SCHEDULE 14A
(Rule 14a-101)

 

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934

Check the appropriate box:

FREDERICK’S OF HOLLYWOOD GROUP INC.

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

Common Stock, Par Value $0.01 Per Share, of Frederick’s of Hollywood Group Inc.

11,594,575 shares of Common Stock and 360,000 shares of Common Stock underlying outstanding options with an exercise price of $0.27 or less.

In accordance with Exchange Act Rule 0-11(c), the filing fee of $407.19 was determined by multiplying 0.00012880 by the aggregate merger consideration of $3,161,435.25. The aggregate merger consideration was calculated based on the sum of (i) 11,594,575 outstanding shares of Common Stock as of January 22, 2014 to be acquired pursuant to the merger multiplied by the merger consideration of $0.27 per share and (ii) 360,000 outstanding shares of Common Stock underlying outstanding options as of January 22, 2014 to be acquired pursuant to the merger with an exercise price of $0.27 or less multiplied by the excess of the merger consideration of $0.27 per share over the weighted average exercise price of $0.184.

$3,161,435.25

$407.19

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PRELIMINARY COPY — SUBJECT TO COMPLETION

Frederick’s of Hollywood Group Inc.
6255 Sunset Boulevard
Hollywood, CA 90028

[•], 2014

Dear Shareholder of Frederick’s of Hollywood Group Inc.:

You are cordially invited to attend a special meeting of the shareholders of Frederick’s of Hollywood Group Inc., a New York corporation (the “Company”, “we”, “our” or “us”), which we will hold at our principal executive offices located at 6255 Sunset Boulevard, 6^th Floor, Hollywood, California 90028, on [•], 2014, at 10:00 a.m. local time.

At the special meeting, holders of our common stock, par value $0.01 per share, will be asked to consider and vote upon a proposal to adopt and approve an Agreement and Plan of Merger (as it may be amended from time to time, the “Merger Agreement”), dated as of December 18, 2013, as amended on April 14, 2014, by and among the Company, FOHG Holdings, LLC, a Delaware limited liability company (“Parent”), and FOHG Acquisition Corp., a New York corporation and wholly owned subsidiary of Parent (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company and the separate corporate existence of Merger Sub will cease. The Company will be the surviving corporation in the merger and will continue to be a New York corporation after the merger.

If the merger is completed, then each share of our common stock will be converted into the right to receive $0.27 in cash (other than shares held by the Rollover Shareholders (as defined below), shares held by us or any wholly owned subsidiary of ours and shares held in our treasury). Immediately prior to the merger, HGI Funding, LLC (“HGI Funding”), a wholly owned subsidiary of Harbinger Group Inc., TTG Apparel, LLC (“TTG”) and Tokarz Investments, LLC (“TKZ”), each of which is controlled by Michael Tokarz, and Fursa Alternative Strategies LLC (“Fursa”) and Arsenal Group, LLC (“Arsenal”), each of which is controlled by William F. Harley III, a member of our Board of Directors, and Mr. Harley individually (collectively, the “Rollover Shareholders”) will cause all of their shares of our capital stock to be contributed to Parent in exchange for an increase in their equity interests in Parent. As a result of the merger, the Company will be privately owned and will be controlled by the Rollover Shareholders through their ownership of Parent.

The Rollover Shareholders, as a group, may be deemed to beneficially own 91,257,883 shares, or 88.7%, of our common stock, including 63,579,204 shares that they have the right to acquire pursuant to convertible preferred stock, warrants and options held by them.

In order to evaluate the fairness of the merger to our shareholders, the Company’s Board of Directors delegated to its lead independent, disinterested director, Milton Walters (the “Lead Director”), authority to consider and negotiate the terms and conditions of the merger with Parent and to make a recommendation to the Board of Directors. The Lead Director, based in part on advice from his legal and financial advisors, determined that the merger and the Merger Agreement were fair to and in the best interests of the Company and its shareholders (other than the Rollover Shareholders and their respective affiliates and associates), and recommended that the Board of Directors approve the merger and the Merger Agreement, and that the Company’s shareholders vote for the approval of the merger and adoption of the Merger Agreement. Based on the Lead Director’s recommendation, our Board of Directors approved the merger and the Merger Agreement. Mr. Harley, who is a Rollover Shareholder, and Thomas J. Lynch, who is our chairman and chief executive

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officer and who has received a new employment agreement which will take effect if the merger is completed and under which he will receive equity in Parent as described in the enclosed proxy statement, recused themselves from the deliberations.

At the special meeting, you will also be asked to approve, by non-binding, advisory vote, compensation that may become payable to our named executive officers (as defined in Item 402 of Regulation S-K of the Exchange Act) in connection with the merger.

Our Board of Directors (other than Messrs. Harley and Lynch) unanimously recommends that the shareholders of the Company vote “FOR” the proposal to approve the merger and adopt the Merger Agreement and “FOR” the non-binding, advisory proposal to approve compensation that may become payable to the Company’s named executive officers in connection with the merger. In arriving at its recommendation to approve the merger and adopt the Merger Agreement, our Board of Directors and the Lead Director carefully considered a number of factors that are described in the enclosed proxy statement, including that (i) the Company has not reported an operating profit since fiscal year 2007, (ii) since that time the Company has suffered from negative working capital and, in many years, deficit equity and (iii) no firm or economically viable offers for strategic transactions resulted from the marketing efforts in which the Company engaged during 2012 and 2013 or from the solicitation permitted under the Merger Agreement.

The enclosed proxy statement describes the Merger Agreement, the merger and related agreements and provides specific information concerning the special meeting. In addition, you may obtain information about us from documents filed with the Securities and Exchange Commission. We urge you to, and you should, read the entire proxy statement carefully, including the appendices, as well as the Schedule 13E-3 relating to the Merger Agreement the transactions contemplated thereby, including the exhibits attached thereto, filed with the Securities and Exchange Commission, as they set forth the details of the Merger Agreement and other important information related to the merger.

The merger cannot be completed unless holders of two-thirds of the aggregate voting power of the outstanding shares of common stock vote in favor of approving the merger and adopting the Merger Agreement. Holders of common stock as of the record date have one vote for each share of common stock owned by the shareholder as of the close of business on the record date. Because the Rollover Shareholders beneficially hold more than two-thirds of our outstanding shares of common stock as of the record date, they can satisfy the required vote under New York law and the Merger Agreement to approve the merger and adopt the Merger Agreement without the affirmative vote of any of our other shareholders.

If you sign, date and return your proxy card without indicating how you wish to vote, your proxy will be voted in favor of the approval of the merger and adoption of the Merger Agreement and the approval of the non-binding, advisory proposal regarding compensation that may become payable to the Company’s named executive officers in connection with the merger. If you fail to vote or submit your proxy, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the special meeting (unless you are a record holder as of the record date, or you obtain a legal proxy from your bank, broker or other nominee, and attend the special meeting in person) and will have the same effect as a vote against the approval of the merger and the adoption of the Merger Agreement.

While shareholders may exercise their right to vote their shares in person, we recognize that many shareholders may not be able to attend the special meeting. Accordingly, we have enclosed a proxy that will enable your shares to be voted on the matters to be considered at the special meeting even if you are unable to attend. If you desire your shares to be voted in accordance with the recommendation of our Board of Directors, you need only sign, date and return the proxy in the enclosed postage-paid envelope. Otherwise, please mark the proxy to indicate your voting instructions; date and sign the proxy; and return it in the enclosed postage-paid envelope. You also may submit a proxy by using a toll-free telephone number or the Internet. We have provided instructions on the proxy card for using these convenient services.

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Submitting a proxy will not prevent you from voting your shares in person if you subsequently choose to attend the special meeting.

Sincerely,
  

Thomas J. Lynch
Chairman and Chief Executive Officer

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

This proxy statement is dated [•], 2014 and is first being mailed to shareholders on or about [•], 2014.

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FREDERICK’S OF HOLLYWOOD GROUP INC.
6255 Sunset Boulevard
Hollywood, CA 90028

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To the Shareholders of Frederick’s of Hollywood Group Inc.:

NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders of Frederick’s of Hollywood Group Inc. (the “Company”, “we”, “our” or “us”) will be held at our principal executive offices located at 6255 Sunset Boulevard, 6^th Floor, Hollywood, California 90028, on [•], 2014, at 10:00 a.m. local time, for the following purposes:

The holders of record of our common stock, par value $0.01 per share (“Common Stock”), voting as a class, as of the close of business on [•], 2014, are entitled to notice of and to vote at the special meeting or at any adjournment thereof. All shareholders of record are cordially invited to attend the special meeting in person. A list of our shareholders will be available at our headquarters located at 6255 Sunset Boulevard, 6^th Floor, Hollywood, California 90028, during ordinary business hours for ten days prior to the special meeting.

On September 26, 2013, HGI Funding, LLC (“HGI Funding”), a wholly owned subsidiary of Harbinger Group Inc., TTG Apparel, LLC (“TTG”) and Tokarz Investments, LLC (“TKZ”), each of which is controlled by Michael Tokarz, and Fursa Alternative Strategies LLC (“Fursa”) and Arsenal Group, LLC (“Arsenal”), each of which is controlled by William F. Harley III, a member of the Company’s Board of Directors, entered into a non-binding consortium term sheet agreement. HGI Funding, TTG, TKZ, Fursa and Arsenal are collectively referred to herein as the “Consortium Members.” Parent and Merger Sub were formed by the Consortium Members for the purpose of acquiring us pursuant to the Merger Agreement. Under the term sheet, the Consortium Members agreed, among other things, to jointly deliver a non-binding proposal to the Company’s Board of Directors for the acquisition of all of the Company’s publicly held Common Stock in a “going private” transaction with the Company, and to use their commercially reasonable efforts to work together to structure, negotiate and do all things necessary or desirable, subject to the Company’s approval, to enter into definitive agreements in respect of the transactions contemplated under the non-binding proposal.

The Consortium Members delivered to the Board of Directors their non-binding, written proposal to acquire all of the outstanding shares of the Company’s Common Stock that they did not directly or indirectly own on September 26, 2013. Following receipt of the Consortium Members’ non-binding written proposal, in order to evaluate the fairness of the merger to our shareholders, the Company’s Board of Directors delegated to its lead independent, disinterested director, Milton Walters (the “Lead Director”), authority to consider and negotiate the terms and conditions of the merger with Parent and to make a recommendation to the Board of Directors. As a result of these considerations and negotiations, and upon the recommendation of the Lead Director, the Board of Directors (other than Mr. Harley and Thomas J. Lynch, for the reasons discussed below) caused the Company to enter into the Merger Agreement and is making the recommendations to the Company’s shareholders set forth herein.

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We have described the merger and the Merger Agreement in the accompanying proxy statement, which you should read in its entirety before voting. A copy of the Merger Agreement (including the amendment thereto) is attached as Annex A to the proxy statement.

Immediately prior to the merger, the Consortium Members and Mr. Harley (collectively, the “Rollover Shareholders”) will cause all of their shares of our capital stock to be contributed to Parent in exchange for an increase in their equity interests in Parent. As a result of the merger, the Company will be privately owned and will be controlled by the Rollover Shareholders through their beneficial ownership of Parent. The Consortium Members and Mr. Harley, as a group, may be deemed to beneficially own 91,257,883 shares, or approximately 88.7%, of the Company’s Common Stock, including 63,579,204 shares that they have the right to acquire pursuant to convertible preferred stock, warrants and options held by them.

Mr. Harley, who is a Rollover Shareholder, and Mr. Lynch, who is our chief executive officer and who has received a new employment agreement which will take effect if the merger is completed and under which he will receive equity in Parent as described in the accompanying proxy statement, recused themselves from all discussions by the Board of Directors relating to the merger negotiations (except to the extent their presence was specifically requested by the Lead Director) and all deliberations by the Board of Directors with respect to the approval of the merger and adoption of the Merger Agreement and related agreements. The Board of Directors (other than Messrs. Harley and Lynch), after receiving the recommendation of the Lead Director, has determined that the merger is fair, advisable, and in the best interests of the Company and its shareholders (other than the Rollover Shareholders and their respective affiliates and associates) and has adopted the Merger Agreement. The Board of Directors (other than Messrs. Harley and Lynch) unanimously recommends that the shareholders of the Company vote “FOR” the proposal to approve the merger and adopt the Merger Agreement and “FOR” the non-binding, advisory proposal to approve compensation that may become payable to the Company’s named executive officers in connection with the merger. In arriving at its recommendation to approve the merger and adopt the Merger Agreement, the Board of Directors and the Lead Director carefully considered a number of factors that are described in the accompanying proxy statement, including that (i) the Company has not reported an operating profit since fiscal year 2007, (ii) since that time the Company has suffered from negative working capital and, in many years, deficit equity and (iii) no firm or economically viable offers for strategic transactions resulted from the marketing efforts in which the Company engaged during 2012 and 2013 or from the solicitation permitted under the Merger Agreement.

Under New York law, the approval of the merger and the adoption of the Merger Agreement require the affirmative vote of holders of two-thirds of the aggregate voting power of outstanding shares of Common Stock. The non-binding, advisory proposal to approve compensation that may become payable to the Company’s named executive officers in connection with the merger requires the affirmative vote of holders of a majority of the voting power present in person or by proxy and entitled to vote thereon. Holders of Common Stock as of the record date have one vote for each share of Common Stock owned by the shareholder as of the close of business on the record date.

You also may submit a proxy by using a toll-free telephone number or the Internet. We have provided instructions on the proxy card for using these convenient services.

If you sign, date and return your proxy card without indicating how you wish to vote, your proxy will be voted in favor of the approval of the merger and adoption of the Merger Agreement and the non-binding, advisory proposal to approve compensation that may become payable to the Company’s named executive officers in connection with the merger. If you fail to vote or submit your proxy (unless you are a record holder as of the record date, or you obtain a legal proxy from your bank, broker or other nominee, and you and attend the special meeting in person), the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the special meeting and will have the same effect as a vote against the approval of the merger and the adoption of the Merger Agreement, but will not affect the vote regarding the non-binding, advisory proposal to approve compensation that may become payable to the Company’s named executive officers in connection with the merger.

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Your proxy may be revoked at any time before the vote at the special meeting by following the procedures outlined in the accompanying proxy statement. If you are a shareholder of record, attend the special meeting and wish to vote in person, you may revoke your proxy and vote in person.

BY ORDER OF THE BOARD OF DIRECTORS
  

Thomas Rende
Secretary

Dated [•], 2014
Hollywood, California

YOUR VOTE IS IMPORTANT

Your vote is important, regardless of the number of shares of Common Stock you own. Whether or not you plan to attend the special meeting, please complete, sign, date and return the enclosed proxy. You also may submit a proxy by using a toll-free telephone number or the Internet. We have provided instructions on the proxy card for using these convenient services. Remember, if you do not return your proxy card or vote by proxy via telephone or the Internet or if you abstain from voting, that will have the same effect as a vote “against” approval of the merger and adoption of the Merger Agreement. If you are a shareholder of record, attend the special meeting and wish to vote in person, you may revoke your proxy and vote in person. Even if you plan to attend the special meeting in person, we request that you complete, sign, date and return the enclosed proxy and thus ensure that your shares will be represented at the special meeting if you are unable to attend.

If you have any questions or need assistance in voting your shares of Common Stock, please call our Secretary, Thomas Rende, at (212) 779-8300.

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SUMMARY TERM SHEET			1
The Parties to the Merger Agreement			1
The Merger Proposal			2
The Special Meeting			3
Record Date and Quorum			3
Required Vote			3
Providing Voting Instructions by Proxy			4
Abstentions			5
Certain Effects of the Merger			5
Treatment of Company Awards and Warrants			5
Conditions to the Merger			6
When the Merger Will be Completed			7
Reasons for the Merger; Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger			7
Opinion of the Lead Director’s Financial Advisor			8
Purpose and Reasons of the Rollover Shareholders, Parent and Merger Sub for the Merger			8
Positions of the Rollover Shareholders, Parent, Merger Sub, HGI, Philip Falcone and Michael Tokarz as to the Fairness of the Merger			8
Financing			8
Interests of the Company’s Directors and Executive Officers in the Merger			9
Material United States Federal Income Tax Considerations			9
Anticipated Accounting Treatment of the Merger			10
Dissenters’ Rights			10
Limited Solicitation			10
Termination			12
Litigation			13
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER			14
SPECIAL FACTORS			18
The Parties to the Merger			18
The Company			18
Parent			18
Merger Sub			18
Background of the Merger			18
Reasons for the Merger; Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger			35
The Lead Director			35
The Board of Directors			40
Opinion of the Lead Director’s Financial Advisor			41
Purpose and Reasons of the Rollover Shareholders, Parent and Merger Sub for the Merger			49
Positions of the Rollover Shareholders to the Fairness of the Merger			50
Positions of Parent, Merger Sub, HGI, Philip Falcone and Michael Tokarz as to the Fairness of the Merger			53
Plans for the Company after the Merger			53
Certain Effects of the Merger			54
Financing of the Merger			58
Rollover Financing			58
Debt Financing			58
Interests of the Company’s Directors and Executive Officers in the Merger			60

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Interests of the Non-Employee Directors			60
Interests of Executive Officers			61
Compensation of the Lead Director			63
Indemnification of Directors and Officers			63
Material United States Federal Income Tax Considerations			63
U.S. Holders			64
Rollover Shareholders			64
Non-U.S. Holders			65
Regulatory Approvals			65
Anticipated Accounting Treatment of the Merger			65
Fees and Expenses			66
Litigation			66
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION			68
THE SPECIAL MEETING			69
Date, Time and Place			69
Record Date and Quorum			69
Required Vote			69
Voting; Proxies; Revocation			70
Attendance			70
Voting in Person			70
Providing Voting Instructions by Proxy			70
Revocation of Proxies			71
Abstentions			71
Postponements			72
Solicitation of Proxies			72
THE MERGER AGREEMENT			73
Explanatory Note Regarding the Merger Agreement			73
Structure of the Merger			73
When the Merger Becomes Effective			73
Effect of the Merger on the Common Stock			74
Treatment of Stock Options and Other Stock-Based Awards			74
Dissenting Shares			75
Payment for the Common Stock in the Merger			75
Representations and Warranties			75
Conduct of Business Pending the Merger			77
Other Covenants and Agreements			79
Indemnification; Directors’ and Officers’ Insurance			79
Access and information			80
Efforts to Consummate			80
Limited Solicitation			80
Shareholder Litigation			82
SEC Reports			82
Conditions to the Merger			83
Termination			83
Fees and Expenses			84
Payment or Reimbursement of Fees and Expenses by the Company			85
Payment or Reimbursement of Fees and Expenses by Parent			85
Amendments and Waivers			85
Equitable Remedies			85

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Vote Required and Board Recommendation			86
AGREEMENTS INVOLVING THE COMPANY’S SECURITIES; TRANSACTIONS BETWEEN THE ROLLOVER SHAREHOLDERS AND THE COMPANY			87
Agreements Involving the Company’s Securities			87
Voting Agreement			87
Rollover Agreement			87
Purchase and Sale Agreement			88
Series B Convertible Preferred Stock Transaction			88
Series A Convertible Preferred Stock Transaction			91
Non-Employee Director Compensation to William F. Harley III and Peter Cole			93
Transactions between the Rollover Shareholders and the Company			93
PROVISIONS FOR PUBLIC SHAREHOLDERS			94
IMPORTANT INFORMATION CONCERNING THE COMPANY			94
Company Background			94
Directors and Executive Officers			94
Prior Public Offerings			96
Additional Financial and Business Information			96
Ratio of Earnings to Fixed Charges			96
Book Value Per Share			97
Market Price of the Company’s Common Stock			97
Security Ownership of Certain Beneficial Owners and Management			98
Ownership of Parent Following the Merger			100
Transactions in Common Stock			100
ADVISORY VOTE REGARDING MERGER-RELATED COMPENSATION PROPOSAL			101
Vote Required and Board Recommendation			101
DISSENTERS’ RIGHTS			102
MULTIPLE SHAREHOLDERS SHARING ONE ADDRESS			105
SUBMISSION OF SHAREHOLDER PROPOSALS			105
WHERE YOU CAN FIND ADDITIONAL INFORMATION			106
Annex A Agreement and Plan of Merger and Amendment No. 1 to Agreement and Plan of Merger			A-1
Annex B Opinion of Cassel Salpeter & Co. LLC			B-1
Annex C Rollover Agreement			C-1
Annex D Voting Agreement			D-1
Annex E Purchase and Sale Agreement			E-1
Annex F-1 Annual Report on Form 10-K for the Fiscal Year Ended July 27, 2013			F-1-1
Annex F-2 Amendment No. 1 to Annual Report on Form 10-K/A for the Fiscal Year Ended July 27, 2013			F-2-1
Annex G Quarterly Report on Form 10-Q for the Fiscal Quarter Ended January 25, 2014			G-1
Annex H New York Business Corporation Law Sections 623 and 910			H-1

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SUMMARY TERM SHEET

This Summary Term Sheet discusses selected information contained in this proxy statement including with respect to the Merger Agreement, as defined below, and the Merger, as defined below, and may not contain all the information about the Merger that is important to you. We encourage you to read carefully this entire proxy statement, its annexes and the documents referenced elsewhere in this proxy statement. The items in this Summary Term Sheet include page references directing you to a more complete description of that topic in this proxy statement.

The Parties to the Merger Agreement

Frederick’s of Hollywood Group Inc.

Frederick’s of Hollywood Group Inc., which we refer to as the “Company,” “we,” “our” or “us,” is a New York corporation. The address of our principal executive office is 6255 Sunset Boulevard, Hollywood, California 90028.

Through our subsidiaries, we sell women’s apparel and related products under our proprietary Frederick’s of Hollywood® brand. Sales are predominantly through our U.S. mall-based specialty retail stores and our catalog and retail website at www.fredericks.com. As of April 14, 2014, we operated 96 Frederick’s of Hollywood stores in 28 states and during fiscal year 2013 mailed approximately 4,300,000 catalogs. See “Important Information Concerning the Company — Company Background” beginning on page 94.

Additional information about the Company is contained in our annual report on Form 10-K for the fiscal year ended July 27, 2013 and the amendment to the annual report attached to this proxy statement as Annexes F-1 and F-2, in our quarterly report on Form 10-Q for the fiscal quarter ended January 25, 2014 attached to this proxy statement as Annex G and in our other public filings. See “Where You Can Find Additional Information” beginning on page 106.

FOHG Holdings, LLC

FOHG Holdings, LLC, which we refer to as “Parent,” is a Delaware limited liability company. The address of Parent’s principal executive office is 450 Park Avenue, 30^th Floor, New York, NY 10022. Parent was formed solely for the purpose of engaging in the Merger and other related transactions.

Currently, the membership interests of Parent are held by HGI Funding, LLC, or “HGI Funding,” TTG Apparel, LLC, or “TTG,” and Tokarz Investments, LLC, or “TKZ,” each of which is controlled by Michael Tokarz, and Fursa Alternative Strategies LLC, or “Fursa,” and Arsenal Group, LLC, or “Arsenal,” each of which is controlled by William F. Harley III, a member of the Company’s Board of Directors, and Mr. Harley individually. We refer to HGI Funding, TTG, TKZ, Fursa, Arsenal and Mr. Harley collectively as the “Rollover Shareholders.”

HGI Funding is a Delaware limited liability company and a wholly-owned subsidiary of Harbinger Group Inc., or “HGI.” HGI is incorporated in Delaware and is a diversified holding company focused on obtaining controlling equity stakes in companies that operate across a diversified set of industries. HGI Funding was formed on January 12, 2011 to manage a portion of HGI’s available cash by investing in equity and debt instruments and to acquire positions in potential acquisition targets.

TKZ is a Delaware limited liability company that was formed by Michael Tokarz in 2002 for the purpose of making various investments. TTG is a Delaware limited liability company that was formed in 2004 by Michael Tokarz for the purpose of investing in the Company.

Fursa, a Delaware limited liability company, is an employee owned hedge fund sponsor. The firm invests in the public equity and fixed income markets across the globe. The firm also invests in the alternative investments markets, typically limiting these investments to private equity. It employs various activist strategies along with an event-driven strategy and a distressed debt strategy while making its investments. Arsenal, a Delaware limited liability company, was co-founded by Mr. Harley in February 2011 and created via the merger of HRK Holdings LLC and Fursa Global Event Driven Fund LLC, a fund previously managed by Fursa. Arsenal owns HRK Holdings LLC and HRK Industries LLC, both of which filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Middle District of Florida on June 27, 2012. The

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court has approved the companies hiring an investment banker to market properties they own and intend to sell in order to emerge from bankruptcy.

Mr. Harley has been a member of the Company’s Board of Directors since January 2008. He currently serves as the chairman and chief executive officer of Arsenal. Mr. Harley is principally responsible for Arsenal’s investment decisions. Mr. Harley also is president and chief investment officer of Fursa, which he co-founded in April 1999 (as HBV Capital Management, LLC) and sold to Mellon Financial Corporation in July 2002 (when it was re-named Mellon HBV Alternative Strategies LLC). Mr. Harley served as chief investment officer and chief executive officer of Fursa from July 2002 until he repurchased it from Mellon in December 2006. Mr. Harley is principally responsible for Fursa’s investment decisions.

Immediately prior to the effective time of the Merger, the Rollover Shareholders will cause all of their shares of our capital stock to be contributed to Parent in exchange for an increase in their equity interests in Parent. The Rollover Shareholders, as a group, may be deemed to beneficially own 91,257,883 shares, or 88.7%, of our common stock, par value $0.01 per share (“Common Stock”), including 63,579,204 shares that they have the right to acquire pursuant to convertible preferred stock, warrants and options held by them. Parent has not engaged in any business other than in connection with the transactions described in this proxy statement. For more information on Parent and the holdings of the Rollover Shareholders, see “Special Factors — The Parties to the Merger” beginning on page 18.

FOHG Acquisition Corp.

FOHG Acquisition Corp., which we refer to as “Merger Sub,” is a New York corporation. The address of Merger Sub’s principal executive office is 450 Park Avenue, 30^th Floor, New York, NY 10022. Merger Sub is a wholly-owned subsidiary of Parent and was formed solely for the purpose of engaging in the Merger and other related transactions. Parent owns 100% of the capital stock of Merger Sub. Merger Sub has not engaged in any business other than in connection with the transactions described in this proxy statement. See “Special Factors — The Parties to the Merger” beginning on page 18.

The Merger Proposal (Page 73 and Annex A)

You are being asked to consider and vote upon the proposal to adopt the Agreement and Plan of Merger, dated as of December 18, 2013, as amended on April 14, 2014, by and among the Company, Parent and Merger Sub, as it may be further amended from time to time, which we refer to as the “Merger Agreement” and which is attached to this proxy statement as Annex A, and to approve the merger contemplated thereby, which we refer to as the “Merger.”

The Merger Agreement provides that Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent, and each outstanding share of our Common Stock, other than Excluded Shares and Dissenting Shares, each as defined below, will be converted into the right to receive $0.27 in cash, which we refer to as the “merger consideration,” without interest and less any required withholding taxes. “Excluded Shares” are shares of our capital stock currently held by the Rollover Shareholders, shares of Common Stock held by the Company or any wholly owned subsidiary of the Company and shares of Common Stock held in the Company’s treasury. “Dissenting Shares” are shares of Common Stock outstanding immediately prior to the effective time of the Merger and which are held by a shareholder (i) who has neither voted for adoption of the Merger Agreement and the Merger nor consented thereto in writing and (ii) who is entitled to and shall have demanded properly in writing appraisal for such shares in accordance with Section 910 of the New York Business Corporation Law, or “NYBCL.”

Shares of our Common Stock owned by the members of our Board of Directors (other than Mr. Harley) and by the current executive officers of the Company, Thomas J. Lynch, the Company’s chairman and chief executive officer, and Thomas Rende, the Company’s chief financial officer (the “Executive Officers”), will receive the same treatment in the Merger as the shares of our Common Stock owned by the unaffiliated shareholders, as defined in Rule 13e-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which definition excludes the Rollover Shareholders.

On September 26, 2013, HGI Funding, TTG, TTZ, Fursa and Arsenal jointly delivered a non-binding proposal letter to our Board of Directors for the acquisition of all of our publicly held Common Stock in a “going private” transaction with us. We refer to HGI Funding, TTG, TTZ, Fursa and Arsenal as the

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“Consortium” or the “Consortium Members.” The Board of Directors delegated authority to Milton Walters, our lead independent, disinterested member of our Board of Directors, who we refer to as the “Lead Director,” to consider and negotiate the terms and conditions of the Merger with the Consortium Members and to make a recommendation to the Board of Directors. The terms of the Merger, including the amount of the merger consideration, were the result of extensive negotiations between the Lead Director and the Consortium Members. During the negotiations, the Lead Director took over two months to analyze and evaluate the Consortium Members’ initial proposal and to negotiate with the Rollover Shareholders the terms of the proposed Merger, including an increase in the merger consideration of approximately 17% and a 50% premium to the closing price of the Company’s Common Stock on September 27, 2013, the last trading day before the announcement by the Consortium Members of their initial proposal. The merger consideration represents an independently negotiated amount for the acquisition of the shares of our Common Stock not already owned by the Rollover Shareholders through the proposed Merger.

The Special Meeting (Page 69)

A special meeting of our shareholders, or the “Special Meeting”, will be held at our principal executive offices located at 6255 Sunset Boulevard, 6^th Floor, Hollywood, California 90028, on [•], 2014, at 10:00 a.m. local time.

Record Date and Quorum (Page 69)

The holders of record of our Common Stock as of the close of business on [•], 2014, the record date for determination of shareholders entitled to notice of and to vote at the Special Meeting, are entitled to receive notice of and to vote at the Special Meeting.

The presence at the Special Meeting, in person or by proxy, of the holders of a majority of shares of our Common Stock outstanding on the record date will constitute a quorum, permitting the Company to conduct its business at the Special Meeting.

Required Vote (Page 69)

For the Company to complete the Merger, under New York law and the Merger Agreement, shareholders holding at least two-thirds of the aggregate voting power of our Common Stock outstanding at the close of business on the record date must vote “FOR” the approval of the Merger and adoption of the Merger Agreement, which we refer to as the “Shareholder Approval.” The Merger is not structured to require the approval of at least a majority of the unaffiliated shareholders.

Subject to the terms of the Voting Agreement, as defined in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Voting Agreement” beginning on page 87, the Rollover Shareholders have agreed to vote all shares of our Common Stock they beneficially own (and any shares acquired by them after the date of the Voting Agreement) in favor of approving the Merger and adopting the Merger Agreement. As of the record date, there were 39,273,254 shares of our Common Stock outstanding, of which the Rollover Shareholders own 27,678,679 shares of Common Stock, representing in the aggregate approximately 70.5% of the issued and outstanding shares of Common Stock. This amount excludes the 63,579,204 shares of Common Stock that the Rollover Shareholders have the right to acquire pursuant to convertible preferred stock, warrants and options held by them. Because the Rollover Shareholders beneficially hold more than two-thirds of our outstanding shares of Common Stock as of the record date, they can satisfy the required vote under New York law and the Merger Agreement to approve the Merger and adopt the Merger Agreement without the affirmative vote of any of our other shareholders.

Despite the fact that the Rollover Shareholders can satisfy the required vote, we are soliciting proxies and furnishing a proxy statement to shareholders for two reasons. First, we must hold a meeting because we are not permitted to take shareholder action by less than unanimous written consent, without a shareholder meeting, pursuant to our certificate of incorporation and Section 615(a) of the NYBCL. Second, we are soliciting proxies to give the unaffiliated shareholders the opportunity to express their respective views of the Merger, even though their approval is not required as a condition to the transaction.

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Except in their capacities as members of our Board of Directors and/or as the Lead Director, as applicable, no officer or director of the Company, nor any of the Rollover Shareholders, has made any recommendation either in support of or in opposition to the Merger or the Merger Agreement.

The directors and Executive Officers have informed the Company that as of date of this proxy statement, they intend to vote in favor of the approval of the Merger and adoption of the Merger Agreement. All references to the Board of Directors in this proxy statement relating to the Board of Directors’ recommendation and/or approval and adoption of the Merger Agreement, the related agreements and the Merger exclude Messrs. Harley and Lynch. Mr. Harley is a Rollover Shareholder. Mr. Lynch, our chairman and chief executive officer, has received a new employment agreement which will take effect if the Merger is completed. Under the employment agreement, he will receive an equity interest in Parent in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms. Messrs. Harley and Lynch recused themselves from all discussions by the Board of Directors relating to the Merger negotiations (except to the extent their presence was specifically requested by the Lead Director) and all deliberations by the Board of Directors with respect to the approval of the Merger and adoption of the Merger Agreement and the related agreements.

Shareholders holding at least a majority of the shares of Common Stock voted at the Special Meeting must vote “FOR” the non-binding, advisory proposal regarding compensation that may become payable to the Company’s named executive officers (as defined in Item 402 of Regulation S-K) in connection with the Merger (as described in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger — Interests of Executive Officers” beginning on page 61), which we refer to as the “Merger-Related Compensation Proposal,” in order for the proposal to be approved. Approval of the Merger-Related Compensation Proposal is not a condition to the completion of the Merger, and the vote with respect to the Merger-Related Compensation Proposal is advisory only and will not be binding on the Parent or the Company. Because the Rollover Shareholders beneficially hold more than a majority of our outstanding shares of Common Stock as of the record date, they can approve or disapprove the Merger-Related Compensation Proposal regardless of how any other shareholder votes.

Providing Voting Instructions by Proxy

If you are a shareholder of record, you may provide voting instructions by (i) submitting a proxy by telephone or via the Internet or (ii) submitting the proxy card attached to this proxy statement. If you sign, date and return your proxy card without indicating how you wish to vote, your proxy will be voted in favor of the approval of the Merger and adoption of the Merger Agreement, and the approval of the Merger-Related Compensation Proposal. If you fail to vote or return your proxy card, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the Special Meeting (unless you attend the special meeting in person) and will have the same effect as a vote against the approval of the Merger and adoption of the Merger Agreement, but will not affect the vote regarding the Merger-Related Compensation Proposal.

If your shares are held by a bank, broker or other nominee on your behalf in “street name”, your bank, broker or other nominee will send you instructions as to how to provide voting instructions for your shares by proxy. In accordance with the rules of the New York Stock Exchange, banks, brokers and other nominees who hold shares of Common Stock in “street name” for their customers do not have discretionary authority to vote the shares with respect to the approval of the Merger and adoption of the Merger Agreement. Accordingly, if banks, brokers or other nominees do not receive specific voting instructions from the beneficial owner of such shares, they may not vote such shares with respect to the approval of the Merger and adoption of the Merger Agreement. Under this circumstance, a “broker non vote” would arise. Broker non votes, if any, will have the same effect as a vote “AGAINST” the approval of the Merger and adoption of the Merger Agreement, but will have no effect on the Merger-Related Compensation Proposal, and will count for purposes of determining the presence of a quorum if the shares are being voted with respect to any matter at the Special Meeting. For shares of Common Stock held in “street name”, only shares of Common Stock affirmatively voted “FOR” approval of the Merger and adoption of the Merger Agreement will be counted as a favorable vote for the proposals.

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Abstentions

Abstentions will be included in the calculation of the number of shares of Common Stock represented at the Special Meeting for purposes of determining the presence of a quorum. Abstaining from voting will have the same effect as a vote “AGAINST” the proposal to approve the Merger and adopt the Merger Agreement, but are not deemed voted and will have no effect on the Merger-Related Compensation Proposal.

Certain Effects of the Merger (Page 54)

If the Shareholder Approval is obtained and the other conditions to the closing of the Merger, which we refer to as the “Closing,” are either satisfied or waived, Merger Sub will be merged with and into the Company with the Company being the surviving corporation. Upon completion of the Merger, shares of Common Stock, other than Excluded Shares and Dissenting Shares, will be converted into the right to receive $0.27 per share, without interest and less any required withholding taxes. Following the completion of the Merger, the Common Stock will no longer be publicly traded, and you will cease to have any ownership interest in the Company.

Treatment of Company Awards and Warrants (Page 74)

Each Company stock option (other than those held by Mr. Harley) that is outstanding immediately prior to the effective time of the Merger, which we refer to as the “Effective Time,” whether or not vested or exercisable, as of the Effective Time, will be cancelled. Each holder will be entitled to receive a payment, if any, in cash from the Company (less any applicable withholding taxes) promptly following the Effective Time, equal to (a) the amount, if any, by which $0.27 exceeds the exercise price per share with respect to the stock option, multiplied by (b) the total number of shares of Common Stock then issuable upon the exercise of the stock option. As of the date of this proxy statement, there are outstanding stock options to purchase 360,000 shares of Common Stock with an exercise price of less than $0.27, which will be cancelled for an aggregate consideration of $30,900. All of the Company’s other outstanding stock options (including all of those held by the Company’s directors and Executive Officers) will be cancelled for no consideration.

Each Company share-based award other than a stock option, including restricted share awards (other than those held by Mr. Harley), whether or not vested, as of the Effective Time, will be cancelled. Each holder will be entitled to receive a payment, in cash from the Company (less any applicable withholding taxes) promptly following the Effective Time, equal to (a) $0.27 per share, multiplied by (b) the total number of shares of Common Stock constituting the award. As of the date of this proxy statement, the Company has outstanding an aggregate of 737,194 shares subject to restricted share awards, which will be cancelled in exchange for aggregate consideration of $199,042.38. These amounts include an aggregate of 578,694 shares subject to restricted share awards held by the Company’s directors (other than Mr. Harley) and Executive Officers, which will be cancelled for aggregate consideration of $156,247.38.

Each Company warrant (other than those held by Mr. Harley and the other Rollover Shareholders), whether or not vested or exercisable, as of the Effective Time, will be cancelled. Each holder will be entitled to receive a payment, if any, in cash from the Company (less any applicable withholding taxes) promptly following the Effective Time, equal to (a) the amount, if any, by which $0.27 exceeds the exercise price per share with respect to the warrant, multiplied by (b) the total number of shares of Common Stock then issuable upon the exercise of the warrant. However, any Company warrant that will have no value after the Effective Time (because the warrant has an exercise price per share that is greater than the merger consideration and, as of the Effective Time, the holder of the warrant will be entitled to receive, upon exercise of the warrant, only the merger consideration multiplied by the number of shares subject to the warrant), may remain outstanding. As of the date of the proxy statement, the Company has no outstanding warrants (other than those held by the Rollover Shareholders) with an exercise price of less than $0.27 and, accordingly, no consideration will be paid with respect to these warrants.

Each Company stock option and restricted share award held by Mr. Harley and each warrant held by Mr. Harley and the other Rollover Shareholders, as of the Effective Time, will be cancelled on the terms and conditions set forth in the Rollover Agreement, as defined in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Rollover Agreement” beginning on page 87.

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Conditions to the Merger (Page 83)

The obligations of the Company, Parent and Merger Sub to effect the Merger are subject to the satisfaction or waiver, at or prior to the date of the Closing, referred to as the “Closing Date”, of the following mutual conditions:

The obligation of Parent and Merger Sub to effect the Merger is subject to the satisfaction or waiver, at or prior to the Closing Date, of the following additional conditions:

The obligation of the Company to effect the Merger is subject to the satisfaction or waiver, at or prior to the Closing Date, of the following additional conditions:

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For the purposes of this proxy statement, “Ancillary Agreements” refers collectively to the Voting Agreement, the Rollover Agreement and the Purchase Agreement, as defined in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities” beginning on page 87.

