UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
July 28, 2012
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ___________ to _________
Commission File Number 001-05893
FREDERICK’S OF HOLLYWOOD GROUP
INC.
(Exact name of registrant as specified in
its charter)
New York
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13-5651322
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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6255 Sunset Blvd., Hollywood, California
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90028
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number,
including area code: (323) 466-5151
Securities registered pursuant to Section
12(b) of the Act:
Title of each class
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Name of each exchange on which registered
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Common Stock, $.01 par value
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NYSE MKT LLC
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Securities registered pursuant to Section
12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes
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No
x
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
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No
x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes
x
No
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Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes
x
No
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (§229.405 of this Chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
x
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(do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act)
Yes
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No
x
As of January 27, 2012 (the last business day of the registrant’s
most recently completed second fiscal quarter), the aggregate market value of the registrant’s common stock (based on its
reported last sale price on the NYSE LLC of $0.43), held by non-affiliates of the registrant, was $4,194,898.
As of October 8, 2012, there were 38,974,968 common shares outstanding.
FREDERICK’S OF HOLLYWOOD GROUP
INC.
2012 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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1
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ITEM 1. – BUSINESS
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1
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ITEM 1A. – RISK FACTORS
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7
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ITEM 1B. – UNRESOLVED STAFF COMMENTS
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11
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ITEM 2. – PROPERTIES
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11
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ITEM 3. – LEGAL PROCEEDINGS
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11
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ITEM 4. – MINE SAFETY DISCLOSURES
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12
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PART II
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13
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ITEM 5. – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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13
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ITEM 6. – SELECTED FINANCIAL DATA
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13
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ITEM 7. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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14
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ITEM 7A. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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22
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ITEM 8. – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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24
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ITEM 9. – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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48
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ITEM 9A. – CONTROLS AND PROCEDURES
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48
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ITEM 9B. – OTHER INFORMATION
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49
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PART III
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49
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ITEM 10. – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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49
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ITEM 11. – EXECUTIVE COMPENSATION
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49
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ITEM 12. – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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49
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ITEM 13. – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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49
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ITEM 14. – PRINCIPAL ACCOUNTING FEES AND SERVICES
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49
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PART IV
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50
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ITEM 15. – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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50
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PART I
Forward Looking Statements
When used in this Form 10-K for the year
ended July 28, 2012 of Frederick’s of Hollywood Group Inc.
(
the “Company,” “we,” “us,”
“our” or “Frederick’s”) and in our future filings with the Securities and Exchange Commission, the
words or phrases “will likely result,” “management expects” or “we expect,” “will continue,”
“is anticipated,” “estimated” or similar expressions are intended to identify “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on
any such forward-looking statements, each of which speaks only as of the date made. We have no obligation to publicly release the
result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances
occurring after the date of such statements.
Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated
or projected. These risks are included in “Item 1. – Business,” “Item 1A. – Risk Factors” and
“Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this
Form 10-K. In assessing forward-looking statements contained herein, readers are urged to carefully read those statements. Among
the factors that could cause actual results to differ materially are: competition; business conditions and industry growth; rapidly
changing consumer preferences and trends; general economic conditions; working capital needs; continued compliance with government
regulations; loss of key personnel; labor practices; product development; management of growth; increases of costs of operations
or inability to meet efficiency or cost reduction objectives; timing of orders and deliveries of products; risks of doing business
abroad; and our ability to protect our intellectual property.
ITEM 1. – BUSINESS
Our History
We are a New York corporation incorporated
on April 10, 1935. On January 28, 2008, we consummated a merger with FOH Holdings, Inc., a privately-held Delaware corporation
(“FOH Holdings”). As a result of the transaction, FOH Holdings became our wholly-owned subsidiary. FOH Holdings is
the parent company of Frederick’s of Hollywood, Inc. Upon consummation of the merger, we changed our name from Movie Star,
Inc. to Frederick’s of Hollywood Group Inc.
During the fourth quarter of fiscal year
2010, we made a strategic decision to divest our wholesale division due to continuing losses and in order to focus on our core
retail operations. On October 27, 2010, we completed the sale to Dolce Vita Intimates LLC (“Dolce Vita”) of substantially
all of the assets of the wholesale division, except cash, accounts receivable and certain other assets. The wholesale division’s
operations are classified as discontinued operations for all periods presented in the consolidated financial statements appearing
elsewhere in this report. Unless otherwise noted, the wholesale division is not discussed in this report.
Our principal executive offices are located
at 6255 Sunset Boulevard, Hollywood, California 90028 and our telephone number is (323) 466-5151. Our retail website is
www.fredericks.com
and our corporate website is
www.fohgroup.com
. We file our annual, quarterly and current reports and other information with
the Securities and Exchange Commission. Our corporate filings, including our Annual Report on Form 10-K, our Quarterly Reports
on Form 10-Q, our Current Reports on Form 8-K, our proxy statements and reports filed by our officers and directors under Section
16(a) of the Securities Exchange Act of 1934, and any amendments to those filings, are available, free of charge, on our corporate
website,
www.fohgroup.com
, as soon as reasonably practicable after we electronically file such material with the Securities
and Exchange Commission. We do not intend for information contained in our websites to be a part of this Annual Report on Form
10-K.
Our Business
Frederick’s of Hollywood Group Inc.,
through its subsidiaries, sells women’s apparel and related products under its proprietary
Frederick’s of Hollywood
®
brand predominantly through its U.S. mall-based specialty retail stores, which are referred to as “Stores,” and through
its catalog and website at
www.fredericks.com
, which are referred to collectively as “Direct.” As of July 28,
2012, we operated 118 Frederick’s of Hollywood stores in 29 states and during fiscal year 2012 mailed approximately 10.8
million catalogs.
We also have a license agreement with a
subsidiary of Emirates Associated Business Group (“EABG”), which provides for EABG to build and operate Frederick’s
of Hollywood retail stores in the Middle East. As of October 8, 2012, EABG had opened three stores in the region. In addition,
we have selectively licensed the right to use the
Frederick’s of Hollywood
®
brand and logo on specified
categories of products manufactured and sold by other companies. Our licensed merchandise categories currently include Halloween
costumes, jewelry and accessories.
Operating Initiatives
While
business continues to be softer than anticipated, we are focused on executing the initiatives described below to improve
sales and profitability. Together with these initiatives, we are working to maintain an efficient balance among inventory,
promotional sales, gross margins and overhead costs. We are also
continuing to evaluate our long-term domestic and
international store and product licensing strategy.
We believe some of these initiatives will have
an immediate impact on our operating results while others may be more gradual, although we cannot assure you that we will
ultimately be successful. These initiatives are as follows:
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·
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E
xpand product categories and product mix
. We have been expanding the types
of products we offer and have increased our branded product assortment. During the first quarter of fiscal year 2013, we introduced
beauty products by Beverly Johnson, accessories by Bijoux Terner and shoes by Charles David to complement our core product offerings.
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·
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Utilize innovative and cost-effective strategies to drive more profitable sales
. Our catalog has evolved over the past
few years to serve more as an important marketing tool to build brand awareness and drive traffic to our website and stores. Due
to the costs involved in producing a traditional catalog, we have steadily reduced catalog circulation and have been reallocating
resources to more innovative direct mail pieces and cost-effective digital marketing alternatives. During the first quarter of
fiscal year 2013, we tested with a limited mailing our “brandzine,” or branded magazine, which includes magazine-like
content and third party advertisements in a mail piece featuring our products. We are planning a wider distribution of our holiday
brandzine during the second quarter of fiscal year 2013. We also are increasing our digital marketing efforts to attract new customers
through digital display advertising, email retargeting, and increased search marketing.
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·
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Implement a three-tier branding and merchandising strategy to provide customers with a full array of products across a broader
assortment of merchandise and price points
. During the first quarter of fiscal year 2013, we launched our new luxury label
collection, Harriett, which is currently sold in our Hollywood flagship store and online through
www.harriett.com
, and offers
higher priced and more luxurious goods. We also introduced The Find by Frederick’s, which serves as an online venue to purchase
our discount and clearance product offerings at
www.thefindbyfredericks.com
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Market and Products
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 35. 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). Our
full retail prices generally range from approximately $8.00 for panties up to approximately $129.00 for dresses. Certain merchandise
is marketed as collections of related items to increase the average sale amount. Our product lines and color pallets are updated
seasonally in an effort to satisfy our customers’ desire for fashionable merchandise and to keep our selections fresh and
appealing. We also have been expanding the types of products we offer, particularly in the accessories and ready-to-wear categories,
to complement our core product offerings.
The following table shows the percentage
of sales that each of these product categories represented for the year ended July 28, 2012:
Product Category
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% of
Retail
Sales
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Foundations
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50
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%
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Lingerie
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33
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%
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Ready-to-Wear
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15
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%
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Fragrance and Accessories
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2
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%
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Total
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100
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%
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Merchandising and Product Development
Our merchandising efforts focus on satisfying
customer demand for current trends and identifying new fashion trends and opportunities. Our merchandising team conducts research
and utilizes its industry expertise to identify new product and category initiatives to appeal to our core customer base and attract
new customers. This team works directly with our merchandise vendors to develop these products to meet our customers’ needs.
Store Operations
We operated 118 Frederick’s of Hollywood
retail stores as of July 28, 2012. These stores are primarily located in shopping malls in 29 states. Approximately one-third of
the stores are in California. Of the stores outside of California, approximately 30% 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.
Our retail stores range in size from 900
to 3,200 square feet and our flagship store is 5,700 square feet. A typical store uses approximately 75% of its square footage
as selling space. Depending on size, square footage and past sales history, o
ur
retail stores showcase branded merchandise best suited for their respective locations, which may include expanded product categories.
Depending on the size, newer and remodeled stores are either designed in the contemporary “Modern Hollywood”
format or the sophisticated “Red Carpet” format. We continue to operate many of our older stores with legacy designs
that evolved through the history of Frederick’s of Hollywood. Periodically, in connection with lease renewals or as other
opportunities arise, older stores are remodeled. New store locations are typically selected on the basis of local demographics,
the proposed location within the mall and projected sales and cost.
During fiscal year 2012, we opened one new
outlet store and closed six stores – three upon expiration of the respective leases and three unprofitable stores through
negotiated early terminations. As leases are scheduled to expire or we are required to relocate our store within a mall, we attempt
to negotiate favorable renewal or relocation terms, as the case may be. However, if we are unsuccessful, we will close the store.
During fiscal year 2013, we intend to reopen one closed store and not to do major remodeling of any stores. We currently expect
that we will be required to relocate six stores, but will close instead of relocate three of them.
Direct Operations
We have an extensive
history – dating back to the first Frederick’s of Hollywood catalog produced in 1947 – of offering women’s
apparel directly to t
he consumer. Today, we market and sell our products directly to consumers primarily through our website,
www.fredericks.com
, and catalog.
In addition to our website’s value
as an important distribution channel and source of revenue, it is a key marketing tool we use to test new products, build brand
equity and increase store traffic. We also partner with Internet search engines and participate in social media advertising programs
to drive traffic to our stores and website. Approximately 90% of all Direct orders are placed online through our website.
Our e-commerce web platform is hosted by
a third-party service provider, which we believe provides a stable foundation upon which we can continue to upgrade and enhance
our website. During fiscal year 2012, we redesigned our website and mobile site to improve navigation, showcase a cleaner design,
and present a more modern look and feel. We are continuing to refine the improved functionality that we implemented over the past
year and add upgrades as they become available.
We recently launched
a three-tier branding and merchandising strategy
to provide customers with a full array of products across a broader assortment
of merchandise and price points, and began selling
products through www.harriett.com, which features
merchandise from Harriett, our new luxury label collection, and through www.thefindbyfredericks.com, which features our discount
and clearance product offerings. We also recently began offering our products on Amazon.com through our own branded storefront.
Our catalog has evolved over the past few
years to serve more as an important marketing tool to build brand awareness and drive traffic to our website and stores. We generally
mail four seasonal catalogs annually (fall, holiday, spring and summer), as well as several smaller direct mail pieces. During
fiscal year 2012, we mailed approximately 10.8 million catalogs to approximately 5.0 million households, from approximately 13.6
million catalogs mailed to approximately 4.1 million households in fiscal year 2011. Due to the costs involved in producing a traditional
catalog, we have steadily reduced catalog circulation and have been reallocating resources to more innovative direct mail pieces
and cost-effective digital marketing alternatives such as digital display advertising, email retargeting, and increased search
marketing. During the first quarter of fiscal year 2013, we tested with a limited mailing our “brandzine,” or branded
magazine, which includes magazine-like content and third party advertisements in a mail piece featuring our products. We are planning
a wider distribution of our holiday brandzine during the second quarter of fiscal year 2013. We continuously seek ways to create
a more personalized branding experience for our customers.
All creative and copy design for our website
and direct mail is coordinated by our in-house design staff. Photography is conducted on location or in studios. We utilize third
party vendors to print and mail. Our direct mailings are currently sent within the United States only.
Licensing Operations
Store
Licensing
. W
e have an exclusive multi-year licensing agreement for EABG to build and operate Frederick’s of Hollywood
retail stores in the Middle East. The agreement provides for EABG to open at least 10 stores in six Middle Eastern countries by
April 2014, with additional store openings based on a mutually agreed upon expansion plan. As of October 8, 2012, EABG had opened
three stores in the region. Under the agreement, EABG purchases products from us to sell in their licensed Frederick’s of
Hollywood stores. We are entitled to receive royalties based on sales of our products in the licensed stores, as well as a per-store
opening fee once a certain number of stores are opened in the territory.
Product
Licensing.
We currently have product license agreements in place for Halloween costumes, jewelry and accessories, which
represented less than 1% of our total sales in fiscal year 2012.
We have
granted our product licensees the right to design, manufacture and sell at wholesale specified categories of products under our
trademarks. We have the right to review, inspect and approve all product designs and quality and approve any use of our trademarks
in packaging, distribution, advertising and marketing. Each licensee has agreed to pay us royalties based on its wholesale sales
of products that use our trademarks. Our license agreements typically have three to five year terms, may grant the licensee conditional
renewal options, limit licensees to certain territorial rights and give us the right to terminate the license agreements if specified
sales levels are not achieved.
Sourcing, Production and Quality
We utilize a variety of third-party vendors
for the sourcing and manufacturing of our merchandise. Orders are typically placed approximately four to six months prior to the
selling season for new products, and approximately three to four months prior to the required delivery dates for reorders.
In fiscal year 2012, we purchased products
from approximately 80 vendors. Our top ten vendors accounted for approximately 81% of the dollar value of those purchases. We had
three suppliers that individually accounted for 10% or more of total purchases in fiscal year 2012. One domestic supplier accounted
for approximately 16% of total purchases and two foreign suppliers based in Canada accounted for approximately 17% and 12% of total
purchases in fiscal year 2012. The Canadian suppliers represented approximately 75% of the products purchased from foreign suppliers
in fiscal year 2012. Many of our third-party domestic and foreign suppliers purchase products from foreign sources. Although we
do not have direct relationships with these foreign sources, management believes that our suppliers source products primarily from
China, Vietnam and the Philippines.
Although we have no long-term manufacturing
contracts, our relationships with vendors are long-standing, with several vendors supplying products for over twenty years. To
assure adequate sources, each major product category is sourced from multiple vendors. We also test products from new suppliers
and expand their services to us as appropriate. We do not believe that we are overly dependent on any one supplier, and the loss
of any one of them would not have a material effect on our business.
Brand Development and Marketing
We believe that
Frederick’s of
Hollywood
is one of the world’s most widely recognized apparel brand names. Our primary advertising media includes our
website, catalog and retail stores. We believe the concurrent operation of retail stores, a website and catalog proves to be advantageous
in brand development and exposure. We use our website and store locations to test new items and promotional strategies that may,
in turn, develop into successful programs.
Our brand development and marketing activities
have focused on enhancing the customer experience in stores and online through updated imagery and increasing online shopping functionality.
We also recently launched a three-tier branding and merchandising strategy to provide customers with a full array of products across
a broader assortment of merchandise and price points. During the first quarter of fiscal year 2013, we launched our new luxury
label collection, Harriett, which is currently sold in our Hollywood flagship store and online through
www.harriett.com
,
and offers higher priced and more luxurious goods. We also introduced The Find by Frederick’s, which serves as an online
venue to purchase our discount and clearance product offerings at
www.thefindbyfredericks.com
.
We also increase brand awareness with the
announcement of new product launches and the arrival of seasonal collections through public relations activities and social media.
Combinations of press releases, media events, gift with purchase offers, and product placements in national magazines and regional
and national television programs are also used.
Distribution and Customer Service
We utilize a 131,000 square foot facility
in Phoenix, Arizona to operate a distribution and information technology center. The majority of shipments received for retail
stores are allocated to individual stores and shipped within a few days. Website and catalog orders are typically processed within
24 hours. We believe our distribution center’s capacity is adequate to meet our projected sales volume for the next several
years.
In October 2012, we outsourced our call
center and customer service functions to a third-party provider. These functions were previously performed in-house in our Phoenix,
Arizona facility. Our third-party provider performs phone order placement and customer services, as well as online customer support.
Information Technology
We maintain information technology systems
to support our merchandising, marketing, planning, store operations, inventory, order management and fulfillment, finance, accounting
and human resources functions.
In our retail stores, sales are updated
daily in the merchandise reporting systems by polling sales information from each store’s point of sale terminals. Through
automated nightly communication with each store, sales information and payroll hours are uploaded to the host system, and stock
changes are downloaded through the terminals. We evaluate information obtained through daily reporting to implement merchandising
decisions.
Customer orders are captured and processed
on our e-commerce website,
www.fredericks.com
, which interfaces with our in-house systems for order management and fulfillment.
Our e-commerce web platform is hosted by a third-party service provider, which we believe provides a stable foundation upon which
we can continue to upgrade and enhance our website and, in turn, our customers’ overall online shopping experience for our
products.
Trademarks and Service Marks
We have a variety of trademark applications
and registrations in the United States and foreign countries. The registered United States trademarks that are material to the
marketing of our products are
Frederick’s of Hollywood
®
,
Frederick’s
®
,
Fredericks.com
®
,
The Original Sex Symbol
®
,
Hollywood Exxtreme Cleavage
®
,
Seduction by Frederick’s of Hollywood
®
, and
Hollywood Icon
®
. We believe that
Frederick’s of Hollywood products are identified by their intellectual property. We have and intend to maintain our intellectual
property by vigorously protecting it against infringement.
Seasonality
Our business experiences seasonal sales
patterns. Sales and earnings typically peak during the second and third fiscal quarters (November through April), primarily during
the holiday season in November and December, as well as the Valentine’s Day holiday in the month of February. As a result,
higher inventory levels are maintained during these peak selling periods.
Competition
The retail apparel business is highly competitive
with numerous competitors, including individual and chain fashion specialty stores, department stores and discount retailers. It
is multi-faceted and operates through various channels; primarily retail stores, catalog and e-commerce. Brand image, marketing,
fashion design, price, service, fashion assortment and quality are the principal competitive areas affecting the retail business.
We believe that we have competitive strengths
because of our widely recognized brand, presence in shopping malls and direct marketing expertise. However, many of our competitors
have greater financial, distribution, logistics, marketing and other resources available to them and may be able to adapt to changes
in customer requirements more quickly, devote greater resources to the design, sourcing, distribution, marketing and sale of their
products, generate greater national brand recognition or adopt more aggressive pricing policies, and there can be no assurance
that we will be able to compete successfully with them in the future.
Employees
As of October 8, 2012, we had 378 full-time
employees and 548 part-time employees. Due to seasonal sales patterns, we hire additional temporary staff at our retail stores
and distribution and customer contact centers during peak sales periods. We have never experienced an interruption of our operations
because of a work stoppage. We believe our relationship with our employees to be good. We are not a party to any collective bargaining
agreement with any union.
ITEM 1A. – RISK FACTORS
General economic conditions, including continued weakening
of the economy, may affect consumer purchases of discretionary items, which could adversely affect our sales.
Since fiscal year 2009, there has been a
significant deterioration in the global financial markets and economic environment, which we believe has negatively impacted consumer
spending at many retailers, including our company. Our results are dependent on a number of factors impacting consumer spending,
including general economic and business conditions; consumer confidence; wages and employment levels; the housing market; consumer
debt levels; availability of consumer credit; credit and interest rates; fuel and energy costs; energy shortages; taxes; general
political conditions, both domestic and abroad; and the level of customer traffic within department stores, malls and other shopping
and selling environments. Consumer purchases of discretionary items, including our products, may decline during recessionary periods
and at other times when disposable income is lower. A continued or incremental downturn in the U.S. economy, an uncertain economic
outlook or an expanded credit crisis could continue to adversely affect our business and our revenue and profits.
