UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For
the Quarterly Period Ended June 30, 2009
|
Or
|
¨
|
|
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, 34th Floor, New York,
NY
|
|
10019-5400
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(Registrant’s
telephone number, including area code): (212) 277-1100
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 x
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
x
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
|
¨
|
|
|
Accelerated
filer
|
¨
|
Non-accelerated
filer
|
x
|
|
|
Smaller
reporting company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
As of
October 31, 2009, 56,951,730 shares of the registrant’s common stock, $.01 par
value per share, were outstanding.
NEXCEN
BRANDS, INC.
QUARTERLY
REPORT ON FORM 10-Q
THE
QUARTER ENDED JUNE 30, 2009
INDEX
PART
I:
|
FINANCIAL
INFORMATION
|
|
1
|
ITEM
1:
|
FINANCIAL
STATEMENTS
|
|
|
|
|
Condensed
consolidated balance sheets as of June 30, 2009 (unaudited) and
December 31, 2008
|
|
|
|
|
Condensed
consolidated statements of operations for the three and six months ended
June 30, 2009 and 2008 (unaudited)
|
|
|
|
|
Condensed
consolidated statements of stockholders’ equity/(deficit) for the six
months ended June 30, 2009 and 2008 (unaudited)
|
|
|
|
|
Condensed
consolidated statements of cash flows for the six months ended June 30,
2009 and 2008 (unaudited)
|
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
|
ITEM
2:
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
ITEM
3:
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
|
|
ITEM
4(T):
|
CONTROLS
AND PROCEDURES
|
|
|
|
|
|
|
PART
II:
|
OTHER
INFORMATION
|
|
|
ITEM
1:
|
LEGAL
PROCEEDINGS
|
|
|
ITEM
1A.
|
RISK
FACTORS
|
|
|
ITEM
2:
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
|
ITEM
3:
|
DEFAULTS
UPON SENIOR SECURITIES
|
|
|
ITEM
4:
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
|
|
ITEM
5:
|
OTHER
INFORMATION
|
|
|
ITEM
6:
|
EXHIBITS
|
|
32
|
PART
I - FINANCIAL INFORMATION
ITEM
1: FINANCIAL STATEMENTS
NEXCEN
BRANDS, INC
CONDENSED
CONSOLIDATED BALANCE SHEETS
(IN
THOUSANDS, EXCEPT SHARE DATA)
|
|
June 30,
|
|
|
|
|
|
|
2009
(Unaudited)
|
|
|
December 31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
8,037
|
|
|
$
|
8,293
|
|
Trade
receivables, net of allowances of $1,469 and $1,367,
respectively
|
|
|
4,158
|
|
|
|
5,617
|
|
Other
receivables
|
|
|
940
|
|
|
|
834
|
|
Inventory
|
|
|
1,268
|
|
|
|
1,232
|
|
Prepaid
expenses and other current assets
|
|
|
1,951
|
|
|
|
2,439
|
|
Total
current assets
|
|
|
16,354
|
|
|
|
18,415
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
3,278
|
|
|
|
4,395
|
|
Investment
in joint venture
|
|
|
389
|
|
|
|
87
|
|
Trademarks
and other non-amortizable intangible assets
|
|
|
78,422
|
|
|
|
78,422
|
|
Other
amortizable intangible assets, net of amortization
|
|
|
5,668
|
|
|
|
6,158
|
|
Deferred
financing costs and other assets
|
|
|
4,816
|
|
|
|
5,486
|
|
Long-term
restricted cash
|
|
|
740
|
|
|
|
940
|
|
Total
assets
|
|
$
|
109,667
|
|
|
$
|
113,903
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
7,692
|
|
|
$
|
9,220
|
|
Restructuring
accruals
|
|
|
7
|
|
|
|
153
|
|
Deferred
revenue
|
|
|
2,884
|
|
|
|
4,044
|
|
Current
portion of long-term debt, net of debt discount of $514 and $541,
respectively
|
|
|
1,768
|
|
|
|
611
|
|
Acquisition
related liabilities
|
|
|
1,330
|
|
|
|
4,689
|
|
Total
current liabilities
|
|
|
13,681
|
|
|
|
18,717
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of debt discount of $605 and $852, respectively
|
|
|
139,714
|
|
|
|
140,262
|
|
Acquisition
related liabilities
|
|
|
298
|
|
|
|
480
|
|
Other
long-term liabilities
|
|
|
3,506
|
|
|
|
3,937
|
|
Total
liabilities
|
|
|
157,199
|
|
|
|
163,396
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 1,000,000 shares authorized; 0 shares issued and
outstanding as of June 30, 2009 and December 31, 2008,
respectively
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.01 par value; 1,000,000,000 shares authorized; 56,951,730 and
56,670,643 shares issued and outstanding as of June 30, 2009 and
December 31, 2008, respectively
|
|
|
571
|
|
|
|
569
|
|
Additional
paid-in capital
|
|
|
2,684,840
|
|
|
|
2,681,600
|
|
Treasury
stock
|
|
|
(1,757
|
)
|
|
|
(1,757
|
)
|
Accumulated
deficit
|
|
|
(2,731,186
|
)
|
|
|
(2,729,905
|
)
|
Total
stockholders’ deficit
|
|
|
(47,532
|
)
|
|
|
(49,493
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
109,667
|
|
|
$
|
113,903
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
NEXCEN
BRANDS, INC
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN
THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
revenues
|
|
$ |
6,144 |
|
|
$ |
6,452 |
|
|
$ |
11,986 |
|
|
$ |
11,811 |
|
Factory
revenues
|
|
|
4,320 |
|
|
|
4,761 |
|
|
|
8,777 |
|
|
|
7,736 |
|
Franchise
fee revenues
|
|
|
1,066 |
|
|
|
397 |
|
|
|
2,396 |
|
|
|
1,980 |
|
Licensing
and other revenues
|
|
|
251 |
|
|
|
314 |
|
|
|
582 |
|
|
|
622 |
|
Total
revenues
|
|
|
11,781 |
|
|
|
11,924 |
|
|
|
23,741 |
|
|
|
22,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
(2,670 |
) |
|
|
(2,974 |
) |
|
|
(5,507 |
) |
|
|
(5,296 |
) |
Selling,
general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchising
|
|
|
(3,470 |
) |
|
|
(4,335 |
) |
|
|
(6,561 |
) |
|
|
(8,663 |
) |
Corporate
|
|
|
(1,912 |
) |
|
|
(3,468 |
) |
|
|
(3,996 |
) |
|
|
(7,834 |
) |
Professional
fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchising
|
|
|
(560 |
) |
|
|
(354 |
) |
|
|
(970 |
) |
|
|
(630 |
) |
Corporate
|
|
|
(652 |
) |
|
|
(1,010 |
) |
|
|
(1,489 |
) |
|
|
(2,008 |
) |
Special
investigations
|
|
|
(52 |
) |
|
|
(1,932 |
) |
|
|
(85 |
) |
|
|
(1,932 |
) |
Impairment
of intangible assets
|
|
|
- |
|
|
|
(109,733 |
) |
|
|
- |
|
|
|
(109,733 |
) |
Depreciation
and amortization
|
|
|
(863 |
) |
|
|
(674 |
) |
|
|
(1,725 |
) |
|
|
(1,165 |
) |
Restructuring
charges
|
|
|
- |
|
|
|
(815 |
) |
|
|
- |
|
|
|
(815 |
) |
Total
operating expenses
|
|
|
(10,179 |
) |
|
|
(125,295 |
) |
|
|
(20,333 |
) |
|
|
(138,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
1,602 |
|
|
|
(113,371 |
) |
|
|
3,408 |
|
|
|
(115,927 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Operating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
47 |
|
|
|
84 |
|
|
|
102 |
|
|
|
334 |
|
Interest
expense
|
|
|
(2,749 |
) |
|
|
(2,472 |
) |
|
|
(5,583 |
) |
|
|
(4,751 |
) |
Financing
charges
|
|
|
31 |
|
|
|
(889 |
) |
|
|
(2 |
) |
|
|
(926 |
) |
Other
income (expense), net
|
|
|
372 |
|
|
|
(193 |
) |
|
|
720 |
|
|
|
(676 |
) |
Total
non-operating expense
|
|
|
(2,299 |
) |
|
|
(3,470 |
) |
|
|
(4,763 |
) |
|
|
(6,019 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(697 |
) |
|
|
(116,841 |
) |
|
|
(1,355 |
) |
|
|
(121,946 |
) |
Income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(81 |
) |
|
|
(107 |
) |
|
|
(155 |
) |
|
|
(184 |
) |
Deferred
|
|
|
- |
|
|
|
4,126 |
|
|
|
- |
|
|
|
2,936 |
|
Loss
from continuing operations
|
|
|
(778 |
) |
|
|
(112,822 |
) |
|
|
(1,510 |
) |
|
|
(119,194 |
) |
Income
(loss) from discontinued operations, net of taxes of $0, $14,916, $0,
$15,083, respectively
|
|
|
362 |
|
|
|
(83,027 |
) |
|
|
229 |
|
|
|
(81,960 |
) |
Net
loss
|
|
$ |
(416 |
) |
|
$ |
(195,849 |
) |
|
$ |
(1,281 |
) |
|
$ |
(201,154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share (basic and diluted) from continuing operations
|
|
$ |
(0.01 |
) |
|
$ |
(1.99 |
) |
|
$ |
(0.03 |
) |
|
$ |
(2.10 |
) |
Income
(loss) per share (basic and diluted) from discontinued
operations
|
|
|
0.00 |
|
|
|
(1.47 |
) |
|
|
0.00 |
|
|
|
(1.45 |
) |
Net
loss per share - basic and diluted
|
|
$ |
(0.01 |
) |
|
$ |
(3.46 |
) |
|
$ |
(0.03 |
) |
|
$ |
(3.55 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic and diluted
|
|
|
56,952 |
|
|
|
56,621 |
|
|
|
56,812 |
|
|
|
56,444 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
NEXCEN
BRANDS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY/(DEFICIT)
(IN
THOUSANDS)
(UNAUDITED)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Treasury
Stock
|
|
|
Total
|
|
Balance
at December 31, 2007
|
|
$
|
-
|
|
|
$
|
557
|
|
|
$
|
2,668,289
|
|
|
$
|
(2,474,126
|
)
|
|
$
|
(1,757
|
)
|
|
$
|
192,963
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(201,154
|
)
|
|
|
-
|
|
|
|
(201,154
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201,154
|
)
|
Exercise
of options and warrants
|
|
|
-
|
|
|
|
1
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
4,617
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,617
|
|
Common
stock issued
|
|
|
-
|
|
|
|
10
|
|
|
|
4,649
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,659
|
|
Balance
at June 30, 2008
|
|
$
|
-
|
|
|
$
|
568
|
|
|
$
|
2,677,559
|
|
|
$
|
(2,675,280
|
)
|
|
$
|
(1,757
|
)
|
|
$
|
1,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$
|
-
|
|
|
$
|
569
|
|
|
$
|
2,681,600
|
|
|
$
|
(2,729,905
|
)
|
|
$
|
(1,757
|
)
|
|
$
|
(49,493
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,281
|
)
|
|
|
-
|
|
|
|
(1,281
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,281
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
288
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288
|
|
Common
stock issued
|
|
|
-
|
|
|
|
2
|
|
|
|
2,952
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,954
|
|
Balance
at June 30, 2009
|
|
$
|
-
|
|
|
$
|
571
|
|
|
$
|
2,684,840
|
|
|
$
|
(2,731,186
|
)
|
|
$
|
(1,757
|
)
|
|
$
|
(47,532
|
)
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
NEXCEN
BRANDS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN
THOUSANDS)
(UNAUDITED)
|
|
Six Months
Ended
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,281
|
)
|
|
$
|
(201,154
|
)
|
Add:
net (income) loss from discontinued operations
|
|
|
(229
|
)
|
|
|
81,960
|
|
Net
loss from continuing operations
|
|
|
(1,510
|
)
|
|
|
(119,194
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Impairment
of intangible assets
|
|
|
-
|
|
|
|
109,733
|
|
Restructuring
|
|
|
-
|
|
|
|
443
|
|
Depreciation
and amortization
|
|
|
1,793
|
|
|
|
1,165
|
|
Stock
based compensation
|
|
|
288
|
|
|
|
2,230
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
(2,936
|
)
|
Unrealized
(gain) loss on investment in joint venture
|
|
|
(260
|
)
|
|
|
220
|
|
Amortization
of debt discount
|
|
|
274
|
|
|
|
224
|
|
Amortization
of deferred financing costs
|
|
|
483
|
|
|
|
845
|
|
Accrued
interest on Deficiency Note
|
|
|
1,109
|
|
|
|
-
|
|
Changes
in assets and liabilities, net of acquired assets and
liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in trade receivables, net of allowances
|
|
|
1,459
|
|
|
|
(1,193
|
)
|
(Increase)
decrease in other receivables
|
|
|
(147
|
)
|
|
|
1,129
|
|
(Increase)
decrease in inventory
|
|
|
(36
|
)
|
|
|
410
|
|
Decrease
(increase) in prepaid expenses and other assets
|
|
|
685
|
|
|
|
(1,070
|
)
|
(Decrease)
increase in accounts payable and accrued expenses
|
|
|
(2,416
|
)
|
|
|
2,795
|
|
(Decrease)
increase in restructuring accruals
|
|
|
(146
|
)
|
|
|
327
|
|
Decrease
in deferred revenues
|
|
|
(1,161
|
)
|
|
|
(637
|
)
|
Net
cash provided by (used in) operating activities from continuing
operations
|
|
|
415
|
|
|
|
(5,509
|
)
|
Net
cash provided by (used in) operating activities from discontinued
operations
|
|
|
229
|
|
|
|
(127
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
644
|
|
|
|
(5,636
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
190
|
|
|
|
5,151
|
|
Purchases
of property and equipment
|
|
|
(185
|
)
|
|
|
(477
|
)
|
Investment
in joint venture
|
|
|
-
|
|
|
|
(725
|
)
|
Purchase
of trademarks, including registration costs
|
|
|
-
|
|
|
|
(46
|
)
|
Distributions
from joint venture
|
|
|
-
|
|
|
|
216
|
|
Acquisitions,
net of cash acquired
|
|
|
(131
|
)
|
|
|
(95,000
|
)
|
Cash
used in discontinued operations for investing activities
|
|
|
-
|
|
|
|
(765
|
)
|
Net
cash used in investing activities
|
|
|
(126
|
)
|
|
|
(91,646
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from debt borrowings
|
|
|
-
|
|
|
|
70,000
|
|
Financing
costs
|
|
|
-
|
|
|
|
(1,670
|
)
|
Principal
payments on debt
|
|
|
(774
|
)
|
|
|
(3,918
|
)
|
Proceeds
from the exercise of options and warrants
|
|
|
-
|
|
|
|
5
|
|
Cash
used in discontinued operations for financing activities
|
|
|
-
|
|
|
|
(1,100
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(774
|
)
|
|
|
63,317
|
|
Net
decrease in cash and cash equivalents
|
|
|
(256
|
)
|
|
|
(33,965
|
)
|
Cash
and cash equivalents, at beginning of period
|
|
|
8,293
|
|
|
|
46,569
|
|
Cash
and cash equivalents, at end of period
|
|
$
|
8,037
|
|
|
$
|
12,604
|
|
Cash
paid for interest
|
|
$
|
3,702
|
|
|
$
|
4,862
|
|
Cash
paid for taxes
|
|
$
|
203
|
|
|
$
|
135
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
NEXCEN
BRANDS, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1)
BUSINESS AND BASIS OF PRESENTATION
(a)
BUSINESS
NexCen
Brands, Inc. (“NexCen,” “we,” “us,” “our,” or the “Company”) is a strategic
brand management company that owns and manages a portfolio of seven franchised
brands, operating in a single business segment: Franchising. 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. Our franchise network, across all of our brands, consists of
approximately 1,750 retail stores in approximately 40 countries.
