x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
|
|||
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2006
|
|||
OR
|
|||
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
|
|||
COMMISSION
FILE NUMBER: 000-27707
|
|||
NEXCEN
BRANDS, INC.
|
|||
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
|
|||
DELAWARE
|
20-2783217
|
||
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer
Identification
Number)
|
||
1330
Avenue of the Americas, New York, N.Y.
|
10019-5400
|
||
(Address
of principal executive offices)
|
(Zip
Code)
|
||
(Registrant’s
telephone number, including area code): (212)
277-1100
|
|||
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
|
|||
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
||
Common
Stock, par value $.01
|
The
NASDAQ Stock Market LLC
|
||
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
|
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
PART
I
|
3
|
|
Item
1
|
Business
|
3
|
Item
1A
|
Risk
Factors
|
9
|
Item
1B
|
Unresolved
Staff Comments
|
15
|
Item
2
|
Properties
|
15
|
Item
3
|
Legal
Proceedings
|
16
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
17
|
PART
II
|
19
|
|
Item
5
|
Market
for the Company’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
19
|
Item
6
|
Selected
Financial Data
|
20
|
Item
7
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
|
Item
7A
|
Quantitative
and Qualitative Disclosures About Market Risk
|
30
|
Item
8
|
Financial
Statements and Supplementary Data
|
31
|
Item
9
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
58
|
Item
9A
|
Controls
and Procedures
|
58
|
Item
9B
|
Other
Information
|
59
|
|
||
PART
III
|
59
|
|
Item
10
|
Directors
and Executive Officers of the Registrant
|
59
|
Item
11
|
Executive
Compensation
|
59
|
Item
12
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
59
|
Item
13
|
Certain
Relationships and Related Transactions
|
59
|
Item
14
|
Principal
Accounting Fees and Services
|
60
|
|
||
PART
IV
|
61
|
|
|
||
Item
15
|
Exhibits,
Financial Statement Schedules
|
61
|
·
|
across
industries, ranging from apparel, footwear and sporting goods to
QSR and
retail franchising;
|
·
|
across
channels of distribution, ranging from luxury to
mass-market;
|
·
|
across
consumer demand categories, ranging from luxury to
mass-market;
|
·
|
across
licensees and franchisees, ranging from large licensees to individual
franchisees; and
|
·
|
across
geographies (both within the United States and internationally);
and
|
·
|
across
multiple demographic groups.
|
·
|
our
businesses can grow both domestically and internationally through
organic,
and synergistic growth;
|
·
|
our
businesses can grow organically by expanding and extending owned
brands
into new product categories and retail channels, increasing brand
awareness and executing new licenses or selling new
franchises;
|
·
|
we
can grow through acquisition by acquiring new brands or additional
franchise systems; and
|
·
|
our
business can grow synergystically by leveraging our three operating
verticals.
|
·
|
overpaying
for acquired assets or businesses;
|
·
|
being
unable to license, market or otherwise exploit IP that we acquire
on
anticipated terms or at all;
|
·
|
negative
effects on reported results of operations from acquisition-related
expenses and amortization or impairment of acquired intangibles;
|
·
|
diversion
of management's attention from management of day-to-day operational
issues;
|
·
|
failing
to maintain focus on, or ceasing to execute, core strategies and
business
plans as our IP portfolio grows and becomes more diversified;
|
·
|
failing
to acquire or hire additional successful managers, or being unable
to
retain critical acquired managers;
|
·
|
potential
adverse effects of a new acquisition on an existing business or
business
relationship; and
|
·
|
underlying
risks of the businesses that we acquire, which may differ from
one
acquisition to the next, including those related to entering new
lines of
business or markets in which we have little or no prior experience.
|
·
|
Political
and economic instability or civil unrest;
|
·
|
Armed
conflict, natural disasters or terrorism;
|
·
|
Health
concerns or similar issues, such as a pandemic or epidemic;
|
·
|
Multiple
foreign regulatory requirements that are subject to change and
that differ
between jurisdictions;
|
·
|
Changes
in trade protection laws, policies and measures, and other regulatory
requirements effecting trade and investment;
|
·
|
Differences
from one country to the next in legal protections applicable to
IP assets,
including trademarks and similar assets, enforcement of such protections
and remedies available for infringements;
|
·
|
Fluctuations
in foreign currency exchange rates and interest rates; and
|
·
|
Adverse
consequences from changes in tax
laws.
|
·
|
We
expect that products using our IP will be manufactured by third
party
licensees, either directly or through third-party manufacturers
on a
subcontract basis. All manufacturers have limited production capacity,
and
the ones with whom we work (directly or indirectly) may not, in
all
instances, be able to satisfy manufacturing requirements for our
(and our
licensees’) products.
|
·
|
We
expect to provide limited training and support to franchisees.
