Unassociated Document
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 March 31, 2010
|
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
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
|
o
|
|
|
Accelerated
filer
|
o
|
Non-accelerated
filer
|
o
|
|
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o 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
April 30, 2010, 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 MARCH 31, 2010
INDEX
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
Item
1.
|
|
Financial
Statements
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2010 (unaudited) and
December 31, 2009
|
|
3
|
|
|
Condensed
Consolidated Statements of Operations for the three months ended March 31,
2010 and 2009 (unaudited)
|
|
4
|
|
|
Condensed
Consolidated Statements of Stockholders’ Deficit for the three months
ended March 31, 2010 and 2009 (unaudited)
|
|
5
|
|
|
Condensed
Consolidated Statements of Cash Flows for the three months ended March 31,
2010 and 2009 (unaudited)
|
|
6
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
7
|
Item
2.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
24
|
Item
3.
|
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
29
|
Item 4(T).
|
|
Controls
and Procedures
|
|
30
|
|
|
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
|
|
|
Item
1.
|
|
Legal
Proceedings
|
|
30
|
Item
1A.
|
|
Risk
Factors
|
|
30
|
Item
2.
|
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
32
|
Item
3.
|
|
Defaults
Upon Senior Securities
|
|
32
|
Item
4.
|
|
(Removed
and Reserved)
|
|
32
|
Item
5.
|
|
Other
Information
|
|
32
|
Item
6.
|
|
Exhibits
|
|
33
|
PART
I - FINANCIAL INFORMATION
ITEM
1: FINANCIAL STATEMENTS
NEXCEN
BRANDS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(IN
THOUSANDS, EXCEPT SHARE DATA)
|
|
March 31,
2010
(Unaudited)
|
|
|
December 31,
2009
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,707
|
|
|
$
|
7,810
|
|
Short-term
restricted cash
|
|
|
—
|
|
|
|
1,436
|
|
Trade
receivables, net of allowances of $1,386 and $1,472,
respectively
|
|
|
3,477
|
|
|
|
4,061
|
|
Other
receivables
|
|
|
841
|
|
|
|
946
|
|
Inventory
|
|
|
1,289
|
|
|
|
1,123
|
|
Prepaid
expenses and other current assets
|
|
|
1,239
|
|
|
|
1,379
|
|
Total
current assets
|
|
|
14,553
|
|
|
|
16,755
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
3,906
|
|
|
|
3,262
|
|
Investment
in joint venture
|
|
|
399
|
|
|
|
335
|
|
Trademarks
and other non-amortizable intangible assets
|
|
|
72,522
|
|
|
|
72,522
|
|
Other
amortizable intangible assets, net of amortization
|
|
|
4,827
|
|
|
|
5,020
|
|
Deferred
financing costs and other assets
|
|
|
3,371
|
|
|
|
3,770
|
|
Long-term
restricted cash
|
|
|
439
|
|
|
|
980
|
|
Total
assets
|
|
$
|
100,017
|
|
|
$
|
102,644
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
6,661
|
|
|
$
|
6,596
|
|
Restructuring
accruals
|
|
|
45
|
|
|
|
312
|
|
Deferred
revenue
|
|
|
3,197
|
|
|
|
3,151
|
|
Current
portion of debt, net of debt discount of $728 and $853,
respectively
|
|
|
135,795
|
|
|
|
137,330
|
|
Acquisition
related liabilities
|
|
|
620
|
|
|
|
820
|
|
Total
current liabilities
|
|
|
146,318
|
|
|
|
148,209
|
|
Acquisition
related liabilities
|
|
|
209
|
|
|
|
196
|
|
Other
long-term liabilities
|
|
|
3,128
|
|
|
|
3,231
|
|
Total
liabilities
|
|
|
149,655
|
|
|
|
151,636
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 1,000,000 shares authorized; 0 shares issued and
outstanding as of March 31, 2010 and December 31, 2009,
respectively
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.01 par value; 1,000,000,000 shares authorized; 57,146,302 shares
issued and 56,951,730 outstanding at March 31, 2010 and December 31,
2009
|
|
|
571
|
|
|
|
571
|
|
Additional
paid-in capital
|
|
|
2,685,001
|
|
|
|
2,684,936
|
|
Treasury
stock, at cost; 194,572 shares at March 31, 2010 and December 31,
2009
|
|
|
(1,757
|
)
|
|
|
(1,757
|
)
|
Accumulated
deficit
|
|
|
(2,733,453
|
)
|
|
|
(2,732,742
|
)
|
Total
stockholders’ deficit
|
|
|
(49,638
|
)
|
|
|
(48,992
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
100,017
|
|
|
$
|
102,644
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
NEXCEN
BRANDS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN
THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
Royalty
revenues
|
|
$ |
4,941 |
|
|
$ |
5,842 |
|
Factory
revenues
|
|
|
4,197 |
|
|
|
4,457 |
|
Franchise
fee revenues
|
|
|
573 |
|
|
|
1,330 |
|
Licensing
and other revenues
|
|
|
303 |
|
|
|
331 |
|
Total
revenues
|
|
|
10,014 |
|
|
|
11,960 |
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
(2,680 |
) |
|
|
(2,837 |
) |
Selling,
general and administrative expenses:
|
|
|
|
|
|
|
|
|
Franchising
|
|
|
(2,916 |
) |
|
|
(3,091 |
) |
Corporate
|
|
|
(1,416 |
) |
|
|
(2,084 |
) |
Professional
fees:
|
|
|
|
|
|
|
|
|
Franchising
|
|
|
(268 |
) |
|
|
(410 |
) |
Corporate
|
|
|
(540 |
) |
|
|
(837 |
) |
Special
investigations
|
|
|
— |
|
|
|
(33 |
) |
Strategic
initiative expenses
|
|
|
(149 |
) |
|
|
— |
|
Depreciation
and amortization
|
|
|
(301 |
) |
|
|
(862 |
) |
Total
operating expenses
|
|
|
(8,270 |
) |
|
|
(10,154 |
) |
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,744 |
|
|
|
1,806 |
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
47 |
|
|
|
55 |
|
Interest
expense
|
|
|
(2,585 |
) |
|
|
(2,834 |
) |
Financing
charges
|
|
|
(3 |
) |
|
|
(33 |
) |
Other
income, net
|
|
|
146 |
|
|
|
348 |
|
Total
non-operating expense
|
|
|
(2,395 |
) |
|
|
(2,464 |
) |
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(651 |
) |
|
|
(658 |
) |
Income
taxes:
|
|
|
|
|
|
|
|
|
Current
|
|
|
(77 |
) |
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(728 |
) |
|
|
(732 |
) |
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of tax
|
|
|
17 |
|
|
|
(133 |
) |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(711 |
) |
|
$ |
(865 |
) |
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations – basic and
diluted
|
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
Income (loss) per share from discontinued operations – basic and
diluted
|
|
|
0.00 |
|
|
|
(0.00 |
) |
Net loss per share – basic and diluted
|
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
56,952 |
|
|
|
56,671 |
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
NEXCEN
BRANDS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(IN
THOUSANDS)
(UNAUDITED)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2008
|
|
$
|
-
|
|
|
$
|
569
|
|
|
$
|
2,681,600
|
|
|
$
|
(1,757
|
)
|
|
$
|
(2,729,905
|
)
|
|
$
|
(49,493
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(865
|
)
|
|
|
(865
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(865
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
138
|
|
|
|
-
|
|
|
|
-
|
|
|
|
138
|
|
Common
stock issued
|
|
|
-
|
|
|
|
2
|
|
|
|
2,952
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,954
|
|
Balance
as of March 31, 2009
|
|
$
|
-
|
|
|
$
|
571
|
|
|
$
|
2,684,690
|
|
|
$
|
(1,757
|
)
|
|
$
|
(2,730,770
|
)
|
|
$
|
(47,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2009
|
|
$
|
-
|
|
|
$
|
571
|
|
|
$
|
2,684,936
|
|
|
$
|
(1,757
|
)
|
|
$
|
(2,732,742
|
)
|
|
$
|
(48,992
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(711
|
)
|
|
|
(711
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(711
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
Balance
as of March 31, 2010
|
|
$
|
-
|
|
|
$
|
571
|
|
|
$
|
2,685,001
|
|
|
$
|
(1,757
|
)
|
|
$
|
(2,733,453
|
)
|
|
$
|
(49,638
|
)
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
NEXCEN
BRANDS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN
THOUSANDS)
(UNAUDITED)
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(711 |
) |
|
$ |
(865 |
) |
Add:
Net (income) loss from discontinued operations
|
|
|
(17
|
) |
|
|
133 |
|
Net
loss from continuing operations
|
|
|
(728
|
) |
|
|
(732 |
) |
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Provision
for doubtful accounts
|
|
|
11 |
|
|
|
172 |
|
Depreciation
and amortization
|
|
|
336 |
|
|
|
895 |
|
Stock
based compensation
|
|
|
65 |
|
|
|
138 |
|
Unrealized
gain on investment in joint venture
|
|
|
(64
|
) |
|
|
(267 |
) |
Amortization
of debt discount
|
|
|
125 |
|
|
|
139 |
|
Amortization
of deferred financing costs
|
|
|
222 |
|
|
|
241 |
|
Accrued
interest on Deficiency Note
|
|
|
629 |
|
|
|
540 |
|
Changes
in assets and liabilities, net of acquired assets and
liabilities:
|
|
|
|
|
|
|
|
|
Decrease
in trade receivables
|
|
|
573 |
|
|
|
937 |
|
Decrease
(increase) in other receivables
|
|
|
105 |
|
|
|
(91 |
) |
(Increase)
decrease in inventory
|
|
|
(166
|
) |
|
|
13 |
|
Decrease
in prepaid expenses and other assets
|
|
|
317 |
|
|
|
450 |
|
Decrease
in accounts payable and accrued expenses
|
|
|
(25
|
) |
|
|
(863 |
) |
Decrease
in restructuring accruals
|
|
|
(267
|
) |
|
|
(87 |
) |
Increase
(decrease) in deferred revenue
|
|
|
46 |
|
|
|
(995 |
) |
Net
cash provided by operating activities from continuing
operations
|
|
|
1,179 |
|
|
|
490 |
|
Net
cash provided by (used in) operating activities from discontinued
operations
|
|
|
17 |
|
|
|
(133 |
) |
Net
cash provided by operating activities
|
|
|
1,196 |
|
|
|
357 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in restricted cash
|
|
|
1,977 |
|
|
|
(1,000 |
) |
Purchases
of property and equipment
|
|
|
(787
|
) |
|
|
(40 |
) |
Distributions
from joint venture
|
|
|
— |
|
|
|
110 |
|
Acquisitions,
net of cash acquired
|
|
|
— |
|
|
|
(131 |
) |
Net
cash provided by (used in) investing activities
|
|
|
1,190 |
|
|
|
(1,061 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal
payments on debt
|
|
|
(2,289
|
) |
|
|
(296 |
) |
Payments
of contingent consideration
|
|
|
(200
|
) |
|
|
— |
|
Net
cash used in financing activities
|
|
|
(2,489
|
) |
|
|
(296 |
) |
Net
decrease in cash and cash equivalents
|
|
|
(103
|
) |
|
|
(1,000 |
) |
Cash
and cash equivalents, at beginning of period
|
|
|
7,810 |
|
|
|
8,293 |
|
Cash
and cash equivalents, at end of period
|
|
$ |
7,707 |
|
|
$ |
7,293 |
|
Cash
paid for interest
|
|
$ |
1,614 |
|
|
$ |
1,931 |
|
Cash
paid for taxes
|
|
$ |
44 |
|
|
$ |
129 |
|
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. NexCen Franchise Management, Inc. (“NFM”), a wholly
owned subsidiary of NexCen, manages all seven franchised brands. Our
franchise network, across all of our brands, consists of approximately 1,700
retail stores in 38 countries. We present the following footnotes based upon our
sole operating segment: Franchising.