We earn
revenues primarily from the franchising, royalty, licensing and other
contractual fees that third parties pay us for the right to use the intellectual
property associated with our brands and from the sale of cookie dough and other
ancillary products to our Great American Cookies franchisees.
(b) BASIS
OF PRESENTATION
The
Condensed Consolidated Balance Sheet as of June 30, 2009, and the Condensed
Consolidated Statements of Operations for the three and six month periods ended
June 30, 2009 and 2008, and the Condensed Consolidated Statements of
Stockholders’ Equity/(Deficit) and the Condensed Consolidated Statements of Cash
Flows for the six month periods ended June 30, 2009 and 2008, are unaudited. The
Unaudited Condensed Consolidated Financial Statements include the accounts of
the Company and our majority-owned subsidiaries. In the opinion of management,
all adjustments have been made, including normal recurring adjustments,
necessary to fairly present the Unaudited Condensed Consolidated Financial
Statements. Operating results for the three and six month periods ended June 30,
2009 are not necessarily indicative of the operating results for the full year.
These statements have been prepared on a basis that is substantially consistent
with the accounting principles applied in our Annual Report on Form 10-K for the
year ended December 31, 2008 (the “2008 10-K”). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with U.S. generally accepted accounting principles (“GAAP”) have been condensed
or omitted. The Company believes that the disclosures provided in this Report
are adequate to make the information presented not misleading. These Unaudited
Condensed Consolidated Financial Statements should be read in conjunction with
the Audited Consolidated Financial Statements and related notes included in the
Company’s 2008 10-K.
(c)
LIQUIDITY AND GOING CONCERN
As of
June 30, 2009, we had a total of approximately $8 million of cash on hand. As of
June 30, 2009, we also had long-term restricted cash of $0.7 million, used to
secure letters of credit issued as security deposits on the Company’s leased
facilities.
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
our credit facility with BTMU Capital Corporation (the “BTMUCC Credit
Facility”); and the BTMUCC Credit Facility imposes restrictions on our ability
to freely access the capital markets. In addition, the BTMUCC Credit Facility
imposes various restrictions on the use of cash generated by operations.
Accordingly, we continue to have uncertainty with respect to our ability to meet
non-ordinary course expenses or expenses beyond certain total annual limits,
which are not permitted to be paid out of cash generated from operations under
the terms of the BTMUCC Credit Facility, but instead must be paid out of cash on
hand. These limits do not apply to certain expenses associated with our
manufacturing facility such as cost of goods. 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 certain expenditures, which may
negatively impact our operations. Alternatively, we would seek to restructure or
refinance our debt, but there can be no guarantee that BTMU Capital Corporation
(“BTMUCC”) would agree to any further restructuring or refinancing plans. (See
Note 7 – Long-Term Debt
to Unaudited Condensed Consolidated Financial Statements for a description of
the BTMUCC Credit Facility.)
Our
current projections indicate that we may exceed the expense limits noted above
prior to our December 31, 2009 year end. We are in discussions with BTMUCC to
increase the 2009 expense limits. However, if our lender declines to increase
our expense limits, we may be required to defer payment of some 2009 expenses
until the expense limits reset in January 2010 and/or use some or all of our
available cash on hand in December to cover expenses.
The
accompanying Unaudited Condensed 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.
(d) 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 intangible assets and estimated useful lives of
identifiable intangible assets, accrued revenues, allowance for doubtful
accounts, 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.
(2)
ACCOUNTING POLICIES AND PRONOUNCEMENTS
(a) CASH
AND CASH EQUIVALENTS
Cash
equivalents include all highly liquid investments purchased with original
maturities of ninety days or less. Cash and cash equivalents consisted of the
following (in thousands):
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
Cash
|
|
$
|
5,768
|
|
|
$
|
6,632
|
|
Money
market account
|
|
|
2,269
|
|
|
|
1,661
|
|
Total
|
|
$
|
8,037
|
|
|
$
|
8,293
|
|
The cash
balances at June 30, 2009 and December 31, 2008 include approximately $4.4
million and $5.1 million, respectively, of cash received from franchisees and
licensees that is being held in “lockbox accounts” established in connection
with the BTMUCC Credit Facility to perfect the lender’s security interest in
such cash receipts. These funds are applied to the principal and interest on the
debt associated with our BTMUCC Credit Facility on a monthly basis, then
released from the “lockbox accounts” to the Company for general corporate
purposes, and any excess is utilized to prepay the debt. See Note 7 – Long-Term
Debt.
(b) TRADE
RECEIVABLES, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade
receivables consist of amounts the Company expects to collect from franchisees
for royalties, franchise fees and cookie dough sales, and from licensees for
license fees, net of allowance for doubtful accounts of approximately $1.5
million as of June 30, 2009 and $1.4 million as of December 31, 2008. 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
Unaudited Condensed Consolidated Statements of Cash Flows.
(c)
INVENTORY
We value
our inventories related to cookie dough manufacturing at the lower of cost
(computed on the first-in, first-out method) or net realizable
value.
Inventories
consisted of the following at (in thousands):
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
Raw
materials
|
|
$
|
756
|
|
|
$
|
728
|
|
Finished
goods
|
|
|
512
|
|
|
|
504
|
|
Total
|
|
$
|
1,268
|
|
|
$
|
1,232
|
|
(d) FAIR
VALUE OF FINANCIAL INSTRUMENTS
Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,”
which defines fair value and establishes a framework for measuring fair value
and expands disclosures about fair value measurements. The effective date of
SFAS No. 157 to fiscal years beginning after November 15, 2007 is for financial
assets and financial liabilities only.
The
determination of the applicable level within the hierarchy of a particular asset
or liability depends on the inputs used in valuation as of the measurement date,
notably the extent to which the inputs are market-based (observable) or
internally derived (unobservable). The three levels are defined as
follows:
|
•
|
Level 1 —
inputs to the valuation methodology based on quoted prices (unadjusted)
for identical assets or liabilities in active
markets.
|
|
•
|
Level 2 —
inputs to the valuation methodology based on quoted prices for similar
assets and liabilities in active markets for substantially the full term
of the financial instrument; quoted prices for identical or similar
instruments in markets that are not active for substantially the full term
of the financial instrument; and model-derived valuations whose inputs or
significant value drivers are
observable.
|
|
•
|
Level 3 —
inputs to the valuation methodology based on unobservable prices or
valuation techniques that are significant to the fair value
measurement.
|
On
January 1, 2009 as required, we adopted SFAS No. 157 for our nonfinancial assets
and liabilities that are not required to be measured at fair value on a
recurring basis. Our nonfinancial assets and liabilities include our
identifiable intangible assets. The adoption of SFAS No. 157 for our
nonfinancial assets and liabilities did not have a significant effect on our
results of operations or financial condition.
A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement.
The
carrying amounts of cash and cash equivalents and restricted cash approximate
their fair values due to their short-term nature (Level
1). The fair value of debt, as included in Note 7 – Long-Term Debt, is based on
the fair value of similar instruments as well as model-derived valuations whose
inputs are observable (Level 2). These inputs include estimates of the Company’s
credit rating and the returns required for similar instruments by market
participants. Management used these inputs to determine discount factors ranging
from 13.5% to 40.0% and applied these factors to the forecasted payment streams
to determine the fair value of debt as of June 30, 2009. A 1% increase in the
discount factors would result in a decrease in the fair value of approximately
$2.9 million.
(e)
PROPERTY AND EQUIPMENT, NET
Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation
is calculated using the straight-line method over the estimated useful lives of
the assets, which range from three to twenty-five 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.
(f)
TRADEMARKS AND OTHER INTANGIBLE ASSETS
Trademarks
represent the value of expected future royalty income associated with the
ownership of the Company’s brands, namely, the Great American Cookies,
MaggieMoo’s, Marble Slab Creamery, Pretzel Time, Pretzelmaker and The Athlete’s
Foot (TAF) trademarks. Other intangible assets are comprised primarily of the
customer/supplier relationship with Great American Cookies franchisees, which
are non-amortizable, as well as franchise agreements, which 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. Trademarks and the
customer/supplier relationship 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 and other non-amortizable intangible assets to determine if facts and
circumstances have changed, requiring a re-evaluation of the estimated value. We
capitalize the material costs associated with registering and maintaining
trademarks.
(g)
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.
(h)
REVENUE RECOGNITION
Royalties
represent periodic 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 revenue, 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 (or
the first franchised store under an area development agreement). The opening of
a franchisee’s store is dependent on, among other things, real estate
availability, construction build-out, and financing, which can cause variability
of the revenues associated with franchise fees. Licensing revenues represent
amounts earned from the use of the Company’s trademarks and are recognized as
revenues when they are earned on an accrual basis. Revenues from the
sale of cookie dough that the Company produces and sells to certain franchisees
are recognized at the time of shipment and are classified in factory
revenues.
(i)
ADVERTISING
The
Company maintains advertising funds in connection with our franchise brands
(“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 generally require domestic franchisees to
remit up to 2% of gross sales to the applicable Marketing Fund. These funds are
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. 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 that the Marketing 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 Unaudited Condensed Consolidated Financial Statements. Franchisee
contributions to these Marketing Funds totaled approximately $1.1 million and
$1.3 million for the three month periods ended June 30, 2009 and 2008,
respectively. For the six month periods ended June 30, 2009 and 2008, franchisee
contributions to these Marketing Funds totaled approximately $2.2 million and
$2.3 million, respectively. At June 30, 2009, the Unaudited Condensed
Consolidated Financial Statements of the Company included loans and advances
receivable of $1.5 million due from The Athlete’s Foot Marketing Support Fund,
LLC (“TAF MSF”). As of June 30, 2009 and 2008, respectively, the Company did not
have any outstanding loans and advances from any other Marketing Fund. In
December 2008, the Company also established a matching contribution program with
the TAF MSF whereby the Company has agreed to match certain franchisee
contributions, not to exceed $1.2 million over 12 quarters. For the three month
and six month periods ended June 30, 2009, the Company contributed approximately
$0.1 million and $0.2 million, respectively, in matching funds to the TAF
MSF.
