Attached files
file | filename |
---|---|
EX-10.6 - NexCen Brands, Inc. | v192692_ex10-6.htm |
EX-32.1 - NexCen Brands, Inc. | v192692_ex32-1.htm |
EX-31.1 - NexCen Brands, Inc. | v192692_ex31-1.htm |
EX-10.7 - NexCen Brands, Inc. | v192692_ex10-7.htm |
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
|
For
the Quarterly Period Ended June 30, 2010
|
||
Or
|
||
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
Commission
File Number: 000-27707
(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 x No ¨
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
|
¨
|
Accelerated
filer
|
¨
|
|
Non-accelerated
filer
|
¨
|
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 x No ¨
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
As of
July 30, 2010, 57,001,730 shares of the registrant’s common stock, $.01 par
value per share, were outstanding.
NEXCEN
BRANDS, INC.
QUARTERLY
REPORT ON FORM 10-Q
THE
QUARTER ENDED JUNE 30, 2010
INDEX
PART
I - FINANCIAL INFORMATION
|
|||
Item
1.
|
Financial
Statements
|
||
Condensed
Consolidated Balance Sheets as of June 30, 2010 (unaudited) and
December 31, 2009
|
3
|
||
Condensed
Consolidated Statements of Operations for the three and six months ended
June 30, 2010 and 2009 (unaudited)
|
4
|
||
Condensed
Consolidated Statements of Stockholders’ Deficit for the six months ended
June 30, 2010 and 2009 (unaudited)
|
5
|
||
Condensed
Consolidated Statements of Cash Flows for the six months ended June 30,
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
|
26
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
33
|
|
Item
4.
|
Controls
and Procedures
|
33
|
|
PART
II - OTHER INFORMATION
|
|||
Item
1.
|
Legal
Proceedings
|
34
|
|
Item
1A.
|
Risk
Factors
|
34
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
36
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
36
|
|
Item
4.
|
(Removed
and Reserved)
|
36
|
|
Item
5.
|
Other
Information
|
36
|
|
Item
6.
|
Exhibits
|
37
|
ITEM
1: FINANCIAL STATEMENTS
NEXCEN
BRANDS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(IN
THOUSANDS, EXCEPT SHARE DATA)
June
30,
2010
(Unaudited)
|
December
31,
2009
|
|||||||
ASSETS
|
||||||||
Cash
and cash equivalents
|
$
|
6,033
|
$
|
7,810
|
||||
Short-term
restricted cash
|
500
|
1,436
|
||||||
Trade
receivables, net of allowances of $1,220 and $1,472,
respectively
|
3,482
|
4,061
|
||||||
Other
receivables
|
620
|
946
|
||||||
Inventory
|
1,189
|
1,123
|
||||||
Prepaid
expenses and other current assets
|
1,182
|
1,379
|
||||||
Total
current assets
|
13,006
|
16,755
|
||||||
Property
and equipment, net
|
4,087
|
3,262
|
||||||
Investment
in joint venture
|
300
|
335
|
||||||
Trademarks
and other non-amortizable intangible assets
|
72,522
|
72,522
|
||||||
Other
amortizable intangible assets, net of amortization
|
4,633
|
5,020
|
||||||
Deferred
financing costs and other assets
|
2,950
|
3,770
|
||||||
Long-term
restricted cash
|
802
|
980
|
||||||
Total
assets
|
$
|
98,300
|
$
|
102,644
|
||||
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
||||||||
Accounts
payable and accrued expenses
|
$
|
7,648
|
$
|
6,596
|
||||
Restructuring
accruals
|
—
|
312
|
||||||
Deferred
revenue
|
2,884
|
3,151
|
||||||
Current
portion of debt, net of debt discount of $604 and $853,
respectively
|
135,726
|
137,330
|
||||||
Acquisition
related liabilities
|
582
|
820
|
||||||
Total
current liabilities
|
146,840
|
148,209
|
||||||
Acquisition
related liabilities
|
201
|
196
|
||||||
Other
long-term liabilities
|
3,018
|
3,231
|
||||||
Total
liabilities
|
150,059
|
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 June 30, 2010 and December 31, 2009,
respectively
|
—
|
—
|
||||||
Common
stock, $0.01 par value; 1,000,000,000 shares authorized; 57,196,302 shares
issued and 57,001,730 outstanding at June 30, 2010; and 57,146,302 shares
issued and 56,951,730 outstanding at December 31, 2009
|
572
|
571
|
||||||
Additional
paid-in capital
|
2,685,064
|
2,684,936
|
||||||
Treasury
stock, at cost; 194,572 shares at June 30, 2010 and December 31,
2009
|
(1,757
|
)
|
(1,757
|
)
|
||||
Accumulated
deficit
|
(2,735,638
|
)
|
(2,732,742
|
)
|
||||
Total
stockholders’ deficit
|
(51,759
|
)
|
(48,992
|
)
|
||||
Total
liabilities and stockholders’ deficit
|
$
|
98,300
|
$
|
102,644
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
3
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN
THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Revenues:
|
||||||||||||||||
Royalty
revenues
|
$ | 5,447 | $ | 6,144 | $ | 10,388 | $ | 11,986 | ||||||||
Factory
revenues
|
4,339 | 4,320 | 8,536 | 8,777 | ||||||||||||
Franchise
fee revenues
|
569 | 1,066 | 1,142 | 2,396 | ||||||||||||
Licensing
and other revenues
|
223 | 251 | 526 | 582 | ||||||||||||
Total
revenues
|
10,578 | 11,781 | 20,592 | 23,741 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Cost
of sales
|
(2,683 | ) | (2,670 | ) | (5,363 | ) | (5,507 | ) | ||||||||
Selling,
general and administrative expenses:
|
||||||||||||||||
Franchising
|
(3,538 | ) | (3,470 | ) | (6,454 | ) | (6,561 | ) | ||||||||
Corporate
|
(1,468 | ) | (1,912 | ) | (2,884 | ) | (3,996 | ) | ||||||||
Professional
fees:
|
||||||||||||||||
Franchising
|
(315 | ) | (560 | ) | (583 | ) | (970 | ) | ||||||||
Corporate
|
(226 | ) | (652 | ) | (766 | ) | (1,489 | ) | ||||||||
Special
investigations
|
- | (52 | ) | - | (85 | ) | ||||||||||
Strategic
initiative expenses
|
(1,551 | ) | - | (1,700 | ) | - | ||||||||||
Depreciation
and amortization
|
(313 | ) | (863 | ) | (614 | ) | (1,725 | ) | ||||||||
Total
operating expenses
|
(10,094 | ) | (10,179 | ) | (18,364 | ) | (20,333 | ) | ||||||||
Operating
income
|
484 | 1,602 | 2,228 | 3,408 | ||||||||||||
Non-operating
income (expense):
|
||||||||||||||||
Interest
income
|
95 | 47 | 142 | 102 | ||||||||||||
Interest
expense
|
(2,647 | ) | (2,749 | ) | (5,232 | ) | (5,583 | ) | ||||||||
Financing
charges
|
9 | 31 | 6 | (2 | ) | |||||||||||
Other
income, net
|
3 | 372 | 149 | 720 | ||||||||||||
Total
non-operating expense
|
(2,540 | ) | (2,299 | ) | (4,935 | ) | (4,763 | ) | ||||||||
Loss
from continuing operations before income taxes
|
(2,056 | ) | (697 | ) | (2,707 | ) | (1,355 | ) | ||||||||
Income
taxes:
|
||||||||||||||||
Current
|
(162 | ) | (81 | ) | (239 | ) | (155 | ) | ||||||||
Loss
from continuing operations
|
(2,218 | ) | (778 | ) | (2,946 | ) | (1,510 | ) | ||||||||
Income
from discontinued operations, net of taxes
|
33 | 362 | 50 | 229 | ||||||||||||
Net
loss
|
$ | (2,185 | ) | $ | (416 | ) | $ | (2,896 | ) | $ | (1,281 | ) | ||||
Loss
per share from continuing operations – basic and diluted
|
$ | (0.04 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.03 | ) | ||||
Income
per share from discontinued operations – basic and diluted
|
0.00 | 0.00 | 0.00 | 0.00 | ||||||||||||
Net
loss per share – basic and diluted
|
$ | (0.04 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.03 | ) | ||||
Weighted
average shares outstanding – basic and diluted
|
56,968 | 56,952 | 56,960 | 56,812 |
See
accompanying notes to unaudited condensed consolidated financial
statements.
