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NEW YORK (Blue MauMau) - NexCen Brands stock plunged 77 percent yesterday after warning that it faced a severe cash squeeze and had "substantial doubt" that it will remain in business. The firm discovered, during a review of its books, reporting errors and its obligation to pay off $21 million in debt by October. NexCen, a fast-growing buyout firm, which owns a number of franchise chains totaling 1,900 units, may try to sell off most of its brands. The firm's portfolio includes Athlete's Foot (a Bill Blass company), Pretzel Time, Pretzelmaker, Great American Cookies, Shoebox New York, Waverly home furnishings, Marble Slab Creamery and Maggie Moos.
As the company's new Chief Financial Officer, who was appointed in March, prepared the first quarter report for 2008, a credit problem was discovered. When NexCen acquired the Great American Cookie business, its bank credit allowed the borrowing of an additional $70 million to finance a portion of the acquisition. The credit included an accelerated-redemption feature applicable to $35 million of the $70 million. The amendments require that the $35 million be reduced to $5 million by October 17, 2008. The company was surprised to find the accelerated-redemption feature in its bank credit as well as other changes. These liabilities were not disclosed in the company’s 2007 Annual Report or its January 29, 2008 report that was filed in connection with the acquisition of Great American Cookies. Such financial obligations will greatly reduce the company's available cash to run operations.
The company may have had substantial doubt of its liquidity at the time it filed its 2007 10-K report.
The failure to correctly disclose such obligations may also expose the company to legal difficulties. Attorneys Roy Jacobs & Associates announced yesterday that it is investigating possible securities violations relating to today's announcement by NexCen Brands, Inc. and asked that those who bought the stock from January 30 through May 16, 2008 contact them regarding their rights.
But in spite of the gloomy report, Lawrence "Doc" Cohen, franchisee of three NexCen brands--Great American Cookies, Pretzel Time and Pretzelmaker--feels confident that NexCen CEO Robert D'Loren will find a way to pull out of it. "I know Bob through the acquisition of Great American Cookies and he has impressed me as being a very honest and honorable guy. He knows franchising." Cohen said he can only speak for his three brands and they are all thriving, even in this economic climate. No matter what happens he thinks their brands will survive. The word they are getting from NexCen is that it is business as usual. Cohen emphasized, "I will do whatever I can as a franchisee to help the company, and I think my attitude probably reflects that of all franchisees."
Cohen, who owns 23 Great American Cookies stores and a total of five units under the two pretzel brands, is past-president of the Great American Cookies franchisee association, and former chairman of the International Franchise Association. According to Cohen the franchisees had no idea the news was coming regarding the company's current financial status. He said, "It was a real shocker to all of us." But in spite of it all he reveals, "Yesterday I even bought stock in NexCen. That reflects my confidence in their ability to get this thing right."
Joel Buckberg, of counsel to Baker Donelson law firm in Nashville, was executive vice president and deputy general counsel for franchise conglomerate Cendant Corporation. He feels this is an unfortunate situation that has developed between the bank and NexCen but that the franchisees may come out of this fine. Buckberg observes, "The lenders are just looking to preserve value so that the next equity investor is willing to make the investment necessary to maintain the brand and get the loan repaid." Franchisees have the most significant long-term stake that the franchise conglomerate will want to preserve. "It's in the company's interest to create a path to continuity of the brand that has the least disruptive effect on the delivery of services and the competitiveness of the brand," he said.
Buckberg sees problems with new conglomerates. Such new firms can take on too much debt. Buckberg also feels that a franchise company, unless it has a significant company-store operations, is always dependent on the ability of its franchisees to understand and operate the business.
NexCen, in operation since June 2006, has stated it plans to explore all strategic alternatives for its businesses, continue discussions with its lender and take immediate steps to reduce operating expenses.
Telephone calls to NexCen were not returned prior to publishing.