If we cannot compete effectively in the retail apparel
industry, our business, financial condition and results of operations may be adversely affected.
The retail apparel industry is highly competitive.
We compete with a variety of retailers, including national department store chains, national and international specialty apparel
chains, apparel catalog businesses and online apparel businesses that sell similar lines of merchandise. Many of our competitors
have greater financial, distribution, logistics, marketing and other resources available to them and may be able to adapt to changes
in customer requirements more quickly, devote greater resources to the design, sourcing, distribution, marketing and sale of their
products, generate greater national brand recognition or adopt more aggressive pricing policies. If we are unable to overcome these
potential competitive disadvantages, such factors could have an adverse effect on our business, financial condition and results
of operations.
The failure to successfully order and manage inventory
to reflect customer demand and anticipate changing consumer preferences and buying trends may adversely affect our revenue and
profitability.
Our success depends, in part, on management’s
ability to anticipate and respond effectively to rapidly changing fashion trends and consumer tastes and to translate market trends
into appropriate, saleable product offerings. Generally, merchandise must be ordered well in advance of the applicable selling
season and the extended lead times may make it difficult to respond rapidly to new or changing product trends or price changes.
If we are unable to successfully anticipate, identify or react to changing styles or trends and we misjudge the market for our
products or our customers’ purchasing habits, then our product offerings may be poorly received by consumers and may require
substantial discounts to sell, which would reduce sales revenue and lower profit margins. Brand image also may suffer if customers
believe that we are unable to offer innovative products, respond to the latest fashion trends, or maintain product quality.
We currently have a working capital deficiency which could
negatively impact our operations.
As of July 28, 2012, we had a working capital
deficiency of $6,326,000. We plan to rely on available borrowings under our revolving credit facility with Salus Capital Partners,
LLC, together with our projected operating cash flows, to meet our working capital needs. If we require working capital and it
is unavailable to us on acceptable terms or at all, it could result in our inability to successfully update and expand our product
offerings in order to keep our selections fresh and appealing to our customers. The foregoing could negatively impact our results
of operations.
We depend on key personnel and we may not be able to operate
and grow the business effectively if we lose the services of any key personnel or are unable to attract qualified personnel in
the future.
We are dependent upon the continuing service
of key personnel and the hiring of other qualified employees. In particular, we are dependent upon the management and leadership
of Thomas J. Lynch, our Chairman and Chief Executive Officer, Don Jones, our President and Chief Operating Officer, and Thomas
Rende, our Chief Financial Officer. The loss of any of them or other key personnel could affect our ability to operate the business
effectively.
We historically have depended on a high volume of mall
traffic, the lack of which would hurt our business.
Most Frederick’s of Hollywood stores
are located in shopping malls. Sales at these stores are influenced, in part, by the volume of mall traffic. Our stores benefit
from the ability of the malls’ “anchor” tenants, generally large department stores, and other area attractions
to generate customer traffic in the vicinity of its stores and the continuing popularity of malls as shopping destinations. A decline
in the desirability of the shopping environment of a particular mall, whether due to the closing of an anchor tenant or competition
from non-mall retailers, or recessionary economic conditions that consumers have been experiencing, could reduce the volume of
mall traffic, which could have an adverse effect on our business, financial condition and results of operations.
If leases for Frederick’s of Hollywood stores cannot
be negotiated or renewed on reasonable terms, our ability to achieve profitability could be harmed.
Our sales are dependent on management’s
ability to operate retail stores in desirable locations with capital investments and lease costs that allow for the opportunity
to earn a reasonable return. Desirable locations and configurations may not be available at a reasonable cost, or at all. If we
are unable to renew or replace our store leases, enter into leases for new stores or terminate leases for unprofitable stores on
favorable terms, our ability to achieve profitability could be harmed.
The extent of our foreign sourcing and manufacturing may
adversely affect our business, financial condition and results of operations.
Substantially all of the products that we
purchase from third-party vendors are manufactured outside the United States. As a result of the magnitude of foreign sourcing
and manufacturing, our business is subject to the following risks:
|
·
|
political and economic instability in foreign countries, including heightened terrorism and other security concerns, which
could subject imported or exported goods to additional or more frequent inspections, leading to delays in deliveries or impoundment
of goods, or to an increase in transportation costs of raw materials or finished products;
|
|
·
|
the imposition of regulations and quotas relating to imports, including quotas imposed by bilateral textile agreements between
the United States and foreign countries;
|
|
·
|
the imposition of duties, taxes and other charges on imports;
|
|
·
|
significant fluctuation of the value of the U.S. dollar against foreign currencies;
|
|
·
|
restrictions on the transfer of funds to or from foreign countries; and
|
|
·
|
violations by foreign contractors of labor and wage standards and resulting adverse publicity.
|
If these risks limit or prevent us from
selling or acquiring products from foreign suppliers, our operations could be disrupted until alternative suppliers are found,
which could negatively impact our business, financial condition and results of operations.
Any disruptions at our distribution center could materially
affect our ability to distribute products, which could lead to a reduction in our revenue and/or profits.
Our distribution center in Phoenix, Arizona
serves our customers. There is no backup facility or any alternate distribution arrangements in place. If we experience disruptions
at our distribution center that impede the timeliness or fulfillment of the products to be distributed, or our distribution center
is partially or completely destroyed, becomes inaccessible, or is otherwise not fully usable, whether due to unexpected circumstances
such as weather conditions or disruption of the transportation systems or uncontrollable factors such as terrorism and war, it
would have a material adverse effect on our ability to distribute products, which in turn would have a material adverse effect
on our business, financial condition and results of operations.
Our product licensees may not comply with standards, which
could harm our brand, reputation and business.
We license our trademarks to third parties
for various products. While we enter into comprehensive licensing agreements with our licensees covering product design, product
quality, sourcing, manufacturing, marketing and other requirements, our licensees may not comply fully with those agreements. Non-compliance
could include marketing products under our brand name that do not meet our quality and other requirements, which could harm our
brand equity, reputation and business.
Our efforts to expand internationally through store licensing
and other arrangements may not be successful and could impair the value of our brand.
We are currently evaluating several opportunities
to grow our business through international expansion. In March 2011, we entered into a licensing agreement with EABG, which provides
for EABG to build and operate Frederick’s of Hollywood stores in the Middle East. We have no prior experience operating through
this type of third party arrangement, and it may not be successful. The effect of this type of arrangement on our business and
results of operations is uncertain and will depend upon various factors, including the demand for our products in new markets internationally.
In addition, certain aspects of this arrangement are not directly within our control, such as the ability of EABG to meet its projections
regarding store openings and sales. Moreover, while the agreement may provide us with certain termination rights, to the extent
that EABG does not operate its stores in a manner consistent with our brand and store concepts, the value of our brand could be
impaired. In addition, our failure to comply with applicable laws and regulations in connection with this agreement could have
an adverse effect on our results of operations.
Any material disruption of our information systems could
disrupt our business and reduce our sales.
We rely on various information technology
systems to manage our operations. We may experience operational problems with our information systems as a result of system failures,
viruses, computer “hackers” or other causes. Any material disruption or slowdown of our systems, including a disruption
or slowdown caused by our failure to successfully upgrade our systems, could cause information, including data related to customer
orders, to be lost or delayed which could result in delays in the delivery of merchandise to our stores and customers or lost sales,
which could reduce demand for our merchandise and cause our sales to decline. Moreover, we may not be successful in developing
or acquiring technology that is competitive and responsive to the needs of our customers and might lack sufficient resources to
make the necessary investments in technology to compete with our competitors. Accordingly, if changes in technology cause our information
systems to become obsolete, or if our information systems are inadequate to handle our business requirements, we could lose customers.
The processing, storage and use of personal data could
give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal
privacy rights.
The collection of data and processing of
transactions through our Frederick’s of Hollywood e-commerce website and call centers require us to receive and store a large
amount of personally identifiable data. This type of data is subject to legislation and regulation in various jurisdictions. We
may become exposed to potential liabilities with respect to the data that we collect, manage and process, and may incur legal costs
if our information security policies and procedures are not effective or if we are required to defend our methods of collection,
processing and storage of personal data. Future investigations, lawsuits or adverse publicity relating to our methods of handling
personal data could adversely affect our business, financial condition and results of operations due to the costs and negative
market reaction relating to such developments.
Our collection and remittance of sales and use tax may
be subject to audit and may expose us to liabilities for unpaid sales or use taxes, interest and penalties on past sales.
Our Direct business collects and pays sales
tax to the relevant state taxing authority on sales made to residents in any state in which we have a physical presence. It is
possible that one or more states may disagree with our method of assessing and remitting these taxes, including sales taxes on
Direct sales. We expect to challenge any and all future assertions by state governmental authorities or private litigants that
we owe sales or use tax, but we may not prevail. If we do not prevail, we could be held liable for additional sales and use taxes,
interest and penalties which could have an adverse effect on our profitability.
We could be sued for infringement, which could force us
to incur substantial costs and devote significant resources to defend the litigation
.
We use many trademarks and product designs
in our business and believe these trademarks and product designs are important to our business, competitive position and success.
As appropriate, we rely on trademark and copyright laws to protect these designs even if not formally registered as marks, copyrights
or designs. Third parties may sue us for alleged infringement of their proprietary rights. The party claiming infringement might
have greater resources than us to pursue its claims, and we could be forced to incur substantial costs and devote significant management
resources to defend the litigation. Moreover, if the party claiming infringement were to prevail, we could be forced to discontinue
the use of the related trademark, patent or design and/or pay significant damages, or to enter into expensive royalty or licensing
arrangements with the prevailing party, assuming these royalty or licensing arrangements are available at all on an economically
feasible basis, which they may not be.
If we cannot protect our trademarks and other proprietary
intellectual property rights, our business may be adversely affected.
We may experience difficulty in effectively
limiting unauthorized use of our trademarks and product designs worldwide, which may cause significant damage to our brand name
and our ability to effectively represent ourselves to our agents, suppliers, vendors and/or customers. We may not be successful
in enforcing our trademark and other proprietary rights and there can be no assurance that we will be adequately protected in all
countries or that we will prevail when defending our trademark and proprietary rights.
Our stock price has been volatile.
The trading price of our common stock has
been volatile. During the quarter ended July 28, 2012, the closing sale prices of our common stock on the NYSE MKT ranged from
$0.23 to $0.45 per share and the closing sale price of our common stock on October 8, 2012 was $0.26 per share. Our stock price
is subject to wide fluctuations in response to a variety of factors, including:
|
·
|
quarterly variations in operating results;
|
|
·
|
general economic conditions;
|
|
·
|
low trading volume; and
|
|
·
|
other events or factors that are beyond our control.
|
Any negative change in the public’s
perception of the prospects for the retail industry could further depress our stock price, regardless of our results. Other broad
market fluctuations may lower the trading price of our common stock. Following significant declines in the market price of a company’s
securities, securities class action litigation may be instituted against that company. Litigation could result in substantial costs
and a diversion of management’s attention and resources.
The NYSE MKT may delist our common stock, which could
limit investors’ ability to make transactions in our common stock.
Our common stock is listed on the NYSE MKT,
a national securities exchange. In order to continue listing our common stock, we must maintain certain financial, distribution
and stock price levels. Generally, we must maintain a minimum amount of shareholders’ equity (usually between $2 million
and $6 million) and a minimum number of public shareholders (usually 300 shareholders or 200,000 shares held by our non-affiliates).
Additionally, our common stock cannot have what is deemed to be a “low selling price” as determined by the exchange.
On November 30, 2011, we received a notice
from the NYSE MKT indicating that we were not in compliance with (a) Section 1003(a)(i) of the Company Guide since we reported
shareholders’ equity of less than $2 million at July 30, 2011 and losses from continuing operations and/or net losses in
two of our three most recent fiscal years and (b) Section 1003(a)(ii) of the Company Guide with shareholders’ equity of less
than $4 million and losses from continuing operations and/or net losses in three of our four most recent fiscal years. On February
3, 2012, the NYSE MKT notified us that it had accepted our plan to regain compliance with the foregoing rules of the Company Guide
and granted us an extension until May 30, 2013 to evidence compliance with Sections 1003(a)(i) and (ii) of the Company Guide. We
are subject to periodic review by the staff of the NYSE MKT during the extension period. Failure to make progress consistent with
the Plan or to regain compliance with the continued listing standards by the end of the extension period could result in the NYSE
MKT initiating delisting proceedings pursuant to Section 1009 of the Company Guide.
If our common stock is delisted, we could
face material adverse consequences, including:
|
·
|
a limited availability of market quotations for our common stock;
|
|
·
|
reduced liquidity in the trading of our stock;
|
|
·
|
a limited amount of news coverage; and
|
|
·
|
a decreased ability to issue additional securities or obtain additional financing in the future.
|
ITEM 1B. – UNRESOLVED STAFF COMMENTS
As a smaller reporting company, we are not
required to provide the information required by this item.
ITEM 2. – PROPERTIES
We lease approximately 27,000 square feet
of space for our principal executive offices at 6255 Sunset Boulevard, Hollywood, CA for an annual base rent of approximately $834,000
pursuant to a lease that expires in February 2015.
We lease approximately 131,000 square feet
of space for our distribution and customer contact center at 5005 S. 40
th
Street, Phoenix, AZ for an annual base rent
of approximately $1,160,000 pursuant to a lease that expires in March 2018.
We lease approximately 1,600 square feet
of executive office space at 8 West 38
th
Street, New York, NY for an annual base rent of approximately $52,000 pursuant
to a lease that expires in November 2013.
Our 118 Frederick’s of Hollywood stores
are located in leased facilities, primarily in shopping malls, in 29 states. A substantial portion of these lease commitments consist
of store leases with an initial term of ten years. The leases expire at various dates between 2012 and 2020, with some leases currently
operating on a month-to-month basis. Rental terms for new locations often include a fixed minimum rent plus a percentage of sales
in excess of a specified amount. We typically pay certain operating costs such as common area maintenance, utilities, insurance
and taxes. We will continue to close certain underperforming stores upon the expiration of their respective leases. See
Business
– Store Operations
.
The following table sets forth the locations
of Frederick’s of Hollywood stores as of July 28, 2012.
Arizona
|
4
|
|
Massachusetts
|
4
|
|
Oklahoma
|
2
|
California
|
41
|
|
Michigan
|
2
|
|
Oregon
|
2
|
Connecticut
|
1
|
|
Minnesota
|
2
|
|
Pennsylvania
|
1
|
Florida
|
14
|
|
Missouri
|
1
|
|
South Carolina
|
1
|
Georgia
|
3
|
|
Nevada
|
5
|
|
Tennessee
|
1
|
Hawaii
|
1
|
|
New Hampshire
|
1
|
|
Texas
|
12
|
Illinois
|
3
|
|
New Jersey
|
1
|
|
Virginia
|
2
|
Indiana
|
1
|
|
New Mexico
|
1
|
|
Washington
|
1
|
Kansas
|
1
|
|
New York
|
5
|
|
Wisconsin
|
1
|
Maryland
|
1
|
|
Ohio
|
3
|
|
|
|
Typically, when space is leased for a store
in a mall shopping center, all improvements, including interior walls, floors, ceilings, fixtures and decorations are performed
by contractors designated by Frederick’s of Hollywood. The cost of improvements varies widely, depending on the design, size
and location of the store. As a lease incentive in certain cases, the landlord of the property may provide a construction allowance
to fund all, or a portion, of the cost of improvements.
We believe that our facilities are adequate
for our current and reasonably foreseeable future needs and that our properties are in good condition and suitable to conduct our
business.
ITEM 3. – LEGAL PROCEEDINGS
On February 2,
2012, a former California store employee filed a purported class action lawsuit in the California Superior Court, County of San
Francisco, naming Frederick’s of Hollywood, Inc., one of the Company’s subsidiaries, as a defendant (Michelle Weber,
on behalf of herself and all others similarly situated v. Frederick’s of Hollywood, Inc., Case No. CGC-12-517909). The complaint
alleges, among other things, violations of the California Labor Code, failure to pay overtime, failure to provide meal and rest
periods and termination compensation and violations of California’s Unfair Competition Law. The complaint seeks, among other
relief, collective and class certification of the lawsuit (the class being defined as all California retail store hourly employees),
unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the Court might find just and
proper. We contest these allegations and deny any liability with respect to the lawsuit. We answered the Plaintiff’s first
amended complaint on April 2, 2012. The parties have agreed to stay discovery proceedings in order to conduct a mediation, which
is scheduled for November 29, 2012. Therefore, we
are unable to predict the likely outcome and whether such outcome may
have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency
has been accrued as of July 28, 2012.
We also are involved from time to time in
litigation incidental to our business. We believe that the outcome of such litigation will not have a material adverse effect on
our results of operations or financial condition.
ITEM 4. – MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. – MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common
stock is traded on the NYSE MKT under the symbol “FOH.” The following table sets forth the reported high and low sales
prices per share for the periods indicated.
|
|
High
|
|
|
Low
|
|
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
|
|
Year Ended July 30, 2011
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.23
|
|
|
$
|
0.74
|
|
Second Quarter
|
|
|
1.40
|
|
|
|
0.71
|
|
Third Quarter
|
|
|
0.98
|
|
|
|
0.62
|
|
Fourth Quarter
|
|
|
0.86
|
|
|
|
0.60
|
|
On October 8, 2012, the closing sale
price of our common stock was $0.26.
Holders
As of October 8, 2012, there were approximately
600 shareholders of record of our common stock. We believe that there are also a significant number of beneficial owners of our
common stock whose shares are held in “street name.”
Dividend Policy
We have not paid any cash dividends on our
common stock to date. It is the present intention of our board of directors to retain all earnings, if any, for use in our business
operations and, accordingly, our board does not currently anticipate declaring any cash dividends in the foreseeable future. The
payment of dividends will be within the discretion of our board of directors and will be contingent upon our revenue and earnings,
if any, capital requirements, general financial condition and such other factors as our board may consider. In addition, the terms
of our Series A Convertible Preferred Stock and covenants contained in our Credit and Security Agreement with
Salus Capital Partners, LLC
restrict our ability to pay cash dividends so long as the Series A Convertible Preferred Stock
is outstanding or any amount is owed and outstanding under the Salus Facility (defined below), respectively.
ITEM 6. – SELECTED FINANCIAL DATA
This item is not required to be completed
by smaller reporting companies. Our consolidated financial statements appear elsewhere in this report in
Item 8. – Financial
Statements and Supplementary Data
.
ITEM 7. – MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Frederick’s of Hollywood Group Inc.,
through its subsidiaries, sells women’s apparel and related products under its proprietary
Frederick’s of Hollywood
®
brand predominantly through its U.S. mall-based specialty retail stores, which are referred to as “Stores,” and through
its catalog and website at
www.fredericks.com
, which are referred to collectively as “Direct.” As of July 28,
2012, we operated 118 Frederick’s of Hollywood stores in 29 states and during fiscal year 2012 mailed approximately 10.8
million catalogs.
For financial reporting purposes, we have
one reportable segment representing the aggregation of our two operating segments (Stores and Direct), based on their similar economic
characteristics, products and target customers. We also have store and product licensing agreements; however, licensing income
from these agreements is currently immaterial.
Financial information for the fiscal years
ended July 28, 2012 and July 30, 2011 is included in the consolidated financial statements appearing elsewhere in this report.
Operating Initiatives
For a discussion of our operating initiatives,
see
Item 1. “Business – Operating Initiatives.”
Critical Accounting Policies and Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires the appropriate application
of certain accounting policies, many of which require estimates and assumptions about future events and their impact on amounts
reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty,
the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.
Management believes that the application
of accounting policies, and the estimates inherently required by the policies, are reasonable. These accounting policies and estimates
are constantly re-evaluated, and adjustments are made when facts and circumstances dictate a change. Historically, management has
found the application of accounting policies to be appropriate, and actual results generally do not differ materially from those
determined using necessary estimates.
Our accounting policies are more fully described
in Note 2 to the consolidated financial statements appearing elsewhere in this report. Management has identified certain critical
accounting policies that are described below.