4
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
|
-
|
-
|
-
|
-
|
(1,281
|
)
|
(1.281
|
)
|
||||||||||||||||
Total
comprehensive loss
|
(1,281
|
)
|
||||||||||||||||||||||
Stock-based
compensation
|
-
|
-
|
288
|
-
|
-
|
288
|
||||||||||||||||||
Common
stock issued
|
-
|
2
|
2,952
|
-
|
-
|
2,954
|
||||||||||||||||||
Balance
as of June 30, 2009
|
$
|
-
|
$
|
571
|
$
|
2,684,840
|
$
|
(1,757
|
)
|
$
|
(2,731,186
|
)
|
$
|
(47,532
|
)
|
|||||||||
Balance
as of December 31, 2009
|
$
|
-
|
$
|
571
|
$
|
2,684,936
|
$
|
(1,757
|
)
|
$
|
(2,732,742
|
)
|
$
|
(48,992
|
)
|
|||||||||
Net
loss
|
-
|
-
|
-
|
-
|
(2,896
|
)
|
(2,896
|
)
|
||||||||||||||||
Total
comprehensive loss
|
(2,896
|
)
|
||||||||||||||||||||||
Stock-based
compensation
|
-
|
-
|
129
|
-
|
-
|
129
|
||||||||||||||||||
Common
stock issued
|
-
|
1
|
(1
|
)
|
-
|
-
|
-
|
|||||||||||||||||
Balance
as of June 30, 2010
|
$
|
-
|
$
|
572
|
$
|
2,685,064
|
$
|
(1,757
|
)
|
$
|
(2,735,638
|
)
|
$
|
(51,759
|
)
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
5
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN
THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
|
|||||||
2010
|
2009
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
loss
|
$
|
(2,896
|
)
|
$
|
(1,281
|
)
|
|
Add:
Net income from discontinued operations
|
(50
|
)
|
(229
|
)
|
|||
Net
loss from continuing operations
|
(2,946
|
)
|
(1,510
|
)
|
|||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|||||||
Provision
for doubtful accounts
|
(33
|
)
|
369
|
||||
Depreciation
and amortization
|
691
|
1,793
|
|||||
Stock
based compensation
|
129
|
288
|
|||||
Unrealized
gain on investment in joint venture
|
(87)
|
(298
|
)
|
||||
Amortization
of debt discount
|
249
|
274
|
|||||
Amortization
of deferred financing costs
|
441
|
483
|
|||||
Accrued
interest on Deficiency Note
|
1,289
|
1,109
|
|||||
Changes
in assets and liabilities, net of acquired assets and
liabilities:
|
|||||||
Decrease
in trade receivables
|
612
|
1,090
|
|||||
Decrease
(increase) in other receivables
|
326
|
(147
|
)
|
||||
Increase
in inventory
|
(66
|
)
|
(36
|
)
|
|||
Decrease
in prepaid expenses and other assets
|
576
|
685
|
|||||
Increase
(decrease) in accounts payable and accrued expenses
|
844
|
(2,416
|
)
|
||||
Decrease
in restructuring accruals
|
(312
|
)
|
(146
|
)
|
|||
Decrease
in deferred revenue
|
(267
|
)
|
(1,161
|
)
|
|||
Net
cash provided by operating activities from continuing
operations
|
1,446
|
377
|
|||||
Net
cash provided by operating activities from discontinued
operations
|
50
|
229
|
|||||
Net
cash provided by operating activities
|
1,496
|
606
|
|||||
Cash
flows from investing activities:
|
|||||||
Decrease
in restricted cash
|
1,114
|
190
|
|||||
Purchases
of property and equipment
|
(1,129
|
)
|
(185
|
)
|
|||
Distributions
from joint venture
|
122
|
38
|
|||||
Acquisitions,
net of cash acquired
|
-
|
(131
|
)
|
||||
Net
cash provided by (used in) investing activities
|
107
|
(88
|
)
|
||||
Cash
flows from financing activities:
|
|||||||
Principal
payments on debt
|
(3,142
|
)
|
(774
|
)
|
|||
Payments
of contingent consideration
|
(238
|
)
|
—
|
||||
Net
cash used in financing activities
|
(3,380
|
)
|
(774
|
)
|
|||
Net
decrease in cash and cash equivalents
|
(1,777
|
)
|
(256
|
)
|
|||
Cash
and cash equivalents, at beginning of period
|
7,810
|
8,293
|
|||||
Cash
and cash equivalents, at end of period
|
$
|
6,033
|
$
|
8,037
|
|||
Cash
paid for interest
|
$
|
3,255
|
$
|
3,702
|
|||
Cash
paid for taxes
|
$
|
74
|
$
|
203
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
6
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 the 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 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, pretzel mix and other ancillary products to our
franchisees.
On July
29, 2010, a special meeting of the Company’s stockholders was held at which the
stockholders approved, among other things: (1) the sale of substantially all of
NexCen’s assets (the “Asset Sale”), including its entire portfolio of franchised
brands, to Global Franchise Group, LLC (“GFG”), an affiliate of Levine Leichtman
Capital Partners, Inc., an independent investment firm, pursuant to
the Acquisition Agreement dated May 13, 2010, between NexCen and GFG (the
“Acquisition Agreement”); and (2) the plan of complete dissolution and
liquidation of NexCen following the closing of the Asset Sale. See Note 13 –
Subsequent
Events.
On July
30, 2010, we completed the Asset Sale and received cash proceeds of $112.5
million before payment of transaction expenses, purchase price adjustments
specified in the Acquisition Agreement and pay-off of our debt. The final sale
proceeds remain subject to a post-closing adjustment and may result in NexCen
receiving additional funds or being required to make a payment to GFG. In
conjunction with the Asset Sale, our lender, BTMU Capital Corporation
(“BTMUCC”), accepted $98.0 million from the sale proceeds , in full satisfaction
of the outstanding indebtedness owed to BTMUCC under the credit facility entered
into by NexCen and certain of our subsidiaries with BTMUCC (the “BTMUCC Credit
Facility”). See Note 13 – Subsequent Events, under the
heading “Asset Sale and Debt Repayment,” and Note 7 – Debt. NexCen retained the
balance of the sale proceeds from the Asset Sale, plus a portion of the cash on
hand. Subject to the resolution of existing and contingent liabilities and
claims, as required by Delaware law, it is expected that the plan of dissolution
approved by NexCen’s stockholders will result in a liquidating distribution to
our stockholders. See Note 13 - “Subsequent Events,” under the
heading “Estimated Liquidating Distribution.” NexCen cannot yet
predict with certainty the timing or amount of any such distribution. See Item
1A. Risk Factors.
(b) BASIS
OF PRESENTATION
The
Condensed Consolidated Balance Sheet as of June 30, 2010, and the Condensed
Consolidated Statements of Operations for the three and six month periods ended
June 30, 2010 and 2009, and the Condensed Consolidated Statements of
Stockholders’ Deficit and the Condensed Consolidated Statements of Cash Flows
for the six month periods ended June 30, 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 and six month periods ended June 30, 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
June 30, 2010, we had $6.0 million of cash on hand, which included approximately
$4.0 million of cash payments from franchisees and licensees that were held in
special accounts (the “lockbox accounts”) controlled by BTMUCC, in accordance
with the terms of 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.
7
As of
June 30, 2010, we had short-term restricted cash of $0.5 million, representing
funds held in escrow pursuant to the anticipated Asset Sale, and long-term
restricted cash of $0.8 million. Approximately $0.2 million of the long-term
restricted cash related to the letter of credit securing our NFM lease and $0.6
million related to the letter of credit securing the lease of our NYC
office.
As of
June 30, 2010, our total debt outstanding under the BTMUCC Credit Facility
before debt discount was $136.2 million. As of June 30, 2010, the remaining
scheduled principal payments during 2010 were $1.7 million.
Our
financial condition and liquidity as of June 30, 2010 raised substantial doubt
about our ability to continue as a going concern. We remained highly leveraged;
we had no additional borrowing capacity under the BTMUCC Credit Facility; and
the BTMUCC Credit Facility imposed restrictions on our ability to freely access
the capital markets. The BTMUCC Credit Facility also imposed various
restrictions on the cash we generated from operations. In addition, our
scheduled principal payments under the BTMUCC Credit Facility included a final
principal payment on our Class B Franchise Note of $34.5 million in July 2011.
We did not expect that we would be able to meet this obligation. If we failed to
meet debt service obligations or otherwise failed to comply with the financial
and other restrictive covenants, we would have defaulted under our BTMUCC Credit
Facility, which could have then triggered, 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.)
However,
in connection with the closing of the Asset Sale on July 30, 2010, BTMUCC
accepted $98.0 million from the sale proceeds, in full satisfaction of the
outstanding indebtedness owed to BTMUCC under the BTMUCC Credit Facility.
As a result, as of the close of business on July 30, 2010, we had no debt
outstanding under the BTMUCC Credit Facility, and the BTMUCC Credit Facility was
cancelled and all liens were released. See Note 13 – Subsequent Events, under the
heading, “Asset Sale and Debt Repayment.”
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):
8
June
30,
2010
|
December 31,
2009
|
|||||||
Cash
|
$
|
3,859
|
$
|
3,874
|
||||
Money
market accounts
|
2,174
|
3,936
|
||||||
Total
|
$
|
6,033
|
$
|
7,810
|
The cash
balances as of June 30, 2010 and December 31, 2009 include approximately $4.0
million and $3.8 million, respectively, of cash received from
franchisees and licensees that was 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
applied 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 released the remaining cash from the lockbox accounts to us for
general corporate purposes. Our lender then utilized any excess cash to
prepay the debt in accordance with the BTMUCC Credit Facility. See Note 7
– Debt.
(e)
SHORT-TERM RESTRICTED CASH
As of
June 30, 2010, we had short-term restricted cash of $0.5 million representing
funds held in escrow pursuant to the Acquisition Agreement. 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 were not reimbursed out of the cash in the
lockbox accounts for any expenses paid in excess of our annual expense limit.
Instead those amounts were 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
June 30, 2010 we had long-term restricted cash of $0.8 million. Approximately
$0.2 million of long-term restricted cash was used as collateral for a letter of
credit on our NFM lease, which letter of credit was returned and cash collateral
released in connection with the assignment of the NFM lease pursuant to the
Asset Sale. Additionally, 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. As of December 31, 2009,
we also had long-term restricted cash of $1.0 million consisting primarily of
amounts to be used to fund the capital improvements to expand the production
capabilities of our manufacturing facility, substantially all of which were
expended as of June 30, 2010.
(g) TRADE
RECEIVABLES, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
Details
of activity in the allowance for doubtful accounts are as follows (in
thousands):
June
30,
2010
|
June
30,
2009
|
|||||||
Beginning
balance
|
$
|
1,472
|
$
|
1,367
|
||||
Additions
|
-
|
369
|
||||||
Deductions
|
(33)
|
)
|
-
|
|||||
Write-offs
|
(219)
|
(267)
|
||||||
Ending
balance
|
$
|
1,220
|
$
|
1,469
|
9
(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):
June
30,
2010
|
December 31,
2009
|
|||||||
Finished
goods
|
$
|
564
|
$
|
590
|
||||
Raw
materials
|
625
|
533
|
||||||
Total
|
$
|
1,189
|
$
|
1,123
|
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 Accord
and Satisfaction Agreement, dated May 13, 2010, entered into by NexCen and
certain of our subsidiaries with BTMUCC, under which BTMUCC agreed to and did
accept a portion of the sale proceeds ($98.0 million) and payment of BTMUCC’s
transaction expenses to a third party ($0.2 million), at the closing of the
Asset Sale, in full satisfaction of the outstanding indebtedness owed to BTMUCC
(Level 3).