(j) INVESTMENTS
IN UNCONSOLIDATED ENTITIES
The
Company has an investment in Shoe Box Holdings, LLC (See Note 5 – Joint Venture Investments – Shoebox
New York). Shoe Box Holdings, LLC is an unconsolidated joint venture, the
purpose of which is to franchise high-quality and high-fashion shoes. The equity
method of accounting is used for unconsolidated entities over which the Company
has significant influence, generally representing ownership interests of at
least 20% and not more than 50%. Under the equity method of accounting, the
Company recognizes our proportionate share of the profits and losses of the
entity. The joint venture agreement specifies the distributions of capital,
profit and losses.
(k)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
For the
six months ended June 30, 2009, the Company released approximately 281,000
shares of our common stock (valued at $10.51 per share at the time of issuance)
for an aggregate value as calculated at the time of issuance of approximately
$3.0 million in connection with the 2007 acquisition of
MaggieMoo’s.
For the
six months ended June 30, 2008, the Company issued 1.1 million shares of our
common stock (valued at $4.23 per share at the time of issuance) and 300,000
warrants with an aggregate value of $5.6 million as calculated at the time of
issuance in connection with the acquisition of Great American Cookies. The
Company also issued 200,000 warrants to BTMUCC with an aggregate value of
$0.9 million at the time of issuance in connection with the financing
of the acquisition of Great American Cookies.
On
February 29, 2008, the Company applied restricted cash of approximately $3.7
million to pay principal and interest on a note issued in connection with the
acquisition of Marble Slab. The restricted cash was held in escrow and was paid
directly to the noteholders.
(l)
RECENT ACCOUNTING PRONOUNCEMENTS
In April
2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS
No. 157-4”), which provides additional guidance for estimating fair value in
accordance with SFAS No. 157, “Fair Value Measurements,”
when the volume and level of activity for the asset or liability have
significantly decreased. FSP FAS No. 157-4 includes guidance on identifying
circumstances that indicate a transaction is not orderly. FSP FAS No. 157-4 is
effective for the interim reporting period ending June 30, 2009. FSP FAS 157-4
does not require disclosures in earlier periods presented for comparative
purposes at initial adoption, and, in periods after initial adoption,
comparative disclosures are only required for periods ending after initial
adoption. The adoption of FSP FAS No. 157-4 did not have a material impact on
the financial condition or results of operations of the Company.
In April
2009, the FASB issued FSP FAS No. 107-1 and Accounting Principles Board (“APB”)
28-1 (“FSP FAS No. 107-1 and APB No. 28-1”), “Interim Disclosures about Fair Value
of Financial Instruments,” which amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” and requires disclosures about the fair value of
financial instruments for interim reporting periods of publically traded
companies as well as in annual financial statements. FSP FAS No. 107-1 and APB
No. 28-1 also amends APB Opinion No. 28, “Interim Financial Reporting,”
to require those disclosures in summarized financial information at interim
reporting periods. FSP FAS No. 107-1 and APB No. 28-1 are effective for interim
reporting periods ending after June 15, 2009. FSP FAS No. 107-1 and APB No. 28-1
do not require disclosures for earlier periods presented for comparative
purposes at initial adoption, and, in periods after initial adoption,
comparative disclosures are only required for periods ending after initial
adoption.
In May
2009 the FASB issued SFAS No. 165, “Subsequent Events,” which
formalizes the recognition and non-recognition of subsequent events and the
disclosure requirements not addressed in other generally accepted accounting
guidance. This statement is effective for the Company’s financial statements
beginning with the quarterly period ended on June 30, 2009. The adoption of SFAS
No. 165 did not have an impact on the financial condition or results of
operations of the Company.
In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R),” which changes the determination of when a variable
interest entity (“VIE”) should be consolidated. Under SFAS No. 167,
the determination of whether to consolidate a VIE is based on the power to
direct the activities of the VIE that most significantly impact the VIE’s
economic performance together with either the obligation to absorb losses or the
right to receive benefits that could be significant to the VIE, as well as the
VIE’s purpose and design. This statement is effective for fiscal years
beginning after November 15, 2009. We do not believe the adoption of
this pronouncement will have a material impact on the financial condition or
results of operations of the Company.
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162.” SFAS No. 168 states that the
FASB Accounting Standards Codification will become the source of authoritative
U.S. GAAP recognized by the FASB. Once effective, the Codification’s content
will carry the same level of authority, effectively superseding SFAS
No. 162. The GAAP hierarchy will be modified to include only two levels of
GAAP: authoritative and non-authoritative. This statement will be effective for
the Company’s financial statements beginning with the interim period ending
September 30, 2009. We do not believe the adoption of SFAS No. 168 will have a
material impact on the financial condition or results of operations of the
Company.
(3) PROPERTY AND EQUIPMENT,
NET
Property
and equipment, net, consists of the following (in thousands):
|
|
Estimated
Useful Lives
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
Furniture
and fixtures
|
|
7 -
10 Years
|
|
$
|
749
|
|
|
$
|
745
|
|
Computers
and equipment
|
|
3 -
5 Years
|
|
|
1,655
|
|
|
|
1,591
|
|
Software
|
|
3
Years
|
|
|
714
|
|
|
|
699
|
|
Building
|
|
25
Years
|
|
|
966
|
|
|
|
966
|
|
Land
|
|
Unlimited
|
|
|
263
|
|
|
|
263
|
|
Leasehold
improvements
|
|
Term of Lease
or
Economic
Life
|
|
|
3,039
|
|
|
|
2,937
|
|
Total
property and equipment
|
|
|
|
|
7,386
|
|
|
|
7,201
|
|
Less
accumulated depreciation and amortization
|
|
|
|
|
(4,108
|
)
|
|
|
(2,806
|
)
|
Property
and equipment, net of accumulated depreciation
|
|
|
|
$
|
3,278
|
|
|
$
|
4,395
|
|
Depreciation
and amortization expense related to property and equipment for the three months
ended June 30, 2009 and 2008 was $585,000 and $375,000, respectively.
Depreciation and amortization expense related to property and equipment for the
six months ended June 30, 2009 and 2008 was $1,302,000 and $587,000,
respectively.
(4)
TRADEMARKS AND OTHER INTANGIBLE ASSETS
In
accordance with SFAS No. 142, the Company tests 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. 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.
Trademarks
and other non-amortizable assets by brand as of June 30, 2009 and December 31,
2008 are as follows (in thousands):
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
The
Athlete's Foot
|
|
$
|
11,350
|
|
|
$
|
11,350
|
|
Great
American Cookies
|
|
|
44,891
|
|
|
|
44,891
|
|
Marble
Slab Creamery
|
|
|
9,062
|
|
|
|
9,062
|
|
MaggieMoo's
|
|
|
4,194
|
|
|
|
4,194
|
|
Pretzelmaker
|
|
|
8,925
|
|
|
|
8,925
|
|
Total
|
|
$
|
78,422
|
|
|
$
|
78,422
|
|
Other
non-amortizable intangible assets consist of the customer/supplier relationships
related to Great American Cookies franchisees.
Other
amortizable intangible assets by brand as of June 30, 2009 and December 31, 2008
are as follows (in thousands):
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
The
Athlete's Foot
|
|
$
|
2,600
|
|
|
$
|
2,600
|
|
Great
American Cookies
|
|
|
780
|
|
|
|
780
|
|
Marble
Slab Creamery
|
|
|
1,229
|
|
|
|
1,229
|
|
MaggieMoo's
|
|
|
654
|
|
|
|
654
|
|
Pretzel
Time
|
|
|
1,322
|
|
|
|
1,322
|
|
Pretzelmaker
|
|
|
788
|
|
|
|
788
|
|
Total
Other Intangible Assets
|
|
|
7,373
|
|
|
|
7,373
|
|
Less:
Accumulated Amortization
|
|
|
(1,705
|
)
|
|
|
(1,215
|
)
|
Total
|
|
$
|
5,668
|
|
|
$
|
6,158
|
|
Other
amortizable intangible assets are comprised primarily of franchise agreements
and the Pretzel Time trademarks. The Pretzel Time trademarks became amortizable
during third quarter of 2008 as a result of the Company’s plan to consolidate
the Pretzel Time brand under the Pretzelmaker brand. These other intangible
assets 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 three months ended June 30, 2009 and 2008 was $245,000 and
$299,000, respectively. Total amortization expense recorded by the Company for
the six months ended June 30, 2009 and 2008 was $490,000 and $578,000,
respectively.
The
following table presents the future amortization expense (in thousands) expected
to be recognized over the amortization period of the other intangible assets
outstanding as of June 30, 2009:
|
|
Amortization
Period
|
|
|
For the six
months ended
December 31,
|
|
|
For the year ended December 31,
|
|
|
|
(Years)
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
The
Athlete's Foot
|
|
|
20 |
|
|
$ |
65 |
|
|
$ |
130 |
|
|
$ |
130 |
|
|
$ |
130 |
|
|
$ |
130 |
|
|
$ |
1,669 |
|
Great
American Cookies
|
|
|
7 |
|
|
|
56 |
|
|
|
111 |
|
|
|
111 |
|
|
|
111 |
|
|
|
111 |
|
|
|
121 |
|
Marble
Slab
|
|
|
20 |
|
|
|
31 |
|
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
811 |
|
MaggieMoo's
|
|
|
20 |
|
|
|
16 |
|
|
|
33 |
|
|
|
33 |
|
|
|
33 |
|
|
|
33 |
|
|
|
430 |
|
Pretzel
Time
|
|
|
5 |
|
|
|
175 |
|
|
|
225 |
|
|
|
225 |
|
|
|
36 |
|
|
|
- |
|
|
|
- |
|
Pretzelmaker
|
|
|
5 |
|
|
|
83 |
|
|
|
166 |
|
|
|
166 |
|
|
|
53 |
|
|
|
- |
|
|
|
- |
|
Total
Amortization
|
|
|
|
|
|
$ |
426 |
|
|
$ |
726 |
|
|
$ |
726 |
|
|
$ |
424 |
|
|
$ |
335 |
|
|
$ |
3,031 |
|
(5)
JOINT VENTURE INVESTMENT – SHOEBOX NEW YORK
Shoe Box
Holdings, LLC is a joint venture among the Company, the VCS Group, LLC (“VCS”),
a premier women's fashion footwear company, and TSBI Holdings, LLC (“TSBI”), the
originator of The Shoe Box, a multi-brand shoe retailer based in New York. In
January 2008, Shoe Box Holdings, LLC acquired the trademarks and other
intellectual property of TSBI for $500,000. 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. TSBI
contributed its knowledge and expertise in retail operations. Until the Company
and VCS are re-paid their respective initial investments of $725,000, the
Company and VCS each owns 50% of the capital of the joint venture entity and
each receive 50% of the profits and losses. Once the Company and VCS are
re-paid, each party is entitled to share equally in joint venture entity
profits.
A wholly
owned subsidiary of Shoe Box Holdings, LLC holds the acquired intellectual
property of TSBI 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.
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 the three month periods ended June 30, 2009 and 2008, NFM
received management fees of approximately $34,000 and $138,000, respectively,
which is included in the Company’s operating income. During the six month
periods ended June 30, 2009 and 2008, NFM received management fees of
approximately $108,000 and $272,000, respectively.
The joint
venture, through its wholly owned subsidiary, executed in the six month period
ended June 30, 2009, franchise agreements for the development of stores in
Kuwait and Aruba. There are currently eight stores open in the United States and
five stores open internationally in Vietnam, South Korea and
Kuwait.
The
Company’s net investment in this joint venture was $389,000 and $87,000 at June
30, 2009 and December 31, 2008, respectively. The Company recorded equity loss
of $7,000 and $116,000 for the three months ending June 30, 2009 and 2008,
respectively. The Company recorded equity income (loss) of $260,000 and
$(220,000) for the six months ending June 30, 2009 and 2008, respectively. The
Company also received excess distributions for which it has recorded a $42,000
reimbursement payable to the joint venture which increased net investment by the
same amount.
(6)
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND RESTRUCTURING ACCRUALS
(a)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following (in
thousands):
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
Accounts
payable
|
|
$
|
4,819
|
|
|
$
|
5,883
|
|
Accrued
interest payable
|
|
|
246
|
|
|
|
353
|
|
Accrued
professional fees
|
|
|
361
|
|
|
|
901
|
|
Deferred
rent - current portion
|
|
|
51
|
|
|
|
80
|
|
Accrued
compensation and benefits
|
|
|
310
|
|
|
|
106
|
|
Income
taxes
|
|
|
410
|
|
|
|
429
|
|
Refundable
franchise fees and gift cards
|
|
|
33
|
|
|
|
24
|
|
All
other
|
|
|
1,462
|
|
|
|
1,444
|
|
Total
accounts payable and accrued expenses
|
|
$
|
7,692
|
|
|
$
|
9,220
|
|
(b)
RESTRUCTURING ACCRUAL
In 2008,
in conjunction with cost cutting efforts and the sales of the Waverly and Bill
Blass brands, we reduced the staff in the New York corporate office. The Company
recorded charges to earnings from continuing operations related primarily to
separation benefits. As the employee separation benefits are expected to be paid
within one year of the restructuring announcement, the corresponding liability
has not been discounted.