When the Merger Will be Completed

We anticipate completing the Merger during our fourth fiscal quarter of 2014, which ends on July 26, 2014, subject to receipt of the Shareholder Approval and the satisfaction of the other conditions to Closing.

Reasons for the Merger; Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger (Page 35)

The Board of Directors (other than Messrs. Harley and Lynch), based upon the recommendation of the Lead Director, unanimously recommends that the shareholders of the Company vote “FOR” the proposal to approve the Merger and adopt the Merger Agreement. The Lead Director’s reasons for the Merger included:

For a complete description of the reasons considered by the Lead Director and the Board of Directors, see “Special Factors — Reasons for the Merger; Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger” beginning on page 35.

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Opinion of the Lead Director’s Financial Advisor (Page 41 and Annex B)

Cassel Salpeter & Co., LLC, or “Cassel Salpeter,” an investment banking firm, rendered its oral opinion to the Lead Director on December 18, 2013 (which was subsequently confirmed in writing by delivery of Cassel Salpeter’s written opinion dated the same date) as to, as of December 18, 2013, the fairness, from a financial point of view, to the holders of Common Stock (other than the Rollover Shareholders, Parent and any of their respective affiliates or associates) of the merger consideration to be received by such holders in the Merger pursuant to the Merger Agreement. We refer to the holders of our Common Stock other than the Rollover Shareholders and any of their respective affiliates or associates as the “Public Shareholders.” The Public Shareholders include our directors (other than Mr. Harley) and our Executive Officers.

The opinion was provided for the use and benefit of the Lead Director (in his capacity as such) and with the consent of the Lead Director, the members of the Board (in their capacity as such) in connection with the Lead Director’s and, as applicable, the Board’s evaluation of the Merger and only addressed, as of the date of the opinion, the fairness, from a financial point of view, to the Public Shareholders of the merger consideration to be received by such holders in the Merger pursuant to the Merger Agreement and did not address any other aspect or implication of the Merger or the Merger Agreement. No opinion or view was expressed as to the relative merits of the Merger as compared to any alternative transaction or business strategy that might exist for the Company, or the merits of the underlying decision by the Lead Director, the Board or the Company to engage in or consummate the Merger. The summary of Cassel Salpeter’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the written opinion. The written opinion is included as Annex B to this proxy statement. It sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Cassel Salpeter in preparing its opinion. However, neither Cassel Salpeter’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to any shareholder or any other security holder as to how such holder should vote or act with respect to any matter relating to the Merger or otherwise.

Purpose and Reasons of the Rollover Shareholders, Parent and Merger Sub for the Merger (Page 49)

For the Rollover Shareholders, Parent and Merger Sub, the purposes and reasons for the Merger are:

For a full description of the purpose and reasons of the Rollover Shareholders, Parent and Merger Sub for the Merger, see “Special Factors — Purpose and Reasons of Parent, Merger Sub and the Rollover Shareholders for the Merger” beginning on page 49.

Positions of the Rollover Shareholders, Parent, Merger Sub, HGI, Philip Falcone and Michael Tokarz as to the Fairness of the Merger (Page 50 and Page 53)

The Rollover Shareholders, Parent, Merger Sub, HGI, Philip Falcone and Michael Tokarz believe that the Merger is substantively and procedurally fair to the Company’s shareholders (other than the Rollover Shareholders, Parent and any of their respective affiliates or associates). See “Special Factors — Positions of the Rollover Shareholders as to the Fairness of the Merger” beginning on page 50 and “Special Factors — Positions of the Parent, Merger Sub, HGI, Philip Falcone and Michael Tokarz as to the Fairness of the Merger” beginning on page 53.

Financing (Page 58)

The Company and Parent estimate that the total financing required to complete the Merger and related transactions and pay related fees and expenses will be approximately $25,230,585, which consists of

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$21,209,150 in rollover equity, $3,161,435 in merger consideration payable in cash to the Public Shareholders and holders of Company stock options and an estimated $860,000 in fees and expenses. The Company and Parent expect this amount to be provided through a combination of (i) the rollover of Common Stock, Series A Convertible Preferred Stock and Series B Convertible Preferred Stock by the Rollover Shareholders and (ii) debt financing (up to $6,000,000 of which may be used for the Merger), which is available to us under our existing credit facility with Salus CLO 2012-1, Ltd., or “Salus CLO,” and Salus Capital Partners, LLC, or “Salus.” We refer to Salus CLO and Salus collectively as the “Lenders.”

Interests of the Company’s Directors and Executive Officers in the Merger (Page 60)

In considering the recommendation of the Lead Director and the Board of Directors with respect to the Merger Agreement, you should be aware that some of the Company’s directors and Executive Officers have interests in the Merger that are different from, or in addition to, the interests of the Company’s unaffiliated shareholders generally. These interests include, among others:

The Lead Director and the Board of Directors were aware of the different or additional interests described in this proxy statement and considered these interests along with other matters in approving the Merger Agreement and the transactions contemplated thereby, including the Merger.

Material United States Federal Income Tax Considerations (Page 63)

The receipt of cash in the Merger will generally be a taxable transaction for U.S. federal income tax purposes. If you are a U.S. holder for U.S. federal income tax purposes, your receipt of cash in exchange for your shares of Common Stock will generally cause you to recognize a gain or loss. The amount of gain or loss will equal the difference, if any, between the cash you receive in the Merger and your adjusted cost basis in your shares. If you are a non-U.S. holder, you generally will not be subject to United States federal income tax unless you have certain connections to the United States. You should consult your tax advisor for a full understanding of the tax consequences of the Merger in your particular circumstances.

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Anticipated Accounting Treatment of the Merger (Page 65)

The Company, as the surviving corporation, will account for the Merger as a business combination using the acquisition method of accounting for financial accounting purposes, whereby the consideration transferred will be allocated to the identifiable assets acquired and liabilities assumed following FASB Accounting Standards Codification Topic 805, Business Combinations.

Dissenters’ Rights (Page 102)

Sections 623 and 910 of the NYBCL provide that if the Merger is consummated, holders of shares of our Common Stock entitled to vote on the approval of the Merger and adoption of the Merger Agreement who object to such actions in writing prior to or at the Special Meeting, but before the vote, and who follow the procedures specified in Section 623 (as summarized in “Dissenters’ Rights” beginning on page 102) will have the right to receive cash payment of the fair value of their shares of Common Stock if the proposed Merger is completed. The express procedures of Section 623 must be followed precisely; if they are not, holders of shares of our Common Stock will lose their right to dissent. As described more fully below, such “fair value” would potentially be determined in judicial proceedings, the result of which cannot be predicted. We cannot assure you that holders of shares of our Common Stock exercising dissenters’ rights will receive consideration equal to or greater than the merger consideration.

Limited Solicitation (Page 80)

Generally, under the Merger Agreement, we may not solicit alternative Takeover Proposals (as defined in the Merger Agreement and as described below in “The Merger Agreement — Other Covenants and Agreements — Limited Solicitation” beginning on page 80), but we may engage in a limited solicitation of certain designated parties that were agreed upon among Parent, Merger Sub and the Company as a result of the negotiations of the Merger Agreement by the Lead Director.

We will, and will direct each of our representatives to, immediately cease any discussions, negotiations, or communications with any party, except the designated parties, with respect to any Takeover Proposal. The Company shall not, nor shall it authorize or permit any of its representatives to (and shall use its reasonable best efforts to cause such persons not to), among other things, directly or indirectly:

However, prior to the receipt of the Shareholder Approval, the Company or the Lead Director may, in response to a bona fide written Takeover Proposal that did not result from a breach of the above paragraph, contact the party that submitted such Takeover Proposal to clarify the terms and conditions thereof and, subject to compliance with the provisions outlined in subsequent paragraphs below and provided that the Lead Director determines in good faith, after consultation with its outside legal counsel and financial advisors, that

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such Takeover Proposal constitutes or could reasonably be expected to lead to a Superior Proposal (as such term is defined in the Merger Agreement, as described in “The Merger Agreement — Other Covenants and Agreements — Limited Solicitation” beginning on page 80):

As promptly as practical and in any event within one business day of the receipt by the Company of any Takeover Proposal or any inquiry with respect to, or that could reasonably be expected to lead to, any Takeover Proposal, the Company will provide notice to Parent of such Takeover Proposal or inquiry. The notice will include the identity of the person making the Takeover Proposal or inquiry and the material terms and conditions of the Takeover Proposal or inquiry. The Company will keep Parent reasonably informed on a current basis of the status of the Takeover Proposal, including any material changes to its terms and conditions. The Company is required to provide Parent, within one business day after receipt, with copies of all written communications, other written materials and summaries of all other communications sent or provided to or by the Company and its representatives in connection with any Takeover Proposal.

The Lead Director will promptly consider in good faith any alteration of the terms of the Merger Agreement or the Merger proposed by Parent in response to any Takeover Proposal.

Prior to the Company receiving the Shareholder Approval, the Lead Director may, in response to a Superior Proposal, effect a change in the Company’s recommendation that the shareholders approve the Merger, which we refer to as a “Change in the Company Recommendation,” or approve and enter into any agreement relating to a Superior Proposal, provided that the Lead Director determines in good faith that the failure to do so would constitute a breach of its fiduciary duties to the shareholders of the Company. At least five business days prior to effecting a Change in the Company Recommendation or approving and entering into an agreement relating to a Superior Proposal, the Lead Director will provide written notice to Parent of his intention to make a Change in the Company Recommendation or enter into such agreement. The notice shall include the reasonable details regarding the cause for, and nature of, the Change in the Company Recommendation or the entering into such agreement. In addition, the Lead Director may not effect the Change in the Company Recommendation or approve and enter into an agreement relating to a Superior Proposal unless Parent does not make, within five business days of receipt of such notice, an offer that the Lead Director determines, in good faith after consultation with his legal and financial advisors, results in the applicable Takeover Proposal no longer being a Superior Proposal.

As described in “The Merger Agreement — Other Covenants and Agreements — Limited Solicitation” beginning on page 80, nothing in the Merger Agreement will prohibit the Company, the Board of Directors or the Lead Director from complying with securities laws in respect of any Takeover Proposal, including making any disclosure to the shareholders of the Company. However, any public disclosure by the Company relating to a Takeover Proposal shall be deemed to be a Change in the Company Recommendation unless the Board of Directors expressly publicly reaffirms its approval of or recommendation to approve the Merger and adopt the Merger Agreement in such disclosure, or in the case of a “stop, look and listen” or similar communication, in a subsequent disclosure.

Other than as otherwise described in “The Merger Agreement — Other Covenants and Agreements —  Limited Solicitation” beginning on page 80, neither the Board of Directors nor any committee thereof nor the Lead Director will, directly or indirectly, effect a Change in the Company Recommendation, take any formal action or make any recommendation or public statement in connection with a tender offer or exchange offer other than a recommendation against such offer or a temporary “stop, look and listen” communication or approve any agreement, arrangement or understanding relating to, or that may reasonably be expected to lead to, any Takeover Proposal.

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Termination (Page 83)

The Merger Agreement may be terminated and the transactions contemplated thereby may be abandoned at any time prior to the Effective Time, whether prior to or after receipt of the Shareholder Approval:

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The Merger Agreement provides that, if the Company terminates the Merger Agreement because the Board of Directors, upon recommendation of the Lead Director, causes the Company to enter into an agreement related to a Superior Proposal, the Company is obligated to reimburse Parent for its expenses (not to exceed $300,000 in the aggregate) and pay Parent a termination fee of $300,000. The Merger Agreement provides further that, if the Company terminates the Merger Agreement because Parent or Merger Sub breached or failed to perform in any material respect any of its representations, warranties, covenants or agreements contained in the Merger Agreement and (i) such breach was material and knowing, willful or intentional and (ii) at the time of such termination, the Company is then ready, willing and able to consummate the Merger and the conditions to Parent and Merger Sub’s obligations under the Merger Agreement have been satisfied or waived, Parent is obligated to reimburse the Company for its expenses (not to exceed $300,000 in the aggregate) and pay the Company a termination fee of $300,000. If the Company terminates the Merger Agreement because Parent or Merger Sub breached or failed to perform in any material respect any of its representations, warranties, covenants or agreements contained in the Merger Agreement in circumstances other than those set forth in the preceding sentence, Parent will reimburse the Company for its expenses (not to exceed $300,000 in the aggregate).

Litigation (Page 66)

Between January 24 and 31, 2014, three purported shareholders of the Company filed putative class action lawsuits in New York State Supreme Court challenging the Merger. These actions are: Bruce H. Paul et al., v. Frederick’s of Hollywood Group Inc., et al., Index No. 650252/2014 (N.Y. Sup. Ct. Jan. 24, 2014); David Strasenburgh v. Frederick’s of Hollywood Group In., et al., Index No. 650294/2014 (N.Y. Sup. Ct. Jan. 28, 2014); and Stephen Dworkin v. Frederick’s of Hollywood Group Inc., et al., Index No. 650356/2014 (N.Y. Sup. Ct. Jan. 31, 2014). On March 6, 2014, the parties to those lawsuits submitted to the court a stipulation and proposed order that would consolidate all three actions into a single action captioned In re Frederick’s of Hollywood Group Inc. Shareholder Litigation, Index No. 650252/2014, and would appoint two of the five firms involved as co-lead plaintiffs’ counsel and the other three firms as the executive committee. The proposed consolidation order also provided that the amended complaint filed Bruce H. Paul, et al, v. Frederick’s of Hollywood Group Inc., et al. on February 11, 2014 would be the operative complaint in the consolidated action. The court has not yet entered the proposed consolidation order. The consolidated amended complaint alleges that the preliminary proxy filed by the Company contained material misstatements and omissions and that the members of the Board of Directors breached their fiduciary duty to maximize shareholder value by pursuing the Merger through a flawed process and for inadequate consideration. The complaint is more fully described in “Special Factors — Litigation” beginning on page 53. Each of the defendants denies any allegations of wrongdoing and believes that the plaintiffs’ claims are without merit. On March 14, 2014, after settlement discussions between plaintiffs’ counsel and counsel for the Company, the parties agreed to resolve the litigation and permit the Merger to proceed as contemplated. The settlement provides, among other things, that certain agreed supplemental and/or modified disclosures be included in this proxy statement. The settlement was subject to confirmatory discovery by the plaintiffs, which was completed on March 31, 2014, and is now subject to court approval.

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

The following questions and answers address briefly some questions you may have regarding the Special Meeting, the Merger Agreement and the Merger. These questions and answers may not address all questions that may be important to you as a shareholder of the Company. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement.

Q:  What is the proposed transaction?

A:  The proposed transaction is the Merger of Merger Sub with and into the Company pursuant to the Merger Agreement, with the Company surviving as a wholly-owned subsidiary of Parent. Parent is an entity formed by the Consortium Members for the purposes of acquiring us in the proposed transaction. The Rollover Shareholders hold 100% of the outstanding equity of Parent. Following the Effective Time, the Company will be privately held by the Rollover Shareholders (and by Mr. Lynch, upon his receipt of an equity interest in Parent, pursuant to his new employment agreement, in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms). See “The Merger Agreement” beginning on page 73.

Q:  What will I receive in the Merger?

A:  If the Merger is completed, you will be entitled to receive $0.27 in cash, without interest and less any required withholding taxes, for each share of Common Stock that you own. For example, if you own 100 shares of Common Stock, you will be entitled to receive $27.00 in cash in exchange for your shares of Common Stock, less any required withholding taxes. You will not be entitled to receive shares in the surviving corporation. Shares of Common Stock owned by the members of our Board of Directors (other than Mr. Harley) and by our Executive Officers will receive the same treatment in the Merger as the shares of common stock owned by the unaffiliated shareholders.

Q:  Where and when is the Special Meeting?

A:  The Special Meeting will take place at our principal executive offices located at 6255 Sunset Boulevard, 6^th Floor, Hollywood, California 90028, on [•], 2014, starting at 10:00 a.m. local time.

Q:  What matters will be voted on at the Special Meeting?

A:  You are being asked to consider and vote on the following proposals:

Q:  What vote of our shareholders is required to approve the Merger and adopt the Merger Agreement?

A:  For the Company to complete the Merger, under New York law, shareholders holding at least two-thirds of the aggregate voting power of the Common Stock outstanding at the close of business on the record date must vote “FOR” the approval of the Merger and adoption of the Merger Agreement. Subject to the terms of the Voting Agreement between us, Parent and the Rollover Shareholders, the Rollover Shareholders have agreed to vote all shares of our Common Stock they beneficially own (and any shares acquired by them after the date of the Voting Agreement) in favor of approving the Merger and adopting the Merger Agreement. See “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Voting Agreement” beginning on page 87. As of the record date, the Rollover Shareholders own 27,678,679 shares of Common Stock, representing in the aggregate approximately 70.5% of the issued and outstanding shares of Common Stock. This amount excludes the 63,579,204 shares of Common Stock that the Rollover Shareholders have the right to acquire pursuant to convertible preferred stock, warrants and options held by them. Because the

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Rollover Shareholders beneficially hold more than two-thirds of our outstanding shares of Common Stock as of the record date, they can satisfy the required vote under New York law and the Merger Agreement to approve the Merger and adopt the Merger Agreement without the affirmative vote of any of our other shareholders.

Except in their capacities as members of the Board of Directors and/or as the Lead Director, as applicable, no officer or director of the Company has made any recommendation either in support of or in opposition to the Merger or the Merger Agreement. The directors (excluding Mr. Harley) and Executive Officers of the Company, who collectively own 1,742,999 shares, or 4.4%, or our outstanding Common Stock (which excludes 1,648,920 shares of Common Stock that the directors (excluding Mr. Harley) and the Executive Officers have the right to acquire pursuant to options held by them), have informed the Company that as of date of this proxy statement they intend to vote in favor of approving the Merger and adopting the Merger Agreement.

See “The Special Meeting — Required Vote” beginning on page 69.

Q:  With respect to the Merger-Related Compensation Proposal, why am I being asked to cast a non-binding advisory vote to approve compensation that may become payable to the Company’s named executive officers in connection with the Merger?

A:  SEC rules require us to seek a non-binding, advisory vote with respect to certain categories of compensation that may be provided to named executive officers in connection with a merger transaction.

Q:  What will happen if shareholders do not approve the non-binding Merger-Related Compensation Proposal?

A:  Approval of the Merger-Related Compensation Proposal is not a condition to the completion of the Merger. The vote on the Merger-Related Compensation Proposal is an advisory vote and will not be binding on the Company.

Therefore, if the Shareholder Approval is obtained and the Merger is completed, the payments that are the subject of the Merger-Related Compensation Proposal may become payable to the named executive officers regardless of the outcome of the vote on the Merger-Related Compensation Proposal.

Q:  What vote of our shareholders is required to approve the Merger-Related Compensation Proposal?

A:  Shareholders holding at least a majority of the shares of Common Stock voted at the Special Meeting must vote “FOR” the Merger-Related Compensation Proposal in order for the proposal to be approved. Because the Rollover Shareholders beneficially hold more than a majority of our outstanding shares of Common Stock as of the record date, they can approve or disapprove the Merger-Related Compensation Proposal regardless of how any other shareholder votes.

Q:  How does the Board of Directors recommend that I vote?

A:  The Board of Directors (other than Messrs. Harley and Lynch, who recused themselves from all deliberations relating to the recommendation and approval of the Merger and adoption of the Merger Agreement), acting upon the recommendation of the Lead Director, unanimously recommends that our shareholders vote “FOR” the approval of the Merger and adoption of the Merger Agreement and “FOR” the approval of the Merger-Related Compensation Proposal. You should read “Special Factors — Reasons for the Merger; Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger” beginning on page 35 for a discussion of the factors that the Lead Director and Board of Directors considered in deciding to recommend the approval of the Merger and adoption of the Merger Agreement. See also “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 60.

Q:  What effects will the Merger have on the Company?

A:  The Common Stock is currently registered under the Securities Exchange Act of 1934, as amended, or the “Exchange Act”, and is quoted on the OTCQB under the symbol “FOHL.” As a result of the Merger,

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the Company will cease to be a publicly traded company and will be wholly owned by Parent. Following the consummation of the Merger, the registration of the Common Stock and our reporting obligations under the Exchange Act will be terminated upon application to the SEC. In addition, upon the consummation of the Merger, the Common Stock will no longer be quoted on any quotation system, including the OTCQB. See “Special Factors — Plans for the Company after the Merger” beginning on page 53.

Q:  What happens if the Merger is not consummated?

A:  If the Shareholder Approval is not obtained or if the Merger is not consummated for any other reason, the Merger will not be effected and the Company’s shareholders will not receive any payment for their shares. Instead, the Company will remain a public company and its shares of Common Stock will continue to be quoted on the OTCQB. Under specified circumstances, the Company may be required to reimburse Parent and Merger Sub for their costs and expenses and pay a termination fee. See “The Merger Agreement —  Termination” beginning on page 83 and “The Merger Agreement — Fees and Expenses” beginning on page 84. The Company’s results of operations and financial condition raise substantial doubt about its ability to continue as a going concern. If the Company is unsuccessful in consummating the Merger, it will need to raise additional capital through debt or equity financings, strategic relationships or other arrangements. Additional financing may not be available in amounts or on terms acceptable to the Company or at all, and if available, may be at prices and on terms that may not be as favorable as they would be without a going concern qualification. An inability to obtain additional financing may result in the Company’s voluntary or involuntary bankruptcy.

Q:  What do I need to do now?

A:  We urge you to read this proxy statement carefully, including its annexes and the documents referred to in this proxy statement as well as the Schedule 13E-3, including the exhibits attached thereto, filed with the Securities and Exchange Commission, or the “SEC,” and to consider how the Merger affects you. If you are a shareholder of record, you can ensure that your shares are voted at the Special Meeting by submitting your proxy via:

If you hold your shares in “street name” through a broker, bank or other nominee, you should follow the directions provided by your broker, bank or other nominee regarding how to instruct your broker, bank or other nominee to vote your shares. Without those instructions, your shares will not be voted, which will have the same effect as voting against the approval of the Merger and adoption of the Merger Agreement.

Q:  Should I send in my stock certificates or other evidence of ownership now?

A:  No. After the Merger is completed, you will be sent a letter of transmittal with detailed written instructions for exchanging your shares of Common Stock for the merger consideration. If your shares of Common Stock are held in “street name” by your broker, bank or other nominee, you may receive instructions from your broker, bank or other nominee as to what action, if any, you need to take to effect the surrender of your “street name” shares in exchange for the merger consideration. Do not send in your certificates now.

Q:  Can I revoke my voting instructions?

A:  Yes. You can revoke your voting instructions at any time before your proxy is voted at the Special Meeting. If you are a shareholder of record, you may revoke your proxy by notifying the Company’s Corporate Secretary in writing at Frederick’s of Hollywood Group Inc., Attn: Secretary, 6255 Sunset Boulevard, 6^th Floor, Hollywood, California 90028, or by submitting a new proxy by telephone, the Internet or mail, in each case, dated after the date of the proxy being revoked. In addition, you may revoke your proxy by attending the Special Meeting and voting in person (simply attending the Special Meeting will not cause your proxy to be revoked). Please note that if you hold your shares in “street name” and you have instructed

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a broker, bank or other nominee to vote your shares, the above-described options for revoking your voting instructions do not apply, and instead you must follow the instructions received from your broker, bank or other nominee to revoke your voting instructions. See “The Special Meeting — Voting; Proxies; Revocation —  Revocation of Proxies” beginning on page 71.

Q:  What does it mean if I get more than one proxy card or voting instruction card?

A:  If your shares are registered differently or are held in more than one account, you will receive more than one proxy or voting instruction card. Please complete and return all of the proxy cards or voting instruction cards you receive (or submit each of your proxies by telephone or the Internet, if available to you) to ensure that all of your shares are voted.

Q:  Who will count the votes?

A:  A representative of our transfer agent, American Stock Transfer & Trust Company, LLC, will count the votes and act as an inspector of election.

Q:  Who can help answer my other questions?

A:  If you have more questions about the Merger, or require assistance in submitting your proxy or voting your shares or need additional copies of the proxy statement or the enclosed proxy card, please contact AST Phoenix Advisors, a division of American Stock Transfer & Trust Company, LLC, at 1-877-732-3617. If your broker, bank or other nominee holds your shares, you should also call your broker, bank or other nominee for additional information.

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SPECIAL FACTORS

The Parties to the Merger

The parties to the Merger Agreement are the Company, Parent and Merger Sub.

The Company

For information regarding the Company, see “Important Information Concerning the Company —  Company Background” beginning on page 94.

Parent

Parent is a new Delaware limited liability company that was formed by HGI Funding to pursue the transaction contemplated by the non-binding consortium term sheet agreement among the Consortium Members. The Rollover Shareholders collectively hold 100% of the issued and outstanding equity of Parent. Immediately prior to the Effective Time, the Rollover Shareholders will cause all of their shares of our capital stock to be contributed to Parent in exchange for an increase in their equity interests in Parent. The Rollover Shareholders, as a group, may be deemed to beneficially own 91,257,883 shares, or 88.7%, of our Common Stock, including 63,579,204 shares that they have the right to acquire pursuant to convertible preferred stock, warrants and options held by them. Parent has not engaged in any business other than in connection with the Merger and the other related transactions contemplated thereby.

Merger Sub

Merger Sub is a newly formed New York corporation. Merger Sub was formed solely for the purpose of engaging in the Merger and other related transactions. Merger Sub is a wholly owned subsidiary of Parent. Merger Sub has not engaged in any business other than in connection with the Merger and other related transactions.

Background of the Merger

Introduction

Our financial condition is precarious. The opinion of our independent auditors included in our Annual Report on Form 10-K for the fiscal year ended July 27, 2013 without completing the Merger questions our ability to continue as a going concern. As of January 25, 2014, we had shareholders’ deficiency of $(29,223,000) or $(0.74) per outstanding share and a working capital deficit of $(23,507,000) or $(0.60) per outstanding share.

During the past six years, we suffered from the economic recession, a protracted recovery and a downturn in consumer spending. In California, the location of many of our stores, the recession was particularly severe. We also faced rising operating costs, difficulties in paying vendors and significant long-term lease costs. Competition also increased from retailers including the GAP, H&M, Aerie and Victoria’s Secret, the leader in our industry. Numerous steps to improve our financial performance were recommended by management and authorized by our Board of Directors. We reduced our workforce, wages and capital expenditures, sold our wholesale division and negotiated margin assistance with vendors. We also negotiated more favorable lending terms and eventually replaced our lender.

From fiscal years 2007 through 2013, annual operating expenses were reduced by approximately $40,000,000. Despite these efforts, we incurred net operating losses of approximately $114,000,000 from fiscal years 2008 through 2013 and have not reported an operating profit since fiscal year 2007. To sustain our operations and finance growth, we completed capital raises of approximately $38,000,000 from fiscal years 2008 through 2013. These capital raises were accomplished through a $20,000,000 rights offering and a $3,000,000 private placement of Common Stock, followed by the $15,000,000 placement of the Series A and Series B Convertible Preferred Stock described below. We also converted approximately $23,000,000 of debt and preferred stock into Common Stock. From fiscal years 2008 through 2013, we struggled to remain solvent, suffering from negative working capital and, in many years, deficit equity. As a result, we had difficulty staying current with vendors. Our Board of Directors encouraged Messrs. Lynch and Rende to explore possible strategic alternatives.

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On April 16 and 18, 2012, we received two unsolicited acquisition inquiries. On April 18, 2012, our Board of Directors authorized Mr. Lynch to retain the investment banking firm, Allen & Co., to assist in evaluating and negotiating the indications of interest. Allen & Co. also was retained to undertake a broad effort to explore other potential strategic alternatives, including an investment of strategic capital. Neither the marketing process to approximately 120 parties nor the two initial unsolicited indications of interest described in further detail below resulted in any firm offers that our Board of Directors believed were viable or would produce any value for our shareholders.

On February 28, 2013, Kyle Shonak, the then Senior Vice President of Salus, arranged for Mr. Lynch to meet with Philip Falcone, Chief Executive Officer of HGI, and Phillip Gass, Managing Director of Investments of HGI, on March 1, 2013 to discuss a potential strategic transaction. Salus is a subsidiary of HGI. The discussions resulted in our $10,000,000 Series B Convertible Preferred Stock and warrant sale on March 15, 2013. The buyer was Five Island Asset Management, LLC, a subsidiary of HGI, which we refer to as “Five Island.” These preferred shares and warrants may be converted into a majority interest in the Company. The negotiations relating to the Series B Convertible Preferred Stock transaction are described in detail below under “Evaluation of Strategic Transactions”.

On August 6, 2013, Five Island initially proposed the Merger to our Board of Directors. Five Island subsequently negotiated with our largest shareholders to form the Consortium, and negotiations between the Consortium and the Lead Director ultimately led to the execution of the Merger Agreement on December 18, 2013. Our Board of Directors, upon recommendation of the Lead Director, determined that the Merger is in the best interests of our unaffiliated shareholders. Our unaffiliated shareholders and our directors (other than Mr. Harley) and Executive Officers, who together own 11,594,575 shares, or approximately 29.5%, of our outstanding Common Stock as of April 14, 2014, will receive $0.27 per share, or an aggregate of approximately $3,100,000, upon the closing of the Merger. Shares of Common Stock owned by our directors (other than Mr. Harley) and Executive Officers will receive the same treatment in the Merger as the shares of Common Stock owned by the unaffiliated shareholders.

The indications of interest, the marketing process and the negotiations with HGI are described in detail below.

Series A Convertible Preferred Stock Transaction and New Credit Facility

Throughout fiscal year 2012, our business continued to be adversely affected by limited working capital. We were also in arrears with our vendors. Accordingly, Messrs. Lynch and Rende focused on negotiating vendor allowances, raising capital and pursuing other strategic possibilities. Because of our financial condition, it was difficult to attract new investors. As an alternative, in late April 2012, Mr. Lynch initiated discussions with our largest shareholders — Michael Tokarz, who controls TTG and TKZ, and William F. Harley III, a member of our Board of Directors who controls Fursa and Arsenal — regarding further investment in the Company. Mr. Tokarz expressed an interest in providing additional funding to the Company.

On May 11, 2012, Messrs. Lynch and Tokarz orally agreed in principle to TTG making a $5,000,000 convertible preferred stock equity investment in the Company. On May 11 and 14, 2012, Marci Frankenthaler, General Counsel to the Company, emailed Edwards Wildman Palmer LLP, or “Edwards Wildman”, counsel to TTG, an initial draft of the Series A Convertible Preferred Stock purchase agreement, an initial draft of the amendment to the Company’s certificate of incorporation establishing the Series A Convertible Preferred Stock and a non-binding term sheet prepared by the Company and Graubard Miller setting forth the proposed terms. The documents contemplated a non-voting, non-redeemable, zero coupon series of convertible preferred stock ranking senior to all other outstanding capital stock. The liquidation preference would be equal to the initial purchase price. The preferred stock would automatically convert into Common Stock, at the same price, if lower, as a subsequent closed private placement.

On May 15, 2012, Graubard Miller arranged for Messrs. Tokarz, Lynch and Rende, Ms. Frankenthaler, Edwards Wildman and Graubard Miller to have a conference call to discuss proposed revisions to the term sheet and transaction agreements. After the call, Edwards Wildman circulated a revised term sheet, which provided for, among other things, dividends, payable quarterly, at the Company’s option, in cash or additional shares of Series A Convertible Preferred Stock (“PIK shares”), at the rate of 9% per annum; conversion at the option of the holder at an initial conversion price of $1.25 per share (with the conversion price decreasing by

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$0.25 per share on each of the first three anniversaries of the closing date); and anti-dilution protection. The term sheet also provided for the issuance of ten-year warrants to purchase the number of shares of Common Stock equal to $1,500,000 divided by the closing price of the Common Stock on the day prior to the closing.

On May 17, 2012, Ms. Frankenthaler, Mr. Rende, Graubard Miller and Edwards Wildman had additional discussions regarding the proposed terms, and, following discussions with Mr. Tokarz, Edwards Wildman circulated a further revised term sheet to reflect what was discussed on the call. This further revised term sheet provided for: (i) beginning on the second anniversary of the closing date, the dividend rate to be the greater of 9% per annum or the highest rate the Company pays on any debt; (ii) conversion at the option of the holder at a price of $1.05 per share for the preferred shares other than the PIK shares, and at a price of $0.45 per share for the PIK shares; (iii) downward adjustments to the conversion price if the Company sells Common Stock or common stock equivalents at a price below the then conversion price, but not lower than the closing price of the Common Stock on the day prior to the closing date; (iv) a liquidation premium equal to 109% of the stated value of the shares (plus all accrued and unpaid dividends) until the first anniversary of the closing date and equal to 105% of the stated value of the shares (plus all accrued and unpaid dividends) from the first anniversary until the second anniversary of the closing date; and (v) three, five and seven year warrants to purchase an aggregate of 1,500,000 shares of Common Stock (500,000 shares each) at exercise prices of $0.45, $0.53 and $0.60, respectively.

On May 21, 2012, Edwards Wildman circulated a revised Series A Preferred Stock purchase agreement, a revised certificate of amendment to the Company’s certificate of incorporation establishing the Series A Convertible Preferred Stock and a form of warrant, each of which reflected the terms set forth in the May 17 revised term sheet. The revised agreements also included the following additional provisions: (i) the proceeds would be used to settle vendor payables, (ii) the preferred shares could be redeemed at the Company’s option, and (iii) a redemption premium would apply to the preferred shares, other than the PIK shares, in an amount equal to 110% of the stated value (plus all accrued and unpaid dividends), if redemption occurred before the third anniversary of the closing, and equal to 108% of the stated value (plus all accrued and unpaid dividends), if the redemption occurred between the third and fifth anniversaries of the closing.

On May 23, 2012, our Board of Directors approved the Series A Convertible Preferred Stock purchase agreement and related documents, and we completed the sale of $5,000,000 in shares of our Series A Convertible Preferred Stock to TTG. As of May 23, 2012, the outstanding shares of Series A Convertible Preferred Stock were convertible into 4,761,905 shares of Common Stock, or 10.9% of the outstanding shares of Common Stock as of May 23, 2012. By April 14, 2014, the outstanding shares of Series A Convertible Preferred Stock, including PIK shares issued as dividends, were convertible into 6,552,127 shares of Common Stock, or 14.3% of the outstanding shares of Common Stock as of April 14, 2014.

On May 23, 2012, pursuant to the Series A Preferred Stock purchase agreement, we also issued to TTG three, five and seven-year warrants, each to purchase 500,000 shares of Common Stock, at exercise prices of $0.45, $0.53 and $0.60 per share, respectively. As required by the Series A Convertible Preferred Stock purchase agreement, the proceeds of the transaction were used to settle vendor accounts payable. We obtained approximately $4,900,000 of vendor allowances during the fiscal quarter ended April 28, 2012. A complete description of the terms of the Series A Convertible Preferred Stock and warrants may be found in “ Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Series A Convertible Preferred Stock Transaction” beginning on page 91.

In addition to the Series A Convertible Preferred Stock investment, on May 31, 2012, we secured a new $24,000,000 credit facility with Salus. At the closing, proceeds from the credit facility were used to repay outstanding secured indebtedness of the Company. The Salus credit facility includes a “first in last out” tranche, which was at the time for up to $9,000,000 million, that consists of the first advances made under the facility and the last amounts repaid thereunder. The credit facility also provides for a revolving line of credit, except that repayments of the “first in last out” tranche may not be reborrowed. The unpaid principal of the “first in last out” tranche bears interest, payable monthly, in arrears, at the 30-day LIBOR rate plus 11.5%, but not less than 12.0% regardless of fluctuations in the LIBOR rate. Up to 2.5% of the interest payable on the “first in last out” tranche is capitalized, compounded and added to the unpaid amount under the credit

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facility each month. The unpaid principal of advances other than the “first in last out” tranche bears interest, payable monthly, in arrears, at the prime rate plus 4.0%, but not less than 7.0%, regardless of fluctuations in the prime rate. The obligations of the borrowers under the credit facility are secured by first priority security interests granted to Salus in all of the borrowers’ tangible and intangible property, including intellectual property such as trademarks and copyrights, as well as shares and membership interests of the borrowers.

Evaluation of Strategic Transactions

On April 16 and 18, 2012, Mr. Lynch received two unsolicited acquisition proposals. On April 18, 2012, all of the members of our Board of Directors held a special meeting to discuss the two proposals. Mr. Rende, Ms. Frankenthaler and Mr. Tokarz were in attendance. At the meeting, the Board considered engaging an investment banking firm to assist in the evaluation of the proposals, and to explore other potential strategic alternatives, including an investment of strategic capital, to enhance shareholder value. Mr. Lynch reported that he and Mr. Rende had recent discussions with two investment banking firms that expressed an interest in working with the Company. He reviewed their respective qualifications and their proposed fees for services. He explained that one firm did not have the extensive industry and financial contacts needed for a widespread marketing effort, and the other firm had industry expertise, but proposed to charge a high retainer and minimum fees. The Board then discussed, at the suggestion of Mr. Harley (who was employed by Allen & Co. prior to June 1996, but who has had no affiliation with and received no consideration from the firm since then), the possibility of engaging Allen & Co. Because of Allen & Co.’s reputation, national recognition and extensive contacts and expertise, the Board of Directors was positively disposed to discussing Allen & Co.’s interest in working with us. The Board of Directors authorized discussions with Allen & Co. and, later that day, Messrs. Walters and Harley met with John Simon, James Quinn and Denise Calvo of Allen & Co., who expressed an interest in working with the Company. On April 24, 2012, Allen & Co. sent a draft engagement letter to Messrs. Lynch and Walters. Between April 24, 2012 and May 3, 2012, Mr. Lynch, at the direction of the Board of Directors, negotiated the terms of Allen & Co.’s engagement. On May 3, 2012, following Board approval, Allen & Co. was retained, and the Company issued a press release announcing their engagement and their role to seek strategic alternatives for the Company. With the assistance of Allen & Co., we prepared confidential evaluation materials regarding the Company, our business and management. Mr. Lynch advised the two parties that had submitted proposals that Allen & Co. would contact them as part of a broader marketing effort.

Our Board of Directors and Messrs. Lynch and Rende continued their extensive business review of the Company, which included analysis of our deteriorating financial condition. They considered our financial and business prospects and further considered financial and strategic alternatives to enhance shareholder value, including, among other things, obtaining additional financing, selling all or a portion of our business and identifying strategic partners. Allen & Co. advised on strategic transactions that might be available to the Company.

Between June and October 2012, Allen & Co. contacted approximately 120 parties, including retailers, private equity firms and family offices and one of the two parties who had submitted unsolicited proposals in April 2012. No subsequent interest was expressed by the other party. Approximately 30 expressed an interest and executed non-disclosure agreements to receive the confidential evaluation materials and gain access to the Company’s electronic data room. The non-disclosure agreements did not contain provisions restricting the purchase of the Company’s securities or the taking of any other actions that could lead to a change of control of the Company at any time. In early October 2012, Allen & Co. called for written proposals from the approximately 12 remaining interested parties. In response, Allen & Co. received indications of interest from only three parties. Two were from private equity firms and contemplated pre-packaged bankruptcy filings, and a third was from a domestic specialty retailer that had previously submitted an indication of interest in April 2012.