(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.
10
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 using the effective interest method. The balance
of deferred financing costs at June 30, 2010 and December 31, 2009 was $1.8
million and $2.2 million, respectively. The amount of amortization of deferred
financing costs included in interest expense was $0.4 million and $0.5 million
for the six months ended June 30, 2010 and 2009, respectively.
(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 warrants to purchase a
total of 200,000 shares of the Company’s common stock from the calculation of
diluted net loss per share for the three and six months ended June 30, 2010 and
2009 and options to purchase a total of 50,000 shares of the Company’s common
stock from the calculation of diluted net loss per share for the three and six
months ended June 30, 2009, because their inclusion would be
anti-dilutive.
11
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.
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 $1.1 million in both the three months ended June 30,
2010 and 2009. For the six month periods ended June 30, 2010 and 2009, franchise
contributions to these Marketing Funds totaled approximately $2.1 million and
$2.2 million, respectively. At June 30, 2010 and December 31, 2009,
respectively, our Unaudited Condensed Consolidated Financial Statements include
loans and advances receivable of $1.0 million and $1.2 million due from The
Athlete’s Foot Marketing Support Fund, LLC (“TAF MSF”). As of June 30, 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 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 and $0.2 million for both the three month
and six month periods ended June 30, 2010 and 2009, respectively, to the TAF
MSF. The amount of the liability recorded related to the matching contribution
program with the TAF MSF was $0.6 million as of June 30, 2010 and $0.7 million
as of 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 June 30, 2010 and 2009, R&D expenses were less than $0.1
million. For the six months ended June 30, 2010 and 2009, R&D expenses
totaled approximately $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.
12
(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, among others, has both of the following characteristics:
(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.
Property
and equipment, net, consists of the following (in thousands):
Estimated
Useful Lives
|
June 30, 2010
|
December 31, 2009
|
|||||||
Furniture
and fixtures
|
7 -
10 Years
|
$
|
749
|
$
|
749
|
||||
Computers
and equipment
|
3 -
5 Years
|
3,289
|
2,206
|
||||||
Software
|
3
Years
|
731
|
714
|
||||||
Building
|
25
Years
|
1,149
|
1,129
|
||||||
Land
|
Unlimited
|
263
|
263
|
||||||
Leasehold
improvements
|
Term of Lease
or
Economic
Life
|
2,891
|
2,882
|
||||||
Total
property and equipment
|
9,072
|
7,943
|
|||||||
Less
accumulated depreciation
|
(4,985
|
)
|
(4,681
|
)
|
|||||
Property
and equipment, net of accumulated depreciation
|
$
|
4,087
|
$
|
3,262
|
Depreciation
expense related to property and equipment for the three months ended June 30,
2010 and 2009 was $0.2 million and $0.6 million, respectively. Depreciation
expense related to property and equipment for the six months ended June 30, 2010
and 2009 was $0.3 million and $1.3 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. The
Asset Sale did not result in any adjustment to the carrying value of our
intangible assets as of June 30, 2010.
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):
13
June
30, 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):
June
30, 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
|
(2,440
|
)
|
(2,053
|
)
|
||||
Total
|
$
|
4,633
|
$
|
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 June 30, 2010 and 2009. We recorded total
amortization expense of $0.4 million and $0.5 million for the six months ended
June 30, 2010 and 2009, respectively.
The
following table presents the future amortization expense that we expect to
recognize over the amortization period of other intangible assets as of June 30,
2010 (in thousands):
Amortization
Period
|
For the six
months ended
December 31,
|
For the year ended December 31,
|
||||||||||||||||||||||||||
(Years)
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
||||||||||||||||||||||
The
Athlete's Foot
|
20
|
$ | 58 | $ | 115 | $ | 115 | $ | 115 | $ | 115 | $ | 1,361 | |||||||||||||||
Great
American Cookies
|
7
|
55 | 111 | 111 | 111 | 111 | 9 | |||||||||||||||||||||
Marble
Slab Creamery
|
20
|
30 | 61 | 61 | 61 | 61 | 750 | |||||||||||||||||||||
MaggieMoo's
|
20 | 17 | 33 | 33 | 33 | 33 | 398 | |||||||||||||||||||||
Pretzel
Time
|
5 | 113 | 225 | 35 | – | – | – | |||||||||||||||||||||
Pretzelmaker
|
5 | 83 | 166 | 53 | – | – | – | |||||||||||||||||||||
Total
Amortization
|
$ | 356 | $ | 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.
14
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 June 30, 2010, our maximum loss exposure is limited to our
investment of $0.3 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 June 30, 2010 and
2009 which we included in our operating income. During both the six month
periods ended June 30, 2010 and 2009, NFM received management fees of
approximately $0.1 million. As of June 30, 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 $0.3 million at June 30, 2010 and December
31, 2009. We recorded equity income of less than $0.1 million for both the three
months ended June 30, 2010 and 2009. We recorded equity income of $0.1
million and $0.3 million for the six months ending June 30, 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 was not the primary
beneficiary as it did 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):
June
30,
2010
|
December 31,
2009
|
|||||||
Accounts
payable
|
$
|
5,103
|
$
|
4,470
|
||||
Accrued
interest payable
|
225
|
245
|
||||||
Accrued
professional fees
|
272
|
150
|
||||||
Deferred
rent - current portion
|
68
|
80
|
||||||
Accrued
compensation and benefits
|
457
|
203
|
||||||
Income
and other taxes
|
504
|
249
|
||||||
All
other
|
1,019
|
1,199
|
||||||
Total
|
$
|
7,648
|
$
|
6,596
|
15
(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
|
(312
|
)
|
||
Restructuring
liability as of June 30, 2010
|
$
|
—
|
(7) DEBT
|
(a)
|
BTMUCC
Credit Facility
|
Our debt
consisted of borrowings under the BTMUCC Credit Facility. On March 12, 2007,
NexCen Acquisition Corp., now NexCen Holding Corporation, (“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”).
On July
30, 2010, BTMUCC accepted $98.0 million and payment of BTMUCC’s transaction
expenses of $0.2 million to a third party, in full satisfaction of the
outstanding borrowings under the BTMUCC Credit Facility. See Note 13 – Subsequent Events, under the
heading “Asset Sale and Debt Repayment.” This debt consisted of
the following three separate tranches: the Class A Franchise Notes, the Class B
Franchise Note and the Deficiency Note (in thousands):
June
30, 2010
|
December 31, 2009
|
|||||||
Class
A Franchise Notes
|
$
|
83,156
|
$
|
85,367
|
||||
Class
B Franchise Note
|
35,320
|
36,251
|
||||||
Deficiency
Note
|
17,854
|
16,565
|
||||||
Total
|
136,330
|
138,183
|
||||||
Less
debt discount
|
(604
|
)
|
(853
|
)
|
||||
Total
|
$
|
135,726
|
$
|
137,330
|
The
estimated fair value of the Company’s debt as of June 30, 2010 and December 31,
2009 was approximately $98.0 million and $92.7 million,
respectively.
Each
Class A Franchise Note was secured by substantially all of the assets of the
Issuer and each of its subsidiaries (the “Co-Issuers”) and was collectively set
to mature on July 31, 2013. The Class A Franchise Notes bore interest at LIBOR
(which in all cases under the BTMUCC Credit Facility was the one-month LIBOR
rate as in effect from time to time) plus 3.8% per year through July 31, 2011
and then LIBOR plus 5.0% per year thereafter until maturity on July 31, 2013.
The rate in effect at June 30, 2010 was 4.1%. The weighted average
interest rate on variable rate debt for the three months ended June 30, 2010 and
2009 was 4.1% and 4.3%, respectively. The weighted average interest rate on
variable rate debt for the six months ended June 30, 2010 and 2009 was 4.1% and
4.3%, respectively.
16
The Class
B Franchise Note was secured by substantially all of the assets of the Issuer
and each Co-Issuer and was set to mature on July 31,
2011. As of January 20, 2009 through maturity, these notes bore interest at a
fixed rate of 8% per year. BTMUCC would have been 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 had not been repaid by October 1,
2010 (“Warrant Trigger Date,” which was changed by the January 14, 2010,
February
10, 2010, March 30, 2010, April 20, 2010 and May 13, 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
remained outstanding on the Warrant Trigger Date.
The
Deficiency Note represented the amounts outstanding on the note that was backed
by the Bill Blass brand, which had 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 was set to mature on July 31, 2013 and bore interest at a
fixed rate of 15% per year through maturity. There was no scheduled principal
payment on the Deficiency Note until its maturity date, and interest was due on
a payment-in-kind (“PIK”) basis that deferred cash interest payments until its
maturity on July 31, 2013.
During
the months of January 2010 through May 2010, we entered into six separate
amendments of the BTMUCC Credit Facility that cumulatively (1) extended the
Warrant Trigger Date from December 31, 2009 to October 1, 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 had changed
significantly since its inception, the basic structure of the facility had
remained the same. The Issuer and Co-Issuers issued notes pursuant to the terms
of the BTMUCC Credit Facility. These notes were secured by the assets of each
brand, which consisted of the respective intellectual property assets and the
related royalty revenues and trade receivables. Special purpose,
bankruptcy-remote entities (each, a “Brand Entity”) held the assets of each
brand. The Issuer, also a special purpose, bankruptcy-remote entity, was
the parent of all of the Brand Entities. The notes were cross-collateralized
with each other, and each Brand Entity was a Co-Issuer of each note. Repayment
of each note and all other obligations under the facility were the joint and
several obligation of the Issuer and each Brand Entity. Certain other NexCen
subsidiaries (the “Managers”) did not own any assets comprising the brands, but
managed the various Brand Entities and were parties to management agreements
that defined the relationship among the Managers and the respective Brand
Entities they managed. In the event that certain adverse events occurred with
respect to the Company, or if the Managers failed to meet certain
qualifications, BTMUCC had the right to replace the Managers.