We earn revenues primarily from
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 are expanding production capabilities of our
manufacturing facility to enable us to produce and sell pretzel mix to our
pretzel franchisees beginning in the second quarter of 2010.
(b) BASIS
OF PRESENTATION
The
Condensed Consolidated Balance Sheet as of March 31, 2010, and the Condensed
Consolidated Statements of Operations, the Condensed Consolidated Statements of
Stockholders’ Deficit and the Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2010 and 2009 are unaudited. The unaudited
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”), as defined in the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 270, for
interim financial information and with the instructions to Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. 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 month period ended March 31, 2010 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, 2009 (the “2009 10-K”). 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 2009 10-K.
(c)
LIQUIDITY AND GOING CONCERN
As of
March 31, 2010, we had $7.7 million of cash on hand, which included
approximately $3.7 million of cash payments from franchisees and licensees that
were held in special accounts (the “lockbox accounts”) controlled by our lender,
BTMU Capital Corporation (“BTMUCC”), in accordance with the terms of our credit
facility (the “BTMUCC Credit Facility”). See Note 2 – Accounting Policies and
Pronouncements - Cash and Cash Equivalents and Note 7 – Debt for additional
information about the BTMUCC Credit Facility.
As of
March 31, 2010, we also had long-term restricted cash of $0.4 million.
Approximately $0.1 million of the long-term restricted cash is used for a
security deposit on our NFM lease, and the remaining $0.3 million consists of
amounts restricted to fund capital improvements to expand the production
capabilities of our manufacturing facility to enable us to produce and sell
pretzel mix to our pretzel franchisees. We plan to utilize the remaining $0.3
million of this restricted cash in the second quarter of 2010.
As of
March 31, 2010, our total debt outstanding under the BTMUCC Credit Facility
before debt discount was $136.5 million. As of March 31, 2010, the remaining
scheduled principal payments during 2010 are $2.6 million.
Our
financial condition and liquidity as of March 31, 2010 raise substantial doubt
about our ability to continue as a going concern. We remain 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. The BTMUCC Credit Facility also imposes various
restrictions on the cash we generate from operations. We are subject to numerous
prevailing economic conditions and to financial, business, and other factors
beyond our control. In addition, our scheduled principal payments under the
BTMUCC Credit Facility include a final principal payment on our Class B
Franchise Note of $34.5 million in July 2011. We do not expect that we will be
able to meet this obligation.
To date,
we have received waivers or amendments from BTMUCC, 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. We anticipate that, absent
further waivers and amendments, we will breach certain covenants under the
BTMUCC Credit Facility in 2010. Accordingly, we have classified all of the debt
outstanding under the BTMUCC Credit Facility as a current liability as of March
31, 2010 and December 31, 2009.
If we
fail to meet debt service obligations or otherwise fail to comply with the
financial and other restrictive covenants, we would 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 –Debt for
details regarding the security structure of the debt.)
In
November 2009, we retained an investment bank to assist us in identifying and
evaluating alternatives to the Company’s current debt and capital structure,
including recapitalization of the Company, restructuring of our debt and/or sale
of some or substantially all of our assets. On May 13, 2010, NexCen entered into
an agreement to sell our franchise business (which includes all of the brands we
currently manage) to an affiliate of Levine Leichtman Capital Partners (“LLCP”),
an independent investment firm, for $112.5 million, subject to certain closing
adjustments. In conjunction with the execution of the sale agreement, NexCen and
certain of our subsidiaries entered into an agreement with BTMUCC, under which
BTMUCC will accept a portion of the sale proceeds, at the closing of the sale
transaction, in full satisfaction of the outstanding indebtedness owed to
BTMUCC. NexCen and certain of our subsidiaries also entered into an
amendment and waiver agreement with BTMUCC, which includes certain limited
waivers of covenants and obligations in the BTMUCC Credit Facility to facilitate
the completion of, and assist NexCen in remaining in compliance with the BTMUCC
Credit Facility pending completion of, the sale transaction. See Note
13 – Subsequent Events
for additional information about the agreements with LLCP and
BTMUCC.
We have
prepared the accompanying Unaudited Condensed Consolidated Financial Statements
assuming that the Company will continue as a going concern, and have not
included any adjustments that might result if we are unable to continue as a
going concern.
(2)
ACCOUNTING POLICIES AND PRONOUNCEMENTS
(a)
PRINCIPLES OF CONSOLIDATION
The
Unaudited Condensed Consolidated Financial Statements include the accounts of
the Company and our majority-owned subsidiaries. We have eliminated all
intercompany transactions and balances in consolidation. The Unaudited Condensed
Consolidated Financial Statements do not include the accounts or operations of
certain brand and marketing funds. See Note 2 (q) – Advertising.
(b)
RECLASSIFICATIONS
We have
reclassified certain prior year amounts to conform to the current year
presentation.
(c) USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the
reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates. We use estimates in accounting for,
among other things, valuation of intangible assets, estimated useful lives of
identifiable intangible assets, accrued revenues, guarantees, depreciation,
restructuring accruals, valuation of deferred tax assets and contingencies. We
review our estimates and assumptions periodically and reflect the effects of
revisions in the consolidated financial statements in the period we determine
them to be necessary.
(d) 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):
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
Cash
|
|
$
|
5,822
|
|
|
$
|
3,874
|
|
Money
market accounts
|
|
|
1,885
|
|
|
|
3,936
|
|
Total
|
|
$
|
7,707
|
|
|
$
|
7,810
|
|
The cash
balances as of March 31, 2010 and December 31, 2009 include approximately $3.7
million and $3.8 million, respectively, of cash received from
franchisees and licensees that is being held in lockbox accounts established
with our commercial bank in connection with the BTMUCC Credit Facility to
perfect the lender’s security interest in such cash receipts. Our lender first
applies the cash received into the lockbox accounts to pay the principal and
interest on the debt associated with our BTMUCC Credit Facility on a monthly
basis and then releases the remaining cash from the lockbox accounts to us for
general corporate purposes. Our lender then utilizes any excess cash
to prepay the debt in accordance with the BTMUCC Credit Facility. See Note 7
– Debt. Cash on hand
also includes $0.6 million of cash previously restricted to secure a letter of
credit for our New York office lease. On April 29, 2010, we entered into an
amendment to the lease for the Company’s New York office which reduced the rent
by approximately $50,000 per month effective as of January
15, 2010. In connection with the execution of this amendment, we replaced the
letter of credit to secure the lease. See Note 13 – Subsequent
Events.
(e)
SHORT-TERM RESTRICTED CASH
As of
March 31, 2010, we had no short-term restricted cash. As of December
31, 2009, we had short-term restricted cash of $1.4 million representing the
cash held in lockbox accounts that we expected would not be released to the
Company but instead would be applied to pay down principal of our debt. Under
the BTMUCC Credit Facility, we are not reimbursed out of the cash in the lockbox
accounts for any expenses paid in excess of our annual expense limit. Instead
those amounts are released to BTMUCC to pay down principal in excess of
scheduled principal payments. We exceeded the expense limit for 2009.
Accordingly, in February 2010, this short-term restricted cash was released to
BTMUCC to pay down $1.4 million of our debt.
(f)
LONG-TERM RESTRICTED CASH
As of
March 31, 2010 and December 31, 2009, we had long-term restricted cash of $0.4
and $1.0 million, respectively. Approximately $0.1 million of long-term
restricted cash is used as collateral for a letter of credit on our NFM lease,
and the remainder consists of amounts to be used to fund the capital
improvements to expand the production capabilities of our manufacturing facility
to enable us to produce and sell pretzel mix to our pretzel franchisees. We
utilized approximately $0.5 million of this restricted cash in the first quarter
of 2010 and plan to utilize the remaining $0.3 million during the second quarter
of 2010 to fund the balance of the capital improvements.
(g) TRADE
RECEIVABLES, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
Trade
receivables consist of amounts we expect 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 $1.4 million and
$1.5 million as of March 31, 2010 and December 31, 2009, respectively. We
provide a reserve for uncollectible amounts based on our assessment of
individual accounts. We classify cash flows related to net changes in trade
receivable balances as increases or decreases in net cash provided by operating
activities in the Unaudited Condensed Consolidated Statements of Cash
Flows.
Details
of activity in the allowance for doubtful accounts are as follows (in
thousands):
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
Beginning
balance
|
|
$
|
1,472
|
|
|
$
|
1,367
|
|
Additions
|
|
|
11
|
|
|
|
172
|
|
Write-offs
|
|
|
(97)
|
|
|
|
(210)
|
|
Ending
balance
|
|
$
|
1,386
|
|
|
$
|
1,329
|
|
(h)
INVENTORY
Inventories
consist of finished goods and raw materials, and we record them at the lower of
cost (first-in, first-out method) or market value. In assessing our ability
to realize inventories, we make judgments as to future demand requirements and
product expiration dates. The inventory requirements change based on
projected customer demand, which changes due to fluctuations in market
conditions and product life cycles. We classify cash flows related to
changes in inventory as increases or decreases in net cash provided by operating
activities in the Unaudited Condensed Consolidated Statements of Cash Flows.
Inventories consisted of the following (in thousands):
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
Finished
goods
|
|
$
|
774
|
|
|
$
|
590
|
|
Raw
materials
|
|
|
515
|
|
|
|
533
|
|
Total
|
|
$
|
1,289
|
|
|
$
|
1,123
|
|
(i) FAIR
VALUE OF FINANCIAL INSTRUMENTS
We
determine the fair value of our nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in our
financial statements, on a recurring basis (at least annually). 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). 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 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.
|
The
carrying amounts of cash and cash equivalents and restricted cash approximate
their fair values (Level 1). The carrying amounts of debt are based on the
actual amounts due under the BTMUCC Credit Facility. The fair value of debt, as
discussed in Note 7 –Debt , is based on the fair
value of similar instruments as well as model-derived valuations whose inputs
are not observable (Level 3). 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 12.6% to 40.0% and applied these factors to the forecasted payment streams
to determine the fair value of debt as of March 31, 2010. A 1% increase in the
discount factors would result in a decrease in the fair value of approximately
$2.7 million.
(j) PROPERTY AND EQUIPMENT,
NET
We record
property and equipment at cost, net of accumulated depreciation. We calculate
depreciation using the straight-line method over the estimated useful lives of
the assets, which range from three to twenty-five years. We capitalize the costs
of leasehold improvements and amortize them using the straight-line method over
the shorter of the lease term or the estimated useful life of the
asset.
We review
long-lived assets such as property and equipment for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. We measure recoverability of assets to be held and used by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, we recognize an impairment charge
in the amount by which the carrying amount of the asset exceeds the fair value
of the asset. We would present separately on the balance sheet assets to be
disposed of and would report them at the lower of the carrying amount or fair
value less costs to sell, and would no longer depreciate them. We would present
the assets and liabilities of a disposed group classified as held for sale
separately in the appropriate asset and liability sections of the balance
sheet.
(k)
TRADEMARKS AND OTHER INTANGIBLE ASSETS
We
classify intangible assets as follows: (1) intangible assets with indefinite
lives not subject to amortization and (2) intangible assets with definite lives
subject to amortization. We do not amortize indefinite-lived intangible
assets. We evaluate the remaining useful life of an intangible asset that
we are not amortizing at each reporting period to determine whether events and
circumstances continue to support an indefinite useful life. If we
subsequently determine that an intangible asset that we are not amortizing has a
finite useful life, we amortize the intangible asset prospectively over its
estimated remaining useful life. We generally amortize the amortizable
intangible assets on a straight-line basis.