Prior to the Company engaging in any negotiations with the interested parties, on November 8, 2012, our Board of Directors selected Mr. Walters to coordinate the full Board’s review and negotiation of all of the proposals received during the marketing process. Mr. Walters was not individually authorized to, and did not, negotiate the terms of these proposals on behalf of the Company or make any final recommendations with respect to such proposals.

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From November 2012 to March 2013, all of the members of our Board of Directors, Messrs. Lynch and Rende, Ms. Frankenthaler, Mr. Tokarz and Allen & Co. met numerous times to evaluate a total of six indications of interest — the three received in October 2012 plus three additional indications of interest subsequently received from parties unaffiliated with the Company. The two indications of interest that contemplated a pre-packaged bankruptcy process were considered by the Board of Directors, but rejected because our shareholders would receive no value. The Board gave no further consideration to these proposals. In making this decision, the Board considered the difficulty of obtaining debtor-in-possession financing and the uncertain outcome of a bankruptcy process. They also considered the Company’s net losses of $6,432,000 and $12,055,000 for the years ended July 28, 2012 and July 30, 2011 and working capital deficiency of $6,326,000 as of July 28, 2012. The Company had used $6,571,000 and $11,137,000 of cash in operating activities for the years ended July 28, 2012 and July 30, 2011. They also considered that, while vendor payables were reduced following the Series A Convertible Preferred Stock transaction in May 2012, during the first quarter of fiscal year 2013 vendor payables were increasing again. Based on these factors, they anticipated that, if the Company filed for bankruptcy protection, liquidation was a legitimate possibility. The Company’s current vendor base would be unlikely to supply the inventory necessary for the Company to continue operations unless existing payables were brought current. Based on the Company’s deteriorating financial condition during the fiscal year 2012 and the first quarter of fiscal year 2013, the Board of Directors ascertained that, if the Company liquidated, the value of its assets would be insufficient to pay its unsecured creditors and its preferred stockholders and, accordingly, the common shareholders would be left with no value.

At the direction of our Board of Directors, Messrs. Lynch and Rende, Ms. Frankenthaler and Allen & Co. engaged in negotiations with the other four parties. We sometimes refer to these parties collectively as the “Proposing Parties.” As described below, despite extensive negotiations between November 2012 and March 2013, we terminated discussions with each of the Proposing Parties because we were unable to reach definitive terms with any of them that the Board of Directors believed would produce any value for our shareholders.

On October 25, 2012, in response to Allen & Co.’s request for written proposals earlier that month, a domestic specialty retailer submitted an indication of interest to acquire the Company. We refer to this party as the “Specialty Retailer.” The Specialty Retailer was the same party who made the unsolicited acquisition inquiry on April 16, 2012. During November 2012, Allen & Co. and the Specialty Retailer’s financial advisor arranged discussions between Mr. Lynch and the Specialty Retailer to further explore their interest in acquiring the Company.

On December 3, 2012, the Specialty Retailer submitted a non-binding letter of intent to Allen & Co. to acquire through a new entity all of the Company’s outstanding capital stock for cash, including the Company’s Series A Convertible Preferred Stock and the Common Stock held by TTG, TKZ, Fursa and Arsenal. The letter of intent also provided an option for TTG, TKZ, Fursa and Arsenal to roll their equity in the Company into a percentage interest in the new entity. The letter contained a 60-day exclusivity period for the Specialty Retailer to conduct due diligence and negotiate with the Company. It also required the Company to pay the Specialty Retailer’s expenses up to $500,000 if the Company terminated the letter of intent prior to the end of the exclusivity period or entered into a definitive agreement with a third party within 180 days after the end of the exclusivity period. With the assistance of Allen & Co. and Graubard Miller, and at the direction of our Board of Directors, Messrs. Lynch and Rende and Ms. Frankenthaler negotiated the terms of the letter of intent with the Specialty Retailer, but the parties were unable to reach an agreement on the length of the exclusivity period or when the Company’s obligation to pay the Specialty Retailer’s expenses would be triggered. Both time and amount were critical to the Company, because of its steadily deteriorating financial condition. The Specialty Retailer did not provide a reason why it would not shorten the exclusivity period or clarify the termination language. On December 21, 2012, the Company terminated discussions with the Specialty Retailer.

On December 5, 2012, a private equity firm with strategic relationships in the retail and entertainment industries submitted a proposal to Allen & Co. We refer to this party as the “PE Firm.” Under the proposal, the PE Firm would acquire all of the Company’s outstanding capital stock for cash, including the Company’s Series A Convertible Preferred Stock and the Common Stock held by TTG, TKZ, Fursa and Arsenal.

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Repayment of the Company’s credit facility with Salus and an infusion of equity capital also were contemplated. The proposal included a 60-day exclusivity period.

On December 10, 2012, Allen &Co. arranged for Messrs. Lynch and Rende and Ms. Frankenthaler to meet with the PE Firm and its financing source at Allen & Co.’s offices. The parties discussed proposed consideration, but the PE Firm and its financing source indicated that no firm offers could be made until it performed due diligence.

Over the next week, Messrs. Lynch and Rende and Ms. Frankenthaler proposed revisions to the PE Firm’s initial indication of interest, including a reduction in the length of the exclusivity period. On December 20, 2012, the PE Firm submitted a non-binding letter of intent to Allen & Co. for the Board’s consideration. It contained substantially the same terms as their initial indication of interest, but included a shortened, 45-day exclusivity period. The letter of intent required a response from the Company by the close of business on December 28, 2012.

On December 12, 2012, another private equity firm with strategic relationships in the retail industry submitted a proposal to acquire the Company. We refer to this party as the “Second PE Firm.” The Second PE Firm had previously submitted one of the two indications of interest that contemplated a pre-packaged bankruptcy process. The new proposal contemplated that the firm would, through a new entity, acquire for cash all of the Common Stock held by shareholders other than TTG, TKZ, Fursa and Arsenal, and that TTG, TKZ, Fursa and Arsenal would roll their equity in the Company into a percentage interest in the new entity. The new proposal also contemplated retiring the Series A Convertible Preferred Stock and infusing additional capital into the Company. The proposal included a 60-day exclusivity period. Mr. Lynch and the firm engaged in preliminary discussions. However, the Second PE Firm’s financing could not be confirmed. Accordingly, the Company terminated discussions with the Second PE Firm and the Board gave no further consideration to the Second PE Firm’s proposal.

On December 20, 2012, Mr. Lynch met with a foreign private equity firm with strategic relationships in the intimate apparel industry. We refer to this party as the “Foreign Strategic Party.” The meeting was arranged at the suggestion of Mr. Tokarz, who was introduced to the Foreign Strategic Party by one of his colleagues. The Foreign Strategic Party discussed with Mr. Lynch its potential interest to go public through a reverse merger with a U.S. exchange listed company, to assist us with our immediate financial needs and to help us source our core intimate apparel inventory. Mr. Lynch invited the Foreign Strategic Party to submit a formal indication of interest for our Board of Directors to consider.

On December 27, 2012, the Foreign Strategic Party submitted to Mr. Lynch a non-binding letter of intent for a $5,000,000 convertible debt financing. On December 28, 2012, at the request of our Board of Directors, Mr. Lynch submitted a revised proposal to the Foreign Strategic Party, which instead contemplated a $5,000,000 preferred stock transaction substantially similar to the Series A Convertible Preferred Stock transaction the Company completed in May 2012 with TTG. The letter of intent did not contain an exclusivity provision, but provided for funding to first occur by no later than January 18, 2013. The Foreign Strategic Party accepted the proposed changes.

On December 28, 2012, all of the members of our Board of Directors held a special meeting to further consider the proposals submitted by the PE Firm and the Foreign Strategic Party. Mr. Rende, Ms. Frankenthaler and Mr. Tokarz were in attendance. After further discussion and review of both proposals, our Board of Directors concluded that the Foreign Strategic Party offered a superior opportunity for the Company because, with its extensive experience in the lingerie industry, it possessed potential synergies that did not exist with the PE Firm. Accordingly, our Board of Directors authorized Mr. Lynch to terminate discussions with the PE Firm and enter into the non-binding letter of intent with the Foreign Strategic Party for a $5,000,000 preferred stock investment, which Mr. Lynch executed and delivered later that day.

Following the execution of the letter of intent, the Foreign Strategic Party was given access to the Company’s electronic data room, and performed extensive due diligence. After the completion of due diligence and further meetings and negotiations, the Foreign Strategic Party withdrew its preferred stock financing proposal. The Foreign Strategic Party believed that the Company’s capital needs were greater than what the Foreign Strategic Party had anticipated. Instead, the Foreign Strategic Party discussed assisting the

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Company with sourcing core intimate apparel inventory and with financing in a pre-packaged bankruptcy. No firm offer was made. Based on our prior determination that in a bankruptcy, liquidation was a legitimate possibility and the common shareholders would be left with no value, our Board of Directors authorized Mr. Lynch to terminate discussions with the Foreign Strategic Party and authorized Allen & Co. and Mr. Lynch to attempt to reinitiate discussions with the Specialty Retailer and the PE Firm.

On January 21, 2013, Mr. Lynch contacted the Specialty Retailer and Allen & Co. contacted the financing source for the PE Firm. The Specialty Retailer expressed an interest in reinitiating discussions with the Company. On the other hand, the PE Firm’s financing source declined to engage in any further discussions. Accordingly, our Board of Directors gave no further consideration to the PE Firm’s proposal. After negotiations resumed with the Specialty Retailer, the Company and the Specialty Retailer executed a non-binding letter of intent on January 25, 2013 with an exclusivity period expiring February 27, 2013. The letter of intent was substantially similar to the one that the parties had previously negotiated, but not signed, in December 2012. Specifically, it provided for the acquisition by the Specialty Retailer of all of the Company’s outstanding Common Stock for $0.45 per share, including the Common Stock held by TTG, TKZ, Fursa and Arsenal. The non-binding letter of intent also contemplated that the Specialty Retailer would purchase the Series A Convertible Preferred Stock and included an option for TTG, TKZ, Fursa and Arsenal to roll their equity in the Company into a 2.5% interest in the new entity.

From January 25, 2013 through February 21, 2013, the Specialty Retailer conducted extensive due diligence on the Company’s operations, financial performance and financial projections, including meetings conducted at the Company’s facilities. During this period, at the direction of the Board and with the assistance of Allen & Co. and Graubard Miller, Messrs. Lynch and Rende and Ms. Frankenthaler provided information to the Specialty Retailer. On February 21, 2013, the Specialty Retailer emailed a revised offer to Allen & Co. to present to the Board of Directors. Later that same day, a conference call was held with Messrs. Lynch and Rende, Allen & Co., the Specialty Retailer and its financial advisor to discuss the terms in more detail. The Specialty Retailer explained that the revised offer reflected its view that the Company had more liabilities than expected, and that they were not prepared to move forward on the previously indicated terms. The revised proposal contemplated (i) that no payment at all would be made to the Company’s equity holders unless the Company could reduce the impact of its liabilities through, among other things, vendor concessions and (ii) that the Company must maintain its working capital levels, with any shortfall reducing equity value, which was equivalent to the pre-packaged bankruptcy plan proposals because, in each case, the unaffiliated shareholders of the Company were likely to receive no value.

On February 22, 2013, all of the members of our Board of Directors met to discuss the Specialty Retailer’s revised offer. Mr. Rende, Ms. Frankenthaler, Allen & Co. and Graubard Miller were in attendance. Allen & Co. reviewed the financial terms of the revised proposal. After discussion, the Board concluded that, based on the Company’s current financial condition and ongoing losses, the Company’s shareholders were likely to be left with no value in the sale of the Company to the Specialty Retailer under the revised offer. The Board determined that further consideration and negotiations should take place, and that Allen & Co. should arrange a call with the Specialty Retailer and financial advisor to allow the Company an opportunity to respond. While the parties continued to negotiate over the next few weeks, little progress was made, primarily because of the Company’s continuing losses and the Specialty Retailer’s unwillingness to guarantee any value for the Company’s common shareholders.

During the Company’s strategic alternative evaluation process conducted with Allen & Co. described above, Messrs. Lynch and Rende provided regular status updates to Mr. Shonak regarding progress in the negotiations with the Proposing Parties. On February 28, 2013, Mr. Lynch advised Mr. Shonak that negotiations with the Specialty Retailer were continuing, but progress was limited. He also confirmed to Mr. Shonak that the Company’s exclusivity agreement with the Specialty Retailer had expired on February 27, 2013. On February 28, 2013, Mr. Shonak arranged for Mr. Lynch to meet on March 1, 2013 with Philip Falcone, the Chief Executive Officer of HGI, and Phillip Gass, Managing Director of Investments of HGI, the parent company of Salus and Parent.

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On March 1, 2013, Mr. Lynch met with Messrs. Falcone and Gass to discuss a potential strategic transaction between the Company and HGI or one of its subsidiaries. On the evening of March 1, 2013, Mr. Gass emailed Mr. Lynch a non-binding term sheet. The term sheet provided for a $10,000,000 investment in the Company through the issuance of Series B Convertible Preferred Stock, which would result in HGI obtaining a controlling interest in the Company. The term sheet contemplated non-voting, non-redeemable, Series B Convertible Preferred Stock ranking senior to all other outstanding capital stock, with cumulative dividends payable quarterly in arrears either (i) at the rate of 9% per annum in cash or, at the Company’s discretion, (ii) at the rate of 12% per annum in additional shares of Series B Convertible Preferred Stock. The Series B Convertible Preferred stock would be convertible, at the option of the holder, into 51% of the Company’s fully diluted common stock. The proposed terms also included a liquidation preference equal to the initial purchase price, standard anti-dilution adjustments, and the ability of a majority of the Series B Convertible Preferred Stock holders to appoint three members of the Company’s Board of Directors, which would consist of a maximum of eight members. The term sheet also contained a seven-day exclusivity period.

On the morning of March 3, 2013, all of the members of our Board of Directors met to review and consider the Series B Convertible Preferred Stock term sheet. Mr. Rende, Ms. Frankenthaler, Mr. Tokarz and Allen & Co. were in attendance. Our Board of Directors reviewed the proposed terms of the Series B Convertible Preferred Stock transaction, including the potential dilutive consequences, and developed a list of proposed changes to the term sheet. The proposed changes included a fixed, rather than a floating, conversion price, a lower interest rate on the cash and payment-in-kind dividends, and to add redemption rights at the Company’s option. Our Board of Directors instructed Mr. Lynch and Ms. Frankenthaler to communicate the Company’s position to Mr. Gass and Milbank, Tweed, Hadley & McCloy LLP, or “Milbank,” HGI’s counsel. Our Board of Directors then determined to reconvene the meeting after Messrs. Lynch and Rende and Ms. Frankenthaler communicated the proposed changes to the term sheet to Mr. Gass and Milbank.

Also at the March 3, 2013 meeting, our Board of Directors considered two other alternatives — continuing to negotiate with the Specialty Retailer and filing for bankruptcy. Allen & Co. reviewed with the Board the potential transaction with the Specialty Retailer, the lack of progress in the negotiations, and the low likelihood of closing a transaction with them quickly enough to address our acute and deteriorating financial condition. Allen & Co. also discussed the Company filing for bankruptcy, the challenges in obtaining debtor-in-possession financing and the uncertain outcome of a bankruptcy process. The Board of Directors engaged in a similar analysis to the one it conducted in October 2012 in connection with the pre-packaged bankruptcy proposals. The Board considered that the Company had net losses of $6,432,000 and $12,055,000 for the years ended July 28, 2012 and July 30, 2011 and had a net loss of $14,959,000 for the six months ended January 26, 2013. In addition, as of January 26, 2013, the Company had a working capital deficiency of $12,349,000 and a shareholders’ deficiency of $17,401,000. The Company had used cash of $6,571,000 and $11,137,000 in operating activities for the years ended July 28, 2012 and July 30, 2011 and used cash of $1,079,000 in operating activities for the six months ended January 26, 2013. They also considered that for the six months ended January 26, 2013, accounts payable and accrued expenses had increased by $12,504,000 primarily as a result of slower payments to the Company’s vendors.

The Board considered that, as a result of the Company’s financial condition, procuring inventory from new vendors had become challenging, and our current vendors had been reluctant to produce new merchandise for the Company due to our inability to make timely payments to them. As in October 2012, the Board anticipated that, if the Company filed for bankruptcy protection, liquidation was a legitimate possibility. The Company’s current vendor base would be unlikely to supply the inventory necessary for the Company to continue operations unless existing payables were brought current. Based on the Company’s deteriorating financial condition during fiscal year 2012 and the first six months of fiscal year 2013, the Board of Directors ascertained that, if the Company liquidated, the value of its assets would be insufficient to pay its unsecured creditors and its preferred stockholders and, accordingly, the common shareholders would be left with no value.

Later that day, Mr. Gass emailed Mr. Lynch a revised term sheet, and all of the Board members reconvened the meeting to consider it. Mr. Rende, Ms. Frankenthaler, Mr. Tokarz and Allen & Co. were in attendance. The revised term sheet included the Company’s right to redeem the Series B Convertible Preferred Stock after the fifth anniversary of the closing, but the dividend rate remained at 9% per annum for cash

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dividends and 12% for payment-in-kind dividends. The revised term sheet also provided for the conversion of the preferred stock at the option of the holder at a fixed conversion price of $0.25 per share, for an aggregate of 40,000,000 shares of Common Stock. On conversion, HGI would own approximately 51% of the current outstanding shares of common stock. To ensure that HGI maintained their majority interest, a provision was added to the revised term sheet that HGI would receive warrants exercisable for a number of shares of Common Stock (“Warrant Shares”) such that the Warrant Shares plus the shares issuable upon conversion of the Series B Convertible Preferred Stock would equal 51% of the issued and outstanding Common Stock on a fully diluted basis. The number of warrants and their exercise price were left open pending a review of the terms of all currently outstanding derivative securities. The term sheet also required waivers from the holder of the Series A Convertible Preferred Stock, including waivers of (i) the anti-dilution adjustments that would otherwise result from the Series B Convertible Preferred Stock transaction, (ii) the holder’s right to force the Company to repurchase the shares of Series A Convertible Preferred Stock upon consummation of the Series B Convertible Preferred Stock transaction, (iii) the holder’s right to receive payment for PIK Shares and a redemption premium for shares other than PIK Shares in connection with any redemption of the Series A Convertible Preferred Stock by the Company, and (iv) the holder’s right to convert its shares of Series A Convertible Preferred Stock after the Company delivers any such redemption notice. The term sheet also required the Company to amend its by-laws with respect to board size and composition and shareholder action by less than unanimous written consent. After reviewing and discussing the revised term sheet, the Board proposed a clarifying change to the term sheet that the warrants are only to cover the Company’s current outstanding derivative securities. Based on conversations with Mr. Tokarz, an affiliate of TTG, the holder of the Series A Convertible Preferred Stock, whose consent was required for the transaction, the Board of Directors also proposed to limit the required waivers to those dealing with the repurchase right and the anti-dilution adjustments triggered by the proposed transaction. The Board authorized Messrs. Lynch and Rende and Ms. Frankenthaler to communicate these changes to Mr. Gass and Milbank and reconvene a meeting the next day.

On March 4, 2013, all of the members of our Board of Directors held a special meeting to consider a further revised draft of the Series B Convertible Preferred Stock term sheet, which Milbank emailed to Mr. Lynch, Ms. Frankenthaler and Graubard Miller earlier that day. Mr. Rende, Ms. Frankenthaler, Mr. Tokarz, Allen & Co. and Graubard Miller were in attendance. They discussed the changes made to the term sheet, noting that both of the requested changes had been made. Because the issuance of the Series B Convertible Preferred Stock would affect the rights of the Company’s Series A Convertible Preferred Stock, Mr. Tokarz, an affiliate of TTG, the holder of the Series A Convertible Preferred Stock, excused himself from the meeting. After further review and consideration of the term sheet, our Board of Directors (with Mr. Eisel abstaining because his law firm represented Mr. Tokarz, including in the Series A Convertible Preferred Stock transaction) authorized Mr. Lynch to enter into the non-binding term sheet with HGI. Our Board of Directors also authorized Messrs. Lynch and Rende to terminate negotiations with the Specialty Retailer, which they did that day. Later on March 4, 2013, Mr. Lynch executed the non-binding term sheet and delivered it to Mr. Gass and Milbank.

On March 7, 2013, Mr. Gass and Kostas Cheliotis, Senior Vice President & Deputy General Counsel of HGI, invited Mr. Lynch to a meeting to discuss the Company’s financial condition. Mr. Lynch provided Messrs. Gass and Cheliotis and Milbank with a draft of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 27, 2013 and explained the reasons for the decrease in sales as compared to the prior year. They also discussed the possibility of HGI providing additional funding in the months following the consummation of the proposed Series B Convertible Preferred Stock transaction.

Between March 4 and March 15, 2013, Messrs. Lynch, Rende, Gass and Cheliotis, and Ms. Frankenthaler worked with Graubard Miller and Milbank to negotiate and prepare the Series B Convertible Preferred Stock transaction documentation, which included: (i) the Series B Preferred Stock Purchase Agreement, or “Series B SPA”; (ii) Certificate of Amendment to the Company’s Restated Certificate of Incorporation, setting forth the rights and preferences of the Series B Convertible Preferred Stock; (iii) Second Amended and Restated Bylaws of the Company, setting forth, among other things, the changes with respect to board size and composition and shareholder action by less than unanimous written consent to the extent permitted by the certificate of incorporation; and (iv) six separate common stock purchase warrants exercisable upon a

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corresponding exercise or conversion of specified outstanding securities, as set forth in the warrants. Five of the warrants are to purchase an aggregate of up to 4,708,850 shares of common stock at prices ranging from $0.67 to $1.21 per share and expire at various times between June 2015 and February 2022. One warrant is to purchase up to 5,468,127 shares of common stock for $.01 per share and expires 30 days following the date that the Series A Convertible Preferred Stock is no longer outstanding.

Additional transaction documentation included the Series A Convertible Preferred Stock waiver executed by TTG and a voting agreement executed by Five Island, TTG, TKZ, Fursa and Arsenal. The voting agreement, dated March 15, 2013, related to a requirement in the Series B SPA in which the Company agreed to hold a meeting of its shareholders, as soon as practicable, but not later than February 1, 2014, for the purpose of voting on the approval and adoption of an amendment to the Company’s certificate of incorporation providing that the shareholders entitled to vote may take any action that they might have taken at a shareholders’ meeting by a written consent signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action. Pursuant to the Voting Agreement entered into in connection with the Merger Agreement, HGI Funding waived the requirement to include the amendment in this proxy statement for the Special Meeting. Accordingly, the certificate of incorporation continues to prohibit the Company from taking action by less than unanimous consent.

On March 11, 2013, all of the members of our Board of Directors held a special meeting to review the terms of the Series B Convertible Preferred Stock transaction documents. Mr. Rende, Ms. Frankenthaler, Mr. Tokarz and Allen & Co. were in attendance. Among other things, they discussed the redemption and conversion rights of the Series B Convertible Preferred Stock as compared to the Series A Convertible Preferred Stock, the waiver of anti-dilution and repurchase rights by the holder of the Series A Convertible Preferred Stock in connection with the Series B Convertible Preferred Stock transaction, the representations and warranties contained in the Series B Convertible Preferred Stock purchase agreement and the minority shareholder protections. They also reviewed the terms of the warrants and how they could only be exercised upon exercise or conversion of corresponding securities, and noted that the terms of these warrants were being finalized, including the exercise prices and anti-dilution adjustment provisions. They also were informed that the Series A Convertible Preferred Stock holder was still in the process of negotiating the waiver with HGI. After further discussion, our Board of Directors determined to hold off on approving the transaction until these items were finalized, and instructed Messrs. Lynch and Rende, Ms. Frankenthaler and Graubard Miller to work with HGI and Milbank to address them. Over the next two days, anti-dilution protection terms of the warrants were agreed upon, and the Board of Directors received confirmation from Mr. Tokarz that the terms of the waiver of anti-dilution and repurchase rights by the holder of the Series A Convertible Preferred Stock were acceptable, and would only apply to this specific transaction.

On the evening of March 13, 2013, the Specialty Retailer submitted another unsolicited revised non-binding proposal to Mr. Lynch and Allen & Co. The proposal contemplated an initial purchase of the outstanding Series A Convertible Preferred Stock and Common Stock held by TTG, TKZ, Fursa and Arsenal at $0.45 per share, the same price the Specialty Retailer had proposed in the non-binding letter of intent the Company and the Specialty Retailer had executed on January 25, 2013. Those purchases were to be followed by a tender offer for the shares of Common Stock held by the unaffiliated shareholders at that same price. That evening, all of the members of our Board of Directors except for Messrs. Walters and Harley, held a special meeting. Mr. Rende, Ms. Frankenthaler, Allen & Co. and Graubard Miller were in attendance. Our Board of Directors and Graubard Miller discussed the Board’s fiduciary obligation to the Company and its shareholders to address the proposal, notwithstanding that the Company and Five Island had finalized negotiations on the Series B Preferred Stock transaction documents and were preparing for the closing. The Board determined to reconvene the meeting early the following morning when all of the Board members were available to attend.

Early the following morning on March 14, 2013, all of the members of our Board of Directors met to discuss the terms of the Specialty Retailer’s proposal. Mr. Rende, Ms. Frankenthaler, Allen & Co. and Graubard Miller were in attendance. The Board discussed whether the Specialty Retailer could close quickly enough, or at all, based on the fact that the Specialty Retailer’s proposal from just a few weeks prior would have likely left the shareholders with no value, as well as the risks related to further delay, including

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bankruptcy. Our Board of Directors considered ways to mitigate these risks and address the Company’s critical need for additional capital. Accordingly, our Board of Directors directed Allen & Co. to communicate to the Specialty Retailer that the Board required the Specialty Retailer to provide a binding commitment letter that day for (i) the immediate purchase of all of the capital stock held by TTG, TKZ, Fursa and Arsenal at $0.45 per share, followed by a tender offer for the shares of Common Stock held by the unaffiliated shareholders at $0.45 per share, and (ii) the provision of interim financing through the closing of the tender offer. Our Board of Directors also requested a timeline for completion of the transaction, which was vital given the Company’s tenuous financial condition. Messrs. Lynch and Ms. Frankenthaler, Allen & Co. and Graubard Miller held discussions with the Specialty Retailer through the day, and the Board reconvened several times for status updates and further discussions. Despite these efforts, the follow-up communication that the Company received from the Specialty Retailer on March 14, 2013 specifically stated that its offer was non-binding. The Specialty Retailer did not explain its refusal to make its offer binding as requested. Accordingly, after extensive discussion of the circumstances, including the history of negotiations with the Specialty Retailer, its refusal to provide the necessary binding commitment and the Company’s deteriorating financing situation, a majority of our Board of Directors approved the Series B Convertible Preferred Stock transaction with Five Island. The Board of Directors authorized Messrs. Lynch and Rende to terminate discussions with the Specialty Retailer and execute the transaction agreements. The Board gave no further consideration to the Specialty Retailer’s proposal.

The closing of the Series B Convertible Preferred Stock transaction took place on March 15, 2013. After expenses, the Company received approximately $9,350,000 of net proceeds. A complete description of the terms of the Series B Convertible Preferred Stock and warrants may be found in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Series B Convertible Preferred Stock Transaction” beginning on page 88.

Upon completion of this transaction, Allen & Co. received a success fee and Allen & Co. and the Company mutually agreed to terminate Allen & Co.’s engagement, because the purpose for its engagement had been achieved. Allen & Co. did not continue its marketing efforts, provide any further advisory services or participate in any subsequent negotiations on the Company’s behalf.

By this time, all discussions with respect to the previous proposals received by the Company had terminated, as described above, and the Company received no further communications with respect to any of the proposals. Following the Series B Convertible Preferred Stock transaction, the Company refocused substantially all of its attention on the operation of its business in the ordinary course on a stand-alone basis.

Negotiations Relating to the Merger

On April 24, 2013, all of the members of our Board of Directors held a regularly scheduled meeting. Mr. Rende, Ms. Frankenthaler, and Messrs. Falcone and Gass were in attendance. Mr. Rende reviewed with our Board of Directors and Messrs. Gass and Falcone the Company’s financial statements for the one, two and eight months ended March 30, 2013, and discussed the anticipated third and fourth fiscal quarter losses, as well as the Company’s need for between $5,000,000 and $10,000,000 of additional funding to pay outstanding payables, plus additional funds to build inventory for the upcoming fall and holiday selling seasons. Messrs. Lynch and Rende also presented the proposed fiscal 2014 budget, discussed the Company’s poor performance of its expansion into non-core product categories such as dresses, sportswear and shoes. They also stressed the need for additional funding to pay vendors to ensure their continued support of the business during the Company’s return to focusing on core intimate apparel product offerings such as bras, lingerie and corsets. Messrs. Gass and Falcone discussed the potential avenues for providing additional financial support to the Company.

Subsequent to the April 24, 2013 Board of Directors meeting, Messrs. Lynch and Gass discussed with Mr. Shonak the possibility of Salus providing the Company with additional temporary financial support with an advance under the Company’s existing credit facility. On May 23, 2013, the revolving credit agreement with Salus was amended to increase the “first in last out” tranche of the Company’s line of credit by $5,000,000 to $14,000,000, and decrease the revolving portion of the line of credit by the same amount, such that the maximum line of credit amount remained the same. The terms of the “first in last out” tranche of the

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line of credit, including the interest rate, remained the same. Concurrently with the execution of the amendment, the Company paid to the Lenders in cash a one-time fee of $50,000 and agreed to an increase in the Lender’s collateral monitoring fee from $4,500 to $12,500 per month.

On June 26, 2013, all of the members of our Board of Directors held a special meeting. Mr. Rende, Ms. Frankenthaler and Mr. Cheliotis were in attendance. The purpose of the meeting was for the Board to reiterate the Company’s need for additional financing and the amounts required to satisfy its business objectives as previously discussed at the April 24, 2013 Board of Directors meeting.

On July 23, 2013, all of the members of our Board of Directors held a regularly scheduled meeting. Mr. Rende, Ms. Frankenthaler, Messrs. Gass and Cheliotis and Vernon Young, Chief Risk Officer of Front Street Re, a subsidiary of HGI, were in attendance. They reviewed a proposed third amendment to the Company’s credit agreement to temporarily remove the facility’s existing $1,500,000 availability block and discussed the Company’s weakening financial condition. After discussion, our Board of Directors concluded that even with the removal of the $1,500,000 availability block as contemplated by the proposed amendment, the Company will continue to have limited liquidity. Mr. Gass informed our Board of Directors that HGI understood the Board of Director’s view of the importance of working with the Lenders to increase the availability under the Company’s credit facility.

On July 25, 2013, the Company’s credit agreement with the Lenders was amended to remove the $1,500,000 credit line block until October 31, 2013. However, the block was reinstated by Salus, effective October 10, 2013, in connection with a subsequent amendment to the credit agreement which is described below. Through October 10, 2013, the initial $1,500,000 of the outstanding balance under the revolving portion of the Company’s line of credit bore interest at a 20% annual rate. Concurrently with the execution of the amendment, the Company paid to the Lenders a one-time $50,000 cash fee.

On August 6, 2013, Mr. Cheliotis emailed Mr. Lynch a non-binding preliminary proposal letter from Five Island to our Board of Directors regarding a potential going private transaction in which a group led by Five Island or its affiliates would acquire the outstanding publicly traded common shares of the Company (excluding shares owned by Five Island’s acquisition group) in an all cash transaction ranging from $0.20 to $0.225 per share. Based on discussions between Mr. Lynch and Messrs. Gass and Cheliotis following receipt of the letter, HGI’s indication of interest was highly contingent upon the Company’s largest shareholders agreeing to form an investor consortium with HGI affiliates to take the Company private.

On August 7, 2013, all of the members of our Board of Directors held a special meeting. Mr. Rende and Ms. Frankenthaler were in attendance. They discussed the Five Island proposal and the Board of Directors’ fiduciary obligations to the Company and its shareholders in connection with its consideration of the proposed transaction. As our Board of Directors had done previously in connection with its review of strategic alternatives for the Company, Mr. Walters was appointed by the Board of Directors to coordinate the full Board’s review and negotiation of the HGI proposal.

On September 26, 2013, after a period of extensive negotiations, HGI successfully formed a consortium with our largest shareholders, which was comprised of HGI Funding (a subsidiary of HGI and successor in interest to Five Island), TTG, TKZ, Fursa and Arsenal. Also on September 26, 2013, Mr. Cheliotis delivered to Mr. Lynch a non-binding, written proposal from the Consortium to acquire all of the outstanding shares of the Company’s Common Stock that they did not directly or indirectly own at a price of $0.23 per share.

On September 27, 2013, the Company issued a press release announcing that the Consortium’s proposal had been received. Also on that day, all of the members of our Board of Directors held a special meeting. Mr. Rende, Ms. Frankenthaler and Graubard Miller were in attendance. The Board discussed the Consortium’s proposal and (i) appointed Mr. Walters, the sole disinterested, independent director, as the Lead Director, with the power to evaluate and negotiate the terms and conditions of the proposed transaction, (ii) authorized the Lead Director to hire his own legal, financial and other advisors and (iii) made the recommendation of the Lead Director a requirement for approval of the proposed transaction. Our Board of Directors did not consider electing additional independent directors to assist the Lead Director in negotiating with the Consortium. Messrs. Lynch and Rende then reviewed with our Board of Directors the Company’s financial condition, and informed them that the Lenders were preparing an amendment to the credit agreement to increase the

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Company’s line of credit by an additional $5,000,000, which was expected to close quickly. Subsequently, Mr. Walters, after considering whether a conflict of interest existed, decided to use Graubard Miller, the Company’s outside general counsel, as his counsel with respect to the Merger. Mr. Walters concluded that no conflict of interest existed because he determined that it was in the best interests of both the Company and the Lead Director to seek the most favorable terms for the Merger. Further, he observed that Graubard Miller did not have a relationship with any of the Rollover Shareholders (except to the extent the firm advised the Board of Directors) and each of the Rollover Shareholders was represented by separate legal counsel in connection with and prior to the Consortium’s proposal. Mr. Walters reserved the right to retain separate counsel at any time.

On September 30, 2013, the Lead Director emailed Messrs. Gass and Cheliotis, confirming his role as Lead Director and the role of Graubard Miller as his counsel and informing them of his intention to retain a financial advisor. He also suggested a time for the parties to meet in person to discuss background issues and transaction terms, including merger consideration, after retaining and receiving input from the financial advisor.

On October 3, 2013, following discussions with several investment banking firms, the Lead Director retained Cassel Salpeter as his financial advisor in connection with the proposed going private transaction.

On October 4, 2013, the Lead Director and Mr. Lynch met with Messrs. Gass and Cheliotis at HGI’s offices. The Lead Director reviewed the process the Company had conducted over the past year to explore strategic alternatives, including the Company’s negotiations with other parties. He also reviewed the timeline of discussions between the Company and HGI leading up to the presentation of the Consortium’s going private proposal, and reviewed the deterioration of the Company’s financial condition and relationships with key vendors over this period of time. The parties agreed to meet again on October 11, 2013 for further discussions.

On October 8, 2013, all of the members of our Board of Directors held a special meeting to consider a fourth amendment to the Company’s credit agreement proposed by Salus. Mr. Rende and Ms. Frankenthaler were in attendance. The Board reviewed the terms of the amendment proposed by Salus, which would provide an immediate $5,000,000 advance to the Company and up to an additional $6,000,000 advance to become available upon the closing of the proposed going private Merger transaction with the Consortium to be used to cover Merger related expenses, including the merger consideration to the Company’s Public Shareholders. The Lead Director informed our Board of Directors that he had retained Cassel Salpeter and provided the Board of Directors with an update on the October 4, 2013 meeting with Messrs. Gass and Cheliotis.

On October 10, 2013, the Company’s credit agreement was amended to provide an immediate $5,000,000 advance and up to an additional $6,000,000 advance to become available upon the closing of the proposed going private transaction with HGI. The unpaid principal of the $5,000,000 advance currently bears annual interest at the LIBOR rate plus 11.5%, but not less than an annual rate of 14%. In addition, the $1,500,000 credit block which had been removed in July 2013 was reinstated. In connection with the amendment, the Company and the Lenders agreed to an additional origination fee equal to the greater of (i) $110,000, or (ii) 1% of the amount funded by the Lenders in respect of the $11,000,000 in total advances, $50,000 of which was paid in cash on the amendment date and the balance of which will be paid on the closing of the Merger, or earlier under certain circumstances. The Company issued a press release announcing the execution of the credit agreement amendment.

On October 11, 2013, Milbank distributed a first draft of the Merger Agreement to the Lead Director and Graubard Miller. Between October 11 and December 18, 2013, Mr. Cheliotis, the Lead Director, Milbank and Graubard Miller negotiated and revised the draft Merger Agreement.

On October 11, 2013, the Lead Director and Mr. Lynch met with Messrs. Gass and Cheliotis at HGI’s offices to negotiate the per share merger consideration for shares held by the Company’s Public Shareholders. Mr. Rende participated by telephone. The Lead Director rejected the Consortium’s $0.23 per share offer as inadequate. In seeking to obtain the highest per-share consideration for the unaffiliated shareholders, the Lead Director argued that the merger consideration in a going private transaction typically represents a 50% premium to the closing price on the trading day prior to the announcement of a proposal, but in this case, the

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$0.23 per share offer represented only 27% premium. After discussion, Messrs. Gass and Cheliotis asked for the Lead Director’s input on the latest draft of the Merger Agreement before continuing merger consideration discussions.

On October 15, 2013, at the Lead Director’s request, the Lead Director and Messrs. Lynch and Rende met with Mr. Cheliotis at HGI’s offices. The Lead Director stressed the importance of closing the proposed transaction expeditiously given the Company’s deteriorating financial condition. The Lead Director proposed that Mr. Cheliotis consider a tender offer followed by a short form merger as an alternative to the proposed one-step merger transaction. Mr. Cheliotis rejected that proposal, stating that the Consortium preferred the certainty of a one-step merger transaction, primarily because a successful tender would be difficult to achieve given the large number of Public Shareholders who own a small amount of shares. Accordingly, a substantial number of the Company’s Public Shareholders would need to participate for the Consortium to acquire the 90% of shares of Common Stock required for a short form merger. In addition, the Consortium noted the disproportionate costs it would bear in obtaining the tenders of the Public Shareholders. However, he did indicate that he would continue to consider increasing the merger consideration to be paid to the Company’s Public Shareholders while simultaneously negotiating the other Merger Agreement terms.

On October 16, 2013, Mr. Cheliotis communicated to the Lead Director and Mr. Lynch that the Consortium would agree to a 10% increase in the per share merger consideration to be paid to the Company’s Public Shareholders, and would not consider any further increases in merger consideration until after negotiation of the terms of the Merger Agreement and related documents had concluded. The Lead Director believed that a greater premium over the closing price on the trading day prior to the announcement of the proposal was justified and that the Consortium could be persuaded to further increase its offer.