Our most significant areas of estimation
and assumption are:
|
·
|
determination of the appropriate amount and timing of markdowns to clear unproductive or slow-moving inventory and overall
inventory obsolescence;
|
|
·
|
estimation of future cash flows used to assess the recoverability of long-lived assets, including trademarks;
|
|
·
|
estimation of expected customer merchandise returns;
|
|
·
|
estimation of the net deferred income tax asset valuation allowance; and
|
|
·
|
capitalization of deferred catalog costs and the estimated amount of future benefit to be derived from the catalogs.
|
Revenue Recognition –
We record revenue for Stores
at the point at which the customer receives and pays for the merchandise at the register. For Direct sales, goods are shipped to
the customer when payment is made and we record the revenue at the time the customer receives the merchandise. We estimate and
defer revenue and the related product costs for shipments that are in transit to the customer. Customers typically receive goods
within a few days of shipment. Outbound shipping charges billed to customers are included in net sales. We record an allowance
for estimated returns from our customers in the period of sale based on prior experience. At July 28, 2012 and July 30, 2011, the
allowance for estimated returns was $665,000 and $794,000, respectively. If actual returns are greater than those expected, additional
sales returns may be recorded in the future. Historically, management has found its return reserve to be appropriate, and actual
results generally do not differ materially from those determined using necessary estimates. Sales are recorded net of sales taxes
collected from customers at the time of the transaction.
Merchandise Inventories
– Store
inventories are valued at the lower of cost or market using the retail inventory first-in, first-out (“FIFO”) method,
and Direct inventories are valued at the lower of cost or market, on an average cost basis that approximates the FIFO method. Stores
and Direct inventories consist entirely of finished goods. Freight costs are included in inventory and vendor allowances are recorded
as a reduction in inventory cost.
These inventory methods inherently require management judgments
and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact
the ending inventory valuations and gross margins. Markdowns are recorded when the sales value of the inventory has diminished.
Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age
of the merchandise, and fashion trends. We reserve for the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand, market conditions, and the age of the inventory. If actual market conditions are less
favorable than those projected by management, additional inventory reserves may be required. Markdown allowances received from
vendors are reflected as reductions to cost of sales in the period they are received if these allowances are received after goods
have been sold or marked down. When markdown allowances are received prior to the sale or markdown, the allowance will be recognized
as a reduction in the cost basis of the inventory. Historically, management has found its inventory reserves to be appropriate,
and actual results generally do not differ materially from those determined using necessary estimates. Inventory reserves were
$628,000 and $547,000 at July 28, 2012 and July 30, 2011, respectively.
Deferred Catalog Costs
– Deferred
catalog costs represent direct-response advertising that is capitalized and amortized over its expected period of future benefit.
The capitalized costs of the advertising are amortized over the expected revenue stream following the mailing of the respective
catalog, which is generally less than three months. The realizability of the deferred catalog costs are also evaluated as of each
balance sheet date by comparing the capitalized costs for each catalog, on a catalog by catalog basis, to the probable remaining
future gross profit of the related revenue. Direct-response
advertising costs of $564,000 and $1,476,000 are included
in prepaid expenses and other current assets in the accompanying consolidated balance sheets at July 28, 2012 and July 30, 2011,
respectively. Management believes that they have appropriately determined the expected period of future benefit as of the date
of the Company’s consolidated financial statements; however, should actual sales results differ from expected sales, deferred
catalog costs may be written off on an accelerated basis.
Impairment of Long-Lived Assets
–
We review long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable based on undiscounted cash flows. If long-lived assets are impaired,
an impairment loss is recognized and is measured as the amount by which the carrying value exceeds the estimated fair value of
the assets. The estimation of future undiscounted cash flows from operating activities requires significant estimates of factors
that include future sales growth and gross margin performance. Management believes they have appropriately determined future cash
flows and operating performance; however, should actual results differ from those expected, additional impairment may be required.
For the year ended July 30, 2011, we recorded impairment charges for property and equipment of $1,910,000. We did not record any
impairment charges for the year ended July 28, 2012.
Intangible Assets
– We have certain
indefinite lived intangible assets, principally the Frederick’s of Hollywood trade name and domain names. Applicable accounting
guidance requires us to not amortize indefinite life intangible assets, but to test those intangible assets for impairment annually
and between annual tests when circumstances or events have occurred that may indicate a potential impairment has occurred. The
fair value of the trademarks was determined using the relief-from-royalty method. The relief-from-royalty method estimates the
royalty expense that could be avoided in the operating business as a result of owning the respective asset or technology. The royalty
savings are measured, tax-effected and, thereafter, converted to present value with a discount rate that considers the risk associated
with owning the intangible asset. No impairment was present and no write-down was required when the trademarks were reviewed for
impairment in connection with the annual impairment test.
Income Taxes
– Income taxes are
accounted for under an asset and liability approach that requires the recognition of deferred income tax assets and liabilities
for the expected future consequences of events that have been recognized in our financial statements and income tax returns. We
provide a valuation allowance for deferred income tax assets when it is considered more likely than not that all or a portion of
such deferred income tax assets will not be realized.
Results of Operations
Management considers certain key indicators
when reviewing our results of operations and liquidity and capital resources. One key operating metric is the performance of comparable
store sales, which are the net merchandise sales of stores that have been open at least one complete year. Because our results
of operations are subject to seasonal variations, retail sales are reviewed against comparable store sales for the similar period
in the prior year. A material factor that we consider when reviewing sales is the gross profit percentage. We also consider our
selling, general and administrative expenses as a key indicator in evaluating our financial performance. Inventory and our outstanding
borrowings are the main indicators we consider when we review our liquidity and capital resources, particularly the size and age
of the inventory. We review all of our key indicators against the prior year and our operating projections in order to evaluate
our operating performance and financial condition.
The following table shows each specified
item as a dollar amount and as a percentage of net sales in each fiscal period, and should be read in conjunction with the consolidated
financial statements included elsewhere in this report (in thousands, except for percentages, which percentages may not add due
to rounding):
|
|
Year Ended
|
|
|
|
July 28, 2012
|
|
|
July 30, 2011
|
|
Net sales
|
|
$
|
111,406
|
|
|
|
100.0
|
%
|
|
$
|
119,615
|
|
|
|
100.0
|
%
|
Cost of goods sold, buying and occupancy
|
|
|
69,782
|
|
|
|
62.6
|
%
|
|
|
76,647
|
|
|
|
64.1
|
%
|
Gross profit
|
|
|
41,624
|
|
|
|
37.4
|
%
|
|
|
42,968
|
|
|
|
35.9
|
%
|
Selling, general and administrative expenses
|
|
|
45,757
|
|
|
|
41.1
|
%
|
|
|
49,771
|
|
|
|
41.6
|
%
|
Impairment of long-lived assets
|
|
|
-
|
|
|
|
-
|
|
|
|
1,910
|
|
|
|
1.6
|
%
|
Operating loss
|
|
|
(4,133
|
)
|
|
|
(3.7
|
)%
|
|
|
(8,713
|
)
|
|
|
(7.3
|
)%
|
Interest expense, net
|
|
|
2,224
|
|
|
|
2.0
|
%
|
|
|
1,483
|
|
|
|
1.2
|
%
|
Loss before income tax provision
|
|
|
(6,357
|
)
|
|
|
(5.7
|
)%
|
|
|
(10,196
|
)
|
|
|
(8.5
|
)%
|
Income tax provision
|
|
|
75
|
|
|
|
0.1
|
%
|
|
|
134
|
|
|
|
0.1
|
%
|
Net loss from continuing operations
|
|
|
(6,432
|
)
|
|
|
(5.8
|
)%
|
|
|
(10,330
|
)
|
|
|
(8.6
|
)%
|
Net loss from discontinued operations, net of tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,725
|
)
|
|
|
(1.5
|
)%
|
Net loss
|
|
|
(6,432
|
)
|
|
|
(5.8
|
)%
|
|
|
(12,055
|
)
|
|
|
(10.1
|
)%
|
Less: Preferred stock dividends
|
|
|
84
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Net loss applicable to common shareholders
|
|
$
|
(6,516
|
)
|
|
|
|
|
|
$
|
(12,055
|
)
|
|
|
|
|
Fiscal
Year 2012 Compared to Fiscal Year 2011
Our fiscal year is the 52- or 53-week period
ending on the last Saturday in July. Our consolidated financial statements for fiscal years 2012 and 2011 consist of the 52-week
periods ended July 28, 2012 and July 30, 2011, respectively.
Net Sales
Net sales for the year ended July 28, 2012
decreased to $111,406,000 as compared to $119,615,000 for the year ended July 30, 2011, and were as follows (in thousands, except
for percentages):
|
|
Year Ended
|
|
|
|
July 28, 2012
|
|
|
July 30, 2011
|
|
|
Decrease
|
|
|
% of decrease
from prior year
|
|
Stores
|
|
$
|
70,783
|
|
|
$
|
72,209
|
|
|
$
|
(1,426
|
)
|
|
|
(2.0
|
)%
|
Direct (catalog and website)
|
|
|
35,819
|
|
|
|
39,663
|
|
|
|
(3,844
|
)
|
|
|
(9.7
|
)%
|
Licensing revenue
|
|
|
66
|
|
|
|
644
|
|
|
|
(578
|
)
|
|
|
(89.8
|
)%
|
Other revenue
|
|
|
4,738
|
|
|
|
7,099
|
|
|
|
(2,361
|
)
|
|
|
(33.3
|
)%
|
Total net sales
|
|
$
|
111,406
|
|
|
$
|
119,615
|
|
|
$
|
(8,209
|
)
|
|
|
(6.9
|
)%
|
Total store sales for the year ended July
28, 2012 decreased by $1,426,000, or 2.0%, as compared to the year ended July 30, 2011. Comparable store sales for the year ended
July 28, 2012 increased by $325,000, or 0.5%, as compared to the year ended July 30, 2011. The decrease in total store sales was
primarily due to
|
·
|
a reduction in the number of stores from 123 at July 30, 2011 to 118 at July 28, 2012. Three of the closed stores were high
sales volume stores, but were among our most unprofitable due to high occupancy costs. One of these stores closed at the end of
January 2012 and two closed at the end of February 2012;
|
|
·
|
lower consumer traffic at our stores as compared to the same period in the prior year; and
|
|
·
|
a reduction in catalog circulation to customers within a 20 mile radius of our stores.
|
These reductions were partially
offset by:
|
·
|
an improvement in the product choices made by our merchandising team; and
|
|
·
|
an increase in promotional activity in order to stimulate sales.
|
Direct sales for the year ended July 28,
2012 decreased by $3,844,000, or 9.7%, as compared to the year ended July 30, 2011. This decrease is primarily attributable to
mailing fewer catalogs in the year ended July 28, 2012 as compared to the year ended July 30, 2011 as part of our efforts to reduce
catalog costs and reallocate resources to our digital marketing initiatives. We mailed approximately 10.8 million catalogs during
the year ended July 28, 2012 as compared to approximately 13.6 million catalogs during the year ended July 30, 2011. We are continuing
to strategically review our Direct marketing strategy in order to find ways to drive more profitable sales.
Licensing revenue for the years ended July
28, 2012 and July 30, 2011 was $66,000 and $644,000, respectively. In March 2011, we entered into an exclusive, multi-year licensing
agreement with EABG, which provides for EABG to build and operate Frederick’s of Hollywood retail stores in the Middle East.
EABG made an initial non-refundable payment of $500,000 to us upon the execution of the agreement, which is included in licensing
revenue for the year ended July 30, 2011. There was no similar transaction during the year ended July 28, 2012.
Other revenue consists of shipping revenue,
commissions earned on direct sell-through programs, breakage on gift cards, and product sales to our licensing partner in the Middle
East. Other revenue for the year ended July 28, 2012 decreased by $2,361,000, or 33.3%, as compared to the year ended July 30,
2011. This decrease is primarily attributable to a $1,978,000 decrease in shipping revenue due to an increase in promotional shipping
offers to stimulate sales. Competitors also frequently offer free shipping. Our results were also impacted by lower Direct sales,
and a $499,000 decrease in gift card breakage. These decreases were partially offset by a $461,000 increase in product sales to
our licensing partner in the Middle East for the year ended July 28, 2012.
Gross Profit
Gross margin (gross profit as a percentage
of net sales) for the year ended July 28, 2012 was 37.4% as compared to 35.9% for the year ended July 30, 2011. The largest contributors
to the increase in gross margin were the following:
|
·
|
Product costs as a percentage of sales decreased by 2.8 percentage points primarily as a result of a $3,965,000 increase in
vendor allowances received during the year ended July 28, 2012 as compared to the year ended July 30, 2011. Vendor allowances increased
to 4.6% of sales for the year ended July 28, 2012 from 1.0% of sales in the prior year. This improvement was partially offset by
higher promotions during the year ended July 28, 2012 as compared to the year ended July 30, 2011. We are implementing a partner-oriented
approach with our vendors that we believe will allow us to continue to share the cost of increased promotional activity on a regular
basis. Therefore, the amount of allowances we may receive during each reporting period will depend on our level of promotional
activity during that period and our success in obtaining the allowances from our vendors. However, we do not expect as significant
an increase in vendor allowances for fiscal year 2013 as compared to fiscal year 2012.
|
|
·
|
All other costs included in cost of sales, including buying costs, store occupancy, store depreciation, freight and distribution
center costs, decreased by $1,966,000 for the year ended July 28, 2012 as compared to the year ended July 30, 2011. This decrease
was primarily attributable to lower occupancy and depreciation costs as a result of fewer stores, headcount reductions resulting
from streamlining the buying and merchandising departments and lower distribution center costs due to lower sales in the year ended
July 28, 2012 as compared to the same period in the prior year. As a percentage of sales, these costs increased by 0.3 percentage
points for the year ended July 28, 2012 as compared to the same period in the prior year. This percentage increase was due to lower
sales during the year ended July 28, 2012 as compared to the same period in the prior year.
|
These improvements were partially
offset by the following:
|
·
|
Other revenue decreased by $2,361,000, primarily due to a reduction in shipping revenue, which resulted from a decrease in
Direct sales and an increase in free shipping offers to stimulate sales, and a reduction in gift card breakage.
|
|
·
|
Licensing revenue decreased by $578,000. This decrease was primarily due to a $500,000 non-refundable payment made by our licensing
partner in the Middle East in the prior year.
|
Selling, General and Administrative Expenses
Selling, general and administrative expenses
for the year ended July 28, 2012 decreased by $4,014,000 to $45,757,000, or 41.1% of sales, from $49,771,000, or 41.6% of sales,
for the year ended July 30, 2011. This decrease was primarily attributable to the following:
|
·
|
Expenses related to corporate overhead decreased by $1,209,000 to $10,903,000 for the year ended July 28, 2012 from $12,112,000
for the same period in the prior year. This decrease was primarily due to a decrease in salaries and salary-related costs of $576,000
resulting from a reduction in full-time personnel and $458,000 of severance and severance-related expenses recorded in the prior
year in connection with the departure of our former president, a $270,000 decrease in stock compensation expense and a $323,000
decrease in professional and consulting fees.
|
|
·
|
Store selling, general and administrative expenses decreased by $214,000 to $20,914,000 for the year ended July 28, 2012 from
$21,128,000 for the same period in the prior year. This decrease was primarily due to having fewer stores during fiscal year 2012
as compared to the prior year. This decrease was partially offset by an increase in store operations headcount and costs associated
with the early termination of three unprofitable stores.
|
|
·
|
Direct selling, general and administrative expenses decreased by $2,557,000 to $13,728,000 for the year ended July 28, 2012
from $16,285,000 for the same period in the prior year. This decrease was primarily due to a decrease of $2,017,000 in catalog
and related expenses as a result of mailing fewer catalogs as compared to the same period in the prior year, lower credit card
fees of $358,000 resulting from lower sales and a reduction in interchange rates, and lower salary and salary related expenses
of $108,000 resulting from a lower headcount. This decrease was partially offset by an increase of $190,000 in marketing expenses
related to our strategy to increase our digital marketing initiatives.
|
|
·
|
Brand marketing expenses decreased by $34,000 to $212,000 for the year ended July 28, 2012 from $246,000 for the same period
in the prior year.
|
Impairment
of Long-lived Assets
We record
impairment charges whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable
based on undiscounted cash flows. At July 30, 2011, we identified six underperforming stores that we concluded were impaired due
to sustained historical losses at those stores and recorded an impairment charge of $1,698,000 related to those stores. In addition,
we determined that a partially completed software upgrade was not going to be completed and recorded an impairment charge of $212,000
related to the work that was performed. We did not record any impairment charges for the year ended July 28, 2012.
Interest
Expense
During the year ended July 28, 2012, net
interest expense increased by $286,000 to $1,769,000 as compared to $1,483,000 for the year ended July 30, 2011. This increase
resulted primarily from higher overall borrowings. In addition, as a result of refinancing the Wells Fargo Facility and Hilco Term
Loan (defined below), we wrote off $375,000 of deferred financing costs and incurred an early termination fee of $80,000, representing
total interest expense of $2,224,000 for the year ended July 28, 2012.
Income
Tax Provision
Our income tax provision for the years ended
July 28, 2012 and July 30, 2011 primarily represents minimum and net worth taxes due in various states. Due to the uncertainty
of realization in future periods, no tax benefit has been recognized on the net losses for these years. Accordingly, a full valuation
allowance has been established on the current loss and all net deferred tax assets existing at the end of the period excluding
the deferred tax liability related to intangible assets, which have an indefinite life.
Discontinued
Operations
During the fourth quarter of fiscal year
2010, we made a strategic decision to divest our wholesale division due to continuing losses and in order to focus on our core
retail operations. On October 27, 2010, we completed the sale to Dolce Vita of substantially all of the assets of the wholesale
division, except cash, accounts receivable and certain other assets. Our wholesale division’s operations are classified as
discontinued operations for all periods presented in the consolidated financial statements appearing elsewhere in this report.
We recorded a net loss from discontinued operations of $1,725,000 for the year ended July 30, 2011. There was no activity related
to the wholesale division in fiscal year 2012 and no further losses are anticipated.
Liquidity and Capital Resources
Cash Used in Operations
Net cash used in operating activities for
the year ended July 28, 2012 was $6,571,000, resulting primarily from the following:
|
·
|
net losses for the year ended July 28, 2012 of $6,432,000 from continuing operations;
|
|
·
|
a decrease in accounts payable and other accrued expenses of $6,571,000, which resulted primarily from $5,163,000 in reductions
to accounts payable due to vendor allowances;
|
|
·
|
a decrease in deferred rent and tenant allowances of $862,000, resulting primarily from the non-cash accelerated amortization
of deferred rent and tenant allowances for three unprofitable stores which have been closed; and
|
|
·
|
net cash used in operating activities of our discontinued operations of $297,000.
|
These decreases in cash flow were partially
offset by the following:
|
·
|
non-cash expenses of $2,460,000 for depreciation and amortization and $553,000 for stock compensation expenses;
|
|
·
|
a decrease in inventory of $1,901,000, which resulted from having less stores at July 28, 2012 as compared to the prior year
and our continued management of our inventory levels; and
|
|
·
|
a decrease in prepaid expenses and other current assets of $1,156,000, which was primarily due to a reduction in deferred catalog
costs in connection with our continued efforts to utilize cost-effective marketing initiatives to reduce catalog costs and reallocate
resources to our digital marketing initiatives
.
|
Cash Used in Investing Activities
Cash used in investing activities for the
year ended July 28, 2012 was $312,000.
Cash Provided by Financing Activities
Net cash provided by financing activities
for the year ended July 28, 2012 was $7,176,000, which resulted primarily from proceeds of $9,000,000 from the FILO Advance under
the Salus Facility described below, $5,000,000 from the issuance of our Series A Convertible Preferred Stock and net borrowings
under the Salus Facility of $1,941,000, net of the repayment of the Wells Fargo Facility, partially offset by the repayment of
the Hilco Term Loan of $8,121,000 and the payment of deferred financing costs of $522,000 under our financing agreements.
Financing Agreements
Salus Credit and Security Agreement
On May 31,
2012, we and our subsidiaries (collectively, the “Borrowers”)
entered into a Credit
and Security Agreement (“Credit Agreement”) with Salus Capital Partners, LLC (“Salus”), which provides
the Borrowers with a $24,000,000 revolving line of credit through May 31, 2015 (the “Salus Facility”). At the closing,
an aggregate of approximately $11,839,000 was advanced to the Borrowers under the Salus Facility to repay outstanding secured indebtedness
owed under the Wells Fargo Facility and the Hilco Term Loan (defined below).