NexCen
was not a named borrowing entity under the BTMUCC Credit Facility. However, the
Brand Entities earned substantially all of our revenues and remitted 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 controlled the amount of cash that could 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 was
required to be paid out of cash on hand.
Our
BTMUCC Credit Facility prohibited NexCen, the Issuer, the Managers and each
Brand Entity from securing any additional borrowings without the prior written
consent of BTMUCC. It also contained 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 have resulted in a default under the BTMUCC Credit Facility, which could
then have triggered, 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 contained a subjective acceleration clause
whereby our lender had the right to accelerate all principal payment obligations
upon a “material adverse change,” which was 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. BTMUCC did not invoke the “material adverse change” provision or
otherwise seek acceleration of our principal payment
obligations.
17
BTMUCC
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. As of June 30, 2010, we anticipated
that, unless we were able to obtain waivers or amendments from our lender, we
would breach certain covenants under the BTMUCC Credit Facility in 2010,
including requirements to meet certain free cash flow margin and debt service
coverage ratio. In addition, our scheduled principal payments under the BTMUCC
Credit Facility included a final principal payment on our Class B Franchise Note
of $34.5 million in July 2011. As of June 30, 2010, we did not expect that we
would be able to make this principal payment. Accordingly, we classified all of
the debt outstanding under the BTMUCC Credit Facility as a current liability as
of June 30, 2010 and December 31, 2009.
On May
13, 2010, in connection with NexCen’s entry into the Acquisition
Agreement with GFG, NexCen and certain of our subsidiaries entered into
agreements with BTMUCC that were intended to facilitate and support the
completion of the Asset Sale. The agreements provided 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 $98.0
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 Asset Sale.
The
scheduled aggregate maturities of our debt as of June 30, 2010 were as follows
(in thousands):
Class A
|
Class B
|
Deficiency Note(1)
|
Total
|
|||||||||||||
2010
|
$
|
1,350
|
$
|
356
|
$
|
-
|
$
|
1,706
|
||||||||
2011
|
3,390
|
34,964
|
-
|
38,354
|
||||||||||||
2012
|
3,918
|
-
|
-
|
3,918
|
||||||||||||
2013
|
74,498
|
-
|
28,471
|
102,969
|
||||||||||||
Total
|
$
|
83,156
|
$
|
35,320
|
$
|
28,471
|
$
|
146,947
|
|
Maturities
related to the Deficiency Note included additional PIK interest of
approximately $10.6 million that would have been due in 2013 if we had not
paid the Deficiency Note prior to its
maturity.
|
As of
July 30, 2010, the closing date of the Asset Sale, the outstanding amount of
indebtedness owed to BTMUCC was $136.2 million. In connection with the closing
of the Asset Sale, BTMUCC accepted $98.0 million plus payment of BTMUCC’s
transaction expenses of $0.2 million to a third party, in full satisfaction of
the outstanding borrowings under the BTMUCC Credit Facility. Accordingly, the
BTMUCC Credit Facility was cancelled, and all liens were released. See Note 13 –
Subsequent
Events.
We
amortized 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 expensed 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 incurred them, and we included these costs
in our Consolidated Statements of Operations as Financing Charges.
(b)
|
Direct
and Guaranteed Lease Obligations
|
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 June 30, 2010 and December 31, 2009 as
follows (in thousands):
18
June
30, 2010
|
December 31,
2009
|
|||||||
Lease
obligations
|
$
|
318
|
$
|
313
|
||||
Lease
guarantees
|
315
|
315
|
||||||
Total
|
$
|
633
|
$
|
628
|
June
30, 2010
|
December 31,
2009
|
|||||||
Current
|
$
|
432
|
$
|
432
|
||||
Long-term
|
201
|
196
|
||||||
Total
|
$
|
633
|
$
|
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 June 30, 2010 and December 31, 2009 of $1.8
million and $2.7 million, respectively.
(8)
STOCK BASED COMPENSATION
We did
not grant any options or warrants during the three and six months ending June
30, 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 | |||||
Issuance
of Restricted Stock
|
(50 | ) | $ | - | ||||
Cancelled/Forfeited/Expired
|
(97 | ) | $ | 0.86 | ||||
Outstanding
June 30, 2010
|
4,145 | $ | 2.64 |
Total
stock-based compensation expense included in selling, general and administrative
expenses was approximately $0.1 million and $0.2 million during the three months
ended June 30, 2010 and 2009, respectively. Total stock-based
compensation expense included in selling, general and administrative expenses
was approximately $0.1 million and $0.3 for the six months ended June 30, 2010
and 2009, respectively. The total unrecognized
compensation cost related to non-vested share-based compensation agreements
granted under all stock option plans as of June 30, 2010 is approximately $0.2
million. We expect to recognize this cost over the remaining vesting period of
less than 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 June 30,
2010 and 2009 or the six months ended June 30, 2010 and 2009.
No stock
options were exercised in the three or six months ended June 30, 2010 or 2009.
The total number of warrants outstanding as of June 30, 2010 was 1,183,333, all
of which were exercisable. There were 904,839 shares available for issuance
as of June 30, 2010.
19
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 was
$0.2 million for the three months ending June 30, 2010 and $0.1 million during
the three months ended June 30, 2009. Our current provision for taxes for the
six months ending June 30, 2010 and 2009 was $0.2 million in both periods. We
recorded no deferred income taxes or benefits for the three months and six
months ending June 30, 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 that there exists objective evidence of our ability to generate
sustainable taxable income from our operations in order to recognize the value.
Based upon our historical operating performance, among other factors, we 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 June 30, 2010, we do not
believe that we 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. The Company thus expects to be able to apply its tax loss
carry-forwards to offset substantially all taxable gain, if any, arising
out of the Asset Sale. However, the Company and its subsidiaries will incur
significant limitations on their ability to utilize the remainder of their tax
loss carry-forwards as a result of the Asset Sale, and likely will forfeit
substantially all of their tax loss carry-forwards when NexCen implements the
plan of dissolution approved by the Company’s stockholders. See Note 13 –
“Subsequent
Events.”
(10)
RELATED PARTY TRANSACTIONS
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 June 30, 2010 and December 31,
2009, we had receivable balances of $1.0 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 June 30, 2010 and
2009. We recorded interest income earned from the fund in the amount of less
than $0.1 million for the six months ended June 30, 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 June 30, 2010
and 2009, we contributed approximately $0.1 million in matching funds to the TAF
MSF. For both the six months ended June 30, 2010 and 2009, we contributed
approximately $0.2 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 $0.6 million and $0.7 million as of June 30, 2010 and December 31, 2009,
respectively.
20
(11)
COMMITMENTS AND CONTINGENCIES
(a) LEGAL
PROCEEDINGS
Class Action. A
purported class action was filed on July 23, 2010 in the Supreme Court of the
State of New York against NexCen Brands, members of the Company’s Board of
Directors and management, LLCP, and GFG. This action is captioned: Soheila Rahbari v. NexCen Brands,
Inc., et al., Index No. 651063/2010. The complaint alleges, among other
things, that certain of the Company’s directors and officers breached their
fiduciary duties of candor, loyalty, due care, independence, good faith and fair
dealing in connection with the proposed sale of the Company’s franchise business
assets to GFG. Plaintiff seeks injunctive relief, rescission, constructive trust
and an award of costs including attorneys’ fees. On July 28, 2010, the
Company removed the lawsuit to the United States District Court for the Southern
District of New York.
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 August 19,
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 by the same plaintiff in
the class action litigation filed in the Supreme Court of the State of New York
described above. 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 held the hearing on the motion to dismiss on June 25, 2010. On July 30,
2010, the Court dismissed the amended complaint.
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.
21
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. On July 15, 2010, we were notified by the
Enforcement Division of the SEC that it had completed its two year investigation
of the Company and does not intend to recommend any enforcement action by the
SEC.
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
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 2018.
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. The lease for our NFM facility in Norcross, Georgia was assumed by
GFG in connection with the Asset Sale. See Note 13 – “Subsequent
Events.”
(c)
LONG-TERM RESTRICTED CASH
As of
June 30, 2010, we had long-term restricted cash of $0.8 million. Approximately
$0.2 million of long-term restricted cash was used as collateral for a letter of
credit on our NFM lease, which lease was assigned pursuant to the Asset
Sale. Additionally, 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. As of December 31, 2009, we had
long-term restricted cash of $1.0 million consisting primarily of amounts to be
used to fund the capital improvements to expand the production capabilities of
our manufacturing facility, substantially all of which were expended as of June
30, 2010 to fund the balance of the capital improvements.
22
(12)
DISCONTINUED OPERATIONS
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Operating
expenses
|
(11 | ) | 361 | (18 | ) | 227 | ||||||||||
Other income
|
44 | 1 | 68 | 2 | ||||||||||||
Income
before income taxes
|
33 | 362 | 50 | 229 | ||||||||||||
Income
taxes
|
- | - | - | - | ||||||||||||
Net
income from discontinued operations
|
$ | 33 | $ | 362 | $ | 50 | $ | 229 | ||||||||
Income per
share (basic and diluted) from discontinued operations
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
Weighted
average shares outstanding
|
56,968 | 56,952 | 56,960 | 56,812 |
Litigation and SEC
Investigation
On July
15, 2010, we were notified by the Enforcement Division of the SEC that it had
completed its two year investigation of the Company and does not intend to
recommend any enforcement action by the SEC.
On July
23, 2010, a purported class action was filed in the Supreme Court of the State
of New York against NexCen Brands, members of the Company’s Board of Directors
and management, LLCP, and GFG. This action is captioned: Soheila Rahbari v. NexCen Brands,
Inc., et al., Index No. 651063/2010. The complaint alleges, among other
things, that certain of the Company’s directors and officers breached their
fiduciary duties of candor, loyalty, due care, independence, good faith and fair
dealing in connection with the proposed sale of the Company’s franchise business
assets to GFG. Plaintiff seeks injunctive relief, rescission, constructive trust
and an award of costs including attorneys’ fees. On July 28, 2010, the
Company removed the lawsuit to the United States District Court for the Southern
District of New York.