Consequently, franchisees may not successfully operate their businesses
in
a manner consistent with our standards and requirements, or may
not hire
and train qualified managers and other store
personnel.
|
·
|
While
we will try to ensure that our licensees and other business partners
maintain a high quality of products and services that use our IP,
they may
take actions that adversely affect the value of our IP or our business
reputation.
|
Votes
For:
|
Votes
Against:
|
Abstain:
|
Broker
Non-votes:
|
32,103,838
|
22,199
|
115,719
|
13,458,671
|
Votes
For:
|
Votes
Against:
|
Abstain:
|
Broker
Non-votes:
|
32,035,990
|
88,502
|
117,264
|
13,458,671 |
Name:
|
Votes
For:
|
Votes
Withheld:
|
James
T. Brady
|
41,792,081
|
3,908,346
|
Robert
W. D’Loren
|
39,221,678
|
6,478,749
|
Jack
B. Dunn IV
|
38,603,925
|
7,096,502
|
Edward
J. Mathias
|
41,794,381
|
3,906,046
|
David
S. Oros
|
39,260,172
|
6,440,255
|
Jack
Rovner
|
41,794,481
|
3,905,946
|
Truman
T. Semans
|
41,795,322
|
3,905,105
|
George
P. Stamas
|
38,901,401
|
6,799,026
|
Votes
For:
|
Votes
Against:
|
Abstain:
|
Broker
Non-Votes:
|
45,203,932
|
17,993
|
478,502
|
0
|
Votes
For:
|
Votes
Against:
|
Abstain:
|
Broker
Non-Votes:
|
25,527,030
|
6,697,235
|
17,491
|
13,458,671
|
Votes
For:
|
Votes
Against:
|
Abstain:
|
Broker
Non-Votes:
|
25,437,530
|
6,213,506
|
590,720
|
13,458,671
|
2006
|
2005
|
||||||||||||
QUARTER
ENDED
|
HIGH
|
LOW
|
HIGH
|
LOW
|
|||||||||
March 31
|
$
|
3.85
|
$
|
3.13
|
$
|
3.51
|
$
|
3.24
|
|||||
June 30
|
$
|
5.50
|
$
|
3.75
|
$
|
3.45
|
$
|
3.04
|
|||||
September 30
|
$
|
6.33
|
$
|
5.54
|
$
|
3.67
|
$
|
3.27
|
|||||
December 31
|
$
|
7.42
|
$
|
5.71
|
$
|
3.57
|
$
|
3.27
|
Plan
Category
|
Plan
Name
|
Number
of
securities
to
be
issued upon exercise
of
outstanding
options,
and
restricted
stock
|
Weighted-average
exercise
price of
outstanding
options,
and
restricted stock
|
Number
of
securities
remaining
available
for
future
issuance
under
equity
compensation
plans
|
|||||||||
Equity
compensation plans approved
by
security holders
|
1999
Equity
Incentive
Plan
|
4,689,398
|
$
|
4.19
|
0
|
||||||||
2006
Equity
Incentive
Plan
|
426,000
|
6.88
|
3,074,000
|
||||||||||
Equity
compensation plans not approved
by
security holders
|
Acquisition
Incentive
Plan
|
123,006
|
3.23
|
0
|
|||||||||
Total
|
5,238,404
|
$
|
4.39
|
3,074,000
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
for Shares
|
Total
Number
of
Shares
Purchased
as
Part
of Publicly
Announced
Plans
or
Programs
|
Maximum
Number
of
Shares that
May
Yet Be
Purchased
Under
the
Plans and
Programs
|
|
January
1 - January 31, 2006
|
-
|
-
|
-
|
-
|
February
1 - February 28, 2006
|
-
|
-
|
-
|
-
|
March
1 - March 31, 2006
|
-
|
-
|
-
|
-
|
April
1 - April 30, 2006
|
-
|
-
|
-
|
-
|
May
1 - May 31, 2006
|
-
|
-
|
-
|
-
|
June
1 - June 30, 2006
|
85,900
|
$4.10
|
-
|
-
|
July
1 - July 31, 2006
|
-
|
-
|
-
|
-
|
August
1 - August 31, 2006
|
-
|
-
|
-
|
-
|
September
1 - September 30, 2006
|
-
|
-
|
-
|
-
|
October
1 - October 31, 2006
|
-
|
-
|
-
|
-
|
November
1 - November 30, 2006
|
-
|
-
|
-
|
-
|
December
1 - December 31, 2006
|
-
|
-
|
-
|
-
|
Total
|
85,900
|
$4.10
|
-
|
-
|
YEAR
ENDED DECEMBER 31,
|
||||||||||||||||
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
||||||||||||||||
CONSOLIDATED
STATEMENT OF OPERATIONS DATA:
|
||||||||||||||||
Royalty
revenues
|
$
|
1,175
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
Franchise
fee revenues
|
749
|
—
|
—
|
—
|
—
|
|||||||||||
Total
revenues
|
1,924
|
—
|
—
|
—
|
—
|
|||||||||||
Total
