diluted) from discontinued
operations
|
|
|
(0.01 |
) |
|
|
- |
|
|
|
(0.01 |
) |
Net
loss per share - basic and diluted
|
|
$ |
(0.09 |
) |
|
$ |
- |
|
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic and diluted
|
|
|
51,889 |
|
|
|
- |
|
|
|
51,889 |
|
|
|
Year ended December 31, 2007
|
|
CONSOLIDATED BALANCE SHEET
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash
& cash equivalents
|
|
$ |
46,345 |
|
|
$ |
224 |
|
|
$ |
46,569 |
|
Trade
receivables, net of allowances (A)
|
|
|
7,098 |
|
|
|
103 |
|
|
|
7,201 |
|
Other
receivables
|
|
|
2,685 |
|
|
|
(8 |
) |
|
|
2,677 |
|
Restricted
cash
|
|
|
5,274 |
|
|
|
(100 |
) |
|
|
5,174 |
|
Prepaid
expenses and other current assets
|
|
|
3,871 |
|
|
|
(4 |
) |
|
|
3,867 |
|
Total
current assets
|
|
|
65,273 |
|
|
|
215 |
|
|
|
65,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
4,200 |
|
|
|
25 |
|
|
|
4,225 |
|
Goodwill
|
|
|
67,224 |
|
|
|
(783 |
) |
|
|
66,441 |
|
Trademarks
|
|
|
210,824 |
|
|
|
484 |
|
|
|
211,308 |
|
Other
intangible assets, net of amortization
|
|
|
7,546 |
|
|
|
19 |
|
|
|
7,565 |
|
Deferred
financing costs, net of other assets
|
|
|
2,484 |
|
|
|
443 |
|
|
|
2,927 |
|
Restricted
cash
|
|
|
1,656 |
|
|
|
- |
|
|
|
1,656 |
|
Total
Assets
|
|
$ |
359,207 |
|
|
$ |
403 |
|
|
$ |
359,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
7,871 |
|
|
$ |
818 |
|
|
$ |
8,689 |
|
Repurchase
agreements and sales tax liabilities - discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Restructuring
accruals
|
|
|
13 |
|
|
|
- |
|
|
|
13 |
|
Deferred
revenue
|
|
|
3,976 |
|
|
|
57 |
|
|
|
4,033 |
|
Current
portion of long-term debt
|
|
|
6,340 |
|
|
|
- |
|
|
|
6,340 |
|
Acquisition
related liabilities
|
|
|
7,173 |
|
|
|
187 |
|
|
|
7,360 |
|
Total
current liabilities
|
|
|
25,373 |
|
|
|
1,062 |
|
|
|
26,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
103,238 |
|
|
|
- |
|
|
|
103,238 |
|
Deferred
tax liability
|
|
|
27,719 |
|
|
|
(1,112 |
) |
|
|
26,607 |
|
Acquisition
related liabilities
|
|
|
3,785 |
|
|
|
130 |
|
|
|
3,915 |
|
Other
long-term liabilities
|
|
|
3,239 |
|
|
|
173 |
|
|
|
3,412 |
|
Total
liabilities
|
|
|
163,354 |
|
|
|
253 |
|
|
|
163,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
3,040 |
|
|
|
- |
|
|
|
3,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock
|
|
|
557 |
|
|
|
- |
|
|
|
557 |
|
Additional
paid-in capital
|
|
|
2,667,920 |
|
|
|
369 |
|
|
|
2,668,289 |
|
Treasury
stock
|
|
|
(1,757 |
) |
|
|
- |
|
|
|
(1,757 |
) |
Accumulated
deficit
|
|
|
(2,473,907 |
) |
|
|
(219 |
) |
|
|
(2,474,126 |
) |
Stockholders'
equity
|
|
|
192,813 |
|
|
|
150 |
|
|
|
192,963 |
|
Total
liabilities and stockholders' equity
|
|
$ |
359,207 |
|
|
$ |
403 |
|
|
$ |
359,610 |
|
|
(A)
|
Included
within the adjustment to trade receivables, net of allowance was an
adjustment to the allowance for doubtful accounts of approximately
$228,000.
|
|
|
Year ended December 31, 2007
|
|
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
(IN
THOUSANDS)
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$ |
(4,063 |
) |
|
$ |
(257 |
) |
|
$ |
(4,320 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
& amortization
|
|
|
1,619 |
|
|
|
41 |
|
|
|
1,660 |
|
Deferred
income taxes
|
|
|
3,067 |
|
|
|
(48 |
) |
|
|
3,019 |
|
Stock
based compensation
|
|
|
4,215 |
|
|
|
72 |
|
|
|
4,287 |
|
Minority
interest
|
|
|
269 |
|
|
|
- |
|
|
|
269 |
|
Amortization
of loan fees
|
|
|
309 |
|
|
|
10 |
|
|
|
319 |
|
Other
non-cash expenses
|
|
|
- |
|
|
|
27 |
|
|
|
27 |
|
Changes
in assets and liabilities, net of acquired assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in trade receivables, net of allowances
|
|
|
(4,719 |
) |
|
|
(103 |
) |
|
|
(4,822 |
) |
Increase
in prepaid expenses and other assets
|
|
|
(1,333 |
) |
|
|
2 |
|
|
|
(1,331 |
) |
Increase
in interest and other receivables
|
|
|
(1,039 |
) |
|
|
10 |
|
|
|
(1,029 |
) |
Increase
in accounts payables and accrued expenses
|
|
|
219 |
|
|
|
857 |
|
|
|
1,076 |
|
Decrease
in deferred revenues
|
|
|
(1,478 |
) |
|
|
93 |
|
|
|
(1,385 |
) |
Cash
used in discontinued operations for operating activities
|
|
|
(1,215 |
) |
|
|
38 |
|
|
|
(1,177 |
) |
Net
cash used in operating activities
|
|
|
(4,149 |
) |
|
|
742 |
|
|
|
(3,407 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
|
(5,632 |
) |
|
|
100 |
|
|
|
(5,532 |
) |
Purchases
of trademarks, including registration costs
|
|
_
|
|
|
|
(123 |
) |
|
|
(123 |
) |
Purchases
of property and equipment
|
|
|
(3,905 |
) |
|
|
(25 |
) |
|
|
(3,930 |
) |
Acquisitions,
net of cash acquired
|
|
|
(136,569 |
) |
|
|
(19 |
) |
|
|
(136,588 |
) |
Net
cash used in investing activities
|
|
|
(146,106 |
) |
|
|
(67 |
) |
|
|
(146,173 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of minority interest
|
|
|
2,771 |
|
|
|
- |
|
|
|
2,771 |
|
Proceeds
from debt borrowing
|
|
|
110,801 |
|
|
|
- |
|
|
|
110,801 |
|
Financing
costs
|
|
|
(2,598 |
) |
|
|
(451 |
) |
|
|
(3,049 |
) |
Principal
payments on debt
|
|
|
(1,223 |
) |
|
|
- |
|
|
|
(1,223 |
) |
Exercise
of options and warrants
|
|
|
3,313 |
|
|
|
- |
|
|
|
3,313 |
|
Net
cash provided by financing activities
|
|
|
113,064 |
|
|
|
(451 |
) |
|
|
112,613 |
|
Net
decrease in cash and cash equivalents
|
|
|
(37,191 |
) |
|
|
224 |
|
|
|
(36,967 |
) |
Cash
and cash equivalents, at beginning of period
|
|
|
83,536 |
|
|
|
- |
|
|
|
83,536 |
|
Cash
and cash equivalents, at end of period
|
|
$ |
46,345 |
|
|
$ |
224 |
|
|
$ |
46,569 |
|
Notes
affected by the restatement are Notes 3(d) – Cash and Cash Equivalents (As
Restated); Note 3(e) – Trade Receivables and Allowance for
Doubtful Accounts (As Restated); Note 6 – Property and Equipment (As
Restated); Note 7 – Goodwill, Trademarks and Intangible
Assets (As Restated); Note 8 – Accounts Payable and Accrued
Expenses (As Restated); Note 9 – Long-Term Debt (As Restated); Note 10 –
Income Taxes (As
Restated); Note 12 – Stock Based Compensation (As
Restated); Note 14 (a) and 14 (d) – Commitments and Contingencies (As
Restated); Note 15 – Discontinued
Operations (As
Restated); Note 16 – Quarterly Financial Information (As
Restated) (Unaudited); Note 19 – Acquisition of Bill Blass (As
Restated); Note 20 – Acquisitions of Marble Slab Creamery
and MaggieMoo’s (As Restated); Note 21 – Acquisition of Waverly (As
Restated); Note 22 – Acquisition of Pretzel Time and
Pretzelmaker (As Restated); Note 23 – Pro Forma Information Related To The
Acquisitions (As Restated) (Unaudited); Note 24 – Segment Reporting (As Restated);
and Note 25 –
Subsequent Events (As Restated).
(3)
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF
PRESENTATION:
In
connection with the acquisition of Great American Cookies in January 2008, we
used approximately $20.0 million of the $46.6 million of cash and cash
equivalents that the Company had on hand as of December 31, 2007. For the
remaining purchase price, the Company and BTMUCC entered into the January 2008
Amendment to the Original BTMUCC Credit Facility. As discussed in detail in Note
9 – Long-Term Debt (As Restated) to our
Consolidated Financial Statements, the January 2008 Amendment allowed us to
borrow an additional $70 million but increased debt service payments to BTMUCC
and reduced the amount of cash flow available to the Company to cover operating
expenses. Specifically, the amendment required $35 million of the principal
amount of the additional borrowings to be reduced to $5 million by October 17,
2008. The increased debt service obligations and the accelerated redemption
feature of the January 2008 Amendment raised significant concerns about the
Company’s liquidity and capital resources and led us to believe that there was
substantial doubt about the Company’s ability to continue as a going concern.
Based on preliminary projections as of May 2008, the Company expected that,
without changes to the terms of the January 2008 Amendment or other measures
that would have enhanced our liquidity, the Company would have faced a cash
shortfall by October 2008 and also would have needed additional cash to make the
required principal payment on October 17, 2008 then estimated to be
approximately $21 million.
As a
result of the August 15, 2008 comprehensive restructuring of the Original BTMUCC
Credit Facility and the January 2008 Amendment and subsequent amendments in 2008
and 2009, as well as actions taken to restructure the Company and reduce our
recurring operating expenses, we improved our cash flow and, in general, the
Company’s financial condition. Under the Current Credit Facility, we deferred to
2011 and thereafter much of our principal repayment obligations and certain of
our interest obligations. We also restructured our credit facility to provide us
with monthly, rather than quarterly, cash distributions from our operating
revenues that are held in lock-box accounts until distributed pursuant to the
terms of the Current Credit Facility. We use these distributions, which are net
of required debt service payments, to pay our operating expenses and for other
purposes permitted by the terms of our Current Credit Facility. Any excess
monies after paying operating expenses and capital expenses permitted under the
Current Credit Facility are required to be applied to pay down the outstanding
principal under our Current Credit Facility. Starting in May 2008, we also took
immediate actions to reduce the Company’s recurring operating expenses,
including a headcount reduction of non-essential staff, thereby significantly
decreasing our monthly cash selling, general and administrative expenses as
compared to April 30, 2008. As a result of these changes, we have access to more
cash more frequently to cover our reduced recurring operating expenses and pay
principal payments on our debt. See Note 9 – Long-Term Debt (As Restated) to the
Consolidated Financial Statements for details regarding our Current Credit
Facility.
We
anticipate that cash generated from operations will provide us with sufficient
liquidity to meet the expenses related to ordinary course operations, including
our debt service obligations, for at least the next twelve months. Nonetheless,
market and economic conditions may worsen and negatively impact our franchisees
and our ability to sell new franchises. As a result, our financial condition and
liquidity raise substantial doubt about our ability to continue as a going
concern. We are highly leveraged; we have no additional borrowing capacity under
the Current Credit Facility; and the cash generated by operations is subject to
lock-box restrictions. Accordingly, we continue to have some uncertainty with
respect to our ability to meet non-ordinary course expenses or expenses beyond
certain total limits, which are not permitted to be paid out of cash generated
from operations under the terms of the Current Credit Facility, but instead must
be paid out of cash on hand. If we are not able to generate sufficient cash from
operations to pay our debt service obligations and our expenses, we would defer,
reduce or eliminate our expenditures, which may negatively impact our
operations. Alternatively, we would seek to restructure or refinance our debt,
but there can be no guarantee that BTMUCC would agree to any further
restructuring or refinancing plans.
The
accompanying Consolidated Financial Statements have been prepared assuming that
the Company will continue as a going concern, and do not contain any adjustments
that might result if we were unable to continue as a going concern.
(a)
PRINCIPLES OF CONSOLIDATION
The
Consolidated Financial Statements include the accounts of the Company and our
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 3 (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
year ended December 31, 2006, the Company also reclassified changes in
restricted cash as cash flows from investing activities. 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 cash flows from investing activities.
(c) USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with GAAP
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 (As Restated)
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 (As Restated1)
|
|
|
DECEMBER 31,
2006
|
|
Cash
|
|
$ |
12,764 |
|
|
$ |
10,694 |
|
Money
market accounts
|
|
|
33,805 |
|
|
|
72,842 |
|
Total
|
|
$ |
46,569 |
|
|
$ |
83,536 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
The cash
balance as of December 31, 2007 also includes approximately $7 million of cash
received from franchisees and licensees that are being held in trust in
accordance with the terms of our Current Credit Facility. See Note 9 – Long-Term Debt (As Restated).
These funds are applied to the principal and interest on the debt associated
with our Current Credit Facility then released to the Company for general
corporate purposes.
(e)
TRADE RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS (As Restated)
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 $1.4 million (as restated) and
$530,000, as of December 31, 2007 and 2006, respectively. The Company provides a
reserve for uncollectible amounts based on our 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:
(in thousands)
|
|
Beginning
Balance
|
|
|
Acquisitions
|
|
|
Additions
(As Restated1)
|
|
|
Write-
Offs
|
|
|
Ending
Balance
(As Restated1)
|
|
2005
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
2006
|
|
$ |
- |
|
|
$ |
530 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
530 |
|
2007
|
|
$ |
530 |
|
|
$ |
158 |
|
|
$ |
713 |
|
|
$ |
- |
|
|
$ |
1,401 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
(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 as of
December 31, 2007 under the Original BTMUCC Credit Facility approximated its
fair value because the entire debt was subject to variable interest rates that
adjusted 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)
GOODWILL, TRADEMARKS 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 Company’s brands as of December 31, 2007,
namely, the TAF, Bill Blass, Marble Slab Creamery, MaggieMoo’s, Waverly, Pretzel
Time and Pretzelmaker trademarks. Other identifiable intangible assets include
the value of non-compete agreements of key executives, license agreements, 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. We capitalize the material costs associated with
registering and maintaining trademarks.
In
accordance with the requirements of SFAS No. 142, goodwill has been assigned to
reporting units for purposes of impairment testing. Our reporting units as of
December 31, 2007 were our operating segments: Retail Franchising, QSR
Franchising, Consumer Branded Products and Corporate.
Costs
incurred in connection with our Current Credit Facility (see Note 9 – Long-Term Debt (As Restated)) 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.
(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,” 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 SFAS No. 148,
“Accounting for Stock-based
Compensation Transition and Disclosure.”
As of
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payments.” 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. 123R. 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 12 – Stock Based Compensation (As
Restated) 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
12 – Stock Based Compensation
(As Restated), 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
represents continuing fees received from franchisees that are determined as a
percentage of franchisee net sales and are recognized as revenues when they are
earned on an accrual basis. Franchise fee income, which represents initial fees
paid by franchisees for franchising rights, is recognized when substantially all
initial services required by the franchise agreements are performed, which is
generally considered to be upon the opening of the franchisee’s store. Revenues
from license agreements represent income that is determined as the greater of a
minimum fixed periodic fee or a percentage of licensee net sales (whichever is
greater). Revenues for licensees whose sales exceed contractual minimums are
recognized when licensed products are sold or reported by the Company’s
licensees. For licensees whose sales do not exceed contractual sales minimums,
royalty is recognized ratably based on contractual minimums.
(m)
ADVERTISING
Advertising
and marketing costs paid by the Company in connection with our consumer brands
segment were expensed as incurred. Advertising expense was $2.8 million (as
restated) for the year ended December 31, 2007, our first full year of brand
operations. The Company received advertising contributions from
licensees of our 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, respectively.
The
Company maintains advertising funds in connection with our QSR Franchising and
Retail Franchising segments (“Marketing Funds”). These Marketing Funds are
considered separate legal entities from the Company. The Marketing Funds are
funded by franchisees pursuant to franchise agreements that require most
domestic franchisees to remit up to approximately 2% of gross sales to the
applicable Marketing Fund. These funds are owned by the Company, but used
exclusively for marketing of the respective franchised brands. The purpose of
the Marketing Funds is to centralize the advertising of the respective franchise
concept into regional and national campaigns. The Company serves as the
administrator of the Marketing Funds, and is reimbursed on a cost-only basis for
the amount spent by the Company for advertising expenses related to the
franchised brands. The Marketing Funds are established with minimal equity
investment. The advisory boards of the Marketing Funds are comprised entirely of
elected franchisees (none of whom are NexCen employees, officers or directors).
The advisory boards determine the advertising policies of their respective
Marketing Funds. Additionally, if the Marketing Funds are dissolved, any
remaining cash in the fund would either be distributed back to the franchisees
or spent on advertising.
Based on
the foregoing, 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 Company’s Consolidated Financial Statements.
Contributions received by these funds totaled approximately $2.2 million for the
year ended December 31, 2007. At December 31, 2007, the Consolidated Financial
Statements of the Company included loans and advances receivable of $1.4 million
due from The Athlete’s Foot Marketing Support Fund, LLC. As of December 31,
2007, the Company did not have any outstanding loans and advances from any other
Marketing Fund.
(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. The impact of adopting SFAS No. 157 is immaterial to the
Company’s Consolidated Financial Statements.
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. The Company did not adopt SFAS No.
159.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations.” Under
Statement SFAS No. 141R, 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. 141R 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. 141R is
effective for annual periods beginning on or after December 15, 2008. SFAS No.
141R will impact the Company’s accounting for future acquisitions, if
any.
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.
The Company adopted SFAS No. 160 as of January 1, 2009. SFAS No. 160 will impact
the presentation and disclosure of minority interest in the Company's
Consolidated Financial Statements.
In April
2008, the FASB issued FSP No. 142-3, "Determination of the Useful Life of
Intangible Assets." FSP No. 142-3 will improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142
and the period of expected cash flows used to measure the fair value of the
asset under FSP No. 141R, and other U.S. generally accepted accounting
principles. FSP No. 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company has adopted this standard as of January 1, 2009.
We are currently assessing the impact of FSP No. 142-3 will have on the
Company’s Consolidated Financial Statements.
In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with U.S. generally accepted accounting principles. SFAS
No. 162 is effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to Auditing Interpretations
("AU") section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The Company will adopt this standard when
effective.
(4)
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
Investments
available-for-sale consisted of highly liquid investments in U.S. Government
Agency-sponsored MBS 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 our 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.
(5)
SUPPLEMENTAL CASH FLOW INFORMATION
Interest
paid for the years ended December 31, 2007, 2006 and 2005 was $2,747, $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 our 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 UCC Capital, 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 TAF, the Company issued
1.4 million shares of common stock and warrants to purchase 500,000 shares of
common stock with an aggregate fair value of approximately $9.8
million.
(6) PROPERTY AND
EQUIPMENT (As Restated)
Property
and equipment consists of the following (in thousands):
|
|
|
|
December
31,
|
|
|
|
Estimated
Useful
Lives
|
|
2007 (As Restated1)
|
|
|
2006
|
|
Furniture
& Fixtures
|
|
7 -
10 Years
|
|
$ |
792 |
|
|
$ |
206 |
|
Computers
and equipment
|
|
3 -
5 Years
|
|
|
914 |
|
|
|
126 |
|
Software
|
|
3
Years
|
|
|
486 |
|
|
|
112 |
|
Leasehold
improvements
|
|
Term
of Lease
|
|
|
2,958 |
|
|
|
393 |
|
Total
property and equipment
|
|
|
|
|
5,150 |
|
|
|
837 |
|
Less
accumulated depreciation
|
|
|
|
|
(925 |
) |
|
|
(448 |
) |
Property
and equipment, net of accumulated depreciation
|
|
|
|
$ |
4,225 |
|
|
$ |
389 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
Depreciation
expense related to property and equipment was $477,000, $272,000 and $159,000 in
2007, 2006 and 2005, respectively.
(7)
GOODWILL, TRADEMARKS AND INTANGIBLE ASSETS (As Restated)
The
following is a discussion of the accounting of goodwill, trademarks and
intangible assets. Events following December 31, 2007 have resulted
in material changes in the value of these assets. See Note 25 – Subsequent Events (As
Restated).
The net
carrying value of goodwill is as follows (in thousands) (as
restated):
|
|
December 31,
|
|
|
|
2007 (As Restated1)
|
|
|
2006
|
|
UCC
Capital
|
|
$ |
37,514 |
|
|
$ |
10,135 |
|
The
Athlete's Foot
|
|
|
2,546 |
|
|
|
5,472 |
|
Bill
Blass
|
|
|
18,927 |
|
|
|
- |
|
Marble
Slab Creamery
|
|
|
2,001 |
|
|
|
- |
|
MaggieMoo's
|
|
|
5,086 |
|
|
|
- |
|
Pretzelmaker
|
|
|
367 |
|
|
|
- |
|
Total
|
|
$ |
66,441 |
|
|
$ |
15,607 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
The
decrease in the net carrying amount of goodwill for TAF is related to the
reversal of an estimated accrual relating to additional consideration under the
TAF purchase agreement which ultimately was not paid as discussed in Note 18 –
Acquisition of The Athlete’s
Foot. The increase in goodwill for UCC Capital resulted from contingent
consideration paid in September 2007 in accordance with the terms of the UCC
Capital merger agreement discussed in Note 17 – Acquisition of UCC Capital. The addition of goodwill
for Bill Blass is discussed in Note 19 – Acquisition of Bill Blass (As
Restated). The addition of goodwill for Marble Slab Creamery and
MaggieMoo’s is discussed in Note 20 – Acquisition of Marble Slab Creamery
and MaggieMoo’s (As Restated). The addition of goodwill for Pretzel Time
and Pretzelmaker is discussed in Note 22 – Acquisition of Pretzel Time and
Pretzelmaker (As Restated).
Trademarks
acquired by entity are as follows (in thousands) (as restated):
|
|
December 31,
|
|
|
|
2007 (As Restated1)
|
|
|
2006
|
|
The
Athlete's Foot
|
|
$ |
49,123 |
(2) |
|
$ |
49,000 |
|
Bill
Blass
|
|
|
58,137 |
|
|
|
- |
|
Waverly
|
|
|
37,321 |
|
|
|
- |
|
Marble
Slab Creamery
|
|
|
22,117 |
|
|
|
- |
|
MaggieMoo's
|
|
|
16,500 |
|
|
|
- |
|
Pretzel
Time
|
|
|
17,386 |
|
|
|
- |
|
Pretzelmaker
|
|
|
10,724 |
|
|
|
- |
|
Total
|
|
$ |
211,308 |
|
|
$ |
49,000 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
|
(2)
|
Includes
$123,000 of additional capitalized costs for registering newly developed
trademarks.
|
The
increase in trademarks from December 31, 2006 is a result of the acquisitions
during 2007 of Bill Blass, Marble Slab Creamery, MaggieMoo’s, Waverly, Pretzel
Time and Pretzelmaker and additional capitalized costs for registering newly
developed TAF trademarks. 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) (as restated):
|
|
December 31,
|
|
|
|
2007 (As Restated1)
|
|
|
2006
|
|
UCC
Capital
|
|
$ |
1,370 |
|
|
$ |
1,370 |
|
The
Athlete's Foot
|
|
|
2,600 |
|
|
|
2,600 |
|
Bill
Blass
|
|
|
966 |
|
|
|
- |
|
Waverly
|
|
|
333 |
|
|
|
- |
|
Marble
Slab Creamery
|
|
|
1,229 |
|
|
|
- |
|
MaggieMoo's
|
|
|
654 |
|
|
|
- |
|
Pretzel
Time
|
|
|
1,012 |
|
|
|
- |
|
Pretzelmaker
|
|
|
788 |
|
|
|
- |
|
Total
Other Intangible Assets
|
|
|
8,952 |
|
|
|
3,970 |
|
Less:
Accumulated Amortization
|
|
|
(1,387 |
) |
|
|
(178 |
) |
Total
|
|
$ |
7,565 |
|
|
$ |
3,792 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
Other
intangible assets are 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 $1,183,000
(as restated), $178,000 and $0, respectively.
Goodwill,
Trademarks, and Other Intangible Assets by reportable segment are as follows (in
thousands) (as restated):
|
|
Goodwill
|
|
|
Trademarks
|
|
|
Other Intangibles
|
|
|
Total
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007(1)
|
|
|
2006
|
|
|
2007(1)
|
|
|
2006
|
|
|
2007(1)
|
|
|
2006
|
|
|
2007(1)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$ |
37,514 |
|
|
$ |
10,135 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,370 |
|
|
$ |
1,370 |
|
|
$ |
38,884 |
|
|
$ |
11,505 |
|
Retail
franchising
|
|
|
2,546 |
|
|
|
5,472 |
|
|
|
49,123 |
|
|
|
49,000 |
|
|
|
2,600 |
|
|
|
2,600 |
|
|
|
54,269 |
|
|
|
57,072 |
|
Consumer
branded products
|
|
|
18,927 |
|
|
|
- |
|
|
|
95,458 |
|
|
|
- |
|
|
|
1,299 |
|
|
|
- |
|
|
|
115,684 |
|
|
|
- |
|
QSR
franchising
|
|
|
7,454 |
|
|
|
- |
|
|
|
66,727 |
|
|
|
- |
|
|
|
3,683 |
|
|
|
- |
|
|
|
77,864 |
|
|
|
- |
|
Total
|
|
|
66,441 |
|
|
|
15,607 |
|
|
|
211,308 |
|
|
|
49,000 |
|
|
|
8,952 |
|
|
|
3,970 |
|
|
|
286,701 |
|
|
|
68,577 |
|
Less:
Accumulated depreciation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,387 |
|
|
|
178 |
|
|
|
1,387 |
|
|
|
178 |
|
Total
|
|
$ |
66,441 |
|
|
$ |
15,607 |
|
|
$ |
211,308 |
|
|
$ |
49,000 |
|
|
$ |
7,565 |
|
|
$ |
3,792 |
|
|
$ |
285,314 |
|
|
$ |
68,399 |
|
|
(1)
|
As
Restated. See Note 2 of these Notes to Consolidated Financial
Statements.
|
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) (as restated):
|
|
Weighted Average
|
|
|
|
|
|
|
Amortization Period
|
|
|
Year Ending December 31,
|
|
|
|
(Years)
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UCC
|
|
|
3.0
|
|
|
$ |
457 |
|
|
$ |
191 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Retail
Franchising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Athlete's Foot
|
|
|
20.0
|
|
|
|
130 |
|
|
|
130 |
|
|
|
130 |
|
|
|
130 |
|
|
|
130 |
|
|
|
1,798 |
|
Consumer
branded products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Blass
|
|
|
4.9
|
|
|
|
188 |
|
|
|
170 |
|
|
|
159 |
|
|
|
159 |
|
|
|
31 |
|
|
|
31 |
|
Waverly
|
|
|
4.6
|
|
|
|
74 |
|
|
|
70 |
|
|
|
70 |
|
|
|
69 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
262 |
|
|
|
240 |
|
|
|
229 |
|
|
|
228 |
|
|
|
31 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QSR
franchising::
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marble
Slab Creamery
|
|
|
20.0
|
|
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
878 |
|
MaggieMoo’s
|
|
|
20.0
|
|
|
|
33 |
|
|
|
33 |
|
|
|
33 |
|
|
|
33 |
|
|
|
33 |
|
|
|
461 |
|
Pretzel
Time
|
|
|
4.8
|
|
|
|
211 |
|
|
|
211 |
|
|
|
211 |
|
|
|
211 |
|
|
|
78 |
|
|
|
- |
|
Pretzelmaker
|
|
|
4.8
|
|
|
|
166 |
|
|
|
166 |
|
|
|
166 |
|
|
|
166 |
|
|
|
53 |
|
|
|
- |
|
|
|
|
|
|
|
|
471 |
|
|
|
471 |
|
|
|
471 |
|
|
|
471 |
|
|
|
225 |
|
|
|
1,339 |
|
Total
Amortization
|
|
|
|
|
|
$ |
1,320 |
|
|
$ |
1,032 |
|
|
$ |
830 |
|
|
$ |
829 |
|
|
$ |
386 |
|
|
$ |
3,168 |
|
(8)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (As Restated)
Accounts
payable and accrued expenses consist of the following (in
thousands):
|
|
December 31,
|
|
|
|
2007 (As Restated1)
|
|
|
2006
|
|
Accounts
payable
|
|
$ |
1,950 |
|
|
$ |
1,418 |
|
Accrued
interest payable
|
|
|
1,925 |
|
|
|
- |
|
Accrued
professional fees
|
|
|
1,465 |
|
|
|
- |
|
Deferred
rent - current portion
|
|
|
85 |
|
|
|
- |
|
Accrued
compensation and benefits
|
|
|
531 |
|
|
|
484 |
|
Refundable
franchise fees and gift cards
|
|
|
811 |
|
|
|
- |
|
Discontinued
operations
|
|
|
1,000 |
|
|
|
1,333 |
|
Accrued
acquisition costs
|
|
|
382 |
|
|
|
- |
|
All
other
|
|
|
540 |
|
|
|
- |
|
Total
accounts payable and accrued expenses
|
|
$ |
8,689 |
|
|
$ |
3,235 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
After the
acquisition of UCC Capital, the Company relocated our principal corporate office
from Baltimore, Maryland to New York City. As a result, certain
reductions in staffing occurred in 2006. Upon termination of employment, the
Baltimore employees became eligible for separation benefits, including severance
payments. Restructuring charges in prior years related to separation agreements
of subsidiaries are classified as discontinued operations.