Also on October 16, 2013, all of the members of our Board of Directors held a regularly scheduled meeting. Mr. Rende, Ms. Frankenthaler and Graubard Miller were in attendance. Messrs. Lynch and Rende reviewed the status of outstanding payables and discussed our continued underfinanced position, even with the recent $5,000,000 advance from Salus. They discussed the Company not meeting its sales plan as a result of starting the fiscal year over $2,000,000 below required inventory levels. Mr. Lynch informed our Board of Directors that he had scheduled a meeting with Salus and Messrs. Gass and Cheliotis for October 21, 2013 to provide a business update and to discuss the transaction process, especially in light of the timing and importance of the Company procuring inventory and executing sales during the upcoming holiday season. The Lead Director updated our Board of Directors on his meetings with Messrs. Gass and Cheliotis, and explained that negotiations regarding merger consideration and Merger Agreement terms were in process. Graubard Miller reviewed the substantive provisions being negotiated in connection with the Merger Agreement, including, among other things, the ability for the Lead Director to terminate the agreement upon acceptance of a superior proposal, a “go shop” provision and a “majority of minority” voting requirement. At this meeting, our Board of Directors approved compensating the Lead Director for serving as Lead Director in the amount of $5,000 per month for a minimum of four months commencing as of September 1, 2013. Mr. Lynch also confirmed that to date, there had been no discussions with HGI regarding post-transaction employment arrangements.

On October 18, 2013, Graubard Miller distributed the Lead Director’s initial comments to Milbank’s draft of the Merger Agreement to the Rollover Shareholders and their counsel.

On October 21, 2013, Messrs. Lynch, Gass, Cheliotis and Young met with Mr. Shonak and Andrew Moser, President of Salus, at the Lenders’ offices in Boston. Mr. Rende participated by phone. They discussed the Company’s financial condition and Mr. Lynch provided a general business update.

On October 24, 2013, the Lead Director and Messrs. Lynch and Rende met with Mr. Cheliotis to continue negotiations on the proposed going private transaction. The Lead Director proposed including a “majority of the minority” voting provision in the Merger Agreement. Mr. Cheliotis rejected this primarily because the vote would be difficult to obtain given the large number of Public Shareholders who own a small amount of shares representing a relatively small dollar value, and would entail significant expenditure on the part of the Company to obtain the requisite shareholder participation. Mr. Cheliotis indicated that the Consortium was willing to consider adding other shareholder protections such as a limited “go shop” provision (along with the payment of a termination fee if the Company accepts a superior proposal). After

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discussion, Mr. Cheliotis suggested a meeting including himself, the Lead Director, Messrs. Lynch and Rende and Ms. Frankenthaler, Milbank and Graubard Miller to settle any outstanding Merger Agreement issues and to complete the merger consideration negotiations.

On October 29, 2013, the Lead Director, Mr. Cheliotis, Mr. Lynch, Ms. Frankenthaler, Milbank and Graubard Miller met at Milbank’s offices. Mr. Rende participated by telephone. At the meeting, Mr. Cheliotis proposed the addition of a limited “go shop” provision, indicating that it was in lieu of a further increase in the merger consideration. The Lead Director was interested in a limited “go shop” provision, but rejected the concept of it being in lieu of a further increase in merger consideration, noting that the Company had agreed to move forward without a “majority of minority” vote. Mr. Cheliotis agreed to discuss a further merger consideration increase with the Consortium and to address it with the Lead Director once the negotiation of the other terms of the Merger Agreement had concluded.

On October 30, 2013, the Company opened its electronic data room to Milbank.

On November 6, 2013, Milbank circulated a revised draft of the Merger Agreement. At Graubard Miller’s request, Milbank, Ms. Frankenthaler and Graubard Miller had a call to discuss the termination provisions included in the Merger Agreement as revised.

On November 8, 2013, at the Lead Director’s request, the Lead Director and Mr. Cheliotis held a conference call. They discussed the termination fee payable to the Company and the Company having the ability to seek specific performance in certain circumstances. Mr. Cheliotis suggested that they discuss the termination fee issue, as well as continuing to negotiate merger consideration, at a follow up meeting to be held on November 11, 2013.

Also on November 8, 2013, Milbank circulated drafts of the ancillary transaction agreements, including the Voting Agreement, Rollover Agreement and Series A Preferred Stock Purchase and Sale Agreement. On November 9, 2013, Ms. Frankenthaler and Graubard Miller discussed modifying the Voting Agreement so that it would terminate upon termination of the Merger Agreement. Later the same day, Graubard Miller proposed the revision to Milbank. There were no discussions between the Lead Director and the Consortium Members relating to material terms of the Rollover Agreement and the Series A Preferred Stock Purchase and Sale Agreements, as to which the Company was not a party.

On November 11, 2013, the Lead Director, Messrs. Lynch and Rende and Mr. Cheliotis held a call to follow up on the discussion from the November 8, 2013 call between the Lead Director and Mr. Cheliotis. With respect to the termination fee issue, Mr. Cheliotis agreed to permit the Company to seek specific performance in certain circumstances. He and the Lead Director also resolved an issue relating to the timing of the closing date and continued to negotiate merger consideration.

On November 15, 2013, at the Lead Director’s request, the Lead Director and Mr. Cheliotis had a call to discuss the Voting Agreement. The Lead Director requested that the Voting Agreement be modified to terminate upon termination of the Merger Agreement, and Mr. Cheliotis agreed. The Lead Director also continued to request an increase in the merger consideration to be paid to the Company’s Public Shareholders.

On November 21, 2013, Mr. Cheliotis emailed Mr. Walters the Consortium’s final offer for a transaction with the Company. Under the terms of the final offer, Parent would acquire all of the Company’s outstanding Common Stock of the Public Shareholders in a merger transaction with per share merger consideration of $0.27, which the Lead Director accepted. In accepting the $0.27 per share offer, Mr. Walters considered, among other things, that it represented a premium of approximately 50% to the closing price of the Company’s Common Stock on September 27, 2013, the last trading day before the announcement by the Consortium Members of their initial proposal. He also weighed the $0.27 per share offer against the Company’s current precarious financial position, and the fact that, in a bankruptcy, the holders of the Company’s Common Stock would likely receive no value, and concluded that agreeing to the $0.27 per share offer was a better alternative to the unaffiliated shareholders. The final offer was conditioned on the completion of a review of the change of control provision contained in employment agreements of Messrs. Lynch and Rende and Ms. Frankenthaler, which were identical other than the payment amounts.

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Between November 22, 2013 and December 17, 2013, Graubard Miller, Milbank, Messrs. Lynch and Cheliotis and Ms. Frankenthaler discussed the applicability of the change of control payments to this transaction. They also discussed the change of control payment amount that would be payable to Mr. Lynch ($675,000), Mr. Rende ($387,500) and Ms. Frankenthaler ($337,500) if they were terminated after the consummation of the Merger.

On December 3, 2013, Mr. Cheliotis confirmed with Mr. Lynch that under the existing employment agreements, the change of control payments to Mr. Lynch, Mr. Rende and Ms. Frankenthaler would be payable upon a termination of employment by the Company after the completion of the Merger. He also required that, prior to the execution of the Merger Agreement, he and Mr. Lynch negotiate an amended employment agreement for Mr. Lynch to serve as Chief Executive Officer to take effect following, and only in the event of, the completion of the Merger.

Between December 3, 2013 and December 17, 2013, Messrs. Cheliotis and Lynch negotiated an employment agreement for Mr. Lynch to take effect following, and only in the event of, the completion of the Merger. The employment agreement was executed in connection with the execution of the Merger Agreement. The change of control provision in Mr. Lynch’s existing employment agreement was not included in the new employment agreement.

On December 18, 2013, the Lead Director held a meeting with Graubard Miller, Ms. Frankenthaler and Cassel Salpeter. The Lead Director reviewed the timeline and process and progress of the negotiations with the Consortium, and, among other things, discussed his efforts to obtain the highest merger consideration for the Company’s unaffiliated shareholders. Graubard Miller then reviewed the Lead Director’s fiduciary duties in connection with his consideration of the final offer from the Consortium, and provided a detailed review of the terms of the Merger Agreement, including, among other things, the termination provisions and the nature of the “fiduciary outs” contained in the Merger Agreement.

At the request of the Lead Director, Cassel Salpeter then reviewed and discussed its financial analyses with respect to the Company and the proposed Merger. Thereafter, Cassel Salpeter rendered its oral opinion to the Lead Director (which was confirmed in writing by delivery of Cassel Salpeter’s written opinion dated the same date), as to, as of December 18, 2013, the fairness, from a financial point of view, to the Company’s Public Shareholders of the merger consideration to be received by such holders in the Merger pursuant to the Merger Agreement. The full text of the written opinion of Cassel Salpeter, which describes, among other things, the assumptions, qualifications, limitations and other matters considered in connection with the preparation of its opinion is attached as Annex B.

After discussion, the Lead Director adopted resolutions declaring the Merger Agreement and the transactions contemplated thereby, including the Merger, to be advisable, and fair to and in the best interests of the Company’s unaffiliated shareholders and recommended that our Board of Directors approve the Merger Agreement and the transactions contemplated thereby, including the Merger.

Later that day, a special meeting of the Board of Directors was convened with all directors present. Mr. Rende, Ms. Frankenthaler and Graubard Miller were in attendance. Messrs. Harley and Lynch recused themselves from the deliberations and left the meeting because they have interests in the Merger different from the interests of the Company’s unaffiliated shareholders generally, as described in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 60. The Lead Director first summarized the basic terms of the proposed Merger Agreement and Merger. He then reviewed the history of the Company’s efforts to obtain funding and execute strategic alternatives to address the challenges the Company has faced with its business, including the Consortium’s proposed going private transaction. The Lead Director next reviewed the timeline, process and progress of the negotiations with the Consortium, and, among other things, discussed his efforts to obtain the highest merger consideration for the Company’s unaffiliated shareholders. Graubard Miller then reviewed our Board of Directors’ fiduciary obligations to the Company and its shareholders in connection with its consideration of the proposed going private transaction. He then provided a detailed review of the terms of the Merger Agreement, including, among other things, the termination provisions and the nature of the “fiduciary outs” contained in the draft Merger Agreement. Our Board of Directors considered the positive and negative factors and risks in connection with the proposed Merger transaction as discussed in “Special Factors — Reasons for the Merger;

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Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger” beginning on page 35. Our Board of Directors, on the basis of the Lead Director’s recommendation, with the unanimous vote of all present, adopted resolutions: declaring the Merger Agreement and the transactions contemplated thereby, including the Merger, to be advisable, and fair to and in the best interests of the Company’s unaffiliated shareholders; approving and adopting the Merger Agreement; and authorizing certain Company officers to take necessary actions to effect the transactions contemplated by the Merger Agreement, including the preparation of this proxy statement, solicitation of shareholder approval of the Merger Agreement, holding a special meeting of shareholders for such purpose, and preparing and filing documents required by applicable law.

On December 18, 2013, the Company executed the Merger Agreement with Parent and Merger Sub and the Company publicly announced the signing of the Merger Agreement on December 19, 2013.

The Merger Agreement generally provides that we may not solicit alternative Takeover Proposals (as defined in the Merger Agreement and described in “The Merger Agreement — Other Covenants and Agreements — Limited Solicitation” on page 80), but we may engage in a limited solicitation of 12 designated parties. Ten of the 12 designated parties are companies the Lead Director believed to have expressed a credible interest in a strategic transaction with the Company during the marketing efforts conducted by Allen & Co. between June 2012 and March 2013, including all of the Proposing Parties. Another designated party is a brand company new to our industry that communicated with the Company for business purposes and which the Lead Director believed to be a prospect for an alternative transaction. Another designated party is one of the Company’s licensing partners which had conversations with the Company concerning a possible strategic transaction prior to Allen & Co.’s marketing efforts. All 12 of the designated parties were contacted to determine whether they would be interested in a transaction with us that would be superior to the transactions contemplated by the Merger Agreement, including the Consortium’s agreement to pay the unaffiliated shareholders $0.27 per share. Five of the parties, including the Specialty Retailer and the PE Firm, expressly declined to make an offer to acquire the Company. Three of the parties did not respond to communications from the Lead Director or Mr. Lynch. The Lead Director received inquiries from four of the parties, including the Foreign Strategic Party and the Second PE Firm, requesting more information. We notified Parent of the inquiries as required under the Merger Agreement. We entered into non-disclosure agreements with all four of these parties and gave each of them access to the Company’s electronic data room and the opportunity to communicate with management. All four of these parties expressly declined to make an offer to acquire the Company.

Between January 29, 2014 and February 28, 2014, Messrs. Lynch and Rende provided updates to Messrs. Falcone, Gass and Cheliotis and Mr. George Nicholson of HGI and separately to Salus through Mr. Shonak and Andrew Moser, President of Salus, regarding the Company’s financial condition. Messrs. Lynch and Rende discussed with them possible ways to alleviate the Company’s limited liquidity and to obtain the funding needed to pay vendors to assure goods are shipped. In the course of these discussions, Mr. Lynch proposed to Mr. Moser that Salus lift the $1,300,000 availability block under the credit agreement and Messrs. Cheliotis and Nicholson suggested to Messrs. Lynch and Rende the possibility of HGI purchasing a portion of the Company’s outstanding payables from certain of the Company’s vendors.

On March 1, 2014, Salus’ counsel emailed Graubard Miller, Ms. Frankenthaler and Mr. Rende a draft of a proposed Fifth Amendment to the Company’s credit agreement (the “Fifth Amendment”). In addition to requiring that the Company hire a consultant to assist with developing a vendor payment plan, the draft contemplated extending the repayment date of the $5,000,000 term loan advance under the credit agreement from April 10, 2014 to May 31, 2014 and that the Company raise at least $5,000,000 of capital. It also contemplated a one-time payment of $130,000 to Salus and an increase in its monthly monitoring fee from $12,500 to $20,000.

Between March 1, 2014 and March 7, 2014, Messrs. Lynch and Rende, Graubard Miller, Salus and Salus’ counsel negotiated the terms of the Fifth Amendment. Following these negotiations, the Fifth Amendment was revised to provide the Company with the option to either raise at least $5,000,000 of capital or to have another party purchase at least $5,000,000 of its outstanding vendor payables.

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Between March 6, 2014 and March 19, 2014, Messrs. Lynch and Rende of the Company and Messrs. Cheliotis, Young and Nicholson of HGI negotiated the structure of the vendor payables purchases. They reached an agreement in principle for HGI to purchase at least $5,000,000 of the Company’s outstanding payables from its five largest vendors and to defer the Company’s payment of that amount for 90 days.

On March 25, 2014, the Lead Director held a meeting with Graubard Miller and Ms. Frankenthaler. The Lead Director reviewed the transactions contemplated by the Fifth Amendment, including the prospective vendor payables purchases to be made by HGI. He considered that the Company was significantly past due on payables, and that pending orders for new inventory may not be fulfilled. He also determined that the Fifth Amendment could provide the Company with an arrangement that was necessary for it to continue to obtain inventory to operate its business. He concluded that the transactions contemplated by the Fifth Amendment were in the best interests of the unaffiliated shareholders and determined to recommend to the Board of Directors that it approve the Fifth Amendment and related agreements and the contemplated transactions.

Following the Lead Director meeting, a special meeting of the Board of Directors was convened with all directors present. Mr. Rende, Ms. Frankenthaler and Erik Frederick, the Company’s Senior Vice President of Finance, were in attendance. Messrs. Harley and Lynch recused themselves from the deliberations and left the meeting. The Board of Directors (other than Messrs. Harley and Lynch), on the basis of the Lead Director’s recommendation, unanimously approved the Fifth Amendment and related agreements and the contemplated transactions.

On March 26, 2014, the Lenders and the Borrowers entered into the Fifth Amendment. Pursuant to the Fifth Amendment, the Lenders agreed to extend the repayment date of the $5,000,000 term loan advance from April 10, 2014 to June 15, 2014. The Lenders also agreed to suspend the requirement that the Borrowers maintain a minimum of $1,300,000 of availability under the revolving line of credit until June 16, 2014, at which time the Borrowers will be required to maintain a minimum of $1,500,000 of availability. The Fifth Amendment also required that, by no later than March 31, 2014, the Borrowers would either have (i) received cash proceeds of a capital infusion in an amount not less than $5,000,000, in the form of equity or subordinated debt, on terms reasonably satisfactory to the Lenders, which amount will be used entirely to reduce the outstanding balance under the credit agreement, or (ii) made arrangements reasonably satisfactory to the Lenders to defer payment of at least $5,000,000 of the Company’s outstanding vendor payables.

On March 27, 2014, pursuant to arrangements deemed satisfactory by the Lenders, HGI, through its subsidiary HGI Funding, purchased an aggregate of approximately $5,238,900 of the Company’s outstanding payables from the Company’s five largest vendors and agreed to defer the payment of that amount for 90 days or until June 28, 2014. The Fifth Amendment also required the Company to engage a consultant to assist in negotiating with vendors and developing a vendor payment plan, and to present a proposed plan to the Lenders by April 4, 2014. The Company satisfied both of these requirements. Concurrently with the execution of the Fifth Amendment, the Borrowers paid to the Lenders a one-time $130,000 cash fee in consideration for the Lenders’ agreement to enter into the Fifth Amendment. In connection with the Fifth Amendment, the Borrowers and the Lenders also entered into an amended and restated fee letter which provides for an increase in the monthly monitoring fees from $12,500 to $20,000.

On April 14, 2014, we entered into an amendment to the Merger Agreement with Parent and Merger Sub, pursuant to which the parties agreed to extend the termination date under the Merger Agreement from April 30, 2014 to June 15, 2014.

Reasons for the Merger; Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger

The Lead Director

As described above, the Board of Directors delegated to the Lead Director the exclusive authority to review, evaluate, reject, negotiate and, if appropriate, make a recommendation to the Board of Directors regarding the proposal from the Consortium Members or any alternative thereto. The Lead Director evaluated, with the assistance of his legal and financial advisors, the Merger Agreement and the Merger and, on

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December 18, 2013, determined that the transactions contemplated by the Merger Agreement and the Ancillary Agreements, including the Merger, are advisable, and fair to, and in the best interests of, the unaffiliated shareholders of the Company.

The Lead Director engaged his own financial advisor and received advice throughout the negotiations from outside counsel to the Company. Since the Lead Director is an independent non-employee director, the Lead Director believed that he could effectively represent the unaffiliated shareholders of the Company in negotiating the terms of the Merger and did not believe it necessary to retain a separate unaffiliated representative to act solely on behalf of unaffiliated shareholders of the Company for the purposes of negotiating the Merger.

The Lead Director also recommended to the Board of Directors that the Board:

In the course of reaching the determinations and decisions, and making the recommendation, described above, the Lead Director considered the following positive factors relating to the Merger Agreement, the Merger and the other transactions contemplated thereby, each of which the Lead Director believed supported his decision:

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In the course of reaching the determinations and decisions, and making the recommendation described above, the Lead Director also considered the following factors relating to the procedural safeguards that the Lead Director believed were and are present to ensure the fairness of the Merger and to permit the Lead Director to represent the unaffiliated shareholders of the Company, each of which safeguards the Lead Director believed supported his decision and provided assurance of the fairness of the Merger to the unaffiliated shareholders of the Company:

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In the course of reaching the determinations and decisions, and making the recommendation described above, the Lead Director considered the following risks and potentially negative factors relating to the Merger Agreement, the Merger and the other transactions contemplated thereby:

The Lead Director did not conduct a going concern valuation, because he believed the other factors he considered, as described above, addressed the fairness of the Merger.

In the course of reaching his decision to recommend to the Board of Directors that they approve the Merger Agreement, the Lead Director considered the liquidation value of the Company in the event the Merger was not consummated, based on the going concern opinion provided by the Company’s independent auditors in their audit report included in the Company’s Annual Report on Form 10-K for the fiscal year

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ended July 27, 2013. In doing so, the Lead Director relied on the estimate by the Company’s management that the liquidation value would be negative, after payment of anticipated liquidation expenses and repayment of its secured debt.

Since the Company has not received any firm or economically viable offers concerning a potential acquisition of the Company or similar fundamental transaction during the past two years from any party (other than the offer from the Consortium Members that led to the Merger Agreement), as described in “Special Factors — Background of the Merger” beginning on page 18, the consideration of any alternative or recent firm or economically viable offers was not a factor available for the Lead Director to consider. However, the Lead Director did consider that no firm or economically viable offers resulted from the marketing efforts in which the Company engaged during 2012 and 2013 with the assistance of a nationally recognized investment banking firm.

The Lead Director also considered the inclusion in the Merger Agreement of a requirement that at least a majority of the unaffiliated shareholders approve the Merger and adopt the Merger Agreement, as described above in “Special Factors — Background to the Merger” beginning on page 18. However, the Consortium Members rejected this provision. The Lead Director determined that the other factors described above in favor of the Merger collectively outweighed the omission of this provision.

The Lead Director also considered that, after the formation of the Consortium, the Rollover Shareholders expressed an unwillingness to sell their stake in the Company to a third party, which likely would have a chilling effect on proposals for alternative transactions. Notwithstanding this statement, the Lead Director believed that, if the terms of an alternative transaction were sufficiently favorable, some or all of the Rollover Shareholders might in fact participate in such an alternative transaction. Accordingly, the Company negotiated for the right under the Merger Agreement to conduct a limited solicitation, to respond to unsolicited inquiries regarding acquisition proposals under certain circumstances and to terminate the Merger Agreement and the Voting Agreement to accept a Superior Proposal.

The foregoing discussion of the information and factors considered by the Lead Director includes the material factors considered by the Lead Director. In view of the variety of factors considered in connection with his evaluation of the Merger, the Lead Director did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination and recommendation. The Lead Director recommended the Merger Agreement and the Merger based upon the totality of the information he considered.

The Board of Directors

The Board of Directors consists of five directors, one of whom, Mr. Lynch, is an employee of the Company, and two of whom, Messrs. Harley and Lynch, have interests in the Merger different from the interests of the unaffiliated shareholders of the Company generally. The Board of Directors delegated to the Lead Director the exclusive authority to review, evaluate, reject, negotiate and, if appropriate, make a recommendation to the Board of Directors regarding the proposal from the Consortium Members or any alternative thereto. On December 18, 2013, on the basis of the Lead Director’s recommendation and the other factors described below, the Board of Directors unanimously (with Messrs. Harley and Lynch recusing themselves from the deliberations because they have interests in the Merger different from the interests of the unaffiliated shareholders of the Company generally, as described in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger — Interests of Executive Officers” beginning on page 61):

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In determining that the Merger Agreement is advisable, and fair to and in the best interests of the unaffiliated shareholders of the Company, and approving the Merger Agreement, the Merger and the other transactions contemplated thereby, and recommending that the Company’s shareholders vote for the approval of the Merger and the adoption of the Merger Agreement, the Board of Directors (excluding Messrs. Harley and Lynch) expressly and unanimously adopted the analysis of the Lead Director, which is discussed above. Messrs. Harley and Lynch recused themselves from all deliberations concerning the Merger Agreement, the Merger and the other transactions contemplated thereby because they have interests in the Merger different from the interests of the unaffiliated shareholders of the Company generally, as described in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger — Interests of Executive Officers” beginning on page 61. Accordingly, the members of the Board of Directors who deliberated on the Merger Agreement, the Merger and the other transactions contemplated thereby were the Lead Director and Messrs. John Eisel and Peter Cole.

The foregoing discussion of the information and factors considered by the Board of Directors includes the material factors they considered. In view of the variety of factors considered in connection with its evaluation of the Merger, the Board of Directors did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination and recommendation. In addition, individual directors may have given different weights to different factors. The Board of Directors approved and recommends the Merger Agreement and the Merger based upon the totality of the information presented to and considered by it.

Opinion of the Lead Director’s Financial Advisor

On December 18, 2013, Cassel Salpeter rendered its oral opinion to the Lead Director (which was confirmed in writing by delivery of Cassel Salpeter’s written opinion dated the same date), as to, as of December 18, 2013, the fairness, from a financial point of view, to the Public Shareholders of the merger consideration to be received by such holders in the Merger pursuant to the Merger Agreement. The summary of the opinion in this proxy statement is qualified in its entirety by reference to the full text of the written opinion, which is included as Annex B to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Cassel Salpeter in preparing its opinion.

The opinion was provided for the use and benefit of the Lead Director (in his capacity as such) and with the consent of the Lead Director, the members of the Board of Directors (in their capacity as such) in connection with the Lead Director’s and, as applicable, the Board of Directors’ evaluation of the Merger. In addition, Cassel Salpeter consented to the inclusion of the opinion and the summary of the opinion set forth below in this proxy statement. Cassel Salpeter’s opinion may not be used for any other purpose without Cassel Salpeter’s prior written consent. Neither the opinion nor the summary of the opinion and related analyses set forth in this proxy statement is intended to and they do not constitute advice or a recommendation to any of the shareholders or any other security holders as to how such holder should vote or act with respect to any matter relating to the Merger or otherwise. Cassel Salpeter’s opinion should not be construed as creating any fiduciary duty on Cassel Salpeter’s part to the Company or any other party to the Merger Agreement, any security holder of the Company or such other party, any creditor of the Company or such other party, or any other person. Cassel Salpeter’s opinion was just one of the several factors the Lead Director took into account in making his determination to recommend that the Company board approve the Merger, including those described elsewhere in this proxy statement.

Cassel Salpeter’s opinion only addressed whether, as of the date of the opinion, the merger consideration to be received by the Public Shareholders in the Merger pursuant to the Merger Agreement was fair, from a

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financial point of view, to such holders and does not address any other terms, aspects, or implications of the Merger or the Merger Agreement, the Rollover Agreement, the Voting Agreement or any arrangements, understandings, agreements, or documents related to the Merger including, without limitation (i) any term or aspect of the Merger that is not susceptible to financial analyses, (ii) the fairness of any portion or aspect of the Merger, or all or any portion of the consideration, to any security holders of the Company or any creditors or other constituencies of the Company, other than the Public Shareholders, or (iii) the fairness of the Merger or all or any portion of the merger consideration, to any other security holders of the Company or any other person or any creditors or other constituencies of the Company or any other person, nor the fairness of the amount or nature, or any other aspect, of any compensation or consideration payable to or received by any officers, directors, or employees of any parties to the Merger, or any class of such persons, relative to the merger consideration to be received by the Public Shareholders pursuant to the Merger Agreement, or otherwise. Cassel Salpeter is not expressing any opinion as to the prices at which shares of the Common Stock, the Company’s Series A Convertible Preferred Stock or Company’s Series B Convertible Preferred Stock may trade, be purchased or sold at any time.

Cassel Salpeter’s opinion did not address the relative merits of the Merger as compared to any alternative transaction or business strategy that might exist for the Company, or the merits of the underlying decision by the Lead Director, the Board or the Company to engage in or consummate the Merger. The financial and other terms of the Merger were determined pursuant to negotiations between the parties to the Merger Agreement and were not determined by or pursuant to any recommendation from Cassel Salpeter. In addition, Cassel Salpeter was not authorized to, and did not, solicit indications of interest from third parties regarding a potential transaction involving the Company.

Cassel Salpeter’s analysis and opinion were necessarily based upon market, economic, and other conditions as they existed on, and could be evaluated as of, the date of the opinion. Accordingly, although subsequent developments could arise that would otherwise affect its opinion, Cassel Salpeter did not assume any obligation to update, review, or reaffirm the opinion to the Lead Director or any other person or otherwise to comment on or consider events occurring or coming to its attention after the date of the opinion.

In arriving at its opinion, Cassel Salpeter made such reviews, analyses, and inquiries as Cassel Salpeter deemed necessary and appropriate under the circumstances. Among other things, Cassel Salpeter:

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In arriving at its opinion, Cassel Salpeter, with the Lead Director’s consent, relied upon and assumed, without independently verifying, the accuracy and completeness of all of the financial and other information that was supplied or otherwise made available to it or available from public sources, and Cassel Salpeter further relied upon the assurances of the Company’s management that they were not aware of any facts or circumstances that would have made any such information inaccurate or misleading. Cassel Salpeter is not a legal, tax, environmental, or regulatory advisory firm and Cassel Salpeter did not express any views or opinions as to any legal, tax, environmental, or regulatory matters relating to the Company, the Merger, or otherwise. Cassel Salpeter understood and assumed that the Company had obtained or would obtain such advice as it deemed necessary or appropriate from qualified legal, tax, environmental, regulatory, and other professionals. The Lead Director also advised Cassel Salpeter that the Company does not prepare, and Cassel Salpeter did not have access to, long-term forecasts with respect to the future financial performance of the Company, and the Lead Director directed Cassel Salpeter to use and rely upon, for purposes of its analyses and opinion, the Company Projections, which with the Lead Director’s consent Cassel Salpeter assumed were reasonably prepared on a basis reflecting the best currently available estimates and judgments of management of the Company with respect to the future financial performance of the Company, and that the Company Projections provided a reasonable basis upon which to analyze and evaluate the Company and form an opinion. Cassel Salpeter expressed no view with respect to the Company Projections or the assumptions on which they were based. Cassel Salpeter did not evaluate the solvency of the Company or any other party to the Merger, the fair value of the Company or any of its assets or liabilities, or whether the Company or any other party to the Merger is paying or receiving reasonably equivalent value in the Merger under any applicable foreign, state, or federal laws relating to bankruptcy, insolvency, fraudulent transfer, or similar matters, nor did Cassel Salpeter evaluate, in any way, the ability of the Company or any other party to the Merger to pay its obligations when they come due. Cassel Salpeter did not physically inspect the Company’s properties or facilities and did not make or obtain any evaluations or appraisals of the Company’s assets or liabilities (including any contingent, derivative, or off-balance-sheet assets and liabilities). Cassel Salpeter did not attempt to confirm whether the Company has good title to its assets. Cassel Salpeter’s role in reviewing any information was limited solely to performing such reviews as Cassel Salpeter deemed necessary to support its own advice and analysis and was not on behalf of the Lead Director, the Board of Directors, the Company or any other party.

Cassel Salpeter assumed, with the Lead Director’s consent, that the Merger would be consummated in a manner that complies in all respects with applicable foreign, federal, state, and local laws, rules, and regulations and that, in the course of obtaining any regulatory or third party consents, approvals, or agreements in the Merger, no delay, limitation, restriction, or condition would be imposed that would have an adverse effect on the Company or the Merger. Cassel Salpeter also assumed, with the Lead Director’s consent, that the final executed form of the Merger Agreement would not differ in any material respect from the draft Cassel Salpeter reviewed and that the Merger would be consummated on the terms set forth in the Merger Agreement, without waiver, modification, or amendment of any term, condition, or agreement thereof that was material to its analyses or opinion. Cassel Salpeter also assumed that the representations and warranties of the parties to the Merger Agreement contained therein were true and correct and that each such party would perform all of the covenants and agreements to be performed by it under the Merger Agreement. Cassel Salpeter offered no opinion as to the contractual terms of the Merger Agreement or the likelihood that the conditions to the consummation of the Merger set forth in the Merger Agreement would be satisfied.

Management of the Company advised Cassel Salpeter that (i) the Company had been and was currently experiencing significant liquidity issues, (ii) the Company only had a limited amount of availability under its line of credit for operations, and (iii) if the Company’s merchandise vendors did not continue to ship new product without being paid in full for their past due invoices, the Company would not have sufficient capital resources to fund its planned activities beyond December 31, 2013. Management of the Company also advised Cassel Salpeter that the Company would require substantial additional capital to operate on a standalone basis

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in accordance with the Company business plan underlying the Company Projections and the Company had not been able to, and did not expect to be able to, identify or otherwise access any sources of equity or debt financing for the future operations of the Company prior to the date that it would exhaust its remaining cash resources, if ever. Management of the Company advised Cassel Salpeter that the inability of the Company to continue as a going concern would likely result in a voluntary or involuntary bankruptcy, restructuring or liquidation of the Company in which the Company could receive less than the value at which its assets were carried on the Company’s consolidated financial statements, and holders of Company Common Stock would likely receive little or no value and would likely lose all or substantially all of their investment in the Company.

In connection with preparing its opinion, Cassel Salpeter performed a variety of financial analyses. The following is a summary of the material financial analyses performed by Cassel Salpeter in connection with the preparation of its opinion. It is not a complete description of all analyses underlying such opinion. The preparation of an opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. As a consequence, neither Cassel Salpeter’s opinion nor the respective analyses underlying its opinion is readily susceptible to partial analysis or summary description. In arriving at its opinion, Cassel Salpeter assessed as a whole the results of all analyses undertaken by it with respect to the opinion. While it took into account the results of each analysis in reaching its overall conclusions, Cassel Salpeter did not make separate or quantifiable judgments regarding individual analyses and did not draw, in isolation, conclusions from or with regard to any individual analysis or factor. Therefore, Cassel Salpeter believes that the analyses underlying the opinion must be considered as a whole and that selecting portions of its analyses or the factors it considered, without considering all analyses and factors underlying the opinion collectively, could create a misleading or incomplete view of the analyses performed by Cassel Salpeter in preparing the opinion.

The implied multiple ranges and implied value reference ranges indicated by Cassel Salpeter’s analyses are not necessarily indicative of actual values nor predictive of future results, which may be significantly more or less favorable than those suggested by such analyses. Much of the information used in, and accordingly the results of, Cassel Salpeter’s analyses are inherently subject to substantial uncertainty.

The following summary of the material financial analyses performed by Cassel Salpeter in connection with the preparation of its opinion includes information presented in tabular format. The tables alone do not constitute a complete description of these analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses Cassel Salpeter performed.

Unless the context indicates otherwise, share prices for the selected companies used in the selected companies analysis described below were as of December 17, 2013, and estimates of financial performance for the Company were based on the Company Projections. Estimates of financial performance for the selected companies listed below for the years ending December 31, 2013 and 2014 were based on publicly available research analyst estimates for those companies.

Selected Companies Analysis

Cassel Salpeter considered certain financial data for the Company and selected companies with publicly traded equity securities Cassel Salpeter deemed relevant. The selected companies were selected because they were deemed to be similar to the Company in one or more respects including, the nature of their business, size and financial performance. The selected companies with publicly traded equity securities were:

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The financial data reviewed included:

Cassel Salpeter calculated the following multiples with respect to the selected companies:

Total Invested Capital Multiple of

High

Mean

Median

Low

LTM Revenue

0.59x

0.33x

0.27x

0.15x

CY 2013 P Revenue

0.59x

0.35x

0.28x

0.16x

FY 2014 P Revenue

0.56x

0.31x

0.27x

0.16x

FY 2014 P EBITDA

12.5x

7.1x

6.7x

3.3x

Taking into account the results of the selected companies analysis and its experience as investment bankers and professional judgment, Cassel Salpeter applied multiple ranges to corresponding financial data for the Company. Cassel Salpeter applied multiples of 0.30x to 0.35x to the Company’s LTM Revenue, 0.30x to 0.35x to the Company’s CY 2013 P Revenue, 0.25x to 0.30x to the Company’s FY 2014 P Revenue, and 6.5x to 7.5x to the Company’s FY 2014 P EBITDA. The selected companies analysis indicated an aggregate implied enterprise value reference range for the Company of $29,000,000 to $34,000,000 as compared to the implied enterprise value of the Company based on the merger consideration of approximately $55,106,000.

None of the selected companies have characteristics identical to the Company. An analysis of selected publicly traded companies is not mathematical; rather it involves complex consideration and judgments concerning differences in financial and operating characteristics of the selected companies and other factors that could affect the public trading values of the companies reviewed.

Selected Transactions Analysis

Cassel Salpeter considered certain financial data for the Company and the financial terms of the following business transactions Cassel Salpeter deemed relevant. The selected transactions were selected because they involved acquisition targets that were deemed to be similar to the Company in one or more respects including, the nature of their business, size and financial performance. The selected transactions were:

Target		Acquirer
Lucky Brand Dungarees, Inc.		Leonard Green & Partners, L.P.
Maidenform Brands, Inc.		Hanesbrands Inc.
True Religion Apparel Inc.		TRLG Holdings, Inc.
Intermix, Inc.		The Gap, Inc.
Warnaco Group, Inc.		PVH Corp.
Charming Shops Inc.		Ascena Retail Group Inc.
Kenneth Cole Productions Inc.		Kenneth D. Cole and Family of Kenneth D. Cole
Avenue Stores		Versa Capital Management, Inc.
Boston Proper, Inc.		Chico’s FAS, Inc.
Urban Brands, Inc.		GB Merchant Partners, LLC
VOLCOM, Inc.		PPR S.A.

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The financial data reviewed included the enterprise value (calculated based on the consideration paid in the relevant transaction) as a multiple of LTM Revenue.

Enterprise Value as a Multiple of

High

Mean

Median

Low

LTM Revenue

1.86x

0.87x

1.00x

0.09

In addition, Cassel Salpeter noted that the mean enterprise value as a multiple of LTM Revenue was 0.27x for those selected transactions involving acquisition targets that had an EBITDA margin of less than 5% or that were acquired in connection with a bankruptcy.

Taking into account the results of the selected transactions analysis and its experience as investment bankers and professional judgment, Cassel Salpeter applied multiple ranges to corresponding financial data for the Company. Cassel Salpeter applied multiples of 0.30x to 0.40x to the Company’s LTM Revenue. The selected transactions analysis indicated an aggregate implied enterprise value reference range for the Company of $25,000,000 to $33,300,000 as compared to the implied enterprise value of the Company based on the merger consideration of approximately $55,106,000.

None of the target companies in the selected transactions have characteristics identical to the Company. Accordingly, an analysis of selected business combinations is not mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics of the target companies in the selected transactions and other factors that could affect the respective acquisition values of the transactions reviewed.

Other Matters Relating to Cassel Salpeter’s Opinion

As part of its investment banking business, Cassel Salpeter regularly is engaged in the evaluation of businesses and their securities in connection with mergers, acquisitions, corporate restructurings, private placements and other purposes. Cassel Salpeter is a recognized investment banking firm that has substantial experience in providing financial advice in connection with mergers, acquisitions, sales of companies, businesses and other assets and other transactions.

Cassel Salpeter received a fee of $75,000 for rendering its opinion, no portion of which was contingent upon the completion of the Merger. In addition, the Company agreed to reimburse Cassel Salpeter for certain expenses incurred by it in connection with its engagement and to indemnify Cassel Salpeter and its related parties for certain liabilities that may arise out of its engagement or the rendering of its opinion. There has been no other material relationship in the last two years, and no other material relationship is mutually contemplated, between Cassel Salpeter, its affiliates or representatives and the Company or its affiliates.

Cassel Salpeter is a recognized investment banking firm which is regularly engaged in providing financial advisory services in connection with mergers and acquisitions. The Lead Director selected Cassel Salpeter to act as his financial advisor in connection with the Merger on the basis of Cassel Salpeter’s experience in similar transactions and its reputation in the investment community. The Lead Director also believed Cassel Salpeter’s fee was proportionate to the transaction size. In selecting a financial advisor in connection with the Merger, the Lead Director approached three investment banking firms other than Cassel Salpeter, including Allen & Co. Allen & Co. declined to be considered because the minimum fee it would accept was disproportionate to the size of the transaction based on the Consortium’s initial offer of $0.23 per share. The second firm declined because of its limited experience in rendering fairness opinions in merger and acquisition transactions. The Lead Director selected Cassel Salpeter over the third firm because Cassel Salpeter’s fee was more commensurate with the transaction size.