A roll
forward of the restructuring accrual is as follows (in thousands):
|
|
Employee
Separation
Benefits
|
|
|
|
|
|
Restructuring
liability as of December 31, 2008
|
|
$
|
153
|
|
|
|
|
|
|
2009
Restructuring:
|
|
|
|
|
Charges
to continuing operations
|
|
|
—
|
|
Cash
payments and other
|
|
|
(146
|
)
|
Restructuring
liability as of June 30, 2009
|
|
$
|
7
|
|
(7) LONG-TERM
DEBT
|
(a)
|
BTMUCC
Credit Facility
|
On March
12, 2007, NexCen Acquisition Corp., now NexCen Holding Corp., (“the Issuer”), a
wholly owned subsidiary of the Company, entered into agreements with BTMUCC (the
“Original BTMUCC Credit Facility”). 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”). On August 15, 2008, the Company restructured the
Original BTMUCC Credit Facility and the January 2008 Amendment whereby certain
NexCen entities entered into an amended and restated note funding, security,
management and related agreements with BTMUCC (the “Amended Credit Facility”).
The Amended Credit Facility replaced all of the agreements comprising both the
Original BTMUCC Credit Facility and the January 2008 Amendment. The Amended
Credit Facility was subsequently amended on September 11, 2008, December 24,
2008, January 27, 2009, July 15, 2009 and August 6, 2009 (as amended, the
“BTMUCC Credit Facility”).
The
BTMUCC Credit Facility is comprised of three separate tranches: the Class A
Franchise Notes, the Class B Franchise Note and the Deficiency
Note. The Company’s debt as of June 30, 2009 and December 31, 2008 is
summarized as follows (in thousands):
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
Class
A Franchise Notes
|
|
$
|
85,791
|
|
|
$
|
86,300
|
|
Class
B Franchise Note
|
|
|
41,459
|
|
|
|
41,724
|
|
Deficiency
Note
|
|
|
15,351
|
|
|
|
14,242
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
142,601
|
|
|
$
|
142,266
|
|
|
|
|
|
|
|
|
|
|
Weighted
average interest rate on variable rate debt
|
|
|
4.29
|
%
|
|
|
7.32
|
%
|
The
estimated fair value of the Company’s debt as of June 30, 2009 and December 31,
2008 was approximately $88.5 million and $101.0 million,
respectively.
Each
Class A Franchise Note is secured by substantially all of the assets of the
Issuer and each of its subsidiaries (the “Co-Issuers”) and is collectively set
to mature on July 31, 2013. The Class A Franchise Notes bear interest at LIBOR
(which in all cases under the BTMUCC 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 rate
in effect at June 30, 2009 was 4.09%.
The Class
B Franchise Note is secured by substantially all of the assets of the Issuer and
each Co-Issuer and is set to mature on July 31, 2011. As of January 20, 2009
through maturity, this note bears interest at a fixed rate of 8% per year. Prior
to a January 27, 2009 amendment to the BTMUCC Credit Facility, the Class B
Franchise Note would have borne interest at a fixed rate of 12% per year through
July 31, 2009 and then 15% per year thereafter. BTMUCC will be entitled to
receive a warrant covering up to 2.8 million shares of the Company’s common
stock if the Class B Franchise Note has not been repaid by December 31, 2009
(“Warrant Trigger Date”) with the number of shares subject to such warrant being
reduced on a pro-rata basis if less than 50% of the original principal amount of
the Class B Franchise Note remains outstanding on the Warrant Trigger Date.
Prior to the July 15, 2009 amendment, discussed below, the Warrant Trigger Date
was July 31, 2009.
The
Deficiency Note represents the amounts outstanding on the note that was backed
by the Bill Blass brand, which remained unpaid because the proceeds from the
sale of the Bill Blass brand were insufficient to pay the related note in full.
The Deficiency Note is set to mature on July 31, 2013 and bears interest at a
fixed rate of 15% per year through maturity. There is no scheduled principal
payment on the Deficiency Note until its maturity date, and interest is to be
payment-in-kind (“PIK”) to defer cash interest payments during the term of the
Deficiency Note.
The
aggregate maturities of long-term debt under the BTMUCC Credit Facility on a
calendar year basis as of June 30, 2009 were as follows (in
thousands):
|
|
Class A
|
|
|
Class B (1)
|
|
|
Deficiency Note (2)
|
|
|
Total
|
|
2009
|
|
$
|
390
|
|
|
$
|
186
|
|
|
$
|
-
|
|
|
$
|
576
|
|
2010
|
|
|
2,700
|
|
|
|
712
|
|
|
|
-
|
|
|
|
3,412
|
|
2011
|
|
|
3,390
|
|
|
|
40,561
|
|
|
|
-
|
|
|
|
43,951
|
|
2012
|
|
|
3,918
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,918
|
|
2013
|
|
|
75,393
|
|
|
|
-
|
|
|
|
28,471
|
|
|
|
103,864
|
|
Total
|
|
$
|
85,791
|
|
|
$
|
41,459
|
|
|
$
|
28,471
|
|
|
$
|
155,721
|
|
|
(1)
|
As
discussed below, on August 6, 2009, the Company paid down $5.0 million of
the Class B Franchise Note. With this payment, the principal balance of
the Class B Franchise Note now due in 2011 is approximately $35.6
million.
|
|
(2)
|
Maturities
related to the Deficiency Note include PIK interest of approximately $13.1
million.
|
On
January 27, 2009, NexCen entered into an amendment of the credit facility, which
reduced the interest rate on the Class B Franchise Note, 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 Note. In addition to the change in interest rate on the Class B
Franchise Note, 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, which would be used for measuring
compliance with loan-to-value covenants, unless requested by
BTMUCC.
On July
15, 2009, NexCen entered into another amendment of the BTMUCC Credit Facility.
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 Note is not repaid by that trigger
date.
On August
6, 2009, in connection with certain Australian and New Zealand license
agreements (see Note 14 – Subsequent Events ) NexCen
entered into an amendment of the BTMUCC Credit Facility whereby the Company used
$5.0 million of the licensing proceeds to pay down a portion of the Class B
Franchise Note and BTMUCC released its security interest in the intellectual
property that is the subject of the license agreements. The balance of the Class
B Franchise Note following the re-payment was approximately $36.4 million, and
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 our manufacturing facility to produce
products beyond cookie dough.
Although
the organization, terms and covenants of the specific borrowings have changed
significantly since their inception, the basic structure of the facility has
remained the same. The Issuer and 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 are 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 BTMUCC 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 to perfect the lender’s security interest
in the cash receipts. (See Note 2 – Accounting Policies and
Pronouncements - 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, and certain non-ordinary
course expenses or expenses beyond certain total limits must be paid out of cash
on hand. (See Note 1(c) – Liquidity and Going Concern.)
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.
Our
BTMUCC Credit Facility contains numerous reporting obligations, as well as
affirmative and negative covenants, including, among other things, restrictions
on indebtedness, liens, fundamental changes, asset sales, acquisitions, capital
and other expenditures, dividends and other payments affecting subsidiaries. The
Company’s failure to comply with the financial and other restrictive covenants
could result in a default under our BTMUCC 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 flows from operations. In addition, our
BTMUCC 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 our subsidiaries, individually or taken as a whole, (iv) the ability
of the Company or our subsidiaries to perform its respective obligations under
the loan agreements, (v) the validity or enforceability of any of the loan
documents, and (vi) 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.
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, waivers and extensions 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 service
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 and the Company’s projected
ability to meet our debt service obligations for at least the next twelve
months, we believe it is unlikely that the Company will need to seek additional
material waivers of, or otherwise default on, the covenants of our BTMUCC Credit
Facility through June 30, 2010.
The
Company does not have any remaining borrowing capacity under the BTMUCC Credit
Facility. Although we have not sought additional equity or debt financing to
date (and BTMUCC’s written consent would be required to do so other than with
respect to equity financing of up to $10 million), we review from time to time
our financing opportunities for suitable options.
Certain
costs incurred in connection with the Original BTMUCC Credit Facility and the
Amended Credit Facility are being amortized over the term of the loan using the
effective interest method. Certain other third party costs associated with
various amendments to the Original BTMUCC Credit Facility, including the January
2008 Amendment, the Amended Credit Facility and all subsequent amendments to
date, are expensed as incurred and included in the Consolidated Statements of
Operations as “Financing Charges.”
|
(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.
During
2007, the Company assumed direct lease obligations with respect to certain
company-owned and operated MaggieMoo’s stores. The Company also assumed certain
guarantees for leases related to certain MaggieMoo’s franchised locations
(“Lease Guarantees”). In general, the Lease Guarantees are contingent guarantees
that become direct obligations of the Company if a franchisee defaults on its
lease agreement. All of the direct lease obligations and 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.
Each
Lease Guarantee was analyzed and the fair value was determined based on the
facts and circumstances of the lease and franchisee performance. Based on those
analyses, the carrying amounts of these liabilities are included in acquisition
related liabilities and are comprised as follows
(in thousands):
|
|
JUNE 30, 2009
|
|
|
DECEMBER 31, 2008
|
|
Assumed
lease obligations
|
|
$
|
452
|
|
|
$
|
891
|
|
Assumed
lease guarantees
|
|
|
337
|
|
|
|
354
|
|
Total
|
|
$
|
789
|
|
|
$
|
1,245
|
|
|
|
JUNE 30, 2009
|
|
|
DECEMBER 31, 2008
|
|
Current
|
|
$
|
490
|
|
|
$
|
765
|
|
Long
term
|
|
|
299
|
|
|
|
480
|
|
Total
|
|
$
|
789
|
|
|
$
|
1,245
|
|
At the
end of each calendar year, the Company reviews the facts and circumstances of
each direct lease obligation and Lease Guarantee. Based on this review, the
Company’s determination as to the carrying amounts of these liabilities may
change.
In
addition to the Lease Guarantees, under the terms of the Pretzel Time,
Pretzelmaker and Great American Cookies acquisitions, the Company agreed to
reimburse the respective sellers for 50% of the sellers’ obligations under
certain lease guarantees if certain franchise agreements were terminated after a
period of one year from the date of acquisition. The Company is not a guarantor
of any leases to third parties and has not recorded any amounts in the financial
statement related to these contingent obligations. The Company had a maximum
amount of undiscounted potential exposure related to these third-party
contingent lease guarantees as of June 30, 2009 and December 31, 2008, of $3.3
million and $4.1 million, respectively.
(8)
STOCK BASED COMPENSATION
Effective
October 31, 2006, the Company adopted the 2006 Equity Incentive Plan (the “2006
Plan”) to replace two of our previously existing plans. 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 previous 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 previous plans. 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 and are granted at an
exercise price no less than the fair value of the common stock on the grant
date.
Total
stock-based compensation expense was approximately $0.1 million and $0.9 million
for the three months ended June 30, 2009 and 2008, respectively. Total
stock-based compensation expense was approximately $0.2 million and $2.2 million
for the six months ended June 30, 2009 and 2008, respectively. A summary
of stock option activity under the 2006 Plan, 1999 Plan, the 2000 Plan and
warrants outstanding as of June 30, 2009 and changes during the six months then
ended is presented below:
|
|
Number of shares
(in thousands)
|
|
|
Weighted - Average
Exercise Price
|
|
Outstanding
at January 1, 2009
|
|
|
4,005 |
|
|
$ |
3.73 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Expired/Cancelled/Forfeited
|
|
|
(330 |
) |
|
|
4.41 |
|
Outstanding
at June 30, 2009
|
|
|
3,675 |
|
|
$ |
3.67 |
|
The
Company did not grant any options or warrants in the three or six month periods
ending June 30, 2009. The total unrecognized
compensation cost related to non-vested share-based compensation agreements
granted under all stock option plans as of June 30, 2009 is approximately $0.3
million. The cost is expected to be recognized over the vesting period of
approximately 2 years. Options and warrants to purchase 350,000 shares of the
Company’s common stock were at exercise prices below the June 30, 2009 closing
price of $0.18.
(9)
INCOME TAXES
The
Company’s effective tax rate from continuing operations was 11.6% and 3.4% for
the three months ended June 30, 2009 and 2008, respectively. The Company’s
effective tax rate from continuing operations was 11.4% and 2.2% for the six
months ended June 30, 2009 and 2008, respectively. The current provision for
taxes for the three and six month periods ending June 30, 2009 of $81,000 and
$155,000, respectively, is comprised primarily of foreign taxes withheld on
franchise royalties received from foreign based franchisees in accordance with
applicable tax treaties. Deferred income tax benefits of $4.1 million and $2.9
million, respectively, for the three and six month periods ending June 30, 2008
resulted from the timing differences between the amortization of trademarks and
other intangible assets for tax purposes and impairment charges recorded for
book purposes.
The
Company records income tax expense and benefits in accordance with the
provisions of SFAS No. 109, “Accounting for Income
Taxes,” and related guidance thereto, including Financial Standards
Accounting Board Interpretation No. 48, “Accounting for Income Taxes”
(“FIN 48”). 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.