operating expenses
|
(10,413
|
)
|
(5,241
|
)
|
(14,643
|
)
|
(21,796
|
)
|
(39,063
|
)
|
||||||
Operating
loss
|
(8,489
|
)
|
(5,241
|
)
|
(14,643
|
)
|
(21,796
|
)
|
(39,063
|
)
|
||||||
Total
non-operating income (loss)
|
3,337
|
1,690
|
(10,000
|
)
|
(3,900
|
)
|
17,703
|
|||||||||
Loss
from continuing operations before taxes
|
(5,152
|
)
|
(3,551
|
)
|
(24,643
|
)
|
(25,696
|
)
|
(21,360
|
)
|
||||||
Income
taxes
|
(81
|
)
|
—
|
—
|
—
|
—
|
||||||||||
Loss
from continuing operations
|
(5,233
|
)
|
(3,551
|
)
|
(24,643
|
)
|
(25,696
|
)
|
(21,360
|
)
|
||||||
Profit
(loss) from discontinued operations, net of tax
expense
(benefit) of $64, $75,and $(535) for
2006,
2003, and 2002, respectively
|
2,358
|
225
|
(44,510
|
)
|
(23,756
|
)
|
(304,062
|
)
|
||||||||
Gain
(loss) on sale of discontinued operations
|
755
|
(1,194
|
)
|
20,825
|
—
|
—
|
||||||||||
Net
loss
|
$
|
(2,120
|
)
|
$
|
(4,520
|
)
|
$
|
(48,328
|
)
|
$
|
(49,452
|
)
|
$
|
(325,422
|
)
|
|
Net
loss per share (basic and diluted) from
continuing
operations
|
$
|
(0.11
|
)
|
$
|
(0.08
|
)
|
$
|
(0.57
|
)
|
$
|
(0.60
|
)
|
$
|
(0.51
|
)
|
|
Gain
(loss) per share (basic and diluted) on sale
of
discontinued operations
|
0.07
|
(0.02
|
)
|
(0.54
|
)
|
(0.56
|
)
|
(7.22
|
)
|
|||||||
Net
loss per share - basic and diluted
|
$
|
(0.04
|
)
|
$
|
(0.10
|
)
|
$
|
(1.11
|
)
|
$
|
(1.16
|
)
|
$
|
(7.73
|
)
|
|
Weighted
average shares outstanding - basic and diluted
|
45,636
|
44,006
|
43,713
|
42,616
|
42,117
|
|||||||||||
CONSOLIDATED
BALANCE SHEET DATA:
|
||||||||||||||||
Cash
and cash equivalents (including restricted cash)
|
$
|
84,834
|
$
|
9,725
|
$
|
69,555
|
$
|
39,682
|
$
|
68,593
|
||||||
Investments
available for sale - discontinued operations
|
—
|
—
|
—
|
220,849
|
255,825
|
|||||||||||
Trademarks
and goodwill
|
64,607
|
—
|
—
|
—
|
—
|
|||||||||||
Mortgage-backed
securities, at fair value,
discontinued
operations
|
—
|
253,900
|
62,184
|
—
|
—
|
|||||||||||
Total
assets
|
158,385
|
266,008
|
136,586
|
398,105
|
475,407
|
|||||||||||
Repurchase
agreements related to
discontinued
operations
|
—
|
133,924
|
—
|
—
|
—
|
|||||||||||
Total
debt
|
—
|
—
|
—
|
154,942
|
154,945
|
|||||||||||
Stockholders’
equity
|
$
|
146,613
|
$
|
126,387
|
$
|
130,590
|
$
|
179,301
|
$
|
229,398
|
•
|
We
provide an introduction to our financial results and
condition.
|
•
|
We
discuss our critical accounting policies.
|
•
|
We
discuss recent accounting pronouncements.
|
•
|
We
discuss the results of our continuing operations for the year ended
December 31, 2006, compared with results for the years ended December
31, 2005 and 2004.
|
•
|
We
discuss our financial condition, liquidity and capital resources
and our
contractual obligations.
|
·
|
We
did not earn franchise or royalty revenues before November 2006,
when we
acquired The Athlete’s Foot. Accordingly, our 2006 results reflect just
seven weeks of revenue from The Athlete’s Foot business. Our results do
not reflect any other revenue for 2006 or any prior years, because
revenues from our prior businesses have been reclassified to “discontinued
operations.”
|
·
|
Our
operating expenses reflect the expenses of our IP business and
all other
expenses that were not directly attributable to the businesses
now
included in “discontinued operations.” This includes the costs of our
corporate staff. Accordingly, while results of our continuing operations
reflect revenues for only a small portion of 2006, they include
significant operating expenses for all of 2006 and prior
years.
