By and  on May 28, 2008

NEW YORK — The fashion world has another drama to fixate on as angry shareholders continue to circle around NexCen Brands Inc.

The unraveling of the global brand management firm has the attributes that make for a good miniseries — or novel: a late high-living fashion designer (Bill Blass); the equally high-living executive who made the designer an even wealthier man and was determined to follow in his footsteps (Robert D’Loren, NexCen’s president and chief executive officer), and scores of industry veterans who pumped money into a business model that, while unproven, offered the chance to make millions. Oh, and there are cookies, pretzels and ice cream, too.

But, as with any drama, there’s another side — and it now involves the possibility that the company will cease to exist as it rushes to sell assets. Investors have lost millions since NexCen shares now are worth less than a tenth of their high, and a once-fabled but now stumbling fashion brand is caught up in turmoil again as shareholders are evaluating whether or not to sue the company.

As one executive said in describing the affair: “The whole franchising thing is hugely complex. It’s very tough to do pretzels, cookies and evening gowns.”

But even though D’Loren is said to be on thin ice given the company’s travails, he continues to believe that the business model is sound — and there are still observers who agree. The NexCen ceo was scheduled to speak this Thursday at a Financial Times luxury conference in Tokyo on the topic of “The Next Business Model.” However, it was learned that NexCen canceled D’Loren’s appearance last week before issuing the warnings during a Wall Street conference call.

“We continue to believe in the NexCen Brands business model as one that can succeed in today’s fast-paced business environment,” D’Loren told WWD. “There is a great opportunity for growth by bringing together a diverse portfolio of global brands and leveraging a single corporate support system to create synergies between those brands and businesses.”

NexCen’s assorted brands, which were cobbled together over the past two years, are MaggieMoo’s Ice Cream and Treateries, Marble Slab Creamery, Great American Cookies, The Athlete’s Foot, Bill Blass, Waverly, Shoebox New York and Pretzelmaker and Pretzel Time.At first glance, most of the brands don’t seem to have much in common, aside from the fact that many of their products can be found at food courts or fashion floors at the mall. But the strategy behind them was to assemble consumer product companies and franchise industries based on the strength of their licensing revenues. In a research note, Todd Slater of Lazard Capital Markets LLC said he believes that this year the brands will generate an estimated $64 million in franchise, licensing and royalty revenue, and will have significant carryover net operating losses of $777 million that can be utilized for tax purposes under certain conditions.

For 2007, NexCen had a net loss of $4.6 million on a GAAP basis, with revenues of $34.4 million.

What prompted the bad news was NexCen’s failure to disclose that $30 million of the $70 million borrowed to acquire Great American Cookies in January for $89 million must be paid down by Oct. 17. NexCen said it planned to delay filing its first-quarter results for the period ended March 31 and may need to restate its annual report for 2007. It now is exploring all alternatives, including the sale of one or more of its operations, and is said to have hired Rothschild as an investment adviser.

NexCen’s stock, which closed Tuesday on Nasdaq at 58.02 cents, is down from a 52-week high of $13.18 on June 1. So far, at least three investigations have been initiated concerning losses suffered by purchasers of the company’s stock. Furthermore, shareholders ranging from Marvin Traub, who sits on the NexCen board, to Haresh Tharani to Michael Groveman (both of whom sold the Blass business to NexCen for $39.1 million in cash and $15.5 million in NexCen common stock last year) reportedly have lost significant sums on their shares, as have several institutional investors.

According to Yahoo Finance, D’Loren held slightly more than 1 million shares at the end of March, while chairman David Oros owned 2.1 million shares. Institutional investors listed on Yahoo as the top holders as of March 31 include Diker Management, 2.8 million shares valued at $9.5 million; North Run Capital, 2.7 million shares at $9.1 million; Buckingham Capital Management, 2.5 million shares at $8.4 million, and Dimensional Fund Advisors Inc., 2 million shares at $6.9 million. The top mutual fund holder on March 31 was Legg Mason Partners Small Cap Growth Fund, with 1.5 million shares valued at $7.5 million. Due to possible sales of the stock by holders in the period between April 1 and May 19, it is unclear how many shares of NexCen these firms still own and what the value of those shares are today.One investor whose holding of NexCen stock was valued in the millions on a good day said he was “very angry” at what happened, while another investor said he might buy up more shares since the stock is at a “bargain basement price” and he expects the stock to pick up again after the dust settles. This investor also insisted that the NexCen business model is still a viable one.

“The real story here is that the company has some terrific pieces,” the investor said. It was a lot of overreaction by investors who sold the stock. In this case, the debt has to be repaid sooner, but it’s not new debt since it was already on the books. The other issue is one of credibility for the ceo. He’s badly damaged, but you can restore the credibility by putting in a new ceo.”