The Salus Facility includes a “first
in last out” tranche (“FILO Advance”) of up to $9,000,000 that consists of the first advances made under the
Salus Facility and will be the last amounts repaid. The maximum amount of the FILO Advance and the total Salus Facility will be
reduced by certain mandatory and voluntary prepayments. The Borrowers may periodically borrow, repay in whole or in part, and reborrow
under the Salus Facility, except that amounts repaid on account of the FILO Advance may not be reborrowed. The actual amount of
credit available under the Salus Facility is determined using measurements based on the Borrowers’ receivables, inventory,
intellectual property and other measures.
The unpaid principal of the FILO Advance
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 (12.0% at July 28, 2012). Up to 2.5% of the interest payable on the FILO Advance will be capitalized, compounded
and added to the unpaid amount of the obligations each month, will accrue interest at the rate applicable to the FILO Advance and
will be due and payable in cash upon the expiration or other termination of the Salus Facility. At July 28, 2012, $9,039,000 was
outstanding under the FILO Advance.
The unpaid principal of advances other than
the FILO Advance 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 (7.25% at July 28, 2012). At July 28, 2012, $7,356,000 of advances other than the FILO Advance was
outstanding.
The obligations of the Borrowers under the
Credit Agreement are secured by first priority security interests 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 Company’s
subsidiaries.
The Credit Agreement provides for the Borrowers
to pay Salus an origination fee of $465,000, 50% of which was paid at the closing and 50% to be paid on the first anniversary of
the closing. The Credit Agreement also provides for certain customary fees to be paid to Salus, including: (i) a monthly fee on
the unused portion of the Salus Facility; (ii) a monthly collateral monitoring fee; and (iii) an annual FILO facility fee based
on the then-outstanding FILO Advance.
The Credit Agreement and other loan documents
contain customary representations and warranties, affirmative and negative covenants and events of default, including covenants
that restrict the Borrowers’ ability to create certain liens, make certain types of borrowings and investments, liquidate
or dissolve, engage in mergers, consolidations, significant asset sales and affiliate transactions, incur certain lease obligations,
pay cash dividends, redeem or repurchase outstanding equity and issue capital stock. In lieu of financial covenants, fixed charge
coverage and overall debt ratios, the Salus Facility has a $1.5 million minimum availability reserve requirement. At July 28, 2012,
we were in compliance with the Salus Facility’s affirmative and restrictive covenants and minimum availability reserve requirement.
Wells Fargo Revolving Credit Facility
The Borrowers had a senior revolving credit
facility (the “Wells Fargo Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), which
was scheduled to mature on January 28, 2013. On May 31, 2012, the Wells Fargo Facility was replaced by the Salus Facility.
The Wells Fargo Facility had a line of credit
commitment of $12.5 million and a letter of credit sublimit of $10 million. The Wells Fargo Facility was secured by a second priority
interest in all of the Borrowers’ intellectual property and a first priority security interest in substantially all of the
Borrowers’ other assets. The amount of credit available under the Wells Fargo Facility was determined using measurements
based on our receivables, inventory and other measures. Interest was payable monthly, in arrears, at the Wells Fargo prime rate
plus 175 basis points for base rate loans and at LIBOR plus 300 basis points for LIBOR rate loans. At July 28, 2012, we had $377,000
of outstanding letters of credit.
Hilco Term Loan
On July 30, 2010, the Borrowers entered
into a financing agreement (“Hilco Financing Agreement”) with the lending parties from time to time a party thereto
and Hilco Brands, LLC, as lender and also as arranger and agent (“Hilco”). The Hilco Financing Agreement originally
provided for a term loan in the aggregate principal amount of $7,000,000, which was subsequently increased to $7,307,740 (“Hilco
Term Loan”). One-half of the principal amount of the Hilco Term Loan, together with accrued interest, was payable by the
Borrowers on July 30, 2013 (“Initial Maturity Date”) and the other half of the principal amount of the Hilco Term Loan,
together with accrued interest, was payable on July 30, 2014 (“Maturity Date”). On May 31, 2012, the Hilco Term Loan
was replaced by the Salus Facility.
The Hilco Term Loan was secured by a first
priority security interest in all of the Borrowers’ intellectual property and a second priority security interest in substantially
all of the Borrowers’ other assets. The Hilco Term Loan bore interest at a fixed rate of 9.0% per annum (“Regular Interest”)
and an additional 6.0% per annum (“PIK Interest”), both of which were compounded annually. Regular Interest was payable
quarterly, in arrears, on the first day of each calendar quarter, commencing on October 1, 2010, and at maturity. PIK Interest
was payable on the Initial Maturity Date and the Maturity Date, with the Borrowers having the right, at the end of any calendar
quarter, to pay all or any portion of the then accrued PIK Interest.
On April 20, 2012, the Hilco Financing Agreement
was amended to increase the principal amount of the Hilco Term Loan by approximately $208,000. The increase in principal was comprised
of approximately $188,000 of Regular Interest that was scheduled to be paid on April 1, 2012 and a $20,000 deferred financing fee.
Series A Convertible Preferred Stock Transaction
On May 23, 2012, we sold 50,000 shares of
Series A Convertible Preferred Stock with a stated value of $100 per share to TTG Apparel, LLC, which together with its affiliate,
Tokarz Investments, LLC, are significant shareholders of the Company. We also issued to TTG Apparel 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 (“Warrants”).
The Warrants are exercisable for cash or on a cashless basis, at TTG Apparel’s option. We received gross proceeds of $5,000,000,
which, as required by the terms of the Series A Convertible Preferred Stock purchase agreement, was used to settle vendor accounts
payable.
The terms of the Series A Convertible Preferred
Stock and Warrants are described in Note 8,
Series A Convertible Preferred Stock Transaction
, included in the notes to the
consolidated financial statements appearing elsewhere in this report.
Future Financing Requirements
For the year ended July 28, 2012, our working
capital deficiency decreased by $1,634,000 from $7,960,000 to $6,326,000. As our business continues to be effected by limited working
capital, management plans to carefully manage working capital and believes that our projected operating cash flows, together with
the Salus Facility, will allow us to maintain sufficient working capital through fiscal year 2013.
We expect our capital expenditures for fiscal
year 2013 to be less than $2,000,000, primarily for improvements to our information technology systems, expenditures to support
our website initiatives, store refurbishment costs, and other general corporate expenditures.
Off Balance Sheet Arrangements
We are not a party to any material off-balance
sheet financing arrangements except relating to open letters of credit as described in Note 7,
Financing Agreements
, and
Note 9,
Commitments and Contingencies
, included in the notes to the consolidated financial statements appearing elsewhere
in this report.
Effect
of New Accounting Standards
See Note 2,
Summary of Significant Accounting
Policies
, included in the notes to the consolidated financial statements appearing elsewhere in this report for a discussion
of recent accounting developments and their impact on our consolidated financial statements. There have been no recently issued
accounting updates that had a material impact on our consolidated financial statements for the year ended July 28, 2012 or are
expected to have an impact in the future.
Seasonality
and Inflation
Our business experiences seasonal sales
patterns. Sales and earnings typically peak during the second and third fiscal quarters (November through April), primarily during
the holiday season in November and December, as well as the Valentine’s Day holiday in the month of February. As a result,
we maintain higher inventory levels during these peak selling periods.
Inflationary factors such as increases in
the cost of our products and overhead costs may adversely affect our operating results. Although we do not believe that inflation
has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may
have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses
as a percentage of net revenue if the selling prices of our products do not increase with these increased costs.
ITEM 7A.
– QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risks
We are exposed to interest rate risk associated
with the Salus Facility.
Interest accrues on the outstanding borrowings under the Salus Facility
at rates per annum equal to (A) with respect to unpaid principal of advances other than the FILO Advance, (i) the Prime Rate plus
(ii) an applicable margin of 4.0%, but not less than 7.0% per annum regardless of fluctuations in the Prime Rate and (B) with respect
to unpaid principal of the FILO Advance, (i) the LIBOR Rate plus (ii) an applicable margin of 11.5%, but not less than 12.0% per
annum regardless of fluctuations in the LIBOR Rate.
Borrowings under the Salus Facility (excluding
the FILO advance) and the Wells Fargo Facility for the year ended July 28, 2012 peaked at $10,868,000 and the average borrowing
during the period was approximately $7,727,000. As of July 28, 2012, the total amount outstanding under the Salus Facility
(excluding the FILO advance) was $7,356,000. An increase or decrease in the interest rate by 100 basis points from the total
loan balance of the Salus Facility (excluding the FILO advance) at July 28, 2012 would have increased or decreased annual interest
expenses by approximately $74,000. Borrowings under the FILO Advance for the year ended July 28, 2012 peaked at $9,039,000 and
the average borrowing during the period was approximately $9,020,000. As of July 28, 2012, the total amount outstanding under the
FILO Advance was $9,039,000. An increase or decrease in the interest rate by 100 basis points from the total loan balance of the
FILO Advance at July 28, 2012 would have increased or decreased annual interest expenses by approximately $90,000.
Foreign
Currency Risks
We buy products from a significant number
of domestic vendors who enter into purchase obligations outside of the U.S. All of our product purchase orders are negotiated
and settled in U.S. dollars. Therefore, we have no exposure to foreign currency exchange risks. However, fluctuations in foreign
currency rates could have an impact on our future purchases.
ITEM 8. – FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
Item
|
|
Page
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
25
|
|
|
|
Consolidated Balance Sheets at July 28, 2012 and July 30, 2011
|
|
26
|
|
|
|
Consolidated Statements of Operations for the years ended July 28, 2012 and July 30, 2011
|
|
27
|
|
|
|
Consolidated Statements of Shareholders’ Equity (Deficiency) for the years ended July 28, 2012 and July 30, 2011
|
|
28
|
|
|
|
Consolidated Statements of Cash Flows for the years ended July 28, 2012 and July 30, 2011
|
|
29-30
|
|
|
|
Notes to Consolidated Financial Statements
|
|
31-46
|
|
|
|
Financial Statement Schedule:
|
|
|
|
|
|
For the fiscal years ended July 28, 2012 and July 30, 2011: II – Valuation and Qualifying Accounts
|
|
47
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Shareholders
of
Frederick’s of Hollywood Group Inc.
New York, New York
We have audited the accompanying consolidated balance sheets
of Frederick’s of Hollywood Group Inc. and subsidiaries as of July 28, 2012 and July 30, 2011 and the related consolidated
statements of operations, shareholders’ equity (deficiency) and cash flows for the years then ended. Our audits also included
the financial statement schedule listed in the Index at item 15 for the years ended July 28, 2012 and July 30, 2011. These financial
statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Frederick’s of Hollywood Group Inc. and subsidiaries at July
28, 2012 and July 30, 2011, and the results of their operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/Mayer Hoffman McCann CPAs
(The New York Practice
of Mayer Hoffman McCann P.C.)
New York, New York
October 26, 2012
FREDERICK’S OF HOLLYWOOD GROUP INC.
CONSOLIDATED BALANCE SHEETS
JULY 28, 2012 AND JULY 30, 2011
(In Thousands, Except Share Data)
|
|
July 28,
|
|
|
July 30,
|
|
|
|
2012
|
|
|
2011
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
741
|
|
|
$
|
448
|
|
Accounts receivable
|
|
|
997
|
|
|
|
1,214
|
|
Income tax receivable
|
|
|
-
|
|
|
|
51
|
|
Merchandise inventories
|
|
|
12,915
|
|
|
|
14,816
|
|
Prepaid expenses and other current assets
|
|
|
952
|
|
|
|
2,108
|
|
Deferred income tax assets
|
|
|
48
|
|
|
|
68
|
|
Total current assets
|
|
|
15,653
|
|
|
|
18,705
|
|
PROPERTY AND EQUIPMENT, Net
|
|
|
6,806
|
|
|
|
8,925
|
|
INTANGIBLE ASSETS
|
|
|
18,259
|
|
|
|
18,259
|
|
OTHER ASSETS
|
|
|
756
|
|
|
|
588
|
|
TOTAL ASSETS
|
|
$
|
41,474
|
|
|
$
|
46,477
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Revolving credit facilities
|
|
$
|
7,356
|
|
|
$
|
5,415
|
|
Accounts payable and other accrued expenses
|
|
|
14,623
|
|
|
|
21,250
|
|
Total current liabilities
|
|
|
21,979
|
|
|
|
26,665
|
|
|
|
|
|
|
|
|
|
|
DEFERRED RENT AND TENANT ALLOWANCES
|
|
|
3,887
|
|
|
|
4,749
|
|
TERM LOANS
|
|
|
9,039
|
|
|
|
7,527
|
|
OTHER
|
|
|
-
|
|
|
|
5
|
|
DEFERRED INCOME TAX LIABILITIES
|
|
|
7,352
|
|
|
|
7,372
|
|
TOTAL LIABILITIES
|
|
|
42,257
|
|
|
|
46,318
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (NOTES 7 AND 9)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY (DEFICIENCY):
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value – authorized, 10,000,000 shares at July 28, 2012 and July 30, 2011; issued and outstanding, 50,000 shares at July 28, 2012 and none at July 30, 2011
|
|
|
5,021
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value – authorized, 200,000,000 shares at July 28, 2012 and July 30, 2011; issued and outstanding 38,964,891 shares at July 28, 2012 and 38,637,363 shares at July 30, 2011
|
|
|
390
|
|
|
|
386
|
|
Additional paid-in capital
|
|
|
88,346
|
|
|
|
87,797
|
|
Accumulated deficit
|
|
|
(94,540
|
)
|
|
|
(88,024
|
)
|
TOTAL SHAREHOLDERS’ EQUITY (DEFICIENCY)
|
|
|
(783
|
)
|
|
|
159
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)
|
|
$
|
41,474
|
|
|
$
|
46,477
|
|
See notes to consolidated financial statements.
FREDERICK’S OF HOLLYWOOD GROUP
INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 28, 2012 AND JULY 30,
2011
(In Thousands, Except Per Share Amounts)
|
|
Year Ended
|
|
|
|
July 28,
2012
|
|
|
July 30,
2011
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
111,406
|
|
|
$
|
119,615
|
|
Cost of goods sold, buying and occupancy
|
|
|
69,782
|
|
|
|
76,647
|
|
Gross profit
|
|
|
41,624
|
|
|
|
42,968
|
|
Selling, general and administrative expenses
|
|
|
45,757
|
|
|
|
49,771
|
|
Impairment of long-lived assets
|
|
|
-
|
|
|
|
1,910
|
|
Operating loss
|
|
|
(4,133
|
)
|
|
|
(8,713
|
)
|
Interest expense
|
|
|
2,224
|
|
|
|
1,483
|
|
Loss before income tax provision
|
|
|
(6,357
|
)
|
|
|
(10,196
|
)
|
Income tax provision
|
|
|
75
|
|
|
|
134
|
|
Net loss from continuing operations
|
|
|
(6,432
|
)
|
|
|
(10,330
|
)
|
Net loss from discontinued operations, net of tax benefit of $0 and $266 for the years ended July 28, 2012 and July 30, 2011, respectively
|
|
|
-
|
|
|
|
(1,725
|
)
|
Net loss
|
|
|
(6,432
|
)
|
|
|
(12,055
|
)
|
Less: Preferred stock dividends
|
|
|
84
|
|
|
|
-
|
|
Net loss applicable to common shareholders
|
|
$
|
(6,516
|
)
|
|
$
|
(12,055
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share from continuing operations
|
|
$
|
(.17
|
)
|
|
$
|
(.27
|
)
|
Basic and diluted net loss per share from discontinued operations
|
|
|
-
|
|
|
|
(.04
|
)
|
Total basic and diluted net loss per share applicable to common shareholders
|
|
$
|
(.17
|
)
|
|
$
|
(.31
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
38,844
|
|
|
|
38,517
|
|
See notes to consolidated financial statements.
FREDERICK’S OF HOLLYWOOD GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIENCY)
YEARS ENDED JULY 28, 2012 AND JULY 30, 2011
(In Thousands, Except Share Amounts)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Total
|
|
BALANCE, JULY 31, 2010
|
|
|
-
|
|
|
$
|
-
|
|
|
|
38,343,199
|
|
|
$
|
383
|
|
|
$
|
86,977
|
|
|
$
|
(75,969
|
)
|
|
$
|
(83
|
)
|
|
$
|
11,308
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,055
|
)
|
|
|
-
|
|
|
|
(12,055
|
)
|
Cumulative translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83
|
|
|
|
83
|
|
Comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,972
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
779
|
|
|
|
-
|
|
|
|
-
|
|
|
|
779
|
|
Issuance of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
189,000
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock
for directors’ fees
|
|
|
-
|
|
|
|
-
|
|
|
|
146,664
|
|
|
|
1
|
|
|
|
134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
135
|
|
Stock options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeitures of restricted shares
|
|
|
-
|
|
|
|
-
|
|
|
|
(45,500
|
)
|
|
|
-
|
|
|
|
(91
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(91
|
)
|
BALANCE, JULY 30, 2011
|
|
|
-
|
|
|
|
-
|
|
|
|
38,637,363
|
|
|
|
386
|
|
|
|
87,797
|
|
|
|
(88,024
|
)
|
|
|
-
|
|
|
|
159
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,432
|
)
|
|
|
-
|
|
|
|
(6,432
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
504
|
|
|
|
-
|
|
|
|
-
|
|
|
|
504
|
|
Issuance of preferred stock, net of
issuance costs of $63
|
|
|
50,000
|
|
|
|
4,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,937
|
|
Issuance of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
230,000
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock
for directors’ fees
|
|
|
-
|
|
|
|
-
|
|
|
|
119,528
|
|
|
|
1
|
|
|
|
48
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49
|
|
Forfeitures of restricted shares
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accrued dividend on preferred
stock
|
|
|
-
|
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(84
|
)
|
|
|
-
|
|
|
|
-
|
|
BALANCE, JULY 28, 2012
|
|
|
50,000
|
|
|
$
|
5,021
|
|
|
|
38,964,891
|
|
|
$
|
390
|
|
|
$
|
88,346
|
|
|
$
|
(94,540
|
)
|
|
$
|
-
|
|
|
$
|
(783
|
)
|
See notes to consolidated financial statements.
FREDERICK’S OF HOLLYWOOD GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 28, 2012 AND JULY 30, 2011
(In Thousands)
|
|
July 28,
|
|
|
July 30,
|
|
|
|
2012
|
|
|
2011
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,432
|
)
|
|
$
|
(12,055
|
)
|
Net loss from discontinued operations
|
|
|
-
|
|
|
|
(1,725
|
)
|
Net loss from continuing operations
|
|
|
(6,432
|
)
|
|
|
(10,330
|
)
|
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,460
|
|
|
|
3,122
|
|
Issuance of common stock for directors’ fees
|
|
|
49
|
|
|
|
135
|
|
Stock-based compensation expense
|
|
|
504
|
|
|
|
688
|
|
Impairment of long-lived assets
|
|
|
-
|
|
|
|
1,910
|
|
Amortization of deferred financing costs
|
|
|
218
|
|
|
|
138
|
|
Write-off of deferred financing costs
|
|
|
375
|
|
|
|
-
|
|
Non-cash interest on term loans
|
|
|
613
|
|
|
|
425
|
|
Amortization of deferred rent and tenant allowances
|
|
|
(862
|
)
|
|
|
(177
|
)
|
Deferred income taxes
|
|
|
-
|
|
|
|
(67
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
217
|
|
|
|
(87
|
)
|
Merchandise inventories
|
|
|
1,901
|
|
|
|
(3,865
|
)
|
Prepaid expenses and other current assets
|
|
|
1,156
|
|
|
|
190
|
|
Income tax receivable
|
|
|
51
|
|
|
|
76
|
|
Other assets
|
|
|
47
|
|
|
|
507
|
|
Accounts payable and other accrued expenses
|
|
|
(6,571
|
)
|
|
|
(1,132
|
)
|
Net cash used in operating activities of discontinued operations
|
|
|
(297
|
)
|
|
|
(2,670
|
)
|
Net cash used in operating activities
|
|
|
(6,571
|
)
|
|
|
(11,137
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(312
|
)
|
|
|
(96
|
)
|
Net cash provided by investing activities of discontinued operations
|
|
|
-
|
|
|
|
4,469
|
|
Net cash used in investing activities
|
|
|
(312
|
)
|
|
|
4,373
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net borrowings under revolving credit facilities
|
|
|
1,941
|
|
|
|
2,146
|
|
Repayment of term loan
|
|
|
(8,121
|
)
|
|
|
-
|
|
Proceeds from term loan
|
|
|
9,000
|
|
|
|
-
|
|
Proceeds from the issuance of preferred stock
|
|
|
5,000
|
|
|
|
-
|
|
Payment of issuance costs
|
|
|
(63
|
)
|
|
|
-
|
|
Repayment of capital lease obligation
|
|
|
(59
|
)
|
|
|
(55
|
)
|
Cash transferred out of a restricted account
|
|
|
-
|
|
|
|
4,660
|
|
Payment of deferred financing costs
|
|
|
(522
|
)
|
|
|
(75
|
)
|
Net cash provided by financing activities
|
|
|
7,176
|
|
|
|
6,676
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
293
|
|
|
|
(88
|
)
|
CASH AND CASH EQUIVALENTS:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
448
|
|
|
|
536
|
|
End of period
|
|
$
|
741
|
|
|
$
|
448
|
|
(Continued)
FREDERICK’S OF HOLLYWOOD GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 28, 2012 AND JULY 30,
2011
(In Thousands)
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|
Year Ended
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July 28,
2012
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July 30,
2011
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|
|
|
|
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
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Cash paid during period for:
|
|
|
|
|
|
|
|
|
Interest
|
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$
|
1,888
|
|
|
$
|
1,153
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Taxes
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|
$
|
48
|
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$
|
63
|
|
(Concluded)
See notes to consolidated financial statements.