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, Pretzelmaker and The Athlete’s Foot (“TAF”)
trademarks. Other non-amortizable intangible assets consist primarily of the
customer/supplier relationship with the Great American Cookies franchisees. We
do not amortize trademarks and the customer/supplier relationship acquired in a
purchase business combination. Instead we test them for impairment at least
annually unless we subsequently determine that the intangible asset has a finite
useful life. At each reporting period, we assess trademarks and other
non-amortizable intangible assets to determine if any changes in facts or
circumstances require a re-evaluation of the estimated value. We capitalize
material costs associated with registering and maintaining
trademarks.
We
amortize other intangible assets over their respective estimated useful lives to
their estimated residual values, and review them for impairment. Amortizable
intangible assets consist primarily of franchise agreements which we are
amortizing on a straight-line basis over a period ranging from one to twenty
years.
(l)
DEFERRED FINANCING COSTS
We
capitalize costs incurred in connection with borrowings or establishment of
credit facilities. We amortize these costs as an adjustment to interest expense
over the life of the borrowing or life of the BTMUCC Credit Facility using the
effective interest method. The balance of deferred financing costs at March 31,
2010 and December 31, 2009 was $2.0 million and $2.2 million, respectively. The
amount of amortization of deferred financing costs included in interest expense
was $0.2 million for both of the three months ended March 31, 2010 and
2009.
(m)
INCOME TAXES
We
recognize income taxes using the asset and liability method. Under this method,
we recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. We measure
deferred tax assets and liabilities using enacted tax rates expected to apply to
taxable income in the years in which we expect to recover or settle those
temporary differences. We recognize the effect of a tax rate change on deferred
tax assets and liabilities as income in the period that includes the enactment
date. In assessing the likelihood of realization of deferred tax assets, we
consider whether it is more likely than not that we will not realize some
portion or all of the deferred tax assets. 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.
(n)
STOCK BASED COMPENSATION
We
account for share-based payments, such as grants of stock options, restricted
shares, warrants, and stock appreciation rights, at fair value as an expense in
our financial statements over the requisite service period. See Note 8
– Stock Based
Compensation, for the assumptions used to calculate the stock
compensation expense under the fair-value method discussed above.
We use
the Black-Scholes option pricing model to value the compensation expense
associated with our stock option awards. In addition, we estimate
forfeitures when recognizing compensation expense associated with our stock
options, and adjust our estimate of forfeitures when appropriate. The
key input assumptions we use to estimate the fair value of stock options include
the market value of the underlying shares at the date of grant, the exercise
price of the award, the expected option term, the expected volatility (based on
historical volatility) of our stock over the option’s expected term, the
risk-free interest rate over the option’s expected term, and the expected annual
dividend yield, if any.
(o) PER
SHARE DATA
We
compute basic earnings per share by dividing net income (loss) for the period by
the weighted average number of common shares outstanding during the period. We
compute diluted earnings per share 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. We compute the dilutive effects of
options, warrants and their equivalents using the “treasury stock”
method. As we had a net loss in each of the periods presented, basic and
diluted net loss per share are the same. We have excluded options and warrants
to purchase a total of 50,000 and 200,000 shares of the Company’s common stock
from the calculation of diluted net loss per share for the three months ended
March 31, 2010 and 2009, respectively, because their inclusion would be
anti-dilutive.
(p)
REVENUE RECOGNITION
Royalties
represent periodic fees we receive from franchisees, which we determine as a
percentage of franchisee net sales and recognize as revenues when we earn them
on an accrual basis. Franchise fees represent initial fees paid by franchisees
for franchising rights. We defer recognition of these revenues and related
direct costs until we have performed substantially all initial services required
by the franchise agreements, which generally we consider to be upon the opening
of the franchisee’s store (or the first franchised store under an area
development agreement). Licensing revenues represent amounts we earn
from the use of the Company’s trademarks and we recognize these revenues when we
earn them on an accrual basis. We recognize revenues from the sale of goods
that we produce and sell to certain franchisees at the time of shipment and
classify them in factory revenues.
(q)
ADVERTISING
We
maintain advertising funds in connection with our franchise brands (“Marketing
Funds”). We consider these Marketing Funds to be separate legal entities from
the Company. Franchisees fund the Marketing Funds pursuant to franchise
agreements that generally require domestic franchisees to remit up to 2% of
their gross sales to the applicable Marketing Fund. We use these funds
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 the Marketing Funds reimburse the
Company on a cost-only basis for the amount the Company spends for advertising
expenses related to the franchised brands. Additionally, if we dissolve the
Marketing Funds, we will either distribute any remaining cash in the fund back
to the franchisees or spend it on advertising.
Based on
the foregoing, we have determined that the Marketing Funds are variable interest
entities. The Company is not the primary beneficiary of these variable interest
entities, and therefore we exclude these funds from our Unaudited Condensed
Consolidated Financial Statements. Franchisee contributions to these Marketing
Funds totaled approximately $1.0 million in both the three months ended March
31, 2010 and 2009. At March 31, 2010 and December 31, 2009, respectively, our
Unaudited Condensed Consolidated Financial Statements include loans and advances
receivable of $1.1 million and $1.2 million due from The Athlete’s Foot
Marketing Support Fund, LLC (“TAF MSF”). As of March 31, 2010 and December 31,
2009, we did not have any outstanding loans and advances from any other
Marketing Fund. We also established a matching contribution program with
the TAF MSF whereby we have agreed to match certain franchisee contributions
representing the expected net present value of these future contributions, which
we include in our franchising selling, general and administrative expenses. We
contributed approximately $0.1 million for the three months ended March 31,
2010 and 2009 to the TAF MSF. The amount of the liability recorded related to
the matching contribution program with the TAF MSF was $0.7 million both as of
March 31, 2010 and December 31, 2009.
(r) RESEARCH
AND DEVELOPMENT (“R&D”)
We
maintain an innovation laboratory in our manufacturing facility in Atlanta,
Georgia where we develop new flavors, new offerings and new formulations of our
food products across all of our QSR brands. Independent suppliers provided
equipment and other resources for the innovation laboratory. From time to time,
independent suppliers also conduct or fund research and development activities
for the benefit of our QSR brands. In addition, we conduct consumer research to
determine our end-consumer’s preferences, trends and opinions. For the three
months ended March 31, 2010 and 2009, R&D expenses were less than $0.1
million.
(s) INVESTMENTS
IN UNCONSOLIDATED ENTITIES
Shoe Box
Holdings, LLC (See Note 5 – Joint Venture Investments – Shoebox
New York) is an unconsolidated joint venture, the purpose of which is to
franchise retail stores that sell high-quality, high-fashion shoes. We use the
equity method of accounting for unconsolidated entities over which we have
significant influence but do not control, generally representing ownership
interests of at least 20% and not more than 50%. Under the equity method of
accounting, we recognize our proportionate share of the profits and losses of
the entity. The joint venture agreement specifies the distributions of capital,
profit and losses.
(t)
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting
Standards Adopted in 2010
On
January 1, 2010, we adopted FASB ASC 810, “Consolidation Variable Interest
Entities,” which requires an enterprise to perform an analysis to
determine whether the enterprise’s variable interest or interests give it a
controlling financial interest in a variable interest entity. This analysis
identifies the primary beneficiary of a variable interest entity as the
enterprise that has both of the following characteristics, among others:
(a) the power to direct the activities of a variable interest entity, which
most significantly impact the entity’s economic performance and (b) the
obligation to absorb losses of the entity, or the right to receive benefits from
the entity, which could potentially be significant to the variable interest
entity. This guidance requires ongoing reassessments of whether an enterprise is
the primary beneficiary of a variable interest entity. This guidance did not
have a material impact on the financial condition or results of operations of
the Company.
(u)
IMPACT OF THE HEALTH CARE AND EDUCATION RECONCILIATION ACT OF 2010
On March
30, 2010, the Health Care and Education Reconciliation Act of 2010 was signed
into law. The Health Care and Education Reconciliation Act of 2010 is
a reconciliation bill that amends the Patient Protection and Affordable Care Act
that was signed into law on March 23, 2010 (collectively, the “Acts”). The Acts
make extensive changes to the current system of health care insurance and
benefits. Although many of the provisions of the Acts do not take effect
immediately, there are various provisions that could have accounting
consequences. We do not believe that the Acts will have a material impact on the
financial condition or the results of operations of the Company.
(3) PROPERTY AND EQUIPMENT,
NET
Property
and equipment, net, consists of the following (in thousands):
|
|
Estimated
Useful Lives
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Furniture
and fixtures
|
|
7 -
10 Years
|
|
$
|
749
|
|
|
$
|
749
|
|
Computers
and equipment
|
|
3 -
5 Years
|
|
|
2,991
|
|
|
|
2,206
|
|
Software
|
|
3
Years
|
|
|
714
|
|
|
|
714
|
|
Building
|
|
25
Years
|
|
|
1,129
|
|
|
|
1,129
|
|
Land
|
|
Unlimited
|
|
|
263
|
|
|
|
263
|
|
Leasehold
improvements
|
|
Term of Lease
or
Economic
Life
|
|
|
2,884
|
|
|
|
2,882
|
|
Total
property and equipment
|
|
|
|
|
8,730
|
|
|
|
7,943
|
|
Less
accumulated depreciation
|
|
|
|
|
(4,824
|
)
|
|
|
(4,681
|
)
|
Property
and equipment, net of accumulated depreciation
|
|
|
|
$
|
3,906
|
|
|
$
|
3,262
|
|
Depreciation
expense related to property and equipment for the three months ended March 31,
2010 and 2009 was $0.1 million and $0.7 million, respectively.
(4)
TRADEMARKS AND OTHER INTANGIBLE ASSETS
We test
trademarks and other non-amortizable intangible assets 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 currently are not impaired, may occur in the future. We have retained an investment bank to
assist us in identifying and evaluating alternatives to our current debt and
capital structure, including recapitalization of the Company, restructuring of
our debt and/or sale of some or substantially all of our assets (See Note 7 –
Debt). A
recapitalization, restructuring, or sales transaction may result in a future
adjustment to the carrying value of our intangible assets.
Other
non-amortizable intangible assets consist of the customer/supplier relationships
related to Great American Cookies franchisees. Trademarks
and other non-amortizable assets by brand are as follows (in
thousands):
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Trademarks:
|
|
|
|
|
|
|
|
|
The
Athlete's Foot
|
|
$
|
5,450
|
|
|
$
|
5,450
|
|
Great
American Cookies
|
|
|
16,481
|
|
|
|
16,481
|
|
Marble
Slab Creamery
|
|
|
9,062
|
|
|
|
9,062
|
|
MaggieMoo's
|
|
|
4,194
|
|
|
|
4,194
|
|
Pretzelmaker
|
|
|
8,925
|
|
|
|
8,925
|
|
Total
trademarks
|
|
|
44,112
|
|
|
|
44,112
|
|
Customer/supplier
relationships related to Great American Cookies
|
|
|
28,410
|
|
|
|
28,410
|
|
Total
trademarks and other non-amortizable intangible assets
|
|
$
|
72,522
|
|
|
$
|
72,522
|
|
Other
amortizable intangible assets by brand are as follows (in
thousands):
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
The
Athlete's Foot
|
|
$ |
2,300 |
|
|
$ |
2,300 |
|
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
|
|
|
7,073 |
|
|
|
7,073 |
|
Less:
Accumulated Amortization
|
|
|
(2,246 |
) |
|
|
(2,053
|
) |
Total
|
|
$ |
4,827 |
|
|
$ |
5,020 |
|
Other
amortizable intangible assets consist primarily of franchise agreements and the
Pretzel Time trademark. The Pretzel Time trademark became amortizable during the
third quarter of 2008 as a result of the Company’s plan to consolidate the
Pretzel Time brand under the Pretzelmaker brand. We are amortizing these other
intangible assets generally on a straight-line basis over periods ranging from
one to twenty years. We recorded total amortization expense of $0.2 million for
both the three months ended March 31, 2010 and 2009.