|
·
|
We
acquired UCC in June 2006. Since that time, UCC has focused on
pursuing
acquisition and financing opportunities for our IP business. UCC
has not
generated revenue since we acquired it, but we have incurred the
operating
expenses associated with the UCC business as part of the cost of
developing our IP business. We cannot predict whether UCC will
generate
revenue in the future from providing advice to third parties, as
this is
not the focus of our business strategy. The reported loan servicing
revenue at UCC of $148,000 in 2006 was recorded in other income
because it
is not the focus of our new IP
business.
|
·
|
Our
financial results and condition for 2006 and prior years do not
include
any of the revenues, expenses, assets or liabilities of Bill Blass,
MaggieMoo’s or Marble Slab, as we acquired these businesses in February
2007. Our 2007 results will include the results and condition of
these
businesses, although they will only be included in our first quarter
2007
results for less than half of that quarter. If we acquire additional
businesses in 2007, our results will include those businesses only
from
and after the date on which we acquire
them.
|
·
|
We
have been focused primarily on acquisitions, and are only beginning
to
focus on the development of acquired businesses. Beginning in 2007,
we
expect to devote substantial attention to integrating our acquired
businesses and pursuing organic growth opportunities through both
franchising and licensing arrangements. While we do not expect
such
activities to require us to incur material additional expenses,
we cannot
predict when they will result in incremental
revenue.
|
·
|
Our
operating expenses are increasing as we add personnel and facilities
to
support our growing business. These additions are coming both through
our
acquisitions and through hirings we make to add needed skills or
to expand
our staff so that we can properly manage and develop our business.
In 2004
and 2005, we reduced our operating expenses significantly as we
sold
businesses and then managed a mortgage-backed securities business
that did
not require an extensive staff. In 2006, we reversed this trend,
as we
began to grow our IP business, and we expect the operating expenses
will
continue to increase in the near term as we build our IP business.
However, we expect that our value net business model will enable
us to
operate efficiently and to leverage our people and facilities across
a
broad base of operations, thereby mitigating the rate of
increase.
|
·
|
Our
balance sheet has changed significantly, and we expect that it
will
continue to change significantly in the near term. During 2006,
we sold
all of our MBS investments for cash and used a substantial portion
of the
cash proceeds to repay indebtedness under repurchase agreements
and to
fund a portion of the purchase prices of UCC and The Athlete’s Foot (as
well as to fund our operating losses). With these acquisitions,
we
acquired substantial IP assets and goodwill, as well as a limited
amount
of other assets and liabilities. With additional acquisitions,
we will be
using cash to pay a portion of the purchase price and we will be
acquiring
assets, particularly trademarks and goodwill, and assuming or incurring
various operating liabilities associated with the acquired businesses.
In
addition, we will be incurring indebtedness under our new credit
facility
to finance a portion of the purchase price of our acquisitions.
We expect
to borrow approximately $72.5 million under the new credit facility
to
finance a portion of the purchase prices of our acquisitions of
The
Athlete’s Foot, Bill Blass, MaggieMoo’s and Marble
Slab.
|
·
|
We
continue to earn interest on our cash balances. In 2007, we will
begin to
pay interest on our borrowings under our new credit facility. Interest
income and interest expense will be reported as part of “Non operating
income” on our statement of
operations.
|
·
|
The
number of shares we have outstanding has continued to increase
as we use
our capital stock as consideration for acquisitions. We also have
granted
a significant number of new stock options and have issued several
warrants
to purchase common stock in connection with acquisitions and as
long-term
incentives for newly hired executives and other key personnel (both
in
connection with acquisitions and as part of our efforts to build
our
management team as we expand our business). We expect to continue
to issue
stock as consideration for acquisitions and possibly to raise additional
capital for our business, subject to limitations under laws and
rules that
could affect our future use of our tax loss carry forwards. These
limitations are discussed above in Item
1. Business
under the caption “Tax Loss Carry Forwards” and also in Item
1A. Risk Factors
under the caption “Risks of Our Tax Loss Carry
Forwards.”
|
·
|
During
2004, we reassessed the value of goodwill, intangible and certain
other
assets of our Transportation and Mobile Government operations and
ultimately recorded aggregate impairment charges of $35.6 million
during
2004. These impairment charges are included in the loss from discontinued
operations in 2004.
|
·
|
During
2005, as a result of changes in our business strategy, we decided
that
unrealized losses in our MBS portfolio at December 31, 2005 should
be
considered “other than temporary” impairments under Statement of
Accounting Standards 115 and needed to be charged against operating
results as of that date. As a result, we recognized the unrealized
loss of
approximately $2.1 million and wrote-off the unamortized premium
of $1.9
million, for a total other than temporary impairment charge of
approximately $4.0 million. These charges are included in the profit
from
discontinued operations in 2005.