A rollforward of the restructuring accrual is as follows:(in thousands)
|
|
Employee
Separation
Benefits
|
|
|
Facility
Closure
Costs and
Other
|
|
|
Total
|
|
2005
Restructuring:
|
|
|
|
|
|
|
|
|
|
Restructuring
liability as of December 31, 2004
|
|
$ |
68 |
|
|
$ |
191 |
|
|
$ |
259 |
|
Adjustments
|
|
|
—
|
|
|
|
(7 |
) |
|
|
(7 |
) |
Cash
payments
|
|
|
(68 |
) |
|
|
(184 |
) |
|
|
(252 |
) |
Restructuring
liability as of December 31, 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges
to continuing operations
|
|
|
895 |
|
|
|
— |
|
|
|
895 |
|
Cash
payments and other
|
|
|
(750 |
) |
|
|
— |
|
|
|
(750 |
) |
Restructuring
liability as of December 31, 2006
|
|
$ |
145 |
|
|
$ |
— |
|
|
$ |
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Restructuring: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
payments and other
|
|
|
(132 |
) |
|
|
— |
|
|
|
(132 |
) |
Restructuring
liability as of December 31, 2007
|
|
$ |
13 |
|
|
|
— |
|
|
$ |
13 |
|
(9)
LONG-TERM DEBT (As Restated)
On March
12, 2007, NexCen Holding Corp. (formerly NexCen Acquisition Corp.) (“the
Issuer”), a wholly owned subsidiary of the Company, entered into agreements with
BTMUCC (the “Original BTMUCC Credit Facility”).
Although
the organization, terms and covenants of the specific borrowings changed
significantly in August 2008, the basic structure of the facility has remained
the same since its inception. The Issuer and its subsidiaries (the “Co-Issuers”)
issued notes pursuant to the terms of the credit facility. These notes were and
are secured by the assets of each brand, which consist of the respective
intellectual property assets and the related royalty revenues and trade
receivables. The assets of each brand are held by special purpose,
bankruptcy-remote entities (each, a “Brand Entity”), and the Issuer, also a
special purpose, bankruptcy-remote entity, is the parent of all of the Brand
Entities. The notes are cross-collateralized with each other, and each Brand
Entity is a Co-Issuer of each note. Repayment of each note and all
other obligations under the facility is the joint and several obligation of the
Issuer and each Brand Entity. Certain other NexCen subsidiaries (the “Managers”)
do not own any assets comprising the brands, but manage the various Brand
Entities and are parties to management agreements that define the relationship
among the Managers and the respective Brand Entities they manage. In the
event that certain adverse events occur with respect to the Company or if the
Managers fail to meet certain qualifications, BTMUCC has the right to replace
the Managers.
NexCen
Brands is not a named borrowing entity under the credit facility. However,
substantially all of our revenues are earned by the Brand Entities and are
remitted to “lockbox accounts” that have been established in connection with the
credit facility. (See Note 3(d) – Basis of Presentation and
Significant Accounting Policies - Cash and Cash Equivalents.) The terms
of the credit facility control the amount of cash that may be distributed by
each Brand Entity to the Managers, the Issuer and NexCen Brands. In addition,
the credit facility prohibits NexCen Brands, the Issuer, the Managers and each
Brand Entity from securing any additional borrowings without the prior written
consent of BTMUCC.
The
maximum aggregate amount of borrowings that could be outstanding at any one time
under the Original BTMUCC Credit Facility was $150 million. In 2007, we borrowed
a total of $110.8 million under the Original BTMUCC Credit Facility. The
borrowings were secured by the assets of TAF, Bill Blass, Waverly, Pretzel Time,
Pretzelmaker, MaggieMoo’s and Marble Slab Creamery brands. Bill Blass and
Waverly were subsequently sold by the Company in late 2008. The Company paid
borrowing fees of $1.3 million, and incurred aggregate transaction costs
including borrowing fees and other direct costs of $3.0 million (as restated),
which were 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 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, 2006 and 2005 was
approximately $5.1 million, $0 and $0, respectively.
As of
December 31, 2007, 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 |
|
Subsequent
Events
In
January 2008, in order to finance the acquisition of Great American Cookies, the
Company and BTMUCC entered into an amendment to the Original BTMUCC
Credit Facility (the “January 2008 Amendment”). Under the January 2008
Amendment, the Company pledged the Great American Cookies assets (including the
trademark, franchise agreement, manufacturing facility and supply business
assets) as collateral in a legal structure that was similar to the Original
BTMUCC Credit Facility. The January 2008 Amendment allowed us to borrow an
additional $70 million and increased the maximum aggregate amount of borrowings
under the credit facility to $181 million. However, the January 2008 Amendment
increased debt service payments to BTMUCC and reduced the amount of cash flow
available to the Company to cover operating expenses. Specifically, the
amendment required $35 million of the additional borrowings that were directly
collateralized by the Great American Cookies supply and manufacturing businesses
(the “GAC Supply Note”) to be reduced to $5 million by October 17, 2008. This
reduction in debt could be achieved by prepayments out of excess cash flow or
the proceeds of a refinancing, but any amount above $5 million that remained
outstanding would need to be repaid by October 17, 2008. To promote prompt
repayment, the January 2008 Amendment included an accelerated principal payment
provision that required certain excess revenues to be used to pay down the GAC
Supply Note on payment dates including and prior to October 17, 2008, as well as
other changes to the cash distribution provisions of the Original BTMUCC Credit
Facility.
The
aggregate maturities of long-term debt for each of the five years subsequent to
the January 2008 Amendment was as follows (in thousands):
|
|
TAF
|
|
|
Blass
|
|
|
Waverly
|
|
|
Maggie-
Moo's
|
|
|
Marble
Slab
|
|
|
Pretzel
Time
|
|
|
Pretzel-
Maker
|
|
|
Great
American
Cookies
Franchise
|
|
|
Great
American
Cookies
Supply
|
|
|
Total
|
|
2008
|
|
$ |
1,972 |
|
|
$ |
2,032 |
|
|
$ |
1,235 |
|
|
$ |
204 |
|
|
$ |
314 |
|
|
$ |
350 |
|
|
$ |
233 |
|
|
$ |
691 |
|
|
$ |
30,000 |
|
|
$ |
37,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
3,466 |
|
|
|
3,569 |
|
|
|
2,717 |
|
|
|
710 |
|
|
|
1,088 |
|
|
|
1,100 |
|
|
|
733 |
|
|
|
3,434 |
|
|
|
597 |
|
|
|
17,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
4,078 |
|
|
|
4,201 |
|
|
|
3,337 |
|
|
|
1,046 |
|
|
|
1,604 |
|
|
|
1,422 |
|
|
|
948 |
|
|
|
4,975 |
|
|
|
726 |
|
|
|
22,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
4,857 |
|
|
|
5,003 |
|
|
|
3,786 |
|
|
|
1,175 |
|
|
|
1,802 |
|
|
|
1,538 |
|
|
|
1,025 |
|
|
|
5,523 |
|
|
|
806 |
|
|
|
25,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
11,657 |
|
|
|
12,011 |
|
|
|
10,657 |
|
|
|
1,457 |
|
|
|
2,234 |
|
|
|
5,190 |
|
|
|
3,461 |
|
|
|
6,774 |
|
|
|
985 |
|
|
|
54,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,908 |
|
|
|
4,458 |
|
|
|
- |
|
|
|
- |
|
|
|
13,603 |
|
|
|
1,886 |
|
|
|
22,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
26,030 |
|
|
$ |
26,816 |
|
|
$ |
21,732 |
|
|
$ |
7,500 |
|
|
$ |
11,500 |
|
|
$ |
9,600 |
|
|
$ |
6,400 |
|
|
$ |
35,000 |
|
|
$ |
35,000 |
|
|
$ |
179,578 |
|
Also, in
January 2008, as partial consideration for the amendments to the Original BTMUCC
Credit Facility, the Company issued to BTMUCC a warrant to purchase 200,000
shares of the Company’s common stock at an exercise price of $0.01 per share.
BTMUCC may exercise the warrant in full or in part at any time from the date of
issuance through January 29, 2018.
On August
15, 2008, the Company restructured the Original BTMUCC Credit Facility and the
January 2008 Amendment whereby certain NexCen entities entered into amended and
restated note funding, security, management and related agreements with BTMUCC
(the “Amended Credit Facility”), which subsequently has been amended further as
discussed below. The Amended Credit Facility replaced all of the agreements
comprising both the Original BTMUCC Credit Facility and the January 2008
Amendment. Although the basic structure and securitization of the credit
facility remained similar to the Original BTMUCC Credit Facility, the Amended
Credit Facility significantly revised the terms of our outstanding borrowings,
which totaled approximately $176 million as of August 15, 2008. In general, the
Amended Credit Facility reduced the borrower subsidiaries’ mandatory principal
payment obligations (eliminating the October 2008 principal repayment obligation
related to the GAC Supply Note) and enhanced our operating liquidity by
increasing the frequency and amount of management fees to cover certain
operating expenses. However, the Amended Credit Facility increased the effective
borrowing rate on certain portions of the debt, substantially tightened the
covenants and events of default, accelerated the maturity dates for some
portions of the debt, increased the Company’s reporting obligations, and
obligated the Company to issue warrants for a significant number of shares if
certain portions of the debt were not paid by specified dates. (As noted below,
the Amended Credit Facility was later amended to ameliorate some of the impact
of these changes on the Company.)
The
following is a summary of what the Company believes to be the key terms of the
Amended Credit Facility as of August 15, 2008. Some of these terms were amended
as noted below:
|
·
|
The
outstanding loans, as of August 15, 2008, were restructured into three
separate tranches. Approximately $86.3 million of notes backed
by the individual franchise brands were classified as “Class A Franchise
Notes” and were set to mature on July 31, 2013; approximately $41.7
million of notes backed by a second-lien against all of the Company’s
franchised brands were classified as “Class B Franchise Notes” and were
set to mature on July 31, 2011; and the remaining $47.6 million of notes
backed by the Bill Blass and Waverly brands were classified as “Brand
Notes” and were set to mature on January 1,
2010.
|
|
·
|
The
Class A Franchise Notes bear interest at LIBOR (which in all cases under
the Amended Credit Facility is the one-month LIBOR rate as in effect from
time to time) plus 3.75% per year through July 31, 2011 and then LIBOR
plus 5% per year thereafter until maturity on July 31,
2013.
|
|
·
|
The
Class B Franchise Notes bore interest at a fixed rate of 12% per year
through July 31, 2009 and then 15% per year thereafter. The interest rate
was later amended and reduced to 8% per year effective on January 20,
2009, as discussed below.
|
|
·
|
The
Brand Note securing the Waverly brand (which has since been paid in full)
bore interest at LIBOR plus 5% per year; provided that if the Waverly
brand had not been sold by December 31, 2008 then the interest rate would
have increased to LIBOR plus 7% per year. The Brand Note securing the Bill
Blass brand (which has since been converted to a Deficiency Note in the
amount of $14.3 million, as discussed below) bore interest at LIBOR plus
7% per year; provided that if the Bill Blass brand had not been sold by
December 31, 2008, then the interest rate would have increased to LIBOR
plus 9% per year. If the proceeds from the sale of either the Bill Blass
or Waverly brand were insufficient to repay the respective Brand Note in
full, such Brand Note automatically converted to a note in the amount of
the remaining principal balance which bears interest at 15% per year (a
“Deficiency Note”). The original maturity date for any Deficiency Note was
January 1, 2010. In connection with the issuance of the Deficiency Note
associated with the Bill Blass brand, as discussed below, this maturity
date was later extended to July 31, 2013, and the cash interest and
principal payments due under the Deficiency Note were deferred until the
maturity date.
|
|
·
|
Mandatory
minimum principal payments were eliminated for the remainder of 2008 and
substantially reduced through 2010.
|
|
·
|
BTMUCC
was entitled to receive warrants to purchase 2.8 million shares of the
Company’s common stock if the applicable subsidiary of the Company still
owned Waverly or Bill Blass and the Brand Notes remained unpaid by March
31, 2009. This provision later was waived, as discussed
below.
|
|
·
|
BTMUCC
will be entitled to receive warrants covering up to 2.8 million shares of
the Company’s common stock if the Class B Franchise Notes have not been
repaid by July 31, 2009 (later extended to December 31, 2009 as discussed
below), with the number of shares being subject to reduction if less than
50% of original principal amount of the Class B Franchise Notes remains
outstanding at that time.
|
On
September 11, 2008, NexCen entered into an amendment of the Amended Credit
Facility, which essentially modified certain definitions of terms used in the
agreements to exclude certain non-recurring expenses incurred by the Company
from the calculation of debt service coverage ratio.
On
December 24, 2008, in connection with the sale of the Bill Blass brand, NexCen
entered into another amendment of the Amended Credit Facility. This amendment
(i) extended the maturity date on the Deficiency Note for the remaining balance
of $14.3 million on the Brand Note related to the Bill Blass brand from January
1, 2010 until July 31, 2013; (ii) deferred the scheduled principal payment
obligations on the Deficiency Note until its maturity date; (iii) permitted
payment-in-kind of interest to defer cash interest payments during the term of
the Deficiency Note until the maturity date of the Deficiency Note; and (iv)
provided for a waiver of BTMUCC’s right to receive warrants to purchase 2.8
million shares of the Company’s common stock at an exercise price of $0.01 per
share if the Deficiency Note remained outstanding after March 31,
2009.
On
January 27, 2009, NexCen entered into an amendment of the Amended Credit
Facility with BTMUCC. This amendment reduced the interest rate on the Class B
Franchise Notes, the outstanding balance of which totaled approximately $41.7
million as of such date, to 8% per year effective January 20, 2009 through July
31, 2011, the maturity date on the Class B Franchise Notes. In addition to the
change in interest rate on the Class B Franchise Notes, the amendment also gave
the Company greater operating flexibility by: (i) reducing the debt service
coverage ratio requirements for the remainder of 2009; (ii) allowing certain
funds paid by supply vendors to be excluded from debt service obligations and
capital expenditure limitations; (iii) revising the covenant causing a manager
event of default upon NexCen filing a qualified financial statement for the 2008
fiscal year such that it applies to 2009 fiscal year and thereafter; and (iv)
eliminating the requirement for valuation reports for fiscal year 2008 unless
requested by BTMUCC.
On July
15, 2009, NexCen entered into an amendment of the Amended Credit Facility with
BTMUCC. The material terms of the amendment increased certain operating
expenditure limits for 2009, reduced debt service coverage ratio requirements,
reduced free cash flow margin requirements, extended the time period to provide
valuation reports, and waived certain potential defaults. The
amendment also extended from July 31, 2009 to December 31, 2009, the trigger
date on which BTMUCC would be entitled to receive warrants covering up to 2.8
million shares of the Company’s common stock if the Class B Franchise Notes are
not repaid by that trigger date.
On August
6, 2009, in connection with certain Australian and New Zealand license
agreements (see Note 25 – Subsequent Events (As Restated)) NexCen
entered into an amendment of the credit facility whereby the Company used $5.0
million of the licensing proceeds to pay down a portion of the Class B Franchise
Notes and BTMUCC released its security interest in the intellectual property
that is the subject of the license agreements. The Company’s repayment will
result in interest expense savings of $400,000 on an annualized basis. The
August 6, 2009 amendment also permitted the Company to use up to $1.2 million of
net proceeds from the license agreements for expenditures, as approved in
writing by BTMUCC, including capital expenditures to expand production
capabilities of its manufacturing facility to produce other products beyond
cookie dough.
The
aggregate maturities of long-term debt under the Current Credit Facility,
subsequent to the August 6, 2009 repayment of $5 million, are as follows (in
thousands):
|
|
Class A
|
|
|
Class B
|
|
|
Deficiency Note
|
|
|
Total
|
|
2009
|
|
$ |
780 |
|
|
$ |
372 |
|
|
$ |
- |
|
|
$ |
1,152 |
|
2010
|
|
|
2,700 |
|
|
|
712 |
|
|
|
- |
|
|
|
3,412 |
|
2011
|
|
|
3,390 |
|
|
|
35,640 |
|
|
|
- |
|
|
|
39,030 |
|
2012
|
|
|
3,918 |
|
|
|
- |
|
|
|
- |
|
|
|
3,918 |
|
2013
|
|
|
75,512 |
|
|
|
- |
|
|
|
28,471 |
|
|
|
103,983 |
|
Thereafter
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
86,300 |
|
|
$ |
36,724 |
|
|
$ |
28,471 |
(1) |
|
$ |
151,495 |
|
|
(1)
|
Maturities
related to the Deficiency Note include paid-in-kind (“PIK”)
interest.
|
Our
Current Credit Facility contains numerous affirmative and negative covenants,
including, among other things, restrictions on indebtedness, liens, fundamental
changes, asset sales, acquisitions, capital and other expenditures, common stock
repurchases, dividends and other payments affecting subsidiaries and sale and
leaseback transactions. The Company’s failure to comply with the financial and
other restrictive covenants could result in a default under our Current Credit
Facility, which could then trigger among other things the lender’s right to
accelerate principal payment obligations, foreclose on virtually all of the
assets of the Company and take control of all of the Company’s cash flow from
operations. In addition, our Current Credit Facility contains provisions whereby
our lender has the right to accelerate all principal payment obligations upon a
“material adverse change,” which is broadly defined as the occurrence of any
event or condition that, individually or in the aggregate, has had, is having or
could reasonably be expected to have a material adverse effect on (i) the
collectability of interest and principal on the debt, (ii) the value or
collectability of the assets securing the debt, (iii) the business, financial
condition, or operations of the Company or its subsidiaries, individually or
taken as a whole, (iv) the ability of the Company or its subsidiaries to perform
its respective obligations under the loan agreements, (v) the validity or
enforceability of any of the loan documents, and (iv) the lender’s ability to
foreclose or otherwise enforce its interest in any of the assets securitizing
the debt. To date, BTMUCC has not invoked the “material adverse change”
provision or otherwise sought acceleration of our principal payment
obligations.
We
believe that we have a good relationship with our lender, and the Company has
received amendments and waivers from BTMUCC (without concessions from the
Company) since the restructuring of the debt in August 2008, including reduction
of interest rates, deferral of scheduled principal payment obligations and
certain interest payments, waiver and extension of time related to the
obligations to issue dilutive warrants, allowance of certain payments to be
excluded from debt service obligations, as well as relief from debt coverage
ratio requirements, certain capital and operating expenditure limits, certain
loan-to-value ratio requirements, certain free cash flow margin requirements,
and the requirement to provide financial statements by certain deadlines. In
light of these amendments and waivers, we believe it is unlikely that the
Company will need to seek additional material waivers or amendments or otherwise
default on our Current Credit Facility through June 30,
2010.
The
Company does not have any remaining borrowing capacity under the Current Credit
Facility. Although we have not sought additional equity or debt financing in
2009 (and BTMUCC’s written consent would be required to do so), we review from
time to time our financing opportunities for suitable options.
|
(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 interim and annual 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 20 – Acquisitions of Marble Slab Creamery
and MaggieMoo’s (As Restated), during 2007, the Company assumed certain
guarantees for leases related to certain MaggieMoo’s franchised locations
(“Lease Guarantees”). 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 MaggieMoo’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 for the calendar years ended 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 our
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 (in
thousands): 2008 - $1,546, 2009 - $817, 2010 - $14.
(10)
INCOME TAXES (As Restated)
The
components of income tax expense from continuing operations for
the years ended December 31, are as follows:
(in thousands)
|
|
2007 (As Restated1)
|
|
|
2006
|
|
|
2005
|
|
Federal
|
|
$ |
2,857 |
|
|
$ |
196 |
|
|
$ |
- |
|
State
and Local
|
|
|
190 |
|
|
|
(152 |
) |
|
|
|
|
Foreign
|
|
|
255 |
|
|
|
37 |
|
|
|
- |
|
Total
income tax expense
|
|
$ |
3,302 |
|
|
$ |
81 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
283 |
|
|
$ |
81 |
|
|
$ |
- |
|
Deferred
|
|
|
3,019 |
|
|
|
- |
|
|
|
- |
|
Total
income tax expense
|
|
$ |
3,302 |
|
|
$ |
81 |
|
|
$ |
- |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
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
(As Restated1)
|
|
|
2006
|
|
|
2005
|
|
U.S.
Statutory Federal Rate
|
|
|
-35.0 |
% |
|
|
-35.0 |
% |
|
|
-35.0 |
% |
Increase/(decrease)
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State
taxes, net of federal benefit
|
|
|
2,885.6 |
% |
|
|
-3.2 |
% |
|
|
0.0 |
% |
Changes
in valuation allowance
|
|
|
-2,561.7 |
% |
|
|
43.8 |
% |
|
|
-136.4 |
% |
Other
|
|
|
35.8 |
% |
|
|
-4.0 |
% |
|
|
171.4 |
% |
Effective
Tax Rate
|
|
|
324.7 |
% |
|
|
1.6 |
% |
|
|
0.0 |
% |
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
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
(As Restated1)
|
|
|
2006
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
Federal
Net Operating Loss Carry-forwards
|
|
$ |
273,601 |
|
|
$ |
271,876 |
|
State
Net Operating Loss Carry-forwards
|
|
|
498 |
|
|
|
34,906 |
|
Investments
|
|
|
5,667 |
|
|
|
5,762 |
|
Capital
Loss Carry-forwards
|
|
|
65,947 |
|
|
|
99,412 |
|
Tax
Credit Carry-forwards
|
|
|
4,150 |
|
|
|
4,150 |
|
AMT
Tax credit Carry-forwards
|
|
|
25 |
|
|
|
63 |
|
Depreciation
and Amortization
|
|
|
145 |
|
|
|
127 |
|
Stock-based
compensation
|
|
|
1,698 |
|
|
|
1,093 |
|
Other
|
|
|
945 |
|
|
|
1,001 |
|
Gross
Deferred Tax Asset
|
|
$ |
352,676 |
|
|
$ |
418,390 |
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities
|
|
|
|
|
|
|
|
|
Amortization
of intangibles
|
|
$ |
(3,671 |
) |
|
$ |
(782 |
) |
Basis
difference of assets acquired
|
|
|
(23,325 |
) |
|
|
- |
|
Gross
Deferred Tax Liability
|
|
$ |
(26,996 |
) |
|
$ |
(782 |
) |
|
|
|
|
|
|
|
|
|
Valuation
Allowance
|
|
|
(352,287 |
) |
|
|
(417,826 |
) |
Net
Deferred Tax Liability
|
|
$ |
(26,607 |
) |
|
$ |
(218 |
) |
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial Statements. Included in
our restatement was a reduction of approximately $1.0 million to the
amount of deferred tax liabilities previously reported, which reduction
resulted primarily from changes to the 2007 effective state tax rates
applicable to the Bill Blass
acquisition.
|
In
accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes”
and related guidance thereto, 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 $3.0 million with respect to these differences.
SFAS No.
109 also provides that the Company must provide a full valuation allowance
against our 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 $353 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 our 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 we will pay little
or no current federal income tax, other than alternative minimum taxes, and will
be subject to certain state and local taxes.
In
addition to the deferred tax liabilities arising from the amortization of
intangibles discussed above, the Company also recorded a deferred tax liability
of $23.3 million (as restated) in connection with the acquisition of Bill Blass
(see Note 19 – Acquisition of
Bill Blass). The liability reflects the tax effect on the difference
between the book and tax bases of the net assets acquired, and was calculated
based on the Company’s federal and state effective tax rate for 2007. The net
deferred tax liability as of December 31, 2007 of $26.6 million will reverse as
of December 31, 2008 in connection with the impairment of intangible assets and
the sale of Bill Blass and Waverly (see Note 24 – Subsequent Events.) No
material cash tax payments were required in connection with these
transactions.
The
valuation allowance for deferred tax assets decreased by $65.5 million (as
restated) 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 ability to realize 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 our deferred tax assets. Accordingly, the Company has provided a
full valuation allowance for our net deferred tax assets. Approximately
$284 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 of approximately $68 million will be
allocated 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 acquisition. 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. FIN 48
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 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.
(11)
BENEFIT PLANS
As a
result of our acquisitions of UCC Capital and MaggieMoo’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.
(12)
STOCK BASED COMPENSATION (As Restated)
In
September 1999, the Company adopted the 1999 Equity Incentive Plan, as
amended on September 2, 2005 (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 our 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 or the 2000 Plan. A total of 3.5 million shares of common
stock were 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
intrinsic
value (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 our 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 shares 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 $4.3 million (As restated),
$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 $7.72, $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 our 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 SEC’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 U.S. Treasury daily yield curve rates for the risk-free interest
rate.
The total
number of options and warrants issued by the Company from January 1, 2005 to
December 31, 2007 included 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 Capital employees on June 6, 2006 in connection with the acquisition
of UCC Capital.
|
|
·
|
In
connection with the acquisition of UCC Capital, the Company compensated
our 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 our Board of
Directors.
|
|
·
|
On
November 7, 2006, in connection with the acquisition of TAF, 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 our 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 the Bill Blass business
meeting three earnings targets on September 30, 2008, December 31, 2009,
and December 31, 2010. As of December 31, 2007, the first earnings target
was the only one that has been deemed probable; therefore, the Company
only deemed the first tranche of 133,333 warrants as
outstanding. Subsequently, the Bill Blass business did meet the
earning target on September 30, 2008, and the first tranche of 133,333
warrants vested on February 15, 2008. As a result of the sale of the
Bill Blass business, the other two tranches of warrants will not vest. 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 our 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, 2006 and 2005 from share options and warrants exercised
under the share-based payment plans was $3,313,000, $12,000 and $19,000,
respectively. Total shares exercised in 2007 were 1,732,336, of which
1,102,916 were related to warrants..
The total
number of warrants outstanding as of December 31, 2007 was
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.
(13)
RELATED PARTY TRANSACTIONS
The
Company receives legal services from Kirkland & Ellis LLP, which
is considered a related party because a partner at that firm
is a member of the Company’s Board of Directors. For the years ended
December 31, 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.
As of
December 31, 2007, the Company had an agreement with Marvin Traub Associates,
Inc., an entity owned by Mr. Traub (then 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 were successful in consummating a relationship with a third party,
Marvin Traub Associates, Inc. would have received an additional $100,000 success
fee. No success fee ultimately was paid.
FTI
Consulting, Inc. (“FTI”) provided due diligence services in 2006 totaling
approximately $15,000 in connection with the acquisition of UCC Capital. Two
members of NexCen’s then Board of Directors served as Directors of FTI, with one
also serving as President and Chief Executive Officer for FTI. For
the year ended December 31, 2006, the Company had no outstanding payables due to
FTI.
Designer
License Holdings, Co. LLC (“DLHC”) is a licensee of the Bill Blass brand. The
owner of DLHC also is an owner of Design Equity Holding Company, LLC (“DEHC”)
which owned 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
$5.0 million to the Company. In February 2008, the Company repurchased one half
of DEHC’s minority interest in Bill Blass Jeans for $1.25 million, which
represented the same value that was used when DEHC purchased its interest in
Bill Blass Jeans in February 2007. On October 24, 2008, DLHC’s contract was
amended to lower the minimum annual royalty and settle certain past due royalty
payments.
Athlete’s
Foot Marketing Support Fund, LLC (“TAF MSF”), is an entity that is funded by the
domestic franchisees of TAF to provide domestic marketing and promotional
services on behalf of the franchisees. On an as needed basis, the Company
advanced funds to the TAF MSF under a loan agreement. The terms of the loan
agreement included a borrowing rate of prime (on the date of the loan) plus 2%,
and repayment by the TAF MSF with no penalty, at any time. As of December 31,
2007 and 2006, the Company had receivable balances of $1.4 million and $350,000
from the TAF MSF, respectively. The Company recorded interest income earned from
the fund in the amount of $85,000.