The
following table presents the future amortization expense that we expect to
recognize over the amortization period of other intangible assets as of March
31, 2010 (in thousands):
|
|
Amortization
Period
|
|
|
For the nine
months ended
December 31,
|
|
|
For the year ended December 31,
|
|
|
|
(Years)
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
The
Athlete's Foot
|
|
|
20 |
|
|
$ |
86 |
|
|
$ |
115 |
|
|
$ |
115 |
|
|
$ |
115 |
|
|
$ |
115 |
|
|
$ |
1,361 |
|
Great
American Cookies
|
|
|
7 |
|
|
|
83 |
|
|
|
111 |
|
|
|
111 |
|
|
|
111 |
|
|
|
111 |
|
|
|
9 |
|
Marble
Slab Creamery
|
|
|
20 |
|
|
|
46 |
|
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
750 |
|
MaggieMoo's
|
|
|
20 |
|
|
|
25 |
|
|
|
33 |
|
|
|
33 |
|
|
|
33 |
|
|
|
33 |
|
|
|
398 |
|
Pretzel
Time
|
|
|
5 |
|
|
|
185 |
|
|
|
225 |
|
|
|
35 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Pretzelmaker
|
|
|
5 |
|
|
|
125 |
|
|
|
166 |
|
|
|
53 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Total
Amortization
|
|
|
|
|
|
$ |
550 |
|
|
$ |
711 |
|
|
$ |
408 |
|
|
$ |
320 |
|
|
$ |
320 |
|
|
$ |
2,518 |
|
(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.
The
Company and VCS each made initial investments of $0.7 million. Until the Company
and VCS are repaid these initial investments, they each receive 50% of the
profits and losses. Once the Company and VCS are re-paid, each member of the
joint venture party is entitled to share equally in joint venture entity
profits. As of March 31, 2010, our maximum loss exposure is limited to our
investment of $0.4 million in the joint venture.
A wholly
owned subsidiary of Shoe Box Holdings, LLC holds the acquired intellectual
property of The Shoe Box, Inc. and the intellectual property of the Shoebox New
York franchise concept (collectively, the “Shoebox Intellectual Property”). A
subsidiary of Shoe Box Holdings, LLC retains the principal of TSBI to assist in
the development of the Shoebox New York concept pursuant to a consulting
agreement (the “Consulting Agreement”), and TSBI has 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”). The purchase price for
the Company and VCS’ ownership interests would be an amount equal to their
respective initial investments of $0.7 million less any distributions they
received through 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
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.
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 may receive from the joint venture entity. NFM received management
fees of $0.1 million during both the three month periods ended March 31, 2010
and 2009 which we included in our operating income. As of March 31, 2010, there
are 8 stores open in the United States and 5 stores open internationally in
Aruba, Kuwait and Vietnam.
Our
investment in this joint venture was $0.4 million at March 31, 2010 and $0.3
million at December 31, 2009. We recorded equity income of $0.1 million and
income of $0.3 million for the three months ending March 31, 2010 and 2009,
respectively. While Shoe Box Holdings, LLC is a variable interest entity
(“VIE”), due primarily to the aforementioned TSBI options and ownership interest
versus economic interests, we believe the Company is not the primary beneficiary
as it does not have the power to direct the activities that most significantly
impact the VIE’s economic performance. Accordingly, we have recorded our
investment in Shoe Box Holdings, LLC under the equity method of
accounting.
(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):
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
Accounts
payable
|
|
$
|
3,575
|
|
|
$
|
4,470
|
|
Accrued
interest payable
|
|
|
240
|
|
|
|
245
|
|
Accrued
professional fees
|
|
|
538
|
|
|
|
150
|
|
Deferred
rent - current portion
|
|
|
80
|
|
|
|
80
|
|
Accrued
compensation and benefits
|
|
|
686
|
|
|
|
203
|
|
Income
and other taxes
|
|
|
393
|
|
|
|
249
|
|
All
other
|
|
|
1,149
|
|
|
|
1,199
|
|
Total
|
|
$
|
6,661
|
|
|
$
|
6,596
|
|
(b)
RESTRUCTURING ACCRUAL
In 2009, in conjunction with cost
cutting efforts and the consolidation of our accounting functions, we reduced
the staff in the New York corporate office and recorded charges to earnings from
continuing operations related primarily to separation benefits. As we expect to
pay the employee separation benefits within one year of the restructuring
announcement, we have not discounted the corresponding liability. A roll forward of the restructuring
accrual is as follows (in thousands):
|
|
Employee
Separation
Benefits
|
|
|
|
|
|
Restructuring
liability as of December 31, 2009
|
|
$
|
312
|
|
Charges
to continuing operations
|
|
|
—
|
|
Cash
payments and other
|
|
|
(267
|
)
|
Restructuring
liability as of March 31, 2010
|
|
$
|
45
|
|
(7) 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. BTMUCC and the Company
subsequently amended the Amended Credit Facility on September 11, 2008, December
24, 2008, January 27, 2009, July 15, 2009, August 6, 2009, January 14, 2010,
February 10, 2010, March 12, 2010, March 30, 2010, April 20,
2010, and May 13, 2010 (as amended, the “BTMUCC Credit
Facility”).
Our debt
consists of borrowings under the BTMUCC Credit Facility, which is comprised of
three separate tranches: the Class A Franchise Notes, the Class B Franchise Note
and the Deficiency Note. This debt consists of the following (in
thousands):
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Class
A Franchise Notes
|
|
$
|
83,831
|
|
|
$
|
85,367
|
|
Class
B Franchise Note
|
|
|
35,498
|
|
|
|
36,251
|
|
Deficiency
Note
|
|
|
17,194
|
|
|
|
16,565
|
|
Total
|
|
|
136,523
|
|
|
|
138,183
|
|
Less
debt discount
|
|
|
(728
|
)
|
|
|
(853
|
)
|
Total
|
|
$
|
135,795
|
|
|
$
|
137,330
|
|
The
estimated fair value of the Company’s debt as of March 31, 2010 and December 31,
2009 was approximately $95.6 million and $92.7 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 March 31, 2010 was 3.98%. The weighted average interest
rate on variable rate debt for the three months ended March 31, 2010 and 2009
was 3.98% and 4.36%, respectively.
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, these notes bear interest at a
fixed rate of 8% per year. BTMUCC will be entitled to receive a warrant covering
up to 2.8 million shares of the Company’s common stock at a price of $0.01 per
share if the Class B Franchise Note has not been repaid by May 31, 2010
(“Warrant Trigger Date,” which was changed by the January 14, 2010, February
10, 2010, March 30, 2010, and April 20, 2010 amendments) 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.
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 due on a
payment-in-kind (“PIK”) basis that defers cash interest payments until its
maturity on July 31, 2013.
During
the months of January 2010 through April 2010, we entered into five separate
amendments of the BTMUCC Credit Facility that cumulatively (1) extended the
Warrant Trigger Date from December 31, 2009 to May 31, 2010; (2) modified the
cash distribution waterfall such that in February 2010 the Company received $0.5
million to pay operating expenses, with a proportional reduction in the overall
reimbursable operating expenditure limits for the 2010 calendar year; (3) waived
potential defaults related to failures to meet certain free cash flow margin
requirements for each of the twelve month periods ended December 31, 2009,
January 31, 2010, February
28, 2010 and March 31, 2010; (4) waived the requirement to provide separate
audited financial statements for certain subsidiaries of the Company; and (5)
waived potential defaults related to failures to meet certain debt service
coverage ratios for the Class A and Class B Franchise Notes and timely pay fees
to BTMUCC’s outside counsel.
In
February 2010, we made an additional unscheduled principal payment of $1.4
million. Because we exceeded our 2009 expense limit under the BTMUCC Credit
Facility, a portion of the cash receipts in lockbox accounts that otherwise
would have been released to the Company to reimburse it for operating expenses
were instead applied in February 2010 to additional principal payments of $0.8
million on the Class A Franchise Notes and $0.6 million on the Class B
Franchise Note.
Although
the organization, terms and covenants of the specific borrowings have changed
significantly since its inception, the basic structure of the facility has
remained the same. The Issuer and Co-Issuers issued notes pursuant to the terms
of the BTMUCC 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. Special purpose,
bankruptcy-remote entities (each, a “Brand Entity”) hold the assets of each
brand. 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 is
not a named borrowing entity under the BTMUCC Credit Facility. However, the
Brand Entities earn substantially all of our revenues and remit the related cash
receipts to lockbox accounts that we have established in connection with the
BTMUCC Credit Facility to perfect the lender’s security interest in the cash
receipts. See Note 2(d) – Accounting Policies and
Pronouncements - Cash and Cash Equivalents. The terms of the BTMUCC
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 a certain annual total limit
must be paid out of cash on hand.
Our
BTMUCC Credit Facility prohibits NexCen, the Issuer, the Managers and each Brand
Entity from securing any additional borrowings without the prior written consent
of BTMUCC. It also 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 the 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. Our BTMUCC Credit
Facility further contains a subjective acceleration clause 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.
BTMUCC
has provided the Company amendments and waivers 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. We anticipate that, unless we are
able to obtain waivers or amendments from our lender, we will breach certain
covenants under the BTMUCC Credit Facility in 2010, including requirements to
meet certain free cash flow margin and debt service coverage ratio. There can be
no assurance that we will be able to obtain waivers or amendments, and our
lender may default the Company and seek to accelerate our principal payment
obligations pursuant to any of the covenants or the subjective acceleration
clause of the BTMUCC Credit Facility. In addition, our scheduled principal
payments under the BTMUCC Credit Facility include a final principal payment on
our Class B Franchise Note of $34.5 million in July 2011. We currently do not
expect that we will be able to make this principal payment. Accordingly, we have
classified all of the debt outstanding under the BTMUCC Credit Facility as a
current liability as of March 31, 2010 and December 31, 2009.
On May
13, 2010, in connection with NexCen’s agreement to sell our
franchise business to an affiliate of LLCP for $112.5 million, subject to
certain closing adjustments, NexCen and certain of our subsidiaries entered into
agreements with BTMUCC that are intended to facilitate and support the
completion of the sale transaction. The agreements provide for the
satisfaction of the debt owed to BTMUCC and the release of liens in favor of
BTMUCC, upon payment to BTMUCC of a portion of the sale proceeds (in no event
less than $98 million), as well as certain limited waivers of covenants and
obligations in the BTMUCC Credit Facility to facilitate the completion of, and
assist NexCen in remaining in compliance with the BTMUCC Credit Facility pending
completion of, the sale transaction. As of April 30, 2010, the
outstanding amount of indebtedness owed to BTMUCC was $136.4 million. See Note
13 – Subsequent Events
for additional information about the agreements with LLCP and
BTMUCC.
The
scheduled aggregate maturities of our debt as of March 31, 2010 are as follows
(in thousands):
|
|
Class A(1)
|
|
|
Class B
|
|
|
Deficiency Note(1)
|
|
|
Total
|
|
2010
|
|
$
|
2,025
|
|
|
$
|
534
|
|
|
$
|
–
|
|
|
$
|
2,559
|
|
2011
|
|
|
3,390
|
|
|
|
34,964
|
|
|
|
–
|
|
|
|
38,354
|
|
2012
|
|
|
3,918
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,918
|
|
2013
|
|
|
74,498
|
|
|
|
–
|
|
|
|
28,471
|
|
|
|
102,969
|
|
Total
|
|
$
|
83,831
|
|
|
$
|
35,498
|
|
|
$
|
28,471
|
|
|
$
|
147,800
|
|
|
(1)
|
Maturities
related to the Deficiency Note include additional PIK interest of
approximately $11.3 million that will be due in 2013 if we do not pay the
Deficiency Note prior to its
maturity.
|
We
amortize certain costs incurred in connection with the Original BTMUCC Credit
Facility and the Amended Credit Facility over the term of the loan using the
effective interest method. We expense 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, as we incur them, and we include these costs in our
Consolidated Statements of Operations as Financing Charges.
|
(b)
|
Direct
and Guaranteed Lease Obligations
|
We
recognize a liability for the fair value of certain lease obligations undertaken
at the inception of a lease guarantee. We assumed direct lease obligations with
respect to the purchase of certain formerly company-owned and operated
MaggieMoo’s stores (“Lease Obligations”). We 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 our
direct obligations if a franchisee defaults on its lease agreement. We treated
all of the direct Lease Obligations and the Lease Guarantees as assumed
liabilities at the time of acquisition of MaggieMoo’s and as a result included
these assumed liabilities in the purchase price of the
acquisition.