On July
30, 2010, the court dismissed the amended complaint in the federal shareholder
derivative action pending in the United States District Court for Southern
District of New York against the directors and former directors of NexCen,
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).
Asset Sale and Debt
Repayment
On July
29, 2010, a special meeting of the Company’s stockholders was held. At the
special meeting, the stockholders approved: 1) the Asset Sale; 2) the
plan of complete dissolution and liquidation of NexCen, including the
liquidation and dissolution of NexCen contemplated thereby, following the
closing of the Asset Sale; 3) an amendment to NexCen’s certificate of
incorporation to reduce the number of authorized shares of capital stock from 1
billion shares of common stock and 1.0 million shares of preferred stock to
100.0 million shares of common stock and 1.0 million shares of preferred stock;
and 4) the authorization for the NexCen Board of Directors to adjourn the
special meeting, in its discretion, if the voting power of holders of NexCen
common stock represented and voting in favor of the Asset Sale proposal, the
plan of dissolution proposal or the share reduction proposal is insufficient to
approve any of such proposals under Delaware law.
23
On July
30, 2010, NexCen completed the Asset Sale and received cash proceeds of
approximately $8.8 million after payment of transaction expenses, purchase price
adjustments specified in the sale agreement and pay-off of our debt. The
final sale proceeds remain subject to a post-closing adjustment and may result
in NexCen receiving additional funds or being required to make a payment to GFG.
In accordance with the terms of the Acquisition Agreement, GFG acquired 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 dough and pretzel mix
factory and research facility in Atlanta, Georgia. Specifically, the Company (i)
sold to GFG all of the Company’s equity interests in TAF Australia, LLC; (ii)
caused NexCen Holding Corporation to sell to GFG 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) caused NB Supply
Management Corp. to sell to GFG certain specified assets, and to assign to GFG
certain specified liabilities; and (iv) caused NFM to sell to GFG certain
specified assets, and to assign to GFG certain specified liabilities. As a
result of the Asset Sale, effective as of July 30, 2010, NexCen is a shell
company with no remaining material assets, as defined in Rule 12b-2 of the
Securities Act of 1934, as amended.
In
conjunction with the Asset Sale, BTMUCC accepted $98.0 million of the sales
proceeds from the Asset Sale in full satisfaction of the outstanding borrowings
under the BTMUCC Credit Facility. The BTMUCC Credit Facility was cancelled and
all liens were released. We recorded a gain on the early extinguishment of our
BTMUCC Credit Facility of $35.9 million, which we believe will be tax free due
to the utilization of a portion of our NOL’s. We anticipate that any
remaining NOL’s will be forfeited in connection with the dissolution of the
Company. NexCen retained the balance of the sale proceeds from the Asset
Sale, plus a portion of the cash on hand. Subject to the resolution of existing
and contingent liabilities and claims, as required by Delaware law, it is
expected that the plan of dissolution approved by the stockholders will result
in a liquidating distribution to NexCen’s stockholders. As set forth in the
June 11, 2010 proxy statement, NexCen Brands continues to estimate that upon the
Company’s dissolution, the cash proceeds ultimately available for distribution
to the holders of NexCen common stock will be between $0.12 and $0.16 per share
of common stock. However, NexCen cannot yet predict with certainty the
timing or amount of any such distribution. See Item 1A. Risk
Factors.
Estimated Liquidating
Distribution
Absent
the emergence of a higher value alternative that the Company’s Board of
Directors concludes it has a fiduciary obligation to explore, the Company
intends to file a certificate of dissolution. Pursuant to the plan of
dissolution, the Company intends to liquidate all of its remaining non-cash
assets, which is not expected to result in material, incremental value.
After paying or making reasonable provision for the payment of claims
against and obligations of the Company as required by law, the Company intends
to distribute any remaining cash to stockholders. The Company may defend suits
and incur claims, liabilities and expenses (such as salaries and benefits, directors' and
officers' insurance, payroll and local taxes, facilities expenses, legal,
accounting and consulting fees, rent, and miscellaneous office expenses) in
implementing the plan of dissolution and during the three years following the
effective date of the dissolution
of the Company. Satisfaction of these claims, liabilities and expenses
will reduce the amount of cash available for ultimate distribution to
stockholders. The Company continues to estimate that upon the
Company’s dissolution, the cash proceeds ultimately available for distribution
to the holders of the Company’s common stock will be between $0.12 to $0.16 per
share of common stock. However, uncertainties as
to the precise net value of our assets, the ultimate amount of our liabilities,
the amount of operating costs during the liquidation and winding-up process and
related timing to complete such transactions make it impossible to predict with
certainty the actual net cash amount that will ultimately be available for
distribution to our stockholders or the timing of any such
distribution.
The
following estimates are not guarantees, do not reflect the total range of
possible outcomes and have not been audited. Shareholders may receive
substantially less than the amount currently estimated, or may not receive any
liquidating distributions. The following is a projected liquidating distribution
analysis (in millions):
Low Range of
Net Proceeds for
Distribution
($, in millions)
|
High Range of
Net Proceeds for
Distribution
($, in millions)
|
|||||
Net
Cash to NexCen(1)
|
$ |
14.3
|
$ 14.9
|
|||
Remaining
NexCen Liabilities:
|
||||||
Employee
Severance(2)
|
(2.9
|
)
|
(2.9
|
)
|
||
Accounts
Payable
|
(1.3
|
)
|
(1.2
|
)
|
||
Settlement
of Lease Liabilities(3)
|
(0.5
|
)
|
(0.5
|
)
|
||
Insurance
|
(0.7
|
)
|
(0.7
|
)
|
||
Other
Operating Expenses(4)
|
(2.0
|
)
|
(0.5
|
)
|
||
Total
|
$ |
(7.4
|
)
|
$ (5.8
|
)
|
|
Estimated
Cash to Distribute to Stockholders
|
$ |
6.9
|
$ 9.1
|
|||
Estimated
Per Share Distribution(5)
|
$ |
0.12
|
$ 0.16
|
24
(1)
|
Estimated amounts include
(i) proceeds from the Asset Sale of $112.5 million, after payment of
$98.0 million to BTMUCC pursuant to the Accord and Satisfaction Agreement
and closing adjustments specified in the Acquisition Agreement
including an estimated working capital adjustment that is subject to a
post-closing true-up 60 days after closing, which may result in the
Company receiving additional funds or being required to make a payment to
the Purchaser (ii) cash on
hand at closing of the Asset Sale of $6.0 million
retained by the Company, (iii) payment of transaction-related fees
and expenses, which are currently estimated to range between approximately
$4.0 and $4.2 million and (iv) proceeds from tax refunds of
approximately $40,000.
|
(2)
|
Estimated amounts assume that all
remaining
executive officers
and corporate employees at NexCen's headquarters in New York and corporate
employees in Norcross, Georgia will be terminated in connection with the
consummation of the asset sale and the implementation of the plan of
dissolution.
|
(3)
|
The Company has
reached an agreement in principle to terminate its New York City
headquarters corporate lease and vacate the premises by August 31, 2010
for a lump sum payment of approximately $1.1 million. Estimated amounts are net of a
$550,000 letter of credit issued to secure the New York City corporate
lease.
|
(4)
|
Estimated amounts
are for all claims, liabilities and expenses related to the implementation
of the plan of dissolution and during the three years following the effective date of
the dissolution of the Company, including but not limited to director fees, salaries of employees prior to their
terminations and
their benefits, directors' and
officers' insurance, payroll and local taxes, facilities
expenses, legal,
accounting and consulting fees, rent, and miscellaneous office expenses.
The estimated amounts assume that any costs including the amount of any
settlements involved in resolving pending securities and class action
litigation, aside from the Company’s insurance deductible, will be
covered by available insurance for such matters.
|
(5)
|
Calculated based on
57,201,730 fully diluted shares
(including only those outstanding options with an exercise price of not
more than $0.16 per share) outstanding as of June 30,
2010.
|
25
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 and potential
future distributions to stockholders 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, including the factors set out in Item 1A of
Part II, under the heading “Risk Factors,” factors discussed in our other
reports filed with the Securities and Exchange Commission, and those discussed
in Item 1A under the heading “Risk Factors” of our Annual Report on Form 10-K
for the year ended December 31, 2009 (the “2009 10-K”). We note that a
majority of the factors discussed in our 2009 10-K relate to the business that
we sold in the Asset Sale and will not be applicable to our activities in the
future. 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
As of
June 30, 2010, and prior to the completion of the Asset Sale on July 30, 2010,
NexCen was a strategic brand management company that owned and managed a
portfolio of seven franchised brands, operating in a single business segment:
Franchising. These brands included five QSR brands (Great American Cookies,
Marble Slab Creamery, MaggieMoo’s, Pretzel Time and Pretzelmaker) and two retail
footwear and accessories brands (TAF and Shoebox New York). All seven
franchised brands were managed by NFM, a wholly owned subsidiary of NexCen.
Our franchise network, across all of our brands, consisted of
approximately 1,700 stores in 38 countries.
We earned
revenues primarily from the franchising, royalty, licensing and other
contractual fees that third parties paid us for the right to use the
intellectual property associated with our brands and from the sale of cookie
dough and other ancillary products to our Great American Cookies
franchisees.
We
discuss this business in detail in Item 1-Business of our 2009 10-K, and we
discuss the risks that affected this business in Item 1A-Risk Factors of our
2009 10-K.