(14)
COMMITMENTS AND CONTINGENCIES (As Restated)
(a) LEGAL
PROCEEDINGS
Securities Class
Action. A total of four putative securities class actions have been filed
in the United States District Court for Southern District of New York against
NexCen Brands and certain of our former officers and current director for
alleged violations of the federal securities laws. These actions are captioned:
Mark Gray v. NexCen Brands,
Inc., David S. Oros, Robert W. D’Loren & David Meister, No.
08-CV-4906 (filed on May 28, 2008); Ghiath Hammoud v. NexCen Brands,
Inc., Robert W. D’Loren, & David B. Meister, No. 08-CV-5063 (filed on
June 3, 2008); Ronald Doty v.
NexCen Brands, Inc., David S. Oros, Robert W. D’Loren & David
Meister, No. 08-CV-5172 (filed on June 5, 2008); and Frank B. Falkenstein v. NexCen
Brands, Inc., David S. Oros, Robert W. D’Loren, David Meister, No.
08-CV-6126 (filed on July 3, 2008).
Although
the formulations of the allegations differ slightly, plaintiffs allege that
defendants violated federal securities laws by misleading investors in the
Company’s public filings and statements. The complaints assert claims under
Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and
also assert that the individual defendants are liable as controlling persons
under Section 20(a) of the Exchange Act. Plaintiffs seek damages and
attorneys’ fees and costs.
On March
5, 2009, the court consolidated the actions and appointed Vincent Granatelli as
lead plaintiff and Cohen, Milstein, Hausfeld & Toll, P.L.L.C. as lead
counsel. Under the Stipulation and Order entered by the court on June 19, 2009,
the plaintiff shall file an Amended Consolidated Complaint on or
before August 24, 2009 and the Company shall file a responsive pleading on
or before October 8, 2009, with any opposition and reply briefing due
on November 23, 2009 and December 23, 2009, respectively.
Shareholder Derivative
Action. A federal shareholder derivative action premised on essentially
the same factual assertions as the federal securities actions also has been
filed in the United States District Court for Southern District of New York
against the directors or former directors of NexCen. This action is captioned:
Soheila Rahbari v. David Oros,
Robert W. D’Loren, James T. Brady, Paul Caine, Jack B. Dunn IV, Edward J.
Mathias, Jack Rovner, George Stamas & Marvin Traub, No. 08-CV-5843
(filed on June 27, 2008). In this action, plaintiff alleges that NexCen’s Board
of Directors breached its fiduciary duties in a variety of ways, mismanaged and
abused its control of the Company, wasted corporate assets, and unjustly
enriched itself by engaging in insider sales with the benefit of material
non-public information that was not shared with shareholders. Plaintiff further
contends that she was not required to make a demand on the Board of Directors
prior to bringing suit because such a demand would have been futile, due to the
board members’ alleged lack of independence and incapability of exercising
disinterested judgment on behalf of the shareholders. Plaintiff seeks damages,
restitution, disgorgement of profits, attorneys’ fees and costs, and
miscellaneous other relief. On November 18, 2008, the court agreed to
stay the derivative case until at least May 18, 2009, on which
date the court scheduled a status conference. After holding the
status conference on May 18, 2009, the court stayed the derivative case until
the filing of this Second Amendment and ordered plaintiff to file its amended
complaint within two weeks after the filing of this Second Amendment. On June 9,
2009, plaintiff requested transfer of the derivative case to the court presiding
over the securities class action case. This request was denied.
California
Litigation. A direct action was filed in Superior Court of California,
Marin County against NexCen Brands and certain of our former officers by a
series of limited partnerships or investment funds. The case is captioned: Willow Creek Capital Partners, L.P.,
et al. v. NexCen Brands, Inc., Case No. CV084266 (Cal. Superior Ct.,
Marin Country) (filed on August 29, 2008). Predicated on substantially similar
factual allegations as the federal securities actions, this lawsuit is brought
under California law and asserts both fraud and negligent misrepresentation
claims. Plaintiffs seek compensatory damages, punitive damages and
costs.
The
California state court action was served on NexCen on September 2, 2008.
Plaintiffs in the California action served NexCen with discovery requests on
September 19, 2008. On October 17, 2008, NexCen filed two simultaneous but
separate motions in order to limit discovery. First, NexCen filed a motion in
the United States District Court for Southern District of New York to stay
discovery in the California actions pursuant to the Securities Litigation
Uniform Standards Act of 1998. Second, NexCen filed a motion in the California
court to dismiss the California complaint on the ground of forum non conveniens, or to
stay the action in its entirety, or in the alternative to stay discovery,
pending the outcome of the federal class actions.
The
California state court held a hearing on NexCen’s motion on December 12, 2008.
At the hearing, the court issued a tentative ruling from the bench granting
defendants’ motion to stay. On December 26, 2008, the court entered a final
order staying the California action in its entirety pending resolution of the
putative class actions pending in the Southern District of New York. A case
management conference is scheduled for September 16, 2009.
SEC Investigation. We
voluntarily notified the Enforcement Division of the SEC of our May 19, 2008
disclosure. The Company has been cooperating with the SEC and voluntarily
provided documents and testimony, as requested. On or about March 17, 2009, we
were notified that the SEC had commenced a formal investigation of the Company
as of October 2008.
Legacy Aether IPO
Litigation. The Company 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 our 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 the Company 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.
After
initial procedural motions and the start of discovery in 2002 and 2003,
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 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.)
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 court on the proposed Issuer Settlement, the
United States 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 resumed, and plaintiffs filed amended complaints in the
focus cases shortly thereafter. Defendants moved to dismiss the amended
complaints. Plaintiffs filed motions for class certification in the focus
cases. Defendants filed papers opposing class
certification.
As of
December 31, 2007, NexCen had reserved $465,000 for our estimated exposure
based on the initial proposed Issuer Settlement.
In 2008,
the Plaintiff’s Executive Committee resumed settlement discussions with the
issuer-defendants, including NexCen, and the officer and director defendants of
the issuers. The parties reached a preliminary settlement in which NexCen
would have to contribute no out-of-pocket amount to the
settlement. The parties filed their motion for preliminary approval
of the settlement on April 2, 2009, which was granted by the district court on
June 9, 2009. The court hearing on final approval is scheduled for September 10,
2009.
Legacy Aether
Litigation. 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 the Company’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 the transportation segment of our discontinued communications
business. In July 2007, the Company settled all claims with 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 also has been recorded
against discontinued operations.
Legacy UCC Capital
Litigation. UCC Capital and Mr. D’Loren, our former chief executive
officer in his capacity as president of UCC Capital, were parties along with
unrelated parties to litigation resulting from a default on a loan to The
Songwriter Collective, LLC (“TSC”), which loan UCC Capital had referred to a
third party. A shareholder of TSC filed a lawsuit in the United States District
Court for the Middle District of Tennessee, captioned Tim Johnson v. Fortress Credit
Opportunities I, L.P., et al., in which plaintiff alleged that certain
misrepresentations by TSC and its agents (including UCC Capital and Mr. D’Loren)
induced the shareholder to contribute certain rights to musical compositions to
TSC. UCC Capital 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 Capital, 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 Capital, Mr. D’Loren,
TSC and the other parties. The parties reached a global settlement on December
19, 2007, with UCC Capital 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. NexCen
and our 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 our franchise systems, occasional
disputes arise between the Company and our franchisees relating to a broad range
of subjects, including, without limitation, contentions regarding grants,
transfers or terminations of franchises, territorial disputes and delinquent
payments.
(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 thousands)
|
|
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 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.
The
sublease amounts 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, which
rented 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 was selected for audit by the Internal
Revenue Service (“IRS”) for the years ended December 31, 2005 and February 15,
2007. Subsequently in 2008, the audit covering the respective years was
completed. The Company did not incur additional income tax expense as a result
of the IRS audit.
As of
December 31, 2007, the Company 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 filed an informal protest against this assessment, claiming errors
in the calculation of the assessment. As of December 31, 2007, the Company
accrued current liabilities of approximately $425,000 for legacy tax assessments
and anticipated a negotiated settlement to this
assessment. Subsequently in 2008, the Company reached a settlement of
all tax liabilities for approximately $74,000.
(d)
RESTRICTED CASH (As Restated)
Restricted
cash of $5.2 million (as restated) as of December 31, 2007 included funds held
in escrow related to the Marble Slab Creamery acquisition. The Company paid $3.7
million of this amount (including interest) on February 28, 2008, and $1.5
million was held back to secure indemnity claims made by the Company of which
$1.25 million plus accrued interest was paid on or about June 18, 2008.
Long-term restricted cash of $1.7 million included 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 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.
(15)
DISCONTINUED OPERATIONS (As Restated)
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
brand management business.
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.
During
2006, the Company discontinued and sold our 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 business.
During
2007, we settled various legal and other claims relating to our discontinued
businesses resulting in a net loss from discontinued operations of $548,000 (as
restated).
In 2008,
we narrowed our business model to operate in a single business segment:
Franchising. Previously, we had owned and licensed two consumer
products brands: Bill Blass and Waverly. In future periods after
December 31, 2007, those businesses will be reported as discontinued operations.
Our franchising business, which now constitutes our only segment, will be
reported as continuing operations.
(16)
QUARTERLY FINANCIAL INFORMATION (As Restated) (UNAUDITED)
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(As
Restated1)
|
|
|
|
March
31,
|
|
|
June
30,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
December
31,
|
|
(in thousands, except per share amounts)
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Adjustments
|
|
|
2007
|
|
Revenues
|
|
$ |
3,885 |
|
|
$ |
8,852 |
|
|
$ |
11,329 |
|
|
$ |
10,229 |
|
|
$ |
273 |
|
|
$ |
10,502 |
|
Operating
expenses
|
|
|
(5,161 |
) |
|
|
(7,865 |
) |
|
|
(8,725 |
) |
|
|
(10,354 |
) |
|
|
(499 |
) |
|
|
(10,853 |
) |
Operating
income (loss)
|
|
|
(1,276 |
) |
|
|
987 |
|
|
|
2,604 |
|
|
|
(125 |
) |
|
|
(226 |
) |
|
|
(351 |
) |
Non-operating
income (expense)
|
|
|
631 |
|
|
|
(560 |
) |
|
|
(1,264 |
) |
|
|
(1,757 |
) |
|
|
(32 |
) |
|
|
(1,789 |
) |
Income
(loss) from continuing operations before income taxes
|
|
|
(645 |
) |
|
|
427 |
|
|
|
1,340 |
|
|
|
(1,882 |
) |
|
|
(258 |
) |
|
|
(2,140 |
) |
Income
taxes
|
|
|
- |
|
|
|
(217 |
) |
|
|
(1,253 |
) |
|
|
(1,833 |
) |
|
|
1 |
|
|
|
(1,832 |
) |
Income
(loss) from continuing operations
|
|
|
(645 |
) |
|
|
210 |
|
|
|
87 |
|
|
|
(3,715 |
) |
|
|
(257 |
) |
|
|
(3,972 |
) |
Income
(loss) from discontinued operations
|
|
|
447 |
|
|
|
(895 |
) |
|
|
(6 |
) |
|
|
(132 |
) |
|
|
38 |
|
|
|
(94 |
) |
Net
income (loss)
|
|
$ |
(198 |
) |
|
$ |
(685 |
) |
|
$ |
81 |
|
|
$ |
(3,847 |
) |
|
$ |
(219 |
) |
|
$ |
(4,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations per common share basic and
diluted
|
|
$ |
(0.01 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(0.07 |
) |
|
$ |
- |
|
|
$ |
(0.07 |
) |
Loss
from discontinued operations per common share basic and
diluted
|
|
$ |
0.01 |
|
|
$ |
(0.01 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Net
income (loss) per share - basic and diluted
|
|
$ |
- |
|
|
$ |
(0.01 |
) |
|
$ |
- |
|
|
$ |
(0.07 |
) |
|
$ |
- |
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
49,159 |
|
|
|
50,824 |
|
|
|
52,384 |
|
|
|
55,116 |
|
|
|
- |
|
|
|
55,116 |
|
Weighted
average shares outstanding – diluted
|
|
|
49,159 |
|
|
|
54,465 |
|
|
|
54,250 |
|
|
|
55,116 |
|
|
|
- |
|
|
|
55,116 |
|
|
|
Quarter
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
income (loss)
|
|
|
(872 |
) |
|
|
(2,831 |
) |
|
|
(2,568 |
) |
|
|
(2,218 |
) |
Non-operating
income (expense)
|
|
|
320 |
|
|
|
671 |
|
|
|
1,202 |
|
|
|
1,144 |
|
Income
(loss) from continuing operations before income taxes
|
|
|
(552 |
) |
|
|
(2,160 |
) |
|
|
(1,366 |
) |
|
|
(1,074 |
) |
Income
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(81 |
) |
Income
(loss) from continuing operations
|
|
|
(552 |
) |
|
|
(2,160 |
) |
|
|
(1,366 |
) |
|
|
(1,155 |
) |
Income
(loss) from discontinued operations
|
|
|
419 |
|
|
|
640 |
|
|
|
544 |
|
|
|
1,510 |
|
Net
income (loss)
|
|
$ |
(133 |
) |
|
$ |
(1,520 |
) |
|
$ |
(822 |
) |
|
$ |
355 |
|
Loss
from continuing operations per common share basic and
diluted
|
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
Loss
from discontinued operations per common share basic and
diluted
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
$ |
0.03 |
|
net
income (loss) per share - basic and diluted
|
|
$ |
- |
|
|
$ |
(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 |
|
|
(1)
|
See Note 2 of these
Notes to Consolidated Financial
Statements.
|
(17)
ACQUISITION OF UCC CAPITAL
On June
6, 2006, NexCen acquired UCC Capital for 2.5 million shares of common stock,
plus the right to contingent consideration if future performance targets were
met (in the form of an earn-out) of up to an additional 2.5 million shares and
up to $10 million in cash.
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 Capital securityholders received the contingent
consideration comprised 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.
In accordance with SFAS No. 141, the Company recorded the value of shares based
on the five day average of the Company’s closing stock price beginning two days
before the approval of the earn out and ending two days after, or $6.87 per
share, totaling approximately $27.2 million.
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
recorded goodwill will not be deductible for tax purposes. See Note
25 – Subsequent Events (As
Restated) under the caption, “Events Affecting Valuations of Goodwill,
Trademarks and Other Intangibles,” for discussion regarding subsequent
impairments.
(18)
ACQUISITION OF THE ATHLETE’S FOOT
On
November 7, 2006, the Company, through our subsidiary NexCen Holding 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. As of December 31, 2007, we reported the results of this
business in our Retail Franchising segment.
The
purchase price for the TAF 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. In accordance with SFAS No. 141, 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 $6.55 per share. 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 Capital and TAF.
UCC Capital provided financial advisory services to TAF. UCC Capital 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 Capital, 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 final purchase price allocation is as follows:
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
Price:
|
|
|
|
Cash
payments
|
|
$ |
42,058 |
|
Stock
consideration
|
|
|
9,258 |
|
Direct
acquisition costs
|
|
|
1,825 |
|
Total
purchase price
|
|
$ |
53,141 |
|
|
|
|
|
|
Allocation
of Purchase Price:
|
|
|
|
|
Trademarks
|
|
$ |
49,000 |
|
Goodwill
|
|
|
2,546 |
|
License
agreements
|
|
|
2,600 |
|
Assets
acquired
|
|
|
1,310 |
|
Total
assets acquired
|
|
|
55,456 |
|
Total
liabilities assumed
|
|
|
(2,315 |
) |
Net
assets acquired
|
|
$ |
53,141 |
|
TAF’s
results of operations are included in the Consolidated Statements of Operations
beginning from November 7, 2006 (the date of acquisition). The recorded amount
of goodwill and trademarks is deductible for tax
purposes.
See Note
25 – Subsequent Events (As
Restated) under the caption, “Events Affecting Valuations of Goodwill,
Trademarks and Other Intangibles,” for discussion regarding subsequent
impairments.
(19)
ACQUISITION OF BILL BLASS (As
Restated)
On
February 15, 2007 the Company, through our 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”). As of December 31, 2007, we reported the results of this business in
our Consumer Branded Products segment.
The
purchase price for the Bill Blass acquisition included initial consideration of
$54.6 million, consisting of $39.1 million in cash and $15.6 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 No. 141
and related guidance thereto, the value of shares issued as consideration in
connection with the stock purchase agreement was 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
per share. Under the terms of the stock purchase agreement, the former
stockholders were entitled to additional consideration of up to $16.2 million
provided certain financial goals relating to the Bill Blass business were
achieved. The contingent consideration would have been payable in cash or stock
at the option of the Company. No additional consideration was paid as
the financial goals were not met.
Immediately
following the acquisition, the Company formed the subsidiary Bill Blass Jeans,
LLC (“Jeans”) and contributed our 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 were
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. The preliminary allocation of
purchase price subsequently was revised to reflect deferred tax liabilities
assumed in connection with the acquisition in the amount of approximately $23.3
million (as restated), 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 $13.0 million, which amount was credited
to goodwill.
Prior to
this acquisition, there were executory contracts between UCC Capital and Bill
Blass. UCC Capital provided financial advisory services to Bill Blass. UCC
Capital earned advisory and loan servicing revenues during the course of the
arrangement, which terminated with the acquisition. The estimated fair value of
these agreements with Bill Blass was recorded when we acquired UCC Capital, 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 final purchase price
allocation is as follows:
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
Price (As Restated)1:
|
|
|
|
Cash
payments
|
|
$ |
39,060 |
|
Stock
consideration
|
|
|
15,593 |
|
Direct
acquisition costs
|
|
|
1,216 |
|
Total
purchase price
|
|
$ |
55,869 |
|
|
|
|
|
|
Allocation
of Purchase Price |
|
|
|
|
(As
Restated)1:
|
|
|
|
|
Trademarks
|
|
$ |
58,137 |
|
Goodwill
|
|
|
18,927 |
|
License
agreements
|
|
|
966 |
|
Assets
acquired
|
|
|
2,301 |
|
Total
assets acquired
|
|
|
80,331 |
|
Total
liabilities assumed
|
|
|
(24,462 |
) |
Net
assets acquired
|
|
$ |
55,869 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
Bill
Blass’ results of operations are included in the Consolidated Statements of
Operations beginning from February 15, 2007 (the date of
acquisition).
See Note
25 – Subsequent Events (As
Restated) under the caption, “Events Affecting Valuations of Goodwill,
Trademarks and Other Intangibles,” for discussion regarding subsequent sale and
impairments.
(20)
ACQUISITIONS OF MARBLE SLAB CREAMERY AND MAGGIEMOO’S (As
Restated)
Marble
Slab
Creamery. On February 28, 2007,
the Company completed the purchase of substantially all of the assets of Marble
Slab Creamery used or intended for use in connection with the operation of the
Marble Slab Creamery franchising system. As of December 31, 2007, the results of
this business was reported in our QSR Franchising 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 accrued interest at the
annual rate of 6% per annum until maturity, which was 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 second
promissory note in the amount of $1.5 million note plus interest was held in an
escrow account pending resolution of certain indemnification
claims. On or about June 20, 2008, the Company paid $1.25 million
plus accrued interest on the promissory note and retained $250,000 as settlement
of the indemnification claims.
The
Company allocated the purchase price of the Marble Slab Creamery assets acquired
and liabilities assumed at the estimated fair values at the acquisition date.
The recorded goodwill and trademarks are deductible for tax purposes. The
preliminary allocation of purchase price was revised to reflect the final
valuation of identified intangibles, which increased by approximately $1
million, which amount was recorded as additional goodwill. The final purchase
price allocation is as follows:
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
Price (As Restated)1:
|
|
|
|
Cash
payments and promissory notes
|
|
$ |
20,900 |
|
Direct
acquisition costs
|
|
|
971 |
|
Total
purchase price
|
|
$ |
21,871 |
|
|
|
|
|
|
Allocation
of Purchase Price
(As
Restated)1:
|
|
Trademarks
|
|
$ |
22,117 |
|
Goodwill
|
|
|
2,001 |
|
Franchise
agreements
|
|
|
1,229 |
|
Assets
acquired
|
|
|
383 |
|
Total
assets acquired
|
|
|
25,730 |
|
Total
liabilities assumed
|
|
|
(3,859 |
) |
Net
assets acquired
|
|
$ |
21,871 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
Marble
Slab Creamery results of operations are included in the Consolidated Statements
of Operations beginning from February 28, 2007 (the date of
acquisition).
See Note
25 – Subsequent Events (As
Restated) under the caption, “Events Affecting Valuations of Goodwill,
Trademarks and Other Intangibles,” for discussion regarding subsequent
impairments.
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”). As of December 31, 2007,
the results of this business was reported in our QSR Franchising
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 transaction, or $10.51.
Under the terms of the Merger, approximately $3 million of the initial
consideration, in the same proportion as the ratio of stock and cash for the
initial consideration, was to be held back from the sellers by the Company
until February 28, 2009 to satisfy potential post-closing purchase price
adjustments and indemnity claims. The sellers also were to receive additional
consideration in the form of an earn-out, totaling approximately $840,000 (as restated), determined by a
formula based on the 2007 audited revenues of MaggieMoo’s and Marble Slab
Creamery, which was payable on March 31, 2008. The earn-out has not yet been
paid due to on-going disputes between the parties.
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. The original
allocation of purchase price has been adjusted to reflect a net increase of
approximately $4.0 million of 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. The final purchase price allocation is as
follows:
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
Price (As Restated)1:
|
|
|
|
Cash
payments
|
|
$ |
10,492 |
|
Stock
consideration
|
|
|
2,462 |
|
Initial
consideration payable
|
|
|
3,084 |
|
Additional
consideration payable
|
|
|
840 |
|
Direct
acquisition costs
|
|
|
587 |
|
Total
purchase price
|
|
$ |
17,465 |
|
|
|
|
|
|
Allocation
of Purchase Price
(As
Restated)1:
|
|
|
|
|
Trademarks
|
|
$ |
16,500 |
|
Goodwill
|
|
|
5,086 |
|
Franchise
agreements
|
|
|
654 |
|
Assets
acquired
|
|
|
1,295 |
|
Total
assets acquired
|
|
|
23,535 |
|
Total
liabilities assumed
|
|
|
(6,070 |
) |
Net
assets acquired
|
|
$ |
17,465 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
MaggieMoo’s
results of operations are included in the Consolidated Statements of Operations
beginning from February 28, 2007 (the date of acquisition).
See Note
25 – Subsequent Events (As
Restated) under the caption, “Events Affecting Valuations of Goodwill,
Trademarks and Other Intangibles,” for discussion regarding subsequent
impairments.
(21)
ACQUISITION OF WAVERLY (As
Restated)
On May 2, 2007, the Company through our
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 (the
“Waverly business”) pursuant to an asset purchase agreement with F.
Schumacher & Co. (“Schumacher”) for cash consideration of
approximately $34 million. As of December 31, 2007, the results of this business
was reported in our Consumer Branded Products segment.
At the closing of the Waverly
acquisition, 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.
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.
The
original purchase price was increased by $239,000 to include additional
acquisition costs. Consequently, the original amount allocated to goodwill has
been increased. The final purchase price allocation is as
follows:
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
Price (As Restated)1:
|
|
|
|
Cash
payments
|
|
$ |
36,775 |
|
Warrants
|
|
|
407 |
|
Direct
acquisition costs
|
|
|
472 |
|
Total
purchase price
|
|
$ |
37,654 |
|
|
|
|
|
|
Allocation
of Purchase Price
(As
Restated)1:
|
|
|
|
|
Trademarks
|
|
$ |
37,321 |
|
License
agreements
|
|
|
333 |
|
Assets
acquired
|
|
$ |
37,654 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
Waverly
results of operations are included in the Consolidated Statements of Operations
beginning from May 2, 2007 (the date of acquisition).
See Note
25 – Subsequent Events (As
Restated) under the caption, “Events Affecting Valuations of Goodwill,
Trademarks and Other Intangibles,” for discussion regarding subsequent sale and
impairments.
(22)
ACQUISITION OF PRETZEL TIME AND PRETZELMAKER (As
Restated)
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. As of December 31, 2007, the results of
this business was reported in our QSR Franchising segment.
The
purchase price consisted of cash of approximately $22.0 million and the issuance
of approximately 1 million shares of common stock with an approximate value of
$7.9 million based on the Company’s closing stock price immediately prior to the
acquisition. In accordance with SFAS No. 141, 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 recorded amount of goodwill and trademarks is
deductible for tax purposes. The final purchase price allocation is as
follows:
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
Price (As Restated)1:
|
|
|
|
Cash
payments
|
|
$ |
21,999 |
|
Stock
consideration
|
|
|
7,972 |
|
Direct
acquisition costs
|
|
|
311 |
|
Total
purchase price
|
|
$ |
30,282 |
|
|
|
|
|
|
Allocation
of Purchase Price
(As
Restated)1:
|
|
|
|
|
Trademarks
|
|
$ |
28,110 |
|
Goodwill
|
|
|
367 |
|
Non-compete
agreement
|
|
|
1,060 |
|
Franchise
agreements
|
|
|
740 |
|
Deferred
franchise agreements |
|
|
5 |
|
Assets
acquired
|
|
$ |
30,282 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
The
results of operations of the Pretzel Time and Pretzelmaker Brands are included
in the Consolidated Statements of Operations beginning from August 7, 2007(the
date of acquisition).
See Note
25 – Subsequent Events (As
Restated) under the caption, “Events Affecting Valuations of Goodwill,
Trademarks and Other Intangibles,” for discussion regarding subsequent
impairments.
(23)
PRO FORMA INFORMATION RELATED TO THE ACQUISITIONS (As Restated)
(Unaudited)
Because
the purchases of Bill Blass, MaggieMoo’s, Marble Slab Creamery, 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 Creamery,
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 FOR
PER SHARE AMOUNTS)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
TAF
|
|
$ |
2,381 |
|
|
$ |
3,076 |
|
|
$ |
8,536 |
|
|
$ |
9,410 |
|
Bill Blass
|
|
|
2,383 |
|
|
|
2,090 |
|
|
|
10,072 |
|
|
|
9,523 |
|
MaggieMoo's
|
|
|
381 |
|
|
|
1,137 |
|
|
|
3,239 |
|
|
|
4,583 |
|
Marble Slab
Creamery
|
|
|
1,331 |
|
|
|
1,064 |
|
|
|
5,737 |
|
|
|
5,469 |
|
Waverly
|
|
|
1,985 |
|
|
|
1,327 |
|
|
|
8,825 |
|
|
|
6,314 |
|
Pretzel
Time
|
|
|
1,266 |
|
|
|
1,194 |
|
|
|
4,594 |
|
|
|
3,761 |
|
Pretzelmaker
|
|
|
775 |
|
|
|
732 |
|
|
|
2,396 |
|
|
|
2,508 |
|
Total pro forma
revenues
|
|
$ |
10,502 |
|
|
$ |
10,620 |
|
|
$ |
43,399 |
|
|
$ |
41,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAF
|
|
$ |
110 |
|
|
$ |
1,700 |
|
|
$ |
2,430 |
|
|
$ |
4,550 |
|
Bill Blass
|
|
|
1,927 |
|
|
|
1,625 |
|
|
|
7,446 |
|
|
|
6,329 |
|
MaggieMoo's
|
|
|
(338 |
) |
|
|
(17 |
) |
|
|
332 |
|
|
|
(2,188 |
) |
Marble Slab
Creamery
|
|
|
220 |
|
|
|
(208 |
) |
|
|
1,557 |
|
|
|
1,123 |
|
Waverly
|
|
|
1,004 |
|
|
|
535 |
|
|
|
4,896 |
|
|
|
2,519 |
|
Pretzel
Time
|
|
|
1,128 |
|
|
|
853 |
|
|
|
3,024 |
|
|
|
2,471 |
|
Pretzelmaker
|
|
|
657 |
|
|
|
523 |
|
|
|
1,684 |
|
|
|
1,648 |
|
Total pro forma operating
income
|
|
$ |
4,708 |
|
|
$ |
5,011 |
|
|
$ |
21,369 |
|
|
$ |
16,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAF
|
|
$ |
(485 |
) |
|
$ |
906 |
|
|
$ |
503 |
|
|
$ |
2,305 |
|
Bill Blass
|
|
|
1,388 |
|
|
|
961 |
|
|
|
5,617 |
|
|
|
4,379 |
|
MaggieMoo's
|
|
|
(448 |
) |
|
|
(102 |
) |
|
|
222 |
|
|
|
(2,273 |
) |
Marble Slab
Creamery
|
|
|
100 |
|
|
|
(336 |
) |
|
|
1,439 |
|
|
|
997 |
|
Waverly
|
|
|
572 |
|
|
|
86 |
|
|
|
3,928 |
|
|
|
1,420 |
|
Pretzel
Time
|
|
|
816 |
|
|
|
643 |
|
|
|
2,661 |
|
|
|
2,212 |
|
Pretzelmaker
|
|
|
619 |
|
|
|
370 |
|
|
|
1,617 |
|
|
|
1,460 |
|
Total
|
|
$ |
2,562 |
|
|
$ |
2,528 |
|
|
$ |
15,987 |
|
|
$ |
10,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$ |
(2,702 |
) |
|
$ |
(1,708 |
) |
|
$ |
(8,634 |
) |
|
$ |
(4,702 |
) |
Income
taxes
|
|
|
(2,240 |
) |
|
|
(370 |
) |
|
|
(3,710 |
) |
|
|
(370 |
) |
Stock based
compensation
|
|
|
(1,592 |
) |
|
|
(548 |
) |
|
|
(4,287 |
) |
|
|
(1,632 |
) |
Total pro forma net income
(loss)
|
|
$ |
(3,972 |
) |
|
$ |
(98 |
) |
|
|
(644 |
) |
|
$ |
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 -
basic
|
|
|
55,116 |
|
|
|
47,234 |
|
|
|
51,889 |
|
|
|
45,636 |
|
Weighted-average shares -
diluted
|
|
|
55,116 |
|
|
|
47,234 |
|
|
|
51,889 |
|
|
|
46,371 |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
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 18 – Acquisition of The Athlete’s
Foot, TAF was acquired in the prior year on November 7,
2006.