In accordance with Cassel Salpeter’s policies and procedures, a fairness committee was not required to, and did not, approve the issuance of the opinion.

Company Projections

As part of its financial planning process, the Company from time to time prepares financial projections for upcoming fiscal years. In connection with the consideration of the Consortium Members’ proposal, the Lead Director and Cassel Salpeter, the Lead Director’s financial advisor, were provided on October 4, 2013 with previously prepared Company Projections through fiscal year 2014. The Company does not, as a matter of course, publicly disclose projected financial information.

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We have included these projections solely for the purpose of giving our shareholders access to certain nonpublic information considered by the Lead Director and Cassel Salpeter in evaluating the Merger. The projections are, in general, prepared solely for internal use in assessing strategic direction, related capital and resource needs and allocations and other management decisions. Projections of this type are based on estimates and assumptions that, in many cases, reflect subjective judgment, and which are subject to significant uncertainties and contingencies, including apparel industry performance, general business, economic, regulatory, market and financial conditions, as well as changes to the business, financial condition and results of operations of the Company. These factors, which may prevent the financial projections or underlying assumptions from being realized, are difficult to predict, and many of them are beyond the Company’s control. Therefore, the projections are forward-looking statements and should be read with caution. See “Cautionary Statement Concerning Forward-Looking Information” beginning on page 68.

When preparing projections the Company makes assumptions based on its past performance, its current financial condition and general economic conditions. When preparing the budget for fiscal year 2014, management assumed, among other things:

There can be no assurance that the underlying assumptions (including those set forth above) will prove to be accurate, that the projected results will be realized or that actual results will not be significantly different than projected. For example, from May 2013 through January 2014, while the Company had obtained an additional $10,000,000 in funding, through increases under the term loan portion of its credit facility, and had been reducing its non-core product inventory, it continued to experience liquidity issues that adversely affected inventory levels of its core product categories (bras, lingerie and corsets) and marketing efforts.

These projections were prepared solely for internal use and not for publication or with a view toward complying with the published guidelines of the SEC regarding projections or with guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Our independent registered public accounting firm has not examined, compiled or otherwise applied procedures to the financial projections presented herein and, accordingly, has not, and does not, express an opinion or any other form of assurance with respect to them. The Merger Agreement includes no representations by the Company or its management as to this projected financial information. In light of the uncertainties inherent in projections of this type, neither the Company nor any other person has expressed any opinion or assurance to shareholders on this information or its achievability, and the inclusion of this information should not be regarded as an indication that the Company, the Lead Director, the Rollover Shareholders, any of their representatives or anyone who received this information then considered, or now considers, it to be necessarily predictive of actual future events.

The Company Projections do not reflect any impact of the Merger, nor do they take into account the effect of any failure of the Merger to occur. None of the Company, the Lead Director, the Rollover Shareholders or any of their representatives intends to update or revise the summary projected financial information set forth below to reflect circumstances existing after the date when made, except as may be required by applicable securities laws.

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($ in thousands)		FY 2014 (Projected)				FY 2013 (Actual)				FY 2012 (Actual)				FY 2011 (Actual)
Total revenues		$	126,799			$	86,507			$	111,406			$	119,615
Total cost of goods			76,600				61,328				69,782				76,647
Gross margin			50,199				25,179				41,624				42,968
Total selling, general and administrative expenses			46,515				42,968				45,757				49,771
Impairment of long-lived assets and lease abandonment			—				2,939				—				1,910
Interest expense, net			2,047				2,137				2,224				1,483
Fair value gain on warrant			—				(381	)			—				—
Net income/(loss) before tax			1,636				(22,484	)			(6,357	)			(10,196	)
Income tax			100				38				75				134
Income/(loss) before discontinued operations			1,536				(22,522	)			(6,432	)			(10,330	)
Loss from discontinued operations			—				—				—				(1,725	)
Net income/(loss)			1,536				(22,522	)			(6,432	)			(12,055	)
Adjusted EBITDA			5,142				(16,558	)			(1,120	)			(2,858	)

The above projections set forth, among other measures, the Company’s projected adjusted EBITDA for fiscal year 2014 that was made available to the Lead Director and Cassel Salpeter. These measures were thought to be useful for evaluating, on a prospective basis, the Company’s potential operating performance. The Company defines adjusted EBITDA as net income from continuing operations before preferred stock dividends in accordance with generally accepted accounting principles, or “GAAP,” adjusted to exclude interest, taxes, depreciation and amortization, stock compensation, changes in the fair value of the warrant liability and impairment of long lived-assets.

Because adjusted EBITDA as calculated by the Company is a non-GAAP financial measure, this measure should not be considered in isolation from, nor as a substitute for, net income as calculated in accordance with GAAP. Adjusted EBITDA, as calculated by the Company, may not be comparable to similarly titled measures employed by other companies. In addition, this measure does not necessarily represent funds available for discretionary use and is not necessarily a measure of the Company’s ability to fund the Company’s cash needs. Adjusted EBITDA excludes certain financial information compared to net income in accordance with GAAP, the most directly comparable GAAP financial measure. Shareholders should consider the types of events and transactions that are excluded when reviewing this financial information.

As required by the SEC in accordance with Regulation G, the tables below provide a reconciliation of net income (as calculated in accordance with GAAP) to EBITDA.

($ in thousands)		FY 2014 (Projected)				FY 2013 (Actual)				FY 2012 (Actual)				FY 2011 (Actual)
Income/(loss) before discontinued operations		$	1,536			$	(22,522	)		$	(6,432	)		$	(10,330	)
Plus:
Interest			2,047				2,137				2,224				1,483
Tax			100				38				75				134
Depreciation and amortization			1,414				1,672				2,460				3,122
Stock compensation			45				314				553				823
Impairment of long-lived assets			—				2,184				—				1,910
Fair value gain on warrant			—				(381	)			—				—
Adjusted EBITDA			5,142				(16,558	)			(1,120	)			(2,858	)

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Purpose and Reasons of the Rollover Shareholders, Parent and Merger Sub for the Merger

Under a possible interpretation of the SEC rules governing “going-private” transactions, each of the Rollover Shareholders, Parent and Merger Sub may be deemed to be affiliates of the Company and, therefore, required to express their purpose and reasons for the Merger to the unaffiliated shareholders of the Company. The Rollover Shareholders, Parent, and Merger Sub are making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

For the Rollover Shareholders, Parent and Merger Sub, the purpose of the Merger is to enable Parent to acquire control of the Company, in a transaction in which the unaffiliated shareholders of the Company will be cashed out for $0.27 per share of Common Stock. For Merger Sub, the purpose of the Merger is to effectuate the transactions contemplated by the Merger Agreement. Following the Merger, Parent and the Rollover Shareholders will bear the rewards and risks of the ownership of the Company and the Company’s Common Stock will cease to be publicly traded.

The Merger provides an opportunity for the Company’s unaffiliated shareholders to immediately receive, in cash, a substantial premium for their shares based upon the closing price of the Company’s Common Stock on September 27, 2013, the last trading date before the Consortium’s offer to acquire all of the outstanding shares of Common Stock of the Company was announced. In addition, the Rollover Shareholders, Parent and Merger Sub believe the Merger is the best way to address the Company’s liquidity needs, as the Company (a) requires substantial additional capital to operate on a standalone basis in accordance with the Company’s business plan as informed by management and (b) has not been able to, and does not expect to be able to, identify or otherwise access any sources of equity or debt financing for the future operations of the Company prior to the date that it would exhaust its remaining cash resources, if ever.

The Merger will also allow the Rollover Shareholders to maintain a significant portion of their investment in the Company through their obligations to make an equity investment in Parent via the rollover of their existing holdings of Common Stock and Preferred Stock as described in “Special Factors —  Financing of the Merger — Rollover Financing” beginning on page 58.

As stated in the Consortium’s initial proposal letter for the Merger submitted to the Company, the Consortium decided to pursue the Merger because they believe that the Company can be operated more effectively as a privately-owned company. Recent market challenges have created a sharply competitive landscape and the Rollover Shareholders believe, at this point in time in the Company’s operating history, it is now more important than ever to embrace a more entrepreneurial approach where the Company and its stakeholders are incentivized to grow and develop the Company’s products, brand and business with a longer term perspective. The Rollover Shareholders believe it is increasingly difficult to develop this type of culture in a public company context, where the public markets are increasingly focused on short-term results. As a privately-owned company, the Company would have increased flexibility to make decisions that may negatively affect quarterly results but that may, over the long-term, increase the Company’s value. In contrast, as a publicly-traded company, the Company currently faces public shareholder pressure to make decisions that may produce better short-term results, but which may over the long-term lead to a reduction in the per share price of its publicly-traded equity securities. As a privately-owned company, the Company would also be relieved of many of the other burdens and constraints imposed on public companies. The need for management to be responsive to public shareholder concerns and to engage in an ongoing dialogue with public shareholders may at times distract management’s time and attention from the effective operation and improvement of the business.

For these reasons, the Rollover Shareholders, Parent and Merger Sub believe that private ownership is in the best interests of the business and the organization and that the Merger is in the best interests of the Company’s shareholders.

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Positions of the Rollover Shareholders as to the Fairness of the Merger

Under a possible interpretation of the SEC rules governing “going-private” transactions, the Rollover Shareholders may be deemed to be affiliates of the Company and, therefore, are required to express their beliefs as to the substantive and procedural fairness of the Merger to the unaffiliated shareholders of the Company. The Rollover Shareholders are making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

As described below, the Rollover Shareholders believe that the Merger is fair to the unaffiliated shareholders of the Company on the basis of (i) the factors as described in “Special Factors — Reasons for the Merger; Recommendation of the Lead Director and the Board of Directors; Fairness of the Merger” beginning on page 35, which factors the Rollover Shareholders agree with and adopt, and (ii) the additional factors described below. In this section and in “Special Factors — Positions of Parent, Merger Sub, HGI, Philip Falcone and Michael Tokarz as to the Fairness of the Merger” beginning on page 53, we refer to the “Board” to mean the “Board of Directors other than Messrs. Harley and Lynch, who recused themselves from all discussions by the Board of Directors relating to the Merger negotiations (except to the extent their presence was specifically requested by the Lead Director) and all deliberations by the Board of Directors with respect to the approval of the Merger and adoption of the Merger Agreement and related agreements.”

None of the Rollover Shareholders participated in the deliberations of the Lead Director or the Board regarding, or received advice from the Company’s legal advisor or the Lead Director’s financial advisor as to, the fairness of the Merger. As described in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 60, and in “Special Factors — Certain Effects of the Merger” beginning on page 54, the Rollover Shareholders have interests in the Merger different from those of the unaffiliated shareholders of the Company by virtue of the Rollover Shareholders’ obligation to make an equity investment in Parent via the rollover of their existing holdings of Common Stock and Preferred Stock.

The unaffiliated shareholders were represented by the Lead Director, who negotiated the terms and conditions of the Merger Agreement and evaluated the fairness of the Merger, with the assistance of the Lead Director’s financial advisor and the Company’s outside counsel. The Rollover Shareholders have not performed, nor engaged a financial advisor to perform, any valuation or other analysis for the purpose of assessing the fairness of the Merger to the unaffiliated shareholders of the Company.

Based on the Rollover Shareholders’ knowledge and analysis of available information regarding the Company, as well as discussions with members of the Company’s senior management regarding the Company and its business and the factors considered by, and the analysis and resulting conclusions of, the Board and the Lead Director described in “Special Factors — Reasons for the Merger; Recommendation of the Lead Director and the Board of Directors; Fairness of the Merger” beginning on page 35, with which the Rollover Shareholders agree and which analysis and resulting conclusions the Rollover Shareholders adopt, the Rollover Shareholders believe that the Merger is substantively fair to the unaffiliated shareholders of the Company. In particular, the Rollover Shareholders considered the following:

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The Rollover Shareholders did not establish, and did not consider, a pre-Merger public company going concern value of Common Stock for the purposes of determining the per share merger consideration or the fairness of the per share merger consideration to the unaffiliated shareholders of the Company because, following the Merger, the Company will have a significantly different capital structure. However, to the extent the pre-Merger going concern value was reflected in the pre-announcement per share price of Common Stock, the per share merger consideration of $0.27 represented a premium to the going concern value of the Company. In addition, the Rollover Shareholders did not consider net book value of Common Stock because they believe that net book value, which is an accounting concept, does not reflect, or have any meaningful

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impact on, either the market trading prices of Common Stock or the Company’s value as a going concern. The Rollover Shareholders did not consider liquidation value in determining the fairness of the Merger to the unaffiliated shareholders of the Company because of (i) their belief that liquidation sales generally result in proceeds substantially less than sales of a going concern, (ii) the impracticability of determining a liquidation value given the significant execution risk involved in any breakup, (iii) their belief that the Company is a viable, going concern and (iv) the Company’s plans to continue to operate its business following the Merger.

The Rollover Shareholders believe that the Merger is procedurally fair to the unaffiliated shareholders of the Company based upon the following:

The foregoing discussion of the information and factors considered and given weight by the Rollover Shareholders in connection with the fairness of the Merger Agreement and the Merger is not intended to be exhaustive, but is believed to include all material factors considered by them. The Rollover Shareholders did not find it practicable to, and did not, quantify or otherwise attach relative weights to the foregoing factors in reaching their position as to the fairness of the Merger Agreement and the Merger. Rather, the Rollover Shareholders made the fairness determinations after considering all of the foregoing as a whole. The Rollover

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Shareholders believe these factors provide a reasonable basis upon which to form their belief that the Merger is fair to the unaffiliated shareholders of the Company. This belief should not, however, be construed as a recommendation to any Company shareholder to approve the Merger or adopt the Merger Agreement. The Rollover Shareholders do not make any recommendation as to how shareholders of the Company should vote their shares of Common Stock relating to the Merger.

The decision to undertake the going-private transaction at this time was made after taking into account the negative effects that the Company’s financial results have had on the Company’s ability to take advantage of certain benefits of being a public entity, including financing opportunities and an active, liquid market for its Common Stock. Despite the capital infusion provided by the Series B Preferred convertible transaction and the recent increase in the amount of funds available under the Company’s credit facility, the Company continued to face significant liquidity and other financial difficulties. The Company has not been able to, and does not expect to be able to, identify or otherwise access any sources of equity or debt financing for the future operations of the Company prior to the date that it would exhaust its remaining cash resources. In light of these factors, the Rollover Shareholders and the Lead Director have determined that the costs and challenges associated with keeping the Company a public company far exceed the benefits and that undertaking the going private transaction at this time would alleviate such costs and challenges.

Positions of Parent, Merger Sub, HGI, Philip Falcone and Michael Tokarz as to the Fairness of the Merger

Under a possible interpretation of the SEC rules governing “going-private” transactions, Parent, Merger Sub, HGI, Philip Falcone and Michael Tokarz may be deemed to be affiliates of the Company and, therefore, required to express their beliefs as to the substantive and procedural fairness of the Merger to the unaffiliated shareholders of the Company. Parent, Merger Sub, HGI, Mr. Falcone and Mr. Tokarz are making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

None of Parent, Merger Sub, HGI, Mr. Falcone or Mr. Tokarz participated in the deliberations of the Lead Director or the Board regarding, or received advice from the Company’s legal advisor or the Lead Director’s legal or financial advisors as to, the fairness of the Merger to the Company’s unaffiliated shareholders. Parent, Merger Sub, HGI, Mr. Falcone and Mr. Tokarz considered the same factors considered by, and adopted the analysis and resulting conclusions of, the Rollover Shareholders, as described in “Special Factors — Positions of the Rollover Shareholders as to the Fairness of the Merger” beginning on page 50. Based on the information and factors set forth in the foregoing discussion, as well as Parent’s, Merger Sub’s, HGI’s, Mr. Falcone’s and Mr. Tokarz’s knowledge and analysis of available information regarding the Company, as well as discussions with members of the Company’s senior management regarding the Company and its business and the factors considered by, and the analysis and resulting conclusions of, the Board and the Lead Director described in “Special Factors — Reasons for the Merger; Recommendation of the Lead Director and the Board of Directors; Fairness of the Merger” beginning on page 35 (including, without limitation, the Board’s and Lead Director’s analysis with respect to the Company’s going concern value), with which Parent, Merger Sub, HGI, Mr. Falcone and Mr. Tokarz agree and which analysis and resulting conclusions Parent, Merger Sub, HGI, Mr. Falcone and Mr. Tokarz adopt, Parent, Merger Sub, HGI, Mr. Falcone and Mr. Tokarz believe that the Merger is fair to the unaffiliated shareholders of the Company. Parent, Merger Sub, HGI, Mr. Falcone and Mr. Tokarz believe that the foregoing information and factors provide a reasonable basis for their belief that the Merger is fair to the unaffiliated shareholders of the Company. This belief should not, however, be construed as a recommendation to any Company shareholder to approve the Merger or adopt the Merger Agreement. Parent, Merger Sub, HGI, Mr. Falcone and Mr. Tokarz do not make any recommendation as to how shareholders of the Company should vote their shares of Common Stock relating to the Merger.

Plans for the Company after the Merger

After the Effective Time, neither the Company’s corporate structure nor its business will change. Parent anticipates that the Company will continue its current operations, except that it will (i) cease to be an independent public company and will instead be a wholly owned subsidiary of Parent and (ii) have significantly more debt than it currently has. There are no current plans to repay the debt taken out to finance

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the Merger, which is due on May 31, 2015 if the Merger is consummated. If the Merger is consummated, the Common Stock will cease to be quoted on the OTCQB and will cease to be registered under the Exchange Act (via termination of registration pursuant to Section 12(g) of the Exchange Act). After the Effective Time: (i) no member of the present Board of Directors of the Company will continue to serve as a director of the Company, and (ii) the present directors of Merger Sub will become the directors of the Company. The named Executive Officers of the Company immediately prior to the Effective Time will remain the named Executive Officers of the Company, specifically Thomas J. Lynch and Thomas Rende, in each case until the earlier of their resignation or removal or until their respective successors are duly elected or appointed and qualified, as the case may be. Parent has entered into a new employment agreement with Thomas J. Lynch, the chief executive officer and chairman of the Board of Directors of the Company, but has not entered into a new employment agreement with Mr. Rende or any other executive officer of the Company.

Mr. Lynch’s new employment agreement, which was negotiated after the Lead Director negotiated the merger consideration of $0.27 per share in cash, will commence only upon the Effective Time. The new employment agreement makes the following material changes to the terms of Mr. Lynch’s employment: (i) the term of his new employment will continue until the third anniversary of the Effective Time, unless terminated earlier as provided in the agreement, or unless extended by mutual written agreement of the Company, Parent and Mr. Lynch, (ii) the Company will pay Mr. Lynch a one-time cash signing bonus of $150,000, (iii) as additional compensation, Parent will recommend to its board of managers that Mr. Lynch be granted an equity interest in Parent, representing approximately 5% of the outstanding equity interests of Parent outstanding after the Merger, in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms, to be made promptly, but in no event more than sixty days, following the Effective Time, (iv) Mr. Lynch must deliver to the Company a general release of all claims in a form and substance acceptable to the Company, in order to receive any payments upon termination of his employment (other than payments required by law), and (v) the “change of control” provision in Mr. Lynch’s existing employment agreement, which would have provided him with a cash bonus of $675,000 if his employment was terminated under certain circumstances following a change of control, was not included. For a full description of the employment agreements of Messrs. Lynch and Rende, see “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 60.

Certain Effects of the Merger

If the Shareholder Approval is obtained and the other conditions to the Closing are either satisfied or waived, Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent. Except for the Rollover Shareholders (and Mr. Lynch, upon his receipt of an equity interest in Parent, pursuant to his new employment agreement, in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms), none of our current shareholders will have any ownership interest in, or be a shareholder of, the Company after the completion of the Merger. As a result, our current shareholders (other than the Rollover Shareholders and Mr. Lynch) will no longer benefit from any increase in our value, nor will they bear the risk of any decrease in our value. Following the Merger, Parent (and Mr. Lynch) will benefit from any increase in our value and also will bear the risk of any decrease in our value.

Upon the consummation of the Merger:

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Following the Merger, the entire equity in the Company, as the surviving corporation, will be owned by Parent. If the Merger is completed, the Rollover Shareholders (and Mr. Lynch, upon his receipt of an equity interest in Parent, pursuant to his new employment agreement, in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms) will be the sole beneficiaries of our future earnings and growth, if any, and will be entitled to vote on corporate matters affecting the Company following the Merger. Similarly, the Rollover Shareholders (and Mr. Lynch, upon his receipt of such equity interest) will also bear the risks of ongoing operations, including the risks of any decrease in our value after the Merger and the operational and other risks related to the incurrence by the Company, as the surviving corporation, of additional debt as described below in “Special Factors — Financing of the Merger” beginning on page 58.

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If the Merger is completed, the Company’s shareholders other than the Rollover Shareholders (and Mr. Lynch) will have no interest in the Company’s net book value or net earnings.

Following the Merger, the Rollover Shareholders (and Mr. Lynch, upon his receipt of an equity interest in Parent, pursuant to his new employment agreement, in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms) will own 100% of Parent (and thereby indirectly 100% of the Company). The following table sets forth, among other things, the percentage ownership of the Company by each of the Rollover Shareholders and Mr. Lynch pre-and post-Merger, as well as the interest in the net book value and net earnings of the Company of each of the Rollover Shareholders and Mr. Lynch pre-and post-Merger.

		Ownership of the Company Prior to the Merger
Rollover Shareholder		Ownership Percentage(1)				Interest in the Net Book Value/ (Shareholders’ Deficiency) of the Company(2)				Percentage Interest in the Net Book Value/ (Shareholders’ Deficiency) of the Company(2)				Interest in the Net Earnings/(Loss) of the Company(3)				Percentage Interest in the Net Earnings/(Loss) of the Company
HGI Funding, LLC			—				—				—				—				—
Tokarz Investments, LLC			21.4	%		$	(3,716	)			21.4	%		$	(5,009	)			21.4	%
TTG Apparel, LLC			4.5	%		$	(783	)			4.5	%		$	(1,055	)			4.5	%
Arsenal Group, LLC			28.9	%		$	(5,033	)			28.9	%		$	(6,784	)			28.9	%
Fursa Alternative Strategies LLC			14.5	%		$	(2,522	)			14.5	%		$	(3,399	)			14.5	%
William F. Harley III			1.2	%		$	(210	)			1.2	%		$	(283	)			1.2	%
Thomas J. Lynch(4)			1.5	%		$	(265	)			1.5	%		$	(357	)			1.5	%

		Ownership of the Company After the Merger
Rollover Shareholder		Ownership Percentage				Interest in the Net Book Value/ (Shareholders’ Deficiency) of the Company(2)				Percentage Interest in the Net Book Value/ (Shareholders’ Deficiency) of the Company				Interest in the Net Earnings / (Loss) of the Company(3)				Percentage Interest in the Net Earnings/ (Loss) of the Company
HGI Funding, LLC			62.0	%		$	(10,789	)			62.0	%		$	(14,542	)			62.0	%
Tokarz Investments, LLC			12.1	%		$	(2,112	)			12.1	%		$	(2,847	)			12.1	%
TTG Apparel, LLC			10.9	%		$	(1,890	)			10.9	%		$	(2,547	)			10.9	%
Arsenal Group, LLC			9.7	%		$	(1,696	)			9.7	%		$	(2,285	)			9.7	%
Fursa Alternative Strategies LLC			4.9	%		$	(850	)			4.9	%		$	(1,145	)			4.9	%
William F. Harley III			0.4	%		$	(65	)			0.4	%		$	(87	)			0.4	%
Thomas J. Lynch(4)			—				—				—				—				—

As of the consummation of the Merger, the Rollover Shareholders (and Mr. Lynch), and any permitted assignee or designee thereof, will have an indirect interest in our net book value and earnings as a result of their ownership of all the equity interests in Parent.

A primary benefit of the Merger to the unaffiliated shareholders of the Company will be the right of such shareholders to receive a cash payment of $0.27, without interest, for each share of Common Stock held by such shareholders, representing a premium of approximately 50% to the closing price of the Common Stock on September 27, 2013, the last trading day before the announcement by the Consortium Members of their

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proposal to acquire all outstanding shares of Common Stock not owned by him, as well as a premium of approximately 46% over the average closing price of the Company’s Common Stock for the 45 trading days prior to that date.

The primary detriments of the Merger to the unaffiliated shareholders of the Company include the lack of interest of such shareholders in our potential future earnings, growth or value. Additionally, the receipt of cash in exchange for shares of Common Stock pursuant to the Merger will generally be a taxable sale transaction for U.S. federal income tax purposes to our shareholders who surrender shares of our Common Stock in the Merger.

In connection with the Merger, the Rollover Shareholders (and Mr. Lynch), and any permitted assignee or designee of the foregoing, will receive benefits and be subject to obligations that are different from, or in addition to, the benefits received by our unaffiliated shareholders generally. The primary benefits of the Merger to the Rollover Shareholders (and Mr. Lynch), based on their ownership of all the equity interests in Parent, include their interest in our potential future earnings and growth which, if they successfully execute their business strategies, could be substantial. Additionally, following the Merger, we will be a private company, and as such will be relieved of the burdens imposed on companies with publicly traded equity, including the requirements and restrictions on trading that our directors, officers and beneficial owners of more than 10% of the shares of our Common Stock face as a result of the provisions of Section 16 of the Exchange Act and the requirement of furnishing a proxy statement in connection with shareholders’ meetings pursuant to Section 14(a) of the Exchange Act. Termination of registration of our Common Stock under the Exchange Act will also substantially reduce the information required to be furnished by the Company to the public and the SEC. It is estimated that the Company will save approximately $700,000 per year as a result of no longer being a publicly traded company. Additionally, following the Merger, the Rollover Shareholders will control the surviving corporation. Additional anticipated benefits to the Rollover Shareholders include receiving tax-free treatment with respect to the contribution of shares of Common Stock in the transaction pursuant to the Rollover Agreement discussed in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Rollover Agreement” beginning on page 87. As a result of the Merger, the Rollover Shareholders (and Mr. Lynch) may also become the beneficiaries of the Company’s future use of net operating loss carryforwards, which, as of July 27, 2013, equaled approximately $80,000,000 before any ownership change adjustments under Section 382 of the Code. The Company’s management determined that an ownership change of the Company under Section 382 of the Code occurred in connection with the sale of the Series B Convertible Preferred Stock on March 15, 2013. Accordingly, management determined, on a preliminary basis, that the amount of net operating loss carryforwards that may be utilized to offset future taxable income will be limited to approximately $365,000 per year until the last of the net operating loss carryforwards expire in 20 years, or approximately $7,300,000 in the aggregate. It is possible that the Company’s income may be higher following the Merger due in part to the cost savings noted above relating to the Company’s avoidance of costs associated with being a publicly traded company. The ownership changes of the Company that occurred on March 3, 2005 and January 28, 2008 would have resulted in a higher annual limitation and therefore have no effect on these estimates. The Company’s management also determined, on a preliminary basis, that the Merger will not result in a further annual limitation, because it will not result in an ownership change of the Company.

The primary detriments of the Merger to the Rollover Shareholders (and Mr. Lynch) include the fact that all of the risk of any possible decrease in our earnings, growth or value, and all of the risks related to our additional leverage, which is substantial, following the Merger will be borne by Parent and indirectly by such shareholders. Additionally, the interests of the Rollover Shareholders (and Mr. Lynch) in Parent and the Company will not be liquid, with no public trading market for such securities, and the equity securities of Parent and the Company may be subject to contractual restrictions on transfer, including, in the case of our securities, liens to the extent provided under the terms of our debt financing.

In connection with the Merger, the Executive Officers will receive benefits and be subject to obligations that are different from, or in addition to, the benefits and obligations of the Company’s unaffiliated shareholders generally, as described above with respect to Mr. Lynch and as described generally in more detail in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger” beginning

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on page 60. Such incremental benefits are expected to include, among others, Mr. Lynch continuing as an executive officer of the surviving corporation and receiving, pursuant to his new employment agreement, an equity interest in Parent in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms. Additionally, Thomas Rende, if he does not continue as executive officer of the surviving corporation, will receive certain “change in control” payments.

The Common Stock is currently registered under the Exchange Act and is quoted on the OTCQB under the symbol “FOHL.” As a result of the Merger, the Company will be a privately held corporation and there will be no public market for its stock. After the Merger, the Common Stock will cease to be quoted on the OTCQB and price quotations with respect to sales of Common Stock in the public market will no longer be available. In addition, registration of the Common Stock under the Exchange Act will be terminated.

The certificate of incorporation and the by-laws of the Company will be amended in the Merger to read in their entirety in the form of Exhibit D to the Merger Agreement (in the case of the certificate of incorporation) and Exhibit E to the Merger Agreement (in the case of the by-laws), and, as so amended, will be the certificate of incorporation and by-laws of the Company following the Merger until thereafter amended in accordance with their respective terms and the NYBCL. The Merger Agreement (including the amendment thereto) is attached to this proxy statement as Annex A.

Financing of the Merger

The Company and Parent estimate that the total financing required to complete the Merger and related transactions and pay related fees and expenses will be approximately $25,230,585, which consists of $21,209,150 in rollover equity, $3,161,435 in merger consideration payable in cash to the Public Shareholders and holders of Company stock options and an estimated $860,000 in fees and expenses. Parent expects this amount to be provided through a combination of the proceeds of:

Rollover Financing

On December 18, 2013, the Rollover Shareholders entered into the Rollover Agreement with Parent, pursuant to which the Rollover Shareholders collectively committed to contribute, immediately prior to the consummation of the Merger, an aggregate amount of 27,678,679 shares of Common Stock, 58,056 shares of Series A Convertible Preferred Stock and 110,804 shares of Series B Convertible Preferred Stock to Parent (the equivalent of a $21,209,150 investment based on the per share merger consideration of $0.27 and valuing the convertible preferred stock on an as-converted basis) in exchange for an increase in their equity interests in Parent. The obligations of the Rollover Shareholders pursuant to the Rollover Agreement are conditioned upon the satisfaction or waiver of the conditions to the obligations of Parent to complete the Merger contained in the Merger Agreement.

The Rollover Agreement is further described in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities” beginning on page 87.

Debt Financing

The Company is party to that certain Credit and Security Agreement, dated as of May 31, 2012, which, as amended, supplemented, modified and in effect on the date of this proxy statement, we refer to as the “Credit Agreement,” with FOH Holdings, Inc., Frederick’s of Hollywood, Inc., Frederick’s of Hollywood

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Stores, Inc. and Hollywood Mail Order, LLC, each a direct or indirect subsidiary of the Company, and which we refer to as the “Borrowers,” and the Lenders.

The Credit Agreement, among other things, provides for a line of credit of up to $35,000,000, which includes two tranches of “first in last out” advances. The second such tranche, or the “Second Tranche,” in the amount of $11,000,000, represents (i) $5,000,000 that was advanced to the Company on October 10, 2013 to provide short term working capital and (ii) up to $6,000,000 that may be advanced upon consummation of the Merger, at the Borrowers’ option, subject to the terms and conditions of the Credit Agreement, in order to finance the payment of the merger consideration and for other fees, expenses, costs and obligations incurred by Borrowers in connection with the Merger, or the “Merger Advance.” The Company will pay an additional origination fee in an amount equal to $60,000, which will be due and payable on the earliest of (A) the date on which the Lender funds the Merger Advance, (B) the occurrence of an Event of Default under the Credit Agreement, or (C) June 15, 2014, if the Merger has not occurred by such date.

The $5,000,000 advance is to be repaid on June 15, 2014 if the Merger is not consummated by that date, or May 31, 2015 if the Merger is consummated on or before June 15, 2014. The $6,000,000 advance, if made, plus any additional amount that the Lender may elect to advance in its sole discretion, is to be repaid on May 31, 2015. The unpaid principal of the Second Tranche will bear interest, payable monthly, in arrears, at an amount equal to the LIBOR Rate (as defined in the Credit Agreement) in effect from time to time plus 11.5% per annum, but not less than 14% per annum regardless of fluctuations in the LIBOR Rate. Following the consummation of the Merger, so long as no “Event of Default” (as defined in the Credit Agreement) has occurred and is continuing, a portion of the interest payable on the Second Tranche equal to 6% per annum (or such lesser amount as the Borrowers may elect) shall be capitalized, compounded and added to the unpaid amount of the total obligations due under the credit facility on each interest payment date and shall also accrue interest at the applicable rate and will be due and payable in cash on May 31, 2015.

The obligations of the Borrowers under the Credit Agreement, including for the Merger Advance, are secured by first priority security interests granted to the Lenders in all of the Borrowers’ tangible and intangible property, including intellectual property such as trademarks and copyrights, as well as shares and membership interests of the Borrowers that are subsidiaries of other Borrowers.

The Merger Advance is subject to certain conditions, including, without limitation:

Although the debt financing described in this proxy statement is not subject to due diligence or a “market out” provision, which allows lenders not to fund their commitments if certain conditions in the financial markets prevail, there is still a risk that such debt financing may not be funded when required. As of the date of this proxy statement, no alternative financing arrangements or alternative financing plans have been made in the event the debt financing described in this proxy statement is not available as anticipated.

The Lenders are affiliates of HGI, HGI Funding and Parent. Salus commenced operations in December 2011 and is a subsidiary of HGI engaged primarily in the business of providing secured asset-based loans across a variety of industries. Salus CLO is a collateralized loan obligation vehicle of Salus providing

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for the issuance of collateralized obligations. The Lenders under the Credit Agreement have in the past engaged, and may in the future engage, in transactions with and perform services, including commercial banking, financial advisory and investment banking services, for the Company and its affiliates in the ordinary course of business for which they have received or will receive customary fees and expenses.

No plans or arrangements have been made to refinance or repay the Merger Advance.

Copies of the Credit Agreement and the amendments thereto are attached as exhibits to the Current Reports on Form 8-K filed by the Company with the SEC June 6, 2012, May 30, 2013, July 31, 2013, October 16, 2013 and April 1, 2014.

Interests of the Company’s Directors and Executive Officers in the Merger

When considering the recommendation of the Board of Directors, you should be aware that certain members of the Board of Directors and our Executive Officers have interests in the Merger other than their interests as shareholders generally, including those described below. These interests may be different from, or in conflict with, your interests as a shareholder of the Company. The members of the Board of Directors and the Lead Director were aware of these additional interests, and considered them, when they approved the Merger Agreement and recommended that shareholders vote in favor of approving the Merger and adopting the Merger Agreement.

At the Effective Time, shares of Common Stock held by the members of the Board of Directors (other than Mr. Harley) and our Executive Officers will be converted into the right to receive the merger consideration in the same manner as all outstanding shares of Common Stock held by the unaffiliated shareholders of the Company, as described in “Special Factors — Certain Effects of the Merger” beginning on page 54.

Interests of the Non-Employee Directors

Each Company stock option that is held by a non-employee director (other than those held by Mr. Harley) and that is outstanding immediately prior to the Effective Time, whether or not vested or exercisable, will, as of the Effective Time, be cancelled and will entitle each holder thereof to receive a payment, if any, in cash from the Company (less any applicable withholding taxes), promptly following the Effective Time, equal to (a) the amount, if any, by which $0.27 exceeds the exercise price per share with respect to such stock option, multiplied by (b) the total number of shares of Common Stock then issuable upon the exercise of such stock option. As of the date of this proxy statement, none of the non-employee directors (including Mr. Harley) hold stock options with an exercise price of less than $0.27. Accordingly, all of the stock options held by the non-employee directors will be cancelled for no consideration.

As of the Effective Time, each Company share-based award other than a stock option, including restricted share awards (other than those held by Mr. Harley), whether or not vested, will be cancelled and will entitle each holder thereof to receive a payment, in cash from the Company (less any applicable withholding taxes) promptly following the Effective Time, equal to (a) $0.27 per share, multiplied by (b) the total number of shares of Common Stock constituting the award. As of the date of this proxy statement, the non-employee directors (other than Mr. Harley) hold an aggregate of 99,500 shares subject to restricted share awards, which will be cancelled in exchange for aggregate consideration of $26,865.

Mr. Harley and the other Rollover Shareholders will contribute, immediately prior to the consummation of the Merger, their shares of our capital stock beneficially owned by them (after taking into account the transfer of shares of Series A Convertible Preferred Stock from TTG to HGI Funding pursuant to the Purchase Agreement) to Parent in exchange for an increase in their equity interests in Parent. Following the Merger, the Company will be 100% beneficially owned by Mr. Harley and the other Rollover Shareholders (and Mr. Lynch, upon his receipt of an equity interest in Parent, pursuant to his new employment agreement, in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms), and any permitted assignee or designee thereof. For a description of the treatment of the Common Stock beneficially owned by Mr. Harley in the Merger and a discussion of Mr. Harley’s continuing interest in the Company as a Rollover Shareholder, see “Special Factors — Certain Effects of the Merger” beginning on page 54. Each Company stock option and restricted share award held by Mr. Harley and each warrant held by Mr. Harley and the other Rollover Shareholders, as

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of the Effective Time, will be cancelled on the terms and conditions set forth in the Rollover Agreement between Parent and the Rollover Shareholders.

Peter Cole and William F. Harley III, each a member of our Board of Directors, became members of the board of managers of Parent on the date the Merger Agreement was executed. Currently, members of the board of managers of Parent receive no cash fees or equity awards for their service.

Interests of Executive Officers

Each Company stock option that is held by an Executive Officer (or any other holder who is not a Rollover Shareholder) and that is outstanding immediately prior to the Effective Time, whether or not vested or exercisable, will, as of the Effective Time, be cancelled and will entitle each such holder thereof to receive a payment, if any, in cash from the Company (less any applicable withholding taxes), promptly following the Effective Time, equal to (a) the amount, if any, by which $0.27 exceeds the exercise price per share with respect to such stock option, multiplied by (b) the total number of shares of Common Stock then issuable upon the exercise of such stock option. As of the date of this proxy statement, the Executive Officers do not hold stock options with an exercise price of less than $0.27. Accordingly, all of the stock options held by the Executive Officers will be cancelled for no consideration.

As of the Effective Time, each Company share-based award other than a stock option that is held by an Executive Officer (or any other holder who is not a Rollover Shareholder), including restricted share awards, whether or not vested, will be cancelled and will entitle each holder thereof to receive a payment, in cash from the Company (less any applicable withholding taxes) promptly following the Effective Time, equal to (a) $0.27 per share, multiplied by (b) the total number of shares of Common Stock constituting the award. As of the date of this proxy statement, our employees hold an aggregate of 637,694 shares of Common Stock subject to restricted share awards (of which 479,194 shares are held by our Executive Officers), which will be cancelled in exchange for aggregate consideration of $172,177.38 (of which $129,382.38 will be paid to our Executive Officers).