FREDERICK’S OF HOLLYWOOD GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
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1.
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THE COMPANY AND BASIS OF PRESENTATION
|
Frederick’s of Hollywood Group Inc. (the “Company”),
through its subsidiaries, primarily sells women’s apparel and related products under its proprietary
Frederick’s
of Hollywood
®
brand predominantly through U.S. mall-based specialty stores, which are referred to as “Stores,”
and through its catalog and website at
www.fredericks.com,
which are referred to collectively as “Direct.”
During the fourth quarter of fiscal year 2010, the Company made
a strategic decision to divest its wholesale division due to continuing losses and in order to focus on its core retail operations.
On October 27, 2010, the Company completed the sale to Dolce Vita Intimates LLC (“Dolce Vita”) of substantially all
of the assets of the wholesale division, except cash, accounts receivable and certain other assets. The wholesale division’s
operations are classified herein as discontinued operations (See Note 3).
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2.
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SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
Principles of Consolidation
– The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All
inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
– The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from those estimates.
The Company’s most significant areas
of estimation and assumption are:
|
·
|
determination of the appropriate amount and timing of markdowns to clear unproductive or slow-moving retail inventory and overall
inventory obsolescence;
|
|
·
|
estimation of future cash flows used to assess the recoverability of long-lived assets, including trademarks;
|
|
·
|
estimation of expected customer merchandise returns;
|
|
·
|
estimation of the net deferred income tax asset valuation allowance; and
|
|
·
|
capitalization of deferred catalog costs and the estimated amount of future benefit to be derived from the catalogs.
|
Fiscal Year
– The Company’s fiscal year is the 52- or 53-week period ending on the last Saturday in July. The Company’s
consolidated financial statements for fiscal years 2012 and 2011 consist of the 52-week period ended July 28, 2012 and the 52-week
period ended July 30, 2011, respectively.
Cash and Cash Equivalents
– The Company
considers highly liquid investments with an initial maturity of three months or less to be cash equivalents. As of July 28, 2012,
the Company had $402,000 in restricted cash that was held as cash collateral against the Company’s outstanding letter of
credit. In August 2012, approximately $300,000 was transferred to a security deposit, $82,000 was applied to rent and bank fees
and the balance was returned to the Company.
Accounts Receivable
–
The Company’s accounts receivable is comprised primarily of amounts due from commercial credit card companies such as Visa,
MasterCard, and American Express, which are generally received within a few days of the related transaction, so a reserve is not
considered necessary. Credit card receivables were $880,000 and $918,000 at July 28, 2012 and July 30, 2011, respectively.
Merchandise Inventories
–
Store inventories are valued at the lower of cost or market using the retail inventory first-in, first-out (“FIFO”)
method, and Direct inventories are valued at the lower of cost or market, on an average cost basis that approximates the FIFO method.
Stores and Direct inventories consist entirely of finished goods. Freight costs are included in inventory and vendor allowances
are recorded as a reduction in inventory cost.
These inventory methods inherently require
management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory,
which may impact the ending inventory valuations and gross margins. Markdowns are recorded when the sales value of the inventory
has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer
preferences, age of the merchandise, and fashion trends. The Company reserves for the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand, market conditions, and the age of the inventory. If
actual market conditions are less favorable than those projected by management, additional inventory reserves may be required.
Markdown allowances received from vendors are reflected as reductions to cost of sales in the period they are received if these
allowances are received after goods have been sold or marked down. When markdown allowances are received prior to the sale or markdown,
the allowance will be recognized as a reduction in the cost basis of the inventory. Historically, management has found its inventory
reserves to be appropriate, and actual results generally do not differ materially from those determined using necessary estimates.
Inventory reserves were $628,000 and $547,000 at July 28, 2012 and July 30, 2011, respectively.
Deferred Catalog Costs
–
Deferred catalog costs represent direct-response advertising that is capitalized and amortized over its expected period of future
benefit. The capitalized costs of the advertising are amortized over the expected revenue stream following the mailing of the respective
catalog, which is generally less than three months. The realizability of the deferred catalog costs are also evaluated as of each
balance sheet date by comparing the capitalized costs for each catalog, on a catalog by catalog basis, to the probable remaining
future gross profit of the related revenue. Direct-response
advertising costs of $564,000 and $1,476,000 are included
in prepaid expenses and other current assets in the accompanying consolidated balance sheets at July 28, 2012 and July 30, 2011,
respectively. Management believes that they have appropriately determined the expected period of future benefit as of the date
of the Company’s consolidated financial statements; however, should actual sales results differ from expected sales, deferred
catalog costs may be written off on an accelerated basis. Direct-response advertising expense for the years ended July 28, 2012
and July 30, 2011 were $6,811,000 and $8,155,000, respectively.
Property and Equipment
–
Property and equipment are stated at cost, less accumulated
depreciation.
The Company’s policy is to capitalize expenditures that materially increase asset lives and expense
ordinary repairs and maintenance as incurred. Depreciation is provided for on the straight-line method over the estimated useful
lives of the assets, which is generally three years for computer software, five years for computer equipment, three to seven years
for furniture and equipment, and the shorter of the remaining lease term or the estimated useful life for leasehold improvements.
Deferred Financing Costs
– Deferred financing costs are amortized using the straight-line method over the terms of the related debt agreements,
which approximate the effective interest method. Amortization of deferred financing costs were $218,000 and $138,000 for the years
ended July 28, 2012 and July 30, 2011, respectively, and were included in interest expense in the accompanying consolidated
statements of operations. In addition, during the year ended July 28, 2012, deferred financing costs of $375,000 were written off
in conjunction with the termination of certain agreements (see Note 7) and are also included in interest expense.
Impairment of Long-Lived Assets
– The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable based on undiscounted cash flows. If long-lived assets are
impaired, an impairment loss is recognized and is measured as the amount by which the carrying value exceeds the estimated fair
value of the assets. The estimation of future undiscounted cash flows from operating activities requires significant estimates
of factors that include future sales growth and gross margin performance. Management believes they have appropriately determined
future cash flows and operating performance; however, should actual results differ from those expected, additional impairment may
be required. The Company recorded impairment charges related to underperforming retail stores in the accompanying consolidated
statements of operations of $1,698,000 for the year ended July 30, 2011 and did not record impairment charges for the year ended
July 28, 2012. The Company also recorded an impairment charge of $212,000 for the year ended July 30, 2011 related to a specific
computer software upgrade that was not expected to be completed.
Intangible Assets
– The
Company has certain indefinite lived intangible assets, principally the Frederick’s of Hollywood trade name and domain names.
The Company’s intangible assets are comprised of $18,090,000 attributable to its trademark and $169,000 to its domain names
as of July 28, 2012 and July 30, 2011.
Applicable accounting guidance requires the
Company to not amortize indefinite life intangible assets, but to test those intangible assets for impairment annually and between
annual tests when circumstances or events have occurred that may indicate a potential impairment has occurred. The fair value of
the trademarks was determined using the relief-from-royalty method. The relief-from-royalty method estimates the royalty expense
that could be avoided in the operating business as a result of owning the respective asset or technology. The royalty savings are
measured, tax-effected and, thereafter, converted to present value with a discount rate that considers the risk associated with
owning the intangible asset. No impairment was present and no write-down was required when the trademarks were reviewed for impairment
in connection with the annual impairment test.
Deferred Rent Obligations
– The Company recognizes rent expense for operating leases on a straight-line basis (including the effect of reduced
or free rent and contractually obligated rent escalations) over the lease term. The difference between the cash paid to the landlord
and the amount recognized as rent expense on a straight-line basis is included in deferred rent in the accompanying consolidated
balance sheets. Cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords
as lease incentives are recorded as deferred rent from tenant allowances. Deferred rent related to tenant allowances is amortized
using the straight-line method over the lease term as a reduction to rent expense.
Fair Value of Financial Instruments
– The Company’s management believes the carrying amounts of cash and cash equivalents, accounts receivable,
and accounts payable and accrued expenses approximate fair value due to their short maturity. The carrying amount of the revolving
line of credit approximates fair value, as these borrowings have variable rates that reflect currently available terms and conditions
for similar debt. The Company believes its long-term loan approximates fair value because the transaction contemplated by
the financing agreement relating to this debt was consummated on May 31, 2012.
Accounting for Stock-Based Compensation
– The Company measures and recognizes compensation expense for all share-based payment awards to employees and directors
based on estimated fair values on the grant date. The Company recognizes the expense on a straight-line basis over the requisite
service period, which is the vesting period. The value of each stock option is estimated on the date of grant using the Black-Scholes
option-pricing model. The fair value generated by the Black-Scholes model may not be indicative of the future benefit, if any,
that may be received by the option holder.
Income Taxes
– Income taxes are accounted for under an asset and liability approach that requires the recognition of deferred income
tax assets and liabilities for the expected future consequences of events that have been recognized in the Company’s financial
statements and income tax returns. The Company provides a valuation allowance for deferred income tax assets when it is considered
more likely than not that all or a portion of such deferred income tax assets will not be realized.
Applicable accounting guidance requires that
a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than
not that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the
largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Accounting provisions also
require that a change in judgment that results in subsequent recognition, derecognition, or change in a measurement of a tax position
taken in a prior annual period (including any related interest and penalties) be recognized as a discrete item in the period in
which the change occurs. The Company regularly evaluates
the likelihood
of recognizing the benefit for income tax positions taken in various federal and state filings by considering all relevant facts,
circumstances, and information available.
The Company classifies any interest and penalties
related to unrecognized tax benefits as a component of income tax expense.
Revenue Recognition
–
The
Company records revenue for Stores at the point at which the customer receives and pays for the merchandise at the register. For
Direct sales, goods are shipped to the customer when payment is made and we record the revenue at the time the customer receives
the merchandise. We estimate and defer revenue and the related product costs for shipments that are in transit to the customer.
Customers typically receive goods within a few days of shipment. Outbound shipping charges billed to customers are included in
net sales. The Company records an allowance for estimated returns from its customers in the period of sale based on prior experience.
At July 28, 2012 and July 30, 2011, the allowance for estimated returns was $665,000 and $794,000, respectively. If actual returns
are greater than those expected, additional sales returns may be recorded in the future. Historically, management has found its
return reserve to be appropriate, and actual results generally do not differ materially from those determined using necessary estimates.
Sales are recorded net of sales taxes collected from customers at the time of the transaction.
The Company records other revenue for shipping
revenue, commissions earned on direct sell-through programs on a net basis as the Company acts as an agent on behalf of the related
vendor, and product sales to its license partner in the Middle East. Product sales to the Company’s license partner are recognized
upon delivery to the partner’s freight forwarder. For the years ended July 28, 2012 and July 30, 2011, total other revenue
recorded in net sales in the accompanying consolidated statements of operations were $4,653,000 and $6,515,000, respectively.
Revenue from licensing arrangements is recognized
when earned in accordance with the terms of the underlying agreements. Licensing revenue recorded in net sales in the accompanying
consolidated statements of operations was $66,000 and $$644,000 for the years ended July 28, 2012 and July 30, 2011, respectively.
The Company recognizes the sales from gift cards, gift certificates,
and store credits (“Gift Cards and Credits”) as they are redeemed for merchandise. Prior to redemption, the Company
maintains a deferred revenue liability for Gift Cards and Credits until the Company is released from such liability. The Company’s
Gift Cards and Credits do not have expiration dates; however, over time, a percentage of them are not redeemed or recovered (“breakage”).
Prior to July 30, 2011, the Company had not recorded breakage, however, based upon its initial evaluation using historical redemption
trend data, the Company determined that the likelihood of the redemption of certain unredeemed Gift Cards and Credits is remote
and the Company has adjusted its deferred revenue liability to record breakage for these Gift Cards and Credits. Breakage has been
recorded in net sales and for the year ended July 28, 2012 and July 30, 2011 of $85,000 and $584,000, respectively. The Company
continues to evaluate its historical redemption trends. If these trends ultimately differ from the assumptions underlying the Company’s
breakage adjustments, or the Company’s future experience indicates the likelihood of redemption becomes remote at a different
point in time after issuance, the Company may recognize further adjustments to its accruals for such deferred revenue, which could
have an effect on the Company’s net sales and results of operations.
Costs of Goods Sold, Buying, and Occupancy
– The Company’s costs of goods sold, buying, and occupancy includes the cost of merchandise, freight from vendors,
shipping and handling, payroll and benefits for the design, buying, and merchandising personnel, warehouse and distribution, and
store occupancy costs. Store occupancy costs include rent, deferred rent, common area maintenance, utilities, real estate taxes,
and depreciation. Markdown allowances received from vendors are reflected as reductions to cost of sales in the period they are
received if these allowances are received after goods have been sold or marked down. When a markdown allowance is received prior
to the sale or mark down of the merchandise, the allowance will be recognized as a reduction in the cost basis of the inventory.
The Company recognized markdown allowances of $5,163,000 and $1,198,000 for the years ended July 28, 2012 and July 30, 2011, respectively.
Shipping and Handling Costs
– The Company’s net sales include amounts billed to customers for shipping and handling at the time of shipment.
Costs incurred for shipping and handling are included in costs of goods sold, buying, and occupancy.
Selling, General, and Administrative
Expenses
– The Company’s selling, general and
administrative expenses primarily includes payroll and benefit costs for its Stores, Direct and administrative departments (including
corporate functions), advertising, and other operating expenses not specifically categorized elsewhere in the consolidated statements
of operations.
Advertising Costs
– Costs associated with advertising, excluding direct-response advertising, and including in-store signage and promotions,
are charged to operating expense when the advertising first takes place. For the years ended July 28, 2012 and July 30, 2011, the
Company recorded advertising costs of
approximately $3,515,000 and $3,975,000, respectively.
Net Income (Loss) Per Share
– Basic net
income (loss) per share is computed by dividing net income (loss) applicable to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted net income per share also includes the dilutive effect of potential common
shares outstanding during the period from stock options, warrants and preferred stock.
Foreign Currency Translation
– The assets
and liabilities of the Company’s former Canadian subsidiary, Cinejour Lingerie Inc. (“Cinejour”), which was sold
in connection with the sale of the wholesale division, were translated into U.S. dollars at current exchange rates on the balance
sheet date and revenue and expenses were translated at average exchange rates for the year ended July 30, 2011. The net exchange
differences resulting from these translations were recorded as a translation adjustment which was a component of shareholders’
equity. Cinejour’s functional currency was the Canadian dollar. The operations of Cinejour are included in discontinued operations
in the consolidated financial statements.
Supplemental Disclosure of Non-cash
Financing Transactions
– The Company had outstanding
accounts payable and accrued expenses of $2
9
,000 at July 2
8
,
20
12
relating to purchases of property and equipment. At July 30, 2011 there
were
no amounts outstanding in accounts payable and accrued expenses relating to purchases of property and equipment.
During
the year ended July 28, 2012, the Company entered into new financing agreement with Salus Capital Partners, LLC (see Note 7)
and had $266,000 in accrued financing fees at July 28, 2012. During the year ended July 28, 2012,
the Company incurred a $20,000 fee in connection with amending the Hilco Term Loan (see Note 7) that was added to the principal
and included in deferred financing costs.
During the year ended July 30, 2011, the Company amended its financing agreement
with Hilco to increase the principal amount of the Hilco Term Loan by $100,000 in exchange for a one-year extension to comply with
its debt service coverage ratio financial covenant (See Note 7).
During the year ended July
28
,
201
2, the Company
accrued dividends of $
84
,000 on
its Series A Convertible Preferred Stock (See Note 8).
Segment Reporting
– The Company has one reportable segment representing the aggregation of its two operating segments (Stores and Direct),
based on their similar economic characteristics, products, and target customers.
Concentrations
– The Company has three major vendors that individually exceeded 10% of total purchases in fiscal year 2012. These
suppliers combined represented approximately 45% and individually accounted for approximately 17%, 16% and 12% of total purchases
in fiscal year 2012. The Company does not believe that the loss of any one of these vendors would adversely impact its operations.
Reclassifications
– The Company has revised
its previously reported consolidated balance sheet for the year ended July 30, 2011 to combine “current liabilities from
discontinued operations” with “accounts payable and other accrued expenses.” This reclassification is not considered
material to the consolidated financial statements.
Recently Issued Accounting Pronouncements
– In May 2011, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards
Board issued Accounting Standards Update (“ASU”) No. 2011-04,
Fair Value Measurement (Topic 820): Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
(“ASU No. 2011-04”).
ASU No. 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where
its use is already required or permitted by other standards within U.S. GAAP or International Financial Reporting Standards. The
amendments in ASU No. 2011-04 change the wording used to describe many of the requirements in U.S. GAAP for measuring fair
value and for disclosing information about fair value measurements. Amendments in ASU No. 2011-04 include those that: (1) clarify
the FASB’s intent about the application of existing fair value measurement and disclosure requirements, and (2) change
a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For
many of the requirements, the FASB does not intend for the amendments in ASU No. 2011-04 to result in a change in the application
of the requirements in Topic 820. ASU No. 2011-04 is effective during interim and annual periods beginning after December 15,
2011. Accordingly, the Company adopted ASU No. 2011-04 commencing in the third quarter of fiscal year 2012. The adoption of
ASU No. 2011-04 did not have a material impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05,
Presentation
of Comprehensive Income
(“ASU No. 2011-05”). ASU No. 2011-05 requires the presentation of comprehensive
income, the components of net income and the components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 also requires presentation of adjustments
for items that are reclassified from other comprehensive income to net income in the statement where the components of net income
and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for
financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011.
The Company does not expect the adoption of ASU No. 2011-05 to have a material impact on the Company’s consolidated
financial statements.
In December 2011, the FASB issued ASU No. 2011-12,
Comprehensive
Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated
Other Comprehensive Income in ASU 2011-05
(“ASU 2011-12”), which defers only those changes in ASU 2011-05 related
to the presentation of reclassification adjustments in order to allow the FASB time to re-deliberate whether to present on the
face of the financial statements the effects of the reclassifications out of accumulated other comprehensive income on the components
of net income and other comprehensive income for all periods presented. ASU 2011-12 is effective at the same time as ASU 2011-05
and until determined, entities should continue to report reclassifications out of accumulated other comprehensive income consistent
with the presentation requirements in effect before ASU 2011-05. The Company does not expect the adoption of ASU 2011-12 to have
a material impact on the Company’s consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02,
Intangibles
– Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment
(“ASU No. 2012-02”). ASU
No. 2012-02 gives companies testing indefinite-lived intangible assets for impairment the option of performing a qualitative assessment
before calculating the fair value of the indefinite-lived intangible asset in a quantitative impairment test. If companies determine,
based on qualitative factors, that the fair value of the intangible asset is more likely than not less than the carrying amount,
the quantitative impairment test would be required. Otherwise, further testing would not be needed. ASU No. 2012-02 is effective
for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted,
including for annual and interim impairment tests performed as of a date before July 27, 2012 if the financial statements for the
most recent or interim period have not yet been issued. The Company adopted ASU No. 2012-02 in the fourth quarter of fiscal 2012.