The
Company has accumulated significant deferred tax assets from federal net
operating loss carry forwards, which expire at various dates through 2028, and
capital loss carry forwards, which expire at various dates between 2009 and
2011. Consistent with SFAS No. 109, the Company has provided a full valuation
allowance against our deferred tax assets for financial reporting purposes
because we have not satisfied the GAAP requirement in order to recognize the
value, namely, that there exists objective evidence of our ability to generate
sustainable taxable income from our operations.
In
addition to the time limitations that apply to the loss carry forwards noted
above, we may be subject to additional limitations on the loss carry forwards
under Section 382 of the Internal Revenue Code. 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 our deferred tax assets. As of the date of this Report,
we do not believe that we have experienced an ownership change as defined under
Section 382 resulting from transfer of shares by our existing shareholders.
However, the Company has entered into recent amendments of the BTMUCC Credit
Facility, and we are in the process of assessing the impact of those amendments
and the limitations, if any, that we may be subject to under Section 382. Until
our assessment is complete, no amounts are being presented as uncertain tax
positions under FIN 48. 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 related to uncertain tax positions as of
June 30, 2009 and December 31, 2008. Tax returns for all years after 2006 are
subject to future examination by tax authorities. The state of New York has
selected the Company’s combined tax returns for 2006 through 2008 for
examination.
If we
determine that it is more likely than not that there has been a Section 382
ownership change, there will be no impact to our financial position given the
valuation allowance recorded on our deferred tax assets. However, even if the
amendments to our credit facility did not result in a change of control as
defined by Section 382, we cannot guarantee that we will not enter into other
transactions or that transfers of stock will not occur, which may result in an
ownership change that would severely limit our ability to use our net operating
loss carry-forwards and capital loss carry-forwards to offset future taxable
income. In addition, we are, and expect that we will continue to be, 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.
(10)
PER SHARE DATA
Basic
earnings per share are computed by dividing net income (loss) for the period by
the weighted average number of common shares outstanding during the period.
Diluted earnings 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. The dilutive effects of options, warrants
and their equivalents are computed using the “treasury stock”
method.
Information
relating to the calculation of earnings per share is summarized as
follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars are in thousands, except per share
data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
loss
|
|
$ |
(416 |
) |
|
$ |
(195,849 |
) |
|
$ |
(1,281 |
) |
|
$ |
(201,154 |
) |
Weighted-average
shares outstanding-basic and diluted
|
|
|
56,952 |
|
|
|
56,621 |
|
|
|
56,812 |
|
|
|
56,444 |
|
Loss
per share – basic and diluted from continuing operations
|
|
$ |
(0.01 |
) |
|
$ |
(1.99 |
) |
|
$ |
(0.03 |
) |
|
$ |
(2.10 |
) |
Income
(loss) per share – basic and diluted from discontinued
operations
|
|
$ |
0.00 |
|
|
$ |
(1.47 |
) |
|
$ |
0.00 |
|
|
$ |
(1.45 |
) |
Net
loss per share – basic and diluted
|
|
$ |
(0.01 |
) |
|
$ |
(3.46 |
) |
|
$ |
(0.03 |
) |
|
$ |
(3.55 |
) |
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 of 150,000 shares and warrants of 200,000 shares of the Company’s
common stock outstanding during the three and six month periods ended June 30,
2009 have been excluded from the calculation of diluted net loss per share
because their inclusion would also be anti-dilutive. Options of 881,000 shares and warrants
of 200,000 shares of the Company’s common stock outstanding during the three and
six month periods ended June 30, 2008 have been excluded from the calculation of
diluted net loss per share because their inclusion would also be
anti-dilutive.
(11)
RELATED PARTY TRANSACTIONS
The
Company receives legal services from Kirkland & Ellis LLP, which is
considered a related party because a partner at that firm, George P. Stamas, is
a member of the Company’s Board of Directors. Expenses related to Kirkland &
Ellis LLP for the three months ended June 30, 2009 and 2008, were approximately
$117,000, and $469,000, respectively. Expenses related to Kirkland & Ellis
LLP for the six months ended June 30, 2009 and 2008, were approximately
$268,000, and $739,000, respectively. As of June 30, 2009 and December 31, 2008,
the Company had outstanding payables due to Kirkland & Ellis LLP of
approximately $832,000 and $989,000, respectively.
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. The Company previously 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 June 30, 2009 and December 31, 2008,
the Company had receivable balances of $1.5 million and $1.7 million from the
TAF MSF, respectively. The Company recorded interest income earned from the fund
in the amounts of $20,000 and $27,000 for the three months ended June 30, 2009
and 2008, respectively. The Company recorded interest income earned from the
fund in the amounts of $42,000 and $56,000 for the six months ended June 30,
2009 and 2008, respectively. In December 2008, the Company also established a
matching contribution program with the TAF MSF whereby the Company has agreed to
match certain franchisee contributions, not to exceed $1.2 million over 12
quarters. For the three months ended June 30, 2009, the Company contributed
approximately $0.1 million in matching funds to the TAF MSF. For the six months
ended June 30, 2009, the Company contributed approximately $0.2 million in
matching funds to the TAF MSF.
(12) COMMITMENTS AND
CONTINGENCIES
(a) LEGAL
PROCEEDINGS
Securities Class
Action. A total of four putative securities class actions were filed in
May, June and July 2008 in the United States District Court for Southern
District of New York against NexCen Brands and certain of our former officers
and a current director for alleged violations of the federal securities laws. On
March 5, 2009, the court consolidated the actions under the caption, In re NexCen Brands, Inc. Securities
Litigation, No. 08-cv-04906, and appointed Vincent Granatelli as lead
plaintiff and Cohen, Milstein, Hausfeld & Toll, P.L.L.C. as lead counsel. On
August 24, 2009, plaintiff filed a Consolidated Amended Class Action Complaint.
Plaintiff alleges that defendants violated federal securities laws by misleading
investors in the Company’s public filings and statements during a putative class
period that begins on March 13, 2007, when the Company announced the
establishment of the credit facility with BTMUCC, and ends on May 19, 2008, when
the Company’s stock fell in the wake of the Company’s disclosure of the
previously undisclosed terms of a January 2008 amendment to the credit facility,
the substantial doubt about the Company’s ability to continue as a going
concern, the Company’s inability to timely file its periodic report and the
expected restatement of its Annual Report on Form 10-K for the year ended
December 31, 2007, initially filed on March 21, 2008 (the “May 19, 2008
disclosure”). The consolidated amended complaint asserts claims under Section
10(b) of the Exchange Act and SEC Rule 10b-5, and also asserts that the
individual defendants are liable as controlling persons under Section 20(a) of
the Exchange Act. Plaintiff seeks damages and attorneys’ fees and costs. On
October 8, 2009, the Company filed a motion to dismiss the consolidated amended
complaint in accordance with the scheduling order entered by the court. Under
the scheduling order, plaintiff must file his opposition to the motion to
dismiss by November 23, 2009, and the Company must file its reply by December 8,
2009.
Shareholder Derivative
Action. A federal shareholder derivative action premised on essentially
the same factual assertions as the federal securities actions also was filed in
June 2008 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, 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 June 9, 2009, plaintiff requested transfer of the
derivative case to the court presiding over the securities class action case.
This request was denied. On August 24, 2009, plaintiff filed the first amended
shareholder derivative complaint. The individually named Directors and
former-Directors (“Director Defendants”) filed a motion to dismiss the amended
complaint on October 8, 2009 in accordance with the scheduling order entered by
the court. Under the scheduling order, Plaintiff must file her opposition to the
motion to dismiss by November 23, 2009, and the Director Defendants must file
their reply by December 23, 2009.
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 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 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 action.
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
class action securities litigation pending in the Southern District of New York.
Plaintiff filed a motion to lift the stay on September 16, 2009, which the
California court denied on October 8, 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 was among the hundreds of defendants named
in a series of securities class action lawsuits brought in 2001
against issuers and underwriters of technology stocks that had their initial
public offerings during the late 1990’s. These cases were consolidated and
pending in the United States District Court for the Southern District of New
York 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 claimed 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 alleged 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 sought unspecified
monetary damages and rescission. NexCen reserved $465,000 for the estimated
exposure for this matter.
In March
2009, the parties, including NexCen, reached a preliminary global settlement of
all 309 coordinated class actions cases under which defendants would pay a total
of $586 million (the “Settlement Amount”) to the settlement class in exchange
for plaintiffs releasing all claims against them. Under the proposed terms of
this settlement, NexCen’s portion of the Settlement Amount would be paid by our
insurance carrier. In October 2009, the district court issued a decision
granting final approval of the settlement. Because NexCen has no out-of-pocket
liability under the approved settlement, we will no longer maintain the reserve
of $465,000. Because the final approval of the settlement represents new
information regarding a matter existing at the balance sheet date, we reversed
the reserve as of June 30, 2009, and the reversal is reflected as income from
discontinued operations in the Unaudited Condensed Consolidated Statement of
Operations for the three and six month periods ended June 30, 2009.
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.
(b)
CONTRACTUAL COMMITMENTS
In
connection with our existing businesses and the businesses sold in 2008, the
Company is obligated under various leases for office space in New York City and
Norcross, Georgia and other locations which expire at various dates through
2017. As of the date of this Report, we have subleased or assigned all of the
Company’s lease obligations, other than for our headquarters in New York City
and our NFM facility in Norcross, Georgia.
(c)
LONG-TERM RESTRICTED CASH
Total
long-term restricted cash of $0.7 million as of June 30, 2009 is for security
deposits relating to letters of credit that secure our NFM facility in Norcross,
Georgia and the Company’s headquarters in New York City.
(13)
DISCONTINUED OPERATIONS
In
accordance with SFAS No. 144, the following table details the income
statement for the Company’s Consumer Branded Products business that was sold
during the quarter ended December 31, 2008 (in thousands, except per share
data).
|
|
Three Months
Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
$ |
- |
|
|
$ |
3,447 |
|
|
$ |
- |
|
|
$ |
9,441 |
|
Operating
costs and expenses
|
|
|
361 |
|
|
|
(102,083 |
) |
|
|
227 |
|
|
|
(106,902 |
) |
Operating
(loss) income
|
|
|
361 |
|
|
|
(98,636 |
) |
|
|
227 |
|
|
|
(97,461 |
) |
Interest
and other expense, net
|
|
|
1 |
|
|
|
(1,121 |
) |
|
|
2 |
|
|
|
(1,968 |
) |
Minority
interest
|
|
|
- |
|
|
|
1,814 |
|
|
|
- |
|
|
|
2,386 |
|
(Loss)
income before income taxes
|
|
|
362 |
|
|
|
(97,943 |
) |
|
|
229 |
|
|
|
(97,043 |
) |
Current
tax
|
|
|
- |
|
|
|
(163 |
) |
|
|
- |
|
|
|
(163 |
) |
Deferred
tax benefit
|
|
|
- |
|
|
|
15,079 |
|
|
|
- |
|
|
|
15,246 |
|
Net
(loss) income from discontinued operations
|
|
$ |
362 |
|
|
$ |
(83,027 |
) |
|
$ |
229 |
|
|
$ |
(81,960 |
) |
Income
(loss) per share (basic and diluted) from discontinued
operations
|
|
$ |
0.00 |
|
|
$ |
(1.47 |
) |
|
$ |
0.00 |
|
|
$ |
(1.45 |
) |
Weighted
average shares outstanding – basic and diluted
|
|
|
56,952 |
|
|
|
56,621 |
|
|
|
56,812 |
|
|
|
56,444 |
|
(14)
SUBSEQUENT EVENTS
On July
15, 2009, NexCen entered into an amendment of the BTMUCC Credit Facility. 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 Note is not repaid by that trigger date. For additional
details regarding the BTMUCC Credit Facility, see Note 7 – Long-Term Debt to our
Unaudited Condensed Consolidated Financial Statements.
On August
6, 2009, NexCen, through our wholly owned subsidiary TAF Australia, LLC
(“TAFA”), 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 Ltd., 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. TAFA 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 BTMUCC Credit Facility whereby the Company used
$5.0 million of the licensing proceeds to pay down a portion of the Class B
Franchise Note and BTMUCC released its security interest in the intellectual
property that is the subject of the license agreements. 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 our
manufacturing facility to produce products beyond cookie dough. For
additional details regarding the BTMUCC Credit Facility, see Note 7 – Long-Term Debt to our
Unaudited Condensed Consolidated Financial Statements.
In
October 2009, the Company resolved a pending litigation for which we had
reserved $465,000. The Company had been among the hundreds of defendants named
in a series of class action lawsuits seeking damages due to alleged
violations of securities law, which was consolidated and pending in the United
States District Court for the Southern District of New York under the caption
In Re Initial Public Offerings
Litigation, Master File 21 MC 92 (SAS). In March 2009, the parties,
including NexCen, reached a preliminary global settlement of all 309 coordinated
class actions cases. Under the proposed terms of this global settlement,
NexCen’s portion of the settlement amount would be paid by our insurance
carrier. In October 2009, the district court issued a decision granting final
approval of the settlement. Because NexCen has no out-of-pocket liability under
the approved settlement, we will no longer maintain the reserve of $465,000.