We have an employment agreement with Thomas Rende, our chief financial officer, which expired on December 31, 2013, although its terms generally continue to apply after its expiration. Under the continuing terms of his employment agreement, Mr. Rende will be entitled to enhanced severance benefits if (1) a “change of control” (as defined in his employment agreement) occurs (which includes the consummation of the Merger) and (2) within 24 months thereafter, his employment as an “at will” employee is terminated. In such event, we will pay Mr. Rende an amount equal to 125% of his base salary, in addition to all other compensation and benefits otherwise to be paid pursuant to his employment agreement. Under the continuing terms of his employment agreement, the “change of control” payment will be made in two installments: (x) the first installment will be paid ten days after his employment is terminated, in an amount equal to twice the lesser of: (a) the sum of his total compensation (including salary and bonus) for the calendar year preceding the year in which his employment with the Company was terminated (adjusted for any increase during that year that was expected to continue indefinitely if he had not terminated employment), and (b) the maximum amount that may be taken into account under a qualified plan under section 401(a)(17) of the Code for the year in which his employment with the Company is terminated; and (y) the second installment will be paid on the first business day following the day that is six months after his employment is terminated, in an amount equal to the balance, if any, of the “change of control” payment. The other compensation and benefits otherwise to be paid to Mr. Rende include: (i) the sum of $250,000; (ii) any non-equity incentive compensation that would have become payable for the year in which his employment was terminated, pro-rated for the number of months worked during the fiscal year of termination; (iii) company-paid continuation of medical coverage for one year after termination; (iv) all valid business expense reimbursements; and (v) all accrued but unused vacation pay.

Named Executive Officer Merger-Related Compensation Table

The descriptions of the payments immediately above as they relate to our named executive officers, Thomas J. Lynch and Thomas Rende, and the quantifications of the payments in the table below are intended to comply with Item 402(t) of Regulation S-K of the Exchange Act, which requires disclosure of information about compensation and benefits that each of the Company’s named executive officers will or may receive in connection with the Merger. This compensation is referred to as “golden parachute” compensation by

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applicable SEC disclosure rules, and such compensation is subject to a non-binding, advisory vote of the Company’s shareholders, as described below in “Advisory Vote Regarding Merger-Related Compensation Proposal” beginning on page 101.

Named Executive Officer		Cash ($)				Equity ($)(1)				Perquisites/benefits ($)				Total ($)
Thomas J. Lynch(2)			—				87,345				—				87,345
Thomas Rende			637,500	(3)			42,037				23,739	(4)			703,276

Employment Agreements

In connection with the execution of the Merger Agreement, we entered into a new employment agreement with Thomas J. Lynch, our chairman and chief executive officer, and Parent, which was negotiated after the Lead Director negotiated the merger consideration of $0.27 per share in cash. The new employment agreement will commence only upon the Effective Time and will continue until the third anniversary of the Effective Time, unless terminated earlier as provided in the agreement, or unless extended by mutual written agreement of the Company, Parent and Mr. Lynch. If the Merger is not consummated, the agreement will not take effect. Until the new employment agreement takes effect, the terms of Mr. Lynch’s employment will continue to be governed by his existing employment agreement. The existing employment agreement expired on January 2, 2014, but its terms generally continue to apply after its expiration.

The new employment agreement provides for Mr. Lynch to continue to serve as the Company’s chief executive officer at a base salary of $540,000 per year. Within 30 days of the Effective Time, the Company will pay Mr. Lynch a one-time cash signing bonus of $150,000. In addition to his base salary, Mr. Lynch is eligible to receive a target annual incentive bonus of up to 65% of his base salary in accordance with the terms of an annual bonus plan approved by the Company’s Board of Directors and Parent. From time to time, Mr. Lynch also will be eligible to receive such discretionary bonuses as the Company’s Board of Directors and Parent deem appropriate. As additional compensation, Parent will recommend to its board of managers that Mr. Lynch be granted an equity interest in Parent, pursuant to his new employment agreement, in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms, to be made promptly, but in no event more than sixty days, following the Effective Time. The equity interest granted to Mr. Lynch will represent approximately 5% of the outstanding equity interests of Parent outstanding after the Merger.

The new employment agreement provides that if, during the employment term, we terminate Mr. Lynch without “cause” or he terminates his employment for “good reason” (as such terms are defined in the new employment agreement), or if we do not continue his employment at the end of the employment term upon substantially similar terms, and if Mr. Lynch delivers to us a general release of all claims in a form and

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substance acceptable to us, we will be required to pay to him (i) his base salary through the end of the employment term, (ii) any bonus that would have become payable to him through the end of the employment term, (iii) the insurance benefits provided in his employment agreement through the end of the employment term, (iv) the lump sum of $450,000 and (v) medical coverage at our expense for one year commencing on either (a) the last day of the employment term if his employment is terminated during the employment term or (b) the date of termination if his employment is terminated after the end of the employment term; provided that medical coverage will terminate upon becoming covered under a similar program by reason of employment elsewhere. The “change of control” provision in Mr. Lynch’s existing employment agreement, which would have provided him with a cash bonus of $675,000 if his employment was terminated under certain circumstances following a change of control, was not included in the new employment agreement.

The employment agreement provides for us to pay the premiums on a life insurance policy for Mr. Lynch providing a death benefit of $1,500,000 to his designated beneficiary and a disability insurance policy for Mr. Lynch providing a non-taxable benefit of at least $10,000 per month payable to him in the event of his disability. Under the new employment agreement, Mr. Lynch is prohibited from disclosing confidential information about us and employing or soliciting any of our current employees to leave the Company during his employment and for a period of one year thereafter. The employment agreement does not contain any change of control or non-competition provisions.

Compensation of the Lead Director

At a meeting of the Board of Directors held on October 16, 2013, the Board authorized the Company to pay Milton Walters $5,000 per month for a minimum of four months effective September 1, 2013 as compensation for serving in his capacity as Lead Director. On January 30, 2014, the Board authorized the Company to extend these monthly payments through the closing of the Merger.

In recommending and approving his compensation for serving as Lead Director, the Board of Directors considered, among other things, the size of the proposed transaction, the complexities added to the transaction by the involvement of the Consortium Members and Mr. Harley, the time expected to be required by the Lead Director, the need for the Lead Director to evaluate matters in addition to the Consortium Members’ proposal and the publicly-reported compensation of the special committees and lead directors of other companies.

Indemnification of Directors and Officers

For a description of the indemnification of directors and officers by the Company following the Merger, see “The Merger Agreement — Other Covenants and Agreements — Indemnification; Directors’ and Officers’ Insurance” beginning on page 79.

Material United States Federal Income Tax Considerations

The following is a general discussion of the material U.S. federal income tax consequences of the Merger to U.S. holders and non-U.S. holders (each as defined below) of Common Stock whose shares are converted into the right to receive the merger consideration. We base this summary on the provisions of the Internal Revenue Code of 1986, as amended, or the “Code,” applicable U.S. Treasury Regulations, judicial authority, and administrative rulings and practice, all of which are subject to change, possibly on a retroactive basis. This discussion is not binding on the Internal Revenue Service or the courts and, therefore, could be subject to challenge, which could be sustained. No ruling is intended to be sought from the Internal Revenue Service with respect to the Merger.

This discussion assumes that each shareholder holds its shares of Common Stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all aspects of U.S. federal income tax that may be relevant to a shareholder in light of its particular circumstances, or that may apply to a shareholder that is subject to special treatment under the U.S. federal income tax laws (including, for example, insurance companies, dealers in securities or foreign currencies, traders in securities who elect the mark-to-market method of accounting for their securities, shareholders subject to the alternative minimum tax, persons that have a functional currency other than the U.S. dollar, tax-exempt organizations, financial institutions, mutual funds, certain expatriates, corporations that accumulate earnings to avoid U.S. federal income tax, shareholders who hold shares of Common Stock as part of a hedge,

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straddle, constructive sale or conversion transaction, shareholders who will hold, directly, indirectly or constructively, an equity interest in the surviving corporation or U.S. holders who acquired their shares of Common Stock through the exercise of employee stock options or other compensation arrangements). In addition, the discussion does not address any tax considerations under state, local or foreign laws or U.S. federal laws other than those pertaining to the U.S. federal income tax that may apply to shareholders. You are urged to consult your own tax advisors to determine the tax consequences in your particular circumstances, including the application and effect of any state, local or foreign income and other tax laws, of the receipt of cash in exchange for Common Stock pursuant to the Merger.

If a partnership holds Common Stock, the tax treatment of a partner will generally depend on the status of the partners and the activities of the partnership. If you are a partner of a partnership holding Common Stock, you should consult your tax advisor.

U.S. Holders

For purposes of this discussion, we use the term “U.S. holder” to mean a beneficial owner of Common Stock that is for U.S. federal income tax purposes:

The receipt of cash in the Merger by U.S. holders of Common Stock will be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. holder of Common Stock will recognize gain or loss in an amount equal to the difference between:

Such gain or loss generally will be capital gain or loss, and will be long-term capital gain or loss if the holding period in the Common Stock surrendered in the Merger is greater than one year as of the date of the Merger. Long-term capital gains of non-corporate holders, including individuals, are generally eligible for reduced rates of taxation. The deductibility of a capital loss recognized on the exchange is subject to limitations. If a U.S. holder acquired different blocks of Common Stock at different times and different prices, such holder must determine its adjusted tax basis and holding period separately with respect to each block of Common Stock.

A U.S. holder of Common Stock may be subject, under certain circumstances, to information reporting on the cash received in the Merger unless such U.S. holder is a corporation or other exempt recipient. Backup withholding may also apply (currently at a rate of 28%) with respect to the amount of cash received, unless a U.S. holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the applicable requirements of the backup withholding rules. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against a U.S. holder’s U.S. federal income tax liability, if any, provided that such U.S. holder furnishes the required information to the Internal Revenue Service in a timely manner.

Rollover Shareholders

Parent, the Company and the Rollover Shareholders expect to take the position that the Rollover Shareholders will generally not recognize gain or loss with respect to their contribution of Common Stock, Series A Convertible Preferred Stock and Series B Convertible Preferred Stock, referred to as the “Rollover Shares,” to Parent. Assuming this position is correct, the Rollover Shareholders’ tax basis in their Parent membership interests will generally equal their tax basis in the Rollover Shares contributed to Parent and their

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holding period in the Parent membership interests received by Rollover Shareholders will generally include the holding period of the Rollover Shares. Alternative tax treatments to the Rollover Shareholders are possible, which may in part depend on the particular circumstances of the Rollover Shareholders, and there can be no assurance that the Internal Revenue Service will agree with the expected treatment described above.

Non-U.S. Holders

For the purposes of this discussion, we use the term “non-U.S. holder” to mean a beneficial owner of Common Stock (other than an entity that is classified as a partnership) that is not a U.S. holder.

Any gain realized upon the exchange of Common Stock for cash pursuant to the Merger by a non-U.S. holder generally will not be subject to U.S. federal income tax unless:

We believe that we are not and have not been a “United States real property holding corporation” for U.S. federal income tax purposes during the relevant period.

An individual non-U.S. holder described in the first bullet point immediately above will be subject to U.S. federal income tax on the net gain derived from the disposition under applicable graduated U.S. federal income tax rates. An individual non-U.S. holder described in the second bullet point immediately above will be subject to U.S. federal income tax at a 30% gross rate, subject to any reduction or reduced rate under an applicable income tax treaty, on the net gain derived from the disposition, which may be offset by U.S. source capital losses. If a non-U.S. holder that is a foreign corporation falls under the first bullet point immediately above, it will be subject to U.S. federal income tax on its net gain in the same manner as if it were a United States person (as defined under the Code) and, in addition, may be subject to the branch profits tax equal to 30% of its effectively connected earnings and profits, subject to any exemption or lower rate as may be specified by an applicable income tax treaty.

A non-U.S. holder is subject to the backup withholding requirements (described above for U.S. holders). In order for a non-U.S. holder to qualify as an exempt recipient, that non-U.S. holder must submit an appropriate IRS Form W-8 or Substitute Form W-8.

Regulatory Approvals

No regulatory approvals are required in connection with the merger.

Anticipated Accounting Treatment of the Merger

The Company, as the surviving corporation, will account for the Merger as a business combination using the acquisition method of accounting for financial accounting purposes, whereby the consideration transferred will be allocated to the identifiable assets acquired and liabilities assumed following FASB Accounting Standards Codification Topic 805, Business Combinations.

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Fees and Expenses

The estimated fees and expenses incurred or expected to be incurred in connection with the Merger are as follows:

Description		Amount
Financial advisory fees		$	80,000
Legal fees and expenses			300,000
Accounting fees and expenses			10,000
Proxy solicitation expenses			10,000
SEC filing fees			407
Printing and mailing costs			30,000
Paying agent fees			20,000
Miscellaneous expenses			9,593
Total		$	460,000

In addition, it is expected that Parent will incur approximately $400,000 of expenses, including legal and other advisory fees (excluding in all cases the expenses of the Company set forth above) in connection with the Merger.

Except as described in “The Merger Agreement — Fees and Expenses” beginning on page 84, all costs and expenses incurred in connection with the Merger, the Merger Agreement and the transactions contemplated thereby will be paid by the party incurring or required to incur such expenses.

Litigation

Between January 24 and 31, 2014, three purported shareholders of the Company filed putative class action lawsuits in New York State Supreme Court challenging the Merger. These actions are: Bruce H. Paul et al., v. Frederick’s of Hollywood Group Inc., et al., Index No. 650252/2014 (N.Y. Sup. Ct. Jan. 24, 2014); David Strasenburgh v. Frederick’s of Hollywood Group Inc., et al., Index No. 650294/2014 (N.Y. Sup. Ct. Jan. 28, 2014); and Stephen Dworkin v. Frederick’s of Hollywood Group Inc., et al., Index No. 650356/2014 (N.Y. Sup. Ct. Jan. 31, 2014). An amended complaint adding plaintiffs and additional allegations was filed in Bruce H. Paul, et al., v. Frederick’s of Hollywood Group Inc., et al. on February 11, 2014. The complaints collectively name as defendants the Board of Directors, the Company, Parent, Merger Sub, HGI Funding, TTG, TKZ, Fursa and Arsenal.

On March 6, 2014, the parties to those lawsuits submitted to the court a stipulation and proposed order that would consolidate all three actions into a single action captioned In re Frederick’s of Hollywood Group Inc. Shareholder Litigation, Index No. 650252/2014, and would appoint two of the five firms involved as co-lead counsel and the other three firms as the executive committee. The proposed consolidation order also provided that the amended complaint in Bruce H. Paul, et al, v. Frederick’s of Hollywood Group Inc., et al. on February 11, 2014 would be the operative complaint in the consolidated action. The court has not yet entered the proposed consolidation order.

The consolidated amended complaint alleges that the preliminary proxy filed by the Company contained material misstatements and omissions and that the members of the Board of Directors breached their fiduciary duty to maximize shareholder value by pursuing the Merger through a flawed process and for inadequate consideration. The complaint further alleges that (i) the Merger took advantage of a temporary depression in the market price of the Common Stock that occurred due to its delisting from the NYSE MKT LLC, (ii) the Board of Directors acquiesced to unreasonable deal protection devices, (iii) the merger process employed by the Board of Directors was unfair because the process did not include a right for minority shareholders to approve the Merger and the Lead Director was not positioned to effectively advocate for the minority shareholders, and (iv) the Board of Directors misstated and/or failed to disclose supposedly material information in the preliminary proxy statement. The complaint further alleges that Merger Sub colluded in or aided and abetted the breaches by the Board of Directors. The complaint seeks, among other things, a declaration that the Merger Agreement was entered in breach of the Board of Directors’ fiduciary duties and is therefore unenforceable, an injunction barring the consummation of the Merger until full disclosures have

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been made or rescinding, to the extent already implemented, the Merger, an order directing the Board of Directors to require approval of the majority of the minority shareholders, and an award of costs and disbursements of the action, including attorneys’ fees. Each of the defendants denies any allegations of wrongdoing and believes that the plaintiffs’ claims are without merit.

On March 14, 2014, after settlement discussions between plaintiffs’ counsel and counsel for the Company, the parties agreed to resolve the litigation and permit the Merger to proceed as contemplated. The settlement provides, among other things, that certain agreed supplemental and/or modified disclosures be included in this proxy statement. The settlement was subject to confirmatory discovery by the plaintiffs, which was completed on March 31, 2014, and is now subject to court approval. There is no assurance that the settlement will be approved by the court. If the settlement does not become effective and litigation resumes before the Merger, the outcome in these lawsuits could have an impact on the consummation of the Merger.

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

This proxy statement, along with the annexes hereto, includes “forward-looking statements” that reflect our current views as to future events and financial performance with respect to our operations, the expected completion and timing of the Merger and other information relating to the Merger. These statements can be identified by the fact that they do not relate strictly to historical or current facts. There are forward-looking statements throughout this proxy statement, including, among other places, in “Summary Term Sheet”, “Questions and Answers About the Special Meeting and the Merger ”, “The Special Meeting”, “Special Factors”, and “Important Information Concerning the Company”, and in statements containing the words “aim”, “anticipate”, “are confident”, “estimate”, “expect”, “will be”, “will continue”, “will likely result”, “project”, “intend”, “plan”, “believe” and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance or other future events. You should be aware that forward-looking statements involve known and unknown risks and uncertainties. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the actual results or developments we anticipate will be realized, or even if realized, that they will have the expected effects on the business or operations of the Company. These forward-looking statements speak only as of the date on which the statements were made and we undertake no obligation to update or revise any forward-looking statements made in this proxy statement or elsewhere as a result of new information, future events or otherwise, except as required by law. In addition to other factors and matters contained in this document, including the annexes hereto, we believe the following factors could cause actual results to differ materially from those discussed in the forward-looking statements:

Many of the factors that will determine our future results are beyond our ability to control or predict. In light of the significant uncertainties inherent in the forward-looking statements contained herein, readers should not place undue reliance on forward-looking statements, which reflect management’s views only as of the date hereof. We cannot guarantee any future results, levels of activity, performance or achievements.

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THE SPECIAL MEETING

Date, Time and Place

This proxy statement is being furnished to our shareholders as part of the solicitation of proxies by the Board of Directors for use at the Special Meeting to be held on [•], 2014, starting at 10:00 a.m. local time at 6255 Sunset Boulevard, 6^th Floor, Hollywood, California 90028, or at any adjournment or postponement thereof.

The purpose of the Special Meeting is for our shareholders to consider and vote upon the approval of the Merger and adoption of the Merger Agreement. Our shareholders must approve the Merger and adopt the Merger Agreement for the Merger to occur. A copy of the Merger Agreement (including the amendment thereto) is attached to this proxy statement as Annex A. This proxy statement and the enclosed form of proxy are first being mailed to our shareholders on or about [•], 2014.

Record Date and Quorum

The holders of record of Common Stock as of the close of business on [•], 2014, the record date for the determination of shareholders entitled to notice of and to vote at the Special Meeting, are entitled to receive notice of and to vote at the Special Meeting. On the record date, 39,273,254 shares of Common Stock were outstanding. Holders of Common Stock as of the record date have one vote for each share of Common Stock owned by such shareholder as of the close of business on the record date.

The presence at the Special Meeting, in person or by proxy, of the holders of a majority of shares of Common Stock outstanding on the record date will constitute a quorum, permitting the Company to conduct its business at the Special Meeting. Any shares of Common Stock held in treasury by the Company or by any of our subsidiaries are not considered to be outstanding for purposes of determining a quorum. Once a share is represented at the Special Meeting, it will be counted for the purpose of determining a quorum at the Special Meeting and any adjournment of the Special Meeting. However, if a new record date is set for the adjourned Special Meeting, then a new quorum will have to be established. Proxies received but marked as abstentions will be included in the calculation of the number of shares considered to be present at the Special Meeting. Broker non-votes, as described in “The Special Meeting — Voting; Proxies; Revocation — Providing Voting Instructions by Proxy” beginning on page 70, also will count for purposes of determining the presence of a quorum if the shares are being voted with respect to any matter at the Special Meeting.

Required Vote

For the Company to complete the Merger, under New York law and the Merger Agreement, shareholders holding at least two-thirds of the aggregate voting power of our Common Stock outstanding at the close of business on the record date must vote “FOR” the approval of the Merger and adoption of the Merger Agreement. The Merger is not structured to require the approval of at least a majority of the unaffiliated shareholders.

Subject to the terms of the Voting Agreement between us, Parent and the Rollover Shareholders, the Rollover Shareholders have agreed to vote all shares of our Common Stock they beneficially own (and any shares acquired by them after the date of the Voting Agreement) in favor of approving the Merger and adopting the Merger Agreement. See “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Voting Agreement” beginning on page 87. As of the record date, there were 39,273,254 shares of our Common Stock outstanding, of which the Rollover Shareholders own 27,678,679 shares of Common Stock, representing in the aggregate approximately 70.5% of the issued and outstanding shares of Common Stock. This amount excludes the 63,579,204 shares of Common Stock that the Rollover Shareholders have the right to acquire pursuant to convertible preferred stock, warrants and options held by them. Because the Rollover Shareholders beneficially hold more than two-thirds of our outstanding shares of Common Stock as of the record date, they can satisfy the required vote under New York law and the Merger Agreement to approve the Merger and adopt the Merger Agreement without the affirmative vote of any of our other shareholders.

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Despite the fact that the Rollover Shareholders can satisfy the required vote, we are soliciting proxies and furnishing a proxy statement to shareholders for two reasons. First, we must hold a meeting because we are not permitted to take shareholder action by less than unanimous written consent, without a shareholder meeting, pursuant to our certificate of incorporation and Section 615(a) of the NYBCL. Second, we are soliciting proxies to give the unaffiliated shareholders the opportunity to express their respective views of the Merger, even though their approval is not required as a condition to the transaction.

Except in their capacities as members of our Board of Directors and/or as the Lead Director, as applicable, no officer or director of the Company, nor any of the Rollover Shareholders, has made any recommendation either in support of or in opposition to the Merger or the Merger Agreement. The directors and Executive Officers of the Company have informed the Company that as of date of this proxy statement, they intend to vote in favor of the approval of the Merger and adoption of the Merger Agreement.

Shareholders holding at least a majority of the shares of Common Stock voted at the Special Meeting must vote “FOR” the Merger-Related Compensation Proposal, in order for such proposal to be approved. However, such approval is not required for, and does not have any impact on, the treatment of the Company stock options and other stock-based awards held by our named executive officers or the completion of the Merger. Approval of the Merger-Related Compensation Proposal is not a condition to the completion of the Merger, and the vote with respect to the Merger-Related Compensation Proposal is advisory only and will not be binding on the Parent or the Company. Because the Rollover Shareholders beneficially hold more than a majority of our outstanding shares of Common Stock as of the record date, they can approve or disapprove the Merger-Related Compensation Proposal regardless of how any other shareholder votes.

Voting; Proxies; Revocation

Attendance

All holders of shares of Common Stock as of the close of business on [•], 2014, the record date for voting at the Special Meeting, including shareholders of record and beneficial owners of Common Stock registered in the “street name” of a bank, broker or other nominee, are invited to attend the Special Meeting. If you are a shareholder of record, please be prepared to provide proper identification, such as a driver’s license. If you hold your shares in “street name”, you will need to provide proof of ownership, such as a recent account statement or letter from your bank, broker or other nominee, along with proper identification.

Voting in Person

Shareholders of record as of the record date will be able to vote in person at the Special Meeting. If you are not a shareholder of record as of the record date, but instead hold your shares in “street name” through a bank, broker or other nominee, you must provide a legal proxy executed in your favor from your bank, broker or other nominee in order to be able to vote in person at the Special Meeting.

Providing Voting Instructions by Proxy

To ensure that your shares are represented at the Special Meeting, we recommend that you provide voting instructions promptly by proxy, even if you plan to attend the Special Meeting in person.

If you are a shareholder of record, you may provide voting instructions by proxy using one of the methods described below.

Submit a Proxy by Telephone or via the Internet.  This proxy statement is accompanied by a proxy card with instructions for submitting voting instructions. You may vote by telephone by calling the toll-free number or via the Internet by accessing the Internet address as specified on the enclosed proxy card. Your shares will be voted as you direct in the same manner as if you had completed, signed, dated and returned your proxy card, as described below.

Submit a Proxy Card.  If you complete, sign, date and return the enclosed proxy card by mail so that it is received before the Special Meeting, your shares will be voted in the manner directed by you on your proxy card.

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If you sign, date and return your proxy card without indicating how you wish to vote, your proxy will be voted in favor of the approval of the Merger and adoption of the Merger Agreement and the Merger-Related Compensation Proposal. If you fail to vote or return your proxy card, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the Special Meeting (unless you are a record holder as of the record date, or you obtain a legal proxy from your bank, broker or other nominee, and attend the Special Meeting in person) and will have the same effect as a vote against the approval of the Merger and adoption of the Merger Agreement, but will not affect the vote regarding the Merger-Related Compensation Proposal.

If your shares are held by a bank, broker or other nominee on your behalf in “street name”, your bank, broker or other nominee will send you instructions as to how to provide voting instructions for your shares by proxy. Many banks and brokerage firms have a process for their customers to provide voting instructions by telephone or via the Internet, in addition to providing voting instructions by proxy card.

In accordance with the rules of the New York Stock Exchange, banks, brokers and other nominees who hold shares of Common Stock in “street name” for their customers do not have discretionary authority to vote the shares with respect to the approval of the Merger and adoption of the Merger Agreement. Accordingly, if banks, brokers or other nominees do not receive specific voting instructions from the beneficial owner of such shares they may not vote such shares with respect to the approval of the Merger and adoption of the Merger Agreement. Under such circumstance, a “broker non-vote” would arise. Broker non-votes, if any, will have the same effect as a vote “AGAINST” the approval of the Merger and adoption of the Merger Agreement, but will have no effect on the Merger-Related Compensation Proposal, and will count for purposes of determining the presence of a quorum if the shares are being voted with respect to any matter at the Special Meeting. For shares of Common Stock held in “street name”, only shares of Common Stock affirmatively voted “FOR” approval of the Merger and adoption of the Merger Agreement will be counted as a favorable vote for such proposal.

Revocation of Proxies

Your proxy is revocable. If you are a shareholder of record, you may revoke your proxy at any time before the vote is taken at the Special Meeting by:

Attending the Special Meeting without taking one of the actions described above will not in itself revoke your proxy. Please note that if you want to revoke your proxy by mailing a new proxy card to the Company or by sending a written notice of revocation to the Company, you should ensure that you send your new proxy card or written notice of revocation in sufficient time for it to be received by the Company before the day of the Special Meeting.

If you hold your shares in “street name” through a bank, broker or other nominee, you will need to follow the instructions provided to you by your bank, broker or other nominee in order to revoke your proxy or submit new voting instructions.

Abstentions

Abstentions will be included in the calculation of the number of shares of Common Stock represented at the Special Meeting for purposes of determining the presence of a quorum. Abstaining from voting will have the same effect as a vote “AGAINST” the proposal to approve the Merger and adopt the Merger Agreement, but are not deemed voted and will have no effect on the Merger-Related Compensation Proposal.

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Postponements

The Company expects there will be present, in person or by proxy, sufficient favorable voting power to secure the vote of the shareholders of the Company necessary to approve the Merger and adopt the Merger Agreement. The Company does not anticipate that it will postpone the Special Meeting for the purpose of soliciting additional proxies unless it is advised by counsel that failure to do so could reasonably be expected to result in a violation of applicable law. Any postponement of the Special Meeting for the purpose of soliciting additional proxies will allow the Company’s shareholders who have already sent in their proxies to revoke them at any time prior to their use at the Special Meeting as postponed.

Solicitation of Proxies

We will bear the cost of solicitation of proxies. This includes the charges and expenses of brokerage firms and others for forwarding solicitation material to beneficial owners of our outstanding Common Stock. We may solicit proxies by mail, personal interview, e-mail, telephone, or via the Internet. The Company has retained a proxy solicitation firm, AST Phoenix Advisors, a division of American Stock Transfer & Trust Company, LLC, to assist it in the solicitation of proxies for the Special Meeting and will pay a fee of $7,500, plus reimbursement of out-of-pocket expenses.

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THE MERGER AGREEMENT

The following is a summary of the material provisions of the Merger Agreement, a copy of which (including the amendment thereto) is attached to this proxy statement as Annex A, and which we incorporate by reference into this proxy statement. This summary may not contain all of the information about the Merger Agreement that is important to you. We encourage you to read carefully the Merger Agreement in its entirety, as the rights and obligations of the parties thereto are governed by the express terms of the Merger Agreement and not by this summary or any other information contained in this proxy statement.

Explanatory Note Regarding the Merger Agreement

The following summary of the Merger Agreement, and the copy of the Merger Agreement (including the amendment thereto) attached hereto as Annex A to this proxy statement, are intended to provide information regarding the terms of the Merger Agreement and are not intended to modify or supplement any factual disclosures about the Company in its public reports filed with the SEC. In particular, the Merger Agreement and the related summary are not intended to be, and should not be relied upon as, disclosures regarding any facts and circumstances relating to the Company or any of its subsidiaries or affiliates. The Merger Agreement contains representations and warranties by the Company, Parent and Merger Sub which were made only for purposes of that agreement and as of specified dates. The representations, warranties and covenants in the Merger Agreement were made solely for the benefit of the parties to the Merger Agreement; may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures; are made for the purposes of allocating contractual risk between the parties to the Merger Agreement instead of establishing these matters as facts; and may apply contractual standards of materiality or material adverse effect that generally differ from those applicable to investors. In addition, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. Moreover, the description of the Merger Agreement below does not purport to describe all of the terms of such agreement, and is qualified in its entirety by reference to the full text of such agreement, a copy of which (including the amendment thereto) is attached hereto as Annex A and is incorporated herein by reference. Notwithstanding the foregoing, to the extent specific material facts exist that contradict the representations or warranties in the Merger Agreement, the Company has provided corrective disclosure in this proxy statement.

Additional information about the Company may be found elsewhere in this proxy statement and the Company’s other public filings. See “Where You Can Find Additional Information” beginning on page 106.

Structure of the Merger

At the Closing of the Merger, Merger Sub will merge with and into the Company and the separate corporate existence of Merger Sub will cease. The Company will be the surviving corporation in the Merger and will continue to be a New York corporation after the Merger. At the Closing of the Merger, the certificate of incorporation of the Company, as in effect immediately prior to the Effective Time, will be amended in accordance with applicable law to reflect the form of certificate of incorporation attached as an exhibit to the Merger Agreement. At the Closing of the Merger, the bylaws of the Company, as in effect immediately prior to the Effective Time, will be amended in accordance with applicable law to reflect the form of bylaws attached as an exhibit to the Merger Agreement. Subject to applicable law, the directors of Merger Sub immediately prior to the Effective Time will from and after the Effective Time be the initial directors of the surviving corporation and will hold office until their respective successors are duly elected and qualified, or their earlier death, resignation or removal. The officers of the Company immediately prior to the Effective Time will from and after the Effective Time be the initial officers of the surviving corporation and will hold office until their respective successors are duly elected and qualified, or their earlier death, resignation or removal.

When the Merger Becomes Effective

The Closing of the Merger will take place on a date to be specified by the Parent after the satisfaction or waiver of the conditions to Closing stated in the Merger Agreement (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions) or at such

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other time as the parties may agree in writing, but if Parent fails to specify a Closing Date, the Closing Date shall be no later than three business days after such conditions have been satisfied or waived (or June 15, 2014, if earlier). The Merger will become effective at the time, which we refer to as the Effective Time, when the Company and Parent file a certificate of Merger with the Department of State of the State of New York or at such later date or time as Parent and the Company agree in writing and specify in the certificate of Merger.

Effect of the Merger on the Capital Stock

At the Effective Time, each issued and outstanding share of Common Stock immediately prior to the Effective Time, other than the Excluded Shares and the Dissenting Shares, will be converted automatically into and will represent the right to receive $0.27 in cash, without interest, and each such share shall otherwise cease to be outstanding and shall otherwise automatically be cancelled and cease to exist.

At the Effective Time, each issued and outstanding Excluded Share immediately prior to the Effective Time, including each share of capital stock that is currently owned by the Rollover Shareholders (all of which such stock shall, immediately prior to the Effective Time, be held indirectly by Parent pursuant to the terms of the Rollover Agreement), shall cease to be outstanding and shall automatically be cancelled and shall cease to exist.

At the Effective Time, each share of common stock of Merger Sub shall be converted into one share of newly issued common stock of the Company as the surviving corporation of the Merger.

Treatment of Stock Options and Other Stock-Based Awards

Each Company stock option (other than those held by Mr. Harley) that is outstanding immediately prior to the Effective Time, whether or not vested or exercisable, as of the Effective Time, will be cancelled. Each holder will be entitled to receive a payment, if any, in cash from the Company (less any applicable withholding taxes) promptly following the Effective Time, equal to (a) the amount, if any, by which $0.27 exceeds the exercise price per share with respect to the stock option, multiplied by (b) the total number of shares of Common Stock then issuable upon the exercise of the stock option. As of the date of this proxy statement, there are outstanding options to purchase 360,000 shares of Common Stock with an exercise price of less than $0.27, which will be cancelled for an aggregate consideration of $30,900. All of the Company’s other outstanding stock options (including all of those held by the Company’s directors and Executive Officers) will be cancelled for no consideration.

Each Company share-based award other than a stock option, including restricted share awards (other than those held by Mr. Harley), whether or not vested, as of the Effective Time, will be cancelled. Each holder will be entitled to receive a payment, in cash from the Company (less any applicable withholding taxes) promptly following the Effective Time, equal to (a) $0.27 per share, multiplied by (b) the total number of shares of Common Stock constituting the award. As of the date of this proxy statement, the Company has outstanding an aggregate of 737,194 shares subject to restricted share awards, which will be cancelled in exchange for aggregate consideration of $199,042.38. These amounts include an aggregate of 578,694 shares subject to restricted share awards held by the Company’s directors (other than Mr. Harley) and Executive Officers, which will be cancelled for aggregate consideration of $156,247.38.

Each Company warrant (other than those held by Mr. Harley and the other Rollover Shareholders), whether or not vested or exercisable, as of the Effective Time, will be cancelled. Each holder will be entitled to receive a payment, if any, in cash from the Company (less any applicable withholding taxes) promptly following the Effective Time, equal to (a) the amount, if any, by which $0.27 exceeds the exercise price per share with respect to the warrant, multiplied by (b) the total number of shares of Common Stock then issuable upon the exercise of the warrant. However, any Company warrant that will have no value after the Effective Time (because the warrant has an exercise price per share that is greater than the merger consideration and, as of the Effective Time, the holder of the warrant will be entitled to receive, upon exercise of the warrant, only the merger consideration multiplied by the number of shares subject to the warrant), may remain outstanding. As of the date of the proxy statement, the Company has no outstanding warrants (other than those held by the Rollover Shareholders) with an exercise price of less than $0.27 and, accordingly, no consideration will be paid with respect to these warrants.

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Each Company stock option and restricted share award held by Mr. Harley and each warrant held by Mr. Harley and the other Rollover Shareholders, as of the Effective Time, will be cancelled on the terms and conditions set forth in the Rollover Agreement between Parent and the Rollover Shareholders. See “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Rollover Agreement” beginning on page 87.

Dissenting Shares

Notwithstanding anything in the Merger Agreement to the contrary, Dissenting Shares shall not be converted into the right to receive the merger consideration at the Effective Time unless and until the holder of such shares fails to perfect, withdraws or otherwise loses such holder’s right to appraisal. If a holder of Dissenting Shares shall withdraw (in accordance with Section 910 of the NYBCL) the demand for such appraisal or shall become ineligible for such appraisal or if a court of competent jurisdiction shall make a final, non-appealable determination that such holder is not entitled to the relief provided by Section 910 of the NYBCL with respect to such Dissenting Shares, then, as of the Effective Time or the occurrence of such event, whichever last occurs, such holder’s Dissenting Shares shall cease to be Dissenting Shares and shall be converted or deemed to have been converted, as the case may be, into the right to receive the merger consideration. We have agreed to give Parent (i) prompt notice of any written demands for appraisal, withdrawals (or attempted withdrawals) of demands for appraisal and any other instruments served pursuant to Section 910 of the NYBCL and received by us and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal.

Payment for the Common Stock in the Merger

Contemporaneously with the Effective Time, Parent will deposit, or cause to be deposited, with a bank or trust company that will be appointed by Parent (and reasonably acceptable to the Company), as the paying agent, in trust for the benefit of the Public Shareholders, sufficient cash to pay to the Public Shareholders the merger consideration of $0.27 per share of Common Stock. As soon as reasonably practicable following the Effective Time but not later than the fifth business day following the Effective Time, the surviving corporation will instruct the paying agent to mail to each Public Shareholder of record of shares of Common Stock that were converted into the merger consideration a letter of transmittal and instructions for use in effecting the surrender of certificates that formerly represented shares of the Common Stock or non-certificated shares represented by book-entry in exchange for the merger consideration.

Representations and Warranties

The Merger Agreement contains representations and warranties of the Company as to, among other things:

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The Merger Agreement also contains representations and warranties of Parent and Merger Sub as to, among other things:

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Some of the representations and warranties in the Merger Agreement are qualified by materiality or include a Material Adverse Effect or Parent Material Adverse Effect qualifier, as applicable.

For purposes of the Merger Agreement, a “Material Adverse Effect” with respect to the Company and its subsidiaries means any effect, together with other effects, that is or would reasonably be expected to be materially adverse to the business, assets (including intangible assets), condition (financial or otherwise) or results of operations of the Company or its subsidiaries or would reasonably be expected to materially impair the Company’s ability to perform its obligations under the Merger Agreement; provided, however, that none of the following shall be deemed to constitute or contribute to a Material Adverse Effect: (A) any adverse effect that results from general economic or market conditions (including changes in financial, securities or currency markets, changes in prevailing interest rates or exchange rates) and that does not disproportionately affect the Company or any of its subsidiaries relative to the other participants in the industry or industry sectors in which the Company or any subsidiary operates, (B) any adverse effect generally affecting the industry or industry sectors in which the Company or any of the its subsidiaries operates that does not disproportionately affect the Company or any of its subsidiaries relative to the other participants in the industry or industry sectors in which the Company or any subsidiary operates, (C) changes, after the date of the Merger Agreement, in laws or other legally enforceable requirements or applicable accounting regulations (including GAAP) or principles or interpretations thereof, or political, legislative or business conditions in the countries in which the Company or any of its subsidiaries operates, that do not disproportionately affect the Company or any of its subsidiaries relative to the other participants in the industry or industry sectors in which the Company or any subsidiary operates, (D) acts of war (whether or not declared), the commencement, continuation or escalation of a war, acts of armed hostility, sabotage or terrorism or other international or national calamity (whether natural or man-made) or any material worsening of such conditions threatened or existing as of the date of the Merger Agreement that do not disproportionately affect the Company or any of its subsidiaries relative to the other participants in the industry or industry sectors in which the Company or any subsidiary operates, (E) any failure by the Company to meet internal or published projections, forecasts or estimates of revenue, earnings or other financial or operating metrics (but not any event, condition, fact, change, occurrence or effect underlying such change or failure that is not otherwise excepted), or (F) any adverse effect that results from actions taken by the Company pursuant to the business plan of the Company developed at the direction of the lenders under the Credit Agreement.

For the purpose of the Merger Agreement, a “Parent Material Adverse Effect” means circumstances that would, or would reasonably be expected to, individually or in the aggregate, prevent or materially delay the performance by Parent or Merger Sub of any of its obligations under this Agreement or the Ancillary Agreements or the consummation of any of the transactions contemplated hereby or thereby.