|
·
|
During
2006, we exited the MBS business and recognized a gain in the fourth
quarter of 2006 of approximately $755,000 related to the sale of
our
remaining MBS investments.
|
·
|
Valuation
of deferred tax assets - We have deferred tax assets as a result
of years
of accumulated tax loss carry forwards. Management believes we
will
achieve profitable operations in future years that may enable us
to
recover the benefit of our deferred tax assets. However, we presently
do
not have sufficient objective evidence to support management’s belief and,
accordingly, we maintain a full valuation allowance for our net
deferred
tax assets as required by U.S. generally accepted accounting
principles.
|
·
|
Valuation
of trademarks, goodwill and intangible assets - Trademarks represent
the
present value of future royalty income associated with the ownership
of
each trademark. The Company expects its trademarks to contribute
to cash
flows indefinitely, and therefore will not amortize any trademarks
unless
their useful life is no longer deemed indefinite. Goodwill represents
the
excess of the acquisition cost over the fair value of the net assets
acquired and is not amortized. Goodwill is evaluated for impairment
annually, or more frequently as required in accordance with SFAS
No. 142
“Goodwill and Other Intangible Assets.” Intangible assets with estimable
useful lives are amortized over their respective estimated useful
lives
and are reviewed for impairment in accordance with SFAS No. 144
“Accounting for Impairment or Disposal of Long-Lived Assets.” We will
evaluate the fair value of trademarks and goodwill to assess potential
impairments on an annual basis, or more frequently if events or
other
circumstances indicate that we may not be able to recover the carrying
amount of the asset. We will evaluate the fair value of trademarks
and
goodwill at the reporting segment level and make that determination
based
upon future cash flow projections. Assumptions to be used in these
projections, such as forecasted growth rates, cost of capital and
multiples to determine the terminal value of the reporting segments,
will
be consistent with internal projections and operating plans. We
will
record an impairment loss when the implied fair value of the trademarks
and goodwill assigned to the reporting segment is less than the
carrying
value of the reporting segment, including trademarks and goodwill.
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets,” whenever events or changes in circumstances
indicate that the carrying values of long-lived assets (which include
our
intangible assets with determinable useful lives) may be impaired,
we will
perform an analysis to determine the recoverability of the asset’s
carrying value. These events or circumstances may include, but
are not
limited to; projected cash flows which are significantly less than
the
most recent historical cash flows; a significant loss of management
contracts without a realistic expectation of a replacement; and
economic
events which could cause significant adverse changes and uncertainty
in
business patterns. In our analysis, to determine the recoverability
of the
asset’s carrying value, we will make estimates of the undiscounted cash
flows from the expected future operations of the asset. If the
analysis
indicates that the carrying value is not recoverable from future
cash
flows, the asset will be written down to estimated fair value and
an
impairment loss will be recognized.
|
·
|
During
2006, the Company exited the MBS business. The Company recognized
a gain
in the fourth quarter of 2006 of approximately $755,000 related to
the
sale of its remaining MBS investments.
|
·
|
Management
determined that unrealized losses in the MBS portfolio at December
31,
2005 should be considered “other than temporary” impairments under
Statement of Accounting Standards 115 and were charged against operating
results as of that date. During the fourth quarter of 2005, the Company
recognized the unrealized loss of approximately $2.1 million and
wrote-off
the unamortized premium of $1.9 million for the total other than
temporary
impairment charge of approximately 4.0 million. Prior to that time,
management had considered such unrealized losses as not “other than
temporary” and had recorded such losses in “Other Comprehensive Losses” on
the Company’s balance sheet.
|
·
|
In
2004, we sold our mobile and wireless data businesses, which were
organized into three operating segments. In January 2004, we sold our
EMS segment for $18.0 million in cash and a $1.0 million note (which
was
paid in full in August 2004). In September 2004 we sold our
Transportation and Mobile Government businesses for $25.0 million
in cash
and $10.0 million in cash, respectively.
|
·
|
During
the second quarter of 2004, we reassessed the value of the Transportation
and Mobile Government goodwill and recorded impairment charges related
to
goodwill of $12.2 million and $8.9 million, respectively. These
impairments are reflected in discontinued operations.
|
·
|
During
2004, we reassessed the value of the Transportation and Mobile Government
intangibles and other long-lived assets and recorded non-cash impairment
charges related to Transportation intangibles and other assets of
$3.1
million and $11.3 million, respectively and reported as discontinued
operations.
