NexCen: Surviving a steady decline

Near-hurricane wind gusts and torrential rains pulsed outside the doors of NexCen Franchise Management in Norcross. But on that dreary May day, it was the much more devastating storm unfolding inside that held the attention of everyone within the company.

NexCen’s parent company in New York, publicly traded NexCen Brands, Inc., had just issued a notice that it failed to notice a clause in the paperwork for its latest purchase requiring a $30 million payment by October.

The company didn’t have the money, which nearly totaled its projected revenues for the year.

The news cast doubt, NexCen executives said in a release issued that day, on its viability as a going concern and would make it impossible to file accurate earnings. Calls from panicked franchisees poured in.

The company’s already weakened stock collapsed, prompting analysts to drop NexCen like the sinking stone it appeared to be.

“Frankly, we are tired of making excuses for NexCen,” Brean Murry Carret & Co. analyst Eric Beder wrote in a note to investors that day. “We have had enough,” he said.

With that, NexCen’s sudden rise-and-fall story seemed to be complete.

But the next chapter of NexCen’s story remains unwritten, six months after its collapse seemed so imminent.

It remains, despite the dire-sounding warning that day, a going concern that is, according to its executives, past the risk of bankruptcy.

Its offices, complete with training mock-ups of ice cream stores, pretzel parlors and a high-end women’s shoe joint, remain open.

It’s even pushing out new product and store concepts.

New Chief Executive Ken Hall, who discovered the debt problem, has renegotiated the company’s credit line, orchestrated the sell-off of the company’s Waverly home products brand to help pay down debt and is working on the sale of its Bill Blass fashion brand.

The company has negotiated an extension from NASDAQ on the stock exchange’s threat to delist the company if it doesn’t fix its reporting failures and raise its stock price at least above a buck.

Franchisees seem to be standing behind the company.

NexCen recently announced it has 394 new stores in development, including a string of international deals that will expand its brands into Vietnam, Lebanon, South Korea and Vietnam, among other places in Africa, Europe and Latin America.

But it’s not as if the stormy weather is entirely behind NexCen. A lot of mystery is wrapped up in as-yet unreleased 2008 financial reports, and the company’s plan to restate its 2007 filings.

Nor let us forget the pesky matter of an economy that’s challenging enough, even for the strongest of firms.

“For this to happen at any time is inopportune, but it’s definitely compounded things,” said NexCen Franchise Management President Chris Dull.

Brand recognition

NexCen Franchise Management is typical of the many businesses that dot the suburban corporate landscape, quietly operating from one-story offices in a generic Gwinnett County office park.

Few people likely even know the company exists, but it controls some quick service treat brands well known to mall-dwellers, such as ice cream seller Marble Slab Creamery, Great American Cookie, Pretzel Time and Pretzel Maker, as well as The Athlete’s Foot shoe stores.

The company formed in 2006 from the marriage of investment banker Bob D’Loren’s UCC Capital with Aether Holdings, a investment firm with history in both wireless communications and real estate.

UCC had helped The Athlete’s Foot restructure into a franchise business after its bankruptcy a few years earlier. The franchisor —- then located across the street from where NexCen is now headquartered in Norcross —- became the company’s first acquisition.

The company went on a 14-month buying spree that saw it go from the franchisor of a single shoe brand to the owner of five quick-service restaurant brands, a cookie dough plant, two footwear brands and two licensing businesses.

It was a dizzying rise that ultimately lifted the company’s stock to a high of nearly $13 a share in early 2007.

But it came at a cost.

“I think this company grew too quickly, too fast,” said Hall. “There wasn’t time to catch your breath.”

Surprise in cookies

Hall hadn’t been on the job but six weeks when he discovered an explosive piece of contract language in paperwork for NexCen’s January 2008 purchase of Great American Cookie from Mrs. Fields Famous Brands for $89 million in cash and about $4.7 million in NexCen stock.

The provision required NexCen to make a $30 million balloon payment in October —- a provision the company hadn’t disclosed because, later investigations revealed, apparently no one realized it was there.

An investigation by the company’s board of directors and an outside auditing firm found no intent to deceive. Hall said it appeared to be an oversight caused by a frenetic pace and insufficient controls during the company’s rapid growth.

Even an oversight can be deadly when it’s worth almost as much as the company’s entire projected annual revenue, as analyst Beder noted in his final report on NexCen in May.

“It is inexcusable that a management team with the financial depth and strength we were led to believe was at NexCen would allow for the creation of a covenant that could place the entire firm at risk …” wrote Beder, who has since —- like all other investment analysts who were following NexCen —- dropped his coverage.

He went on to say that he believed “NexCen has virtually no Street credibility and, even if it can solve its current liquidity issues, will remain in the ‘penalty box’ for a long time.”

Hall took over the company when D’Loren left in the wake of the discovery. Nexcen cut 10 percent of its work force, all of it from the New York corporate offices and agreed to sell its Waverly and Bill Blass brands, in an effort to placate its lender, BTMU Capital Corporation, and pay down debt.

The company has already sold Waverly. The Bill Blass sale is taking longer than expected because of the world credit crunch, Hall said.

With the worse of the crisis behind it and the Bill Blass sale drawing closer, the NexCen is finally in a position to focus on “buffing up” the brands it now controls.

Franchisees are eager for that work to begin.

‘Normal services’ go on

Lawrence “Doc” Cohen owns 30 NexCen-branded stores in the Houston area. He said NexCen has continued to provide the support he needs to keep his business going, but the turmoil has slowed efforts to roll out new brand images and launch a top-shelf national marketing campaign.

“We’re getting the normal services,” he said. “We’re getting marketing. We’re getting new product development. But they may not be able, because of financial constraints, to do some of the things we were hoping they would be able to do as quickly as they had hoped,” he said.

Some initiatives are moving forward, such as an effort to push most of The Athlete’s Foot locations back to their roots as technical running stores, even as a smaller core of stores goes to an urban fashion format with sleek black and white decor and “hook up walls” designed to offer quick, fashionable pairings for shoes, shirts and caps.

NexCen also has changes in store for its two pretzel brands, seeking to merge the Pretzel Time and Pretzel Maker brands into a new updated Pretzel Maker concept. Great American Cookie will shed it’s “little bit circusy” image, Dull said, for a more contemporary theme.

Companies like NexCen can get squeezed all sorts of ways, said Mark Dayman, a former executive of a franchising company who now helps companies devise franchising strategies and find the capital to carry them out.

On the consumer side, retail spending is down, which can affect franchising companies because part of the revenue stream involves a percentage of sales. On the franchising side, even development deals aren’t guaranteed money in an environment where there’s precious little lending going on, Dayman said.

Trying to work with suppliers —- primarily shoe makers —- is also a challenge. Dull said he’s trying to persuade vendors to bring prices down to help the company reduce costs, but that’s hardly unique to one struggling franchisor in Norcross, Ga.

“You can see it in their faces,” Dull said. “We’re not the only ones asking.”

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MICHAEL DABROWA / Staff

NEXCEN DAILY STOCK PERFORMANCE

Company start: $6.84

Nov. 1, 2006

Stock high: $12.98

April 25 & June 4, 2007

Friday: $0.08

A LOOK AT NEXCEN

135 employees: All but 10 in metro Atlanta.

$34 million: 2007 annual revenues

1,880: Total number of franchised locations worldwide

394: Stores in the pipeline worldwide

42: Number of countries with Nexcen-branded stores in operation

Source: Yahoo.com