The application of ASU 2012-02 did not have an impact on the Company’s consolidated financial statements.
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3.
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DISCONTINUED OPERATIONS
|
On October 27, 2010, the Company entered into and consummated
the transactions contemplated by an Asset Purchase Agreement (the “Purchase Agreement”) with Dolce Vita, pursuant to
which the Company sold to Dolce Vita substantially all of the assets of the wholesale division, except cash, accounts receivable
and certain other assets.
The assets were purchased for an
aggregate purchase price of approximately $4,469,000, subject to adjustment as provided in the Purchase Agreement. The Company
recorded a gain of approximately $1,070,000 as a result of the sale, which is net of approximately $225,000 earned by Avalon Securities
Ltd., the Company’s investment banking firm, upon consummation of the transaction. Revenue from discontinued operations was
$3,421,000
for the year ended July 30, 2011
. For the year ended
July 30, 2011,
net loss from discontinued operations was $1,725,000. There was no activity related to discontinued operations during the year
ended July 28, 2012.
The remaining liabilities of the discontinued operations are
comprised of accounts payable and accrued expenses as of July 28, 2012 and July 30, 2011 (See Note 5). There were no assets remaining
as of July 30, 2011 related to the discontinued operations.
|
4.
|
PROPERTY AND EQUIPMENT
|
Property and equipment at July 28, 2012
and July 30, 2011 consist of the following (in thousands):
|
|
July 28, 2012
|
|
|
July 30, 2011
|
|
Furniture and fixtures
|
|
$
|
4,760
|
|
|
$
|
4,796
|
|
Computer equipment and software
|
|
|
5,020
|
|
|
|
4,873
|
|
Leasehold improvements.
|
|
|
17,009
|
|
|
|
17,000
|
|
Construction in progress
|
|
|
8
|
|
|
|
2
|
|
|
|
|
26,797
|
|
|
|
26,671
|
|
Less accumulated depreciation and amortization
|
|
|
19,991
|
|
|
|
17,746
|
|
Property and equipment – net
|
|
$
|
6,806
|
|
|
$
|
8,925
|
|
|
5.
|
ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
|
Accounts payable and other accrued expenses
at July 28, 2012 and July 30, 2011 consist of the following (in thousands):
|
|
July 28, 2012
|
|
|
July 30, 2011
|
|
Accounts payable
|
|
$
|
6,875
|
|
|
$
|
12,395
|
|
Accrued payroll and benefits
|
|
|
1,182
|
|
|
|
1,474
|
|
Accrued vacation
|
|
|
914
|
|
|
|
1,204
|
|
Deferred revenue from gift cards, gift certificates, and store credits
|
|
|
1,428
|
|
|
|
1,427
|
|
Return reserves
|
|
|
665
|
|
|
|
794
|
|
Deferred revenue
|
|
|
328
|
|
|
|
393
|
|
Sales and other taxes payable
|
|
|
541
|
|
|
|
760
|
|
Current liabilities of discontinued operations
|
|
|
166
|
|
|
|
468
|
|
Miscellaneous accrued expense and other
|
|
|
2,524
|
|
|
|
2,335
|
|
Total
|
|
$
|
14,623
|
|
|
$
|
21,250
|
|
The provision for
income
taxes on continuing operations for the
years ended July 28, 2012 and July 30, 2011 consists of the following (in thousands):
|
|
July 28, 2012
|
|
|
July 30, 2011
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
75
|
|
|
|
67
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Total current income tax expense
|
|
$
|
75
|
|
|
$
|
67
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
57
|
|
State
|
|
|
-
|
|
|
|
10
|
|
Total deferred income tax expense
|
|
|
-
|
|
|
|
67
|
|
Total income tax expense
|
|
$
|
75
|
|
|
$
|
134
|
|
Reconciliations of the provision for income taxes on continuing
operations to the amount of the provision that would result from applying the federal statutory rate of 35% to loss before provision
for income taxes on continuing operations for the years ended July 28, 2012 and July 30, 2011 are as follows:
|
|
Year Ended
|
|
|
|
July 28, 2012
|
|
|
July 30, 2011
|
|
Provision for income taxes at federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Surtax benefit
|
|
|
(1.0
|
)
|
|
|
(1.0
|
)
|
State income taxes – net of federal income tax benefit
|
|
|
3.9
|
|
|
|
4.1
|
|
Other nondeductible expense
|
|
|
(0.2
|
)
|
|
|
(1.6
|
)
|
Valuation allowance
|
|
|
(38.9
|
)
|
|
|
(37.8
|
)
|
Effective tax rate
|
|
|
(1.2
|
)%
|
|
|
(1.3
|
)%
|
The major components of the Company’s
net deferred income tax liability at July 28, 2012 and July 30, 2011, inclusive of deferred income taxes related continuing and
discontinued operations, are as follows (in thousands):
|
|
July 28, 2012
|
|
|
July 30, 2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Merchandise inventories
|
|
$
|
1,078
|
|
|
$
|
1,149
|
|
Net operating loss and other tax attribute carryforwards
|
|
|
23,919
|
|
|
|
20,933
|
|
Accrued vacation and bonuses
|
|
|
309
|
|
|
|
622
|
|
Deferred rent
|
|
|
1,230
|
|
|
|
1,459
|
|
Deferred revenue
|
|
|
401
|
|
|
|
404
|
|
Stock based compensation
|
|
|
1,755
|
|
|
|
1,555
|
|
Difference between book and tax basis of fixed assets
|
|
|
296
|
|
|
|
248
|
|
Other
|
|
|
531
|
|
|
|
489
|
|
Valuation allowance
|
|
|
(29,161
|
)
|
|
|
(26,690
|
)
|
|
|
|
358
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
(7,236
|
)
|
|
|
(7,236
|
)
|
Other
|
|
|
(426
|
)
|
|
|
(237
|
)
|
|
|
|
(7,662
|
)
|
|
|
(7,473
|
)
|
Net deferred income tax liability
|
|
$
|
(7,304
|
)
|
|
$
|
(7,304
|
)
|
As a result of cumulative losses, management
concluded that it is more likely than not that the Company will not realize certain deferred income tax assets. As a result, the
Company established a valuation allowance in fiscal years 2012 and 2011 to reduce the deferred income tax assets to an amount expected
to be realized. The amount of deferred tax assets expected to be realized is equal to the Company’s deferred tax liabilities
excluding the deferred tax liabilities on trademarks and domain names which are not expected to reverse in the same periods as
the deferred tax assets. Therefore, as of July 28, 2012 and July 30, 2011, valuation allowances have been recorded in the amounts
of $29,161,000 and $26,690,000, respectively. The valuation allowance increased by $2,471,000
and
$4,609,000 for the years ended July 28, 2012 and July 30, 2011, respectively.
The Company has a federal net operating loss
carryforward for financial reporting purposes of $59,799,000 at July 28, 2012 that will expire from 2024 to 2032. The Company also
has state net operating loss carryforwards in various states that have different expiration dates depending on the state.
Section 382 of the Internal Revenue Code (“Section
382”) contains provisions that may limit the availability of net operating carryforwards to be used to offset taxable income
in any given year upon the occurrence of certain events, including significant changes in ownership interests. Under Section 382,
an ownership change that triggers potential limitations on net operating loss carryforwards occurs when there has been a greater
than 50% change in ownership interest by shareholders owning 5% or more of a company over a period of three years or less. Based
on management’s analysis, FOH Holdings, Inc., one of the Company’s subsidiaries (“FOH Holdings”) had an
ownership change on March 3, 2005, which resulted in Section 382 limitations applying to federal net operating loss carryforwards
generated by FOH Holdings prior to that date. The Company’s management estimates that all of the pre-ownership change net
operating loss carryforwards are below the aggregate Section 382 annual limitations that will be available over the remaining carryforward
period. As a result, the Company will be able to fully utilize the pre-ownership change net operating loss carryforwards to the
extent that it generates sufficient taxable income within the carryforward period.
The Company has also concluded that it underwent
a change in control under Section 382 with respect to the acquisition of Movie Star, Inc. (“Movie Star”) on January
28, 2008, and, as a result, the pre-merger net operating loss carryforwards of Movie Star
of approximately
$8,644,000 will be subject to annual limitations of approximately $1,109,000 per year. These net operating losses expire from 2024
to 2027.
Uncertain Tax Positions
A reconciliation of the gross amounts of unrecognized tax benefits
for the year ended July 28, 2012 is as follows (in thousands):
Unrecognized tax benefit as of July 31, 2011
|
|
$
|
1,401
|
|
Increases:
|
|
|
|
|
Tax positions in current period
|
|
|
-
|
|
Tax positions in prior period
|
|
|
-
|
|
Decreases:
|
|
|
|
|
Tax positions in prior periods
|
|
|
(16
|
)
|
Tax positions in current period
|
|
|
(217
|
)
|
Settlements
|
|
|
-
|
|
Unrecognized tax benefit as of July 28, 2012
|
|
$
|
1,168
|
|
The amounts in the table above represent the gross amount of
unrecognized tax benefits. These amounts resulted in an adjustment to the Company’s net operating loss carryforwards. As
of July 28, 2012, there is no liability for unrecognized tax benefits as the adjustments for uncertain tax positions resulted in
a reduction of the net operating loss carryforwards. If recognized in the future, the tax benefits would have no impact on the
Company’s effective tax rate as they are not permanent differences and, therefore, relate to deferred income tax assets and
liabilities. Recognition of the tax benefits would result in an increase to the Company’s net operating loss carryforwards
with corresponding adjustment to the valuation allowance.
The Company does not expect that, during the next twelve months,
there will be a significant increase or decrease in the total amount of its unrecognized tax benefits. As a result, the Company
does not expect a material increase or decrease in its fiscal year 2013 provision for income taxes related to unrecognized tax
benefits.
The Company is subject to examination by the Internal Revenue
Service and taxing authorities in the various jurisdictions in which it files tax returns. During fiscal year 2012, the Internal
Revenue Service began an examination of the federal tax returns of the Company and its subsidiaries for fiscal year 2010. The examination
is currently in progress. No changes have been proposed with respect to the fiscal year 2010 examination. During fiscal year 2008,
the Internal Revenue Service completed its examination of FOH Holdings’ federal tax returns for fiscal years 2005 and 2006,
resulting in the loss or adjustment of previously established net operating loss carryforwards, but with no additional taxes due.
The Internal Revenue Service examined Movie Star’s federal income tax returns through the period ended June 30, 2003 and
proposed no changes to the tax returns filed. Certain state tax returns are currently under audit by state tax authorities. Due
to the Company’s carryforward of unutilized net operating losses, tax years for periods ending June 30, 2004 and thereafter
are subject to examination by the United States and certain states. Matters raised upon subsequent audits may involve substantial
amounts and could result in material cash payments if resolved unfavorably; however, the Company believes that its tax positions
are supportable.
Salus Credit and Security Agreement
On May 31, 2012,
the
Company and its subsidiaries (collectively, the “Borrowers”)
entered into a Credit and Security Agreement (“Credit Agreement”) with Salus Capital Partners, LLC (“Salus”),
which provides the Borrowers with a $24,000,000 revolving line of credit through May 31, 2015 (the “Salus Facility”).
At the closing, an aggregate of approximately $11,839,000 was advanced to the Borrowers under the Salus Facility to repay outstanding
secured indebtedness owed under the Wells Fargo Facility and the Hilco Term Loan (as defined below).
The Salus Facility includes a “first in last out”
tranche (“FILO Advance”) of up to $9,000,000 that consists of the first advances made under the Salus Facility and
will be the last amounts repaid. The maximum amount of the FILO Advance and the total Salus Facility will be reduced by certain
mandatory and voluntary prepayments. The Borrowers may periodically borrow, repay in whole or in part, and reborrow under the Salus
Facility, except that amounts repaid on account of the FILO Advance may not be reborrowed. The actual amount of credit available
under the Salus Facility is determined using measurements based on the Borrowers’ receivables, inventory, intellectual property
and other measures.
The unpaid principal
of the FILO Advance 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 (12.0% at July 28, 2012). Up to 2.5% of the interest payable on the FILO Advance will be capitalized,
compounded and added to the unpaid amount of the obligations each month, will accrue interest at the rate applicable to the FILO
Advance and will be due and payable in cash upon the expiration or other termination of the Salus Facility.
At
July 28, 2012, $9,039,000 was outstanding under the FILO Advance.
The unpaid principal of advances other than the FILO Advance
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 (7.25% at July 28, 2012). At July 28, 2012, $7,356,000 of advances other than the FILO Advance was outstanding.
The obligations of the Borrowers under the Credit Agreement
are secured by first priority security interests 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 Company’s subsidiaries.
The Credit Agreement provides for the Borrowers to pay Salus
an origination fee of $465,000, 50% of which was paid at the closing and 50% to be paid on the first anniversary of the closing.
The Credit Agreement also provides for certain customary fees to be paid to Salus, including: (i) a monthly fee on the unused portion
of the Salus Facility; (ii) a monthly collateral monitoring fee; and (iii) an annual FILO facility fee based on the then-outstanding
FILO Advance.
The Credit Agreement and other loan documents contain customary
representations and warranties, affirmative and negative covenants and events of default, including covenants that restrict the
Borrowers’ ability to create certain liens, make certain types of borrowings and investments, liquidate or dissolve, engage
in mergers, consolidations, significant asset sales and affiliate transactions, incur certain lease obligations, pay cash dividends,
redeem or repurchase outstanding equity and issue capital stock. In lieu of financial covenants, fixed charge coverage and overall
debt ratios, the Salus Facility has a $1.5 million minimum availability reserve requirement. At July 28, 2012, the Company was
in compliance with the Salus Facility’s affirmative and restrictive covenants and minimum availability reserve requirement.
Wells Fargo Revolving Credit Facility
The Borrowers had a senior revolving credit facility (the “Wells
Fargo Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”), which was scheduled to mature on
January 28, 2013. On May 31, 2012, the Wells Fargo Facility was replaced by the Salus Facility.
The Wells Fargo Facility had a line of credit commitment of
$12.5 million and a letter of credit sublimit of $10 million. The Wells Fargo Facility was secured by a second priority interest
in all of the Borrowers’ intellectual property and a first priority security interest in substantially all of the Borrowers’
other assets. The actual amount of credit available under the Wells Fargo Facility was determined using measurements based on the
Company’s receivables, inventory and other measures. Interest was payable monthly, in arrears, at the Wells Fargo prime rate
plus 175 basis points for base rate loans and at LIBOR plus 300 basis points for LIBOR rate loans. At July 28, 2012, the Company
had $377,000 of outstanding letters of credit.
Hilco Term Loan
On July 30, 2010, the Borrowers entered into a financing agreement
(“Hilco Financing Agreement”) with the lending parties from time to time a party thereto and Hilco Brands, LLC, as
lender and also as arranger and agent (“Hilco”). The Hilco Financing Agreement originally provided for a term loan
in the aggregate principal amount of $7,000,000, which was subsequently increased to $7,307,740 (“Hilco Term Loan”).
One-half of the principal amount of the Hilco Term Loan, together with accrued interest, was payable by the Borrowers on July 30,
2013 (“Initial Maturity Date”) and the other half of the principal amount of the Hilco Term Loan, together with accrued
interest, was payable on July 30, 2014 (“Maturity Date”). On May 31, 2012, the Hilco Term Loan was replaced by the
Salus Facility.
The Hilco Term Loan was secured by a first priority security
interest in all of the Borrowers’ intellectual property and a second priority security interest in substantially all of the
Borrowers’ other assets. The Hilco Term Loan bore interest at a fixed rate of 9.0% per annum (“Regular Interest”)
and an additional 6.0% per annum (“PIK Interest”), both of which were compounded annually. Regular Interest was payable
quarterly, in arrears, on the first day of each calendar quarter, commencing on October 1, 2010, and at maturity. PIK Interest
was payable on the Initial Maturity Date and the Maturity Date, with the Borrowers having the right, at the end of any calendar
quarter, to pay all or any portion of the then accrued PIK Interest.
On April 20, 2012, the Hilco Financing Agreement was amended
to increase the principal amount of the Hilco Term Loan by approximately $208,000. The increase in principal was comprised of approximately
$188,000 of Regular Interest that was scheduled to be paid on April 1, 2012 and a $20,000 deferred financing fee.
Future Financing Requirements
For the year ended July 28, 2012, the Company’s working
capital deficiency decreased by $1,634,000 from $7,960,000 to $6,326,000. As the Company’s business continues to be effected
by limited working capital, management plans to carefully manage working capital and believes that the Company’s projected
operating cash flows, together with the Salus Facility, will allow the Company to maintain sufficient working capital through fiscal
year 2013.
|
8.
|
SERIES A CONVERTIBLE PREFERRED STOCK TRANSACTION
|
On May 23, 2012, the Company sold 50,000 shares of Series A
Convertible Preferred Stock (“Preferred Stock”) with a stated value of $100 per share (“Stated Value”)
to TTG Apparel, LLC (the “Purchaser”), which together with its affiliate, Tokarz Investments, LLC, are significant
shareholders of the Company. The Company also issued to the Purchaser 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 (“Warrants”). The Warrants are exercisable
for cash or on a cashless basis, at the Purchaser’s option. The Company received gross proceeds of $5,000,000, which, as
required by the terms of the Preferred Stock purchase agreement, was used to settle vendor accounts payable.
The terms of the Preferred Stock are as follows:
|
·
|
Dividends
. Cumulative dividends on the Preferred Stock are payable quarterly in arrears at the rate of 9.0% per annum in additional shares of Preferred Stock (“PIK Shares”), except that from and after May 23, 2014, the rate will be the greater of 9.0% per annum or the highest rate the Company is paying on any outstanding debt under its then existing credit facilities. Preferred stock dividends for the year ended July 28, 2012 were $84,000 and are included in the preferred stock balance at July 28, 2012.
|
|
·
|
Conversion
. The 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 (“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 (“PIK Share Conversion Price”). The Conversion Price and PIK Share Conversion Price will be adjusted for customary structural changes such as stock splits and dividends. The Conversion Price will also be adjusted if the Company sells common stock or common stock equivalents at a price below the Conversion Price, and the PIK Share Conversion Price will be adjusted if the Company sells common stock or common stock equivalents at a price below the PIK Share Conversion Price; however, the foregoing conversion price adjustments can never result in a conversion price of less than $0.29 per share (“Floor Conversion Price”).
|
|
|
|
|
·
|
Ranking
. The 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 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 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 Preferred Stock.
|
|
|
|
|
·
|
Voting Rights
. Except as required by law, the Preferred Stock does not have voting rights. However, as long as any shares of Preferred Stock are outstanding, the Company may not, without the affirmative vote of the holders of a majority of the then outstanding shares of Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the holders of the 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 Preferred Stock, (c) authorize or designate any new security ranking on a parity with or senior to the Preferred Stock, (d) issue any common stock or debt or equity security convertible into common stock, whether senior, on parity or junior to the Preferred Stock, at a price per share which is lower than the Floor 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 (“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 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 “Liquidation Event”), a holder of Preferred Stock will be entitled to receive in preference to the holders of any capital stock of the Company junior to the Preferred Stock, an amount equal to: (i) the Stated Value plus all accrued but unpaid dividends, multiplied by (ii)(A) 1.09 if the Liquidation Event takes place by May 23, 2013, or $5,542,000 as of July 28, 2012, (B) 1.05 if the Liquidation Event takes place after May 23, 2013 but no later than May 23, 2014, or (C) 1.0 if the 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, multiplied by (y) the number of PIK Shares. A holder of the Preferred Stock will also have the right to require the Company to purchase its shares of Preferred Stock for a price equal to the amount the holder would be entitled to receive upon a Liquidation Event in the event of a cash investment in the Company (other than by holders of the Preferred Stock) resulting in a 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 Preferred Stock is redeemable, at the option of the Company, at any time. Upon redemption, a holder of Preferred Stock will be paid: (a) for each share of Preferred Stock other than a PIK Share, a price equal to the Stated Value 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 plus all accrued but unpaid dividends.
|
|
9.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
–
The Company leases its store, warehouse, and office facilities
under operating lease agreements expiring on various dates through 2020, with some leases currently operating on a month-to-month
basis. Certain leases include lease incentives, rent abatements and fixed rent escalations, for which the effects are recorded
and amortized over the initial lease term on a straight-line basis. The Company has options to renew certain leases under various
terms as specified within each lease agreement. Lease terms generally require additional payments covering common area maintenance,
property taxes, utilities, and certain other expenses. These additional payments are excluded from the table below.