Conduct of Business Pending the Merger

The Merger Agreement provides that, subject to certain exceptions or as consented to in writing by Parent or required by the business plan of the Company developed at the direction of the lenders under the Credit Agreement, during the period from the signing of the Merger Agreement to the Effective Time or the termination of the Merger Agreement pursuant to its terms, the Company, among other things, will, and will cause its subsidiaries to, conduct its business in the ordinary course of business consistent with past practice and shall use its reasonable best efforts to preserve intact its business organization, assets and goodwill and beneficial relationships with customers, suppliers and others having business dealings with it and to keep available the services of its officers and key employees on terms and conditions substantially comparable to those in effect prior to the signing of the Merger Agreement and maintain its rights and franchises, in each case, consistent with past practice. In addition, subject to certain exceptions or as consented to in writing by Parent or required by the business plan of the Company developed at the direction of the lenders under the Credit Agreement, the Company shall not, and shall not permit any of its subsidiaries to, among other things:

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Other Covenants and Agreements

Indemnification; Directors’ and Officers’ Insurance

All rights to indemnification, advancement of expenses and exculpation now existing in favor of each individual who, as of the Effective Time, is a present or former director or officer of the Company or any of its subsidiaries, referred to as the “indemnified parties”, will, with respect to matters occurring at or prior to the Effective Time, survive the Merger and continue in full force and effect. Until the sixth anniversary of the Closing Date, the organizational documents of the surviving corporation and its subsidiaries will, with respect to matters occurring at or prior to the Effective Time, contain provisions no less favorable with respect to indemnification, advancement of expenses and exculpation of the indemnified persons than as in effect prior to execution of the Merger Agreement. All rights to indemnification or advancement of expenses now existing in favor of the indemnified persons in any indemnification agreement between such person and the Company or any of its subsidiaries, as the case may be, or under law shall survive the Merger and continue in full force and effect in accordance with the terms of such agreement or law. In the event that Parent, the Company or any of their successors or assigns subsequently (i) consolidates with or merges into any other entity and is not be the continuing or surviving entity of such consolidation or merger or (ii) transfers or conveys a majority of its properties and assets to one or more persons in one or more transactions, then, and in each such case, proper provision shall be made so that the successors, assigns and transferees of Parent or the Company or their respective successors or assigns, as the case may be, assume the obligations described in this paragraph.

Prior to the Effective Time, the Company shall purchase a fully-paid, non-cancellable “tail” policy under the Company’s existing directors’ and officers’ insurance policy that has an effective term of six years from

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the Effective Time, covers the indemnified persons for actions and omissions occurring at or prior to the Effective Time and contains terms with respect to coverage and amount no less favorable than those of the applicable policy in effect immediately prior to the execution of the Merger Agreement. Notwithstanding the foregoing, in no event shall the Company be permitted to expend for such “tail” policy in excess of 300% of the annual premium currently provided by the Company for its existing policy of directors’ and officers’ liability insurance. If the premium of such insurance coverage exceeds such amount, the Company shall be permitted to obtain a policy with the greatest coverage available for a cost not to exceed such amount.

Access and Information

During normal business hours throughout the period prior to the Effective Time, the Company will provide Parent access to the Company’s records, contracts, financial and other data, properties and facilities (and, if requested by Parent, to conduct, at the sole cost of Parent, an environmental assessment of such properties and facilities), personnel, auditors, management reports and to such other information as Parent shall reasonably request. Prior to the Effective Time, the Company shall provide to Parent, promptly when available, financial statements of the Company and its subsidiaries for each quarter and month through the Effective Time, as prepared by management, a copy of each report, schedule, registration statement and other document filed by the Company or any of its subsidiaries after the date of the Merger Agreement and prior to the Effective Time pursuant to the requirements of federal or state securities laws, and any update of quarterly projections.

Efforts to Consummate

Subject to the terms and conditions of the Merger Agreement, each of the parties to the Merger Agreement (and each of their respective subsidiaries) will use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make the Merger effective as promptly as practicable, and to cooperate with each other for such purposes. The parties to the Merger Agreement will use their respective reasonable best efforts to resist, contest or defend any suit, claim, action or proceeding (including administrative or judicial actions and proceedings) challenging the Merger.

Limited Solicitation

Generally, under the Merger Agreement, we may not solicit alternative Takeover Proposals (as such term is defined in the Merger Agreement, as described below in this “The Merger Agreement — Other Covenants and Agreements — Limited Solicitation” section), but we may engage in a limited solicitation of certain designated parties that were agreed upon among Parent, Merger Sub and the Company as a result of the negotiations of the Merger Agreement by the Lead Director.

The Company will direct its representatives to, immediately cease any discussions, negotiations, or communications with any party, except the designated parties, with respect to any Takeover Proposal. The Company shall not, nor shall it authorize or permit any of its subsidiaries or its and their representatives to (and shall use its reasonable best efforts to cause such persons not to), among other things, directly or indirectly:

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However, prior to the receipt of the Shareholder Approval, the Company or the Lead Director may, in response to a bona fide written Takeover Proposal that did not result from a breach of the above paragraph, contact the party that submitted such Takeover Proposal to clarify the terms and conditions thereof and, subject to compliance with the provisions outlined in subsequent paragraphs below and provided that and that the Lead Director determines in good faith, after consultation with it outside legal counsel and financial advisors, that such Takeover Proposal constitutes or could reasonably be expected to lead to a Superior Proposal (as such term is defined in the Merger Agreement, as described below in this “The Merger Agreement — Other Covenants and Agreements — Limited Solicitation” section):

As promptly as practical and in any event within one business day of the receipt by the Company of any Takeover Proposal or any inquiry with respect to, or that could reasonably be expected to lead to, any Takeover Proposal, the Company will provide notice to Parent of such Takeover Proposal or inquiry. The notice will include the identity of the person making the Takeover Proposal or inquiry and the material terms and conditions of the Takeover Proposal or inquiry. The Company will keep Parent reasonably informed on a current basis of the status of the Takeover Proposal, including any material changes to its terms and conditions. The Company is required to provide Parent, within one business day after receipt, with copies of all written communications and other written materials, and summaries of all other communications, sent or provided to or by the Company and its representatives in connection with any Takeover Proposal.

The Lead Director will promptly consider in good faith any alteration of the terms of the Merger Agreement or the Merger proposed by Parent in response to any Takeover Proposal.

Prior to the Company receiving the Shareholder Approval, the Lead Director may, in response to a Superior Proposal, effect a Change in the Company Recommendation or approve and enter into any agreement relating to a Superior Proposal, provided that the Lead Director determines in good faith that the failure to do so would constitute a breach of its fiduciary duties to the shareholders of the Company. At least five business days prior to effecting a Change in the Company Recommendation or approving and entering into an agreement relating to a Superior Proposal, the Lead Director will provide written notice to Parent of its intention to make a Change in the Company Recommendation or enter into such agreement. The notice shall include the reasonable details regarding the cause for, and nature of, the Change in the Company Recommendation or the entering into such agreement. In addition, the Lead Director may not effect the Change in the Company Recommendation or approve and enter into an agreement relating to a Superior Proposal unless Parent does not make, within five business days of receipt of such notice, an offer that the Lead Director determines, in good faith after consultation with its legal and financial advisors, results in the applicable Takeover Proposal no longer being a Superior Proposal.

As described in this “The Merger Agreement — Other Covenants and Agreements — Limited Solicitation” section, nothing in the Merger Agreement will prohibit the Company, the Board of Directors or the Lead Director from complying with securities laws in respect of any Takeover Proposal, including making any disclosure to the shareholders of the Company. However, any public disclosure by the Company relating to a Takeover Proposal shall be deemed to be a Change in the Company Recommendation unless the Board of

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Directors expressly publicly reaffirms its approval or recommendation of the Merger Agreement and the Merger in such disclosure, or in the case of a “stop, look and listen” or similar communication, in a subsequent disclosure.

Other than as otherwise described in this “The Merger Agreement — Other Covenants and Agreements — Limited Solicitation” section, neither the Board nor any committee thereof nor the Lead Director will, directly or indirectly, effect a Change in the Company Recommendation, take any formal action or make any recommendation or public statement in connection with a tender offer or exchange offer other than a recommendation against such offer or a temporary “stop, look and listen” communication or approve any agreement, arrangement or understanding relating to, or that may reasonably be expected to lead to, any Takeover Proposal.

For purposes of this proxy statement:

A “Takeover Proposal” refers to any proposal or offer in respect of:

A “Superior Proposal” refers to any bona fide written proposal or offer made by a third party in respect of a business combination transaction involving, or any purchase or acquisition of, a majority of the voting power of the Company’s capital stock or a majority of the consolidated assets of the Company and its subsidiaries, which transaction or other purchase or acquisition contains terms and conditions that the Lead Director determines in good faith would result in a transaction that:

Shareholder Litigation

The Company will give Parent the opportunity to participate in the defense or settlement of any shareholder litigation against the Company and/or its directors relating to the transactions contemplated by the Merger Agreement, whether commenced prior to or after the execution and delivery of the Merger Agreement. The Company will not settle or offer to settle any litigation commenced prior to or after the execution of the Merger Agreement against the Company or any of its directors or executive officers by any shareholder of the Company relating to the Merger Agreement, the Merger, any other transaction contemplated thereby or otherwise, without the prior written consent of Parent, which shall not be unreasonably withheld or delayed.

SEC Reports

During the period prior to the Effective Time, the Company shall continue to timely file or furnish all forms, reports, statements, schedules and other materials with the SEC required to be filed or furnished pursuant to federal securities laws.

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Conditions to the Merger

The obligations of the Company, Parent and Merger Sub to effect the Merger are subject to the satisfaction or waiver, at or prior to the Closing Date, of the following mutual conditions:

The obligation of Parent and Merger Sub to effect the Merger is subject to the satisfaction or waiver, at or prior to the Closing Date, of the following additional conditions:

The obligation of the Company to effect the Merger is subject to the satisfaction or waiver, at or prior to the Closing Date, of the following additional conditions:

Termination

The Merger Agreement may be terminated and the transactions contemplated thereby may be abandoned at any time prior to the Effective Time, whether prior to or after receipt of the Shareholder Approval:

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Fees and Expenses

Except as otherwise provided in the Merger Agreement as described in this “The Merger Agreement — Fees and Expenses” section, all fees and expenses incurred in connection with the Merger and the other transactions contemplated by the Merger Agreement shall be paid by the party incurring such fees or expenses, whether or not the Merger is consummated.

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Payment or Reimbursement of Fees and Expenses by the Company

If the Merger Agreement is terminated by Parent because of a Change in the Company Recommendation, as described in “The Merger Agreement — Termination” beginning on page 83, the Company will reimburse Parent for its expenses (not to exceed $300,000 in the aggregate). If the Merger Agreement is terminated by the Company because the Board of Directors, upon the recommendation of the Lead Director, causes the Company to enter into an agreement related to a Superior Proposal, as described in “The Merger Agreement — Termination” beginning on page 83, the Company will reimburse Parent for its expenses (not to exceed $300,000 in the aggregate) and will pay Parent a termination fee of $300,000. Parent’s right to receive such reimbursement of expenses and/or such termination fee, as applicable, shall be the sole and exclusive remedy in the event of a termination of the Merger Agreement as described, except in the event of a willful or intentional material breach of any provision of the Merger Agreement by the Company.

Payment or Reimbursement of Fees and Expenses by Parent

If the Merger Agreement is terminated by the Company because Parent or Merger Sub breached or failed to perform in any material respect any of its representations, warranties, covenants or agreements contained in the Merger Agreement, as described in “The Merger Agreement — Termination” beginning on page 83, and (i) such breach was material and knowing, willful or intentional and (ii) at the time of such termination, the Company is then ready, willing and able to consummate the merger and the conditions to Parent and Merger Sub’s obligations under the Merger Agreement have been satisfied or waived, Parent will reimburse the Company for its expenses (not to exceed $300,000 in the aggregate) and will pay the Company a termination fee in an amount equal to $300,000. If the Merger Agreement is terminated by the Company because Parent or Merger Sub breached or failed to perform in any material respect any of its representations, warranties, covenants or agreements contained in the Merger Agreement, as described in “The Merger Agreement —  Termination” beginning on page 83, in circumstances other than those set forth in the preceding sentence, Parent will reimburse the Company for its expenses (not to exceed $300,000 in the aggregate). The Company’s right to terminate and receive such reimbursement of expenses and/or such termination fee, as applicable, shall be the sole and exclusive monetary remedy of the Company. In the event the Merger Agreement is terminated as described, under no circumstances shall the Company be permitted or entitled to receive any injunction, specific performance or other equitable relief.

Amendments and Waivers

The Merger Agreement may not be amended and no waiver, consent or approval by or on behalf of the Company (or Lead Director, if applicable) may be granted except pursuant to an instrument in writing signed by or on behalf of the Company (or Lead Director, if applicable) following approval of such action by the Lead Director and signed by Parent; provided, however, that following the Shareholder Approval, no amendment may be made to the Merger Agreement that by law requires further approval or authorization by the shareholders of the Company or Merger Sub without such further approval or authorization.

At any time prior to the Effective Time, whether before or after receipt of the Shareholder Approval:

Equitable Remedies

The Company will not be entitled to receive both equitable remedies and the reimbursement of expenses and/or a termination fee, as described in “The Merger Agreement — Fees and Expenses — Payment or Reimbursement of Fees and Expenses by Parent” beginning on page 85. Parent and/or Merger Sub shall be entitled to an injunction or injunctions to prevent breaches of the Merger Agreement or to enforce specifically the performance of the terms hereof in addition to any other remedies to which they are entitled at law or in

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equity. The Company has waived any defenses in any action for specific performance, including the defense that a remedy at law would be adequate. Except as otherwise provided in the Merger Agreement, as described in this paragraph, the exercise by Parent or Merger Sub of a particular remedy shall not preclude the exercise of any other remedy.

Vote Required and Board Recommendation

For the Company to complete the Merger, under New York law and the Merger Agreement, shareholders holding at least two-thirds of the aggregate voting power of our Common Stock outstanding at the close of business on the record date must vote “FOR” the approval of the Merger and adoption of the Merger Agreement. For purposes of the proposal to approve the Merger and adopt the Merger Agreement, abstentions and shares deemed present at the meeting but not entitled to vote with respect to the proposal (because of either shareholder withholding or broker non-vote) will have the same effect as a vote “AGAINST” the proposal. If you fail to submit a proxy or vote in person at the Special Meeting, the shares of Common Stock not voted will have the same effect as a vote “AGAINST” this proposal.

Subject to the terms of the Voting Agreement between us, Parent and the Rollover Shareholders, the Rollover Shareholders have agreed to vote all shares of our Common Stock they beneficially own (and any shares acquired by them after the date of the Voting Agreement) in favor of approving the Merger and adopting the Merger Agreement. See “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Voting Agreement” beginning on page 87. As of the record date, there were 39,273,254 shares of our Common Stock outstanding, of which the Rollover Shareholders own 27,678,679 shares of Common Stock, representing in the aggregate approximately 70.5% of the outstanding shares of Common Stock. This amount excludes the 63,579,204 shares of Common Stock that the Rollover Shareholders have the right to acquire pursuant to convertible preferred stock, warrants and options held by them. Because the Rollover Shareholders beneficially hold more than two-thirds of our outstanding shares of Common Stock as of the record date, they can satisfy the required vote under New York law and the Merger Agreement to approve the Merger and adopt the Merger Agreement without the affirmative vote of any of our other shareholders.

THE BOARD OF DIRECTORS, BASED ON THE RECOMMENDATION OF THE LEAD DIRECTOR, RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE MERGER AND THE ADOPTION OF THE MERGER AGREEMENT.

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AGREEMENTS INVOLVING THE COMPANY’S SECURITIES; TRANSACTIONS BETWEEN THE
ROLLOVER SHAREHOLDERS AND THE COMPANY

Agreements Involving the Company’s Securities

Voting Agreement

In connection with the execution of the Merger Agreement, on December 18, 2013, Parent, HGI Funding and the Rollover Shareholders entered into an agreement with the Company, which we refer to as the “Voting Agreement,” pursuant to which each Rollover Shareholder agreed, subject to the terms and conditions set forth therein, to vote the Subject Shares (as defined therein, and including any shares acquired by them after the date of the Voting Agreement) in favor of approving the Merger and adopting the Merger Agreement. The Rollover Shareholders further agreed to vote against (i) any Takeover Proposal or Superior Proposal, (ii) any action, proposal, transaction or agreement which could reasonably be expected to result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement or of such shareholder under the Voting Agreement, and (iii) any action, proposal, transaction or agreement that could reasonably be expected to impede, interfere with, delay, discourage, adversely affect or inhibit the timely consummation of the Merger or the fulfillment of Parent’s, the Company’s or Merger Sub’s conditions under the Merger Agreement or change in any manner the voting rights of any class of shares of the Company. The Voting Agreement will terminate upon the occurrence of certain events, including the termination of the Merger Agreement in accordance with its terms.

A copy of the Voting Agreement is attached to this proxy statement as Annex C and is incorporated by reference into this proxy statement. The summary of the Voting Agreement in the preceding paragraph does not purport to be complete and may not contain all of the information about the Voting Agreement that may be important to you and is qualified in its entirety by reference to the full text of such agreement. We encourage you to read the Voting Agreement carefully and in its entirety, as the rights and obligations of the parties thereto are governed by the express terms of the Voting Agreement and not by this summary or any other information contained in this proxy statement.

As of the record date, there were 39,273,254 shares of our Common Stock outstanding, of which the Rollover Shareholders own 27,678,679 shares of Common Stock, representing in the aggregate approximately 70.5% of the outstanding shares of Common Stock. This amount excludes the 63,579,204 shares of Common Stock that the Rollover Shareholders have the right to acquire pursuant to convertible preferred stock, warrants and options held by them.

Rollover Agreement

In connection with the execution of the Merger Agreement, on December 18, 2013, the Rollover Shareholders entered into an agreement with Parent, which we refer to as the “Rollover Agreement,” pursuant to which, simultaneously with the execution of the Rollover Agreement, Parent issued to each Rollover Shareholder an equity interest in Parent. Subject to the consummation of the transactions contemplated by the Purchase Agreement (as defined in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Purchase and Sale Agreement” below), immediately prior to the Effective Time, each Rollover Shareholder will contribute the shares of Common Stock, Series A Convertible Preferred Stock and Series B Convertible Preferred Stock held by such Rollover Shareholder (after taking into account the transfer of shares of Series A Convertible Preferred Stock from TTG to HGI Funding pursuant to the Purchase Agreement) to Parent in exchange for an increase in their equity interests in Parent. The issuance of the equity interests will be effected by increasing the value of the capital account corresponding to such Rollover Shareholder’s existing equity interests.

In addition, each stock option, stock-based award (other than a stock option) and warrant held by the Rollover Shareholders will, immediately following the Effective Time, automatically and without the taking of any further action on the part of the Company or any Rollover Shareholder, be cancelled (and to the extent formerly exercisable shall no longer be exercisable) and shall no longer represent the right to receive or acquire shares of Common Stock or receive any other consideration therefor.

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In the event that the transactions contemplated by the Rollover Agreement are consummated but the Merger Agreement is terminated in accordance with its terms, then the transactions contemplated by the Rollover Agreement will be deemed not to have occurred. The Rollover Agreement will terminate upon the termination of the Merger Agreement in accordance with its terms.

A copy of the Rollover Agreement is attached to this proxy statement as Annex D and is incorporated by reference into this proxy statement. The summary of the Rollover Agreement in the preceding paragraph does not purport to be complete and may not contain all of the information about the Rollover Agreement that may be important to you and is qualified in its entirety by reference to the full text of such agreement. We encourage you to read the Rollover Agreement carefully and in its entirety, as the rights and obligations of the parties thereto are governed by the express terms of the Rollover Agreement and not by this summary or any other information contained in this proxy statement.

Purchase and Sale Agreement

In connection with the execution of the Merger Agreement, on December 18, 2013, HGI Funding and TTG entered into an agreement, which we refer to as the “Purchase Agreement,” pursuant to which, subject to the terms and conditions of the agreement, HGI Funding agreed to purchase and TTG agreed to sell 14,900 shares of the Company’s Series A Convertible Preferred Stock for an aggregate purchase price of $1,490,000. The sale will close immediately prior to the closing of the Merger (with a condition subsequent that the closing of the Merger occurs) and the transactions contemplated by the Rollover Agreement. The Purchase Agreement will terminate upon the termination of the Merger Agreement in accordance with its terms.

A copy of the Purchase Agreement is attached to this proxy statement as Annex E and is incorporated by reference into this proxy statement. The summary of the Purchase Agreement in the preceding paragraph does not purport to be complete and may not contain all of the information about the Purchase Agreement that may be important to you and is qualified in its entirety by reference to the full text of such agreement. We encourage you to read the Purchase Agreement carefully and in its entirety, as the rights and obligations of the parties thereto are governed by the express terms of the Purchase Agreement and not by this summary or any other information contained in this proxy statement.

Series B Convertible Preferred Stock Transaction

Purchase Agreement

On March 15, 2013, the Company entered into a Series B Convertible Preferred Stock Purchase Agreement, the “Series B SPA,” pursuant to which the Company sold $10,000,000 of Series B Convertible Preferred Stock to Five Island, a subsidiary of HGI. In addition, the Company issued to Five Island warrants to purchase up to an aggregate of 10,246,477 shares of Common Stock at exercise prices ranging from $0.01 to $1.21 per share. The warrants are exercisable only upon a corresponding exercise or conversion of specified outstanding securities, as set forth in the warrants. On September 26, 2013, Five Island transferred the Series B Convertible Preferred Stock and the warrants, along with its rights under the agreements described below, to HGI Funding.

Series B Convertible Preferred Stock

The terms of the Series B Convertible Preferred Stock, as set forth in a certificate of amendment, or the “Series B Certificate of Amendment,” to the Company’s certificate of incorporation, are as follows:

Dividends.  Cumulative dividends on the Series B Convertible Preferred Stock are payable quarterly in arrears either (i) at the rate of 9% per annum in cash or, at the Company’s discretion, (ii) at the rate of 12% per annum in additional shares of Series B Convertible Preferred Stock. The dividends on the Series B Convertible Preferred Stock will be paid prior to dividends on the Company’s common stock and preferred stock ranking junior to the Series B Convertible Preferred Stock, or the “Junior Preferred Stock.”

Rank.  The Series B Convertible Preferred Stock ranks, with respect to rights upon a Liquidation Event (as defined below), (a) junior to any other class or series of capital stock of the Company subsequently created that by its terms ranks senior to the Series B Convertible Preferred Stock; (b) senior to the common stock and the Series A Convertible Preferred Stock; (c) senior to any class or series of capital stock of the

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Company subsequently created that does not specifically rank senior to or on parity with the Series B Convertible Preferred Stock; and (d) on parity with any class or series of capital stock of the Company subsequently created that by its terms ranks on parity with the Series B Convertible Preferred Stock.

Voting Rights.  Except as otherwise required by law or by the terms of the Series B Certificate of Amendment, the Series B Convertible Preferred Stock does not have voting rights. However, as long as any shares of Series B Convertible Preferred Stock are outstanding, the Company may not, without the vote or written consent of the holders of at least a majority of the outstanding shares of Series B Convertible Preferred Stock: (a) amend, alter or repeal of any provision of the Company’s certificate of incorporation or by-laws; (b) alter or change the powers, preferences or other special rights, privileges or restrictions of the Series B Convertible Preferred Stock; (c) authorize or designate any new security ranking on a parity with or senior to the Series B Convertible Preferred Stock; (d) issue any common stock or equity or debt security convertible into common stock (other than shares of Series A Convertible Preferred Stock issued as dividends on the outstanding shares of Series A Convertible Preferred Stock), whether senior, on parity or junior to the Series B Convertible Preferred Stock; (e) issue any equity or debt in a Series B Qualifying Investment (as defined in the Series B Certificate of Amendment) where the securities issued in such investment are by their terms mandatorily redeemable by the Company; (f) incur, assume or guarantee any indebtedness for borrowed money in excess of $1,000,000 or permit any liens other than in connection with such indebtedness; (g) enter into any transaction with affiliates other than salary and benefits in the ordinary course of business or conversion of the Series A Convertible Preferred Stock into common stock; (h) purchase, redeem or otherwise acquire any equity interests of the Company, other than a mandatory redemption of the Series A Convertible Preferred Stock pursuant to its terms; (i) declare or pay any dividend or distribution to any equity holders of the Company other than preferred dividends on the Series B Convertible Preferred Stock, the Series A Convertible Preferred Stock and any dividends payable in additional shares of common stock; (j) except as provided in the Series B Certificate of Amendment, increase or decrease the size of the Board of Directors; or (k) liquidate, dissolve or wind up, or commence any bankruptcy or similar proceeding, with respect to the Company.

Director Election Rights.  As long as the holders of the Series B Convertible Preferred Stock (together with former holders (or affiliates thereof) who have exercised their conversion rights) represent (A) at least 25% of the outstanding shares of the Company’s common stock (assuming (x) conversion of the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock and (y) exercise of any warrants held by the holders of the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock), the holders of a majority of the outstanding shares of Series B Convertible Preferred Stock will be entitled to elect 35% of the Board of Directors (rounded up to the nearest whole number of directors and in all cases at least two directors) or (B) at least 15%, but less than 25%, of the outstanding shares of the Company’s common stock (assuming (x) conversion of the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock and (y) exercise of any warrants held by the holders of the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock), the holders of a majority of the outstanding shares of Series B Convertible Preferred Stock will be entitled to elect one director of the Board of Directors (in either case, such directors or director shall be referred to as the “Series B Directors” or “Series B Director”).

At any annual or special meeting of the Company’s shareholders, the holders of a majority of the outstanding shares of Series B Convertible Preferred Stock will be entitled to elect the Series B Directors. Series B Directors may be removed, with or without cause, only by a vote of the holders of a majority of the outstanding shares of Series B Convertible Preferred Stock. Vacancies in seats held by Series B Directors can only be filled by a vote of the holders of a majority of the outstanding shares of Series B Convertible Preferred Stock.

Additionally, as long as the holders of the Series B Convertible Preferred Stock (together with any former holders (or affiliates thereof) of shares of Series B Convertible Preferred Stock who have exercised their conversion rights) represent at least a majority of the outstanding shares of the Company’s common stock (assuming (x) conversion of the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock and (y) exercise of any warrants held by the holders of the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock), upon delivery of written notice to the Company from all of the remaining holders of Series B Convertible Preferred Stock exercising their right to convert all of the

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Series B Convertible Preferred Stock, the number of members of the Board of Directors will automatically increase, without any action required by the Company or the Board of Directors, such that the number of newly created seats plus the number of Series B Directors will constitute a majority of the Board of Directors. The holders of a majority of the outstanding shares of Series B Convertible Preferred Stock delivering the conversion notice will be entitled to elect directors to fill all of the newly created seats.

Liquidation Rights.  Upon the occurrence of an Acquisition or Asset Transfer (each as defined in the Series B Certificate of Amendment) or upon any bankruptcy, liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (any such Acquisition, Asset Transfer, bankruptcy, liquidation, dissolution or winding up, a “Series B Liquidation Event”), the holders of Series B Convertible Preferred Stock will be entitled to receive, in preference to the holders of any security not ranking by its terms senior to or on parity with the Series B Convertible Preferred Stock, including the common stock and any Junior Preferred Stock, an amount equal to: (i) the stated value of the Series B Convertible Preferred Stock plus all accrued but unpaid dividends thereon, multiplied by (ii) (A) 1.05, if the Liquidation Event occurs after March 15, 2014 but no later than March 15, 2015 or (B) 1.00, if the Series B Liquidation Event occurs after March 15, 2015.

Mandatory Repurchase Obligation.  A holder of the Series B Convertible Preferred Stock will have the right to require the Company to purchase its shares of Series B Convertible Preferred Stock for a price equal to the amount the holder would be entitled to receive upon a Series B Liquidation Event in the event of a cash investment in the Company (other than by holders of the Series B Convertible Preferred Stock) resulting in (i) 30% or more of the equity of the Company being held by one or more parties that did not own it immediately prior to the investment and (ii) the securities issued under such investment are not by their terms mandatorily redeemable by the Company.

Conversion.  The Series B Convertible Preferred Stock may be converted at any time, at the option of the holder, into shares of common stock at a conversion price of $0.25 per share, or the “Series B Conversion Price.” The Series B Conversion Price is subject to adjustment resulting from dividends, distributions, stock combinations, splits, recapitalizations or similar capital adjustments. The Series B Conversion Price is also subject to adjustment if the Company sells common stock or common stock equivalents at a price below the Series B Conversion Price; provided, however, that the foregoing conversion price adjustments can never result in a conversion price of less than $0.07 per share, as adjusted from time to time for any stock combinations, splits, recapitalizations or similar capital adjustments.

Upon full conversion and exercise of all preferred stock, HGI Funding would own a majority of the Company’s common stock and be entitled to appoint a majority of the Company’s Board of Directors. Formerly, TTG, TKZ, Fursa and Arsenal collectively controlled a majority of the Company’s common stock.

Optional Redemption by the Company.  The Series B Convertible Preferred Stock is redeemable, at the option of the Company, at any time after March 15, 2018. Upon redemption, a holder of Series B Convertible Preferred Stock will be paid, for each share of Series B Convertible Preferred Stock, a price equal to the stated value of the Series B Convertible Preferred Stock then in effect plus all accrued or cumulated but unpaid dividends thereon.

The Series B Certificate of Amendment was adopted by the Board of Directors on March 12, 2013 and became effective upon filing with the New York Secretary of State on March 15, 2013.

Registration Rights

Pursuant to the Series B SPA, the Company agreed to file, by May 14, 2013, a registration statement to register the resale of the shares of Common Stock issuable upon conversion of the Series B Convertible Preferred Stock, the shares of Common Stock underlying any shares of Series B Convertible Preferred Stock issuable as dividends on such shares and shares of Common Stock issuable upon exercise of the warrants. The requirement to file a registration statement was waived, but HGI Funding reserves its right to rescind the waiver in the future. In addition, HGI Funding has certain demand and “piggyback” registration rights with respect to such shares of Common Stock.

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Shareholder Meeting

Pursuant to the Series B SPA, the Company agreed to cause a general or special meeting of its shareholders to be duly called and held, as soon as practicable, but not later than February 1, 2014, for the purpose of voting on the approval and adoption of an amendment to the Company’s certificate of incorporation providing that the shareholders entitled to vote may take any action that they might have taken at a shareholders’ meeting by a written consent signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action. The Company agreed to use its best efforts to prepare and file a proxy statement with the SEC for use in soliciting proxies for the general or special meeting of shareholders. Pursuant to the Voting Agreement, HGI Funding waived the requirement to include the amendment in this proxy statement for the Special Meeting. Accordingly, the certificate of incorporation continues to prohibit the Company from taking action by less than unanimous consent.

Amendments to By-laws

Pursuant to the Series B SPA, effective on March 15, 2013, the Board of Directors adopted the Second Amended and Restated By-laws of the Company to, among other things, provide for the Series B Directors to serve on the Board of Directors as described above and to allow the shareholders of the Company to act by majority written consent if the Company’s certificate of incorporation is amended as described above under the heading “Shareholder Meeting.” Under the Company’s prior effective by-laws, the shareholders could only act by unanimous written consent. Additionally, the new by-laws provide that for so long as the holders of Series B Convertible Preferred Stock are entitled to appoint one Series B Director to the Board of Directors, each committee of the Board of Directors (including the executive committee) shall include at least one Series B Director.

Series B Directors

Pursuant to the Series B SPA, the Company agreed to use its best efforts to cause the rights granted to the holder of the Series B Convertible Preferred Stock with respect to the nomination and appointment of the Series B Directors to be effectuated. The Company will enter into separate indemnification agreements with each Series B Director upon his or her appointment or election to the Board of Directors. As of the date of this proxy statement, a Series B Director has not been appointed.

Consent and Waiver of Holder of Series A Convertible Preferred Stock

In connection with the transaction, TTG, the holder of the outstanding shares of Series A Convertible Preferred Stock, consented to the transaction and waived, on behalf of itself and any transferees of the Series A Convertible Preferred Stock, (a) any and all anti-dilution adjustments applicable to the Series A Convertible Preferred Stock which might otherwise be made to the conversion prices of such shares and any additional shares of Series A Convertible Preferred Stock that may be issued as a dividend on such shares and (b) any and all rights to redemption in connection with a Qualifying Investment (as defined in the Company’s certificate of incorporation), in each case as a result of the transactions contemplated by the Series B SPA.

Additional Information

The foregoing are summaries of the Series B SPA, Series B Certificate of Amendment, Warrants, Amended and Restated By-laws and Indemnification Agreement are not complete and are qualified in their entirety by reference to the full text of those documents, which are attached as exhibits to the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2013. Readers should review the Series B SPA and all related documents for a complete understanding of the terms and conditions associated with this transaction.

Series A Convertible Preferred Stock Transaction

Purchase Agreement

On May 23, 2012, the Company entered into a Series A Convertible Preferred Stock Purchase Agreement, or the “Series A SPA,” pursuant to which the Company sold $5,000,000 of Series A Convertible Preferred Stock to TTG. In addition, the Company issued to TTG three, five, and seven year warrants, each to purchase 500,000 shares of Common Stock (for an aggregate of 1,500,000 shares of Common Stock) at exercise prices of $0.45, $0.53 and $0.60 per share, respectively.

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Series A Convertible Preferred Stock

The terms of the Series A Convertible Preferred Stock are as follows:

Dividends.  Cumulative dividends on the Series A Convertible Preferred Stock will be payable quarterly in arrears at the rate of 9% per annum in additional shares of Series A Convertible Preferred Stock, or “PIK Shares,” except that from and after May 23, 2014, the rate will be the greater of 9% per annum or the highest rate the Company is paying on any outstanding debt under its then existing credit facilities.

Conversion.  The Series A Convertible Preferred Stock other than the PIK Shares may be converted at any time, at the option of the holder, into shares of common stock at a conversion price of $1.05 per share, or the “Series A Series A Conversion Price,” and the PIK Shares may be converted at any time, at the option of the holder, into shares of common stock at a conversion price of $0.45 per share, or the “PIK Share Series A Conversion Price.” The Series A Conversion Price and PIK Share Series A Conversion Price will be adjusted for customary structural changes such as stock splits and dividends. The Series A Conversion Price will also be adjusted if the Company sells common stock or common stock equivalents at a price below the Series A Conversion Price, and the PIK Share Series A Conversion Price will be adjusted if the Company sells common stock or common stock equivalents at a price below the PIK Share Series A Conversion Price; provided, however, that the foregoing conversion price adjustments can never result in a conversion price of less than $0.29 per share, or the “Floor Series A Conversion Price.”

Ranking.  The Series A Convertible Preferred Stock ranks, with respect to rights upon a Liquidation Event (defined below), (a) junior to any other class or series of capital stock of the Company created that by its terms ranks senior to the Series A Convertible Preferred Stock; (b) senior to the common stock; (c) senior to any class or series of capital stock of the Company created that does not specifically rank senior to or on parity with the Series A Convertible Preferred Stock; and (d) on parity with any class or series of capital stock of the Company created that by its terms ranks on parity with the Series A Convertible Preferred Stock.

Voting Rights.  Except as required by law, the Series A Convertible Preferred Stock will not have voting rights. However, as long as any shares of Series A Convertible Preferred Stock are outstanding, the Company may not, without the affirmative vote of the holders of a majority of the then outstanding shares of Series A Convertible Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the holders of the Series A Convertible Preferred Stock, (b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of the Series A Convertible Preferred Stock, (c) authorize or designate any new security ranking on a parity with or senior to the Series A Convertible Preferred Stock, (d) issue any common stock or debt or equity security convertible into common stock, whether senior, on parity or junior to the Series A Convertible Preferred Stock, at a price per share which is lower than the Floor Series A Conversion Price or (e) issue any equity or debt in a Qualifying Investment (as defined in the Certificate of Amendment to the Certificate of Incorporation of the Company, or the “Series A Certificate of Amendment”) where the securities issued in such investment are by their terms mandatorily redeemable by the Company.

Liquidation Rights.  Upon the occurrence of an Acquisition or Asset Transfer (each as defined in the Series A Certificate of Amendment) or upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (any such Asset Acquisition, Asset Transfer, liquidation, dissolution or winding up, a “Series A Liquidation Event”), a holder of Series A Convertible Preferred Stock will be entitled to receive in preference to the holders of any capital stock of the Company junior to the Series A Convertible Preferred Stock, an amount equal to: (i) the stated value of the Series A Convertible Preferred Stock plus all accrued but unpaid dividends thereon, multiplied by (ii)(A) 1.05 if the Series A Liquidation Event takes place by May 23, 2014, or (B) 1.0 if the Series A Liquidation Event takes place after May 23, 2014, plus (x) the original value per share as of the date of issuance for any PIK Shares (as adjusted for stock splits, reverse stock splits and similar capital adjustments) plus all accrued but unpaid dividends thereon, multiplied by (y) the number of PIK Shares. A holder of the Series A Convertible Preferred Stock will also have the right to require the Company to purchase its shares of Series A Convertible Preferred Stock for a price equal to the amount the holder would be entitled to receive upon a Series A Liquidation Event in the event of a cash investment in the Company (other than by holders of the Series A Convertible Preferred Stock) resulting in a

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change in ownership of more than 30% of the equity of the Company and the securities issued under such investment not being mandatorily redeemable by the Company.

Optional Redemption by the Company.  The Series A Convertible Preferred Stock is redeemable, at the option of the Company, at any time. Upon redemption, a holder of Series A Convertible Preferred Stock will be paid: (a) for each share of Series A Convertible Preferred Stock other than a PIK Share, a price equal to the stated value of the Series A Convertible Preferred Stock plus all accrued but unpaid dividends thereon multiplied by (i) 1.10 if the redemption occurs on or prior to May 23, 2015, (ii) 1.08 if the redemption occurs after May 23, 2015 but on or prior to May 23, 2017 or (iii) 1.0 if the redemption occurs after May 23, 2017, and (b) for each PIK Share, an amount equal to the stated value of the Series A Convertible Preferred Stock plus all accrued but unpaid dividends thereon.

Registration Rights

The Company filed a registration statement to register the resale of the shares of common stock issuable upon conversion of the Series A Convertible Preferred Stock and exercise of the warrants issued to TTG.

Additional Information

The foregoing is a summary of the Series A SPA, Series A Certificate of Amendment and Warrants, which is not complete, and is qualified in its entirety by reference to the full text of those agreements, which are attached as exhibits to the Company’s Current Report on Form 8-K filed with the SEC on May 29, 2013. Readers should review the Series A SPA and all related agreements for a complete understanding of the terms and conditions associated with this transaction.

Non-Employee Director Compensation to William F. Harley III and Peter Cole

During past two years, as compensation for services rendered to the Company as a non-employee director, the Company issued shares of Common Stock to William F. Harley III, a Rollover Shareholder, in the amounts and as of the dates set forth below. The shares were issued on a quarterly basis and the number of shares was calculated, in each case, based on the price per share set forth below, which was the closing price on the last trading day prior to the end of the quarter.