On July
30, 2010, we sold substantially all of our assets (including all of the
franchise brands that we managed) in the Asset Sale. Substantially all of
our employees became employed by GFG, the buyer of our assets. We received
cash proceeds of $112.5 million in the Asset Sale, before payment of transaction
expenses, purchase price adjustments specified in the Acquisition Agreement and
payment of $98.0 million to BTMUCC in full satisfaction of our outstanding
borrowings under the BTMUCC Credit Facility, which was terminated. We no
longer have any obligations under the BTMUCC Credit Facility, and our remaining
assets are no longer subject to any liens or other restrictions in favor of
BTMUCC. Absent the emergence of a higher value alternative that the
Company’s Board of Directors concludes it has a fiduciary obligation to explore,
we intend to file a certificate of dissolution with the Secretary of State of
Delaware and formally commence the process of dissolving and winding down
NexCen, including all of our subsidiaries. Our stockholders approved the
Asset Sale and the plan of dissolution at the special meeting of stockholders
held on July 29, 2010. See Note 13 - “Subsequent Events,” under the
heading “Estimated Liquidating Distribution.”
As a
result of the completion of the Asset Sale, effective July 30, 2010 we ceased to
have an operating business. We also no longer have any outstanding
indebtedness or other obligations under the BTMUCC Credit Facility. We
recorded a gain on the early extinguishment of our BTMUCC Credit Facility of
$35.9 million, which we believe will be tax free due to the utilization of a
portion of our NOL’s. We anticipate that any remaining NOL’s will be
forfeited in connection with the dissolution of the Company. After the payment
to BTMUCC and the payment of various transaction-related costs and expenses, we
retained approximately $8.8 million of the proceeds from the Asset Sale.
Consequently, as of August 1, 2010, we had approximately $15.0 million of cash
on hand (including $1.0 million of restricted cash). As of that date,
we had approximately no other material assets and estimate approximately $5.8 to
$7.4 million of liabilities. See Note 13 - “Subsequent Events,” under the
heading “Estimated Liquidating Distribution.”
26
In the
dissolution process, we intend to dispose of our remaining non-cash assets, pay
or otherwise resolve our existing and contingent liabilities and claims and
distribute remaining cash proceeds to our stockholders. We do not intend
to acquire, commence or otherwise be involved in any other business or
operations. Subject to the resolution of existing and contingent
liabilities and claims, as required by Delaware law, we expect that the
dissolution process will result in a liquidating distribution to NexCen’s
stockholders. While we continue to estimate that the distribution to
stockholders should be in the range of $0.12 to $0.16 per share, we cannot yet
predict with certainty the timing or amount of such distribution. The
dissolution process and the payment of any distribution to stockholders involve
substantial risks and uncertainties, as discussed below in Item 1A-Risk
Factors.
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, as they relate to our
franchise management business, 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 the brands we owned and managed through July
30, 2010 is seasonal. However, we believe the seasonality of these brands is
complementary, so that the Company’s operations did not experience material
seasonality on an aggregate basis. For example, average sales of the
mall-based QSR brands (Great American Cookies, Pretzel Time, and Pretzelmaker)
are higher during the winter months, especially in December, whereas average
sales of the ice cream brands (MaggieMoo’s and Marble Slab Creamery) are higher
in the summer months and lower during the winter months.
NON-GAAP FINANCIAL
MEASURES
In
discussing our financial results for the three and six months ended June 30,
2010 and 2009, we refer to certain non-GAAP financial measures, including total
operating expenses, operating income, loss from continuing operations before
income taxes and loss from continuing operations each as adjusted to exclude
certain material special charges and expenses. We believe that the use of
these additional measures is appropriate to enhance an overall understanding of
our past financial performance in light of these material special charges and
expenses. The adjustments to our GAAP results are made with the intent of
providing both management and our investors with a more complete understanding
of the underlying financial performance of the Company and our marketplace
performance. The presentation of this additional information is not meant
to be considered in isolation or as a substitute for total operating expenses,
operating income, loss from continuing operations before income taxes and loss
from continuing operations prepared in accordance with GAAP. The following
table represents our unaudited operating results on a non-GAAP adjusted basis
(in thousands, except share data):
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Total
revenues
|
$ | 10,578 | $ | 11,781 | $ | 20,592 | $ | 23,741 | ||||||||
Total
operating expenses
|
(10,094 | ) | (10,179 | ) | (18,364 | ) | (20,333 | ) | ||||||||
Adjustments
for special charges:
|
||||||||||||||||
Special
investigations (1)
|
- | 52 | - | 85 | ||||||||||||
Strategic
initiative expenses (2)
|
1,551 | - | 1,700 | - | ||||||||||||
Total
operating expenses, as adjusted
|
(8,543 | ) | (10,127 | ) | (16,664 | ) | (20,248 | ) | ||||||||
Operating
income, as adjusted
|
2,035 | 1,654 | 3,928 | 3,493 | ||||||||||||
Total
non-operating expenses
|
(2,540 | ) | (2,299 | ) | (4,935 | ) | (4,763 | ) | ||||||||
Loss
from continuing operations before income taxes, as
adjusted
|
(505 | ) | (645 | ) | (1,007 | ) | (1,270 | ) | ||||||||
Income
taxes
|
(162 | ) | (81 | ) | (239 | ) | (155 | ) | ||||||||
Loss
from continuing operations, as adjusted
|
$ | (667 | ) | $ | (726 | ) | $ | (1,246 | ) | $ | (1,425 | ) |
(1)
|
The
Company incurred outside legal fees related to special investigations
conducted at the direction of the Audit Committee of the Board of
Directors, the Company and the SEC, respectively, regarding the Company's
public disclosure on May 19, 2008 of previously undisclosed terms of a
January 2008 amendment of the BTMUCC Credit
Facility.
|
(2)
|
The
Company incurred legal costs, investment banking fees, incremental board
fees and other costs associated with identifying and evaluating
alternatives to our debt and capital structure and executing the Asset
Sale and plan of dissolution.
|
27
RESULTS OF CONTINUING
OPERATIONS FOR THREE MONTH PERIODS
ENDED JUNE 30, 2010 AND JUNE 30, 2009
Royalty,
Franchise Fee, Factory, Licensing and Other Revenues
We
recognized $10.6 million in revenues for the three months ended June 30, 2010, a
decrease of $1.2 million, or 10%, in revenues from the three months ended June
30, 2009. Of the $10.6 million in revenues recognized for the three months ended
June 30, 2010, $5.4 million related to royalties, a decrease of $0.7 million, or
11%, from the 2009 comparable quarter; $4.3 million related to factory revenues
from the sales of cookie dough and other products to our Great American Cookies
franchisees, which remained the same as the 2009 comparable quarter; $0.6
million related to franchise fees, a decrease of $0.5 million, or 47%, from the
2009 comparable quarter; and $0.2 million related to licensing and other
revenues, which decreased 11% 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 TAF Australia
and New Zealand licensing transaction.
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 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.
Cost
of Sales
For the
three months ended June 30, 2010, we incurred $2.7 million in cost of sales,
which remained flat compared to 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 38%
for the three months ended June 30, 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 June 30, 2010, we recorded Franchising SG&A expenses of
$3.5 million, a 2% increase from the 2009 comparable quarter. We
recorded Corporate SG&A expenses of $1.5 million for the three months
ended June 30, 2010, a decrease of 23% 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 June 30, 2010, we incurred professional fees related to
franchising of $0.3 million, a decrease of 44% from the 2009 comparable quarter.
We incurred corporate professional fees of $0.2 million for the three months
ended June 30, 2010, a decrease of 65% 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.
28
Strategic
Initiative Expenses
Strategic
initiative expenses of $1.6 million for the three months ended June 30, 2010
represent legal costs, incremental board fees and other related costs associated
with identifying and evaluating alternatives to our debt and capital structure
and implementing the Asset Sale and plan of dissolution.
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 June 30, 2010, we recorded depreciation and amortization
expense of $0.3 million, a decrease of 64% 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
As a
result of the foregoing factors, operating income for the three months ended
June 30, 2010 was $0.5 million, a decrease of 70% from the 2009 comparable
quarter. Excluding special charges for strategic initiative expenses and special
investigations (“as adjusted” or “adjusted”) adjusted
operating income for the three months ended June 30, 2010 was $2.0
million, an increase $0.4 million or 23% 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 June 30, 2010, we recognized interest
income of $0.1 million compared to less than $0.1 million for the three months
ended June 30, 2009.
Interest
Expense
For the
three months ended June 30, 2010, we recorded interest expense of $2.6
million, a decrease of 4% from the 2009 comparable quarter. Interest expense
consists primarily of interest incurred in connection with our borrowings 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 June 30, 2010 and 2009, and imputed
interest of less than $0.1 million for both the three months ended June 30, 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 due primarily to decreased borrowings (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 June 30, 2010 and 2009, we recorded other income of less than
$0.1 million and $0.4 million, respectively. Other income consists primarily of
earnings from our equity investment in Shoebox New York. The results for the
three months ended June 30, 2009 include lease settlements of approximately $0.4
million.
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 June 30, 2010 was $2.1 million, an increase in
the loss of $1.4 million from the 2009 comparable quarter. Excluding the
aforementioned special items, adjusted loss from continuing operations before
income taxes for the three months ended June 30, 2010 was $0.5 million, an
improvement of $0.1 million or 22% from the 2009 comparable
quarter.
29
Income
Taxes
For both
the three months ended June 30, 2010 and 2009, we recorded a current provision
for income taxes of $0.2 million and $0.1 million, respectively, 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.
RESULTS OF CONTINUING
OPERATIONS FOR SIX MONTH PERIODS ENDED
JUNE 30, 2010 AND JUNE 30, 2009
Royalty,
Franchise Fee, Factory, Licensing and Other Revenues
We
recognized $20.6 million in revenues for the six months ended June 30, 2010, a
decrease of $3.1 million, or 13%, in revenues from the six months ended June 30,
2009. Of the $20.6 million in revenues recognized for the six months ended June
30, 2010, $10.4 million related to royalties, a decrease of $1.6 million, or
13%, from the 2009 comparable period; $8.5 million related to factory revenues
from the sales of cookie dough and other products to our Great American Cookies
franchisees, a decrease of $0.2 million, or 3%, from the 2009 comparable period;
$1.1 million related to franchise fees, a decrease of $1.3 million, or 52%, from
the 2009 comparable period; and $0.5 million related to licensing and other
revenues, which decreased $0.1 million or 10% as compared to the 2009 comparable
period. 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 period-over-period 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 TAF Australia and
New Zealand licensing transaction.