We
analyze each Lease Obligation and Lease Guarantee and determine the fair value
based on the facts and circumstances of the lease and franchisee performance.
Based on those analyses, we include the carrying amounts of these liabilities in
acquisition related liabilities as of March 31, 2010 and December 31, 2009 as
follows (in thousands):
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Lease
obligations
|
|
$
|
326
|
|
|
$
|
313
|
|
Lease
guarantees
|
|
|
315
|
|
|
|
315
|
|
Total
|
|
$
|
641
|
|
|
$
|
628
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Current
|
|
$
|
432
|
|
|
$
|
432
|
|
Long-term
|
|
|
209
|
|
|
|
196
|
|
Total
|
|
$
|
641
|
|
|
$
|
628
|
|
At the
end of each calendar year, we review the facts and circumstances of each Lease
Obligation and Lease Guarantee. Based on this review, we may change our
determination as to the carrying amounts of these liabilities and/or expected
maturities of the leases.
In
addition to the Lease Guarantees, under the terms of the Pretzel Time,
Pretzelmaker and Great American Cookies acquisitions, we 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. We are not a guarantor of any leases to third
parties and have not recorded any amounts in the financial statement related to
these contingent obligations. We may mitigate our exposure to these lease
guarantees in cases where the primary lessors of the property have also
personally guaranteed the lease obligations by finding new franchisees to
perform on the leases, or by negotiating directly with landlords to settle the
amounts due. We had
maximum amounts of undiscounted potential exposure related to these third-party
contingent lease guarantees as of March 31, 2010 and December 31, 2009 of $2.2
million and $2.7 million, respectively.
(8)
STOCK BASED COMPENSATION
We did
not grant any options or warrants during the three months ending March 31, 2010.
Information related to options outstanding and warrants issued by the Company is
as follows:
|
|
Number of shares
(in thousands)
|
|
|
Weighted - Average
Exercise Price
|
|
Outstanding
at January 1, 2010
|
|
|
4,292 |
|
|
$ |
2.60 |
|
Cancelled/Forfeited/Expired
|
|
|
(80 |
) |
|
$ |
0.92 |
|
Outstanding
March 31, 2010
|
|
|
4,212 |
|
|
$ |
2.63 |
|
Total
stock-based compensation expense included in selling, general and administrative
expenses was approximately $0.1 million during both of the three months ended
March 31, 2010 and 2009. The total unrecognized
compensation cost related to non-vested share-based compensation agreements
granted under all stock option plans as of March 31, 2010 is approximately $0.2
million. We expect to recognize this cost over the vesting period of
approximately 2 years. There was no income tax benefit recognized in the income
statement for stock-based compensation arrangements and no capitalized
stock-based compensation cost incurred during the three months ended March 31,
2010 and 2009.
No stock
options were exercised in the three months ended March 31, 2010 or 2009. The
total number of warrants outstanding as of March 31, 2010 was 1,183,333, all of
which were exercisable. There were 887,922 shares available for issuance as of
March 31, 2010.
(9)
INCOME TAXES
We incur
state income tax expense for taxable income at the subsidiary level and foreign
taxes withheld on franchise royalties received from foreign based franchisees in
accordance with acceptable tax treaties. Our current provision for taxes for the
three months ending March 31, 2010 and 2009 was $0.1 million in both periods. We
recorded no deferred income taxes or benefits for the three months ending March
31, 2010 and 2009.
We record
income tax expense and benefits for financial statement recognition and
measurement for tax positions that we believe more-likely-than-not will be
substantiated upon examination by taxing authorities. We measure the
amount recognized as the largest amount of benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement. It is the Company’s
position to recognize interest and/or penalties related to uncertain tax
positions in income tax expense. We have not been audited by the IRS and
currently are not under IRS examination, although all tax years for which we
have tax loss carry-forwards are subject to future examination by taxing
authorities. We are currently under examination by the state of New York for the
2006 through 2008 tax years.
Deferred
income taxes reflect the net tax effect of temporary differences that may exist
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, using enacted tax rates
in effect for the year in which the differences are expected to reverse. As of December 31, 2009
deferred tax assets were $359.2 million, consisting primarily of $293.0 million
from federal net operating loss carry-forwards of $837.0 million, which expire
at various dates through 2029, and $36.6 million of deferred tax benefits
arising from the impairment of intangible assets.
Consistent
with ASC 740, we have 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. Based upon our historical operating performance and the reported
cumulative net losses to date, as well as amortization expense relating to
intangible assets that will be deductible in computing taxable income in future
years, we presently do not have sufficient objective evidence to support the
recovery of our deferred tax assets.
Because
we have significant tax loss carry-forwards, we monitor any potential “ownership
changes” as defined in Section 382 of the Internal Revenue Code (“Code Section
382”) by reviewing available information regarding the transfer of shares by our
existing shareholders and evaluating other transactions that may be deemed an
“ownership change,” such as amendments to our credit facility. If we have an
“ownership change” as defined in Code Section 382, 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
Code Section 382 resulting from transfer of shares by our existing shareholders
or from deemed ownership changes resulting from the various amendments to the
BTMUCC Credit Facility. In the future, we may enter into additional amendments
to our outstanding debt, other transactions, or have transfers of stock, 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 the event of an ownership change, there will be no
impact to our financial position given the valuation allowance recorded on our
deferred tax assets. 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)
RELATED PARTY TRANSACTIONS
We
receive legal services from Kirkland & Ellis LLP, which we consider to be a
related party because a partner at that firm, George P. Stamas, is a member of
our Board of Directors. Expenses related to Kirkland & Ellis LLP for the
three months ended March 31, 2010 and 2009 were approximately $0.1 million and
$0.2 million, respectively. Outstanding payables due to Kirkland & Ellis LLP
were $0.4 million at March 31, 2010 and December 31, 2009.
The
Athlete’s Foot Marketing Support Fund, LLC (the “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. We 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 March 31, 2010 and December 31,
2009, we had receivable balances of $1.1 million and $1.2 million, respectively,
from the TAF MSF. We recorded interest income earned from the fund in
the amount of less than $0.1 million for the three months ended March 31, 2010
and 2009. We also established a matching contribution program with the TAF MSF
whereby we agreed to match certain franchisee contributions, not to exceed $0.1
million per quarter over 12 quarters. For both the three months ended
March 31, 2010 and 2009, we contributed approximately $0.1 million in matching
funds to the TAF MSF. The amount of the liability recorded related to
the matching contribution program with the TAF MSF was $0.7 million as of both
March 31, 2010 and December 31, 2009.
(11) 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 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 Sellers & Toll PLLC as lead counsel. On August
24, 2009, plaintiff filed an Amended Consolidated 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 Amended Consolidated 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 amended complaint. Plaintiff filed his opposition on December 14,
2009, and the Company filed a reply on January 27, 2010. The court has
rescheduled the hearing on the motion to dismiss for June 8, 2010.
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 and former directors of NexCen. This action is captioned:
Soheila Rahbari v. David Oros,
Robert W. D’Loren, James T. Brady, Paul Caine, Jack B. Dunn IV, Edward J.
Mathias, Jack Rovner, George Stamas & Marvin Traub, No. 08-CV-5843
(filed on June 27, 2008). In this action, plaintiff alleges that NexCen’s Board
of Directors breached its fiduciary duties in a variety of ways, mismanaged and
abused its control of the Company, wasted corporate assets, and unjustly
enriched itself by engaging in insider sales with the benefit of material
non-public information that was not shared with shareholders. Plaintiff further
contends that she was not required to make a demand on the Board of Directors
prior to bringing suit because such a demand would have been futile, due to the
board members’ alleged lack of independence and incapability of exercising
disinterested judgment on behalf of the shareholders. Plaintiff seeks damages,
restitution, disgorgement of profits, attorneys’ fees and costs, and
miscellaneous other relief. On November 18, 2008, the Court informed
the parties that the case would be stayed for 180 days and requested that they
file a status report thereafter so the Court might consider whether the stay
should be extended. Plaintiff thereafter indicated that she intended to file an
amended derivative complaint after the Company filed its amended Annual Report
on Form 10-K for the year ended December 31, 2007, including a restatement of
its 2007 financial results. On June 2, 2009, the Court lifted the
stay and ordered the plaintiff to file her amended derivative complaint no later
than two weeks after the Company filed its restated 2007 financials. On August
25, 2009, plaintiff filed an amended complaint that includes additional
allegations based on the Company’s August 11, 2009 Form 10-K/A. However, the
amended complaint does not assert any new legal claims, and omits plaintiff’s
previously asserted claim for corporate waste. Defendants moved to
dismiss the amended complaint on October 8, 2009. Plaintiff filed her opposition
on November 23, 2009, and defendants filed their reply on December 8, 2009. The
court has scheduled the hearing on the motion to dismiss for June 25,
2010.
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 two simultaneous but
separate motions in order to limit discovery. First, NexCen filed a motion in
the United States District Court for Southern District of New York to stay
discovery in the California actions pursuant to the Securities Litigation
Uniform Standards Act of 1998. Second, NexCen filed a motion in the California
court to dismiss the California complaint on the ground of forum non conveniens, or to
stay the action in its entirety, or in the alternative to stay discovery,
pending the outcome of the federal class 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, which motion was denied on October 8,
2009.
SEC
Investigation. We
voluntarily notified the Enforcement Division of the SEC of our May 19, 2008
disclosure. The SEC commenced an informal investigation of the Company
regarding the matters disclosed, and
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. The Company is continuing to cooperate
with the SEC in its formal investigation.
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 initial public
offerings during the late 1990’s. These cases were consolidated 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 on 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 from
certain of their customers additional and excessive fees, commissions and
benefits beyond those listed in the arrangements, 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 $0.5 million 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 no longer maintain the reserve of
$0.5 million. We recorded the reversal of this reserve in income from
discontinued operations as of June 30, 2009. On October 23, 2009, certain
objectors filed a petition to the U.S. Court of Appeals for the Second Circuit
to appeal the class certification order on an interlocutory basis. Two other
notices of appeal were filed by nine other objectors. Plaintiffs,
underwriter defendants, and the issuer defendants filed opposition
papers. The appeals are pending.
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, we are
obligated under various leases for office space in New York City and Norcross,
Georgia and other locations, which leases 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
As of
March 31, 2010 and December 31, 2009, we had long-term restricted cash of $0.4
million and $1.0 million, respectively. Approximately $0.1 million of the
long-term restricted cash is used for a security deposit on our NFM lease, and
the remainder consists of amounts to be used to fund the capital improvements to
expand the production capabilities of our manufacturing facility to enable us to
produce and sell pretzel mix to our pretzel franchisees. We utilized
approximately $0.5 million of this restricted cash in the first quarter of 2010
and plan to utilize the remaining $0.3 million during the second quarter of 2010
to fund the balance of the capital improvements.