Because the final approval of the settlement represents new information
regarding a matter existing at the balance sheet date, we reversed the reserve
as of June 30, 2009, and the reversal is reflected in income from discontinued
operations in the Unaudited Condensed Consolidated Statement of Operations for
the three and six month periods ended June 30, 2009. For additional details
regarding this litigation, see Note 12(a) – Legal Proceedings to our
Unaudited Condensed Consolidated Financial Statements.
The
Company has evaluated subsequent events through November 5, 2009,
which is the date these financial statements are issued.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (MD&A)
FORWARD-LOOKING
STATEMENTS
In this
Report, we make statements that are considered forward-looking statements within
the meaning of the Securities Exchange Act of 1934, as amended (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 throughout this
Report, in Item 1A, under the heading “Risk Factors,” of our Annual Report on
Form 10-K for the year ended December 31, 2008, and our other periodic reports
filed with the Securities and Exchange Commission. 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.
OVERVIEW
OVERVIEW
NexCen is
a strategic brand management company that owns and manages a portfolio of seven
franchised brands, operating in a single business segment: Franchising. Five of
our brands (Great American Cookies, Marble Slab Creamery, MaggieMoo’s, Pretzel
Time and Pretzelmaker) are in the 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., a wholly owned subsidiary of NexCen Brands. Our franchise
network, across all of our brands, consists of approximately 1,750 retail stores
in approximately 40 countries.
We earn
revenues primarily from the franchising, royalty, licensing and other
contractual fees that third parties pay us for the right to use the intellectual
property associated with our brands and from the sale of cookie dough and other
ancillary products to our Great American Cookies franchisees.
We
discuss our business in detail in Item 1-Business of our 2008 10-K, and we
discuss the risks affecting our business in Item 1A-Risk Factors of our 2008
10-K.
The
Company’s financial condition and operating results for the three and six month
periods ended June 30, 2009 reflect the changes that the Company implemented to
address the financial and operational challenges that we faced in 2008. By the
end of 2008, we improved our cash management, reduced operating expenses,
restructured our credit facility, sold our Waverly and Bill Blass businesses,
reduced our outstanding debt, and ceased all activities of UCC Capital. As a
result of these changes, for the three and six month periods ended June 30, 2009
as compared to the same periods in 2008, the Company generated positive cash
flow from operations, operating income instead of operating loss, and
significantly decreased our net loss.
The
following factors impacted our operating results for the three and six month
periods ended June 30, 2009 compared to the same periods in 2008:
|
·
|
We
acquired Great American Cookies on January 28, 2008. Thus, our
financial results for the six months ended June 30, 2009 reflect a full
period of ownership of Great American Cookies, whereas our financial
results for the six months ended June 30, 2008 do not.
|
|
·
|
We
acquired our joint venture interest in Shoebox New York on January 15,
2008. Fees paid to the Company by the joint venture to manage the brand
are reflected in the Company’s revenues. The Company’s portion of income
or expense from the joint venture investment is included in non-operating
income (expense).
|
|
·
|
We
report the Bill Blass, Waverly and UCC Capital businesses as discontinued
operations for all periods
presented.
|
|
·
|
We
disclosed issues related to our debt structure in May 2008 that materially
and negatively affected the Company. As a result of the events
of May 2008, we incurred significant expenses in the second quarter of
2008 that we did not incur in the second quarter of 2009, including $1.9
million in professional fees related to special investigations, $109.7
million of impairment charges related to our intangible assets, and $0.8
million in restructuring charges. Thus, our expenses in 2009 reflect the
effects of our ongoing cost reduction measures that began in May 2008 as
well as more normalized expenses.
|
CRITICAL
ACCOUNTING POLICIES
Critical
accounting policies are the accounting policies that are most important to the
presentation of our financial condition and results of operations and require
management’s most difficult, subjective or complex estimates and judgments. Our
critical accounting policies include valuation of our deferred tax assets,
valuation of goodwill, trademarks and intangible assets, valuation of
stock-based compensation and valuation of allowances for doubtful accounts.
These critical accounting policies are discussed in detail in our 2008 10-K in
Item 7 under the heading “Critical Accounting Policies.” We also discuss our
significant accounting policies in Note 2 to our Unaudited Condensed
Consolidated Financial Statements contained in this Report and in Notes 2 and 3
to our Audited Consolidated Financial Statements included in Item 8 in our 2008
10-K.
New
accounting pronouncements are discussed in Note 2 to the Unaudited Condensed
Consolidated Financial Statements contained in this Report.
COMPARISON
OF RESULTS FOR THREE MONTH PERIODS ENDED JUNE 30, 2009 AND JUNE 30,
2008
RESULTS
OF CONTINUING OPERATIONS
Royalty,
Franchise Fee, Factory, Licensing and Other Revenues
We
recognized $11.8 million in revenues for the three months ended June
30, 2009, a decrease of $0.1 million, or 1%, from $11.9 million in revenues
for the three months ended June 30, 2008. Of the $11.8 million in revenues
recognized for the three months ended June 30, 2009, $6.1 million related
to royalties, a decrease of $0.3 million, or 5%, from the 2008 comparable
quarter; $4.3 million related to factory revenues from the sales of cookie dough
and other products to our Great American Cookies franchisees, a decrease of $0.5
million, or 9%, from the 2008 comparable quarter; $1.1 million related to
franchise fees, an increase of $0.7 million, or 169%, from the 2008 comparable
quarter; and $0.3 million related to licensing and other revenues, which
approximates the 2008 comparable quarter. Other revenues consist primarily of
management fees paid to the Company from the Shoebox New York joint venture and
rebates earned from vendors with which the Company conducts
business.
We
believe the modest quarter-over-quarter decline in royalty and factory revenues
reflects the effects of the decline in general economic conditions from second
quarter of 2008 to second quarter of 2009. Royalty revenues associated with our
brands are seasonal, but the seasonality is complementary so that we generally
do not experience material seasonality in royalty revenues on an aggregate
basis. For example, our royalty revenues from our mall-based QSR’s (Great
American Cookies, Pretzel Time and Pretzelmaker) and our retail brands (TAF and
Shoebox New York) tend to be higher in the fourth quarter of the year due to
higher retail sales from higher mall traffic around the holiday season.
Conversely, royalty revenues from our ice cream brands (MaggieMoo’s and Marble
Slab Creamery) tend to be higher in the warmer months of the second and third
quarters from the higher retail sales in those months. In addition, we
anticipate slightly lower royalty revenues from TAF beginning in the third
quarter of 2009 due to our entry into long-term license agreements for the
territories of Australia and New Zealand on August 6, 2009. See Note 14 – Subsequent Events. We
received a one-time, non-refundable licensing fee of $6.2 million relating to
these licenses, and, as a result, will not receive further royalties or
franchise fees from these territories.
The
quarter-over-quarter increase in initial franchise fees is attributable to the
fact that we recognized significant initial franchise fees for Great American
Cookies in the second quarter of 2009. In contrast, we recognized no fees in the
2008 comparable quarter due to our inability to sell new franchises while we
prepared, and in some states registered, our franchise offering documents for
Great American Cookies after we acquired the brand in January 2008We believe
that the amount of initial franchise fees that we recognized in the second
quarter of 2009, while greater than those recognized in the 2008 comparable
quarter, nonetheless reflects the difficulties we have experienced in selling
new franchises in light of the challenged economic environment and the lack of
readily available credit to current and prospective franchisees who generally
depend upon financing from banks or other financial institutions in order to
construct and open new units.
Cost
of Sales
For the
three months ended June 30, 2009, the Company incurred $2.7 million in cost of
sales, a decrease of $0.3 million, or 10%, from $3.0 million from the 2008
comparable quarter. Cost of sales is comprised of raw ingredients, labor and
other direct manufacturing costs associated with our Great American Cookies
manufacturing facility. The gross profit margin on the manufacture and supply of
cookie dough and the supply of ancillary products sold through our Great
American Cookies franchised stores increased to 38% for the three months
ended June 30, 2009 from 37% for the three months ended June 30,
2008. The 1% quarter-over-quarter increase in our gross profit margin
is the result of our realizing reductions in overhead expenses and our
instituting price increases on our cookie dough in April 2008 to adjust for
certain increases to our cost of sales.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses consist of compensation, stock
compensation expense and personnel related costs, rent, facility related support
costs, travel and advertising.
For the
three months ended June 30, 2009, the Company recorded Corporate SG&A
expenses of $1.9 million, a decrease of $1.6 million, or 45%, from $3.5 million
for the three months ended June 30, 2008. The quarter-over-quarter decrease is
primarily the result of a reduction in stock compensation expense of $0.8
million, along with reductions in compensation expense due to the Company’s
corporate restructuring during second quarter 2008 and other cost reduction
efforts. The Company recorded Franchising SG&A of $3.4 million for the
three months ended June 30, 2009, a decrease of $0.9 million, or 20%, from $4.3
million for the 2008 comparable quarter. This quarter-over-quarter decrease
reflects reductions in salaries and bonuses along with reductions in travel,
entertainment, and general office expenses.
Professional
Fees
For the
three months ended June 30, 2009, the Company incurred $52,000 in professional
fees related to special investigations as compared to $1.9 million during
the three months ended June 30, 2008.
For the
three months ended June 30, 2009, the Company incurred corporate professional
fees of $0.6 million, a decrease of $0.4 million, or 35%, from $1.0 million for
the three months ended June 30, 2008. Corporate professional fees primarily
consist of legal fees associated with public reporting, compliance and
litigation (including claims arising from the same events as the special
investigations), and accounting fees related to auditing and tax services. The
Company incurred professional fees related to franchising of $0.6 million for
the three months ended June 30, 2009, an increase of $0.2 million, or 58%, from
$0.4 million for the 2008 comparable quarter. Franchising professional fees
primarily consist of legal and accounting fees associated with franchising
activities and trademark maintenance. The total professional fees incurred in
the second quarter of 2009 reflect a more normalized expense structure than the
professional fees incurred in the second quarter of 2008, which were affected by
the events of May 2008.
Impairment
of Intangible 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.
The
Company did not record any impairment charges in the three months ended June 30,
2009. For the three months ended June 30, 2008, we recorded impairment charges
totaling $109.7 million. In May 2008, the Company disclosed issues related to
our debt structure that materially and negatively affected the
Company.
Depreciation
and Amortization
Depreciation
expenses arise from property and equipment purchased for use in our operations,
including our factory. Amortization costs arise from amortizable intangible
assets acquired in acquisitions.
For the
three months ended June 30, 2009 and 2008, the Company recorded depreciation and
amortization expenses of approximately $0.9 million and $0.7 million,
respectively. The quarter-over-quarter increase primarily reflects accelerated
depreciation of corporate assets following the Company’s May 2008
restructuring.
Restructuring
Charges
The
Company did not incur restructuring charges in the three months ended June 30,
2009. In the three months ended June 30, 2008, Company recorded $0.8
million in restructuring charges primarily related to employee separation
benefits, stemming from the reduction of staff in the New York corporate
offices.
Total
Operating Expenses
Total
operating expenses for the three months ended June 30, 2009 were $10.2 million,
a decrease of $115.1 million, or 92%, from $125.3 million for the 2008
comparable quarter. This decrease reflects both the Company’s cost reduction
efforts and the more normalized operating expenses of the Company without the
expenses specific to events and circumstances of 2008.
Excluding
the special expense items that were incurred in second quarter of 2008, which
were not incurred in second quarter of 2009, namely impairment charges related
to intangible assets, professional fees related to special investigations and
restructuring charges, operating expenses for the three months ended June 30,
2009 were $2.6 million or 21% below the total operating expenses for the three
months ended June 30, 2008.
Operating
Income (Loss)
The
Company generated operating income of $1.6 million for the three months ended
June 30, 2009, an increase of $115.0 million from the operating loss of $113.4
million for the three months ended June 30, 2008. This quarter-over-quarter
increase is primarily the result of the Company’s cost reduction efforts, lack
of impairment charges and the more normalized operating expenses of the Company
without the expenses specific to the events and circumstances of May
2008.
Interest
Income
The
Company recognized interest income of $47,000 for the three months ended June
30, 2009, a decrease of $37,000, or 44%, from $84,000 for the three months ended
June 30, 2008. Interest income primarily reflects the interest earned on our
average cash balances, which decreased between the respective periods, along
with interest rates.
Interest
Expense
The
Company recorded interest expense of $2.7 million for the three months
ended June 30, 2009, an increase of $0.2 million, or 11%, from $2.5 million for
the three months ended June 30, 2008. Interest expense consists primarily of
interest incurred in connection with our borrowings related to our continuing
operations under the BTMUCC Credit Facility. Interest expense also includes, all
for the three months ended June 30, 2009 and 2008, respectively, amortization of
deferred loan costs of $241,000 and $364,000, amortization of debt discount of
$137,000 and $128,000, and imputed interest of approximately $45,000 and
$46,000, related to a long-term consulting agreement liability assumed in the
TAF acquisition, which liability expires in 2028. Interest expense of
approximately $797,000 related to the Waverly and Bill Blass businesses that we
sold in 2008 is included in discontinued operations for the three months ended
June 30, 2008. For additional details regarding the BTMUCC Credit Facility, see
Note 7 – Long-Term Debt
to our Unaudited Condensed Consolidated Financial Statements.