Most agree D’Loren, 50, is unlikely to last at NexCen, the company he created from Aether Holdings and its 2006 acquisition of UCC Capital. Sources attribute his problems to the fact that he wound up buying too many companies and wasn’t equipped to run them all. Eric Beder of Brean Murray, Carret & Co. last week called the material omission regarding disclosure of terms of the bank credit agreement as “the final blow to management’s credibility.”

It’s an interesting turn of events for D’Loren, who first became familiar with Bill Blass in 1999 when he ran CAK Universal Credit Corp. He financed the purchase of Bill Blass Ltd. by creating the apparel industry’s first investment grade asset-backed securities, based on Blass’ trademarks, brand equity and licensing revenues. The deal, which made the late Blass himself $50 million richer, was closer to something out of the entertainment and music worlds, where DreamWorks and rocker David Bowie are among the more high-profile bond players.

D’Loren became involved with the Blass business, receiving monthly reports on developments at the company. He was later hired to sell the Blass business and ended up buying the company himself from Tharani and Groveman.

And D’Loren clearly loves the fashion world even beyond Blass. In October 2006, he purchased the former estate of Geoffrey Beene in Oyster Bay Cove on Long Island’s North Shore for a reported $3.5 million. The now-48-year-old Palladian-style stucco home was listed at nearly $4.95 million and had been on the market for 15 months. According to published reports, the mansion is on a 6-acre lot, with three bedrooms, four full bathrooms, fireplaces in the master bedroom and living room, a guest suite, a greenhouse and a pool. One source said the mansion originally had features that were reminiscent of France’s Versailles, but had been stripped away to reflect a modernism that was more in line with Beene’s minimalist designs. D’Loren is said to have done some reconstruction work on the home, bringing back some of the Parisian glamour. A collector of vintage cars, he’s also an avid skier who spends time at Stratton Mountain Resort in Vermont.In NexCen’s most recent proxy statement of Aug. 1, D’Loren received total compensation of $1.2 million, which included a base salary of $427,083 in 2006. His base salary is $750,000, but is prorated from his start date of June 6, 2006, according to the regulatory filing. The initial term of his employment agreement is three years.

Those who have worked with D’Loren describe him as a stickler for details, a person who leaves no stone unturned. It was that intense focus that enabled him to complete many securitization deals that were and still are unparalleled in the intellectual property field. In April 2005, Institutional Investor’s Securitization News awarded UCC Capital its Deal of the Year Award for the bank’s 2004 financing of the BCBG Max Azria Group. The BCBG transaction also received the Deal of Distinction honor by the Licensing Executives Society in October 2005.

Although sources noted that D’Loren is an intelligent and financially astute man, they said he’s a “fast talker” who needed to be involved in all these businesses, but “got a little lost.” In an era of specialization, some observers — at least now — believe NexCen was way too diverse to be successful.

“[D’Loren] is not focused,” said one industry executive.

“Why go back to the old-fashioned conglomerate model? I like old stories told in a new way, but the conglomerate business model was thrown out in the Seventies,” said one source, referring to conglomerates such as Gulf + Western, whose holdings once ranged from Paramount Pictures and Simon and Schuster to Kayser-Roth hosiery, or Sara Lee Corp., whose businesses at one point included Aris Gloves, Hanes, Playtex and Champion, as well as Hillshire Farms and Ball Park Franks.

During his career, D’Loren helped Iconix Brand Group Inc., formerly Candie’s Inc., transform itself from a manufacturing company to a brand management firm. D’Loren’s detractors said he often takes credit for some of Iconix’s successful acquisitions. The business model at Iconix is somewhat similar to that used by NexCen, although Iconix’s holdings are completely focused on the apparel and home industries. NexCen, on the other hand, set up its company with a three-pronged strategy. The first two involve retail franchising, such as The Athlete’s Foot, and what is known as quick-service restaurant franchises, or fast food, like Pretzel Time. The third prong is the consumer-branded businesses such as Bill Blass.Asked about the future of the Blass business, D’Loren said Blass is “an iconic American brand that is well-established in the fashion world and continues to have strong consumer recognition and retail interest.” However, he added that it was “too early to say what the future might hold for this business. We are exploring all options to improve NexCen’s liquidity, which may include the sale of one or more of our businesses.”

Meantime, Blass executives were surprised at the recent turn of events. “I was confused and shocked. It’s something I never expected,” said Arnold Simon, president and ceo of Designer Licensing Holdings, which has the Bill Blass jeanswear license and owns 10 percent of the Bill Blass trademark.

“We didn’t have a heads-up. We don’t know anything about their other businesses. We’re concerned about the licensees and that there’s no interruption of the business,” he added.

“Their accounting issues came out of left field,” said another Blass insider.

Veteran staffers — especially those who worked for the company’s namesake and have been there for 35 to 40 years, were said to be particularly shaken.

It was the future of the Blass business that fixated the fashion industry last week. The key questions are, what kind of interest is actually being shown, and will it be disposed of at a fire-sale price?