(24)
SEGMENT REPORTING (As Restated)
As of
December 31, 2007, the Company operated in four segments: QSR Franchising,
Retail Franchising, Consumer Branded Products and Corporate. The Company's
reportable operating segments were determined in accordance with the Company's
internal management structure as of December 31, 2007. The following tables set
forth the Company's financial performance by reportable operating
segment.
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2007 (As Restated1)
|
|
|
2006
|
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Franchise
management
|
|
|
|
|
|
|
|
|
|
Retail
franchising
|
|
$ |
8,536 |
|
|
$ |
1,924 |
|
|
$ |
- |
|
QSR
franchising
|
|
|
11,052 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
19,588 |
|
|
|
1,924 |
|
|
|
|
|
Brand
management
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer branded
products
|
|
|
14,980 |
|
|
|
- |
|
|
|
- |
|
Corporate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
revenues
|
|
$ |
34,568 |
|
|
$ |
1,924 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
management
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
franchising
|
|
$ |
2,452 |
|
|
$ |
1,326 |
|
|
$ |
- |
|
QSR
franchising
|
|
|
4,737 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
7,189 |
|
|
|
1,326 |
|
|
|
- |
|
Brand
management
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer branded
products
|
|
|
10,295 |
|
|
|
- |
|
|
|
- |
|
Total
Brands
|
|
|
17,484 |
|
|
|
1,326 |
|
|
|
- |
|
Corporate
|
|
|
(15,520 |
) |
|
|
(9,815 |
) |
|
|
(5,241 |
) |
Total operating income
(loss)
|
|
$ |
1,964 |
|
|
$ |
(8,489 |
) |
|
$ |
(5,241 |
) |
|
|
December
31,
|
|
|
December
31,
|
|
(in thousands, except per share
amounts)
|
|
2007 (As Restated1)
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
Franchise
management:
|
|
|
|
|
|
|
Retail
franchising
|
|
$ |
59,057 |
|
|
$ |
59,937 |
|
QSR
franchising
|
|
|
87,927 |
|
|
|
|
|
Total
|
|
|
146,984 |
|
|
|
59,937 |
|
Brand
management
|
|
|
|
|
|
|
|
|
Consumer branded
products
|
|
|
126,107 |
|
|
|
- |
|
Total
brands
|
|
|
273,091 |
|
|
|
59,937 |
|
Corporate
|
|
|
86,519 |
|
|
|
98,448 |
|
Total
assets
|
|
$ |
359,610 |
|
|
$ |
158,385 |
|
|
|
|
|
|
|
|
|
|
Current and long-term
debt:
|
|
|
|
|
|
|
|
|
Franchise
management
|
|
|
|
|
|
|
|
|
Retail
franchising
|
|
$ |
26,030 |
|
|
$ |
- |
|
QSR
franchising
|
|
|
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 |
|
|
$ |
- |
|
|
(1)
|
See
Note 2 of these Notes to Consolidated Financial
Statements.
|
As of
December 31, 2007, our QSR Franchising and Retail Franchising segments earned
revenues from franchising locations to independent operators who pay initial
franchise fees and continuing royalties determined as a percentage of retail
sales. Our franchising operations are based in our Norcross, Georgia facility.
As of December 31, 2007, our Consumer Branded Products segment earned 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 were 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 TAF. 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.
(25)
SUBSEQUENT EVENTS (As Restated)
Change
to Single Business Segment
In 2008, we narrowed our business model
to operate in a single business segment: Franchising. Previously, we
had owned and licensed two consumer products brands: Bill Blass and
Waverly. In future periods
after December 31, 2007, those businesses will be reported as discontinued
operations. Our franchising business, which now constitutes our only segment,
will be reported as continuing operations.
Events
Affecting Valuations of Goodwill, Trademarks and Other Intangibles
Generally
On May
19, 2008, the Company disclosed issues related to our debt structure that
materially and negatively affected the Company. Specifically, we disclosed previously undisclosed terms of the
January 2008 Amendment, the substantial doubt about our ability to continue as a
going concern, our inability to timely file our periodic report and our expected
restatement of our Original 10-K. The Company also announced that
it was actively exploring all strategic alternatives to enhance its liquidity
including the possible sale of one or more of our businesses. These disclosures had an immediate and
significant adverse impact on our business. The price of our common stock
dropped; the Company and certain current and former officers and
directors of the Company
were sued for various
claims under the federal securities laws and certain state statutory and common
laws; and we became the
subject of a formal investigation by the Enforcement Division of the SEC.
In addition, as a result of noncompliance with the listing requirements of NASDAQ, including delays in filing
our periodic reports, our common
stock was suspended from
trading on NASDAQ on January 13, 2009 and delisted on February 13,
2009.
Throughout
2008, the worldwide financial markets experienced an unprecedented
deterioration, affecting both debt and equity markets in the U.S. and
internationally. The economy underwent a significant slowdown due to
uncertainties related to, among other factors, energy prices, availability of
credit, difficulties in the banking and financial services sectors, softness in
the housing market, severely diminished market liquidity, geopolitical
conflicts, falling consumer confidence and rising unemployment rates. The market
for home and luxury brands fell especially dramatically.
Bill
Blass
On
December 24, 2008, the Company and certain of our subsidiaries sold
substantially all of the assets associated with the Bill Blass licensing
business to Peacock International Holdings, LLC for $10 million in cash. As a
result of the sale of the business, a loss on sale of approximately $13 million
was recorded, which is in addition to the impairment charges discussed below.
See Note 19 for further detail regarding the initial purchase of this
business.
Waverly
On
October 3, 2008, the Company and certain of our subsidiaries sold all of the
assets associated with the Waverly business (including the Gramercy and Village
brands) to Iconix Brand Group, Inc. for approximately $26 million in cash and
the assumption of certain liabilities. As a result of the sale of the
business, a loss on sale of approximately $2 million was recorded, which is in
addition to the impairment charges discussed below. See Note 21 for further
detail regarding the initial purchase of this business.
UCC
Capital
As of
December 31, 2008, goodwill of $37.5 million, which is included in the
Consolidated Balance Sheets as of December 31, 2007, was written down to $0.
This is attributed to the decision in May 2008 to discontinue all acquisition
activities.
Impairments of Goodwill,
Trademarks and Other Intangibles
The
events and circumstances described above all had swift, material and adverse
affect on the value of our goodwill, trademarks and other intangibles which
comprise our principal assets.
In
accordance with SFAS No. 142, the Company tests goodwill, trademarks and other
intangibles for potential impairment annually and between annual tests if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit or the assets below its respective carrying
amount. During 2008, the Company determined that it was necessary to evaluate
goodwill and trademarks for impairment between annual tests due to, among other
things, deteriorating market conditions and the announcement that we would sell
certain businesses.
Inherent
in our fair value determinations are certain judgments and estimates, including
projections of future cash flows, the discount rate reflecting the risk inherent
in future cash flows, the interpretation of current economic indicators and
market valuations, and our strategic plans with regard to our operations. A
change in these underlying assumptions would cause a change in the results of
the tests, which could cause the fair value to be more or less than their
respective carrying amounts. In addition, to the extent that there are
significant changes in market conditions or overall economic conditions or our
strategic plans change, it is possible that impairment charges related to
reporting units, which are not currently impaired, may occur in the
future.
Goodwill
The
following tables summarize impairment charges recorded related to goodwill
during the year ended December 31, 2008 (in thousands):
|
|
12/31/2007(1)
|
|
|
2008 Additions
|
|
|
2008 Impairment/Disposition
|
|
|
12/31/2008
|
|
UCC
Capital
|
|
$ |
37,514 |
|
|
$ |
- |
|
|
$ |
(37,514 |
) |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Athlete's Foot
|
|
|
2,546 |
|
|
|
- |
|
|
|
(2,546 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Blass
|
|
|
18,927 |
|
|
|
- |
|
|
|
(18,927 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marble
Slab Creamery
|
|
|
2,001 |
|
|
|
150 |
(2) |
|
|
(2,151 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MaggieMoo's
|
|
|
5,086 |
|
|
|
- |
|
|
|
(5,086 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretzelmaker
|
|
|
367 |
|
|
|
- |
|
|
|
(367 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great
American Cookies (3)
|
|
|
- |
|
|
|
1,719 |
|
|
|
(1,719 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
66,441 |
|
|
$ |
1,869 |
|
|
$ |
(68,310 |
) |
|
$ |
- |
|
(2)
|
Additional
contingent purchase price paid in 2008 consisting of interest distributed
on certain promissory notes. See Note 20
above.
|
Trademarks
The
following tables summarize impairment charges recorded related to trademarks
during the year ended December 31, 2008 (in thousands):
|
|
12/31/2007(1)
|
|
|
2008 Additions
|
|
|
2008
Impairment/Disposition
|
|
|
12/31/2008
|
|
The
Athlete's Foot
|
|
$ |
49,123 |
|
|
$ |
45 |
(2) |
|
$ |
(37,818 |
) |
|
$ |
11,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Blass
|
|
|
58,137 |
|
|
|
- |
|
|
|
(58,137 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waverly
|
|
|
37,321 |
|
|
|
13 |
(2) |
|
|
(37,334 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marble
Slab Creamery
|
|
|
22,117 |
|
|
|
- |
|
|
|
(13,055 |
) |
|
|
9,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MaggieMoo's
|
|
|
16,500 |
|
|
|
- |
|
|
|
(12,306 |
) |
|
|
4,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretzel
Time
|
|
|
17,386 |
|
|
|
- |
|
|
|
(17,075 |
) |
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretzelmaker
|
|
|
10,724 |
|
|
|
- |
|
|
|
(1,799 |
) |
|
|
8,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great
American Cookie (3)
|
|
|
- |
|
|
|
43,500 |
|
|
|
(27,020 |
) |
|
|
16,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
211,308 |
|
|
$ |
43,558 |
|
|
$ |
(204,544 |
) |
|
$ |
50,322 |
|
(2)
|
Additional
capitalized trademark costs.
|
Other
Intangible Assets
The
following table summarizes impairment charges recorded related to other
intangible assets during the year ended December 31, 2008 (in
thousands):
|
|
12/31/2007
|
|
|
2008 Acquisition
|
|
|
2008
Amortization
|
|
|
2008
Impairment/Disposition
|
|
|
12/31/2008
|
|
Non-compete
agreement - Corporate
|
|
$ |
648 |
(1) |
|
$ |
- |
|
|
$ |
(336 |
) |
|
$ |
(312 |
) |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
agreements - Bill Blass
|
|
|
553 |
(1) |
|
|
- |
|
|
|
(67 |
) |
|
|
(486 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
asset – Bill Blass
|
|
|
188 |
(1) |
|
|
- |
|
|
|
(13 |
) |
|
|
(175 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
agreements – Waverly
|
|
|
283 |
(1) |
|
|
- |
|
|
|
(31 |
) |
|
|
(252 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply/Customer
Relationship - Great American Cookies (2)
|
|
|
- |
|
|
|
45,000 |
|
|
|
- |
|
|
|
(16,590 |
) |
|
|
28,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
other intangibles (not impaired)
|
|
|
5,893 |
|
|
|
1,091 |
(3) |
|
|
(825 |
) |
|
|
- |
|
|
|
6,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,565 |
|
|
$ |
46,091 |
|
|
$ |
(1,272 |
) |
|
$ |
(17,815 |
) |
|
$ |
34,569 |
|
(1)
|
Net
of accumulated amortization.
|
(3)
|
Includes
$311,000 of Pretzel Time trademark value, which became amortizable during
third quarter 2008 as a result of the Company’s plan to consolidate the
Pretzel Time brand under the Pretzelmaker
brand.
|
Other
intangible assets are comprised of non-compete agreements of key executives and
others, license agreements, franchise agreements, lease asset of an acquired
below-market lease, and customer/supplier relationship related to the acquired
exclusive supply and customer relationship with Great American Cookies
franchisees. Impairment charges were recorded in 2008 with respect to
all of these other intangible assets, except franchise agreements, certain
non-compete agreements and the amortizable portion of the Pretzel Time trademark
assets.
Acquisitions
Bill
Blass
In
February 2008, the Company repurchased one half of DEHC’s minority interest
equaling 5% in Bill Blass Jeans, LLC for $1.25 million. The interest that was
repurchased by the Company was priced at the same value used when DEHC purchased
its 10% initial interest in Bill Blass Jeans, LLC in February 2007.
In order
to have greater control of the Bill Blass brand and conduct a more comprehensive
sales process, on July 11, 2008, the Company acquired all of the membership
interests of the limited liability company Bill Blass, Ltd. LLC, which owned and
operated the Bill Blass couture business pursuant to a royalty-free license from
the Company (“Bill Blass Couture”). The purchase price paid at closing was
comprised of nominal consideration and the Company’s assumption of approximately
$12,000 in net liabilities, excluding amounts owed by Bill Blass Couture to the
Company. Starting in January 2008, the Company made loans, advances and
investments of approximately $2.2 million to Bill Blass Couture. Following the
sale of the Bill Blass licensing business, on December 31, 2008, Bill Blass,
Ltd. LLC (which remained an indirect subsidiary of the Company) filed for
liquidation under Chapter 7 of the United States Bankruptcy Code. The Company
did not recover any of the $2.2 million of loans, advances or
investments.
Great American
Cookies
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
$95.5 million, consisting of $89 million in cash and 1,099,290 shares of
the Company’s common stock (valued at $4.24 per share which was the closing price
of one share of the Company’s common stock on January 28, 2008). In addition, pursuant to a settlement
agreement with certain franchisees, the Company issued 300,000 warrants to
purchase shares of the Company’s common stock valued at $3.28 per warrant. The
$89 million cash portion of the purchase price was funded with $70 million
borrowed pursuant to the January 2008 Amendment and $20 million of cash on
hand. (See “Financing Transactions” below.) 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. The final purchase price
allocation is as follows:
(in
thousands)
|
|
|
|
|
|
|
|
Purchase
price:
|
|
|
|
Cash
payments
|
|
$ |
89,028 |
|
Stock
consideration
|
|
|
5,690 |
|
Direct
acquisition costs
|
|
|
769 |
|
Total
purchase price
|
|
$ |
95,487 |
|
|
|
|
|
|
Allocation
of purchase price:
|
|
|
|
|
Trademarks
|
|
$ |
43,500 |
|
Goodwill
|
|
|
1,719 |
|
Franchise
agreements
|
|
|
780 |
|
Supply/Customer
Relationship
|
|
|
45,000 |
|
Assets
acquired
|
|
|
5,013 |
|
Total
assets acquired
|
|
|
96,012 |
|
Total
liabilities assumed
|
|
|
(525 |
) |
Net
assets acquired
|
|
$ |
95,487 |
|
See above for 2008 impairments.
Joint
Venture Investment
Shoebox New
York
In
January 2008, Shoe Box Holdings, LLC acquired the trademarks and other
intellectual property of The Shoe Box, Inc., a multi-brand shoe retailer based
in New York for $500,000. Shoe Box Holdings, LLC is a joint venture with the VCS
Group, LLC (“VCS”), a premier women's fashion footwear company, and TSBI
Holdings, LLC (“TSBI”), the originator of The Shoe Box. The purpose of the joint
venture is to franchise The Shoe Box’s high-quality, high-fashion shoes and
accessories concept under the Shoebox New York brand. The Company and VCS each
contributed $725,000 to Shoe Box Holdings, LLC, in exchange for a 33.3% interest
in the entity. TSBI contributed its knowledge and expertise in retail operations
and owns the remaining 33.3% interest in Shoe Box Holdings,
LLC.
A wholly
owned subsidiary of Shoe Box Holdings, LLC holds the acquired intellectual
property of The Shoe Box, Inc. and the intellectual property of the Shoebox New
York franchise concept (collectively, the “Shoebox Intellectual Property”). The
principal of TSBI was retained to assist in the development of the Shoebox New
York concept pursuant to a consulting agreement (the “Consulting Agreement”),
and TSBI was granted a non-exclusive license to the Shoebox Intellectual
Property (the “License Agreement) to continue operating the existing The Shoe
Box stores and to open additional stores under the Shoebox New York brand. If
the License Agreement is terminated due to a breach by TSBI or if the Consulting
Agreement is terminated due to a breach by the principal of TSBI, Shoe Box
Holdings, LLC has the right to repurchase all of TSBI’s ownership interest for
$1.00. The terms of the transaction also include an option for TSBI to purchase
all of the ownership units of Shoe Box Holdings, LLC in the event that 20
franchised stores are not opened and operating on or prior to the date that is
36 months from the transaction’s second closing date (January 15, 2011) or the
date that is 48 months from the transaction’s second closing date (January 15,
2012, collectively, the “Trigger Dates”). TSBI also has an alternative option,
in the event that 20 franchised stores are not opened and operating on or prior
to the either of the Trigger Dates, to withdraw from Shoe Box Holdings, LLC by
surrendering its ownership units, terminating the License Agreement, and by
ceasing all uses of the Shoebox Intellectual Property.
Until the
Company and VCS are re-paid their respective initial investments of $725,000,
the Company and VCS will each receive 50% of the profits and losses from the
joint venture entity. Once the Company and VCS are re-paid, each party is
entitled to 33.3% of joint venture entity profits. NexCen Franchise
Management, Inc. (“NFM”) manages the Shoebox New York brand, as it does NexCen’s
other brands, and receives a management fee for its services, in addition to any
distributions that NexCen Brands may receive from the joint venture entity.
During 2008, NFM received management fees of approximately
$318,000.
The joint
venture, through its wholly owned subsidiary, executed in January 2008 its first
franchise agreement for the development of 20 stores in South Korea, followed by
the execution of franchise agreements for the development of stores in Vietnam,
Aruba and Kuwait. There are currently 9 stores open in the United States and 6 stores open internationally
in Vietnam, South Korea and
Kuwait.
Financing
Transactions
In
January 2008, the Company amended the Original BTMUCC Credit Facility,
originally entered into on March 12, 2007, in order to finance a portion of the
consideration related to the Great American Cookies acquisition.
Also, in
January 2008, as partial consideration for the amendments to the Original BTMUCC
Credit Facility, the Company issued to BTMUCC a warrant to purchase 200,000
shares of the Company’s common stock at an exercise price of $0.01 per share.
BTMUCC may exercise the warrant in full or in part at any time from the date of
issuance through January 29, 2018.
On August
15, 2008, NexCen restructured the Original BTMUCC Credit Facility and the
January 2008 Amendment by entering into the Amended Credit Facility. The parties
entered into further amendments on September 11, 2008, December 24, 2008,
January 27, 2009, July 15, 2009 and August 6, 2009.
For
additional details regarding the Original BTMUCC Credit Facility, the January
2008 Amendment, the Amended Credit Facility and our Current Credit Facility, see
Note 9 – Long-Term Debt (As
Restated) to our Consolidated Financial Statements.
TAF
Australia Transaction
On August
6, 2009, NexCen, through its wholly owned subsidiary TAF Australia, LLC, entered
into long-term license agreements with RCG Corporation Ltd. and The Athlete’s
Foot Australia Pty Ltd. The Athlete’s Foot Australia Pty Ltd., a subsidiary of
RCG Corporation, was previously the master franchisee for TAF for the
territories of Australia and New Zealand. Pursuant to the license agreements,
which replace all prior franchise agreements among the parties, TAFA granted The
Athlete’s Foot Australia Pty Ltd. exclusive licenses of The Athlete’s Foot
trademarks and trade dress for the territories of Australia and New Zealand for
an initial 99-year term. In consideration for these license agreements, The
Athlete’s Foot Australia Pty Ltd. paid one-time, non-refundable licensing fees
of $6.2 million. The license agreements are renewable for three 50-year terms
for nominal additional consideration. TAF Australia, LLC is a special purpose,
bankruptcy-remote limited liability company formed under the laws of Delaware,
whose only assets are the license agreements and the intellectual property that
is the subject of those license agreements.
On August
6, 2009, in connection with the license agreements discussed above, NexCen
entered into an amendment of the credit facility whereby the Company used $5.0
million of the licensing proceeds to pay down a portion of the Class B Franchise
Notes and BTMUCC released its security interest in the intellectual property
that is the subject of the license agreements. The Company’s repayment will
result in interest expense savings of $400,000 on an annualized basis. The
August 6, 2009 amendment also permitted the Company to use up to $1.2 million of
net proceeds from the license agreements for expenditures, as approved in
writing by BTMUCC, including capital expenditures to expand production
capabilities of its manufacturing facility to produce other products beyond
cookie dough.
Settlements
On
October 24, 2008, the Company entered into settlement agreement with Designer
License Holdings, Co. LLC (“DLHC), a licensee of the Bill Blass brand, regarding
certain past due royalty payments and other allegations of breach of the license
agreement. Simultaneously, the parties entered into an amendment of the
license agreement to lower the minimum annual royalty for 2008 from $5.0 million
to approximately $1.4 million and lower the minimum annual royalty for
subsequent years. This license agreement, as amended, was assigned to Peacock
International Holdings, LLC pursuant to the sale of the Bill Blass
business.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES (AS RESTATED)
(a)
Evaluation of Disclosure Controls and Procedures
We have
designed our disclosure controls and procedures to ensure that information we
are required to disclose in reports that we file or submit under the Exchange
Act is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure, and that such information is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms.
|
·
|
In
March 2008, under the supervision and with the participation of our
management, including our then Chief Executive Officer and then Chief
Financial Officer, we evaluated the effectiveness of our disclosure
controls and procedures, as such terms are defined in Rule 13a-15(e) and
Rule 15d-15(e) under the Exchange Act, as of December 31, 2007. Based on
this evaluation and considering the then identified material weaknesses in
our internal control over financial reporting as of December 31, 2007,
management concluded that our disclosure controls and procedures were not
effective as of December 31, 2007.
|
|
·
|
In
connection with the restatement of information contained in this Second
Amendment, we have identified additional reasons why our disclosure
controls and procedures were not effective as of December 31, 2007. These
include (i) additional material weaknesses in internal control over
financial reporting as described below and (ii) management’s judgment that
the Company did not have sufficiently detailed written policies and
procedures to ensure that the preparation and review of reports filed with
or submitted to the SEC included all material information and otherwise
complied with applicable rules and regulations and the Company did not
provide adequate training to ensure that relevant personnel fully
understood their responsibilities associated with the preparation and
review of such reports.
|
However,
because we performed additional analyses and implemented new procedures and
controls for NexCen and all of its entities, management believes that, despite
the material weaknesses, the financial information for the periods covered by
this Second Amendment and the accompanying Consolidated Financial Statements are
fairly stated in all material respects.
(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) and Rule
15d-15(f) under the Exchange Act). Because of its inherent limitations, internal
control over financial reporting may not prevent or detect all misstatements.
Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes of
conditions, or that the degree of compliance with the policies or procedures may
deteriorate. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP.
Under the
supervision and with the participation of our management, including our then
Chief Executive Officer and then Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2007. This evaluation was based on the
framework in Internal Control
– Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). We excluded from our assessment
the internal control over financial reporting of those entities and businesses
that we acquired during 2007, namely Bill Blass Holding, Co., Inc., MaggieMoo’s
International, LLC, Marble Slab Creamery, Inc., the Waverly business, Pretzel
Time Franchising, LLC and Pretzelmaker Franchising, LLC, with total assets of
$203.7 million (as restated) (of which $192.6 million (as restated) represents
goodwill and intangible assets included within the scope of the assessment) and
total revenues of $26.0 million (as restated) included in the Company’s
Consolidated Financial Statements as of and for the year ended December 31,
2007.
A
material weakness is a control deficiency, or a combination of control
deficiencies, 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.
In the
Company’s Original 10-K, we concluded that the Company’s internal control over
financial reporting as of December 31, 2007 was not effective. We identified the
following material weaknesses in internal control over financial reporting as of
December 31, 2007 in our Original 10-K:
|
·
|
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 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.
|
In
connection with the restatement of our consolidated financial statements
described in this Second Amendment, we reassessed, with the participation of our
management, including our current Chief Executive Officer and current Chief
Financial Officer, whether additional material weakness in internal control over
financial reporting existed as of December 31, 2007. As a result of our
reassessment, we identified the following additional material weaknesses in
internal control over financial reporting as of December 31, 2007:
|
·
|
The
Company had a diffused management structure that lacked sufficient clarity
as to the roles and responsibilities of senior management, including for
communications with the Board of Directors, oversight of the Company’s
legal matters that impact the Company’s consolidated financial statements
and other public disclosures, and oversight of financial planning,
analysis and reporting. As a result, information that impacted financial
reporting was not shared within or across corporate functions leading to
information relating to a significant agreement affecting the Company’s
financial condition not being communicated effectively among members
of management or to the Board of
Directors.
|
Management
has concluded that errors in the 2007 financial statements reflect the effects
of the various material weaknesses. Management previously had concluded that the
Company did not maintain effective internal control over financial reporting as
of December 31, 2007 because of the existence of material weaknesses as
discussed in our Original 10-K. Management has determined that additional
material weaknesses, as described above, also existed as of December 31, 2007
and has concluded that the Company did not maintain effective internal control
over financial reporting as of December 31, 2007. The Company’s independent
registered public accounting firm, KPMG LLP, has issued an attestation report on
the Company’s internal control over financial reporting, which appears
below.
(c)
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.
|
As of the
filing of our Original 10-K on March 21, 2008, we had commenced efforts to
replace certain accounting and financial reporting personnel and hire additional
personnel with technical expertise in GAAP and experience with public company
financial reporting. The Company also had planned to enhance and strengthen its
written accounting and reporting policies pertaining to accrued liabilities and
to train employees with respect to the new policies.
As part
of these efforts, on March 25, 2008, we hired a new chief financial officer for
NexCen Brands (who subsequently became our chief executive officer) and, on
April 30, 2008, we hired a new chief financial officer for NFM (who subsequently
became our chief financial officer). In May 2008, in preparing our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2008, we determined that
certain aspects of the January 2008 Amendment were not contained in our prior
public filings, including the Current Report on Form 8-K filed on January 29,
2008 or in our Original 10-K. We further concluded that the January 2008
Amendment’s effect on the Company’s financial condition and liquidity raised
substantial doubt about our ability to continue as a going concern, which doubt
may have existed as of the filing of our Original 10-K. The Audit Committee
retained independent counsel to conduct an investigation into these matters. The
Audit Committee also directed the Company’s management to implement a complete
review and assessment of our disclosure controls and procedures and our internal
control over financial reporting and to report to the Audit Committee on
specific changes that should be made to remediate weaknesses or deficiencies, in
light of the conclusions of the independent investigation and the material
weaknesses previously identified in our Original 10-K.