(12)
DISCONTINUED OPERATIONS
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues
|
|
$
|
–
|
|
|
$
|
–
|
|
Operating
expenses
|
|
|
(7
|
)
|
|
|
(133
|
)
|
Other
income
|
|
|
24
|
|
|
|
–
|
|
Income
(loss) before income taxes
|
|
|
17
|
|
|
|
(133
|
)
|
Income
taxes
|
|
|
–
|
|
|
|
–
|
|
Net
income (loss) from discontinued operations
|
|
$
|
17
|
|
|
$
|
(133
|
)
|
Income
(loss) per share (basic and diluted) from discontinued
operations
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
Weighted
average shares outstanding
|
|
|
56,952
|
|
|
|
56,671
|
|
On April
29, 2010, we entered into an amendment to the lease for the Company’s New York
office which reduced the rent by approximately $50,000 per month effective as of
January 15, 2010. In connection with the execution of this amendment, we
provided a letter of credit for approximately $0.6 million to secure the
lease.
On May
13, 2010, NexCen entered into an agreement to sell our franchise business
to an affiliate of LLCP. The purchase price for the business is $112.5 million
and is subject to certain closing adjustments. Under the terms of the
sale agreement, LLCP’s affiliate, Global Franchise Group, LLC (“Purchaser”),
will acquire the subsidiaries of the Company that own the Company’s franchise
business assets and also the Company’s franchise management operations,
including the Company’s management operations in Norcross, Georgia, and its
cookie and pretzel dough factory and research facility in Atlanta,
Georgia. Specifically, the Company will: (i) sell to Purchaser all of
the Company’s equity interests in TAF Australia, LLC; (ii) cause NexCen Holding
Corporation to sell to Purchaser all of its equity interests in Athlete’s Foot
Brands, LLC, The Athlete’s Foot Marketing Support Fund, LLC, GAC Franchise
Brands, LLC, GAC Manufacturing, LLC, GAC Supply, LLC, MaggieMoo’s Franchise
Brands, LLC, Marble Slab Franchise Brands, LLC, PM Franchise Brands, LLC, PT
Franchise Brands, LLC, and ShBx IP Holdings LLC; (iii) cause NB Supply
Management Corp. to sell to Purchaser certain specified assets, and to assign to
Purchaser certain specified liabilities; and (iv) cause NexCen Franchise
Management, Inc. to sell to Purchaser certain specified assets, and to assign to
Purchaser certain specified liabilities (such shares and assets, collectively
the “NexCen Franchise Business”). The purchase price is subject to
closing adjustments for cash, indebtedness, other than borrowings under the
BTMUCC Credit Facility, which will be satisfied at closing, working capital and
other specified items, including approval of the stockholders of NexCen. The
agreement does not provide for any post-closing indemnities. The transaction is
expected to close in the third quarter of 2010.
In
connection with the sale transaction, and as contemplated by the sale agreement,
NexCen’s Board of Directors expects to approve, and recommend to stockholders
the adoption of a plan of dissolution that, absent the emergence of a higher
value alternative, would be implemented after the closing of the sale
transaction. Subject to the resolution of existing and contingent liabilities
and claims, as required by Delaware law, it is expected that the plan of
dissolution will result in a liquidating distribution to NexCen’s
stockholders. NexCen cannot yet predict with certainty the timing or
amount of any such distribution.
In conjunction with the sale agreement,
NexCen and certain of our subsidiaries entered into an accord and satisfaction
agreement with BTMUCC, under which BTMUCC will accept a portion of the sale
proceeds (but in no event less than $98.0 million), at the closing of the sale
transaction, in full satisfaction of the outstanding indebtedness owed to
BTMUCC. The accord and satisfaction agreement provides that the Issuer and the
Co-Issuers can satisfy and permanently extinguish all outstanding obligations
under the BTMUCC Credit Facility (which was an aggregate principal amount (plus
accrued and unpaid interest) of $136.4 million as of April 30, 2010) through the
payment of (i) $98.0 million, (ii) the amount by which aggregate consideration
for the sale of the Company (after giving effect to various adjustments) exceeds
$112.5 million, (iii) the amount by which the Company’s cash (after giving
effect to various adjustments) exceeds $6.0 million, and (iv) all outstanding
third-party fees and expenses of BTMUCC. NexCen will retain the
balance of the sale proceeds, plus a portion of the cash on hand. NexCen and
certain of our subsidiaries also entered into an amendment and waiver agreement
with BTMUCC on May 13, 2010, which includes certain limited waivers of covenants
and obligations in the existing credit agreement with BTMUCC to facilitate the
completion of, and assist NexCen in remaining in compliance with the BTMUCC
Credit Facility pending completion of, the sale transaction.
For
additional information about the agreements with LLCP and BTMUCC, as well as
copies of the agreements, see our Current Report on Form 8-K filed with the SEC
on May 17, 2010.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 2009 (“2009 10-K”), 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
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 (TAF and
Shoebox New York) are in the retail footwear and accessories industry. All seven
franchised brands are managed by NFM, a wholly owned subsidiary of
NexCen. Our franchise network, across all of our brands, consists of
approximately 1,700 stores in 38 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 are expanding
production capabilities of our manufacturing facility in 2010 to enable us to
produce and sell pretzel mix to our pretzel franchisees.
We
discuss our business in detail in Item 1-Business of our 2009 10-K, and we
discuss the risks affecting our business in Item 1A-Risk Factors of our 2009
10-K.
As
discussed in Note 13 – Subsequent Events to our
Unaudited Condensed Consolidated Financial Statements contained in this report,
on May 13, 2010 we entered into an agreement to sell our franchise business,
including all seven of our existing brands. Completion of the sale is
subject to various closing conditions, including the approval of NexCen’s
stockholders. We expect the transaction to close in the third
quarter. The decision to sell the business resulted from an extensive strategic
review of various alternatives to address our debt and capital structure, which
we began in November 2009 and carried out with the assistance of an investment
bank.
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 trademarks and intangible assets, valuation of stock-based
compensation and valuation of allowances for doubtful accounts. We discuss these
critical accounting policies in detail in our 2009 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 2009
10-K.
We
discuss new accounting pronouncements in Note 2 to the Unaudited Condensed
Consolidated Financial Statements contained in this Report.
SEASONALITY
The
business associated with certain of our brands is seasonal. However, we believe
the seasonality of our brands is complementary, so that the Company’s operations
do not experience material seasonality on an aggregate basis. For example,
average sales of our mall-based QSR brands (Great American Cookies, Pretzel
Time, and Pretzelmaker) are higher during the winter months, especially in
December, whereas average sales of our ice cream brands (MaggieMoo’s and Marble
Slab Creamery) are higher in the summer months and lower during the winter
months.
RESULTS OF CONTINUING
OPERATIONS FOR THREE MONTH PERIODS
ENDED MARCH 31, 2010 AND MARCH 31, 2009
Royalty,
Franchise Fee, Factory, Licensing and Other Revenues
We
recognized $10.0 million in revenues for the three months ended March 31, 2010,
a decrease of $1.9 million, or 16%, in revenues from the three months ended
March 31, 2009. Of the $10.0 million in revenues recognized for the three months
ended March 31, 2010, $4.9 million related to royalties, a decrease of $0.9
million, or 15%, from the 2009 comparable quarter; $4.2 million related to
factory revenues from the sales of cookie dough and other products to our Great
American Cookies franchisees, a decrease of $0.3 million, or 6%, from the 2009
comparable quarter; $0.6 million related to franchise fees, a decrease of $0.8
million, or 57%, from the 2009 comparable quarter; and $0.3 million related to
licensing and other revenues, which remained flat as compared to the 2009
comparable quarter. Other revenues consist primarily of management fees paid to
us from the Shoebox New York joint venture and rebates earned from vendors with
which we conduct business.
Our
royalty revenues have declined as a result of the quarter-over-quarter lower
store count, reduced consumer spending which has affected all of our brands, as
well as a decline in TAF revenue as a result of the August 6, 2009 FAF Australia
and New Zealand licensing transaction. Because of the economic factors that
negatively affected our revenues during 2009, we currently are unable to
determine whether our revenues will stabilize or will continue to decline in
2010.
We
generally record franchise fee revenues upon the opening of the franchisee’s
store, which is dependent on, among other factors, real estate availability,
construction build-out, and financing. Thus, we experience variability in our
initial franchise fee revenue from both our sales of new franchises and in the
timing of the opening of the franchisee’s store. The quarter-over-quarter
decrease in initial franchise fees reflects the difficulties we have experienced
in selling new franchises in light of the challenged economic environment and
the lack of ready 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.
The
quarter-over-quarter decrease in our factory revenue is due to lower consumer
sales of products from our Great American Cookies franchised stores, resulting
in decreased demand for cookie dough from our franchisees.
Cost
of Sales
For the
three months ended March 31, 2010, we incurred $2.7 million in cost of sales, a
decrease of 6%, from the 2009 comparable quarter. Cost of sales is comprised of
raw ingredients, labor and other direct manufacturing costs associated with our
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 remained steady at 36% for the three
months ended March 31, 2010 and 2009.
Selling,
General and Administrative Expenses (“SG&A”)
SG&A
expenses consist primarily of compensation and personnel related costs, rent and
facility related support costs, travel, advertising, bad debt expense
and stock compensation expense.
For the three months ended March 31,
2010, we recorded Franchising SG&A expenses of $2.9 million, a decrease of
6% from the 2009 comparable quarter. This quarter-over-quarter decrease reflects
reductions in general office expenses as well as improved collections and fewer
past due balances resulting in lower bad debt expense. We recorded Corporate SG&A
expenses of $1.4 million for the three months ended March 31, 2010, a decrease
of 32% from the 2009 comparable quarter. This quarter-over-quarter decrease is
primarily the result of cost reduction measures, resulting in, among other
things, lower rent and banking fees, and the Company’s corporate restructuring
in 2009 which has resulted in lower payroll costs.
Professional
Fees
Franchising
professional fees primarily consist of legal and accounting fees associated with
franchising activities and trademark maintenance. Corporate
professional fees primarily consist of legal fees associated with public
reporting, compliance and litigation, and accounting fees related to auditing
and tax services.
For the
three months ended March 31, 2010, we incurred professional fees related to
franchising of $0.3 million, a decrease of 35% from the 2009 comparable quarter.
We incurred corporate professional fees of $0.5 million for the three months
ended March 31, 2010, a decrease of 36% from the 2009 comparable quarter. The
quarter-over-quarter decrease in both franchising and corporate professional
fees reflects negotiated reductions in fees and reduced need for outside
professionals for reporting, compliance and litigation matters.
Strategic
Initiative Expenses
Strategic
initiative expenses of $0.1 million for the three months ended March 31, 2010
represent legal costs, incremental board fees and other related costs associated
with identifying and evaluating alternatives to our debt and capital
structure.
Depreciation
and Amortization
Depreciation
expenses arise from property and equipment purchased for use in our
operations. We include depreciation relating to our factory
operations in cost of sales. Amortization costs arise from amortizable
intangible assets acquired in acquisitions.
For the
three months ended March 31, 2010, we recorded depreciation and amortization
expense of $0.3 million, a decrease of 65% from the 2009 comparable quarter. The
quarter-over-quarter decrease is primarily the result of accelerated
depreciation expense related to the New York headquarters office which ceased in
August 2009.
Operating
Income (Loss)
As a
result of the foregoing factors, operating income for the three months ended
March 31, 2010 was $1.7 million, a decrease of 3% from the 2009 comparable
quarter.
Interest
Income
Interest
income primarily reflects the interest earned on our average cash balances.
Interest income also includes interest earned from the loan agreement with the
TAF MSF. For the three months ended March 31, 2010, we recognized
interest income of less than $0.1 million compared to $0.1 million for the three
months ended March 31, 2009.