The
period-over-period decrease in initial franchise fees reflects the difficulties
we 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
period-over-period 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
six months ended June 30, 2010, we incurred $5.4 million in cost of sales, a
decrease of 3%, from the 2009 comparable period. 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 37% for the six
months ended June 30, 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 six months ended June 30, 2010,
we recorded Franchising SG&A expenses of $6.5 million, a decrease of 2% from
the 2009 comparable period. This period-over-period 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 $2.9 million for the six months ended June 30, 2010, a decrease of
28% from the 2009 comparable period. This period-over-period 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.
30
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
six months ended June 30, 2010, we incurred professional fees related to
franchising of $0.6 million, a decrease of 40% from the 2009 comparable period.
We incurred corporate professional fees of $0.8 million for the six months ended
June 30, 2010, a decrease of 49% from the 2009 comparable period. The
period-over-period 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 $1.7 million for the six months ended June 30, 2010
represent legal costs, incremental board fees and other related costs associated
with identifying and evaluating alternatives to our debt and capital structure
and implementing the Asset Sale and plan of dissolution.
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
six months ended June 30, 2010, we recorded depreciation and amortization
expense of $0.6 million, a decrease of 64% from the 2009 comparable period. The
period-over-period decrease is primarily the result of accelerated depreciation
expense related to the New York headquarters office which ceased in August
2009.
Operating
Income
As a
result of the foregoing factors, operating income for the six months ended June
30, 2010 was $2.2 million, a decrease of 35% from the 2009 comparable period.
Excluding special charges for strategic initiative expenses and special
investigations, adjusted operating income for the six months ended
June 30, 2010 was $3.9 million, an increase $0.4 million or 13% from the 2009
comparable period.
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 six months ended June 30, 2010 and 2009, we recognized
interest income of $0.1 million.
Interest
Expense
For the
six months ended June 30, 2010, we recorded interest expense of $5.2
million, a decrease of 6% from the 2009 comparable period. Interest expense
consists primarily of interest incurred in connection with our borrowings under
the BTMUCC Credit Facility. Interest expense also includes amortization of
deferred loan costs and debt discount of $0.7 million and $0.8 million,
respectively, for the six months ended June 30, 2010 and 2009, and imputed
interest of less than $0.1 million for both the six months ended June 30, 2010
and 2009, related to a long-term consulting agreement liability assumed in the
TAF acquisition (which expires in 2028). The period-over-period decrease in
interest expense is due primarily to decreased borrowings (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
six months ended June 30, 2010 and 2009, we recorded other income of $0.1
million and $0.7 million, respectively. Other income consists primarily of
earnings from our equity investment in Shoebox New York. The results for
the six months ended June 30, 2009 also include lease settlements of
approximately $0.4 million.
31
Loss
From Continuing Operations Before Income Taxes
As a
result of the foregoing factors, loss from continuing operations before income
taxes for the six months ended June 30, 2010 was $2.7 million, an increase in
the loss of 100% from the 2009 comparable period. Excluding the aforementioned
special items, adjusted loss from continuing operations before income taxes for
the six months ended June 30, 2010 was $1.0 million, an improvement of $0.3
million or 21% from the 2009 comparable period.
Income
Taxes
For both
the six months ended June 30, 2010 and 2009, we recorded a current provision for
income taxes of $0.2 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
In
connection with the Asset Sale (See Note 13 – Subsequent Events, under the
heading “Asset Sale and Debt Repayment”), BTMUCC accepted $98.0 million from the
sale proceeds in full satisfaction of the outstanding indebtedness owed to
BTMUCC under the BTMUCC Credit Facility. As a result, as of the close of
business on July 30, 2010, we did not owe anything further to BTMUCC and the
BTMUCC Credit Facility has been cancelled.
During
the six months ended June 30, 2010, our total assets decreased by $4.3 million,
and our total liabilities decreased by $1.6 million.
As of
June 30, 2010, we had short-term restricted cash of $0.5 million representing
funds held in escrow pursuant to the Asset Sale. 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 were not reimbursed out of the cash in the lockbox accounts
for any expenses paid in excess of our annual expense limit. Instead those
amounts were 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.
As of
June 30, 2010 we had long-term restricted cash of $0.8 million used as
collateral for letters of credit on two leases, approximately $0.6 million for
our New York office lease and $0.2 million for our NFM lease. As of December 31,
2009, we had long-term restricted cash of $1.0 million consisting
primarily of amounts to be used to fund the capital improvements to expand the
production capabilities of our manufacturing facility, which amounts were
substantially utilized as of June 30, 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 six month periods ended June 30, 2010 and 2009 (in
thousands).
June
30,
|
||||||||
2010
|
2009
|
|||||||
Net
(loss) income adjusted for non-cash activities
|
$
|
(267
|
)
|
$
|
2,508
|
|||
Working
capital changes
|
1,713
|
(2,131
|
)
|
|||||
Discontinued
operations
|
50
|
229
|
||||||
Net cash provided by
operating activities
|
1,496
|
606
|
||||||
Net cash provided by (used in)
investing activities
|
107
|
(88
|
)
|
|||||
Net cash used in financing
activities
|
(3,380
|
)
|
(774
|
)
|
||||
Net decrease in cash
and cash equivalents
|
$
|
(1,777
|
)
|
$
|
(256
|
)
|
Cash flow
from operating activities consists of (i) net income adjusted for depreciation,
amortization and certain other non-cash items; (ii) changes in working capital;
and (iii) cash flows from discontinued operations. We generated $1.5 million in
cash provided by operating activities during in the six months ended June 30,
2010, an increase of $0.9 million from $0.6 million in the same period of 2009.
The year-over-year improvement is primarily the result of increased cash from
working capital, partially offset by declines in net income adjusted for
non-cash activities.
32
Net cash
provided by investing activities for the six months ended June 30, 2010 was $0.1
million, including a $1.1 million decrease in restricted cash, offset by $1.1
million of purchases of property and equipment. Net cash used in investing
activities for the six months ended June 30, 2009 was $0.1 million.
Net cash
used in financing activities for the six months ended June 30, 2010 and 2009 was
$3.4 million and $0.8 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. See Note 7 – Debt.
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
maintained advertising funds in connection with our franchised brands
(“Marketing Funds”). Franchisees fund the Marketing Funds pursuant to franchise
agreements. We considered these Marketing Funds to be separate legal entities
from the Company and used 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 included a borrowing rate of prime plus 2%, and
repayment by the TAF MSF with no penalty, at any time. As of June 30, 2010, we
had a receivable balance of $1.0 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.
As a
result of the Asset Sale, we no longer maintain the Marketing Funds. See
Note 13 – Subsequent
Events, under the heading “Asset Sale and Debt Repayment.”
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
ITEM
4. 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 June 30, 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 June 30, 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. Following the Asset Sale,
all of the employees of NFM resigned from the Company and became the employees
of GFG, including Mark Stanko who, prior to the Asset Sale, was the chief
financial officer of the Company and NFM. These changes in the Company’s
employees and officers will affect the Company’s internal controls over
financial reporting.
33
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
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
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.
We are
proceeding with the plan of dissolution approved by the stockholders of the
Company. However, 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, the impact of any negative adjustments to the purchase price for the Asset
Sale (pursuant to the terms of the Acquisition 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 the Asset Sale, 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 wind
down the business. As a result, if the dissolution process takes longer
than currently estimated, 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.
Our
Board of Directors may abandon or delay implementation of the plan of
dissolution.
Our Board
of Directors has approved the Asset Sale and has adopted and approved a plan of
dissolution for the dissolution and winding-down of the Company following the
closing of the Asset Sale. However, our Board of Directors may, in its
sole discretion, abandon the plan of dissolution if our Board of Directors
concludes that its fiduciary obligations require it to pursue business
opportunities that present themselves or to abandon the plan of
dissolution. If our Board of Directors elects to pursue any alternative to
the plan of dissolution, the value of our common stock may decline, and our
stockholders may not receive any of the funds currently estimated to be
available for distribution pursuant to the plan of dissolution.
Stockholder
approval of the plan of dissolution authorized our Board of Directors to do and
perform, or to cause our executive officers to do and perform, any and all acts
and to make, execute, deliver or adopt any and all agreements, resolutions,
conveyances, certificates and other documents of every kind that our Board of
Directors deems necessary, appropriate or desirable, in the absolute discretion
of our Board of Directors, to implement the plan of dissolution and the
transactions contemplated thereby, including all filings or acts required by any
state or federal law or regulation to wind up our affairs. Accordingly, we may
dispose of any and all of our other remaining non-cash assets, consisting of any
office furniture, equipment, supplies and other miscellaneous assets, without
further stockholder approval. As a result, our Board of Directors may
authorize actions in implementing the plan of dissolution, including the terms
and prices for the sale of our remaining non-cash assets, with which our
stockholders may not agree.
34
We
will continue to incur the expenses of complying with public company reporting
requirements until either the SEC provides relief from such reporting
requirements, the deregistration of our shares or the Company's
dissolution.
We will
continue to have an obligation to comply with the applicable reporting
requirements of the Securities Exchange Act of 1934, as amended, or the Exchange
Act, until the Company is permitted to deregister its shares under the Exchange
Act or the Company is dissolved. In order to curtail the economically
burdensome expenses that the Company would incur to comply with our Exchange Act
reporting requirements, we intend to seek deregistration of our shares of common
stock or other relief from the SEC from our reporting obligations. To the
extent that we are unable to deregister our shares or the SEC denies such
relief, we will be obligated to continue complying with the applicable reporting
requirements of the Exchange Act. The expenses we incur in complying with
the applicable reporting requirements will reduce the assets available for
distribution to our stockholders.
Distributions
to our stockholders could be delayed.