Since
the filing of the Original 10-K in March 2008, we have engaged, and
continue to engage, in substantial efforts to improve our disclosure
controls and procedures and our internal control over financial reporting
to address all of the identified material weaknesses. As of June 30, 2009,
these efforts have included the
following:
|
|
·
|
We
have a new chief executive officer and new chief financial officer, both
with substantial financial, accounting, and operating experience with
respect to public companies and substantial knowledge and understanding of
public company financial reporting
obligations.
|
|
·
|
We
clarified lines of executive responsibility and altered our management
structure.
|
|
·
|
We
centralized responsibility for board communication with the chief
executive officer, in collaboration with the general counsel and the chief
financial officer.
|
|
·
|
We
completed our transition to centralized control and oversight by our
general counsel of all of the Company’s material legal matters and the
outside counsels working on them, including those that impact the
Company’s consolidated financials and other public
disclosures.
|
|
·
|
We
restructured the corporate finance function so that it is more closely
aligned with the corporate accounting function. As a result, those
departments now collaborate, under the direction of the chief financial
officer, in the development and maintenance of financial models, operating
budgets and various analyses of financial
performance.
|
|
·
|
We
revised our charter and procedures for the Disclosure Committee, a subset
of management, implemented a new policy and procedure related to certain
SEC filings, and provided additional training to ensure that the Company’s
public filings, including our annual and quarterly reports, are complete
and accurate, that the appropriate personnel are involved in the review of
public filings, and that such personnel fully understand the
responsibilities associated with public
filings.
|
|
·
|
We
reorganized and committed substantial resources to our accounting
department. We created new positions and hired additional accounting
personnel at both NexCen Brands and
NFM.
|
|
·
|
We
engaged outside resources to ensure GAAP, SEC and Sarbanes-Oxley
compliance. We engaged a leading accounting firm, separate from our
independent auditing firm, to provide consulting services to assist
management in evaluating the application of GAAP and SEC rules and
regulations and to advise on the completeness of the consideration of GAAP
and SEC literature for certain key and complex transactions. We engage
outside consultants to review internal controls at NexCen Brands and at
NFM and to provide assistance to management with Sarbanes-Oxley
compliance.
|
|
·
|
We
enhanced and strengthened our policies and procedures related to
accounting and reporting including our procedures for deferred revenue,
payroll changes, expense reporting, new account approvals, journal entries
and accrued liabilities.
|
|
·
|
We
developed more robust weekly, monthly, quarterly, annual, and multi-year
models for cash management, budgeting, and forecasting. These reports and
models are now consistent and integrated across the Company and are the
result of more unified corporate accounting department and corporate
finance department.
|
|
·
|
We
instituted additional period-end closing procedures, including monthly
closing work plans for NFM and procedures requiring all significant
non-routine transactions to be reviewed by the chief financial
officer.
|
|
·
|
We
instituted additional procedures for review of account reconciliations and
analyses for significant financial statement accounts by qualified
accounting personnel.
|
|
·
|
We
implemented additional procedures for the timely review and approval of
complex accounting estimates by qualified accounting personnel and, when
appropriate, external subject matter
experts.
|
|
·
|
We
established additional monitoring controls at both NexCen Brands and at
NFM including instituting (1) weekly accounts receivable aging reports,
(2) weekly staff meetings for all members of the corporate and franchise
management finance and accounting staff during which material issues are
discussed and (3) monthly meetings to review financial
statements.
|
Even with
these significant changes, the Company has been unable to fully remediate all
material weaknesses, and our internal control over financial reporting may be
materially affected in the future by our continued mediation efforts. As part of
these efforts, and to centralize and consolidate all accounting functions at our
principal operating facility, the Company plans to supplement its accounting
staff in its NFM offices with additional accounting personnel with appropriate
level of technical expertise in GAAP and public reporting, then transition all
corporate accounting functions currently in the New York headquarters to the
Company’s NFM offices in Norcross, Georgia.
(d)
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 (as restated) appearing under Item 9A(b) of the Annual
Report on Form 10-K/A. 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. Management’s Report on Internal Control over Financial
Reporting has been restated to include an additional material weakness. The
following material weaknesses have been identified and included in management's
assessment (as restated): 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 management structure lacked sufficient
clarity as to the roles and responsibilities of senior management.
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 $203.7 million (of which $192.6 million represents goodwill and
intangible assets included within the scope of the assessment) and total
revenues of $26.0 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, except for Note
2, as to which the date is August 11, 2009, 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.
/s/ KPMG
LLP
New York,
New York
March 20,
2008, except for the material weakness related to the management structure
lacking sufficient clarity as to the roles and responsibilities of senior
management, as to which the date is August 11, 2009
ITEM
9(B). OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive
Officers of the Registrant
The
Company filed the First Amendment solely to include the information required by
Part III of Form 10-K because the Company’s definitive proxy statement for our
2008 annual meeting was not filed within 120 days after the end of the Company’s
fiscal year. Because of the events surrounding the January 2008 Amendment and
our need to restate our Original 10-K, we did not issue a proxy statement and we
did not hold an annual meeting in 2008.
Since
April 29, 2008, we had extensive turnover in the composition of our
executive management and Board of Directors. Robert W. D’Loren, who was our
President and Chief Executive Officer, and also a director, resigned as director
and officer on August 15, 2008. James Haran, who was our Executive Vice
President, M&A and Operations, resigned on August 14, 2008. The Company
terminated on March 21, 2008 the employment of David Meister, who was our Senior
Vice President, Chief Financial Officer and Treasurer.
Due to
the changes in our business strategy and in connection with expense reduction
efforts, the Company terminated on May 30, 2008 the employment of Charles A.
Zona, who was our Executive Vice President, Brand Management and Licensing, and
terminated on May 23, 2008 the employment of Joseph DiMuro, who was our
Executive Vice President, Chief Marketing Officer. In addition, Jack B. Dunn IV
resigned as a director on September 25, 2008; Jack Rovner resigned as a director
on August 29, 2008; and Marvin Traub resigned as a director on December 4,
2008.
Kenneth
J. Hall joined the Company on March 25, 2008 as our Executive Vice President,
Chief Financial Officer and Treasurer. He became our Chief Executive Officer on
August 15, 2008. Mark E. Stanko joined the Company on April 30, 2008 as the
Chief Financial Officer of NFM. He became the Company’s Chief Financial Officer
and Treasurer on November 12, 2008. Chris Dull, the President of NFM who
had joined the
Company on February 28, 2007, was appointed an executive officer of NexCen
Brands on February 13, 2009. Ms. Nam joined the Company on September 24, 2007 as
General Counsel and added the role of Secretary to her responsibilities on
December 6, 2007. She remains an executive officer of the Company.
Identification
of Directors
Current
Directors
The
following table lists all five incumbent directors as of the date of this Second
Amendment. In accordance with the Company’s bylaws, the Board of Directors
approved the reduction in the size of the board to five members. Accordingly,
there are no vacancies on our Board of Directors, and each of our incumbent
directors will continue in office until his successor is elected and qualified,
or until his earlier resignation, removal or death. As noted above, we did not
hold an annual meeting of stockholders in 2008. At our next annual meeting,
which we expect to hold as soon as possible after we meet applicable
requirements for soliciting proxies, stockholders will elect directors to hold
office until the next annual meeting of stockholders. There are no arrangements
or understandings known to us between any of the individuals listed below and
any other person pursuant to which a director was or is to be selected as a
director or nominee, other than any arrangements or understandings with
directors or officers of NexCen acting solely in their capacities as
such.
Name
|
|
Age
|
|
Position
|
|
David
S. Oros
|
|
49
|
|
Chairman
of the Board, Restructuring Committee1
(Chairman)
|
|
James
T. Brady
|
|
68
|
|
Director,
Audit Committee (Chairman), Compensation Committee, Nominating/Corporate
Governance Committee (Chairman), Restructuring
Committee
|
|
Paul
Caine
|
|
44
|
|
Director,
Audit Committee, Nominating/Corporate Governance Committee
|
|
Edward
J. Mathias
|
|
67
|
|
Director,
Audit Committee, Compensation Committee (Chairman)
|
|
George
P. Stamas
|
|
58
|
|
Director,
Restructuring Committee
|
|
________________
1
|
On
May 18, 2008, we established an ad hoc Restructuring Committee of our
Board of Directors, consisting of David S. Oros, James T. Brady and George
P. Stamas. The Restructuring Committee was charged with overseeing, on
behalf of the Board, the Company’s efforts to improve our financial
condition and evaluate our restructuring alternatives. On May 12, 2009,
the Restructuring Committee was disbanded after the Board’s determination
that this ad hoc committee was no longer needed in light of the progress
made to date by the Company in its restructuring efforts and the reduced
number of members on the Board.
|
Former
Directors
The
following table lists all of those persons who served on our Board of Directors
between January 1, 2007 and the date of this filing, but who no longer serve on
the Board.
Name
|
|
Date
Became Director
|
|
|
Date
Resigned As Director
|
|
Robert
W. D’Loren
|
|
June
6, 2006
|
|
|
August
15, 2008
|
|
Jack
B. Dunn IV
|
|
June
28, 2002
|
|
|
September
25, 2008
|
|
Jack
Rovner
|
|
October
31, 2006
|
|
|
August
29, 2008
|
|
Marvin
Traub
|
|
May
2, 2007
|
|
|
December
4, 2008
|
|
Identification
of Executive Officers
Current
Executive Officers
The
following table lists all of our incumbent executive officers as of the date of
this Second Amendment. Each of our incumbent executive officers will continue in
office until his or her successor is elected and qualified, or until his or her
earlier resignation, removal or death. There are no arrangements or
understandings known to us between any of the individuals listed below and any
other person pursuant to which he or she was or is to be selected as an officer,
other than any arrangements or understandings with directors or officers of
NexCen acting solely in their capacities as such.
Name
|
|
Age
|
|
Position
|
|
Kenneth
J. Hall1
|
|
51
|
|
Chief
Executive Officer
|
|
Mark
E. Stanko2
|
|
47
|
|
Chief
Financial Officer and Treasurer
|
|
Sue
J. Nam3
|
|
39
|
|
General
Counsel and Secretary
|
|
Chris
Dull4
|
|
36
|
|
President,
NFM
|
|
1
|
Mr.
Hall joined the Company on March 25, 2008 as our Executive Vice President,
Chief Financial Officer and Treasurer. He became our Chief
Executive Officer on August 15,
2008.
|
2
|
Mr.
Stanko joined the Company on April 30, 2008 as the Chief Financial Officer
and Treasurer of NFM. He became the Company’s Chief Financial
Officer on November 12, 2008.
|
3
|
Ms.
Nam joined the Company on September 24, 2007 as General
Counsel. She became Secretary on December 6,
2007.
|
4
|
Mr.
Dull joined the Company on February 28, 2007 as Executive Vice President
of the QSR Franchising of NFM. On May 22, 2007, he was promoted to
President of the QSR Division of NFM. He then was appointed President of
NFM on August 31, 2007 and appointed an executive officer of the Company
on February 13, 2009.
|
Former
Executive Officers
The
following table lists all of our former executive officers who served the
Company between January 1, 2007 and the date of this filing.
Name
|
|
Date
Became
Officer
|
|
Date
Ceased
Being
Officer
|
|
Position
|
Robert
W. D’Loren
|
|
June
6, 2006
|
|
August
15, 2008
|
|
President
and Chief Executive Officer
|
David
Meister
|
|
September
12, 2006
|
|
March
21, 2008
|
|
Senior
Vice President, Chief Financial Officer, Treasurer and
Secretary
|
James
Haran
|
|
June
6, 2006
|
|
August
14, 2008
|
|
Executive
Vice President, M&A and Operations
|
Charles
A. Zona
|
|
December
11, 2006
|
|
May
30, 2008
|
|
Executive
Vice President, Brand Management and Licensing
|
Joseph
DiMuro
|
|
March
17, 2008
|
|
May
23, 2008
|
|
Executive
Vice President, Chief Marketing
Officer
|
Business
Experience of Current Directors and Current Executive Officers
Set forth
below is biographical information for our current directors and executive
officers.
David S.
Oros founded the Company in
1996, and currently serves as our Chairman of the Board of Directors. From 1996
until June 2006, Mr. Oros served as our Chief Executive Officer. From 1994 until
1996, Mr. Oros was President of NexGen Technologies, L.L.C., a wireless software
development company that contributed all of its assets to the Company. From 1992
until 1994, he was President of the Wireless Data Group at Westinghouse
Electric. Prior to that, from 1982 until 1992, Mr. Oros was at Westinghouse
Electric directing internal research and managing large programs in advanced
airborne radar design and development. Mr. Oros received a B.S. in mathematics
and physics from the University of Maryland. Mr. Oros is currently a managing
partner for Global Domain Partners, LLC. Other directorships
include: Evolving Systems, Inc.
James T.
Brady was elected director of the Company on June 28, 2002. Mr. Brady has
served as the Managing Director - Mid-Atlantic, for Ballantrae International,
Ltd., a management consulting firm, since 2000 and was an independent business
consultant from May 1998 until 2000. From May 1995 to May 1998, Mr. Brady was
the Secretary of the Maryland Department of Business and Economic Development.
Prior to May 1995, Mr. Brady was a managing partner with Arthur Andersen LLP in
Baltimore, Maryland. Mr. Brady received a B.A. from Iona College. Other
directorships include: McCormick & Company, Inc., Constellation
Energy Group, Inc. and T. Rowe Price Group.
Paul Caine
was elected director of the Company on September 5, 2007. Since October 2008,
Mr. Caine has served as President and Group Publisher of Time Inc.’s Style and
Entertainment Group overseeing the PEOPLE Group (PEOPLE, People.com, Stylewatch, People en Español, People Country), as well as
Entertainment Weekly,
EW.com., In Style and
Essence. His career at Time Inc.
began in 1989 as an advertising sales representative for PEOPLE. During his tenure at
Time Inc., Mr. Caine has been the Associate Publisher of PEOPLE, Publisher of Teen People, Entertainment Weekly
and PEOPLE, the Group
Publisher of the PEOPLE Group and the President of the Entertainment Group.
Prior to joining Time Inc., Mr. Caine worked for USA Today and J. Walter
Thompson. Mr. Caine received a B.S. in Business Communication from Indiana
University.
Edward J.
Mathias was elected director of the Company on June 28, 2002. Mr. Mathias
has been a managing director of The Carlyle Group, a Washington, D.C. based
global private equity firm, since 1994. Mr. Mathias served as a managing
director of T. Rowe Price Associates, Inc., an investment management firm, from
1971 to 1993. He received a B.A. from the University of Pennsylvania and an
M.B.A. from Harvard University. Other directorships include: Allied
Capital, Brown Advisory Holdings, Inc. and a special purpose acquisition
corporation, Triple Crown Acquisition Corp.
George P.
Stamas was elected a director of the Company on October 20, 1999. Since
January 2002, Mr. Stamas has been a senior partner with the law firm of Kirkland
& Ellis LLP. Also, since November 2001, Mr. Stamas has been a venture
partner with New Enterprise Associates. From December 1999 until December 2001,
Mr. Stamas served as the Vice Chairman of the board of directors and Managing
Director of Deutsche Banc Alex Brown (now Deutsche Bank Securities). Mr. Stamas
is counsel to, and a limited partner of, the Baltimore Orioles baseball team and
also of Lincoln Holdings, which holds interests in the Washington Wizards and
Washington Capitals. He received a B.S. in economics from the Wharton School of
the University of Pennsylvania and a J.D. from the University of Maryland Law
School. Other directorships include: FTI Consulting, Inc.
Kenneth J.
Hall joined the Company on March 25, 2008 as Executive Vice President,
Chief Financial Officer and Treasurer. He was appointed Chief Executive Officer
of the Company on August 15, 2008. Prior to joining the Company, Mr. Hall served
as the Chief Financial Officer and Treasurer of Seevast Corp., a position he
held from April 2005 to February 2008. From December 2003 to March 2005, Mr.
Hall worked as an independent consultant advising companies on strategic and
financial matters. From July 2001 to November 2003, he served as Executive Vice
President, Chief Financial Officer and Treasurer of Mercator Software, Inc. Mr.
Hall holds a B.S. in Finance from Lehigh University and a M.B.A. from Golden
Gate University.
Mark E.
Stanko joined the Company on April 30, 2008 as Chief Financial Officer of
NFM, a wholly owned subsidiary of the Company. He was appointed Chief
Financial Officer and Treasurer of the Company on November 12, 2008. Prior to
joining the Company, Mr. Stanko most recently served as Regional Controller for
Levitt Corporation, a publicly traded homebuilding and land development company,
from 2006 to 2008. From 2003 to 2006, Mr. Stanko held the position of Vice
President of Finance of KB Home, a publicly traded homebuilding company. From
2001 to 2003, Mr. Stanko was Director of Corporate Audit, then the Director of
Finance of Pulte Homes, Inc., a publicly traded homebuilding company. Mr. Stanko
began his career at Ernst & Young LLP where he held positions of increasing
responsibility over 16 years. Mr. Stanko holds a BBA in Accounting from
Cleveland State University. He is a Certified Public Accountant.
Sue J.
Nam joined
the Company on September 24, 2007 as General Counsel. She was
appointed Secretary of the Company on December 6, 2007. Prior to joining the
Company, since 2001, Ms. Nam was Vice President, Corporate Counsel for
Prudential Financial, where she served as Intellectual Property Counsel and
Assistant Corporate Secretary. Prior to that, Ms. Nam was in private practice
with Brobeck, Phleger & Harrison LLP in its San Francisco office and Gibson,
Dunn & Crutcher LLP in its New York office. Ms. Nam earned her B.A. in
English and French Literature from Northwestern University and her J.D. from
Yale Law School.
Chris
Dull joined
the Company on February 28, 2007 as Executive Vice President of the QSR
Franchising of NFM. On May 22, 2007, he was promoted to President of the QSR
Division of NFM. He then was appointed President of NFM on August 31, 2007 and
appointed an executive officer of NexCen Brands on February 13, 2009. Prior to
joining the Company, Mr. Dull most recently served as the Executive Vice
President for Marble Slab Creamery, Inc. from 2004 to 2007 and served as Vice
President of Franchise Development for Marble Slab Creamery, Inc. from 1999 to
2004. Mr. Dull began his career in franchise management with Marble Slab
Creamery, where he held positions of increasing responsibility over 13
years. Mr. Dull received a B.A. from Baylor University.
Business
Experience of Former Directors and Former Executive Officers
Robert W.
D'Loren was elected a director and appointed Chief Executive Officer of
the Company on June 6, 2006. He was appointed President on August 9, 2006. Mr.
D’Loren resigned with respect to all director and officerships on August 15,
2008. Prior to joining the Company, he was the President and Chief Executive
Officer of UCC Capital Corporation, where he provided services in connection
with intellectual property and whole company securitization finance. Prior to
forming UCC Capital, Mr. D'Loren served as President and Chief Operating Officer
of CAK Universal Credit Corporation, an intellectual property finance company.
From 1985 to 1997, Mr. D'Loren founded and served as President and Chief
Executive Officer of the D'Loren Organization, a real estate investment,
lending, and restructuring firm. Prior to that, Mr. D'Loren served as an asset
manager for Fosterlane Management, and previously served as a manager with
Deloitte & Touche. Mr. D’Loren is a Certified Public Accountant and holds a
Master’s degree from Columbia University and a B.S. from New York
University.
James
Haran joined the Company on June 6, 2006 as Executive Vice President of
Mergers and Acquisitions (M&A) and Operations. He resigned on August 14,
2008. Prior to joining the Company, Mr. Haran served for nine years as the Chief
Credit Officer of UCC Capital Corporation, where he had business experience in
structured finance, M&A and consulting for intellectual property centric
companies and assets. Prior to joining UCC Capital, since 1987, Mr. Haran was a
Partner at Sidney Yoskowitz and Company P.C., a regional diversified certified
public accounting firm. Mr. Haran is a Certified Public Accountant and holds a
B.S. degree from State University of New York, at Plattsburgh.
Charles A.
Zona joined the Company on December 11, 2006 as Executive Vice President
of Brand Management and Licensing. His employment terminated on May
30, 2008. Prior to joining the Company, Mr. Zona was a licensing consultant for
three years for clients such as The J. Peterman Company, Chris-Craft Boats and
XOR. Before that, he served as the Senior Vice President of Consumer Products
for The National Football League Properties where he was responsible for
developing a new consumer products (apparel, hardlines and accessories)
licensing business model. Preceding his position with the NFL, he served as
President of Salant Menswear Group which included Perry Ellis Dress
Furnishings/Accessories and Private Label denim. Earlier, he served, for nine
years, as President of Nautica Dress Furnishings/State of Maine Menswear
Division. Mr. Zona began a 19-year career in retail at Stern Brothers Department
Stores and Bambergers that concluded as a Senior Vice President at Lord and
Taylor. He holds a B.S. degree in Industrial Relations from Seton Hall
University.
Joseph
DiMuro joined the Company on March 17, 2008 as Executive Vice President,
Chief Marketing Officer. His employment terminated on May 23, 2008.
Prior to joining the Company, since 1998, Mr. DiMuro served as the Executive
Vice President & General Manager of Sony BMG Entertainment, where he managed
television, film, commercial-advertising licensing, digital/mobile-content
platform development, new product and joint-venture initiatives in addition to
corporate/strategic business development. He also was the President of the
jointly operated Nickelodeon Records with Nickelodeon as well as the
President/Founder of Burgundy Records. In addition to these duties, Mr. DiMuro
was the chief strategic architect behind the global re-branding of the Elvis
Presley recording masters. Prior to his career at Sony BMG, Mr. DiMuro worked at
News Corp’s 20th Century Fox Film in a variety of senior theatrical marketing,
sales, distribution and licensing areas for the film, home entertainment, and
interactive business units. Mr. DiMuro graduated from Concordia College with a
B.A. in English/Communications Arts.
Jack B. Dunn
IV was elected director of the Company on June 28, 2002. He
resigned on September 25, 2008. Since October 1995, Mr. Dunn has been Chief
Executive Officer of FTI Consulting, Inc, a multi-disciplined consulting firm
with practices in the areas of financial restructuring, corporate finance,
forensic accounting, litigation consulting, economic consulting, technology and
strategic communications. He joined FTI in 1992 as Executive Vice President and
Chief Financial Officer and has served as a director of FTI since May 1992 and
as Chairman of the board of directors from December 1998 to September 2004.
Prior to joining FTI, he was a member of the board of directors and a managing
director of Legg Mason Wood Walker, Inc. and directed its Baltimore corporate
finance and investment banking activities. He is a limited partner of the
Baltimore Orioles. Mr. Dunn received a B.A. from Princeton University and a J.D.
from the University of Maryland Law School. Other directorships
included: Pepco Holdings, Inc.
Jack
Rovner was elected director of the Company on October 31,
2006. He resigned on August 29, 2008. Mr. Rovner has led the RCA
Record label, co-founded Vector Recordings and has partnered to lead Vector
Management. Preceding his work at RCA and Vector, Mr. Rovner was Senior Vice
President of Marketing at BMG North America and reported directly to the
chairman of BMG Worldwide and directed marketing efforts for company-owned
properties. Prior to that, he was a Senior Vice President of Arista Records from
1991 to 1994. Mr. Rovner's career began at Columbia Records from 1981 until his
departure in 1991 from the office of Vice President of Marketing. Mr. Rovner
received a B.A. in Communication Studies from the University of
Iowa.
Marvin
Traub was appointed director of the Company by board resolution on May 2,
2007. He resigned on December 4, 2008. Mr. Traub began his career at
Bloomingdales and became Executive Vice President and General Merchandise
Manager in 1962, President in 1969 and Chairman and Chief Executive Officer in
1978. Mr. Traub also served as a Director of Federated Department Stores for
twelve years and Vice Chairman of the Campeau Corporation prior to his
resignation in 1992. At that time, he formed Marvin Traub Associates, a
consulting firm with expertise in global retailing, shopping centers, marketing,
media and the consumer goods sector. Mr. Traub received a B.A. from Harvard
College and a M.B.A. from Harvard Business School.
Corporate
Governance
Standing
Committees of the Board of Directors
Our
bylaws authorize our Board of Directors to appoint one or more committees, each
consisting of one or more directors. The Board of Directors currently has three
standing committees: an Audit Committee, a Nominating/Corporate Governance
Committee and a Compensation Committee, each of which has adopted written
charters that are all currently available on our website. On May 4, 2007, the
Board approved combining the previously separate Nominating Committee and
Corporate Governance Committees, and a new charter for the combined committee
was adopted. On December 5, 2008, in connection with the approval of the
reduction in size of the Board to five members, the Board reduced the size of
both the Nominating/Corporate Governance Committee and the Compensation
Committee to two directors.
Audit
Committee
The Audit
Committee’s responsibilities include:
|
·
|
appointing,
replacing, overseeing and compensating the work of a firm to serve as the
registered independent public accounting firm to audit the Company's
financial statements;
|
|
·
|
discussing
the scope and results of the audit with the independent registered public
accounting firm and reviewing with management and the independent
registered public accounting firm the Company's interim and year-end
operating results;
|
|
·
|
considering
the adequacy of the Company's internal accounting controls and audit
procedures;
|
|
·
|
approving
(or, as permitted, pre-approving) all audit and non-audit services to be
performed by the independent registered public accounting firm;
and
|
|
·
|
providing
an avenue of communication among the independent auditors, management,
employees and the Board.
|
As of
April 29, 2008, the Audit Committee consisted of Messrs. Brady, Caine and
Mathias, with Mr. Brady serving as its chairman. (The members
of the Audit Committee currently are Messrs. Brady, Caine and Mathias, with Mr.
Brady serving as its chairman.) The then Board of Directors determined that the
members of the Audit Committee satisfied the “independence” and “financial
literacy” requirements for audit committee members as set forth by the SEC and
as adopted in the NASDAQ listing standards.
The then
Board of Directors also determined that Mr. Brady was an audit committee
financial expert, as defined by Item 407 of Regulation S-K and as required by
Nasdaq Rule 4350(d), and is independent of management, as defined by Rule
10A-3(b)(1) of the Securities Exchange Act of 1934, as amended, and Nasdaq Rule
4200(a)(15) and as required by Nasdaq Rule 4350(d). We believed, and continue to
believe, that Mr. Brady is qualified to be an “audit committee financial expert”
because he has the following attributes: (i) an understanding of GAAP and
financial statements, (ii) the ability to assess the general application of such
principles in connection with accounting for estimates, accruals and reserves,
(iii) experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the Company’s financial statements, and
experience actively supervising one or more persons engaged in such activities,
(iv) an understanding of internal control over financial reporting and (v) an
understanding of audit committee functions. Mr. Brady acquired these attributes
by having held various positions that provided the relevant experience,
including 33 years with Arthur Andersen (including twenty years as an audit
partner) and membership on the audit committees of several public companies
since 1998. As of April 29, 2008, Mr. Brady also served on the audit committees
of three other public companies, but the then Board of Directors determined that
such service does not affect his independence, responsibilities or duties as a
member of the Audit Committee.
Nominating/Corporate
Governance Committee
The
Nominating/Corporate Governance Committee's responsibilities
include:
|
·
|
identifying,
evaluating and recommending nominees to serve on the Board of Directors
and committees of the Board of
Directors;
|
|
·
|
conducting
searches for appropriate directors and evaluating the performance of the
Board of Directors and of individual
directors;
|
|
·
|
screening
and recommending to the Board of Directors individuals qualified to become
the chief executive officer of the Company or to become senior executive
officers of the Company;
|
|
·
|
assessing
the policies, procedures and performance of the Board of Directors and its
committees;
|
|
·
|
developing,
evaluating and recommending to the Board of Directors any changes or
updates to the Company’s policies on business ethics, conflicts of
interest and related party
transactions;
|
|
·
|
making
recommendations regarding director compensation to the Board of Directors;
and
|
|
·
|
overseeing
the Company’s corporate governance procedures and
practices.
|
As of
April 29, 2008, the members of the committee were Messrs. Brady, Dunn and
Mathias, with Mr. Brady serving as chairman. (The members of the
Nominating/Corporate Governance Committee currently are Messrs. Brady and Caine,
with Mr. Brady serving as its chairman.)
Compensation
Committee
The
Compensation Committee's responsibilities include:
|
·
|
reviewing
and approving corporate goals and objectives that are relevant to the
compensation of the chief executive officer and other executive
officers;
|
|
·
|
evaluating
the chief executive officer's performance and setting compensation in
light of corporate objectives;
|
|
·
|
reviewing
and approving the compensation of the Company's other executive
officers;
|
|
·
|
administering
the Company’s stock option and stock incentive plans;
and
|
|
·
|
reviewing
and making recommendations to the Board of Directors with respect to the
Company’s overall compensation objectives, policies and practices,
including with respect to incentive compensation and equity
plans.
|
As of
April 29, 2008, the members of the committee were Messrs. Mathias, Dunn and
Rovner, with Mr. Mathias serving as chairman. (The members of the Compensation
Committee currently are Messrs. Mathias and Brady, with Mr. Mathias serving as
its chairman.)
Ad
Hoc Committees of the Board of Directors
Restructuring
Committee
On May
18, 2008, we established an ad hoc Restructuring Committee, consisting of
Messrs. Oros, Brady and Stamas. The Restructuring Committee did not have a
formal charter, but was charged with overseeing, on behalf of the Board, the
Company’s efforts to improve our financial condition and evaluate our
restructuring alternatives. On May 12, 2009, the Restructuring Committee was
disbanded after the Board’s determination that this ad hoc committee was no
longer needed in light of the progress made to date by the Company in its
restructuring efforts and the reduced number of members on the Board.
Compensation Committee
Interlocks and Insider Participation
None of
the members of our Compensation Committee is or has ever been an officer or
employee of NexCen or any of our subsidiaries. As of April 29, 2008 and as of
the date of this Second Amendment, none of our then executive officers served as
a member of the board of directors or a compensation committee of any entity
that had one or more executive officers serving on our Board of Directors or our
Compensation Committee.
Director
Independence
Our Board
of Directors has adopted the following standard for independence:
“Independent director” means a
person other than an executive officer or employee of the Company or any other
individual having a relationship which, in the opinion of the Company's Board,
would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director.
In
connection with, and to assist in making, this determination, the Board has
adopted the definition of independence contained in the NASDAQ listing standards
as our categorical standard of independence. However, even if a director meets
this categorical standard of independence, to conclude that a director is
independent, the Board must also determine that no other relationship exists
that, in the Board’s judgment, “would interfere with the exercise of independent
judgment by that director in carrying out the responsibilities of a
director.”