Date		Shares				For Quarter Ended				Closing Price
November 4, 2011			19,512				October 29, 2011			$	0.41
February 1, 2012			18,605				January 28, 2012			$	0.43
May 3, 2012			28,443				April 28, 2012			$	0.26
August 2, 2012			17,949				July 28, 2012			$	0.39
November 13, 2012			20,000				October 27, 2012			$	0.30
February 7, 2013			56,522				January 26, 2013			$	0.23
May 7, 2013			60,000				April 27, 2013			$	0.15
August 5, 2013			44,444				July 27, 2013			$	0.18
November 5, 2013			39,130				October 26, 2013			$	0.23

On January 11, 2012, each non-employee director, including Mr. Harley and Peter Cole, who became a member of the board of managers of Parent on the date the Merger Agreement was executed, was issued 9,000 shares of restricted stock and options to purchase 21,000 shares of common stock at an exercise price of $0.40 per share under the 2010 Long-Term Incentive Equity Plan. One-third of the shares and options vested on each of January 11, 2012 and 2013, and one-third vested on January 11, 2014.

Transactions between the Rollover Shareholders and the Company

Except for the Merger and as described in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company” above, there have been no transactions between the Rollover Shareholders and the Company during the past two years.

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PROVISIONS FOR PUBLIC SHAREHOLDERS

No provision has been made (i) to grant the unaffiliated shareholders of the Company access to the corporate files of the Company, any other party to the Merger or any of their respective affiliates, except that the opinion of Cassel Salpeter attached to this proxy statement as Annex B and the presentation by Cassel Salpeter attached as exhibit (c)(1) to the Schedule 13E-3 relating to the Merger will be made available for inspection and copying at the principal executive offices of the Company during its regular business hours, or (ii) to obtain counsel or appraisal services at the expense of the Company, any other such party or affiliate.

IMPORTANT INFORMATION CONCERNING THE COMPANY

Company Background

Through our subsidiaries, we sell women’s apparel and related products under our proprietary Frederick’s of Hollywood® brand through our retail stores, website and catalog. Our customer target is women primarily between the ages of 18 and 45. Our major merchandise categories are foundations (including bras, corsets, shapewear and panties), lingerie (including daywear and sleepwear), ready-to-wear (dresses and sportswear, including denim), and fragrance and accessories (including shoes, handbags, jewelry, personal care products and novelties).

As of April 14, 2014, we operated 96 Frederick’s of Hollywood stores. These stores are primarily located in shopping malls in 28 states. Approximately one-third of the stores are in California. Of the stores outside of California, approximately 35% are situated in our other key operating states, which include Florida, Texas, New York and Nevada. Our flagship store is on Hollywood Boulevard in Hollywood, California.

We also have an extensive history — dating back to the first Frederick’s of Hollywood catalog produced in 1947 — of offering women’s apparel directly to the consumer. Today, we market and sell our products directly to consumers primarily through our retail website, www.fredericks.com, and catalog. During fiscal year 2013, we mailed approximately 4,300,000 catalogs.

In addition, we have an exclusive multi-year licensing agreement for Emirates Associated Business Group, or “EABG,” to build and operate Frederick’s of Hollywood retail stores in the Middle East. As of January 25, 2014, EABG had closed the three stores it had been operating and has not paid any royalties during the six months ended January 25, 2014. We are seeking to terminate the agreement with EABG. The Company’s principal offices are located at 6255 Sunset Boulevard, Hollywood, California 90028.

If the Merger Agreement is approved and adopted by the Company shareholders at the Special Meeting and the Merger is completed as contemplated, the Company will survive the Merger and will continue its operations as a private company and a wholly-owned subsidiary of Parent.

Directors and Executive Officers

The Board of Directors presently consists of five members. The below listed persons are the Executive Officers and directors of the Company as of the date of this proxy statement. Each Executive Officer will serve until a successor is elected by the Board of Directors or until the earlier of his resignation or removal. None of these persons has been convicted in a criminal proceeding during the past five years (excluding traffic violations or similar misdemeanors), and none of these persons has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal or state securities laws. All of the directors and Executive Officers of the Company are citizens of the United States and can be reached c/o:

Frederick’s of Hollywood Group Inc.
6255 Sunset Boulevard
Hollywood, California 90028
(323) 466-5151

Thomas J. Lynch, 45 years old, became our Chief Executive Officer in January 2009 and our Chairman of the Board of Directors in May 2009 and has been a member of our Board of Directors since January 2008. From February 2007 to December 2008, he served as Chief Executive Officer of Fursa. From July 2006 to

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January 2007, Mr. Lynch was a Managing Director at UBS, an investment bank and global asset management business. From August 2000 to May 2006, Mr. Lynch was Managing Director and Senior Vice President of Mellon Asset Management. Mr. Lynch was a member of the Mellon Asset Management Senior Management Committee and was a thought leader in global distribution strategies and strategic planning. He had direct management responsibility for a $36 billion (Assets Under Management) institutional asset management business. Mr. Lynch received a B.A. degree from St. Anselm College and attended The Brandeis University International Business School.

Peter Cole, 65 years old, has served as a member of our Board of Directors since April 2004 and was our Executive Chairman from January 2008 to May 2009. From January 2007 to January 2008, he served as the lead director to facilitate the completion of our merger with FOH Holdings, Inc. Since October 2005, Mr. Cole has been the managing member of Performance Enhancement Partners, LLC, a private consulting firm that he founded. Since July 2010, Mr. Cole has served as a director, and from July 2010 to March 2011 served as Chief Executive Officer of Harmony Health & Beauty, Inc., a privately-held in-airport retailer. From April 2001 through July 2005, he served as Chairman of the Board and Chief Executive Officer of Qwiz, Inc., a privately-held leading provider of skills and behavioral testing now operating as SHL Previsor, Inc. Prior to joining SHL Previsor, Inc., Mr. Cole was a Managing Director at Citibank, where he was responsible for one of its global capital markets businesses. Since May 2012, Mr. Cole has served as Chief Administrative Officer and a director of Focus Pointe Holdings, Inc., a privately-held provider of focus group panelists and facilities. He received a B.A. degree in economics from the University of Vermont.

John L. Eisel, 65 years old, has been a member of our Board of Directors since April 2004. Since 1980, Mr. Eisel has been a partner at Edwards Wildman Palmer LLP and its predecessor, Wildman, Harrold, Allen & Dixon LLP, a law firm located in Chicago, Illinois that he joined in 1975. Mr. Eisel’s primary areas of practice are mergers and acquisitions and securities regulation. As part of his legal practice, Mr. Eisel has provided counsel to the boards of directors of several public and private companies. Mr. Eisel was Chairman of his firm’s Management Committee from 1994 to 1999 and is currently co-chair of the firm’s Business Law Department. Mr. Eisel received a B.S. degree in accounting and a J.D. degree from the University of Illinois. Mr. Eisel passed the CPA examination in 1971. He currently serves on the board of directors of several private companies, and he is a member of the Planning Committee for the Ray Garrett Jr. Corporate and Securities Law Institute.

William F. “Mickey” Harley, III, 50 years old, has been a member of our Board of Directors since January 2008. He currently serves as the Chairman and Chief Executive Officer of Arsenal Group, LLC, a company he co-founded in February 2011. Mr. Harley is principally responsible for Arsenal Group’s investment decisions. Arsenal Group owns HRK Holdings LLC and HRK Industries LLC, both of which filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Middle District of Florida on June 27, 2012. The court has approved the companies hiring an investment banker to market properties they own and intend to sell in order to emerge from bankruptcy. Mr. Harley also is President and Chief Investment Officer of Fursa, which he co-founded in April 1999 (as HBV Capital Management, LLC) and sold to Mellon Financial Corporation in July 2002 (when it was re-named Mellon HBV Alternative Strategies LLC). Mr. Harley served as Chief Investment Officer and Chief Executive Officer of Fursa from July 2002 until he repurchased it from Mellon in December 2006. Mr. Harley is principally responsible for Fursa’s investment decisions. From June 1996 to April 1999, Mr. Harley was the Head of Research at Milton Partners, L.P., a hedge fund manager specializing in arbitrage funds. Before joining Milton Partners, Mr. Harley was a Vice President and Director of Allen & Company, where he was responsible for the day-to-day management and investment strategies of the arbitrage department. From January 2003 to April 2006, and since April 2007, Mr. Harley has served as a director of FOH Holdings. Since December 2008, Mr. Harley has served as a director, and from December 2008 to September 2012, he served as President of Xemplar Energy Corporation (TSX Venture: XE). Mr. Harley also has previously served on the board of directors of the following privately-held companies: J.L. French Automotive Castings, Inc., Metromedia International Group, Inc., Integral Systems, Inc., Coastal Greenland Limited and Interboro Insurance. Mr. Harley received a Master’s degree in public and private management from Yale University’s School of Management and a B.S. degree in chemical engineering and a B.A. degree in economics from Yale University.

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Milton J. Walters, 71 years old, has been a member of our Board of Directors since January 2008 and a director of FOH Holdings since January 2003. He has more than 40 years of investment banking experience including serving as Managing Director of AG Becker and its successor Warburg Paribas Becker, where he was employed from 1965 to 1984; Senior Vice President and Managing Director of Smith Barney from 1984 to 1988; Managing Director of Prudential Securities from 1997 to 1999; and since August 1999 as President and Chief Executive Officer of Tri-River Capital, a strategic financial advisory and valuation service provider which he founded. Since November 2010, Mr. Walters has served as a member of the board of directors of Sabra Healthcare REIT, Inc. (NASDAQ: SBRA). He also has served as a director of Petroleum & Franchise Capital, a privately-held company that provides financing for national and regional franchise and retail petroleum operators, since November 2012, and as a director of Gorilla Toolz Inc., a privately-held software developer of partner relationship programs, since September 2013. From September 2001 to December 2012, he served as a director and chairman of the audit committee of Sun Healthcare Group, Inc. (NASDAQ: SUNH), and from January 2003 to June 2010, he served as a director and chairman of the audit committee of Decision One Corporation, a privately-held information technology services company. Mr. Walters is a member of the Economics Club of New York, the National Association of Corporate Directors and the University Club of New York, and currently serves as a director of the Lyme Land Conservation Trust, Inc. and the Southeast Connecticut World Affairs Council. He is a former trustee of Hamilton College and Friends Academy. Mr. Walters received an A.B. degree from Hamilton College.

Thomas Rende, 53 years old, has served as our Chief Financial Officer since January 2008, and served as Chief Financial Officer of our wholesale division from February 1999 until it was sold in October 2010. He also served as a member of our Board of Directors from January 2008 to May 2010 and from April 2004 to April 2007. Since joining the company in 1989, Mr. Rende has held various positions within the finance department. Mr. Rende received a B.S. degree in economics from the State University of New York at Oneonta.

Prior Public Offerings

We have not made any underwritten public offerings of Common Stock or other Company securities in the past three years.

Additional Financial and Business Information

Additional financial and business information about the Company, including our audited financial statements for the years ended July 27, 2013 and July 28, 2012 and our unaudited financial statements for the six months ended January 25, 2014 and January 26, 2013, may be found in our Annual Report on Form 10-K and the amendment to the Annual Report attached to this proxy statement as Annexes F-1 and F-2 and in our Quarterly Report on Form 10-Q attached to this proxy statement as Annex G. Such financial statements should be read together with the notes thereto.

Ratio of Earnings to Fixed Charges

The following table presents our ratio of earnings to fixed charges for the fiscal periods indicated.

(in thousands)		January 25, 2014				October 26, 2013				July 27, 2013				July 28, 2012
Earnings		$	(4,591	)
Pretax loss			2,797			$	(7,251	)		$	(22,484	)		$	(6,357	)
Fixed charges			—				2,686				9,059				8,722
Amortization of capitalized interest			—				—				—				—
Distributed income of equity investee			—				—				—				—
Share of pre-tax losses of equity investee for which charges arising from guarantees are included in fixed charges			—				—				—				—
Subtotal			(1,794	)			(4,565	)			(13,425	)			2,365
Less: Interest capitalized			—				—				—				—
Less: Preference security dividend requirements			451				418				933				84

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(in thousands)		January 25, 2014				October 26, 2013				July 27, 2013				July 28, 2012
Less: Non-controlling interest in pre-tax income of subsidiaries that have not incurred fixed charges			—				—				—				—
Total Earnings			(2,245	)			(4,983	)			(14,358	)			2,281
Fixed Charges			—
Interest charges			914				792				2,137				2,224
Amortization of debt issue costs			—				—				—				—
Portion of rental expense which represents interest factor(1)			1,423				1,476				5,989				6,414
Preferred stock dividend requirements			451				418				933				84
Total Fixed Charges			2.797			$	2,686			$	9,059			$	8,722
Ratio of earnings to fixed charges(2)			—				—				—				—

Book Value Per Share

Our net book value per share of Common Stock as of January 25, 2014, was approximately $(0.74) (calculated based on 39,223,254 shares of Common Stock outstanding as of such date).

Market Price of the Company’s Common Stock

The Company’s Common Stock is quoted on the OTCQB under the symbol “FOHL.” The following table sets forth during the periods indicated the high and low closing sales prices for the Common Stock:

		High				Low
Year Ending July 26, 2014
First Quarter			0.24				0.17
Second Quarter		$	0.265			$	0.20
Third Quarter*		$	0.27			$	0.261
Year Ended July 27, 2013
First Quarter		$	0.41			$	0.25
Second Quarter			0.35				0.16
Third Quarter			0.29				0.13
Fourth Quarter			0.24				0.16
Year Ended July 28, 2012
First Quarter		$	0.74			$	0.38
Second Quarter			0.54				0.31
Third Quarter			0.64				0.20
Fourth Quarter			0.58				0.14

The closing sale price of our Common Stock on September 27, 2013, which was the last trading day before the Consortium Members announced their proposal to acquire all outstanding shares of Common Stock not owned by them, was $0.18 per share, compared to which the merger consideration represents a premium of approximately 50%.

We have not paid any cash dividends on our Common Stock to date. It is the present intention of the Board of Directors to retain all earnings, if any, for use in our business operations and, accordingly, the Board of Directors does not currently anticipate declaring any cash dividends in the foreseeable future. The payment

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of dividends will be within the discretion of the Board of Directors and will be contingent upon our revenue and earnings, if any, capital requirements, general financial condition and such other factors as the Board of Directors may consider. In addition, the terms of our Series A Convertible Preferred Stock and Series B Convertible Preferred Stock and covenants contained in our Credit Agreement restrict our ability to pay cash dividends so long as the Series A Convertible Preferred Stock or the Series B Convertible Preferred Stock is outstanding or any amount is owed and outstanding under the Credit Agreement, respectively.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information as of April 14, 2014 with respect to the beneficial ownership of Common Stock by:

Beneficial ownership has been determined in accordance with applicable SEC rules, pursuant to which a person is deemed to be the beneficial owner of securities if such person has or shares voting or investment power with respect to such securities or has the right to acquire voting or investment power within 60 days.

Except as otherwise indicated, the persons listed below, to our knowledge, have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to the application of community property laws where applicable. The percentage of beneficial ownership for each table is based on 39,273,254 shares of Common Stock outstanding as of April 14, 2014.

Name and Address of Beneficial Owner(1)		Number of Shares				Percent of Class
Harbinger Group Inc. 450 Park Avenue, 30th Floor New York, NY 10022			91,257,883	(2)			88.7	%
Arsenal Group, LLC 21 Greene Avenue Amityville, New York 11701			91,257,883	(3)			88.7	%
Fursa Alternative Strategies LLC, on behalf of certain funds and accounts affiliated with or managed by it or its affiliates 21 Greene Avenue Amityville, New York 11701			91,257,883	(4)			88.7	%
Tokarz Investments, LLC 287 Bowman Avenue Purchase, New York 10577			91,257,883	(5)			88.7	%
TTG Apparel, LLC 287 Bowman Avenue Purchase, New York 10577			91,257,883	(6)			88.7	%
Thomas J. Lynch			1,729,500	(7)			4.3	%
Thomas Rende			656,720	(8)			1.7	%
Peter Cole			510,612	(9)			1.3	%
John L. Eisel			240,333	(10)			*
William F. Harley III c/o Fursa Alternative Strategies LLC 21 Greene Avenue Amityville, New York 11701			512,547	(11)			1.3	%
Milton J. Walters			254,754	(12)			*
All Executive Officers and directors as a group (6 individuals)			3,904,466	(13)			9.5	%

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Ownership of Parent Following the Merger

Following the Merger, the Rollover Shareholders (and Thomas J. Lynch, our chairman and chief executive officer, upon his receipt of an equity interest in Parent, pursuant to his new employment agreement, in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms) will own 100% of the equity interests of Parent.

Transactions in Common Stock

Other than the Rollover Agreement, the Voting Agreement, the Purchase Agreement and the compensation paid to Mr. Harley for his services as a non-employee director of the Company as discussed in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities” beginning on page 87, Parent, Merger Sub, and their respective affiliates have not made any transactions with respect to Common Stock during the past 60 days.

On November 5, 2013, as compensation for services rendered to the Company as a non-employee director for the quarter ended October 26, 2013, the Company issued 10,870 shares of Common Stock to Milton Walters, the Lead Director. The number of shares was calculated based on a price per share of $0.23, which was the closing price of the Company’s Common Stock on October 25, 2013. Except for the issuance to Mr. Walters and the transaction with Mr. Harley discussed in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities” beginning on page 87, no other officers or directors of the Company have engaged in transactions in Common Stock during the past 60 days.

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ADVISORY VOTE REGARDING MERGER-RELATED COMPENSATION PROPOSAL

In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which we refer to as the Dodd-Frank Act, and pursuant to Section 14A of the Exchange Act, we are providing our shareholders with an opportunity to cast a non-binding advisory vote to approve the “golden parachute” compensation that the Company’s named executive officers (as defined in Item 402 of Regulation S-K of the Exchange Act) will or may receive in connection with the Merger. Under the Dodd-Frank Act and for this purpose, “golden parachute” compensation is any type of compensation, whether present, deferred or contingent, that is based on or otherwise relates to the Merger pursuant to arrangements entered into with the Company and as disclosed in this proxy statement. Accordingly, we are asking our shareholders to approve the following non-binding resolution at the Special Meeting:

“RESOLVED, that the shareholders of Frederick’s of Hollywood Group Inc. approve, on a non-binding advisory basis, the “golden parachute” compensation based on or otherwise related to the Merger that the Company’s named executive officers will or may receive in connection with the Merger as disclosed pursuant to Item 402(t) of Regulation S-K in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger — Interests of Executive Officers.””

Vote Required and Board Recommendation

The vote on this proposal is a vote separate and apart from the vote to approve the Merger. Accordingly, you may vote not to approve the Merger-Related Compensation Proposal and vote to approve the Merger and adopt the Merger Agreement and vice versa.

Approval of this resolution, commonly referred to as a “say-on-golden-parachute” resolution, requires the affirmative vote of a majority of the votes cast at the Special Meeting with respect to the Merger-Related Compensation Proposal. For purposes of this proposal, abstentions and shares deemed present at the meeting but not entitled to vote with respect to the proposal (because of either shareholder withholding or broker non-vote) are not deemed voted and therefore will have no effect on this proposal. If you fail to submit a proxy or vote in person at the Special Meeting, the shares of Common Stock not voted will not be counted in respect of, and will not have an effect on, this proposal.

Because the vote is advisory in nature only, it will not be binding on either the Company or the Parent regardless of whether the Merger is completed. Approval of the Merger-Related Compensation Proposal is not a condition to completion of the Merger, and failure to approve this advisory matter will have no effect on the vote to approve the Merger. Because the compensation to be paid in connection with the Merger is based on contractual arrangements with the named executive officers, regardless of the outcome of this advisory vote, such compensation will be payable, subject only to the contractual conditions applicable thereto, if the Merger is completed.

Because the Rollover Shareholders beneficially hold more than a majority of our outstanding shares of Common Stock as of the record date, they can approve or disapprove the Merger-Related Compensation Proposal regardless of how any other shareholder votes.

THE BOARD OF DIRECTORS, BASED ON THE RECOMMENDATION OF THE LEAD DIRECTOR, RECOMMENDS THAT YOU VOTE “FOR” THE MERGER-RELATED COMPENSATION PROPOSAL.

DISSENTERS’ RIGHTS

Sections 623 and 910 of the NYBCL provide that if the Merger is consummated, holders of shares of our Common Stock entitled to vote on the approval of the Merger and adoption of the Merger Agreement who object to such actions in writing prior to or at the Special Meeting, but before the vote, and who follow the procedures specified in Section 623 (summarized below) will have the right to receive cash payment of the fair value of their shares of Common Stock if the proposed corporate actions are taken. The express procedures of Section 623 must be followed precisely; if they are not, holders of shares of Common Stock will lose their right to dissent. As described more fully below, such “fair value” would potentially be determined in judicial proceedings, the result of which cannot be predicted. We cannot assure you that holders of shares of Common Stock exercising dissenters’ rights will receive consideration equal to or greater than the merger consideration.

The statutory procedures outlined below are complex. What follows is a summary and is qualified in its entirety by reference to the full text of Section 623 and Section 910 of the NYBCL, which are attached hereto as Annex H. Holders of shares of Common Stock wishing to exercise their dissenters’ rights should consult their own legal advisors to ensure that they fully and properly comply with the requirements of New York law.

Any holder of shares of Common Stock who is entitled to vote on the approval of the Merger and adoption of the Merger Agreement will have the right to receive cash payment of the fair value of his or her shares of Common Stock and the other rights and benefits provided in Section 623 if such shareholder:

A vote against approval of the Merger and adoption of the Merger Agreement will not satisfy the requirement of filing a written objection. Failure to vote against approval of the Merger and adoption of the Merger Agreement will not waive the right of a holder of shares of Common Stock to receive payment if such holder has filed a written objection in accordance with Section 623 and has not voted in favor of approval of the Merger and adoption of the Merger Agreement. If a holder of shares of Common Stock abstains from voting on approval of the Merger and adoption of the Merger Agreement, this will not waive his or her dissenters’ rights so long as the appropriate written objection to the approval of the Merger and adoption of the Merger Agreement are properly and timely filed. Since a proxy left blank will be voted for approval of the Merger and adoption of the Merger Agreement, any holder of shares of Common Stock who wishes to exercise his or her dissenters’ rights must either vote against approval of the Merger and adoption of the Merger Agreement or abstain. Written objection prior to the vote by the Company shareholders on the approval of the Merger Agreement and adoption of the Merger Agreement may not be required from any holder of shares of Common Stock to whom the Company did not give proper notice of the Special Meeting of shareholders contemplated by this proxy statement.

A holder of shares of Common Stock may not dissent as to less than all shares of Common Stock held of record by him or her that he or she owns beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial owner of shares of Common Stock as to less than all of the shares of Common Stock of such owner held of record by the nominee or fiduciary for such beneficial owner.

All written objections to the Merger and notices of election to dissent should be addressed to:

Frederick’s of Hollywood Group Inc.
6255 Sunset Boulevard
Hollywood, California 90028
Attention: Secretary

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If the Merger Agreement is approved and adopted by the Company’s shareholders, within 10 days after such action the Company will give written notice of such approval and adoption by registered mail to each holder of shares of Common Stock who filed a timely written objection or from whom written objection was not required, except for any holder of shares of Common Stock who voted in favor of approval of the Merger and adoption of the Merger Agreement. Any holder of shares of Common Stock from whom objection was not required and who elects to dissent must file with the Company, within 20 days after the giving of such notice to him or her, a written notice of election to dissent, stating his or her name and residence address, the number of shares of Common Stock as to which he or she dissents and a demand for payment of the fair value for his or her Common Stock.

Either at the time of filing of the notice of election to dissent or within one month after the filing of the notice of election to dissent, a dissenting holder of Common Stock must submit the certificates representing his or her shares of Common Stock to the Company, or to its transfer agent, which shall note conspicuously on the certificates that a notice of election has been filed and will then return such certificates to such holder. Any holder of Common Stock who fails to submit his or her certificates for notation within one month after the filing of the notice of election to dissent shall, at the option of the Company upon written notice to such holder of Common Stock within 45 days from the date of filing of such notice of election to dissent, lose his or her dissenters’ rights unless a court, for good cause shown, otherwise directs.

Within 15 days after the expiration of the period within which holders of Common Stock may file their notices of election to dissent, or within 15 days after the completion of the Merger, whichever is later (but in no case later than 90 days after the Company's shareholders approve the Merger and adopt the Merger Agreement), the surviving corporation will make a written offer by registered mail to each holder of Common Stock who has filed a notice of election to pay for his or her dissenting shares of Common Stock at a specified price which the surviving corporation considers to be their fair value. If the Merger has occurred, such offer must be accompanied by an advance payment to each holder of Common Stock who has submitted, in accordance with the foregoing requirements, his or her share certificates to the Company of an amount equal to 80% of the amount of the offer or, if such holder has not yet submitted his or her share certificates, a statement that an advance payment equal to 80% of the offer will be made promptly upon submission of his or her certificates. Acceptance of such payment shall not constitute a waiver of any dissenters’ rights. The offer must be made at the same price per share to all the holders of Common Stock who have filed their notices of election to dissent before the expiration of the period within which to do so. If, within 30 days after the making of an offer, the surviving corporation and any holder of shares of Common Stock agree on the price to be paid for his or her shares, the balance of payment for such shares must be made within 60 days after the making of the offer or the completion of the Merger, whichever is later, upon surrender of the certificates representing such shares of Common Stock.

If the surviving corporation fails to make an offer to dissenting holders of shares of Common Stock within the 15-day period described above, or if it makes the offer and any dissenting holder of shares of Common Stock fails to agree with it within 30 days thereafter upon the price to be paid for his or her shares, the surviving corporation is required, within 20 days after the expiration of whichever is the applicable of the two periods referred to above, to institute a special proceeding in the Supreme Court of the State of New York in the judicial district in which the office of the surviving corporation is located to determine the rights of dissenting holders of shares of Common Stock and to fix the fair value of their shares of Common Stock. If the Company fails to institute such proceeding within such 20-day period, any dissenting holder of shares of Common Stock may institute such proceeding for the same purpose not later than 30 days after the expiration of such 20-day period. If such proceeding is not instituted within such 30-day period, all dissenters’ rights are lost unless the Supreme Court of the State of New York, for good cause shown, otherwise directs.

During each proceeding, the court will determine whether each dissenting holder of shares of Common Stock who has not agreed to an offer by the Company is entitled to receive payment for his or her shares and, if so, will fix the value of such shares, which shall be the fair value as of the close of business on the day prior to the date the Company's shareholders voted to approve the Merger and adopt the Merger Agreement, taking into consideration the nature of the transaction giving rise to the right of the dissenting holder of shares of Common Stock to receive payment for his or her shares of Common Stock and its effect on the surviving corporation and its shareholders, the concepts and methods then customary in the relevant securities and

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financial markets for determining the fair value of shares of a corporation engaging in a similar transaction under comparable circumstances and all other relevant factors. The court shall determine the fair value of the shares of Common Stock without a jury and without referral to an appraiser or referee. The court will also award interest on such amount to be paid from the date of the completion of the Merger to the date of payment unless the court finds that the refusal by a dissenting holder of Common Stock to accept the surviving corporation’s offer of payment was arbitrary, vexatious or otherwise not in good faith. Each party to such proceeding will bear his, her or its respective costs and expenses unless the court finds the refusal by any such dissenting holders to accept the surviving corporation’s offer of payment was arbitrary, vexatious or otherwise not in good faith, in which case the court, in its discretion, may apportion and assess the Company’s costs against any or all such dissenting holders. The court, in its discretion, may also apportion or assess any part of the costs of dissenting holders of Common Stock against the surviving corporation if it finds that the fair value of the dissenting holders’ shares of Common Stock as determined materially exceeds the amount which the surviving corporation offered to pay, or that no offer or advance payment was made by the surviving corporation, or that the surviving corporation failed to institute such special proceeding within the specified period, or that the actions of the surviving corporation in complying with its obligations under Section 623 of the NYBCL were arbitrary, vexatious or otherwise not in good faith. Within 60 days following the final determination of the applicable proceeding, the surviving corporation shall pay to each dissenting holder of shares of Common Stock the amount found to be due him or her upon the surrender by such holder of all certificates representing dissenting shares.

The enforcement by a holder of shares of Common Stock of his or her right to receive payment for shares in accordance with Section 623 of the NYBCL excludes the enforcement by such holder of Common Stock of any other right to which he or she might otherwise be entitled by virtue of his or her ownership of shares (unless the holder of Common Stock timely withdraws his or her notice of election or the Merger is abandoned), except that the holder of Common Stock will retain the right to bring or maintain an appropriate action to obtain relief on the grounds that the Merger will be or is unlawful or fraudulent as to him or her. A notice of election by a holder of Common Stock may be withdrawn at any time prior to his or her acceptance in writing of an offer to purchase his or her dissenting shares of Common Stock by the Company, but no withdrawal may be made later than 60 days from the completion of the Merger (unless the Company failed to make a timely offer) without the consent of the Company.

In view of the complexity of Sections 623 and 910 of the NYBCL, shareholders who may wish to dissent from the Merger and pursue dissenters’ rights should consult their legal advisors.

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MULTIPLE SHAREHOLDERS SHARING ONE ADDRESS

In accordance with Rule 14a-3(e)(1) under the Exchange Act, one proxy statement will be delivered to two or more shareholders who share an address, unless the Company has received contrary instructions from one or more of the shareholders. The Company will deliver promptly upon written or oral request a separate copy of the proxy statement to a shareholder at a shared address to which a single copy of the proxy statement was delivered. Requests for additional copies of the proxy statement, and requests that in the future separate proxy statements be sent to shareholders who share an address, should be directed to Frederick’s of Hollywood Group Inc., 6255 Sunset Boulevard, 6^th Floor, Hollywood, California 90028, Attn: Secretary or by calling our secretary, Thomas Rende, at (212) 779-8300. In addition, shareholders who share a single address but receive multiple copies of the proxy statement may request that in the future they receive a single copy by contacting the Company at the address and phone number set forth in the prior sentence.

SUBMISSION OF SHAREHOLDER PROPOSALS

If the Merger is completed, we may not hold an annual meeting of shareholders in 2014. If the Merger is not completed, you will continue to be entitled to attend and participate in our annual meetings of shareholders and we will hold a 2014 annual meeting of shareholders, in which case we will provide notice of or otherwise publicly disclose the date on which such 2014 annual meeting will be held. If the 2014 meeting is held, shareholder proposals will be eligible for inclusion in the proxy statement and form of proxy for our 2014 annual meeting of shareholders in accordance with Rule 14a-8 under the Exchange Act and our bylaws, as described below.

In order for any shareholder proposal to be eligible for inclusion in our proxy statement for such meeting, we must receive them at our principal executive offices a reasonable time before we print proxy materials (because the date of the 2014 annual meeting will have changed by more than 30 days from the date of the 2013 annual meeting) and they must be submitted in compliance with the Rule 14a-8 under the Exchange Act. Each proposal should include the exact language of the proposal, a brief description of the matter and the reasons for the proposal, the name and address of the shareholder making the proposal and the disclosure of that shareholder’s number of shares of common stock owned, length of ownership of the shares, representation that the shareholder will continue to own the shares through the annual shareholder meeting, intention to appear in person or by proxy at the annual shareholder meeting and material interest, if any, in the matter being proposed.

Any shareholder proposal or nomination for director that a shareholder wishes to propose for consideration at the 2014 annual meeting of shareholders, but does not seek to include in our proxy statement under applicable SEC rules, must be submitted in accordance with our bylaws. Any such shareholder proposal must be an appropriate subject for shareholder action under applicable law and must otherwise comply with our bylaws. Pursuant to SEC Rule 14a-4(c)(1), if we receive any shareholder proposal that is intended to be presented at the 2014 annual meeting, without inclusion in the proxy statement for the meeting, at our principal executive offices after a reasonable time before we print proxy materials (because the date of the 2014 annual meeting will have changed by more than 30 days from the date of the 2013 annual meeting), the proxies designated by the Board will have discretionary authority to vote on such proposal.

Shareholders who wish to recommend to the Nominating and Governance Committee a candidate for election to the Board of Directors should send their letters to Frederick’s of Hollywood Group Inc., 6255 Sunset Boulevard, Hollywood, California 90028, Attention: Nominating and Governance Committee. The Corporate Secretary will promptly forward all such letters to the members of the Nominating and Governance Committee. Shareholders must follow certain procedures to recommend to the Nominating and Governance Committee candidates for election as directors. In general, to provide sufficient time for the Nominating and Governance Committee to evaluate candidates recommended by shareholders to be considered for nomination in connection with our Annual Meeting of Shareholders, the Corporate Secretary must receive the shareholder’s recommendation no later than thirty days after the end of our fiscal year.

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The recommendation must contain the following information about the candidate:

WHERE YOU CAN FIND ADDITIONAL INFORMATION

The Company files annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy these reports, proxy statements and other information at the SEC’s Public Reference Section at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Section of the SEC. The Company’s public filings are also available to the public from document retrieval services and the Internet website maintained by the SEC at www.sec.gov.

The Company will make available a copy of its public reports, without charge, upon written request to the Secretary, Frederick’s of Hollywood Group Inc., 6255 Sunset Boulevard, Hollywood, California 90028. Each such request must set forth a good faith representation that, as of the record date, the person making the request was a beneficial owner of Common Stock entitled to vote at the Special Meeting. In order to ensure timely delivery of such documents prior to the Special Meeting, any such request should be made promptly to the Company. A copy of any exhibit may be obtained upon written request by a shareholder (for a fee limited to the Company’s reasonable expenses in furnishing such exhibit) to the Secretary, Frederick’s of Hollywood Group Inc., 6255 Sunset Boulevard, Hollywood, California 90028.

Our Annual Report on Form 10-K for the fiscal year ended July 27, 2013, filed with SEC on October 25, 2013, the amendment to the Annual Report filed on November 22, 2013, and our Quarterly Report on Form 10-Q for the fiscal quarter ended January 25, 2014 filed with the SEC on March 11, 2014 are attached to this proxy statement as Annexes F-1, F-2 and G, respectively, and are included in and constitute part of, this proxy statement (except with respect to any reference in such documents to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995).

Because the Merger is a “going private” transaction, the Company, the Rollover Shareholders have filed with the SEC a Transaction Statement on Schedule 13E-3 with respect to the Merger. The Schedule 13E-3, including any amendments and exhibits filed or incorporated by reference as a part of it, is available for inspection as set forth above. The Schedule 13E-3 will be amended to report promptly any material change in the information set forth in the most recent Schedule 13E-3 filed with the SEC. We urge you to read the entire Schedule 13E-3 carefully, including the exhibits, in connection with your consideration of the Merger.

No persons have been authorized to give any information or to make any representations other than those contained in this proxy statement and, if given or made, such information or representations must not be relied upon as having been authorized by us or any other person. This proxy statement is dated [•], 2014. You should not assume that the information contained in this proxy statement is accurate as of any date other than that date, and the mailing of this proxy statement to shareholders shall not create any implication to the contrary.

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ANNEX A

AGREEMENT AND PLAN OF MERGER
 
 
BY AND AMONG
 
 
FOHG HOLDINGS, LLC
 
 
FOHG ACQUISITION CORP.
 
 
AND
 
 
FREDERICK’S OF HOLLYWOOD GROUP INC.
 
 
DATED AS OF DECEMBER 18, 2013
 

 

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		Page
ARTICLE I THE MERGER			A-1
Section 1.01. The Merger			A-1
Section 1.02. Closing			A-2
Section 1.03. Effects of the Merger			A-2
Section 1.04. Certificate of Incorporation and By-laws			A-2
Section 1.05. Directors			A-2
Section 1.06. Officers			A-2
Section 1.07. Conversion of Shares			A-2
Section 1.08. Stock Options, Company Awards and Warrants			A-3
Section 1.09. Stock Options, Company Awards and Warrants Held by Rollover Shareholders.			A-4
Section 1.10. Shareholders Meeting; Proxy Materials and Other SEC Filings			A-5
Section 1.11. Further Assurances			A-6
ARTICLE II DISSENTING SHARES; PAYMENT FOR SHARES			A-7
Section 2.01. Dissenting Shares			A-7
Section 2.02. Payment Fund			A-7
Section 2.03. Stock Transfer Books			A-9
Section 2.04. Adjustments to Prevent Dilution			A-9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY			A-9
Section 3.01. Corporate Organization			A-9
Section 3.02. Capital Structure of the Company			A-10
Section 3.03. Authority Relative to this Agreement and the Ancillary Agreements			A-11
Section 3.04. No Conflict; Required Filings and Consents			A-12
Section 3.05. SEC Filings and Company Financial Statements			A-13
Section 3.06. Absence of Certain Changes or Events			A-15
Section 3.07. Proxy Statement and Schedule 13E-3			A-15
Section 3.08. Litigation			A-15
Section 3.09. Compliance with Laws, Orders, Permits and Regulations			A-15
Section 3.10. Taxes			A-16
Section 3.11. Suppliers			A-17
Section 3.12. Real Estate; Assets			A-17
Section 3.13. Employee Benefit Plans and Related Matters; ERISA			A-18
Section 3.14. Employees, Labor Matters			A-20
Section 3.15. Intellectual Property Rights			A-21
Section 3.16. Contracts			A-21
Section 3.17. Environmental Laws and Regulations			A-24
Section 3.18. Insurance Coverage			A-24
Section 3.19. Rights Agreement; Anti-Takeover Provisions			A-25

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		Page
Section 3.20. Absence of Undisclosed Liabilities			A-25
Section 3.21. Shareholder Approval			A-25
Section 3.22. Third Party Acquisition Agreements			A-25
Section 3.23. Opinion of Financial Advisor			A-25
Section 3.24. Brokers			A-26
Section 3.25. Investment Company			A-26
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB			A-26
Section 4.01. Organization			A-26
Section 4.02. Authority Relative to this Agreement and the Ancillary Agreements			A-26
Section 4.03. No Conflict; Required Filings and Consents			A-26
Section 4.04. Proxy Statement and Schedule 13E-3			A-27
Section 4.05. Brokers			A-27
Section 4.06. Litigation			A-27
Section 4.07. Financial Capability			A-27
ARTICLE V COVENANTS AND OTHER AGREEMENTS			A-28
Section 5.01. Conduct of Business of the Company			A-28
Section 5.02. Notification of Certain Matters			A-30
Section 5.03. Indemnification; Directors’ and Officers’ Insurance			A-30
Section 5.04. Access and Information			A-31
Section 5.05. Publicity			A-31
Section 5.06. Efforts to Consummate			A-32
Section 5.07. No Solicitation			A-32
Section 5.08. Shareholder Litigation			A-35
Section 5.09. Expenses			A-35
Section 5.10. Transfer Taxes			A-35
Section 5.11. Ancillary Agreements			A-35
Section 5.12. Section 16 Matters			A-35
Section 5.13. Governance Matters			A-36
Section 5.14. SEC Reports			A-36
ARTICLE VI CONDITIONS			A-36
Section 6.01. Conditions to Obligation of Each Party to Effect the Merger			A-36
Section 6.02. Conditions to Obligation of Parent and Merger Sub			A-36
Section 6.03. Conditions to Obligations of the Company			A-37
Section 6.04. Frustration of Conditions			A-37