Financing
Charges
The
Company recovered $31,000 in financing charges as a result of obtaining
discounts on certain outstanding payables with outside attorneys during the
three months ended June 30, 2009 as compared to $0.9 million in expense during
the three months ended June 30, 2008. Financing charges consist primarily of
legal fees related to the amendments to the BTMUCC Credit Facility. In the
second quarter of 2008, the Company incurred significant legal fees related to
the restructuring of the BTMUCC Credit Facility, which was finalized in August
2008.
Other
Income (Expense)
The
Company recognized other income of $372,000 for the three months ended June 30,
2009, which included $357,000 in lease settlements and approximately $7,000 of
income from the Company’s investment in Shoebox New York. For the three months
ended June 30, 2008, the Company incurred other expense of $193,000, primarily
reflecting $117,000 in loss from the Company’s investment in Shoebox New
York.
Loss
From Continuing Operations Before Income Taxes
We
recognized loss from continuing operations before income taxes of $0.7 million
for the three months ended June 30, 2009, a decrease of $116.1 million,
from a loss of $116.8 million for the three months ended June 30, 2008. This
quarter-over-quarter decrease in loss reflects the changes to the Company’s
business, the absence of expenses specific to 2008, and our ongoing cost
reduction measures that began in 2008.
Income
Taxes – Continuing Operations
For the
three months ended June 30, 2009, the Company recorded a current provision for
income taxes of $81,000, consisting primarily of foreign taxes withheld on
franchise royalties received from foreign based franchisees in accordance with
applicable tax treaties. The Company recorded no deferred income tax expense.
Income tax benefit for the three months ended June 30, 2008 was $4.0 million,
comprised of a current provision of $107,000 and deferred tax benefit of $4.1
million resulting from impairment charges recorded for book purposes related to
intangible assets and the related reversal of deferred tax
liabilities.
The
Company computes our combined current and deferred quarterly income tax expense
or benefit based upon an estimate of the annual effective tax rate from
continuing operations. The Company’s effective tax rate from continuing
operations was approximately 11.6% and 3.4% in the second quarter of 2009 and
2008, respectively. In 2008, the Company was subject to annual combined federal
and state deferred tax expense of approximately $1.2 million, resulting
primarily from timing differences relating to the Company’s trademarks,
goodwill and other intangibles, which are amortized over fifteen years for tax
purposes but not amortized for book purposes. The deferred tax liability
resulting from these timing differences reversed by year end 2008 due to
impairment charges recorded related to the Company’s intangible
assets.
For a
further discussion of the Company’s tax situation, including deferred tax assets
and liabilities, see Note 9 – Income Taxes to our Unaudited
Consolidated Financial Statements.
Discontinued
Operations
For the
three months ended June 30, 2009, the Company recognized net income from
discontinued operations of approximately $0.4 million, resulting primarily from
the reversal of a reserve for litigation. See Note 12(a) – Legal Proceedings for further
information. There was no income tax expense incurred in discontinued operations
for the three months ended June 30, 2009. For the three months ended June 30,
2008, the Company recognized net loss from discontinued operations of $83.0
million, consisting primarily of net losses from Bill Blass and Waverly, which
comprised our Consumer Branded Products business.
COMPARISON
OF RESULTS FOR SIX MONTH PERIODS ENDED JUNE 30, 2009 AND JUNE 30,
2008
RESULTS
OF CONTINUING OPERATIONS
Royalty,
Franchise Fee, Factory, Licensing and Other Revenues
We
recognized $23.7 million in revenues for the six months ended June
30, 2009, an increase of $1.5 million, or 7%, from $22.2 million in
revenues for the six months ended June 30, 2008. Of the $23.7 million in
revenues recognized for the six months ended June 30, 2009, $12.0 million
related to royalties, an increase of $0.2 million, or 1%, from the 2008
comparable period; $8.7 million related to factory revenues, an increase of $0.9
million, or 13%, from the 2008 comparable period; $2.4 million related to
franchise fees, an increase of $0.4 million, or 21%, from the 2008 comparable
period; and $0.6 million related to licensing and other revenues, which
approximates the 2008 comparable quarter. Other revenues consist primarily of
management fees paid to the Company from the Shoebox New York joint venture and
rebates earned from vendors with which the Company conducts
business.
On a pro
forma basis, assuming that Great American Cookies was acquired on January 1,
2008, the Company’s royalty revenues for the six months ended June 30, 2008
declined approximately $0.4 million, or 3%, and factory revenues declined $0.5
million, or 6%, from the 2008 comparable period. We believe this modest decline
reflects the general downturn in the economy from 2008 to 2009. Royalty revenues
associated with our brands are seasonal, but the seasonality is complementary so
that we generally do not experience material seasonality in royalty revenues on
an aggregate basis. For example, our royalty revenues from our mall-based QSR’s
(Great American Cookies, Pretzel Time and Pretzelmaker) and our retail brands
(TAF and Shoebox New York) tend to be higher in the fourth quarter of the year
due to higher retail sales from higher mall traffic around the holiday season.
Conversely, royalty revenues from our ice cream brands (MaggieMoo’s and Marble
Slab Creamery) tend to be higher in the warmer months of the second and third
quarters from the higher retail sales in those months. In addition, we
anticipate slightly lower royalty revenues from TAF beginning in the third
quarter of 2009 due to our entry into long-term license agreements for the
territories of Australia and New Zealand on August 6, 2009. See Note 14 – Subsequent Events. We
received a one-time, non-refundable licensing fee of $6.2 million relating to
these licenses, and, as a result, will not receive further royalties or
franchise fees from these territories.
The
period-over-period increase in initial franchise fees is attributable to the
fact that we recognized significant initial franchise fees for Great American
Cookies in the six months ended June 30, 2008. In contrast, we recognized
no fees in the 2008 comparable period due to our inability to sell new
franchises while we prepared, and in some cases registered, our franchise
offering documents for Great American Cookies after we acquired the brand in
January 2008. We believe that the amount of initial franchise fees that we
recognized in the six months ended June 30, 2009, while greater than those
recognized in the 2008 comparable period, nonetheless reflects the difficulties
we have experienced in selling new franchises in light of the challenged
economic environment and the lack of readily available credit to current and
prospective franchisees who generally depend upon financing from banks or other
financial institutions in order to construct and open new units.
Cost
of Sales
For the
six months ended June 30, 2009, the Company incurred $5.5 million in cost of
sales, an increase of $0.2 million, or 4%, from $5.3 million for the 2008
comparable period. Cost of sales is comprised of raw ingredients, labor and
other manufacturing costs associated with our Great American Cookies
manufacturing facility. The period-over-period increase in cost of sales
reflects full-period results for the manufacturing facility, which we acquired
in January 2008. The gross profit margin on the manufacture and supply of cookie
dough and the supply of ancillary products sold through our Great American
Cookies franchised stores increased to 37% for the six months ended June
30, 2009 from 32% for the six months ended June 30, 2008. In 2008, we instituted
price increases on our cookie dough to adjust for certain increases to our raw
materials costs and we instituted certain expense reductions. In addition, we
recorded $234,000 in the first quarter of 2008 resulting from purchase
accounting adjustments related to inventory acquired. Together, these factors
resulted in period-over-period increase in the gross profit margin.
Selling,
General and Administrative Expenses
For the
six months ended June 30, 2009, the Company recorded Corporate SG&A expenses
of $4.0 million, a decrease of $3.8 million, or 49%, from $7.8 million for the
2008 comparable period. This period-over-period decrease is the result of a
reduction in stock compensation expense of $2.0 million, along with reductions
in compensation expense as a result of the Company’s corporate restructuring
during second quarter 2008 and other cost reduction efforts. The Company
recorded Franchising SG&A of $6.5 million for the six months ended June
30, 2009, a decrease of $2.2 million, or 24%, from $8.7 million for the 2008
comparable period. This period-over-period decrease reflects reductions in
salaries and bonuses along with reductions in travel, entertainment, and general
office expenses.
Professional
Fees
For the
six months ended June 30, 2009, the Company incurred $85,000 in professional
fees related to special investigations as compared to $1.9 million during
the six months ended June 30, 2008.
For the
six months ended June 30, 2009, the Company incurred corporate professional fees
of $1.5 million, a decrease of $0.5 million, or 26%, from $2.0 million for the
six months ended June 30, 2008. Corporate professional fees primarily consist of
legal fees associated with public reporting, compliance and litigation
(including claims arising from the same events as the special investigations),
and accounting fees related to auditing and tax services. The Company incurred
professional fees related to franchising of $1.0 million for the six months
ended June 30, 2009, an increase of $0.4 million, or 54%, from $0.6 million for
the 2008 comparable period. Franchising professional fees primarily consist of
legal and accounting fees associated with franchising activities and trademark
maintenance. The total professional fees incurred in the six months ended June
30, 2009 reflect a more normalized expense structure than the professional fees
incurred in the 2008 comparable period, which were affected by the events of May
2008.
Impairment
of Intangible 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.
The
Company did not record any impairment charges in the six months ended June 30,
2009. We recorded impairment charges totaling $109.7 million during the six
months ended June 30, 2008, specifically in the second quarter of 2008. In May
2008, the Company disclosed issues related to our debt structure that materially
and negatively affected the Company.
Depreciation
and Amortization
Depreciation
expenses arise from property and equipment purchased for use in our operations,
including our factory. Amortization costs arise from amortizable intangible
assets acquired in acquisitions.
For the
six months ended June 30, 2009 and 2008, the Company recorded depreciation and
amortization expenses of approximately $1.7 million and $1.2 million,
respectively. The period-over-period increase primarily reflects accelerated
depreciation of corporate assets following the Company’s May 2008
restructuring.
Restructuring
Charges
The
Company did not incur restructuring charges in the six months ended June 30,
2009. The Company recorded $0.8 million in restructuring charges primarily
related to employee separation benefits in the six month period ended June 30,
2008, specifically in the second quarter of 2008, stemming from the reduction of
staff in the New York corporate offices.
Total
Operating Expenses
Total
operating expenses for the six months ended June 30, 2009 were $20.3 million, a
decrease of $117.8 million, or 85%, from $138.1 million for the 2008 comparable
period. This decrease reflects the Company’s ongoing cost reduction measures
that began in May 2008, the lack of impairment charges in 2009 and the more
normalized operating expenses of the Company without the expenses specific to
events and circumstances of May 2008.
Excluding
the special expense items that were incurred in the six months ended June 30,
2008, and specifically in the second quarter of 2008, which were not incurred in
the 2009 comparable period, namely, impairment charges related to intangible
assets, professional fees related to special investigations and restructuring
charges, operating expenses for the six months ended June 30, 2009 were
approximately $5.3 million or 21% below the total operating expenses for the
2008 comparable period.
Operating
Income (Loss)
The
Company generated operating income of $3.4 million for the six months ended June
30, 2009, an increase of $119.3 million from an operating loss of $115.9 million
for the six months ended June 30, 2008. This period-over-period increase is
primarily the result of the Company’s cost reduction efforts, the lack of
impairment charges in 2009 and the more normalized operating expenses of the
Company without the expenses specific to events and circumstances of
2008.
Interest
Income
The
Company recognized interest income of $102,000 for the six months ended June 30,
2009, a decrease of $232,000, or 69%, from $334,000 for the six months ended
June 30, 2008. Interest income primarily reflects the interest earned on our
average cash balances, which decreased between the respective periods, along
with interest rates.
Interest
Expense
The
Company recorded interest expense of $5.6 million for the six months ended
June 30, 2009, an increase of $0.8 million, or 18%, from $4.8 million for the
six months ended June 30, 2008. Interest expense consists primarily of interest
incurred in connection with our borrowings related to our continuing operations
under the BTMUCC Credit Facility. Interest expense also includes, all for the
six months ended June 30, 2009 and 2008, respectively, amortization of deferred
loan costs of $484,000 and $671,000, amortization of debt discount of $137,000
and $128,000, and imputed interest of approximately $91,000 and $93,000, related
to a long-term consulting agreement liability assumed in the TAF acquisition,
which liability expires in 2028. The period-over-period increase in interest
expense reflects the increased borrowings related to our continuing
operations after the acquisition of Great American Cookies in January 2008.
Interest expense of approximately $1.7 million related to the Waverly and Bill
Blass businesses that we sold in 2008 is included in discontinued operations for
the three months ended June 30, 2008. For additional details regarding the
BTMUCC Credit Facility, see Note 7 – Long-Term Debt to our
Unaudited Condensed Consolidated Financial Statements.
Financing
Charges
The
Company incurred approximately $2,000 in net financing charges in the six months
ended June 30, 2009 as compared to $0.9 million during the six months ended June
30, 2008. Financing charges consist primarily of legal fees related to the
amendments to the BTMUCC Credit Facility. In second quarter of 2008, the Company
incurred significant legal fees related to the restructuring of the BTMUCC
Credit Facility, which was finalized in August 2008.