Each of
our directors in 2007, other than Messrs. Oros, D’Loren, Stamas and Traub,
qualified as “independent” in accordance with the Company’s independence
standard. In making their affirmative determination of independence for 2007,
the directors reviewed and discussed information provided by the directors and
management with regard to each director’s business and personal activities as
they relate to NexCen and NexCen’s management. Messrs. Oros and D’Loren were
employed by the Company, and, as such, neither qualified as an independent
director. The then Board of Directors determined that Mr. Stamas should not be
considered an independent director in view of the business relationship between
the Company and Kirkland & Ellis LLP. Mr. Stamas’ business relationship with
the Company is described in Item 13 – Certain Relationships and Related
Transactions, and Director Independence, under the caption “Certain
Relationships and Related Party Transactions.” The then Board of Directors also
determined that Mr. Traub should not be considered an independent director
because in July 2007 the Company entered into a commercial agreement with Mr.
Traub and a business that he owns and operates, Marvin Traub Associates. This
agreement is described in Item 13 under the caption “Certain Relationships and
Related Party Transactions.” The then Board of Directors made these decisions
despite the fact that the respective business relationships of Mr. Stamas and
Mr. Traub do not cause them to be deemed non-independent under the Company’s
categorical standard. All members of the Audit Committee, Compensation Committee
and Nominating/Corporate Governance Committee were independent
directors.
In
connection with the independence determination for Mr. Dunn, the directors
considered that in 2006, FTI Consulting, Inc. (FTI) provided due diligence
services to the Company totaling approximately $15,000 in connection with the
acquisition of UCC Capital. Since 1992, Mr. Dunn has served as a director of FTI
and/or as its President and Chief Executive Officer. Our then Board of Directors
determined that Mr. Dunn should be considered an independent director in view of
the fact that the services were immaterial to FTI and of a one-time
nature.
Section 16(a) Beneficial
Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our officers (as defined in regulations
issued by the SEC) and directors, and persons who own more than ten percent of
our common stock, to file with the SEC initial reports of ownership and reports
of changes in ownership of our common stock (including options and warrants to
acquire common stock). Officers, directors and greater than ten percent
stockholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file.
Based
solely on a review of the copies of such reports of ownership received by us and
certifications from our executive officers and directors, we believe that during
fiscal year 2007 all filing requirements applicable to our executive officers,
directors and such greater than ten percent stockholders were complied with on a
timely basis other than the following: a late report on Form 4 by Mr. Oros filed
on September 14, 2007, reporting the exercise of a warrant and the acquisition
of 157,500 shares of the Company’s common stock, and a late report on Form 4 by
Mr. Traub filed on March 27, 2008, reporting the purchase of 35,000 shares of
the Company’s common stock.
Corporate Governance
Policies
We have
adopted Corporate Governance Guidelines, as well as a general code of ethics for
our business and a code of ethical conduct that applies solely to our principal
executive officer, principal financial officer, principal accounting officer,
controller and persons performing similar functions. We also adopted the Policy
and Procedures with respect to Related Persons Transactions. The
Nominating/Corporate Governance Committee is responsible for reviewing and
authorizing waivers from the code of ethics, the code of ethical conduct for
senior financial officers, and the Policy and Procedures with respect to Related
Persons Transactions, and we will file any waivers from, or amendments to, these
codes and policy on our website at www.nexcenbrands.com, the content of which
website is not incorporated by reference into or considered a part of this
document.
No
waivers were reviewed or authorized in 2007. The Company’s Corporate Governance
Guidelines, our general code of ethics, our code of ethical conduct for senior
financial officers, and the Policy and Procedures with respect to Related
Persons Transactions, as well as the charters for our Audit Committee,
Nominating/Corporate Governance Committee and Compensation Committee, are
available on our website. This information is also available in print upon
written request to our corporate secretary at the address of our corporate
headquarters office in New York City.
ITEM
11. EXECUTIVE COMPENSATION
The
following Compensation Discussion and Analysis and Compensation Committee Report
is as of the original filing date of our First Amendment on April 29, 2008 and
from the Compensation Committee of our Board of Directors as composed on that
date.
Compensation Discussion and
Analysis as of April 29, 2008
Overview
and Objectives
We
entered the brand management and franchising 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 Capital
Corporation, became our President and Chief Executive Officer and a member of
our Board of Directors. From June 2006 to date, we have acquired nine
brands: Bill Blass, Waverly, The Athlete's Foot, Shoebox New York, Great
American Cookies, MaggieMoo's, Marble Slab Creamery, Pretzel Time, and
Pretzelmaker. We now 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. As we continue to build both our business
and our senior management team, we expect that we will make material adjustments
and refinements to our compensation policies and programs.
Our
current compensation programs are intended to reward our named executives for
growing our business profitably. They also are intended to encourage the
retention of executives who contribute significantly to improved business
performance, overall growth and increased stockholder value. The components of
our compensation programs for named executives include salary, annual bonus,
equity incentive compensation, and benefits.
We have
paid salaries to each of our named executive officers that are at or slightly
below the median level in the marketplace pursuant to employment agreements
negotiated in 2006 with each such officer, reflecting our goal of conserving
cash as we acquire businesses and seek to build a profitable operation. To
enable us to attract and retain superior individuals, however, we offered
opportunities for generous performance-based annual bonus and equity incentive
awards. In the case of our chief executive officer, on whom we depended to build
our new brand management and franchising business, we agreed to a compensation
package that, by component and in the aggregate, based upon our review of
relevant market information, will be at the top of the marketplace if certain
performance levels are achieved. We believe that this compensation package was
necessary to attract and retain our chief executive officer.
In 2007,
we did not make any incentive equity awards to any of our named executive
officers. We also did not make any bonus awards to named executive officers in
2007 either under our existing management bonus plan (the 2006 Management Bonus
Plan) or pursuant to the Compensation Committee’s general discretion under its
Charter to set executive compensation levels. The 2006 Management Bonus Plan is
designed so that amounts paid thereunder can qualify as performance-based
compensation under Section 162(m) where the Compensation Committee sets
performance targets for eligible participants and such targets are met. The
total bonus pool available under the 2006 Management Bonus Plan is capped at 5%
of the Company’s net income, as determined based on the Company’s audited
financial statements in the applicable fiscal year.
We do not
currently have a comprehensive policy and approach to compensation. We believe
that the Company’s business and strategies must mature before we can fully
understand the critical elements to our financial and operational success for
which we can set appropriate metrics for short and long-term compensation. In
that regard, we have decided not to adopt performance or award targets in 2008
under the 2006 Management Bonus Plan, and we are evaluating the 2006 Management
Bonus Plan and other Company plans in our efforts to develop long-term
compensation policies that will apply both to the named executive officers and
more generally to our employee base. Our ultimate goal is to provide an
attractive, flexible and market-based total compensation program tied to
performance and aligned with shareholder interests.
Process
for Determining Compensation
General. Our Compensation
Committee plays an integral role in shaping the Company’s overall compensation
objectives, policies and practices. The Compensation Committee is responsible
for, among other things, reviewing and recommending approval of the compensation
of our executive officers; administering our equity incentive and stock option
plans; reviewing and making recommendations to the Board of Directors with
respect to incentive compensation and equity incentive and stock option plans;
evaluating our chief executive officer's performance in light of corporate
objectives; and setting our chief executive officer's compensation based on the
achievement of corporate objectives.
The
Compensation Committee relies on its judgment in making compensation decisions,
based upon a review of the Company’s performance, the executive’s performance
and responsibilities, the Company’s and the executive’s achievement of business
objectives, plans and specified goals, and the executive’s contributions to the
development of the Company’s business and its long-term prospects for growth and
success. The Compensation Committee also takes into account information about
market levels of compensation provided by its compensation consultant, Towers
Perrin. Towers Perrin uses information from relevant published compensation
surveys, as well as public filings for similar peer companies. The Compensation
Committee also considers a named executive’s current and past compensation
levels in determining whether to make any discretionary awards or any
adjustments to compensation of a continuing executive. In this process, the
Company’s objective is to keep annual salaries at or below median levels, but to
provide annual bonus opportunities and equity incentive awards that offer
opportunities to earn overall compensation above median levels, if the Company
and the executive deliver superior performance.
In
general, the Compensation Committee has not developed or adhered to any strict
formulas in setting compensation or in establishing compensation packages. We
expect that over time, the annual salaries of the named executive officers will
be less than 50% of each person’s overall annual compensation and a
significantly smaller portion of such compensation over a period of years,
taking into account the value of incentive equity awards. In 2007, we did not
pay any annual bonuses or incentive equity awards to our named executive
officers. Accordingly, salaries represented a large proportion of their overall
annual compensation. We expect that this will change in future
years.
Participation of the Chief Executive
Officer and Other
Executives. We do not currently have a human resources
department. Our chief executive officer participates in discussions
with the Compensation Committee regarding compensation decisions about all named
executives other than himself. Except for the chief executive officer, no other
named executive participates directly in discussions with the Compensation
Committee about compensation matters, although the chief executive officer does
discuss these matters with the chief financial officer. The Compensation
Committee expects to rely heavily on the recommendations of the chief executive
officer on these matters, particularly with respect to bonuses based on the
performance of the executive and the Company.
Role of the Compensation
Consultant. To assist the Compensation Committee in fulfilling
its responsibilities, the Compensation Committee has retained an independent
compensation consultant, Towers Perrin. The consultant reports directly to the
Compensation Committee. Other than the work Towers Perrin performs for the
Compensation Committee and the Board of Directors, Towers Perrin has not
provided any consulting services to NexCen or its executive
officers.
In
assisting the Compensation Committee, Towers Perrin presents the committee with
peer group benchmarking data and information about other relevant market
practices and trends, and makes recommendations to the Compensation Committee
regarding target levels for various elements of total compensation for executive
officers and directors of the Company. Towers Perrin’s
recommendations are presented to and considered by the Compensation Committee in
their deliberations on compensation matters.
Towers
Perrin was retained by the Compensation Committee in 2006 to provide a
compensation study to benchmark and assist in the development of the
compensation packages for Mr. D’Loren and Mr. Haran. The compensation study
evaluated the reasonableness of the base salary, annual bonus and stock option
grants proposed for Mr. D’Loren employment as our new chief executive officer in
comparison to the competitive market. The compensation study was presented to
the Compensation Committee and the Board of Directors and was considered by each
in their deliberations and discussions on Mr. D’Loren’s compensation package.
The compensation packages for Mr. D’Loren and Mr. Haran have not
changed.
Again in
2007, Towers Perrin was retained by the Compensation Committee to assist in a
review of executive officer and director compensation. In the 2007 review,
Towers Perrin obtained peer group benchmarking data primarily from a group of
companies with revenue of $30 to $200 million regardless of industry, and
secondly from a group of companies that have a similar business strategy to us,
regardless of revenue size. Although the data did not result in a statistical
random sampling, we believe it provided helpful data regarding the compensation
levels and practices of peer companies with whom we compete for key executive
talent.
Process for Approving Equity
Grants. The Compensation Committee administers the 2006 Equity Incentive
Plan, which is our long-term incentive plan that was approved by our
stockholders in October 2006. The Compensation Committee is required
to approve all grants of all awards under that plan, and has not delegated any
grant authority. Under the terms of the 2006 Equity Incentive Plan, stock
options are required to be priced at the closing price of NexCen common stock on
the date of grant, which is the actual date on which the option (including all
of its material terms) is approved by the Compensation Committee. Our long-term
incentive plan does not permit the re-pricing of options. Previously, we did not
have a policy that addressed the specific issue of whether equity grants may be
approved prior to the release of material information. On February 25, 2008, the
Compensation Committee established a policy to grant options on a quarterly
basis on the third trading day after the Company publicly announces its
quarterly financial results following each of the first three fiscal quarters of
each year and after annual financial results following the fourth fiscal quarter
of each year.
We
typically grant stock options to new employees at senior levels when they begin
working for the Company. In 2007, these grants were usually made at the next
regularly scheduled or special meeting of the Compensation Committee after the
date on which employment commenced. Beginning as of February 25, 2008, grants
made to new employees are made on the next quarterly grant date following the
start of employment.
Share Ownership Guidelines.
We do not currently have any requirements for any of our executive officers or
other employees to own specified amounts of NexCen common stock. As a result of
his prior ownership of UCC and purchases of our common stock on the open market
for which he received pre-clearance, our chief executive officer (directly or
through entities that he controls) currently owns approximately 3.7 million
shares of our common stock.
Compensation Deduction Limit.
Section 162(m) of the Internal Revenue Code generally limits the compensation
that a corporation can deduct for payments to a chief executive officer and the
four other most highly compensated executive officers to $1 million per officer
per year. However, compensation that is “performance-based,” as defined by
Section 162(m), is exempt from this limitation on deductibility. In general,
compensation attributable to the exercise of stock options granted with an
exercise price at or above the market price of the underlying stock at the time
of the grant qualifies as performance-based compensation. In 2007, we did not
pay our chief executive officer or our four other most highly compensated
executive officers compensation in excess of $1 million (excluding compensation
in respect of exercised options that we believe qualifies as performance-based
compensation).
Elements
of Compensation
For 2007,
the principal components of compensation for our named executive officers
consisted of:
|
·
|
Perquisites
and other personal benefits; and
|
These
principal elements have been chosen to create a flexible package that can reward
both our short and long-term performance, while providing the executive with a
competitive compensation package.
Base salary. We provide named
executive officers and other employees with a base salary to compensate them for
basic services rendered during the fiscal year. Initial base salaries
for our named executive officers were determined for each executive in 2006
based on negotiations between the new executive, on the one hand, and the
Company, on the other. The Compensation Committee expects to review salary
levels at least annually, as well as upon a promotion or other changes in job
responsibility. Merit based increases to salaries, if any, will be based on the
Compensation Committee’s review and overall assessment of an individual’s
performance.
In 2007,
none of the named executive salaries received an increase in their respective
base salaries.
Equity-based awards. We
provide equity-based compensation to promote our long-term growth and
profitability. Equity-based awards not only provide directors, executive
officers, and employees with incentives to maximize stockholder value and
otherwise contribute to our long-term success, but they also allow us to
attract, retain and reward the best available individual for positions of
responsibility.
Awards of
stock options and restricted stock are made under our 2006 Equity Incentive
Plan, which was approved by our stockholders in October 2006. The Compensation
Committee administers the 2006 Equity Incentive Plan and has not delegated any
grant authority. Shares of restricted stock are issued subject to a vesting
schedule and cannot be sold until and to the extent the shares have vested.
Stock options are issued at an exercise price of no less than fair market value
on the date of grant and are subject to vesting requirements, which may include
time-based vesting, performance-based vesting, or both. Historically, we have
not issued any options subject to performance-based vesting.
In 2007,
we did not award any restricted stock or stock options to any of the named
executive officers.
Cash bonuses. We provide cash
bonus compensation to motivate, reward and retain key executives. Under the 2006
Management Bonus Plan bonuses are paid out of a pool determined to be 5% of the
Company’s net income. The chief executive officer has a contractual right to 50%
of this pool and the other half is allocated to senior executives based on
performance achievements determined by the chief executive officer and the
Compensation Committee.
The
Company reported net loss for 2007 and as a result there was no bonus pool under
the 2006 Management Bonus Plan. In addition, the Compensation Committee did not
award, nor did any of the named executive officers seek, any bonus under the
Compensation Committee’s general discretion pursuant to its Charter to set
executive compensation.
Perquisites and other personal
benefits. We provide certain executive officers with perquisites and
other personal benefits that we and the Compensation Committee believe are
reasonable and consistent with our overall compensation program to better enable
us to attract and retain superior employees for key positions. Perquisites are
generally granted as part of our executive recruitment and retention efforts.
During 2007, our named executive officers received a limited amount of
perquisites and other personal benefits that we paid on their behalf. These
perquisites and other personal benefits included, among other
things:
|
·
|
Payments
of life, health and/or disability insurance
premiums;
|
Other
Compensation. In addition to the compensation discussed above,
we also provide our named executive officers with customary employee benefits,
available to all employees, including health, disability and life insurance. In
general, these benefits are substantially the same as those available to all of
our employees.
Compensation Committee
Report as of April 29, 2008
The
Compensation Committee has reviewed the Compensation Discussion and Analysis and
discussed that Analysis with management. Based on its review and its discussions
with management, the Committee has recommended to our Board of Directors that
the Compensation Discussion and Analysis be included in the Company’s Annual
Report on Form 10-K/A for 2007 and the Company’s 2008 proxy statement. This
Report is provided by the following independent directors, who comprise the
Compensation Committee:
Edward
J. Mathias (Chairman)
Jack
B. Dunn IV
Jack
Rovner
Summary Compensation Table
(As Restated)
The table
below summarizes the total compensation paid to or earned by each of our named
executive officers for the fiscal year ended December 31, 2007. None of these
persons currently are employed by the Company.
Because
we reported a net loss for fiscal year ended December 31, 2007, our named
executive officers were not entitled to receive payments which would be
characterized as “Non-Equity Incentive Plan Compensation” pursuant to our 2006
Management Bonus Plan. Additionally, the Compensation Committee of the Board of
Directors did not award any payments which would be characterized as “Bonus”
payments to any of the named executive officers and did not increase their base
salaries. We also have no defined benefit plans, actuarial plans, or
non-qualified deferred compensation plans.
In
reviewing our executives’ compensation and expense reimbursements for 2007 and
2008, we became aware that our previous disclosure related to “All Other
Compensation” for Mr. D’Loren for fiscal year 2007 was inaccurate. In our First
Amendment filed on April 29, 2008, we initially reported that Mr. D’Loren
received a total of $80,223 in “All Other Compensation,” comprised of the
Company’s payment of insurance premiums for auto, life and long term
disability of $26,882, car expenses of $22,956 and club dues of $30,385. Upon
review, we concluded that he actually received a total of $101,090 in “All Other
Compensation.” Certain expenses that the Company had agreed to pay pursuant to
Mr. D’Loren’s employment agreement, such as health and life insurance premiums,
in fact were not paid by the Company, whereas other expenses that arguably were
not authorized under Mr. D’Loren’s employment agreement or by the Compensation
Committee had been paid or reimbursed by the Company. After netting these
expenses, the Company came to believe that the classification of $65,923 of
expenses that we paid in 2007 and $65,069 of expenses that we paid in 2008 as
business expenses or authorized perquisites was questionable. Pursuant to the
Separation Agreement by and between the Company and Mr. D’Loren dated August 15,
2008, Mr. D’Loren did not agree with the Company’s conclusion, but agreed to
reimburse the Company $130,992, which represented the entire amount of disputed
expenses for 2007 and 2008. In providing the restated information with respect
to Mr. D’Loren’s “All Other Compensation” for fiscal year ended December 31,
2007 below, we have taken into account the reimbursement by Mr. D’Loren of the
disputed expenses and have reported his “All Other Compensation” on a net basis,
reflecting the amount of the repayments. We found no discrepancies with respect
to the compensation or expense reimbursements for any of our other named
executives officers.
Name
and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
All
Other
Compensation
(As
Restated)
($)
|
|
|
Total
(As
Restated)
($)
|
|
(1)
|
|
|
|
(2)
|
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
Robert
W. D’Loren
|
|
2007
|
|
|
750,000 |
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,167
|
(4)
|
|
$
|
785,167
|
|
Former
Chief
|
|
2006
|
|
$
|
427,083 |
|
|
|
|
|
|
|
$ |
701,406
|
|
|
- |
|
|
-
|
|
$ |
40,162
|
|
|
$ |
1,168,651
|
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
B. Meister
|
|
2007
|
|
$
|
225,000
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
4,863
|
(5)
|
|
$
|
229,863
|
|
Former Chief
|
|
2006
|
|
$
|
69,375
|
|
|
|
|
|
|
|
$
|
40,671 |
|
|
|
|
|
|
|
|
-
|
|
|
$
|
110,046
|
|
Financial
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Haran
|
|
2007
|
|
$
|
375,000
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
15,150
|
(6)
|
|
$
|
390,150
|
|
Former
Executive
|
|
2006
|
|
$ |
338,542 |
|
|
|
|
|
|
|
$ |
145,117 |
|
|
|
|
|
|
|
|
-
|
|
|
$
|
483,659
|
|
Vice
President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
Zona
|
|
2007
|
|
$
|
300,000
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
$
|
300,000
|
|
Former
Executive
|
|
2006
|
|
$ |
18,182 |
|
|
|
|
|
|
|
$ |
10,994 |
|
|
|
|
|
|
|
|
-
|
|
|
$
|
29,176
|
|
Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Mr.
D’Loren became a named executive officer on June 6, 2006 and resigned from
the Company on August 15, 2008. Mr. Meister became a named
executive officer on September 12, 2006. His employment was terminated on
March 21, 2008. Mr. Haran became a named executive officer on
June 6, 2006 and resigned from the Company on August 14, 2008. Mr. Zona
became a named executive officer on December 11, 2006. His employment was
terminated on May 30, 2008.
|
(2)
|
The
amounts included for the year ended December 31, 2006
for Messrs. D’Loren, Meister, Haran and Zona is based on a base
salary of $750,000, $225,000, $375,000 and $300,000, respectively,
prorated from their start dates of June 6, 2006, September 12, 2006, June
6, 2006 and December 11, 2006, respectively. Mr. Meister’s amount for 2006
does not include $29,000 which was paid to Mr. Meister for services as a
consultant with the Company from July 2006 until September 2006. The
amount for Mr. Haran for 2006 includes a deferred bonus of $125,000 from
UCC Capital that the Company assumed upon the
acquisition.
|
(3)
|
The
amounts in the Option Awards column represents expenses for stock options
in each respective year in accordance with FAS 123R. For the year ended
December 31, 2007, none of the named executive officers received stock
option awards. For the year ended December 31, 2006, Messrs. D’Loren,
Meister, Haran and Zona received option awards pursuant to the terms of
their employment agreements.
|
(4)
|
For
the year ended December 31, 2007, Mr. D’Loren received a total of $35,167
(as restated) in “All Other Compensation,” comprised of the Company’s
payment of premiums for life and health insurance of
$13,383 (as restated), car expenses of $16,027 (as restated), club dues of
$5,757 (as restated). This restated amount takes into account
reimbursements by Mr. D’Loren in 2008, pursuant to the Separation
Agreement by and between the Company and Mr. D’Loren dated August 15,
2008. Pursuant to that separation agreement, Mr. D’Loren agreed to
reimburse the Company $65,923 of the $101,090 in “All Other Compensation”
that the Company actually paid in 2007, which reimbursed amount
represented the entire amount of disputed expenses for 2007. In our First
Amendment filed on April 29, 2008, we initially reported that Mr. D’Loren
received a total of $80,223 in “All Other Compensation,” comprised of the
Company’s payment of insurance premiums for auto, life and long
term disability of $26,882, car expenses of $22,956 and club dues of
$30,385.
|
(5)
|
As
previously reported, in 2007, Mr. Meister received a total of $4,863 in
“All Other Compensation,” comprised of the Company’s payment of health
insurance premiums.
|
(6)
|
As
previously reported, in 2007, Mr. Haran received a total of $15,150 in
“All Other Compensation,” comprised of the Company’s payment of car
expenses.
|
Grants of Plan-Based Awards
Table
During
fiscal year ended December 31, 2007, we did not granted any stock options or
restricted stock awards to our named executive officers under any of our
long-term equity incentive plans.
Outstanding Equity Awards at
Fiscal Year-End Table
The
following table sets forth information with respect to outstanding equity-based
awards at December 31, 2007 for our named executive officers.
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
|
Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
(#)
|
|
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
|
|
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
(#)
|
|
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
W. (1)
D’Loren
|
|
|
787,324 |
|
|
|
1,874,652 |
|
|
|
-
|
|
|
|
4.10 |
|
06/05/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
B. Meister(2)
|
|
|
66,667 |
|
|
|
133,333 |
|
|
|
-
|
|
|
|
6.08 |
|
09/11/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Haran(3)
|
|
|
193,930 |
|
|
|
387,858 |
|
|
|
-
|
|
|
|
4.10 |
|
06/05/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
Zona(4)
|
|
|
83,334 |
|
|
|
166,666 |
|
|
|
-
|
|
|
|
6.96 |
|
12/10/2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
On
June 6, 2006, in accordance with his employment agreement, Mr. D’Loren was
granted a warrant to purchase 125,000 shares and an option to purchase
2,686,976 shares. Both the warrant and the option were to vest in equal
amounts on the three anniversaries of grant: June 6, 2007, June 6, 2008
and June 6, 2009. Accordingly, 41,666 shares underlying the warrant and
895,658 shares underlying the option vested on June 6, 2007. As noted in
the following Option Exercises and Stock Vesting Table, Mr. D’Loren
partially exercised his option and purchased 150,000 shares. Mr. D’Loren
resigned from the Company on August 15, 2008. Pursuant to his employment,
separation and warrant/option grant agreements, respectively, all of Mr.
D’Loren’s unexercisable warrants and options expired upon his resignation.
Mr. D’Loren did not exercise any of his exercisable warrants or options
within the 90 day post-employment exercise period provided in the warrant
and option grant agreements. Thus, all of the securities underlying Mr.
D’Loren’s exercisable and unexercisable warrants and options listed above
expired in 2008. For additional information with respect to Mr. D’Loren’s
employment agreement and separation agreement, see “Employment Agreements
– Robert W. D’Loren.”
|
(2)
|
On
September 12, 2006, in accordance with his employment agreement, Mr.
Meister was granted an option to purchase a total of 200,000 shares that
was to vest in equal amounts on the three anniversaries of grant:
September 12, 2007, September 12, 2008 and September 12, 2009.
Accordingly, 66,667 shares underlying the option vested on September 12,
2007. On March 21, 2008, Mr. Meister’s employment was terminated without
cause, and all unvested options immediately vested and became fully
exercisable pursuant to his employment agreement. Pursuant to a separation
agreement, the Company agreed to extend the post-employment exercise
period on Mr. Meister’s 200,000 options until December 31, 2009. For
additional information with respect to Mr. Meister’s employment agreement
and separation agreement, see “Employment Agreements - David B.
Meister.”
|
(3)
|
On
June 6, 2006, in accordance with his employment agreement, Mr. Haran was
granted an option to purchase a total of 581,788 shares that was to vest
in equal amounts on the three anniversaries of grant: June 6, 2007, June
6, 2008 and June 6, 2009. Accordingly, 193,930 shares underlying the
option vested on June 6, 2007. Mr. Haran resigned from the
Company on August 14, 2008. Pursuant to his employment, separation and
option grant agreements, respectively, all of Mr. Haran’s unexercisable
options, totaling 387,858 shares, expired upon his resignation. Mr. Haran
did not exercise any of his exercisable options, totaling 193,930 shares,
within the 90 day post-employment exercise period provided in the option
grant agreement. Thus, all of the securities underlying Mr. Haran’s
exercisable and unexercisable options listed above expired in 2008. For
additional information with respect to Mr. Haran’s employment agreement
and separation agreement, see “Employment Agreements – James
Haran.”
|
(4)
|
On
December 11, 2006, in accordance with his employment agreement, Mr. Zona
was granted an option to purchase a total of 250,000 shares that was to
vest in equal amounts on the three anniversaries of grant: December 11,
2007, December 11, 2008 and December 11, 2009. Accordingly, 83,334 shares
underlying the option vested on December 11, 2007. Mr. Zona’s
employment was terminated on May 30, 2008. Under his employment agreement,
Mr. Zona was entitled to accelerated vesting of all unvested options of
the December 2006 grant.
However, pursuant to a separation agreement, Mr. Zona agreed to
voluntarily surrender 166,666 of his unvested options from the December
2006 grant. The Company agreed to extend the post-employment
exercise period on Mr. Zona’s vested 83,334 options through December 31,
2009, accelerate the vesting of 25,000 options granted to Mr. Zona on
March 19, 2008, and extend the post-employment exercise period on the
25,000 options until December 31, 2009. For additional information with
respect to Mr. Zona’s employment agreement and separation agreement, see
“Employment Agreements - Charles A.
Zona.”
|
Option Exercises and Stock
Vested Table
The
following table sets forth certain information regarding exercise of options and
vesting of restricted stock held by the named executive officers during the year
ended December 31, 2007.
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
Name
|
|
Number
of Shares
Acquired
on Exercise
(#)
|
|
|
Value
Realized
on
Exercise
($)
|
|
|
Number
of Shares
Acquired
on Vesting
(#)
|
|
|
Value Realized
On Vesting
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
W. D’Loren
|
|
|
150,000 |
|
|
|
219,000 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
B. Meister
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Haran
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
Zona
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Compensation
for Named Executives Officers in 2007
We
discuss here the compensation of those individuals who were named executive
officers on December 31, 2007. None of these named executive officers remain
with the Company at the date of this Second Amendment. For each named executive
officer, we negotiated employment agreements in connection with their hire in
2006, which provided competitive base salaries, discretionary bonus
opportunities, basic benefit packages and severance arrangements. Some of the
terms of these employment agreements were modified in connection with the
respective terminations of employment of each of the named executive officers.
See the section captioned “Employment Agreements” for more in-depth information
regarding each executive’s employment and separation agreements.