Aggregate
minimum rental commitments under all non-cancelable leases in effect as of July 28, 2012 were as follows (in thousands):
Fiscal Years Ending
|
|
|
|
2013
|
|
$
|
11,074
|
|
2014
|
|
|
9,670
|
|
2015
|
|
|
8,257
|
|
2016
|
|
|
6,200
|
|
2017.
|
|
|
5,191
|
|
Thereafter
|
|
|
4,079
|
|
|
|
$
|
44,471
|
|
Rental expense for the years ended July 28,
2012 and July 30, 2011 consists of the following (in thousands):
|
|
Year Ended
|
|
|
|
July 28, 2012
|
|
|
July 30, 2011
|
|
Minimum rentals
|
|
$
|
11,846
|
|
|
$
|
12,756
|
|
Contingent rentals
|
|
|
258
|
|
|
|
162
|
|
Total rental expense
|
|
$
|
12,104
|
|
|
$
|
12,918
|
|
Capital Leases
–
In November 2009, the Company entered into a non-cancelable
capital lease for store telecommunications equipment. The present value of the net minimum lease payments was $10,000 and $69,000
on the consolidated balance sheet as of July 28, 2012 and July 30, 2011, respectively. The current portion of the capital lease
obligation is $10,000 and $64,000 as of July 28, 2012 and July 30, 2011, respectively, and is included in accounts payable and
accrued expenses on the consolidated balance sheets. The minimum rental commitment under capital leases is $10,000 for the fiscal
year ending July 27, 2013.
Employment Contracts
–
The Company has entered into various employment agreements expiring at various dates through January 2014. The Company and Linda
LoRe, its former President, entered into a Transition Services, Separation Agreement and General Release (“Separation Agreement”)
whereby the Company and Ms. LoRe mutually agreed that, effective September 2, 2011, Ms. LoRe would resign as President. Under the
terms of the Separation Agreement, Ms. LoRe continued as a non-executive employee of the Company through January 20, 2012 (“Separation
Date”), during which period she provided transition services to the Company and continued to receive her base salary of $400,000
per year and regular employee benefits. The payments and benefits provided to Ms. LoRe under the Separation Agreement are substantially
consistent with those that were to be provided under her employment agreement in the event of termination. In connection with Ms.
LoRe’s separation from the Company, the Company had accrued approximately $458,000 as of July 30, 2011, which represents
the contractual severance benefit to be paid to Ms. LoRe after the Separation Date. As of July 28, 2012, the Company had an accrued
balance of $269,000 remaining.
These payments are excluded from the table
below.
Future commitments consist of the following
(in thousands):
Fiscal Years Ending
|
|
|
|
2013
|
|
|
1,446
|
|
2014
|
|
|
270
|
|
|
|
$
|
1,716
|
|
State Sales Taxes
– The
Company sells its products through two channels – Stores and Direct. The Company operates the channels separately and accounts
for sales and use tax accordingly. The Company is periodically audited by the states and it is possible states may disagree with
the method of assessing and remitting these taxes. The Company believes that it properly assesses and remits all applicable state
sales taxes in the applicable jurisdictions and records necessary reserves for any contingencies that require recognition.
Legal Matters
–
On February 2, 2012, a former California store employee filed a purported class action lawsuit in the California Superior Court,
County of San Francisco, naming Frederick’s of Hollywood, Inc., one of the Company’s subsidiaries, as a defendant (Michelle
Weber, on behalf of herself and all others similarly situated v. Frederick’s of Hollywood, Inc., Case No. CGC-12-517909).
The complaint alleges, among other things, violations of the California Labor Code, failure to pay overtime, failure to provide
meal and rest periods and termination compensation and violations of California’s Unfair Competition Law. The complaint seeks,
among other relief, collective and class certification of the lawsuit (the class being defined as all California retail store hourly
employees), unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the Court might
find just and proper. The Company contests these allegations and denies any liability with respect to the lawsuit. The Company
answered the Plaintiff’s first amended complaint on April 2, 2012. The parties have agreed to stay discovery proceedings
in order to conduct a mediation, which is scheduled for November 29, 2012. Therefore, the Company is
unable to predict the
likely outcome and whether such outcome may have a material adverse effect on its results of operations or financial condition.
Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.
The Company is involved from time to time in litigation incidental
to its business. The Company believes that the outcome of such litigation will not have a material adverse effect on its results
of operations or financial condition.
|
10.
|
share-based
compensation
|
Stock Options
The Company adopted the 2003 Employee Equity
Incentive Plan on December 1, 2003 to grant options to purchase up to 623,399 shares of common stock to specific employees of its
retail operations. In December 2006 and 2007, the Company’s Board of Directors authorized an additional 445,285 and 178,114
shares, respectively, to be reserved for issuance under this plan, resulting in a total of 1,246,798 authorized shares. Options
granted under the plan generally have a ten-year term and vest 25% on the last day of the January fiscal period for each of the
next four years, commencing on the first January following the date of grant. Options to purchase 62,341 shares at an average exercise
price of $3.46 per share were outstanding and exercisable as of July 28, 2012. Options to purchase 770,123 shares at an average
exercise price of $2.43 per share were outstanding and exercisable as of July 30, 2011. Options can no longer be granted under
the 2003 Employee Equity Incentive Plan.
The Company also has the 1988 Non-Qualified
Stock Option Plan, under which the Company is authorized to grant options to purchase up to 833,333 shares of common stock to key
employees. Options granted under this plan are not subject to a uniform vesting schedule. Options to purchase 632,500 shares at
an average exercise price of $0.83 per share were outstanding at July 28, 2012 of which 552,500 shares were exercisable. Options
to purchase 732,500 shares at an average price of $0.96 were outstanding at July 30, 2011, of which 552,500 were exercisable. No
options were granted under this plan in fiscal years 2011 or 2012.
The Company also has the 2000 Performance
Equity Plan (including an Incentive Stock Option Plan). The 2000 Performance Equity Plan originally authorized 375,000 shares of
common stock for the issuance of qualified and non-qualified stock options and other stock-based awards to eligible participants.
In January 2008, the Company’s shareholders approved an increase in the shares available for issuance under this plan to
2,000,000. Options granted under the 2000 Performance Equity Plan are not subject to a uniform vesting schedule. Options to purchase
591,750 shares at an average exercise price of $2.68 per share were outstanding at July 28, 2012, of which 555,250 shares were
exercisable. Options to purchase 604,250 shares at an average exercise price of $2.64 per share were outstanding at July 30, 2011,
of which 533,250 shares were exercisable. No options were granted under this plan in fiscal years 2011 or 2012.
The Company’s Board of Directors adopted
the 2010 Long-Term Incentive Equity Plan (including an Incentive Stock Option Plan) on June 29, 2010, under which the Company is
authorized 4,000,000 shares of common stock for the issuance of qualified and non-qualified stock options and other stock-based
awards to eligible participants. Options granted under the 2010 Long-Term Incentive Equity Plan are not subject to a uniform vesting
schedule. Options to purchase 1,387,000 shares at an average exercise price of $0.72 per share were outstanding at July 28, 2012,
of which 458,000 shares were exercisable. Options to purchase 1,022,334 shares at an average exercise price of $0.89 per share
were outstanding at July 30, 2011 of which 147,001 shares were exercisable. In fiscal years 2012 and 2011, options to purchase
500,000 and 441,000 shares, respectively, were granted under this plan.
The following is a summary of stock option
activity:
|
|
Number of Shares
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of July 31, 2011
|
|
|
3,129,207
|
|
|
$
|
1.63
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Granted
|
|
|
500,000
|
|
|
|
0.47
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(955,616
|
)
|
|
|
2.08
|
|
|
|
|
|
|
|
Outstanding as of July 28, 2012
|
|
|
2,673,591
|
|
|
$
|
1.25
|
|
|
6.6 years
|
|
$
|
3,600
|
|
Exercisable on July 28, 2012
|
|
|
1,628,091
|
|
|
$
|
1.47
|
|
|
3.9 years
|
|
$
|
3,600
|
|
The value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model. The fair value generated by the Black-Scholes model may not be indicative of the
future benefit, if any, that may be received by the option holder. The following assumptions were used for options granted during
the years ended July 28, 2012 and July 30, 2011:
|
|
Year ended
|
|
|
|
July 28, 2012
|
|
|
July 30, 2011
|
|
Risk-free interest rate
|
|
|
1.34-1.41%
|
|
|
|
2.7%
|
|
Expected life (years)
|
|
|
7.0
|
|
|
|
7.0
|
|
Expected volatility
|
|
|
74.4-76.1%
|
|
|
|
74%
|
|
Dividend yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
No options were exercised in fiscal year 2012. During the year
ended July 30, 2011, 4,000 options granted under the 2000 Performance Equity Plan were exercised at an exercise price of $0.17
per share. The total fair value of shares vested during the years ended July 28, 2012 and July 30, 2011 was $314,000 and $493,000,
respectively.
A summary of the status of the Company’s non-vested shares
as of July 28, 2012, and changes during the year ended July 28, 2012, is presented below:
|
|
Shares
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Non-vested shares:
|
|
|
|
|
|
|
|
|
Non-vested at July 31, 2011
|
|
|
1,126,333
|
|
|
$
|
0.63
|
|
Granted
|
|
|
500,000
|
|
|
|
0.32
|
|
Vested
|
|
|
(492,000
|
)
|
|
|
0.61
|
|
Forfeited
|
|
|
(88,833
|
)
|
|
|
0.71
|
|
Non-vested at July 28, 2012
|
|
|
1,045,500
|
|
|
$
|
0.49
|
|
All stock options are granted at fair market
value of the common stock at grant date. As of July 28, 2012, there was approximately $216,000 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under the plans. That cost is expected to be recognized
over a weighted-average period of 1.3 years.
During the year ended July 28, 2012, the
Company granted to four directors, three officers and certain other employees options to purchase an aggregate of 500,000 shares
of common stock under the 2010 Long-Term Incentive Equity Plan. These options are identified as follows:
Number
|
|
|
Exercise
|
|
|
|
of Options
|
|
|
Price
|
|
|
Vesting Period
|
|
350,000
|
|
|
$
|
0.40
|
|
|
33.3% immediately and 33.3% on each of the first and second
anniversary date
|
|
150,000
|
|
|
$
|
0.62
|
|
|
50% on August 22, 2012 and on August 22, 2013
|
During the year ended July 30, 2011, the Company granted to
four directors, three officers and certain other employees options to purchase an aggregate of 441,000 shares of common stock
under the 2010 Long-Term Incentive Equity Plan. These options are identified as follows:
Number
|
|
|
Exercise
|
|
|
|
of Options
|
|
|
Price
|
|
|
Vesting Period
|
|
441,000
|
|
|
$
|
1.05
|
|
|
33.3% immediately and 33.3% on each of the first and second
anniversary date
|
Restricted Shares and Share Grants
During the year ended July 28, 2012, the Company issued to
four directors, three officers and certain other employees 230,000 shares of restricted common stock pursuant to the terms and
conditions of the Company’s 2010 Long-Term Incentive Equity Plan. These restricted shares are identified as follows:
Number
of Restricted
Shares
|
|
|
Price
|
|
|
Vesting Period
|
|
150,000
|
|
|
$
|
0.40
|
|
|
33.3% immediately and 33.3% on each of the first and second
anniversary date
|
|
80,000
|
|
|
$
|
0.62
|
|
|
50% on August 22, 2012 and on August 22, 2013
|
During the year ended July 30, 2011, the Company issued to
four directors, three officers and certain other employees 189,000 shares of restricted common stock pursuant to the terms and
conditions of the Company’s 2010 Long-Term Incentive Equity Plan. These restricted shares are identified as follows:
Number
of Restricted
Shares
|
|
|
Price
|
|
|
Vesting Period
|
|
189,000
|
|
|
$
|
0.91
|
|
|
33.3% immediately and 33.3% on each of the first and second
anniversary date
|
Total expense related to restricted shares and share grants
during the years ended July 28, 2012 and July 30, 2011 was approximately $190,000 and $194,000, respectively.
|
11.
|
EMPLOYEE BENEFIT
PLANS
|
The Company maintains a 401(k) profit sharing plan that covers
substantially all employees who have completed six months of service and have reached age 18. Employer contributions are discretionary
and effective January 1, 2009, the Company discontinued making employer contributions. Accordingly, there were no employer contributions
in fiscal years 2012 and 2011.
In 1983, the Company adopted an Employee
Stock Ownership and Capital Accumulation Plan (the “
Plan”). The Company terminated
the Plan effective December 31, 2007. The Plan covered the Company’s employees who met the minimum credited service requirements
of the Plan. The Plan was funded solely from employer contributions and income from investments. The Company has made no contributions
to the Plan since July 1996 and, at that time, all employees became 100% vested in their shares. These shares have been distributed
to each employee according to his or her direction and the applicable Plan rules
and all participants with a balance were
eligible for a distribution. In October 2010, the Company liquidated the remaining shares and transferred the proceeds into separate
IRA accounts in each of the remaining participants’ names.
The Company’s calculations of basic
and diluted net loss per share applicable to common shareholders are as follows (in thousands, except per share amounts):
|
|
Year Ended
|
|
|
|
July 28,
|
|
|
July 30,
|
|
|
|
2012
|
|
|
2011
|
|
Net loss from continuing operations
|
|
$
|
(6,432
|
)
|
|
$
|
(10,330
|
)
|
Net loss from discontinued operations
|
|
$
|
-
|
|
|
$
|
(1,725
|
)
|
Net loss applicable to common shareholders
|
|
$
|
(6,516
|
)
(a)
|
|
$
|
(12,055
|
)
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
38,844
|
|
|
|
38,517
|
|
Basic and diluted net loss
per share from continuing operations
|
|
$
|
(.17
|
)
|
|
$
|
(.27
|
)
|
Basic and diluted net loss
per share from discontinued operations
|
|
|
-
|
|
|
$
|
(.04
|
)
|
Total basic and diluted net
loss per share
|
|
$
|
(.17
|
)
|
|
$
|
(.31
|
)
|
___________________________
|
(a)
|
Includes Preferred Stock dividend of $84.
|
There were 34,000 and 156,000 potentially dilutive shares that
were not included in the computation of diluted net loss per share for the years ended July 28, 2012 and July 30, 2011, respectively,
since their effect would be anti-dilutive.
For the year ended July 28, 2012, there were 2,748,000 shares
of common stock issuable upon the exercise of stock options, 4,419,000 shares of common stock issuable upon the exercise of warrants
and 4,949,000 shares of common stock issuable upon the conversion of the Preferred Stock that also were not included in the computation
of diluted net loss per share since the respective exercise and conversion prices of these instruments exceeded the average market
price of the common stock during the period.
For the year ended July 30, 2011, there were 2,326,000 shares
of common stock issuable upon the exercise of stock options and 4,359,000 shares of common stock issuable upon the exercise of
warrants that also were not included in the computation of diluted net loss per share since the respective exercise and conversion
prices of these instruments exceeded the average market price of the common stock during the period.
FREDERICK’S OF HOLLYWOOD
GROUP INC.
|
VALUATION AND QUALIFYING ACCOUNTS
|
(In Thousands)
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charges to
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
|
|
|
|
|
|
at End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Other
|
|
|
Deductions
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED JULY 28, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales return reserve
|
|
$
|
794
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(129
|
)
|
|
$
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
$
|
26,690
|
|
|
$
|
2,471
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
29,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserves
|
|
$
|
547
|
|
|
$
|
81
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED JULY 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales return reserve
|
|
$
|
868
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(74
|
)
|
|
$
|
794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
$
|
22,081
|
|
|
$
|
4,609
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserves
|
|
$
|
278
|
|
|
$
|
269
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
547
|
|
ITEM 9. – CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
– CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
and Procedures
Disclosure controls
and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company
reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As required by
Rules 13a-15 and 15d-15 under the Exchange Act, an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of July 28, 2012 was made under the supervision and with the participation of our senior management,
including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, they concluded that our disclosure
controls and procedures were effective as of July 28, 2012.
Management’s Annual Report
on Internal Control Over Financial Reporting
Our management
is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in
Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process used to provide reasonable assurance regarding
the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance
with generally accepted accounting principles in the United States. Internal control over financial reporting includes policies
and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation
of our financial statements in accordance with generally accepted accounting principles in the United States, and that our receipts
and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Under the supervision
and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in
Internal
Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on our evaluation under the criteria established in
Internal Control – Integrated Framework
, our management
concluded that our internal control over financial reporting was effective as of July 28, 2012.
Attestation Report of the Independent
Registered Public Accounting Firm
This annual report
does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the
Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control Over
Financial Reporting
During the quarter ended July 28, 2012,
there has been no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B.
– OTHER INFORMATION
None.
PART III
ITEM 10.
– DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
See Item 14.
ITEM 11.
– EXECUTIVE COMPENSATION
See Item 14.
ITEM 12.
– SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
See Item 14.
ITEM 13.
– CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
See Item 14.
ITEM 14.
– PRINCIPAL ACCOUNTING FEES AND SERVICES
The information
required by Items 10, 11, 12, 13 and 14 will be contained in our definitive proxy statement for our fiscal year 2012 Annual Meeting
of Shareholders, to be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year
covered by this report pursuant to Regulation 14A under the Exchange Act, and incorporated herein by reference.
PART IV
ITEM 15.
– EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
|
|
The following documents are filed as part of this report:
|
|
1.
|
Financial Statements:
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
|
Consolidated Balance Sheets at July 28, 2012 and July 30, 2011
|
|
|
|
|
|
Consolidated Statements of Operations for the years ended July 28, 2012 and July 30, 2011
|
|
|
|
|
|
Consolidated Statements of Shareholders’ Equity (Deficiency) for the years ended July 28, 2012 and July 30, 2011
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended July 28, 2012 and July 30, 2011
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
2.
|
Financial Statement Schedule:
|
|
|
|
|
|
For the years ended July 28, 2012 and July 30, 2011:
|
|
|
|
|
|
II – Valuation and Qualifying Accounts
|
Schedules other than those listed above are omitted for the
reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes
thereto. Columns omitted from schedules filed have been omitted because the information is not applicable.