Interest
Expense
For the
three months ended March 31, 2010, we recorded interest expense of $2.6
million, a decrease of 9% from the 2009 comparable quarter. 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 amortization of deferred loan costs and debt discount of
$0.3 million and $0.4 million, respectively, for the three months ended March
31, 2010 and 2009, and imputed interest of less than $0.1 million for both the
three months ended March 31, 2010 and 2009, related to a long-term consulting
agreement liability assumed in the TAF acquisition (which expires in 2028). The
quarter-over-quarter decrease in interest expense is primarily due to decreased
borrowings related to our continuing operations (including as a result of
additional, unscheduled principal payments of $5.0 million in August 2009 and
$1.4 million in February 2010) and lower interest rates on our variable rate
debt. For additional details regarding the BTMUCC Credit Facility, see Note 7
–Debt to our Unaudited
Condensed Consolidated Financial Statements contained
in this report.
Other
Income
For the
three months ended March 31, 2010 and 2009, we recorded other income of $0.1
million and $0.3 million, respectively. Other income consists primarily of
earnings from our equity investment in Shoebox New York.
Loss
From Continuing Operations Before Income Taxes
As a
result of the foregoing factors, loss from continuing operations before income
taxes for the three months ended March 31, 2010 was $0.7 million, an improvement
of 1% from the 2009 comparable quarter.
Income
Taxes
For both
the three months ended March 31, 2010 and 2009, we recorded a current provision
for income taxes of $0.1 million, consisting of state income taxes and foreign
taxes withheld on franchise royalties received from foreign based franchisees in
accordance with applicable tax treaties. We recorded no deferred income tax
expense. We compute our current and deferred quarterly income tax expense or
benefit based upon an estimate of the annual effective tax rate from continuing
operations.
For a
further discussion of the Company’s income taxes, including deferred tax assets
and liabilities, see Note 9 – Income Taxes to our Unaudited
Consolidated Financial Statements contained in this report.
FINANCIAL
CONDITION
Our
financial condition and liquidity as of March 31, 2010 raise substantial doubt
about our ability to continue as a going concern. We remain 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. The BTMUCC Credit Facility also imposes various
restrictions on our use of cash generated from operations. See Note 1(c) – Liquidity and Going Concern
to our Unaudited Condensed Consolidated Financial Statements contained in
this report. We are subject to numerous prevailing economic conditions and to
financial, business, and other factors beyond our control. In addition, the
BTMUCC Credit Facility obligates us to make a scheduled principal payment of
$34.5 million on our Class B Franchise Note in July 2011. We currently do not
expect that we will be able to meet this obligation. To date, we have received
waivers or amendments from BTMUCC, 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. We anticipate that, absent
further waivers and amendments, we will breach certain covenants under the
BTMUCC Credit Facility in 2010. Accordingly, we have classified all of the debt
outstanding under the BTMUCC Credit Facility as a current liability as of March
31, 2010 and December 31, 2009.
If we
fail to meet debt service obligations or otherwise fail to comply with the
financial and other restrictive covenants, we would 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 –Debt to
the Unaudited Condensed Consolidated Financial Statements contained in this
report for details regarding the security structure of the debt.)
In the
wake of our efforts to stabilize the Company, we have evaluated our business and
concluded that for long-term growth and viability of our business, we must
address the Company’s debt and capital structure. In November 2009, we retained
an investment bank to assist us in identifying and evaluating alternatives to
the Company’s current debt and capital structure, including recapitalization of
the Company, restructuring of our debt and/or sale of some or substantially all
of our assets.
On May
13, 2010, in connection with NexCen’s agreement to sell our
franchise business to an affiliate of LLCP for $112.5 million, subject to
certain closing adjustments, NexCen and certain of our subsidiaries entered into
agreements with BTMUCC that are intended to facilitate and support the
completion of the sale transaction. The agreements provide for the
satisfaction of the debt owed to BTMUCC and the release of liens in favor of
BTMUCC, upon payment to BTMUCC of a portion of the sale proceeds (in no event
less than $98 million), as well as certain limited waivers of covenants and
obligations in the BTMUCC Credit Facility to facilitate the completion of, and
assist NexCen in remaining in compliance with the BTMUCC Credit Facility pending
completion of, the sale transaction. As of April 30, 2010, the
outstanding amount of indebtedness owed to BTMUCC was $136.4
million. See Note 13 – Subsequent Events to our
Unaudited Condensed Consolidated Financial Statements contained in this report
for additional information about the agreements with LLCP and
BTMUCC.
During
the three months ended March 31, 2010, our total assets decreased by $2.6
million, and our total liabilities decreased by $2.0 million.
As of
March 31, 2010, we had a total of approximately $7.7 million of cash and cash
equivalents including $3.7 million of cash received from franchisees and
licensees that is being held in lockbox accounts established with our commercial
bank in connection with the BTMUCC Credit Facility to perfect the lender’s
security interest in such cash receipts. Cash and cash equivalents also includes
$0.6 million of cash previously restricted to secure a letter of credit for our
New York office lease. On April 29, 2010, we entered into an amendment to the
lease for the Company’s New York office which reduced the rent by approximately
$50,000 per month effective as of January 15, 2010. In connection with the
execution of this amendment, we replaced the letter of credit to secure the
lease. See Note 13 – Subsequent Events to our
Unaudited Condensed Consolidated Financial Statements contained in this
report.
As of
March 31, 2010, we had no short-term restricted cash. As of December 31, 2009,
we had short-term restricted cash of $1.4 million representing the cash held in
lockbox accounts that we expected would not be released to the Company but
instead would be applied to pay down principal of our debt. In December 2009, we
exceeded the total annual expense limit for 2009 established by the BTMUCC
Credit Facility (which limit does not apply to cost of goods for our
manufacturing facility). Under the BTMUCC Credit Facility, we are not reimbursed
out of the cash in the lockbox accounts for any expenses paid in excess of our
annual expense limit. Instead those amounts are released to BTMUCC to pay down
principal in excess of scheduled principal payments. In order to manage our cash
balance, we deferred payment of certain expenses incurred in excess of our 2009
expense limit until the expense limit reset for 2010. On January
14, 2010, we entered into an amendment of the BTMUCC Credit Facility that, among
other things, essentially allowed the Company to increase its expense limit
retroactively for 2009 by $0.5 million by decreasing its expense limit for 2010
by the same amount. (See Note 7 – Debt to our Unaudited
Condensed Consolidated Financial Statements contained in this report.) We may exceed our expense
limit in 2010, and we can provide no guarantees that our current cash on hand
and cash from operations after debt service will continue to satisfy our working
capital requirements in the future. In February 2010, the $1.4 million of
short-term restricted cash was applied as additional principal payments on our
debt.
As of
March 31, 2010, we had long-term restricted cash of $0.4 million. Approximately
$0.1 million of the long-term restricted cash is used for a security deposit on
our NFM lease, and the remainder consists of a portion of the fees that we
received from the TAFA Licenses, which we are permitted under the BTMUCC Credit
Facility to use to fund the capital improvements to expand the production
capabilities of our manufacturing facility to enable us to produce and sell
pretzel mix to our pretzel franchisees. We plan to utilize this $0.3 million of
restricted cash during the second quarter of 2010 to fund the balance of the
capital improvements.
The
following table reflects the use of net cash from operations, investing, and
financing activities for the three month periods ended March 31, 2010 and 2009
(in thousands).
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Net
income adjusted for non-cash activities
|
|
$ |
596 |
|
|
$ |
1,126 |
|
Working
capital changes
|
|
|
583 |
|
|
|
(636
|
) |
Discontinued
operations
|
|
|
17 |
|
|
|
(133
|
) |
Net
cash provided by operating activities
|
|
|
1,196 |
|
|
|
357 |
|
Net
cash provided by (used in) investing activities
|
|
|
1,190 |
|
|
|
(1,061
|
) |
Net
cash used in financing activities
|
|
|
(2,489
|
) |
|
|
(296
|
) |
Net
decrease in cash and cash equivalents
|
|
$ |
(103 |
) |
|
$ |
(1,000 |
) |
Cash flow
from operating activities 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 $1.2 million in cash provided by operating activities during in the
three months ended March 31, 2010, an increase of $0.8 million from $0.4 million
in the same period of 2009. The year-over-year improvement is primarily the
result of increased cash from working capital purposes, partially offset by
declines in net income adjusted for non-cash activities.
Net cash
provided by investing activities for the three months ended March 31, 2010 was
$1.2 million, including a $2.0 million decrease in short-term restricted cash
used to pay down debt for capital improvements to expand production capabilities
of our manufacturing facility to enable us to produce and sell pretzel mix to
our pretzel franchisees as permitted under the BTMUCC Credit Facility, partially
offset by $0.8 million of purchases of property and equipment. Net cash used in
investing activities for the three months ended March 31, 2009 was $1.1 million,
which was primarily the result of the temporary use of $1.0 million as cash
collateral pending the transfer of a letter of credit that supported certain
lockbox arrangements with our lender.
Net cash
used in financing activities for the three months ended March 31, 2010 and 2009
was $2.5 million and $0.3 million, respectively, consisting of principal
payments on debt and payments of contingent consideration related to a
settlement agreement with the former owners of MaggieMoo’s. In February 2010, we
made a $1.4 million additional principal payment given that we exceeded our 2009
expense limit under the BTMUCC Credit Facility.
CONTRACTUAL
OBLIGATIONS
We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this item.
Off
Balance Sheet Arrangements
We
maintain advertising funds in connection with our franchised brands (“Marketing
Funds”). Franchisees fund the Marketing Funds pursuant to franchise agreements.
We consider these Marketing Funds to be separate legal entities from the Company
and use them exclusively for marketing of the respective franchised brands. TAF
MSF is a Marketing Fund for the TAF brand. Historically, on an as needed basis,
we 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 March 31, 2010, we had a receivable
balance of $1.1 million from the TAF MSF. We do not consolidate Marketing Funds.
For further discussion of Marketing Funds, see Note 2(q) to our Unaudited
Condensed Consolidated Financial Statements contained
in this report.
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.
Our
primary exposure to market risk is to changes in interest rates on our long-term
debt. As of March 31, 2010, the Company had outstanding borrowings of $136.5
million under the BTMUCC Credit Facility in three separate tranches: (1)
approximately $83.8 million of Class A Franchise Notes, (2) approximately $35.5
million of a Class B Franchise Note and (3) $17.2 million of a Deficiency Note.
The Class B Franchise Note and the Deficiency Note both bear a fixed interest
rate. The Class A Franchise Notes, representing 61% of the outstanding debt as
of March 31, 2010, 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 March 31, 2010 is
shown in the following table (in millions).
|
|
Balance
|
|
|
% of Total
|
|
Fixed
Rate Debt
|
|
$
|
52.7
|
|
|
|
39
|
%
|
Variable
Rate Debt
|
|
|
83.8
|
|
|
|
61
|
%
|
Total
long-term debt
|
|
$
|
136.5
|
|
|
|
100
|
%
|
The
estimated fair value of the Company’s debt as of March 31, 2010 was
approximately $95.6 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
March 31, 2010, a 1% increase in 30-day LIBOR would result in additional $0.8
million in interest expense per year, while a 1% decrease in LIBOR would reduce
interest expense by $0.8 million per year. We did not as of March 31,
2010, 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, we do not expect the overall exposure to foreign
exchange gains and losses to have a material impact on the consolidated results
of operations. Because we collect international development fees and store
opening fees in U.S. dollars, our foreign currency exchange exposure primarily
involves continuing royalty revenues from our international
franchisees. International revenues, including royalty, franchise fee
and factory revenues were approximately $0.8 million or 8.2% 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 Securities and Exchange Act of 1934, as
amended (the “Exchange Act”), as of March 31, 2010. 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
their evaluation, the Chief Executive Officer and the Chief Financial Officer of
the Company have concluded that the Company’s disclosure controls and procedures
were effective as of March 31, 2010.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting, as
such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange
Act, that occurred during the period covered by this quarterly report that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART
II—OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
See Note
11 to the Unaudited Condensed Consolidated Financial Statements contained in
this report.