Compensation for then Chief
Executive Officer. In 2007, the compensation
of Mr. D’Loren, the President and Chief Executive Officer, was based on his
employment agreement entered into on June 6, 2006. Mr. D’Loren did not receive
an increase in his base salary and received no bonus either in cash or in
equity.
Compensation for then Other Named
Executive Officers. In 2007, the compensation of our other named
executive officers was based on their respective employment agreements entered
into in 2006. In 2007, none of the other named executives received an increase
in their respective base salaries and none received a bonus either in cash or
equity.
Post-termination compensation.
Each of the employment agreements with our named executive officers
provided for payments and other benefits if the executive's employment were to
terminate under certain circumstances, including by the Company without “Cause,”
by the executive for “Good Reason” or in the event of a “Change of Control,” as
these terms are defined in the employment agreements.
“Cause”
is defined in each employment agreement as the occurrence of one or more of the
following: (i) indictment of a felony involving moral turpitude,
misappropriation of Company property, embezzlement of Company funds, violation
of the securities laws or dishonesty, (ii) persistent and repeated refusal
to comply with material directives that are not inconsistent with the
executive’s fiduciary obligations; (iii) reporting to work under the
influence of alcohol or illegal drugs, or the use of illegal drugs (whether or
not at the workplace), or (iv) any willful breach of certain terms of the
employment agreement.
“Good
Reason” is defined in each employment agreement as the occurrence, without the
executive’s written consent, of one or more of the following events:
(i) the Company reduces the amount of executive’s base salary,
(ii) the Company requires that the executive to relocate his principal
place of employment to a site that is more than 50 miles from the Company’s
offices in New York City or the Company changes the location of our headquarters
without the consent of the executive to a location that is more than 50 miles
from such location, (iii) the Company materially reduces the executive’s
responsibilities or removes the executive from his position other than pursuant
to a termination of his employment for Cause or upon the executive’s death or
disability, (iv) the failure or unreasonable delay of the Company to
provide to the executive any of the payments or benefits due under the agreement
or (v) the Company otherwise materially breaches the terms of the
agreement.
A “Change
of Control” is defined in each employment agreement by reference to our 1999
Equity Incentive Plan or 2006 Equity Incentive Plan, which is defined to include
a change in majority of our Board of Directors, consummation of certain mergers,
the sale of all or substantially all of our assets or the acquisition of at
least 80% of the undiluted total voting power of our then-outstanding
securities. In addition, if within twelve months following a change of control,
our named executive officers are terminated without “Cause” or they terminate
their employment for “Good Reason,” then all unvested stock options, shares of
restricted stock and other equity awards shall vest immediately, and remain
exercisable for the lesser of 180 days after termination or the remaining term
of the applicable grant.
A Change
of Control did not occur during the term of the executives’ respective
employment periods, and the Company negotiated separation agreements with each
executive that provided severance and benefits that differed from the terms of
their original employment agreements. A description of the actual severance
benefits provided in 2008 to the named executive officers as well as the
hypothetical severance and change of control benefits that would have been
provided under their employment agreements had their employment been terminated
as of December 31, 2007 are provided below in sections captioned “Employment
Agreements," “Actual Payments to Named Executive Officers upon Separation” and
“Potential Payments to Named Executive Officers upon Termination or Change of
Control as of December 31, 2007.”
Employment
Agreements
Employment Agreements for 2007 Named
Executive Officer
Robert
W. D’Loren
Simultaneous
with the acquisition of UCC Capital, on June 6, 2006, we entered into an
employment agreement with Mr. D’Loren, and he joined the Company as the Chief
Executive Officer and a director. Pursuant to a Separation Agreement by and
between the Company and Mr. D’Loren dated August 15, 2008, Mr. D’Loren resigned
from the Company as of the date of the agreement.
Pursuant
to the terms of Mr. D’Loren’s employment agreement, Mr. D’Loren received an
initial annual base salary of $750,000 (which was not adjusted) and certain
perquisites and benefits. For each calendar year during the term of the
employment agreement, Mr. D’Loren was entitled to receive an incentive bonus
equal to 50% of amounts awarded under the 2006 Management Bonus Plan (the
“Annual Bonus”) to be payable 50% percent in cash and 50% in restricted shares
of NexCen’s common stock that would vest in three equal installments over three
years following the date of their issuance, unless otherwise agreed. No Annual
Bonus was ever paid to Mr. D’Loren.
On June
6, 2006, as specified in Mr. D’Loren’s employment agreement, we granted Mr.
D’Loren options to purchase an aggregate of 2,686,976 shares of our common stock
under the terms of the Company’s 1999 Equity Incentive Plan and issued to Mr.
D’Loren a ten-year warrant to purchase 125,000 shares of our common stock, at an
exercise price of $4.10 per share. The terms of the warrant were identical to
those of the option grant he received on June 6, 2006. See “Outstanding Equity
Awards at Fiscal Year-End” table for details of Mr. D’Loren’s stock options and
warrants.
The
initial term of Mr. D’Loren’s employment agreement was three years. Under the
employment agreement, if (i) we terminated Mr. D’Loren’s employment without
“Cause,” (ii) Mr. D’Loren terminated his employment for “Good Reason,” or (iii)
we did not renew the agreement, he would have been entitled to receive a
severance package consisting of:
|
·
|
any
earned but unpaid base salary through the date of employment termination
and any declared but unpaid annual
bonus;
|
|
·
|
an
amount equal to his base salary (at the rate then in effect) for the
greater of the remainder of the initial three-year term or two years,
payable over a six-month period or such shorter period as is required to
comply with Section 409A of the Internal Revenue Code and applicable
regulations adopted thereunder;
|
|
·
|
continued
participation in NexCen’s group medical plan on the same basis as he
previously participated or receive payment of, or reimbursement for, COBRA
premiums (or, if COBRA coverage is not available, reimbursement of
premiums paid for other medical insurance in an amount not to exceed the
COBRA premium) for a two-year period following termination, subject to
termination of this arrangement if a successor employer provides him with
health insurance coverage; and
|
|
·
|
accelerated
vesting of all unvested options and restricted shares issued on June 6,
2006 pursuant to the 1999 Equity Incentive
Plan.
|
Pursuant
to the separation agreement, Mr. D’Loren agreed to voluntarily resign. The
Company agreed to pay Mr. D’Loren all earned but unpaid base salary and vacation
pay. (Starting on May 29, 2008, Mr. D’Loren had agreed to defer payment of his
base salary to provide the Company with additional liquidity.) The Company did
not provide any cash severance payments or any other severance benefit other
than continued health insurance coverage. The Company agreed to allow Mr.
D’Loren to continue to participate in NexCen’s group medical plan on the same
basis as he previously participated or receive payment of, or reimbursement for,
COBRA premiums (or, if COBRA coverage is not available, reimbursement of
premiums paid for other medical insurance in an amount not to exceed the COBRA
premium) until August 15, 2009, subject to termination of this arrangement if a
successor employer provides him with health insurance coverage. Mr. D’Loren
agreed to abide by certain continuing obligations of his employment agreement,
including non-solicitation, non-competition, confidentiality, non-interference
and non-disparagement provisions, as amended.
In the
separation agreement, the Company and Mr. D’Loren also reached a settlement with
respect to certain expense discrepancies. In reviewing our executives’
compensation and expense reimbursements for 2007 and 2008, we came to realize
that the Company had not paid certain expenses that we had agreed to pay
pursuant to Mr. D’Loren’s employment agreement, such as health and life
insurance premiums, but had paid other expenses that arguably were not
authorized under Mr. D’Loren’s employment agreement or by the Compensation
Committee. The Company came to believe that the classification of $130,992 of
expenses that we paid in 2007 and 2008 as business expenses or authorized
perquisites was questionable. Although Mr. D’Loren did not agree with the
Company’s assessment, he agreed to reimburse the Company all disputed expenses
in the context of a separation agreement.
Consistent
with the employment, separation and warrant/option grant agreements, Mr.
D’Loren’s unvested options and warrants (937,327 as of August 15, 2008) were
forfeited on the separation date, and all vested options and warrants (1,724,649
as of August 15, 2008) remained exercisable for 90 days following the separation
date. Mr. D’Loren did not exercise his vested options and warrants within this
post-employment exercise period, and they expired and were forfeited at the end
of such period.
David
B. Meister
On
September 12, 2006, we entered into an employment agreement with Mr. Meister,
and Mr. Meister joined the Company as Senior Vice President, Chief Financial
Officer, Treasurer and Secretary. Mr. Meister’s employment was terminated by the
Company on March 21, 2008.
Pursuant
to the terms of Mr. Meister’s employment agreement, Mr. Meister received an
initial annual base salary of $225,000 (which was not adjusted), as well as
customary employee perquisites and benefits. For each calendar year during the
term of the employment agreement, Mr. Meister was eligible to receive a
performance-based bonus pursuant to the 2006 Management Bonus Plan or any other
management bonus plan adopted by the Company based on achieving annual
performance goals recommended by the Chief Executive Officer and subject to
review and confirmation by the Compensation Committee or Board of Directors. No
such annual bonus was ever paid to Mr. Meister.
On
September 12, 2006, as contemplated by the employment agreement, Mr. Meister was
granted options to purchase an aggregate of 200,000 shares of the Company’s
common stock under the terms of the Company’s 1999 Equity Incentive Plan. See
“Outstanding Equity Awards at Fiscal Year-End” table for details of Mr.
Meister’s stock options.
The
initial term of Mr. Meister’s employment agreement was three years. Under the
employment agreement, if (i) we terminated Mr. Meister’s employment without
“Cause” or (ii) Mr. Meister terminated his employment for “Good Reason,” he
would have been entitled to receive a severance package consisting
of:
|
·
|
any
earned but unpaid base salary through the date of employment termination
and any declared but unpaid annual
bonus;
|
|
·
|
an
amount equal to his base salary (at the rate then in effect) for a period
of twelve months, payable over a six-month period or such shorter period
as is required to comply with Section 409A of the Internal Revenue Code
and applicable regulations adopted
thereunder;
|
|
·
|
continued
participation in NexCen’s group medical plan on the same basis as he
previously participated or receive payment of, or reimbursement for, COBRA
premiums (or, if COBRA coverage is not available, reimbursement of
premiums paid for other medical insurance in an amount not to exceed the
COBRA premium) for a one-year period following termination, subject to
termination of this arrangement if a successor employer provides him with
health insurance coverage; and
|
|
·
|
accelerated
vesting of all unvested options issued on September 12, 2006 pursuant to
the 1999 Equity Incentive Plan.
|
Under the
Separation and Release Agreement by and between the Company and Mr. Meister
dated April 28, 2008, the Company acknowledged that Mr. Meister’s termination
was without “Cause.” Consistent with the terms of Mr. Meister’s employment
agreement, the Company (i) agreed to pay Mr. Meister all earned but unpaid base
salary and vacation pay (ii) agreed to pay Mr. Meister severance in an amount
equal to his base salary for a period of 12 months payable over a six-month
period, and (iii) agreed to allow Mr. Meister to continue to participate in the
Company’s group medical plan on the same basis as he previously participated
until March 21, 2009, subject to termination of this arrangement if a successor
employer provides him with health insurance coverage. Consistent with the
employment and option grant agreements, all unvested options from his September
12, 2006 grant immediately vested as of the date of termination and became fully
exercisable. In the separation agreement, the Company provided the additional
benefit of an extension of the post-employment exercise period for Mr. Meister’s
200,000 options until December 31, 2009. Mr. Meister provided a general release
in favor of the Company and agreed to abide by certain continuing obligations of
his employment agreement, including the non-solicitation, non-competition,
confidentiality, non-interference and non-disparagement provisions.
James
Haran
Simultaneous
with the acquisition of UCC Capital in June 2006, we entered into an employment
agreement with Mr. Haran. Pursuant to a Separation and General Release Agreement
by and between the Company and Mr. Haran dated August 14, 2008, Mr. Haran
resigned from the Company as of the date of the agreement.
Pursuant
to the terms of Mr. Haran’s employment agreement, Mr. Haran received an initial
annual base salary of $375,000 (which was not adjusted), as well as customary
employee perquisites and benefits. For each calendar year during the term of the
employment agreement, Mr. Haran also was eligible to receive a performance-based
bonus pursuant to the 2006 Management Bonus Plan or any other management bonus
plan adopted by the Company on achieving annual performance goals recommended by
the President and Chief Executive Officer and subject to review and confirmation
by the Compensation Committee or Board of Directors. No such annual bonus was
ever paid to Mr. Haran.
On June
6, 2006, as specified in Mr. Haran’s employment agreement, we granted Mr. Haran
options to purchase an aggregate of 581,788 shares of our common stock under the
terms of the Company’s 1999 Equity Incentive Plan. See “Outstanding Equity
Awards at Fiscal Year-End” table for details of Mr. Haran’s stock
options.
The
initial term of Mr. Haran’s employment agreement was three years. Under the
employment agreement, if (i) we terminated Mr. Haran’s employment without
“Cause” or (ii) Mr. Haran terminates his employment for “Good Reason,” he would
have been entitled to receive a severance package consisting of:
|
·
|
any
earned but unpaid base salary through the date of employment termination
and any declared but unpaid annual
bonus;
|
|
·
|
an
amount equal to his base salary (at the rate then in effect) for a period
of eighteen months, payable over a six-month period or such shorter period
as is required to comply with Section 409A of the Internal Revenue Code
and applicable regulations adopted
thereunder;
|
|
·
|
continued
participation in NexCen’s group medical plan on the same basis as he
previously participated or receive payment of, or reimbursement for, COBRA
premiums (or, if COBRA coverage is not available, reimbursement of
premiums paid for other medical insurance in an amount not to exceed the
COBRA premium) for a one-year period following termination, subject to
termination of this arrangement if a successor employer provides him with
health insurance coverage; and
|
|
·
|
accelerated
vesting of all unvested options issued on June 6, 2006 pursuant to the
1999 Equity Incentive Plan.
|
Pursuant to the separation agreement,
Mr. Haran agreed to voluntarily resign. The Company agreed to pay Mr. Haran all
earned but unpaid base salary and vacation pay. (Starting on May 29, 2008, Mr.
Haran had agreed to defer payment of a portion of his base salary to provide the
Company with additional liquidity.) The Company also agreed to pay Mr. Haran
severance in an amount equal to his base salary for a nine-month period
to be paid over a period of nine months in accordance with the Company’s normal
payroll practices, and agreed to allow him to continue to participate in NexCen’s
group medical plan on the same basis as he previously participated or receive
payment of, or reimbursement for, COBRA premiums (or, if COBRA coverage is not
available, reimbursement of premiums paid for other medical insurance in an
amount not to exceed the COBRA premium) until August 31, 2009, subject to
termination of this arrangement if a successor employer provides him with health
insurance coverage. Mr.
Haran provided a general release in favor of the Company and agreed to abide by
certain continuing obligations of his employment agreement, including the
non-solicitation, non-competition, confidentiality, non-interference and
non-disparagement provisions, as
amended.
Consistent
with the employment, severance and option grant agreement, Mr. Haran’s unvested options (193,929
as of August 14, 2008) were forfeited as of the separation date, and all vested
options (387,859 as of August 14, 2008) remained exercisable for 90 days
following the separation date. Mr. Haran did not exercise his vested options
within this post-employment exercise period.
Charles
A. Zona
On December 11, 2006, we entered
into an employment agreement with Mr. Zona, and Mr. Zona joined the Company on that date
as Executive Vice President, Brand Management and Licensing. Mr. Zona’s employment with the
Company was terminated on May 30, 2008.
Pursuant
to the terms of the employment agreement, Mr. Zona received an initial annual
base salary of $300,000 (which was not adjusted), as well as customary employee
perquisites and benefits. For each calendar year during the term
of the employment agreement, Mr. Zona was eligible to receive a
performance-based bonus pursuant
to the 2006 Management Bonus Plan or any other management bonus plan
adopted by the Company based on achieving annual performance goals
recommended by the Chief Executive Officer and subject to review and
confirmation by the Compensation Committee or Board of Directors. No such annual
bonus was ever paid to Mr. Zona.
On
December 11, 2006, as contemplated by the employment agreement, Mr. Zona was
granted options to purchase a total of 250,000 shares of the Company’s common
stock pursuant to the terms of the Company’s 2006 Equity Incentive Plan. See
“Outstanding Equity Awards at Fiscal Year-End” table for details of Mr. Zona’s
stock options.
The
initial term of Mr. Zona’s employment agreement was three years. Under the employment agreement, if
(i) we terminated Mr. Zona’s employment without “Cause” or (ii) Mr. Zona
terminated his employment for “Good Reason,” he would have been entitled to receive a
severance package consisting of:
|
·
|
any earned but unpaid base salary
through the date of employment termination and any declared but unpaid
annual bonus;
|
|
·
|
an amount equal to his base salary
(at the rate then in effect) for a period of six months, payable over a
six-month period or such shorter period as is required to comply with
Section 409A of the Internal Revenue Code and applicable regulations
adopted thereunder;
|
|
·
|
continued participation in
NexCen’s group medical plan on the same basis as he previously
participated or receive payment of, or reimbursement for, COBRA premiums
(or, if COBRA coverage is not available, reimbursement of premiums paid
for other medical insurance in an amount not to exceed the COBRA premium)
for a one-year period following termination, subject to termination of
this arrangement if a successor employer provides him with health
insurance coverage; and
|
|
·
|
accelerated vesting of all
unvested options issued on December 11, 2006 pursuant to the 2006 Equity
Incentive Plan.
|
Under the Separation and Release
Agreement by and between the Company and Mr. Zona dated June 26, 2008, the
Company acknowledged that Mr. Zona’s termination was without “Cause.” Consistent
with the terms of Mr. Zona’s employment agreement, the Company (i) agreed to pay
Mr. Zona all earned but unpaid base salary and vacation pay, (ii) agreed to pay
Mr. Zona severance in an amount equal to his base salary for a period of six
months payable over a six-month period, and (iii) agreed to allow Mr. Zona to
continue to participate in the Company’s group medical plan on the same basis as
he previously participated until May 30, 2009, subject to termination of this
arrangement if a successor employer provides him with health insurance coverage.
Although Mr. Zona was entitled to accelerated vesting of all unvested options
under his employment agreement, he agreed to voluntarily surrender 166,666 of
his unvested options granted on December 11, 2006. The Company agreed to extend
the post-employment exercise period on Mr. Zona’s vested 83,334 options through
December 31, 2009, accelerate the vesting of 25,000 options granted to Mr. Zona
on March 19, 2008, and extend the post-employment exercise period on the 25,000
options until December 31, 2009. Mr. Zona provided a general release in favor of
the Company and agreed to abide by certain continuing obligations of his
employment agreement, including the non-solicitation, non-competition,
confidentiality, non-interference and non-disparagement provisions, as
amended.
Actual Payments to Named
Executive Officers Upon Separation
The
following table provides a summary of the actual amounts of payments and
benefits provided to the named executive officers under their respective
separation agreements in 2008.
Name
|
|
Cash Severance
Payment
($)
|
|
|
Continuation of
Medical/Welfare
Benefits (Present Value)
($)(1)
|
|
|
Value of Accelerated
Vesting of Equity
Awards
($)(2)
|
|
|
Accrued but Unused
Paid Time off
($)
|
|
|
Total Termination
Benefits
($)
|
|
Robert
W. D’Loren
|
|
$ |
0 |
|
|
$ |
14,722 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
14,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
B. Meister
|
|
$ |
225,000 |
|
|
$ |
15,330 |
|
|
$ |
256,994 |
|
|
$ |
26,827 |
|
|
$ |
524,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Haran
|
|
$ |
281,250 |
|
|
$ |
14,722 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
295,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
Zona
|
|
$ |
150,000 |
|
|
$ |
9,466 |
|
|
$ |
401,787 |
|
|
$ |
29,000 |
|
|
$ |
590,253 |
|
|
(1)
|
Calculated
at insurance premium rates in effect at December 31, 2008 for the period
of time of the benefit.
|
|
(2)
|
This
amount represents the unamortized portion of the expense related to each
respective named executive officer’s equity awards as of the date of
termination of employment Without Cause, the event that triggered
acceleration.
|
Potential Payments to Named
Executive Officers upon Termination or Change-of-Control as of December 31,
2007
The
employment agreements with each of our named executive officers provided for
certain payments and other benefits if a named executive officer’s employment
with us were terminated under circumstances specified in his agreement,
including a “Change of Control” of the Company. The amounts of potential
payments in the following tables are hypothetical based on the rules of the SEC.
The value of what was actually paid by the Company upon the respective
separations of all of our named executive officers in 2008 is provided above. As
a result of the resignations or employment terminations of all of the named
executive officers disclosed in the First Amendment, none of the below
hypothetical termination payments remain applicable.
Hypothetical
Termination Payments (Other than in Connection with a
Change-of-Control)
The table
below includes a description and the amount of hypothetical payments and
benefits that would be provided by us (or our successor) to each of the named
executive officers, had a termination circumstance occurred as of December 31,
2007 and a “Change of Control” had not occurred.
|
|
|
|
Estimated Amount of Termination Payment to:
|
|
Termination Event
|
|
Type of Payment
|
|
Robert D’Loren
|
|
|
David B. Meister
|
|
|
James Haran
|
|
|
Charles
Zona
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
for Cause, death or disability
|
|
Payment
of accrued but unused
vacation
time
|
|
$ |
8,219 |
|
|
$ |
10,479 |
|
|
$ |
7,192 |
|
|
$ |
10,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
without Cause or by
executive
for Good Reason
|
|
Lump
Sum Severance Payment
|
|
$ |
1,500,000 |
|
|
$ |
225,000 |
|
|
$ |
562,500 |
|
|
$ |
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
without Cause or by
executive
for Good Reason
|
|
Pro
rata portion
of
Bonuses (1)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death,
termination without Cause, or
termination
by executive for Good Reason
|
|
Continued
coverage under medical, dental, hospitalization and life insurance plans
(2)
|
|
$ |
27,732 |
|
|
$ |
15,798 |
|
|
$ |
11,291 |
|
|
$ |
11,291 |
|
(1)
|
The
bonuses payable upon a termination event are based on the actual bonus
paid in the prior year. Since no bonuses were paid in the prior year, no
amount is shown here.
|
(2)
|
Calculated
at insurance premium rates in effect at December 31, 2007 for the period
of time of the benefit:
|
Robert
D’Loren - 2 years
David
Meister - 1 year
James
Haran - 1 year
Charles
Zona - 1 year
Hypothetical
Termination Payments and Benefits in Connection with a Change of
Control
The
employment agreements with each of Messrs. D’Loren, Meister, Haran
and Zona provided that, if, within twelve months following a “Change
of Control,” their employment were terminated without “Cause” or they terminate
their employment for “Good Reason,” we are obligated to make a lump-sum
severance payment.
For Mr.
D’Loren, the severance payment would have been equal to $100 less than three
times the sum of Mr. D’Loren’s base salary plus a bonus amount calculated as the
percentage of the bonus pool that Mr. D’Loren received in the prior fiscal year
multiplied times five percent of the annualized net income for the quarter
immediately preceding the executive’s separation. For each of Messrs. Meister,
Haran and Zona, the separation amount would have been calculated the same as for
Mr. D’Loren, except that the amount is multiplied times two. For each of our
named executive officers, in the event that the foregoing calculation, together
with all other cash and non-cash amounts that the executive has the right to
receive from us, would result in the severance payment being treated as an
“excess parachute payment” within the meaning of Section 280G of the Internal
Revenue Code, then the payment is reduced automatically to the largest amount
that will not result in the payment being treated as an “excess parachute
payment.” Because this formula is intended to avoid the lump sum being treated
as a parachute payment subject to an excise tax under the tax code, we do not
provide for any “gross-up” payments to cover federal excise taxes in the event
that the severance payments are treated as a parachute payment.
The
following table quantifies the hypothetical maximum amount of payments and
benefits under our employment agreements and agreements relating to awards
granted under our equity incentive and stock option plans to which the named
executive officers would have been entitled upon termination of employment if we
had terminated their employment without cause on December 31, 2007, assuming a
Change of Control occurred on that date. We have assumed that these payments
would not have resulted in the aggregate severance payments being treated as an
“excess parachute payment.” We, therefore, have not reduced the aggregate amount
calculated under the base formula.
Name
|
|
Cash Severance
Payment
($)
|
|
|
Continuation of
Medical/Welfare Benefits
(Present Value)
($)(1)
|
|
|
Value of Accelerated
Vesting of Equity
Awards
($)(2)
|
|
|
Total Termination
Benefits
($)
|
|
Robert
W. D’Loren
|
|
$ |
2,249,900 |
|
|
$ |
24,426 |
|
|
$ |
1,293,843 |
|
|
$ |
3,568,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
B. Meister
|
|
$ |
449,900 |
|
|
$ |
14,778 |
|
|
$ |
175,179 |
|
|
$ |
639,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Haran
|
|
$ |
749,900 |
|
|
$ |
10,562 |
|
|
$ |
269,285 |
|
|
$ |
1,029,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
Zona
|
|
$ |
599,900 |
|
|
$ |
10,562 |
|
|
$ |
293,716 |
|
|
$ |
904,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Calculated
at the present value of insurance premiums to be paid over the benefit
period.
|
|
|
(2)
|
This
amount represents the unamortized portion of the expense related to each
respective named executive officer’s equity awards as of December 31,
2007.
|
Director
Compensation
The
following table sets forth compensation information for 2007 for each member of
our then Board of Directors with the exception of Mr. D’Loren. Directors who are
or were employees, such as Messrs. D’Loren and Oros, do not receive additional
compensation for serving on the Board. However, in connection with an option
grant made to members of our then Board of Directors in September 2007, the
Board authorized grants to each director other than Mr. D’Loren. See “Summary
Compensation” table and “Grants of Plan-Based Awards” table for disclosures
related to Mr. D’Loren.
Name
|
|
Fees Earned
or Paid
in Cash
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Change in
Pension Value
and Nonqualified
Deferred Compensation
Earnings
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
David
S. Oros
|
|
|
- |
|
|
|
- |
|
|
$ |
29,079 |
(9) |
|
|
- |
|
|
|
- |
|
|
$ |
213,665 |
(12) |
|
$ |
242,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
T. Brady
|
|
$ |
68,250 |
(1) |
|
|
- |
|
|
$ |
29,079 |
(9) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
97,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul
Caine
|
|
$ |
12,000 |
(2) |
|
|
- |
|
|
$ |
29,079 |
(9) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
41,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack
B. Dunn, IV
|
|
$ |
39,000 |
(3) |
|
|
- |
|
|
$ |
29,079 |
(9) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
68,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward
J. Mathias
|
|
$ |
57,000 |
(4) |
|
|
- |
|
|
$ |
29,079 |
(9) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
86,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack
Rovner
|
|
$ |
38,000 |
(5) |
|
|
- |
|
|
$ |
29,079 |
(9) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
67,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truman
T. Semans
(former
director)
|
|
$ |
42,500 |
(6) |
|
|
- |
|
|
$ |
47,910 |
(10) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
90,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George
P. Stamas
|
|
$ |
36,500 |
(7) |
|
|
- |
|
|
$ |
29,079 |
(9) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
65,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marvin
Traub
|
|
$ |
17,500 |
(8) |
|
|
- |
|
|
$ |
127,341 |
(11) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
144,841 |
|
(1)
|
Consists
of $20,000 annual retainer, $19,500 in Board attendance fees, $12,500
retainer as chairman of the Audit Committee, $15,000 in Audit Committee
meeting fees, and $1,250 retainer as chairman of the Nominating/Corporate
Governance Committee. Mr. Brady was the chairman and a member of the Audit
Committee throughout the fiscal year ended December 31, 2007 and became
the chairman of the Nominating/Corporate Governance Committee on May 4,
2007.
|
(2)
|
Consists
of $5,000 annual retainer, $4,500 in Board attendance fees, and $2,500 in
Audit Committee meeting fees. Mr. Caine has been a member of
the Board and the Audit Committee since September 5,
2007.
|
(3)
|
Consists
of $20,000 annual retainer, $16,500 in Board attendance fees, and $2,500
retainer as chairman of the Nominating Committee. Mr. Dunn was the
chairman of the Nominating Committee through May 4, 2007 when the
Nominating Committee was merged with the Corporate Governance Committee.