All or a
portion of the distribution could be delayed, depending on many factors,
including if:
|
·
|
a
creditor or other third party seeks an injunction against the making of
distributions to our stockholders on the grounds that the amounts to be
distributed are needed to provide for the satisfaction of our liabilities
or other obligations,
|
|
·
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we
are unable to settle, resolve or dispose of pending lawsuits in a timely
fashion, we may be exposed to contingent liabilities and be required to
make appropriate reserves for such
matters,
|
|
·
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we
become a party to new lawsuits or other claims asserted by or against us,
including any claims or litigation arising in connection with the Asset
Sale or our decision to liquidate and
dissolve,
|
|
·
|
we
are unable to sell our remaining non-cash assets, consisting of any office
furniture, equipment, supplies and other miscellaneous assets, or if such
sales take longer than expected,
|
|
·
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we
are unable to resolve claims with creditors or other third parties, or if
such resolutions take longer than
expected,
|
|
·
|
we
encounter unexpected delays imposed by regulators or state
agencies.
|
Any of
the foregoing could delay or substantially diminish the amount available for
distribution to our stockholders.
If
we fail to create an adequate contingency reserve for payment of our expenses
and liabilities, a stockholder could be held liable for payment to the Company's
creditors up to the amount actually distributed to such
stockholder.
Once the
Company files the certificate of dissolution, the Company will continue to exist
for three years after the dissolution becomes effective or for such longer
period as the Delaware courts shall direct, for the sole purpose of winding down
our business and affairs. Following the effective date of the dissolution,
we will pay or make reasonable provision to pay all claims and obligations,
including all contingent, conditional or unmatured contractual claims, known to
us. We also may obtain and maintain insurance coverage or establish and set
aside a reasonable amount of cash or other assets as a contingency reserve to
satisfy claims against and obligations of the Company. If the amount of
the contingency reserve, insurance and other resources calculated to provide for
the satisfaction of liabilities and claims is insufficient to satisfy the
aggregate amount ultimately found payable in respect of our liabilities and
claims against us, each stockholder could be held liable for amounts due to
creditors up to the amounts distributed to such stockholder under the plan of
dissolution. In such event, a stockholder could be required to return all
amounts received as distributions pursuant to the plan of dissolution and
ultimately could receive nothing under the plan of dissolution. Moreover,
for federal income tax purposes, payments made by a stockholder in satisfaction
of our liabilities not covered by the cash or other assets in our contingency
reserve or otherwise satisfied through insurance or other reasonable means
generally would produce a capital loss for such stockholder in the year the
liabilities are paid. The deductibility of any such capital loss generally
would be subject to limitations for income tax purposes.
Stockholders
may not be able to recognize a loss for federal income tax purposes until they
receive a final distribution from us.
As a
result of our dissolution and liquidation, for federal income tax purposes, our
stockholders generally will recognize gain or loss equal to the difference
between (1) the sum of the amount of cash and the fair market value (at the time
of distribution) of property, if any, distributed to them, and (2) their tax
basis for their shares of our common stock. Liquidating distributions
pursuant to the plan of dissolution may occur at various times and in more than
one tax year. Any loss generally will be recognized by a stockholder only
when the stockholder receives our final liquidating distribution to the
stockholders, and then only if the aggregate value of all liquidating
distributions with respect to a share is less than the stockholder's tax basis
for that share. Stockholders are urged to consult their own tax advisors as to
the specific tax consequences to them of our dissolution and liquidation
pursuant to the plan of dissolution.
The
directors and officers of the Company will receive indemnification benefits as a
result of the Asset Sale and the dissolution and liquidation.
We will
continue to indemnify each of our current and former directors and officers to
the fullest extent permitted under Delaware law and our certificate of
incorporation and bylaws as in effect immediately prior to the filing of the
certificate of dissolution. In addition, we will maintain our current
directors' and officers' insurance policy for six years after the Asset Sale for
claims made with respect to the wind down operations as well as acts that
occurred through consummation of the Asset Sale. Pursuant to the terms of the
Acquisition Agreement, the Company was required to obtain runoff coverage for at
least six years after the Asset Sale.
35
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM
4. (REMOVED AND RESERVED)
ITEM
5. OTHER INFORMATION
As
previously reported in a Current Report on Form 8-K filed by the Company on
August 2, 2010, in connection with the Asset Sale, the Company’s Chief Financial
Officer resigned and commenced employment with GFG. As a result, on August 4,
2010, the Company’s Board of Directors appointed Kenneth J. Hall to the position
of Chief Financial Officer, effective immediately. Mr. Hall will serve in
this position, in addition to his current position of Chief Executive Officer,
until his expected departure from the Company later this month in connection
with the Company’s wind down. In his capacity as Chief Financial Officer,
Mr. Hall will serve as the principal financial officer of the
Company.
The
Company has decided to engage XRoads Solutions Group, LLC (“XRoads”) to assist
in the wind down and liquidation of the Company. On August 4, 2010, the
Board of Directors of the Company appointed Dennis Simon, the Managing Principal
of XRoads, to the position of President, effective immediately. In this
capacity, Mr. Simon will oversee the wind down of the Company. The Company
is negotiating the final terms of a formal agreement with XRoads, and Mr. Simon
will not receive any separate compensation for serving as
President.
Mr. Hall,
age 52, joined the Company on March 25, 2008 as Executive Vice President, Chief
Financial Officer and Treasurer. He was appointed Chief Executive Officer
of the Company on August 15, 2008. Prior to joining the Company, Mr. Hall
served as the Chief Financial Officer and Treasurer of Seevast Corp., a position
he held from April 2005 to February 2008. From December 2003 to March
2005, Mr. Hall worked as an independent consultant advising companies on
strategic and financial matters. From July 2001 to November 2003, he
served as Executive Vice President, Chief Financial Officer and Treasurer of
Mercator Software, Inc. Mr. Hall holds a B.S. in Finance from Lehigh
University and a M.B.A. from Golden Gate University.
Dennis
Simon, age 68, is a Founder and the Managing Principal of XRoads, a turnaround
and restructuring company that offers a range of professional services designed
to enhance the value of both distressed and healthy companies. Mr. Simon
also leads XRoads’ Corporate Restructuring practice, which focuses on distressed
and under-valued companies and their constituents. Before founding XRoads
in 1996, Mr. Simon headed the business turnaround services practice, western
region, for PricewaterhouseCoopers from 1992 to 1996. Mr. Simon holds a
B.A. in Economics from American International College and a M.B.A. with
distinction from Harvard University.
Separation
Agreements
In
connection with the Asset Sale, on August 5, 2010, the Company entered into a
Separation Agreement and Release of Claims with each of Kenneth J. Hall, Chief
Executive Officer and Chief Financial Officer of the Company, and Sue J. Nam,
General Counsel and Secretary of the Company (each, a “Separation Agreement” and
together, the “Separation Agreements”). The descriptions of the Separation
Agreements set forth herein are qualified in their entirety by reference to the
full text of the Separation Agreements, which are attached hereto as Exhibits
10.6 and 10.7 and which are incorporated herein by reference.
The last
day of employment for Mr. Hall will be August 13, 2010 and for Ms. Nam will be
August 17, 2010. The Separation Agreements generally provide for severance
benefits that are materially consistent with the severance benefits contained
under the employment agreements for each of the executives upon a termination of
employment by the Company without “cause” (as defined in the employment
agreements). However, in light of the pending cessation of operations and
wind-up of the Company, the Company has agreed to waive the application of the
post-termination non-competition covenant contained in the employment agreements
for each of the executives.
36
ITEM 6. EXHIBITS
Exhibits
*2.1
|
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)
|
|
*2.2
|
Plan
of Complete Dissolution and Liquidation of NexCen Brands, Inc.
(Designated as Annex B to the Definitive Proxy Statement filed on June 11,
2010)
|
|
*3.1
|
Certificate
of Incorporation of NexCen Brands, Inc. (Designated as Exhibit 3.1
to the Form 10-Q filed on August 5, 2005)
|
|
*3.2
|
Certificate
of Amendment of Certificate of Incorporation of NexCen Brands, Inc.
(Designated as Exhibit 3.1 to the Form 8-K filed on November 1,
2006)
|
|
*3.3
|
Certificate
of Amendment of Certificate of Incorporation of NexCen Brands, Inc.
(Designated as Annex C to the Definitive Proxy Statement filed on June 11,
2010)
|
|
*3.4
|
Amended
and Restated By-laws of NexCen Brands, Inc. (Designated as Exhibit
3.1 to the Form 8-K filed on March 7, 2008)
|
|
*10.1
|
Waiver
and 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)
|
|
10.2
|
Lease
between Deka First Real Estate USA L.P. and Aether Holdings, Inc., dated
September 29, 2006
|
|
10.3
|
First
Amendment of Lease between NexCen Brands, Inc. and 1330 Acquisition Co.
LLC, dated April 29, 2010. (Designated as Exhibit 10.7 to the Form 10-Q
filed on May 17, 2010)
|
|
*10.4
|
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)
|
|
*10.5
|
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)
|
|
*+10.6
|
Separation
Agreement dated August 5, 2010 by and between NexCen Brands,
Inc.
and Kenneth J.
Hall.
|
|
*+10.7
|
Separation
Agreement dated August 5, 2010 by and between NexCen Brands,
Inc.
and Sue
J. Nam.
|
|
31.1
|
Certification
pursuant to 17 C.F.R § 240.15d−14 (a), as adopted pursuant to Section 302
of the Sarbanes−Oxley Act of 2002 for Kenneth J. Hall.
|
|
**32.1
|
Certifications
pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes−Oxley Act of 2002 for Kenneth J.
Hall.
|
*
Incorporated by reference.
** These
certifications are being furnished solely pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and are not being filed as part this Quarterly Report
on Form 10-Q or as a separate disclosure document.
+Management
contract or compensatory plan or arrangement.
37
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 August 6,
2010.
NEXCEN
BRANDS, INC.
|
|||
By:
|
/s/
Kenneth J. Hall
|
||
KENNETH
J. HALL
|
|||
Chief
Executive Officer and Chief Financial Officer
|
38