|
(IN
THOUSANDS)
|
2006
|
2005
|
2004
|
|||||||
Net
cash (used in) provided by operating activities
|
$
|
(890
|
)
|
$
|
2,128
|
$
|
(17,623
|
)
|
||
Net
cash provided by (used in) investing activities
|
210,274
|
(195,907
|
)
|
202,278
|
||||||
Net
cash (used in) provided by financing activities
|
(126,940
|
)
|
134,148
|
(150,154
|
)
|
|||||
Net
increase (decrease) in cash and cash equivalents
|
$
|
82,444
|
$
|
(59,631
|
)
|
$
|
34,501
|
Payments
due by period
|
||||||||||||||||
Contractual
Obligations
|
|
Less
than
|
1-3
|
3-5
|
More
than
|
|||||||||||
($
in thousands)
|
Total
|
1
year
|
years
|
years
|
5
years
|
|||||||||||
Long-Term
Debt
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
Capital
Lease Obligations
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
Operating
Leases
|
8,718
|
502
|
1,735
|
1,739
|
4,742
|
|||||||||||
Purchase
Obligations
|
58,600
|
58,600
|
-
|
-
|
-
|
|||||||||||
Other
Long-Term Liabilities Reflected on the
Registrants
Balance Sheet under GAAP
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
Total
|
$
|
67,318
|
$
|
59,102
|
$
|
1,735
|
$
|
1,739
|
$
|
4,742
|
Report
of Management on Internal Control over Financial Reporting
|
32
|
Reports
of Independent Registered Public Accounting Firm
|
33
|
Consolidated
Balance Sheets as of December 31, 2006 and 2005
|
35
|
Consolidated
Statements of Operations and Comprehensive Loss
for
the years ended December 31, 2004, 2005, and 2006
|
36
|
Consolidated
Statements of Stockholders’ Equity for the
years
ended December 31, 2006, 2005 and 2004
|
37
|
Consolidated
Statements of Cash Flows for the years
ended
December 31, 2006, 2005 and 2004
|
38
|
Notes
to Consolidated Financial Statements
|
39
|
/s/
Robert W. D’Loren
|
||
President
and Chief Executive Officer
|
||
/s/
David B. Meister
|
||
Senior
Vice President and Chief Financial Officer
|
||
(Principal
Financial and Accounting Officer)
|
||
New
York, New York
|
||
March
16, 2007
|
KPMG
LLP
|
|
Baltimore,
Maryland
|
|
March
16, 2007
|
KPMG
LLP
|
|
Baltimore,
Maryland
|
|
March
16, 2007
|
DECEMBER 31,
|
|||||||
2006
|
2005
|
||||||
ASSETS
|
|||||||
Cash
and cash equivalents
|
$
|
83,536
|
$
|
1,092
|
|||
Mortgage-backed
securities, at fair value - discontinued operations
|
—
|
253,900
|
|||||
Trade
receivables, net of allowances of $530 and $0
|
2,042
|
—
|
|||||
Interest
receivable
|
511
|
1,174
|
|||||
Prepaid
expenses and other current assets
|
2,210
|
954
|
|||||
Total
current assets
|
88,299
|
257,120
|
|||||
Property
and equipment, net
|
389
|
255
|
|||||
Restricted
cash
|
1,298
|
8,633
|
|||||
Trademarks
and goodwill
|
64,607
|
—
|
|||||
Intangible
assets, net of amortization
|
3,792
|
—
|
|||||
Total
Assets
|
$
|
158,385
|
$
|
266,008
|
|||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
Accounts
payable and accrued expenses
|
$
|
3,235
|
$
|
2,797
|
|||
Repurchase
agreements and sales tax liabilities - discontinued
operations
|
1,333
|
135,592
|
|||||
Restructuring
accruals
|
145
|
—
|
|||||
Other
current liabilities
|
4,524
|
175
|
|||||
Total
current liabilities
|
9,237
|
138,564
|
|||||
Other
liabilities, long term
|
2,535
|
1,057
|
|||||
Total
liabilities
|
11,772
|
139,621
|
|||||
Commitments
and Contingencies
|
|||||||
Stockholders’
equity:
|
|||||||
Preferred
stock, $0.01 par value; 1,000,000 shares
authorized;
0
shares issued and outstanding
at
December 31,
2006
and 2005, respectively
|
—
|
—
|
|||||