Other
Income (Expense)
The
Company recorded other income of $0.7 million for the six months ended June 30,
2009, which included $0.4 million in lease settlements and $0.3 million of
income from the Company’s joint venture investment in Shoebox New York. The
Company recorded other expense of $0.7 million for the six months ended June 30,
2008, primarily reflecting certain non-operating expenses attributable to the
Company’s brands and a loss of $0.2 million related to the Company’s joint
venture in Shoebox New York.
Loss
From Continuing Operations Before Income Taxes
We
recognized loss from continuing operations of $1.4 million for the six months
ended June 30, 2009, an improvement of $120.5 million from a loss of $121.9
million for the six months ended June 30, 2008. This period-over-period decrease
in loss reflects the changes to the Company’s business, the lack of impairment
charges in 2009, the absence of expenses specific to 2008 and our ongoing cost
reduction measures that began in 2008.
Income
Taxes – Continuing Operations
For the
six months ended June 30, 2009, the Company recorded a current provision for
income taxes of $155,000, consisting primarily of foreign taxes withheld on
franchise royalties received from foreign based franchisees in accordance with
applicable tax treaties. The Company recorded no deferred income tax expense.
Income tax benefit for the six months ended June 30, 2008 was $2.7 million,
comprised of a current provision of $184,000 and deferred tax benefit of $2.9
million resulting from impairment charges recorded for book purposes related to
intangible assets and the related reversal of deferred tax
liabilities.
The
Company computes our combined current and deferred quarterly income tax expense
or benefit based upon an estimate of the annual effective tax rate from
continuing operations. The Company’s effective tax rate from continuing
operations was approximately 11.4% and 2.2% in the six months ended June 30,
2009 and 2008, respectively. In 2008, the Company was subject to annual combined
federal and state deferred tax expense of approximately $1.2 million, resulting
primarily from timing differences relating to the Company’s trademarks,
goodwill and other intangibles, which are amortized over fifteen years for tax
purposes but not amortized for book purposes. The deferred tax liability
resulting from these timing differences reversed by year end 2008 due to
impairment charges recorded related to the Company’s intangible
assets.
For a
further discussion of the Company’s tax situation, including deferred tax assets
and liabilities, see Note 9 – Income Taxes to the Unaudited
Condensed Consolidated Financial Statements.
Discontinued
Operations
For the
six months ended June 30, 2009, the Company recognized net income from
discontinued operations of approximately $0.2 million, resulting primarily from
the reversal of a reserve for litigation. See Note 12(a) – Legal Proceedings for further
information. There was no income tax expense incurred in discontinued operations
for the six months ended June 30, 2009. For the six months ended June 30, 2008,
the Company incurred net loss from discontinued operations of $82.0 million,
consisting primarily of losses related to the Bill Blass and Waverly businesses,
which comprised our Consumer Branded Products business.
FINANCIAL
CONDITION
During
the six months ended June 30, 2009, our total assets decreased by $4.2 million,
and our total liabilities decreased by $6.2 million.
As of
June 30, 2009, we had a total of approximately $8.0 million of cash on hand. As
of June 30, 2009, we also had long-term restricted cash of $0.7 million, used to
secure letters of credit issued as security deposits on the Company’s leased
facilities.
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 June 30, 2009 raise substantial doubt about our ability to
continue as a going concern. We are highly leveraged; we have no additional
borrowing capacity under the BTMUCC Credit Facility; and the BTMUCC Credit
Facility imposes restrictions on our ability to freely access the capital
markets. In addition, the BTMUCC Credit Facility imposes various
restrictions on the cash generated by operations. 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 BTMUCC 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 certain 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 restructuring or refinancing plan.
Our
BTMUCC 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,
dividends and other payments affecting subsidiaries. The Company’s failure to
comply with the financial and other restrictive covenants could result in a
default under our BTMUCC 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 7 – Long-Term Debt to the
Unaudited Condensed Consolidated Financial Statements for details regarding the
security structure of the debt.) In addition, our BTMUCC 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 our subsidiaries,
individually or taken as a whole, (iv) the ability of the Company or our
subsidiaries to perform its respective obligations under the loan agreements,
(v) the validity or enforceability of any of the loan documents, and (vi) 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.
The
Company has received waivers and/or amendments from BTMUCC (without concessions
from the Company), 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 and
the Company’s projected ability to meet our debt service obligations for at
least the next twelve months, we believe it is unlikely that the Company will
need to seek additional material waivers or amendments of, or otherwise default
on, the covenants of our BTMUCC Credit Facility through June 30,
2010.
The
following table reflects the use of net cash from operations, investing, and
financing activities for the six month periods ended June 30, 2009 and June 30,
2008 (in thousands).
|
|
For the six months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
loss adjusted for non-cash activities
|
|
$ |
2,177 |
|
|
$ |
(7,270 |
) |
Working
capital changes
|
|
|
(1,762 |
) |
|
|
1,761 |
|
Discontinued
operations
|
|
|
229 |
|
|
|
(127 |
) |
Net
cash provided by (used in) operating activities
|
|
|
644 |
|
|
|
(5,636 |
) |
Net
cash used in investing activities
|
|
|
(126 |
) |
|
|
(91,646 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(774 |
) |
|
|
63,317 |
|
Net
decrease in cash and cash equivalents
|
|
$ |
(256 |
) |
|
$ |
(33,965 |
) |
Cash flow
from operations consists of (i) net income adjusted for depreciation,
amortization, impairment charges and certain other non-cash items; (ii) changes
in working capital; and (iii) cash flows from discontinued operations. We
generated $2.2 million in net income adjusted for non-cash items in the six
months ended June 30, 2009, an increase of $9.4 million from the $7.3 million
use of cash in the same period of 2008. The period-over- period
improvement is a result of the Company’s successful efforts to
reduce costs and manage expenses. Partially offsetting this
improvement was a use of cash of $1.8 million for working capital purposes in
2009 compared to a source of cash of $1.8 million in the 2008 period. This
change primarily reflects our efforts to reduce our accounts payable and accrued
expenses in the 2009 period, partially offset by improved collections on
accounts receivable in 2009.
Net cash
used in investing activities for the six months ended June 30, 2009 was $0.1
million. Net cash used in investing activities for the six months ended June 30,
2008 was $91.6 million, and related primarily to the acquisition of Great
American Cookies. In the 2008 period, the Company also used $0.7 million for the
acquisition of equity interest in Shoe Box Holdings, LLC.
Net cash
used in financing activities for the six months ended June 30, 2009 was $0.8
million consisting of principal payments of debt. Net cash provided
by financing activities for the six months ended June 30, 2008 was $63.3
million, which primarily reflects the funds received from BTMUCC to finance the
Great American Cookie acquisition, net of loan costs as well as greater
principal payments on debt and cash used in discontinued operations for
financing activities.
CONTRACTUAL
OBLIGATIONS
We
provided tabular information regarding our contractual obligations in our 2008
10-K in Part II, Item 7, under the caption, “Contractual Obligations.”
Significant changes to our obligations through June 30, 2009 are as
follows:
|
·
|
We
assigned the lease for our Bill Blass showroom in New York City to a third
party on June 11, 2009, reducing our net obligation by $2.5 million from
the amount of our Operating Lease Obligations as of December 31,
2008.
|
|
·
|
We
subleased our Waverly showroom in New York City through the lease
expiration for approximately the same amounts as we pay under the lease,
reducing our net obligation by $3.6 million from the amount of our
Operating Lease Obligations as of December 31,
2008.
|
|
·
|
We
satisfied four of the fifteen remaining guaranteed lease obligations that
we assumed in connection with our acquisition of MaggieMoo’s, reducing the
expected net present value of these obligations by $0.4 million from the
amount of Other Long-Term Liabilities as of December 31, 2008. We remain
obligated under ten such leases.
|
|
·
|
On October 22, 2009, we received
a notice of breach of the lease for our corporate offices in New York City
based on our failure to maintain a letter of credit as a security deposit
on the lease. As part of our efforts to renegotiate the lease and occupy a
space more appropriate to the needs and expense structure of the Company,
we declined to provide a new letter of credit when the existing letter of
credit was not renewed. As of the date of this Report, we are within the
cure period for the breach, and we continue to discuss with the landlord a
resolution of this matter.
|
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. 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 plus 2%, and repayment by the TAF MSF with no penalty, at any time. As
of June 30, 2009, the Company had a receivable balance of $1.5 million from the
TAF MSF. 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 2(i) to our
Unaudited Condensed Consolidated Financial Statements.
ITEM
3. 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 June 30, 2009, the Company had outstanding borrowings of $142.6
million under the BTMUCC Credit Facility in three separate tranches: (1)
approximately $85.8 million of Class A Franchise Notes, (2) approximately $41.4
million of a Class B Franchise Note and (3) $15.4 million of a Deficiency Note.
(On August 6, 2009, the Company paid down $5 million of the Class B Franchise
Note. See Note 7 – Long-Term
Debt and Note 14 – Subsequent Events ). The
Class B Franchise Note and the Deficiency Note both bear a fixed interest rate.
However, the Class A Franchise Notes, representing approximately 60% of the
outstanding debt as of June 30, 2009, bear interest at 30-day 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 June 30, 2009 is
shown in the following table (in thousands).
|
|
As of June 30, 2009
|
|
|
% of Total
|
|
Fixed
Rate Debt
|
|
$
|
56,810
|
|
|
|
40
|
%
|
Variable
Rate Debt
|
|
$
|
85,791
|
|
|
|
60
|
%
|
Total
long-term debt
|
|
$
|
142,601
|
|
|
|
100
|
%
|
The
estimated fair value of the Company’s debt as of June 30, 2009 was approximately
$88.5 million.
A change
in LIBOR can have a material impact on our interest expense and cash flows.
Under our BTMUCC Credit Facility and based upon the principal balance as of June
30, 2009, a 1% increase in 30-day LIBOR would result in additional $0.9 million
in interest expense per year, while a 1% decrease in LIBOR would reduce interest
expense by $0.9 million per year. We did not as of June 30, 2009, 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 30-day 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 for the
three months ended June 30, 2009 was approximately $1.7 million or 14.4% of our
total revenues.
ITEM
4(T). CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and 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 June 30, 2009.
Disclosure controls and procedures refer to controls and procedures designed to
ensure that information required to be disclosed 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. Based on this evaluation, management
concluded that our disclosure controls and procedures were not effective as of
June 30, 2009 or as of the date of the filing of this Report.
We did
not timely file this Report. While we have made progress in improving our
disclosure controls and procedures and we continue to strive to improve our
processes to enable us to provide complete and accurate public disclosures on a
timely basis, management believes that material weaknesses related to our
disclosure controls and procedures will not be remediated until we are able to
file required reports with the SEC on a timely basis.
To
address the material weaknesses, we performed additional analyses and procedures
in order for management to conclude that the financial information for the
periods covered by this Report and the accompanying Unaudited Condensed
Consolidated Financial Statements are fairly stated in all material
respects.
Changes
in Internal Control over Financial Reporting and Disclosure Controls and
Procedures
Since the
filing of our Amendment No. 2 to the Annual Report on Form 10-K/A for the fiscal
year ended December 31, 2007 on August 11, 2009, in which we discussed the
changes in internal control over financial reporting in 2008 and through June
2009, we have continued to make changes to the Company’s internal control over
financial reporting, which have materially affected, or are reasonably likely to
materially affect, the Company’s internal controls over financial reporting. The
Company has supplemented our NFM accounting staff with additional accounting
personnel with appropriate level of technical expertise in GAAP and public
reporting in order to transition all corporate accounting functions currently in
the New York headquarters to the Company’s NFM offices, our principal operating
facility in Norcross, Georgia. Newly hired NFM accounting personnel include a
Chief Accounting Officer hired in September 2009 and a Director of Financial
Reporting hired in October 2009. However, as noted above, 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
remediation efforts.
PART
II—OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
See Note
12 to the Unaudited Condensed Consolidated Financial Statements.
ITEM
1A. RISK FACTORS
Information
regarding risk factors appears in “Forward-Looking Statements,” in
the Part I, Item 2 of this Report and in Part I - Item 1A of our 2008
10-K. As of the date of this filing, there have been no material
changes in the risk factors previously disclosed in Part I - Item 1A of our 2008
10-K.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM
3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
Exhibits
*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)
|
|
|
|
*10.1
|
|
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)
|
|
|
|
*10.2
|
|
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)
|
|
|
|
*10.3
|
|
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)
|
|
|
|
*10.4
|
|
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 10.2 to the Form 8-K filed on August 6,
2009)
|
|
|
|
+10.5
|
|
Amended
and Restated Employment Agreement effective as of June 30, 2009 by and
between NexCen Brands, Inc. and Chris Dull (Designated as Exhibit 10.22 to
the Form 10-K filed on October 6, 2009)
|
|
|
|
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 this Quarterly Report
on Form 10-Q 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 Quarterly Report on Form 10-Q to be
signed on its behalf by the undersigned, thereunto duly authorized on November
5, 2009.
NEXCEN
BRANDS, INC.
|
|
|
By:
|
/s/
Kenneth J. Hall
|
|
KENNETH
J. HALL
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons in the capacities and on the dates
indicated.