The owner of Bill Blass, Athlete's Foot and other operations saw shares fall 77.1 percent in trading Monday after the company said there is "substantial doubt" about its ability to continue as a going concern, and that the same "doubt also may have existed" when the firm filed its 2007 annual report.
Senior NexCen Brands Inc. executives issued the warnings during a conference call with Wall Street. They said certain information became apparent after the company reviewed public filings in connection with the preparation of first-quarter results. Those results were expected to be released earlier this month by the company's new chief financial officer, Ken Hall, who joined NexCen in March.
Robert D'Loren, president and chief executive officer, said on the call that the NexCen board and management are considering the "future direction of the company" and are "actively exploring" options, including the sale of one or more businesses.
In the meantime NexCen, pressured by a near-term operating cash shortfall, will be focusing on reducing expenses.
D'Loren said on the call that the company will delay filing its first-quarter results for the period ended March 31 and may need to restate its annual report for 2007. The CEO also said KPMG's audit report and its analysis of management's effectiveness of internal control over financial reporting "should not be relied upon."
He also said the company does not expect "any changes in our 2007 financial results." However, he did not specify what changes NexCen might have to make to its annual report for last year.
The main issue is that the company failed to disclose that $30 million of the $70 million borrowed to acquire Great American Cookie in January for $89 million must be paid down by Oct. 17, 2008.
In addition, the money NexCen gets from its operations is sent to lockbox accounts. Under such accounts, funds are sent to the bank and put in separate accounts that get "unlocked" when a bank employee is ready to credit that account. Different lockboxes exist for different NexCen franchise operations. The bank credit facility with BTMU Capital Corp. also changed the priority of cash distributions from the lockbox accounts. After paying operating costs, much of the money is applied toward reducing the Great American Cookie loan, leaving little cash flow to invest in the rest of NexCen's brand management business.
As a major creditor, BTMU could have a significant say in determining the future of NexCen.
The revelations of NexCen's woes rippled through the market Monday. Lazard Capital Markets analyst Todd Slater dropped coverage of the NexCen "due to the company's revelations this morning that cause us to have serious concerns regarding management's disclosure of material information."
Eric Beder of Brean Murray, Carret & Co., lowered his rating of the company's shares to "hold" from "buy." He cited the material omission regarding disclosure of terms of the bank credit agreement as the "final blow to management's credibility" and said his firm is "tired" of making excuses for NexCen, touting the strength of the business model, now that "poor negotiating of the debt covenants show a lack of controls."
Whether NexCen can refinance the pending debt paydown is uncertain, considering the current difficulties in accessing the credit markets due to the continuing hangover from the subprime mortgage debacle nine months ago.
An investment banker familiar with NexCen's Blass operation, which the firm acquired in December 2006 for $54.6 million in cash and stock, said the company has been "unable to get the traction it needed to build the Blass business."
The banker said NexCen managed to make some positive moves at the brand since its acquisition, such as installing Peter Som as creative director for its women's division and Michael Bastian in a comparable role for men's. Since Blass' death in 2002, the brand has struggled to regain its footing. The fashion house has gone through a string of designers, including Lars Nilsson and Michael Vollbracht, generating mixed reviews that critiqued the collections as too retro and lacking a light touch.
Other sources familiar with the Blass operation said that in recent months cash has been tight, with many vendors not getting paid on time. One source said that nonpayment to vendors was one reason why the company delayed the relaunch of its men's line, which in March sparked speculation that a bankruptcy filing might not be too far away.
Another source said the denim line under the direction of Arnold Simon at the end of the day was a "much smaller business than originally anticipated," due in part to consolidation at retail and because the moderate jeans business had changed from the days when Simon oversaw a sizable denim business. Simon is the former CEO of Designer Holdings, which at one point held the license to the Calvin Klein jeans business. He also once oversaw Aris Industries Inc.
While some financial investors said Blass is still a good brand, many who spoke on background deemed the label as one that still required significant work to return it to the level of its heyday.
A banker speculated that Blass and the Waverly home brand were the likely candidates that could be sold, possibly quickly, to raise capital. Two names were raised regarding possible purchasers of Blass: Tharanco and NRDC Equity Partners.
Haresh Tharanco, chairman of Tharanco, was also chairman of Blass Holdings. Along with Blass CEO Michael Groveman, the two sold the company to NexCen.
Tharanco declined comment Monday. Sources said that while he would likely consider the opportunity, they weren't sure what anyone would learn about the operation after conducting due diligence.
NRDC was mentioned because it owns Lord & Taylor and Creative Design Studio, which invests in up-and-coming designers. CDS designers include Peter Som. Richard Baker, president and ceo of NRDC, did not return a request for comment.
Shares of NexCen closed Monday in over-the-counter trading at 58 cents, down from its previous close of $2.53. Over 19.4 million shares changed hands, compared with a three-month average volume of 404,181.
D'Loren said on the call that he expects the firm to receive a notice of delisting from Nasdaq, but that the company will appeal. He also expects the shares will continue to be traded during the appeals process.
D'Loren did not return a call seeking further comment.
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