Common
stock, $0.01 par value; 1,000,000,000 shares
authorized;
47,966,085 and 44,018,946 shares issued and
outstanding
at December 31, 2006 and 2005, respectively
|
481
|
440
|
|||||
Additional
paid-in capital
|
2,615,742
|
2,593,085
|
|||||
Treasury
stock
|
(352
|
)
|
—
|
||||
Accumulated
deficit
|
(2,469,258
|
)
|
(2,467,138
|
)
|
|||
Unrealized
loss on investments available for sale
|
—
|
—
|
|||||
Total
stockholders’ equity
|
146,613
|
126,387
|
|||||
Total
liabilities and stockholders’ equity
|
$
|
158,385
|
$
|
266,008
|
YEAR
ENDED DECEMBER 31,
|
||||||||||
2006
|
2005
|
2004
|
||||||||
Royalty
revenues
|
$
|
1,175
|
$
|
—
|
$
|
—
|
||||
Franchise
fee revenues
|
749
|
—
|
—
|
|||||||
Total
revenues
|
1,924
|
—
|
—
|
|||||||
Operating
expenses:
|
||||||||||
Selling,
general and administrative expenses
|
(6,082
|
)
|
(3,569
|
)
|
(7,975
|
)
|
||||
Professional
fees
|
(1,149
|
)
|
(1,444
|
)
|
(2,808
|
)
|
||||
Depreciation
and amortization
|
(471
|
)
|
(159
|
)
|
(2,212
|
)
|
||||
Stock
based compensation
|
(1,632
|
)
|
(76
|
)
|
(594
|
)
|
||||
Restructuring
charges
|
(1,079
|
)
|
7
|
(1,054
|
)
|
|||||
Total
operating expenses
|
(10,413
|
)
|
(5,241
|
)
|
(14,643
|
)
|
||||
Operating
loss
|
(8,489
|
)
|
(5,241
|
)
|
(14,643
|
)
|
||||
Non-operating
income (expense)
|
||||||||||
Interest
income
|
2,637
|
1,478
|
3,955
|
|||||||
Interest
expense from subordinated notes
|
—
|
—
|
(7,917
|
)
|
||||||
Other
income (expense)
|
700
|
231
|
(60
|
)
|
||||||
Loss
on early extinguishment of subordinated notes
|
—
|
—
|
(2,419
|
)
|
||||||
Investment
loss, net
|
—
|
(19
|
)
|
(3,559
|
)
|
|||||
Total
non-operating income (expense)
|
3,337
|
1,690
|
(10,000
|
)
|
||||||
Loss
from continuing operations before income taxes
|
(5,152
|
)
|
(3,551
|
)
|
(24,643
|
)
|
||||
Income
taxes
|
(81
|
)
|
—
|
—
|
||||||
Loss
from continuing operations
|
(5,233
|
)
|
(3,551
|
)
|
(24,643
|
)
|
||||
Discontinued
operations:
|
||||||||||
Income
(loss) from discontinued operations,
net
of tax expense of $64 for 2006 and $75 for 2004
|
2,358
|
225
|
(44,510
|
)
|
||||||
Gain
(loss) on sale of discontinued operations
|
755
|
(1,194
|
)
|
20,825
|
||||||
Net
loss
|
(2,120
|
)
|
(4,520
|
)
|
(48,328
|
)
|
||||
Other
comprehensive income (loss):
|
||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
(3,830
|
)
|
||||||
Unrealized
holding gain on investments available for sale
|
—
|
—
|
67
|
|||||||
Comprehensive
loss
|
$
|
(2,120
|
)
|
$
|
(4,520
|
)
|
$
|
(52,091
|
)
|
|
Loss
per share (basic and diluted) from continuing operations
|
$
|
(0.11
|
)
|
$
|
(0.08
|
)
|
$
|
(0.57
|
)
|
|
Income
(loss) per share (basic and diluted) from
discontinued
operations
|
0.07
|
(0.02
|
)
|
(0.54
|
)
|
|||||
Net
loss per share - basic and diluted
|
$
|
(0.04
|
)
|
$
|
(0.10
|
)
|
$
|
(1.11
|
)
|
|
Weighted
average shares outstanding -basic and diluted
|
45,636
|
44,006
|
43,713
|
FOREIGN
|
UNREALIZED
|
||||||||||||||||||||||||
ADDITIONAL
|
ACCUM-
|
CURRENCY
|
GAIN
|
||||||||||||||||||||||
PREFERRED
|
COMMON
|
PAID-IN
|
ULATED
|
TREASURY
|
TRANSLATION
|
(LOSS)
ON
|
|||||||||||||||||||
STOCK
|
STOCK
|
CAPITAL
|
DEFICIT
|
STOCK
|
ADJUSTMENT
|
INVESTMENT
|
TOTAL
|
||||||||||||||||||
Balance
at
December
31, 2003
|
$
|
-
|
$
|
429
|
$
|
2,589,608
|
$
|
(2,414,283
|
)
|
$
|
-
|
$
|
3,830
|
$
|
(283
|
)
|
$
|
179,301
|
|||||||
Exercise
of options
and
warrants
|
-
|
11
|
1,952
|
-
|
-
|
-
|
-
|
1,963
|