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 the 2009
10-K. As of the date of this filing, the following are material
changes in the risk factors previously disclosed in Part I - Item 1A of the 2009
10-K.
The
transaction with an affiliate of LLCP may not be completed, which could
materially and adversely impact our business, financial condition and results of
operations.
To
complete the sale of NexCen’s franchise business to an affiliate of LLCP, NexCen
stockholders must approve the transaction because it will be considered a sale
of substantially all of the Company’s assets. In addition, the sale agreement
contains additional closing conditions that may not be satisfied or waived. If
we are unable to complete the transaction, NexCen would be subject to a number
of risks, including the following:
|
·
|
We
may not be able to identify an alternate sale transaction or otherwise
complete a recapitalization of the Company or restructuring of our debt to
address our current debt and capital structure. If an alternate sale
transaction is identified, such alternate sale transaction may not result
in an equivalent amount of consideration to that proposed in this
transaction;
|
|
·
|
The
trading price of our common stock may decline to the extent that the
current market price reflects a market assumption that the transaction
will be completed;
|
|
·
|
Under
the agreement with BTMUCC, we have received waivers of certain anticipated
breaches of the BTMUCC Credit Facility through the close of the proposed
transaction. We have not reached any agreement with BTMUCC regarding
waivers of breaches should we be unable to close the transaction. Without
such waivers, we anticipate that we will breach certain covenants in 2010
and fail to make a required scheduled principal payment of $34.5 million
in July 2011. If we fail to meet debt service obligations or otherwise
fail to comply with the financial and other restrictive covenants, we
would 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;
and
|
|
·
|
The
Company will incur significant transaction, compliance and other
transaction related fees and costs (including, in many circumstances, an
obligation to reimburse LLCP’s affiliate for its transaction costs up to
$500,000 plus, in most cases (and particularly if we complete an alternate
transaction), to pay a termination fee to LLCP’s affiliate of $4.5
million) which will need to be paid out of current cash on hand and cash
from operations after debt service. The terms of the BTMUCC Credit
Facility limit the amount of cash flow from operations that may be used
for operating expenses and other general corporate purposes. We anticipate
that payment of any such amounts would adversely affect the Company’s cash
balance, its ability to comply with the 2010 expense limit under the
BTMUCC Credit Facility, and our ability to satisfy our working capital
requirements in the future.
|
The
occurrence of any of these events individually or in combination could have a
material adverse effect on our business, financial condition and results of
operation.
The
fact that there is a transaction pending could have a material and adverse
effect on our business, financial condition and results of
operations.
While the
transaction is pending, it creates uncertainty about our future. As a result of
this uncertainty, franchisees and other business partners may decide to delay,
defer or cancel entering into new franchising or other business arrangements
with us pending completion or termination of the transaction.
In
addition, while the transaction is pending, we are subject to a number of risks,
including:
|
·
|
The
diversion of management and employee attention from the day-to-day
business of the Company;
|
|
·
|
The
potential disruption to our franchisees, business partners, vendors and
other service providers;
|
|
·
|
The
loss of employees who may depart due to their concern about losing their
jobs following the transaction; and
|
|
·
|
We
may be unable to respond effectively to competitive pressures, industry
developments and future
opportunities.
|
The
occurrence of any of these events individually or in combination could have a
material adverse effect on our business, financial condition and results of
operation.
The
sale agreement limits our ability to pursue alternatives to the
transaction.
The
acquisition agreement contains provisions that make it more difficult for us to
sell our franchising business to a party other than LLCP. These
provisions include a general prohibition on the Company from soliciting,
initiating or knowingly encouraging any acquisition proposal for a competing
transaction, the requirement that the Company pay a termination fee of $4.5
million if the sale agreement is terminated in specified circumstances, and
subject to certain exceptions, the requirement that the Company submit the
principal terms of the proposed transaction to a vote of the Company’s
stockholders, even if the Company’s Board of Directors decides not to recommend
that stockholders vote in favor of the transaction.
These
provisions could discourage a third party that might have an interest in
acquiring all of or a significant part of the Company from considering or
proposing any acquisition, even if that party were prepared to pay consideration
with a higher value than the consideration to be paid by
LLCP. Furthermore, the payment of the termination fee could also have
an adverse effect on our financial condition.
Additionally,
LLCP has a right to be advised of and to submit a new offer not less favorable
to the Company than any unsolicited third-party acquisition offer, as set forth
in the acquisition agreement, which could make it more difficult for the Company
to complete an alternative transaction or discourage a third party from making
an unsolicited offer.
If
the pending sale transaction is completed, the Company will not have an active
business or assets to generate revenue.
If the
transaction is completed, the Company will have sold substantially all of its
assets. Currently, all of the Company’s revenue from operations is generated
from its franchise business and the subsidiaries being transferred in the
pending sale transaction. If the transaction closes, we will have no active
business left to operate, we will have no assets with which to generate revenue,
and we will have transferred as part of the transaction substantially all of our
employees (other than employees at our corporate headquarters in New
York). Nevertheless, we will have cash on hand, certain liabilities
and continuing obligations.
In
connection with the sale transaction, and as contemplated by the sale agreement,
our Board of Directors expects to approve, and recommend to stockholders the
adoption of a plan of dissolution that, absent the emergence of a higher value
alternative, would be implemented after the closing of the sale transaction. If
the plan of dissolution is not approved or implemented, and if an alternative is
not identified and we are required to continue for an extended period without a
source of revenue, the proceeds from the sale transaction that we retain will be
depleted, which will reduce (and could over time eliminate) amounts that
otherwise are expected to be available for distribution to
stockholders.
If
we complete the pending sale transaction and proceed with a dissolution of the
Company, the amount or timing of any distributions to our stockholders is
difficult to estimate, because there are many factors, some of which are outside
of our control, that could affect our ability to make such
distributions.
If we
complete the pending sale transaction and proceed with dissolution of the
Company, the timing and amount of any distributions to our stockholders is
difficult to estimate and is subject to variation, including because of matters
beyond our control. The timing and amount of any such distributions will depend
upon a variety of factors, including but not limited to, whether the pending
sale transaction closes on the current terms, the timing of the closing of that
transaction, the impact of any negative adjustments to the purchase price for
our business (pursuant to the terms of the existing sale agreement), the amount
we are required to pay to satisfy our known liabilities and obligations, the
amount of liabilities and obligations that we incur in the future, our future
operating costs, potential limitations on the use of our tax loss carry-forwards
to offset any taxable gain arising out of completion of the pending sale
transaction, the resolution of currently known contingent liabilities, the
amount of any unknown or contingent liabilities of which we become aware in the
future, general business and economic conditions, and other similar matters. We
will continue to incur claims, liabilities and expenses from operations (such as
operating costs, salaries, directors’ and officers’ insurance, payroll and local
taxes, legal and accounting fees, compliance costs, and miscellaneous office
expenses) as we seek to close the sale transaction and then as we wind down the
business. As a result, if the dissolution process takes longer, we
are likely to have less money available to distribute to our
stockholders. For all of these reasons, any estimates
regarding our anticipated expense levels and the amount we would expect to have
available to distribute to our stockholders may be
inaccurate.
The
pending sale transaction may limit our ability to utilize our tax loss
carry-forwards.
If the
Company does not maintain involvement in an active trade or business following
the closing of the pending sale transaction, it may be deemed to constitute a
constructive liquidation of the Company or a constructive liquidation of certain
subsidiaries of the Company, for income tax purposes. If the
completion of the pending sale transaction is deemed a constructive liquidation
of the Company or a constructive liquidation of certain of the subsidiaries, the
Company or certain of its subsidiaries may lose, permanently, the ability to
utilize their tax loss carry-forwards following completion of the
transaction.
None.
ITEM
3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM
4. (REMOVED AND RESERVED)
ITEM
5. OTHER INFORMATION
ITEM
6. EXHIBITS
Exhibits
*2.1
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Acquisition
Agreement, dated as of May 13, 2010, by and between NexCen Brands, Inc.
and Global Franchise Group, LLC. (Designated as Exhibit 2.1 to
the Form 8-K filed on May 17, 2010)
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*3.1
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Certificate
of Incorporation of NexCen Brands, Inc. (Designated as Exhibit
3.1 to the Form 10-Q filed on August 5, 2005)
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*3.2
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Certificate
of Amendment of Certificate of Incorporation of NexCen Brands,
Inc. (Designated as Exhibit 3.1 to the Form 8-K filed on
November 1, 2006)
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*3.3
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Amended
and Restated By-laws of NexCen Brands, Inc. (Designated as
Exhibit 3.1 to the Form 8-K filed on March 7, 2008)
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*10.1
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Waiver
and Sixth Amendment dated January 14, 2010, by and among NexCen Brands,
Inc., NexCen Holding Corporation, the Subsidiary Borrowers parties
thereto, and BTMU Corporation. (Designated as Exhibit 10.1 to the Form 8-K
filed on January 15, 2010)
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*10.2
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Waiver
and Seventh Amendment dated February 10, 2010, by and among NexCen Brands,
Inc., NexCen Holding Corporation, the Subsidiary Borrowers parties
thereto, and BTMU Corporation. (Designated as Exhibit 10.1 to the Form 8-K
filed on February 12, 2010)
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*10.3
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Waiver
and Eighth Amendment dated March 12, 2010, by and among NexCen Brands,
Inc., NexCen Holding Corporation, the Subsidiary Borrowers parties
thereto, and BTMU Corporation. (Designated as Exhibit 10.1 to the Form 8-K
filed on March 17, 2010)
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*10.4
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Ninth
Amendment dated March 30, 2010, by and among NexCen Brands, Inc., NexCen
Holding Corporation, the Subsidiary Borrowers parties thereto, and BTMU
Corporation. (Designated as Exhibit 10.1 to the Form 8-K filed on March
31, 2010)
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*10.5
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Waiver
and Tenth Amendment dated April 20, 2010, by and among NexCen Brands,
Inc., NexCen Holding Corporation, the Subsidiary Borrowers parties
thereto, and BTMU Corporation. (Designated as Exhibit 10.1 to the Form 8-K
filed on April 20, 2010)
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10.6
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Lease
between Deka First Real Estate USA L.P. and Aether Holdings, Inc., dated
September 29, 2006
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10.7
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First
Amendment of Lease between NexCen Brands, Inc. and 1330 Acquisition Co.
LLC, dated April 29, 2010
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*10.8
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Accord
and Satisfaction Agreement, dated as of May 13, 2010, by and among NexCen
Brands, Inc., NexCen Holding
Corporation, the Subsidiary
Borrowers parties thereto, the Managers parties thereto, BTMU Capital
Corporation, as Agent for the Noteholders, and the Noteholders (as
defined in the agreement). (Designated as Exhibit 10.1 to the
Form 8-K filed on May 17, 2010)
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*10.9
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Waiver and Omnibus
Amendment, dated as of May 13, 2010, by and among BTMU Capital
Corporation as Agent and as Noteholder, NexCen Holding Corporation as
Issuer, NexCen Brands, Inc., and the Subsidiary Borrowers parties
thereto. (Designated as Exhibit 10.2 to the Form 8-K filed on May 17,
2010)
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31.1
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Certification
pursuant to 17 C.F.R § 240.15d−14 (a), as adopted pursuant to Section 302
of the Sarbanes−Oxley Act of 2002 for Kenneth J. Hall.
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31.2
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Certification
pursuant to 17 C.F.R § 240.15d−14 (a), as adopted pursuant to Section 302
of the Sarbanes−Oxley Act of 2002 for Mark E. Stanko.
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**32.1
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Certifications
pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes−Oxley Act of 2002 for Kenneth J. Hall and Mark E.
Stanko.
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*
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.
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 May 17,
2010.
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NEXCEN
BRANDS, INC.
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By:
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/s/
Kenneth J. Hall
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KENNETH
J. HALL
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Chief
Executive Officer
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