Mr. Dunn resigned as a director on September 25,
2008.
|
(4)
|
Consists
of $20,000 annual retainer, $19,500 in Board attendance fees, $2,500
retainer as chairman of the Compensation Committee, and $15,000 in Audit
Committee meeting fees. Mr. Mathias was the chairman of the Compensation
Committee and a member of the Audit Committee throughout the fiscal year
ended December 31, 2007.
|
(5)
|
Consists
of $20,000 annual retainer and $18,000 in Board attendance
fees. Mr. Rovner resigned as a director on August 29,
2008.
|
(6)
|
Consists
of $15,000 annual retainer, $15,000 in Board attendance fees, and $12,500
in Audit Committee meeting fees. Mr. Semans was a director through
September 5, 2007 but did not stand for re-election to the Board of
Directors at the 2007 annual meeting held on that
date.
|
(7)
|
Consists
of $20,000 annual retainer and $16,500 in Board attendance
fees.
|
(8)
|
Consists
of $10,000 annual retainer and $7,500 in Board attendance fees. Mr. Traub
was a member of the Board from May 2, 2007 to December 4,
2008.
|
(9)
|
The
amounts in the Option Awards column represents expenses for stock options
in accordance with FAS 123R. On September 6, 2007, the Company granted
non-qualified options to purchase 100,000 shares to each of the directors
in 2007, other than Mr. D’Loren and Mr. Traub, with an exercise price
equal to the closing price per share on September 6, 2007. These options
were to vest equally on the annual meeting date of each of the four annual
meeting dates following the date of grant. Because we did not have an
annual meeting in 2008, no portion of these grants vested in 2008. In
addition, each of these option grants were subsequently cancelled either
(1) voluntarily by the director through the Company’s Stock Option
Cancellation Program instituted on November 12, 2008 (see Item 5
–Securities
Authorized for Issuance under Equity Compensation Plans, for
further detail about this program) or (2) in accordance with the option
grant agreements which provided that the grantee would forfeit any
unvested options upon
resignation.
|
(10)
|
On October 31, 2006, immediately
following the 2006 annual meeting, the Company granted to Mr. Semans
non-qualified options to purchase 25,000 shares, as part of the Company’s
annual compensatory grant of options to directors. The exercise price of
these options was the closing price per share on October 31, 2006. By
their terms, the options vested on October 31, 2007, the first anniversary
of the grant date. However, the Company accelerated the vesting of these
options to September 4, 2007 because Mr. Semans planned to retire from the
Board as of the 2007 annual meeting on September 5, 2007. In accelerating
the options, the Company sought to avoid inadvertently penalizing Mr.
Semans based on the scheduling of our annual
meeting.
|
(11)
|
On
May 4, 2007, the Company granted to Mr. Traub, in connection with his
appointment to the Board of Directors, non-qualified options to purchase
29,166 shares, which was comprised of a pro rata amount of the 25,000
stock options granted to non-employee directors in 2006 and an additional
25,000 options granted for his expected service in 2007. The exercise
price of these options was the closing price per share on May 4, 2007. The
options vested on May 4, 2008 but subsequently were cancelled by Mr. Traub
pursuant to the Company’s Stock Option Cancellation Program. On September
6, 2007, Mr. Traub was granted non-qualified options to purchase 75,000
shares with an exercise price equal to the closing price per share on
September 6, 2007. These options were to vest equally on the second, third
and fourth annual meeting dates following the date of the grant. This
grant was cancelled in accordance with the option grant agreement because
Mr. Traub resigned prior to any
vesting.
|
(12)
|
In
June 2006, Mr. Oros relinquished his position as Chief Executive Officer
of the Company, remaining as Chairman. Under the terms of his amended
employment agreement, for a period of three years ending in June 2009, Mr.
Oros remains an employee to provide advice and guidance to the Company and
to assist with the management and business transition processes. Mr. Oros
receives an annual salary of $200,000 and health care coverage as an
employee during this period. In 2007, the Company paid $13,665 for the
employee’s portion of the premiums for Mr. Oros’ health care
coverage.
|
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth certain information with respect to beneficial
ownership of our common stock as of June 30, 2009, as to:
|
·
|
each
of our current directors and named executive officers for 2007
individually; and
|
|
·
|
all
the current directors and named executive officers for 2007 as a
group.
|
To our
knowledge, no person or entity, other than Mr. D’Loren, is the beneficial owner
of more than 5% of our common stock.
For the
purposes of calculating percentage ownership, 56,951,730 shares were issued and
outstanding as of June 30, 2009. For any individual, who beneficially owned
shares of restricted stock that vested or shares represented by options that
were or became exercisable within 60 days of June 30, 2009, those shares were
treated as if outstanding for that person, but not for any other person. In
preparing the following table, we relied upon statements filed with the SEC by
beneficial owners of more than 5% of the outstanding shares of our common stock
pursuant to Section 13(d) or 13(g) of the Exchange Act, unless we knew or had
reason to believe that the information contained in such statements was not
complete or accurate, in which case we relied upon information which we
considered to be accurate and complete. Unless otherwise indicated, the address
of each of the individuals and entities named below is: c/o NexCen Brands, Inc.,
1330 Avenue of the Americas, 34th Floor, New York, NY 10019.
|
|
Beneficial
Ownership
|
|
|
|
of Shares
|
|
Name and Address –
|
|
Number
|
|
|
Percent
|
|
Current
directors and named executive officers for 2007:
|
|
|
|
|
|
|
David
S. Oros (1)
|
|
|
2,385,879 |
|
|
|
3.56 |
% |
James
T. Brady (2)
|
|
|
127,500 |
|
|
|
* |
|
Paul
Caine
|
|
|
- |
|
|
|
- |
|
Edward
J. Mathias (3)
|
|
|
175,700 |
|
|
|
* |
|
George
P. Stamas (4)
|
|
|
171,868 |
|
|
|
* |
|
Robert
W. D’Loren (5)
|
|
|
3,692,103 |
|
|
|
6.48 |
% |
David
Meister (6)
|
|
|
200,000 |
|
|
|
* |
|
James
Haran (7)
|
|
|
517,499 |
|
|
|
* |
|
Charles
A. Zona (8)
|
|
|
118,334 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
All
current directors and named executive officers for 2007 as a
group
(9
Persons)
|
|
|
|
|
|
|
11.08 |
% |
(1)
|
Consists of (i) 1,261,000 shares of common stock owned
directly by Mr. Oros, (ii) 764,279 shares of common stock owned by Mr.
Oros and his wife, (iii) exercisable warrants to purchase 155,000 shares
of common stock, (iv) exercisable options to purchase 55,600 shares of
common stock and (v) 150,000 shares of exercisable restricted
stock.
|
(2)
|
Consists of (i) 2,500
shares of common stock owned directly by Mr. Brady and (ii) exercisable
options to purchase 125,000 shares of common
stock.
|
(3)
|
Consists of (i) 14,000
shares of common stock owned directly by Mr. Mathias, (ii) exercisable
options to purchase 125,000 shares of common stock, (iii) 29,000 shares of
common stock held indirectly in a retirement account and (iv) 7,700 shares
of common stock held as custodian for Ellen
Mathias.
|
(4)
|
Consists of (1) 11,268
shares of common stock owned directly by Mr. Stamas and (ii) exercisable
options to purchase 160,600 shares of common
stock.
|
(5)
|
Consists of (i) 1,041,384 shares
of common stock owned directly by Mr. D’Loren, (ii) 1,775,193 shares of
common stock owned by D’Loren Realty LLC, which is solely owned and
managed by Mr. D’Loren and (iii) 875,526 shares of common stock owned by
D’Loren 2008 Retained Annuity Trust. The shares of common stock held by
Mr. D’Loren exclude 537,308 shares held by the Robert D’Loren Family Trust
Dated March 29, 2002 (the “Family Trust”), the beneficiaries of which are
two minor children of Mr. D’Loren. The Family Trust is irrevocable, the
trustee is not a member of Mr. D’Loren’s immediate family, and the trustee
has independent authority to vote and dispose of the shares held by the
Family Trust. As a result, Mr. D’Loren disclaims any beneficial ownership
of the shares held by the Family
Trust.
|
(6)
|
Consists
of exercisable options to purchase 200,000 shares of common stock, which
remain exercisable through December 31,
2009.
|
(7)
|
Consists
of 517,499 shares of common stock owned directly by Mr.
Haran.
|
(8)
|
Consists of (i) 10,000
shares of common stock owned directly by Mr. Zona and (ii) exercisable
options to purchase 108,334 shares of common stock, which remain
exercisable through December 31,
2009.
|
Securities Authorized for
Issuance Under Equity Compensation Plans
See Item
5 of Part II of this Second Amendment for information regarding securities
authorized for issuance under equity compensation plans.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Policies and Procedures for
the Review and Approval of Related Party Transactions
The
Company adopted the Policy and Procedures with respect to Related Persons
Transactions for the review, approval or ratification of all related party
transactions. The policy is administered by the Nominating/Corporate Governance
Committee.
Pursuant to the
Policy and Procedures, any proposed related
person transaction must be submitted for consideration at the first regular or
special meeting of the Nominating/Corporate Governance Committee that immediately precedes
or follows the Company entering into a related party transaction. In
determining whether or not to approve or ratify such transactions, the Committee
considers all the relevant facts and circumstances related to the transaction
including, but not limited to (1) the benefit to the Company; (2) if the
transaction involves a director, a member of the director’s immediate family or
an entity affiliated with a director, the impact on the director’s independence;
(3) the related person’s relationship to the Company and interest in the
transaction; (4) the availability of other sources for comparable products or
services; (5) the terms of the transaction (including dollar value of the
transaction); (6) the terms available to unrelated third parties; and (7) any
other information regarding the transaction or the related person in the context
of the transaction that is material to investors in light of the circumstances
of the particular transaction. The Nominating/Corporate Governance Committee
approves or ratifies only those transactions that are in, or are not
inconsistent with, the best interests of the Company and our
shareholders.
In the
event that the Nominating/Corporate Governance Committee determines not to
ratify a related party transaction, it may evaluate all options, including but
not limited to, termination of the transaction on a prospective basis,
rescission of such transaction, or modification of the transaction in a manner
that would permit it to be ratified by the Committee.
The
Company’s Policy and Procedures with respect to Related Persons Transactions can
be found on our website.
Certain Related Party
Transactions for 2007
The
Company receives legal services from Kirkland & Ellis LLP, which is
considered a related party because a partner at that firm, George P. Stamas, is
a member of the Company’s Board of Directors. For the years ended December 31,
2007, 2006 and 2005, expenses related to Kirkland & Ellis LLP were
approximately $1.3 million, $1.7 million, and $640,000, respectively. For the
years ended December 31, 2007, 2006 and 2005, the Company had outstanding
payables due to Kirkland & Ellis LLP of approximately
$121,000, $492,000 and $45,000, respectively.
In July,
2007, the Company entered into an agreement with Marvin Traub Associates, Inc.
an entity owned by Mr. Traub, 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. Marvin
Traub Associates, Inc. received a one time retainer fee of $25,000 upon the
agreement’s execution. If the Company were successful in consuming a
relationship with a third party, Marvin Traub Associates, Inc. would have
received an additional $100,000 success fee. No success fee
ultimately was paid.
Director
Independence
See Item
10 of Part III of this Second Amendment for information regarding director
independence.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit
Fees
The
aggregate fees billed for professional services rendered for NexCen by KPMG LLP,
NexCen’s independent accounting firm, for the years ended December 31, 2007 and
2006 were:
|
|
2007
|
|
|
2006
|
|
Audit
Fees
|
|
$ |
668,211 |
|
|
$ |
225,000 |
|
Audit-Related
Fees
|
|
|
287,699 |
|
|
|
97,562 |
|
Tax
Fees
|
|
|
37,608 |
|
|
|
76,544 |
|
Total
Fees
|
|
$ |
993,518 |
|
|
$ |
399,106 |
|
“Audit
Fees” include time billed to NexCen for professional services rendered for the
annual audit for NexCen’s consolidated financial statements, the quarterly
reviews of the consolidated financial statements for fiscal years 2007 and 2006
and the audit with respect to management’s assessment of the effectiveness of
internal control over financial reporting as of December 31, 2007 and 2006 and
the effectiveness of internal control over financial reporting as of December
31, 2007 and 2006.
The
aggregate amount billed for all tax fees for the years ended December 31, 2007
and 2006 (see chart above under heading “Tax Fees”) principally covered tax
planning, tax consulting and tax compliance services provided to
NexCen.
“Audit
Related Fees” for 2007 include professional services performed by KPMG LLP
related primarily to Current Report on Form 8-K/A filings related to Bill Blass,
MaggieMoo’s, Marble Slab Creamery, Pretzel Time and Pretzelmaker acquisitions
and audits of the financial statements of certain of our franchise brands as
required by the Federal Trade Commission in preparing Uniform Franchise Offering
Circulars. For 2006, these fees include professional services performed by KPMG
LLP related to the UCC Capital and TAF acquisitions, and Current Report on Form
8-K and Form S-3 filings with the SEC.
NexCen
does not use our independent auditor as our internal auditor nor do we have an
internal auditor.
No other
professional services were rendered or fees were billed by KPMG LLP for the most
recent fiscal years or for the year ending December 31, 2007 and
2006.
The Audit
Committee has adopted policies and procedures for the pre-approval of the above
fees. All requests for services to be provided by KPMG LLP are submitted to the
Audit Committee. Requests for all non-audit related services require
pre-approval from the entire Audit Committee. A schedule of approved services is
then reviewed and approved by the entire Audit Committee at each Audit Committee
meeting.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL
STATEMENTS AND SCHEDULES
The
following financial statements required by this item are included in this Second
Amendment beginning on page 45.
Report
of Independent Registered Public Accounting Firm
|
44
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
45
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006,
and 2005
|
46
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31,
2007, 2006 and 2005
|
47
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006
and 2005
|
48
|
Notes
to Consolidated Financial Statements
|
49
|
All other
schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or the notes
thereto.
EXHIBITS
The
following exhibits are filed herewith or are incorporated by reference to
exhibits previously filed with the SEC.
Exhibit
Index
*2.1
|
|
Agreement
and Plan of Merger dated June 5, 2006, by and among UCC Capital Corp., UCC
Consulting Corp., UCC Servicing, LLC, Aether Holdings, Inc., AHINV
Acquisition Corp., the holders of UCC Shares identified therein and Robert
W. D’Loren, as the Security holders’
Representative. (Designated as Exhibit 2.1 to the Form 8−K
filed on June 7, 2006)
|
*2.2
|
|
Equity
Interest and Asset Purchase Agreement dated August 21, 2006, by and among
Aether Holdings, Inc., NexCen Franchise Brands, Inc., NexCen Franchise
Management, Inc., Athlete’s Foot Marketing Associates, LLC, Athlete’s Foot
Brands, LLC, Robert J. Corliss, Donald Camacho, Timothy Brannon and Martin
Amschler. (Designated as Exhibit 2.1 to the Form 8−K filed on
August 22, 2006)
|
*2.3
|
|
Stock
Purchase Agreement dated December 19, 2006, by and among NexCen Brands,
Inc., Blass Acquisition Corp., Haresh T. Tharani, Mahesh T. Tharani and
Michael Groveman, Bill Blass Holding Co., Inc., Bill Blass International
LLC and Bill Blass Licensing Co., Inc. (Designated as Exhibit
2.1 to the Form 8−K filed on December 21, 2006)
|
*2.4
|
|
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)
|
*2.5
|
|
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)
|
*2.6
|
|
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)
|
*2.7
|
|
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)
|
*2.8
|
|
Asset
Purchase Agreement dated January 29, 2008, by and among NexCen Brands,
Inc., NexCen Asset Acquisition, LLC, Great American Cookie Company
Franchising, LLC, Great American Manufacturing, LLC and Mrs. Fields Famous
Brands, LLC. (Designated as Exhibit 2.1 to the Form 8−K filed
on January 29, 2008)
|
*2.9
|
|
Asset
Purchase Agreement dated September 29, 2008, by and among NexCen Brands,
Inc., NexCen Fixed Asset Company, LLC, NexCen Brand Management, Inc., WV
IP Holdings, LLC, and Iconix Brand Group, Inc.. (Designated as
Exhibit 2.1 to the Form 8−K filed on September 30,
2008)
|
*2.10
|
|
Asset
Purchase Agreement dated December 24, 2008, by and among NexCen Brands,
Inc., NexCen Fixed Asset Company, LLC, NexCen Brand Management, Inc., Bill
Blass Holding Co., Inc., Bill Blass Licensing Co., Inc., Bill Blass Jeans,
LLC, Bill Blass International, LLC and Peacock International Holdings,
LLC. (Designated as Exhibit 2.1 to the Form 8−K filed on
December 29, 2008)
|
*3.1
|
|
Certificate
of Incorporation of NexCen Brands, Inc. (Designated as Exhibit
3.1 to the Form 10-Q filed on August 5,
2005)
|
*3.2
|
|
Certificate
of Amendment of Certificate of Incorporation of NexCen Brands,
Inc. (Designated as Exhibit 3.1 to the Form 8-K filed on
November 1, 2006)
|
*3.3
|
|
Amended
and Restated By-laws of NexCen Brands, Inc. (Designated as
Exhibit 3.1 to the Form 8-K filed on March 7, 2008)
|
*4.1
|
|
Form
of Common Stock Certificate. (Designated as Exhibit 4.3 to the
Form S-8 filed on December 1, 2006)
|
*4.2
|
|
Registration
Rights Agreement dated 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)
|
*4.3
|
|
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)
|
*4.4
|
|
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
|
|
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)
|
*4.6
|
|
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)
|
*4.7
|
|
Registration
Rights Agreement dated January 29, 2008, by and among NexCen Brands,
Inc.
Great
American Cookie Company Franchising, LLC and Great American Manufacturing,
LLC. (Designated as Exhibit 4.1 to the Form 8−K filed on
January 29, 2008)
|
*4.8
|
|
Registration
Rights Agreement dated January 29, 2008, by and between NexCen Brands,
Inc. and BTMU Capital Corporation. (Designated as Exhibit 4.4
to the Form 8−K filed on January 29, 2008)
|
*+4.9
|
|
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)
|
*4.10
|
|
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)
|
*+4.11
|
|
Stock
Option Grant Agreement by and between Aether Holdings, Inc. and Robert W.
D’Loren. (Designated as Exhibit 10.5 to the Form 8−K filed on June 7,
2006)
|
*4.12
|
|
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)
|
*4.13
|
|
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)
|
*4.14
|
|
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)
|
*4.15
|
|
Form
of Common Stock Warrant issued by NexCen Brands, Inc. to certain
Franchisees on January 29, 2008. (Designated as Exhibit 4.2 to
the Form 8−K filed on January 29, 2008)
|
*4.16
|
|
Common
Stock Warrant dated January 29, 2008, issued to BTMU Capital
Corporation. (Designated as Exhibit 4.3 to the Form 8−K filed
on January 29, 2008)
|
*4.17
|
|
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)
|
*4.18
|
|
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)
|
*9.1
|
|
Voting
Agreement dated November 7, 2006, by and between NexCen Brands, Inc. and
Robert Corliss. (Designated as Exhibit 9.1 to the Form 8−K
filed on November 14, 2006)
|
*9.2
|
|
Voting
Agreement dated November 7, 2006, by and between NexCen Brands, Inc. and
Athlete’s Foot Marketing Associates, LLC. (Designated as
Exhibit 9.2 to the Form 8−K filed on November 14, 2006)
|
*9.3
|
|
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)
|
*9.4
|
|
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)
|
*9.5
|
|
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)
|
*9.6
|
|
Voting
Agreement dated January 29, 2008, by and among NexCen Brands, Inc. and
Great American Cookie Company Franchising, LLC and Great American
Manufacturing, LLC. (Designated as Exhibit 9.1 to the Form 8−K
filed on January 29,
2008)
|
*+10.1
|
|
2006
Management Bonus Plan. (Designated as Exhibit 10.4 to the Form
8−K filed on June 7, 2006)
|
*+10.2
|
|
2006
Long-Term Equity Incentive Plan. (Designated as Exhibit 10.1 to
the Form 8−K filed on November 1, 2006)
|
*+10.3
|
|
Form
of 2006 Long-Term Equity Incentive Plan Director Stock Option Award
Agreement. (Designated as Exhibit 10.15 to the Form 10-K
filed on March 16, 2007)
|
*+10.4
|
|
Form
of 2006 Long-Term Equity Incentive Plan Employee/Management Stock Option
Award Agreement. (Designated as Exhibit 10.16 to the Form
10-K filed on March 16, 2007)
|
*10.5
|
|
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)
|
*+10.6
|
|
Employment
Agreement dated June 6, 2006, by and between Aether Holdings, Inc. and
Robert W. D’Loren. (Designated as Exhibit 10.1 to the Form 8−K
filed on June 7, 2006)
|
*+10.7
|
|
Separation
Agreement dated August 15, 2008 by and between NexCen Brands, Inc. and
Robert W. D’Loren. (Designated as Exhibit 10.1 to the Form 8-K
filed on August 19, 2008)
|
*+10.8
|
|
Employment
Agreement dated September 12, 2006, by and between Aether Holdings, Inc.
and David B. Meister. (Designated as Exhibit 10.1 to the Form 8−K dated
September 13, 2006)
|
+10.9
|
|
Separation
Agreement dated April 28, 2008, by and between NexCen Brands, Inc. and
David Meister.
|
+10.10
|
|
Employment
Agreement dated June 6, 2006, by and between Aether Holdings, Inc. and
James Haran. (Designated as Exhibit 10.24 to the
Form 10−K/A filed on April 30, 2007)
|
*+10.11
|
|
Separation
and General Release Agreement dated August 14, 2008, by and between NexCen
Brands, Inc. and James Haran. (Designated as Exhibit 10.4 to
the Form 8-K filed on August 19, 2008)
|
*+10.12
|
|
Employment
Agreement dated December 11, 2006, by and between NexCen Brands, Inc. and
Charles A. Zona. (Designated as Exhibit 10.1 to the Form 8−K
filed on December 13, 2006)
|
*+10.13
|
|
Separation
Agreement and Release of Claims dated June 26, 2008, by and between NexCen
Brands, Inc. and Charles A. Zona. (Designated as Exhibit 10.1
to the Form 8-K filed on June 27, 2008)
|
*+10.14
|
|
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)
|
*10.15
|
|
Amended and Restated Security
Agreement, by and among NexCen Holding Corp., the Subsidiary Borrowers
Parties thereto and BTMU Capital Corporation, dated August 15,
2008. (Designated as Exhibit 10.1 to the Form 8-K filed on
August 21, 2008)
|
10.16
|
|
First
Amendment to Amended and Restated Security Agreement by and among NexCen
Brands, Inc., NexCen Holding Corp., the Subsidiary Borrowers parties
thereto and BTMU Capital Corporation dated September 11,
2008.
|
*10.17
|
|
Second
Amendment to Amended and Restated Security Agreement by and among NexCen
Brands, Inc., NexCen Holding Corp., the Subsidiary Borrowers parties
thereto and BTMU Capital Corporation dated December 24,
2008. (Designated as Exhibit 10.1 to the Form 8-K filed on
December 29, 2008)
|
*10.18
|
|
Amended and Restated Note Funding
Agreement, by and among NexCen Holding Corporation, the Subsidiary
Borrowers Parties thereto, NexCen Brands, Inc. and BTMU Capital
Corporation, dated August 15, 2008. (Designated as
Exhibit 10.2 to the Form 8-K filed on August 21, 2008)
|
*10.19
|
|
Amended and Restated Franchise
Management Agreement, by and between NexCen Franchise Management, Inc. and
Athlete’s Foot Brands, LLC, dated August 15,
2008. (Designated as Exhibit 10.3 to the Form 8-K filed
on August 21, 2008)
|
*10.20
|
|
Second Amended and Restated Brand
Management Agreement, by and among NexCen Brand Management, Inc., NexCen
Holding Corporation, Bill Blass Jeans, LLC and Bill Blass International,
LLC, dated August 15, 2008. (Designated as Exhibit 10.4 to the Form
8-K filed on August 21, 2008)
|
*10.21
|
|
Second Amended and Restated Brand
Management Agreement, by and between NexCen Brand Management, Inc. and WV
IP Holdings, LLC, dated August 15, 2008. (Designated as Exhibit
10.5 to the Form 8-K filed on August 21, 2008)
|
*10.22
|
|
Second Amended and Restated
Franchise Management Agreement, by and among NexCen Franchise Management,
Inc., PT Franchise Brands, LLC and PT Franchising, LLC, dated August 15,
2008. (Designated as Exhibit 10.6 to the Form 8-K filed
on August 21, 2008)
|
*10.23
|
|
Second Amended and Restated
Franchise Management Agreement, by and among NexCen Franchise Management,
Inc., PM Franchise Brands, LLC and PM Franchising, LLC, dated August 15,
2008.
(Designated as Exhibit 10.7 to the Form 8-K filed on August 21,
2008)
|
*10.24
|
|
Amended and Restated Franchise
Management Agreement, by and among NexCen Franchise Management, Inc.,
Marble Slab Franchise Brands, LLC and Marble Slab Franchising, LLC, dated
August 15, 2008. (Designated as Exhibit 10.8 to the Form
8-K filed on August 21, 2008)
|
*10.25
|
|
Amended and Restated Franchise
Management Agreement, by and among NexCen Franchise Management, Inc.,
MaggieMoo’s Franchise Brands, LLC and MaggieMoo’s Franchising, LLC, dated
August 15, 2008. (Designated as Exhibit 10.9 to the Form
8-K filed on August 21, 2008)
|
*10.26
|
|
Amended
and Restated Franchise Management Agreement, by and among NexCen Franchise
Management, Inc. GAC Franchise Brands, LLC and GAC Franchising, LLC, dated
August 15, 2008. (Designated as Exhibit 10.10 to the
Form 8-K filed on August 21, 2008)
|
*10.27
|
|
Amended
and Restated Supply Management Agreement, by and between NB Supply
Management Corp. and GAC Supply, LLC, dated August 15,
2008. (Designated as Exhibit 10.11 to the Form 8-K filed
on August 21, 2008)
|
*10.28
|
|
Amended
and Restated Supply Management Agreement, by and between NB Supply
Management Corp. and GAC Manufacturing, LLC, dated August 15,
2008. (Designated as Exhibit 10.12 to the Form 8-K filed
on August 21, 2008)
|
*10.29
|
|
Omnibus
Amendment dated January 27, 2009 by and among NexCen Brands, Inc.,
NexCen
Holding Corporation, the Subsidiary Borrowers parties thereto, the
Managers parties thereto, and BTMU Capital
Corporation. (Designated as Exhibit 10.1 to the Form 8-K filed
on January 29, 2009)
|
*10.30
|
|
Waiver
and Omnibus Amendment dated July 15, 2009 by and among NexCen Brands,
Inc., NexCen Holding Corporation, the Subsidiary Borrowers parties
thereto, the Managers parties thereto, and BTMU Capital
Corporation. (Designated as Exhibit 10.1 to the Form 8-K filed
on July 20, 2009)
|
*10.31
|
|
Omnibus
Amendment dated August 6, 2009 by and among NexCen Brands, Inc., NexCen
Holding Corporation, the Subsidiary Borrowers parties thereto, the
Managers parties thereto, and BTMU Capital
Corporation. (Designated as Exhibit 10.3 to the Form 8-K filed
on August 6, 2009)
|
*10.32
|
|
Australia
License Agreement dated August 6, 2009, by and among TAF Australia, LLC,
The Athlete’s Foot Australia Pty Ltd. and RCG Corporation Ltd. (Designated
as Exhibit 10.1 to the Form 8-K filed on August 6,
2009)
|
*10.33 |
|
New
Zealand License Agreement dated August 6, 2009, by and among TAF
Australia, LLC, The Athlete’s Foot Australia Pty Ltd. and RCG Corporation
Ltd. (Designated as Exhibit 10.1 to the Form 8-K filed on August 6,
2009)
|
*10.34
|
|
Settlement
and Release Agreement dated January 29, 2008 by and among NexCen Brands,
Inc., Great American Cookie Company Franchising, LLC, Mrs. Fields Famous
Brands, LLC, Mrs. Fields Original Cookies, Inc. and certain Franchisees.
(Designated as Exhibit 10.1 to the Form 8−K filed on January 29,
2008)
|
21.1
|
|
Subsidiaries
of NexCen Brands, Inc.
|
23.1
|
|
Consent
of KPMG LLP
|
31.1
|
|
Certification
pursuant to 17 C.F.R § 240.15d−14 (a), as adopted pursuant to Section 302
of the Sarbanes−Oxley Act of 2002 for Kenneth J. Hall.
|
31.2
|
|
Certification
pursuant to 17 C.F.R § 240.15d−14 (a), as adopted pursuant to Section 302
of the Sarbanes−Oxley Act of 2002 for Mark E. Stanko.
|
**32.1
|
|
Certifications
pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes−Oxley Act of 2002 for Kenneth J. Hall and Mark E. Stanko
.
|
__________________________
* 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 Second
Amendment 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 Amendment No. 2 to the Annual
Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto
duly authorized on August 11, 2009.
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NEXCEN
BRANDS, INC.
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By:
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/s/
Kenneth J. Hall
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KENNETH
J. HALL
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Chief
Executive Officer
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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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August
11, 2009
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DAVID
S. OROS
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/s/ Kenneth J. Hall
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Chief
Executive Officer
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August
11, 2009
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KENNETH
J. HALL
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/s/ Mark E. Stanko
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Chief
Financial Officer
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August
11, 2009
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MARK
E. STANKO
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/s/ James T. Brady
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Director
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August
11, 2009
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JAMES
T. BRADY
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/s/ Paul Caine
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Director
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August
11, 2009
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PAUL
CAINE
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/s/ Edward J. Mathias
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Director
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August
11, 2009
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EDWARD
J. MATHIAS
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/s/ George P. Stamas
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Director
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August
11, 2009
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GEORGE
P. STAMAS
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