|||||||||||||||||
Option
and warrant expense
|
-
|
-
|
1,417
|
-
|
-
|
-
|
-
|
1,417
|
|||||||||||||||||
Unrealized
gain on
investments
available
for sale
|
-
|
-
|
-
|
-
|
-
|
-
|
67
|
67
|
|||||||||||||||||
Foreign
currency translation
|
-
|
-
|
-
|
-
|
-
|
(3,830
|
)
|
-
|
(3,830
|
)
|
|||||||||||||||
Net
loss
|
-
|
-
|
-
|
(48,328
|
)
|
-
|
-
|
(48,328
|
)
|
||||||||||||||||
Balance
at
December
31, 2004
|
$
|
-
|
$
|
440
|
$
|
2,592,977
|
$
|
(2,462,611
|
)
|
$
|
-
|
$
|
-
|
$
|
(216
|
)
|
$
|
130,590
|
|||||||
Exercise
of
options
and warrants
|
-
|
-
|
32
|
(7
|
)
|
-
|
-
|
-
|
25
|
||||||||||||||||
Option
and
warrant
expense
|
-
|
-
|
76
|
-
|
-
|
-
|
-
|
76
|
|||||||||||||||||
Unrealized
gain on
investments
available
for
sale
|
-
|
-
|
-
|
-
|
-
|
-
|
216
|
216
|
|||||||||||||||||
Net
loss
|
-
|
-
|
-
|
(4,520
|
)
|
-
|
-
|
-
|
(4,520
|
)
|
|||||||||||||||
Balance
at
December
31, 2005
|
$
|
-
|
$
|
440
|
$
|
2,593,085
|
$
|
(2,467,138
|
)
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
126,387
|
||||||||
Exercise
of options
and
warrants
|
-
|
-
|
1
|
-
|
-
|
-
|
-
|
1
|
|||||||||||||||||
Option
and
warrant
expense
|
-
|
-
|
3,177
|
-
|
-
|
-
|
-
|
3,177
|
|||||||||||||||||
Common
stock
issued
|
-
|
41
|
19,479
|
-
|
-
|
-
|
-
|
19,520
|
|||||||||||||||||
Common
stock
repurchased
|
-
|
-
|
-
|
-
|
(352
|
)
|
-
|
-
|
(352
|
)
|
|||||||||||||||
Net
loss
|
-
|
-
|
-
|
(2,120
|
)
|
-
|
-
|
-
|
(2,120
|
)
|
|||||||||||||||
Balance
at
December
31, 2006
|
$
|
-
|
$
|
481
|
$
|
2,615,742
|
$
|
(2,469,258
|
)
|
$
|
(352
|
)
|
$
|
-
|
$
|
-
|
$
|
146,613
|
2006
|
2005
|
2004
|
||||||||
Revised
|
Revised
|
|||||||||
Cash
flows from operating activities:
|
||||||||||
Net
loss from continuing operations
|
$
|
(5,233
|
)
|
$
|
(3,551
|
)
|
$
|
(24,643
|
)
|
|
Adjustments
to reconcile net loss from
continuing
operations to net cash (used in)
provided
by operating activities:
|
||||||||||
Depreciation
and amortization
|
471
|
159
|
2,212
|
|||||||
Amortization
of loan fees
|
—
|
—
|
840
|
|||||||
Amortization
of mortgage premiums
|
—
|
670
|
22
|
|||||||
Stock
based compensation
|
1,632
|
76
|
594
|
|||||||
Gain
on disposal of assets
|
—
|
—
|
(80
|
)
|
||||||
Realized
losses on long term investments
|
—
|
19
|
3,559
|
|||||||
Loss
on early extinguishment of subordinated notes
|
—
|
—
|
2,419
|
|||||||
Changes
in assets and liabilities, net of
acquired
assets and liabilities:
|
||||||||||
(Increase)
in trade receivables, net of allowances
|
(791
|
)
|
—
|
—
|
||||||
(Increase)
decrease in prepaid expenses
and
other assets
|
(1,096
|
)
|
3,112
|
(513
|
)
|
|||||
Decrease
(increase) in interest receivable
|
663
|
(818
|
)
|
1,211
|
||||||
(Decrease)
increase in accounts payable, accrued
expenses,
accrued
employee compensation and
benefits
and accrued interest payable
|
(249
|
)
|
903
|
(4,128
|
)
|
|||||
Increase
(decrease) in restructuring accruals
and
other liabilities
|
314
|
(1,202
|
)
|
836
|
||||||
Cash
provided (used in) by discontinued
operations
for
operating activities
|
3,399
|
2,760
|
48
|
|||||||
Net
cash (used in) provided by operating activities
|
(890
|
)
|
2,128
|
(17,623
|
)
|
|||||
Cash
flows from investing activities:
|
||||||||||
Sales
and maturities of investments available for sale
|
—
|
45
|
1,171,641
|
|||||||
Purchases
of investments available for sale
|
—
|
—
|
(952,791
|
)
|
||||||
Purchases
of property and equipment
|
(151
|
)
|
(47
|
)
|