Industry sources believe the Blass business today is clearly challenged, and various lines aren’t performing that well. Two new licenses that were recently signed with Peerless Clothing and Phillips-Van Heusen Corp. were structured in such a way that they aren’t paying any royalties in the first year. Instead, the licensees are splitting the advertising costs with NexCen. Consequently, Blass’ royalty stream is estimated to be less than $4 million, said sources.

Some believe Blass may need to be sold at a substantial discount — perhaps as little as $15 million to $18 million — a far cry from the $54.6 million NexCen paid for it 15 months ago.

As reported, Simon has assembled a group of investors who want to buy the Blass trademark, and sources said Tharani and Iconix have shown interest in the business, while Windsong Brands is said to be interested in both Waverly and Blass. D’Loren also was said to have been in contact with the investment arm of Hilco and Schottenstein about a sale of certain NexCen assets. Other names mentioned include Phillips-Van Heusen and Li & Fung.When NexCen purchased Blass from Tharani and Groveman, Groveman held onto the ready-to-wear portion of the business, i.e., the designer collection that is shown on the runway during New York Fashion Week. That business, which in its heyday was generating about $25 million to $30 million, has fallen to about $20 million at retail today, said sources. NexCen bought the Blass trademark and benefits from the royalty stream from its licensees, and actually is responsible for Peter Som’s salary.

The Bill Blass collection — which sets the tone for all the licensed businesses — has had several bumpy years since the designer’s death in 2002. A parade of designers have come and gone, beginning with Steven Slowik, Lars Nilsson and Michael Vollbracht, and now Som.

It was Vollbracht who had the longest rein at the house — four years — despite largely uneven reviews from the press. While Vollbracht’s February 2007 runway show received a more favorable review than in seasons past, some believed he never quite found his footing. In March 2003, Vollbracht arrived immediately following Nilsson’s swift dismissal — the latter was fired the day after presenting his spring rtw collection. Vollbracht left the firm last May.

Reached for comment about the current Blass predicament, Vollbracht told WWD: “Bill Blass was a personal friend of mine since I was 19 years old. He asked me to come back and work with him. He may have died, but I would hate to see the label die.” He said he wasn’t privy to what happened at NexCen, but “I wish the label well. My role was to get the consumer back. I succeeded somewhat.”

Som’s fall 2008 collection for Blass was critically praised by the press. WWD said it offered “refined separates at which he’s so adept,” and the “Som polish was evident all over.” The line is available in such stores as Saks Fifth Avenue, Neiman Marcus, Bergdorf Goodman and Nordstrom.

Neither Som nor his business partner, Elana Waksal Posner, would comment.

Since NexCen purchased Blass’ business in February 2007, the company has tried to clean up its current distribution. In an interview in March, D’Loren told WWD, “Our strategy with Bill Blass was to reposition back at the upper tier. That’s always a challenge when you have product in lots of distribution channels.” While sources said Blass was experiencing too slow and weak a stream of revenues, D’Loren said: “Sometimes you have to bring it back to bring it forward. I am comfortable where I think we will be in 2008. 2008 is the year to sign all the new licenses, and the volume will be in 2009.”In the past year, the company has hired Som to design the women’s line and Michael Bastian to design men’s. In the licensing arena, it signed deals for footwear, handbags and fur in women’s, and for several categories in men’s wear, including Peerless Clothing. In addition, NexCen is using its Waverly division — which it acquired last May for $34 million in a cash deal — to create the Bill Blass home brand. The company upgraded its denim products and raised the prices from about $29 a pair to between $48 and $54.

Simon said the Blass jeanswear business generates about $25 million to $30 million in wholesale volume. Although things are tough, he said the Blass jeanswear is making progress. NexCen also has been increasing the division’s revenues through direct home sales, where the bridge-priced Bill Blass line is expected to do $30 million this year. Across all categories, Bill Blass does about $200 million in sales today.

“The licensees are good companies. They’re not related to NexCen. We’ve invested in the trademarks,” said Simon. He called NexCen’s group of companies “a strange combination.”

What combination survives probably won’t be evident for months. One investor told WWD that he thinks the stock should be worth around $2 a share, adding that the business model “still works.”

Another investor said the NexCen business model is “salvageable.”

Richard Kestenbaum, a partner at investment banking firm Triangle Capital, said, “Sometimes you can find great value in stocks and companies where the market has overreacted to the bad news. Often the underlying value is not as diminished as what the market assumes.”

C.L. King & Associates analyst Scott Krasik suspended its rating of NexCen. He noted that, since the company is operating with current liabilities exceeding current assets, it was forced to issue a “going concern” statement. A refinancing of debt or sale of assets “will alleviate” the issue, Krasik said.

But Krasik also noted that it “appears that management intentionally withheld information” about the accelerated-redemption clause in its bank amendment, which the analyst said may expose the company and its executives to legal liability — adding more to the drama.

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