EXHIBIT INDEX
EXHIBIT
NUMBER
|
|
EXHIBIT
|
|
METHOD
OF FILING
|
2.1
|
|
Asset Purchase Agreement by and between the Company and Dolce Vita Intimates LLC, dated
as of October 27, 2010
|
|
Incorporated by reference as Exhibit 2.1 to Form 8-K dated October 27, 2010 and filed on
October 28, 2010
|
|
|
|
|
|
3.1
|
|
Restated Certificate of Incorporation
|
|
Incorporated by reference as Exhibit 3.1 to Form 8-K dated January 28, 2008 and filed on
February 1, 2008
|
|
|
|
|
|
3.2
|
|
Amended and Restated Bylaws
|
|
Incorporated by reference as Exhibit 3.2 to Form 8-K dated January 28, 2008 and filed on
February 1, 2008
|
|
|
|
|
|
3.3
|
|
Certificate of Amendment of Certificate of Incorporation
|
|
Incorporated by reference as Exhibit 3.1 to Form 8-K dated May 23, 2012 and filed on May
29, 2012
|
EXHIBIT
NUMBER
|
|
EXHIBIT
|
|
METHOD
OF FILING
|
|
|
|
|
|
4.1
|
|
Specimen Common Stock Certificate
|
|
Incorporated by reference as Exhibit 4.1 to Form 8-K dated January 28, 2008 and filed on
February 1, 2008
|
|
|
|
|
|
4.2
|
|
Form of Series A Warrant, dated March 16, 2010, issued to investors
|
|
Incorporated by reference as Exhibit 10.3 to Form 8-K dated March 16, 2010 and filed on
March 22, 2010
|
|
|
|
|
|
4.3
|
|
Form of Series B Warrant, dated March 16, 2010, issued to investors
|
|
Incorporated by reference as Exhibit 10.4 to Form 8-K dated March 16, 2010 and filed on
March 22, 2010
|
|
|
|
|
|
4.4
|
|
Form of Three-Year, Five-Year and Seven-Year Warrants, dated May 18, 2010, issued to Fursa
Capital Partners LP, Fursa Master Rediscovered Opportunities L.P., Blackfriars Master Vehicle LLC – Series 2 and Fursa
Master Global Event Driven Fund L.P.
|
|
Incorporated by reference as Exhibit A to Exhibit 10.1 to Form 8-K dated February 1, 2010
and filed on February 5, 2010
|
|
|
|
|
|
4.5
|
|
Form of Three-Year, Five-Year and Seven-Year Warrants, dated May 23, 2012, issued to TTG
Apparel, LLC
|
|
Incorporated by reference as Exhibit A to Exhibit 10.2 to Form 8-K dated May 23, 2012 and
filed on May 29, 2012
|
|
|
|
|
|
10.1
|
|
Amended and Restated 1988 Non-Qualified Stock Option Plan
|
|
Incorporated by reference as Exhibit 10.2 to Non-Qualified Stock Option Plan Form 10-K
for fiscal year ended June 30, 2006 and filed on September 27, 2006
|
|
|
|
|
|
10.2
|
|
Amended and Restated 2000 Performance Equity Plan
|
|
Incorporated by reference as Exhibit 4.1 to Form S-8 and filed on July 28, 2008
|
|
|
|
|
|
10.3
|
|
Form of 2000 Plan Non-Employee Director Non-Qualified Stock Option Agreement
|
|
Incorporated by reference as Exhibit 10.14 to Form 8-K dated December 6, 2004 and filed
on December 14, 2004
|
|
|
|
|
|
10.4
|
|
2003 Employee Equity Incentive Plan
|
|
Incorporated by reference as Exhibit 4.2 to Form S-8 and filed on July 28, 2008
|
|
|
|
|
|
10.5
|
|
2010 Long-Term Incentive Equity Plan
|
|
Incorporated by reference as Exhibit 4.1 to Form S-8 and filed on June 15, 2011
|
|
|
|
|
|
10.6
|
|
Form of 2010 Plan Employee Non-Qualified Stock Option Agreement, dated January 12, 2011
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K dated January 12, 2011 and filed
on January 14, 2011
|
|
|
|
|
|
10.7
|
|
Form of 2010 Plan Non-Employee Director Non-Qualified Stock Option Agreement, dated January
12, 2011
|
|
Incorporated by reference as Exhibit 10.2 to Form 8-K dated January 12, 2011 and filed
on January 14, 2011
|
EXHIBIT
NUMBER
|
|
EXHIBIT
|
|
METHOD
OF FILING
|
10.8
|
|
Form of 2010 Plan Employee Restricted Stock Agreement, dated January 12,2011
|
|
Incorporated by reference as Exhibit 10.3 to Form 8-K dated January 12, 2011 and filed
on January 14, 2011
|
|
|
|
|
|
10.9
|
|
Form of 2010 Plan Non-Employee Director Restricted Stock Agreement, dated January 12, 2011
|
|
Incorporated by reference as Exhibit 10.4 to Form 8-K dated January 12, 2011 and filed
on January 14, 2011
|
|
|
|
|
|
10.10
|
|
Form of 2010 Plan Employee Non-Qualified Stock Option Agreement, dated January 11, 2012
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K dated January 11, 2012 and filed
on January 13, 2012
|
|
|
|
|
|
10.11
|
|
Form of 2010 Plan Non-Employee Director Non-Qualified Stock Option Agreement, dated
January 11, 2012
|
|
Incorporated by reference as Exhibit 10.2 to Form 8-K dated January 11, 2012 and filed
on January 13, 2012
|
|
|
|
|
|
10.12
|
|
Form of 2010 Plan Employee Restricted Stock Agreement, dated January 11, 2012
|
|
Incorporated by reference as Exhibit 10.3 to Form 8-K dated January 11, 2012 and filed
on January 13, 2012
|
|
|
|
|
|
10.13
|
|
Form of 2010 Plan Non-Employee Director Restricted Stock Agreement, dated January 11, 2012
|
|
Incorporated by reference as Exhibit 10.4 to Form 8-K dated January 11, 2012 and filed
on January 13, 2012
|
|
|
|
|
|
10.14
|
|
Non-Employee Director Compensation Plan effective January 1, 2005
|
|
Incorporated by reference as Exhibit 10.13 to Form 8-K dated December 6, 2004 and filed
on December 14, 2004
|
|
|
|
|
|
10.15
|
|
Annual Incentive Bonus Plan effective August 1, 2010
|
|
Incorporated by reference as Exhibit 10.4 to Form 8-K dated June 29, 2010 and filed on
July 6, 2010
|
|
|
|
|
|
10.16
|
|
Registration Rights Agreement, dated as of January 28, 2008, by and among the Company,
Fursa, Fursa Managed Accounts, Tokarz Investments and TTG Apparel, LLC
|
|
Incorporated by reference as Exhibit 10.3 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
|
|
|
|
|
10.17
|
|
Joinder, dated as of January 28, 2008, by the Company and Fursa
|
|
Incorporated by reference as Exhibit 10.5 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
|
|
|
|
|
10.18
|
|
Debt Exchange and Preferred Stock Conversion Agreement, dated as of February 1, 2010, among
the Company, Fursa Capital Partners LP, Fursa Master Rediscovered Opportunities L.P., Blackfriars Master Vehicle LLC –
Series 2 and Fursa Master Global Event Driven Fund L.P.
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K dated February 1, 2010 and filed
on February 5, 2010
|
|
|
|
|
|
10.19
|
|
Amended and Restated Financing Agreement dated as of January 28, 2008 by and among the
Company and certain of its Subsidiaries, as Borrowers, the financial institutions from time to time party thereto and Wells
Fargo, as the Arranger and Agent (“Amended and Restated Financing Agreement”)
|
|
Incorporated by reference as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter
ended January 23, 2010 and filed on March 8, 2010
|
|
|
|
|
|
10.20
|
|
First Amendment, dated as of September 9, 2008, to Amended and Restated Financing Agreement
|
|
Incorporated by reference as Exhibit 10.2 to Form 8-K dated September 21, 2009 and filed
on September 23, 2009
|
EXHIBIT
NUMBER
|
|
EXHIBIT
|
|
METHOD
OF FILING
|
10.21
|
|
Second Amendment, dated as of September 21, 2009, to Amended and Restated Financing Agreement
|
|
Incorporated by reference as Exhibit 10.3 to Form 8-K dated September 21, 2009 and filed
on September 23, 2009
|
|
|
|
|
|
10.22
|
|
Third Amendment, dated as of October 23, 2009, to Amended and Restated Financing Agreement
|
|
Incorporated by reference as Exhibit 10.24 to Annual Report on Form 10-K for the fiscal
year ended July 25, 2009 and filed on October 23, 2009
|
|
|
|
|
|
10.23
|
|
Fourth Amendment, dated as of July 30, 2010, to Amended and Restated Financing Agreement
|
|
Incorporated by reference as Exhibit 10.8 to Form 8-K dated July 30, 2010 and filed on
August 4, 2010
|
|
|
|
|
|
10.24
|
|
Fifth Amendment, dated as of September 22, 2011, to Amended and Restated Financing Agreement
|
|
Incorporated by reference as Exhibit 10.2 to Form 8-K dated September 22, 2011 and filed
on September 26, 2011
|
|
|
|
|
|
10.25
|
|
Amended and Restated Revolving Credit Note, dated as of January 28, 2008, in the stated
original principal amount of $25,000,000, executed by the Borrowers and payable to the order of Wells Fargo
|
|
Incorporated by reference as Exhibit 10.8 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
|
|
|
|
|
10.26
|
|
Security Agreement, dated as of January 28, 2008, by the Company in favor of Wells
Fargo
|
|
Incorporated by reference as Exhibit 10.9 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
|
|
|
|
|
10.27
|
|
Pledge Agreement, dated as of January 28, 2008, by the Company in favor of Wells
Fargo
|
|
Incorporated by reference as Exhibit 10.10 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
|
|
|
|
|
10.28
|
|
Assignment for Security (Trademarks), dated as of January 28, 2008, by the Company in favor
of Wells Fargo
|
|
Incorporated by reference as Exhibit 10.11 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
|
|
|
|
|
10.29
|
|
Ratification and Reaffirmation Agreement, dated as of January 28, 2008, by the Borrowers
(other than the Company) and Fredericks.com, Inc. in favor of Wells Fargo
|
|
Incorporated by reference as Exhibit 10.12 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
|
|
|
|
|
10.30
|
|
Amended and Restated Contribution Agreement, dated as of January 28, 2008, by the Borrowers
and Fredericks.com, Inc. in favor of Wells Fargo
|
|
Incorporated by reference as Exhibit 10.14 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
|
|
|
|
|
10.31
|
|
Securities Purchase Agreement dated as of May 23, 2012, between the Company and TTG Apparel,
LLC
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K dated May 23, 2012 and filed on May
29, 2012
|
|
|
|
|
|
10.32
|
|
Financing Agreement dated as of July 30, 2010 by and among the
Company and certain of its Subsidiaries, as Borrowers, the Lenders from time to time party thereto and Hilco Brands, LLC as
Arranger and Agent (“Hilco”)
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K dated July 30, 2010 and filed on
August 4, 2010
|
|
|
|
|
|
10.33
|
|
Financing Agreement and Note Modification Agreement, dated as of July 29, 2011 by and among
the Borrowers, the Lenders and Hilco
|
|
Incorporated by reference as Exhibit 10.2 to Form 8-K dated July 29, 2011 and filed on
July 29, 2011
|
EXHIBIT
NUMBER
|
|
EXHIBIT
|
|
METHOD
OF FILING
|
10.34
|
|
Second Financing Agreement and Note Modification Agreement, dated as of April 20, 2012
by and among the Borrowers, the Lenders and Hilco
|
|
Incorporated by reference as Exhibit 10.3 to Form 8-K dated April 20, 2012 and filed on
April 24, 2012
|
|
|
|
|
|
10.35
|
|
Guaranty, dated July 30, 2010, by Fredericks.com, Inc. in favor of each of the Lenders
and Hilco
|
|
Incorporated by reference as Exhibit 10.2 to Form 8-K dated July 30, 2010 and filed on
August 4, 2010
|
|
|
|
|
|
10.36
|
|
Secured Promissory Note, dated July 30, 2010, in the stated original principal amount of
$7,000,000, executed by the Borrowers and payable to the order of Hilco
|
|
Incorporated by reference as Exhibit 10.3 to Form 8-K dated July 30, 2010 and filed on
August 4, 2010
|
|
|
|
|
|
10.37
|
|
Security Agreement, dated July 30, 2010, by the Borrowers and Hilco
|
|
Incorporated by reference as Exhibit 10.4 to Form 8-K dated July 30, 2010 and filed on
August 4, 2010
|
|
|
|
|
|
10.38
|
|
Agreement for Security (Trademarks), dated July 30, 2010, by the Borrowers in favor of
Hilco
|
|
Incorporated by reference as Exhibit 10.5 to Form 8-K dated July 30, 2010 and filed on
August 4, 2010
|
|
|
|
|
|
10.39
|
|
Agreement for Security (Copyrights), dated July 30, 2010, by the Borrowers in favor of
Hilco
|
|
Incorporated by reference as Exhibit 10.6 to Form 8-K dated July 30, 2010 and filed on
August 4, 2010
|
|
|
|
|
|
10.40
|
|
Intercreditor Agreement, dated as of July 30, 2010, between Wells Fargo and Hilco and acknowledged
by the Borrowers
|
|
Incorporated by reference as Exhibit 10.7 to Form 8-K dated July 30, 2010 and filed on
August 4, 2010
|
|
|
|
|
|
10.41
|
|
First Amendment to the Intercreditor Agreement, dated as of July 29, 2011, between Wells
Fargo and Hilco and acknowledged by the Borrowers
|
|
Incorporated by reference as Exhibit 10.4 to Form 8-K dated July 29, 2011 and filed on
July 29, 2011
|
|
|
|
|
|
10.42
|
|
Second Amendment to the Intercreditor Agreement, dated as of April 20, 2012, between Wells
Fargo and Hilco and acknowledged by the Borrowers
|
|
Incorporated by reference as Exhibit 10.6 to Form 8-K dated April 20, 2012 and filed on
April 24, 2012
|
|
|
|
|
|
10.43
|
|
Credit and Security Agreement, dated as of May 31, 2012, by and among Company and certain
of its Subsidiaries, as Borrowers and Salus Capital Partners, LLC (“Salus”), as Lender
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K dated May 31, 2012 and filed on June
6, 2012
|
|
|
|
|
|
10.44
|
|
Secured Revolving Note, dated May 31, 2012, in the stated original principal amount of
$24,000,000 executed by the Borrowers and payable to the order of Salus
|
|
Incorporated by reference as Exhibit 10.2 to Form 8-K dated May 31, 2012 and filed on June
6, 2012
|
|
|
|
|
|
10.45
|
|
Agreement for Security (Copyrights), dated May 31,2012, by the Borrowers in favor of Salus
|
|
Incorporated by reference as Exhibit 10.3 to Form 8-K dated May 31, 2012 and filed on June
6, 2012
|
|
|
|
|
|
10.46
|
|
Agreement for Security (Trademarks), dated May 31,2012, by the Borrowers in favor of Salus
|
|
Incorporated by reference as Exhibit 10.4 to Form 8-K dated May 31, 2012 and filed on June
6, 2012
|
|
|
|
|
|
10.47
|
|
Pledge Agreement, dated as of May 31, 2012, by the Company in favor of Salus
|
|
Incorporated by reference as Exhibit 10.5 to Form 8-K dated May 31, 2012 and filed on June
6, 2012
|
|
|
|
|
|
10.48
|
|
Fee Letter, dated as of May 31, 2012, by the Company in favor of Salus
|
|
Incorporated by reference as Exhibit 10.6 to Form 8-K dated May 31, 2012 and filed on June
6, 2012
|
EXHIBIT
NUMBER
|
|
EXHIBIT
|
|
METHOD
OF FILING
|
10.49
|
|
Employment Agreement, dated as of June 1, 2010, by and between the Company and Thomas Rende
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K, dated June 1, 2010 and filed on
June 4, 2010
|
|
|
|
|
|
10.50
|
|
Non-Qualified Stock Option Agreement, dated as of December 10, 2004, between the Company
and Thomas Rende and the Company
|
|
Incorporated by reference as Exhibit 10.18 to Form 8-K dated December 10, 2004 and filed
on December 15, 2004
|
|
|
|
|
|
10.51
|
|
Non-Qualified Stock Option Agreement, dated as of October 13, 2006, between the Company
and Thomas Rende
|
|
Incorporated by reference as Exhibit 10.24 to Form 8-K dated October 13, 2006 and filed
on October 18, 2006
|
|
|
|
|
|
10.52
|
|
Stock Agreement, dated January 28, 2008, between the Company and Thomas Rende
|
|
Incorporated by reference as Exhibit 10.31 to Form 8-K, dated January 24, 2008 and filed
on January 29, 2008.
|
|
|
|
|
|
10.53
|
|
Non-Qualified Stock Option Agreement, dated January 28, 2008, between the Company and Thomas
Rende
|
|
Incorporated by reference as Exhibit 10.19 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
|
|
|
|
|
10.54
|
|
Non-Qualified Stock Option Agreement, dated June 1, 2010, between the Company and Thomas
Rende
|
|
Incorporated by reference as Exhibit 10.2 to Form 8-K, dated June 1, 2010 and filed on
June 4, 2010
|
|
|
|
|
|
10.55
|
|
Restricted Stock Agreement, dated June 1, 2010, between the Company and Thomas Rende
|
|
Incorporated by reference as Exhibit 10.3 to Form 8-K, dated June 1, 2010 and filed on
June 4, 2010
|
|
|
|
|
|
10.56
|
|
Employment Agreement, dated as of June 29, 2010, between the Company and Thomas Lynch
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K dated June 29, 2010 and filed on
July 6, 2010
|
|
|
|
|
|
10.57
|
|
Stock Option Agreement, dated as of January 29, 2009, between the Company and Thomas Lynch
|
|
Incorporated by reference as Exhibit 10.2 to Form 8-K dated January 29, 2009 and filed
on February 3, 2009
|
|
|
|
|
|
10.58
|
|
Restricted Stock Agreement between the Company and Thomas Lynch, dated as of January 29,
2009
|
|
Incorporated by reference as Exhibit 10.3 to Form 8-K dated January 29, 2009 and filed
on February 3, 2009
|
|
|
|
|
|
10.59
|
|
Stock Option Agreement between the Company and Thomas Lynch, dated as of June 29, 2010
|
|
Incorporated by reference as Exhibit 10.2 to Form 8-K dated June 29, 2010 and filed on
July 6, 2010
|
|
|
|
|
|
10.60
|
|
Restricted Stock Agreement between the Company and Thomas Lynch, dated as of June 29, 2010
|
|
Incorporated by reference as Exhibit 10.3 to Form 8-K dated June 29, 2010 and filed on
July 6, 2010
|
|
|
|
|
|
10.61
|
|
Transition Services, Separation Agreement and General Release, dated as of August 19, 2011,
between the Company and Linda LoRe
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K dated August 19, 2011 and filed on
August 24, 2011
|
EXHIBIT
NUMBER
|
|
EXHIBIT
|
|
METHOD
OF FILING
|
|
|
|
|
|
10.62
|
|
Employment Agreement, dated as of September 8, 2011 between the Company and Donald Jones
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K dated September 8, 2011 and filed
on September 14, 2011
|
|
|
|
|
|
10.63
|
|
Amendment to Employment Agreement, dated as of February 9, 2012, by and between Company
and Donald Jones
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K dated February 9, 2012 and filed
on February 14, 2012
|
|
|
|
|
|
10.64
|
|
Stock Option Agreement, dated as of September 8, 2011 between the Company and Donald Jones
|
|
Incorporated by reference as Exhibit 10.2 to Form 8-K dated September 8, 2011 and filed
on September 14, 2011
|
|
|
|
|
|
10.65
|
|
Restricted Stock Agreement, dated as of September 8, 2011 between the Company and Donald
Jones
|
|
Incorporated by reference as Exhibit 10.3 to Form 8-K dated September 8, 2011 and filed
on September 14, 2011
|
|
|
|
|
|
14
|
|
Amended and Restated Code of Ethics
|
|
Incorporated by Reference as Exhibit 14 to Form 8-K dated August 15, 2008 and filed on
August 21, 2008
|
|
|
|
|
|
21
|
|
Subsidiaries of the Company
|
|
Filed herewith
|
|
|
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
Filed herewith
|
|
|
|
|
|
31.1
|
|
Certification by Chief Executive Officer
|
|
Filed herewith
|
|
|
|
|
|
31.2
|
|
Certification by Principal Financial and Accounting Officer
|
|
Filed herewith
|
|
|
|
|
|
32
|
|
Section 1350 Certification
|
|
Filed herewith
|
101
|
Financial statements from the Annual Report on Form 10-K of the Company for the year ended July 28, 2012, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Shareholders’ Equity (Deficiency), (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements, as blocks of text and in detail.*
|
|
|
101.INS
|
XBRL Instance Document*
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document *
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document *
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document *
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document*
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document *
|
|
*
|
As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section
11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability
under those sections.
|
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
October 26, 2012
|
FREDERICK’S OF HOLLYWOOD GROUP INC.
|
|
|
|
|
By:
|
/s/ THOMAS J. LYNCH
|
|
|
Thomas J. Lynch
|
|
|
Chairman and Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
/s/ Thomas J. Lynch
|
|
Chairman and Chief Executive Officer
|
|
October 26, 2012
|
Thomas J. Lynch
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Thomas Rende
|
|
Chief Financial Officer (Principal
|
|
October 26, 2012
|
Thomas Rende
|
|
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Peter Cole
|
|
Director
|
|
October 26, 2012
|
Peter Cole
|
|
|
|
|
|
|
|
|
|
/s/ John L. Eisel
|
|
Director
|
|
October 26, 2012
|
John L. Eisel
|
|
|
|
|
|
|
|
|
|
/s/ William F. Harley
|
|
Director
|
|
October 26, 2012
|
William F. Harley
|
|
|
|
|
|
|
|
|
|
/s/ Milton J. Walters
|
|
Director
|
|
October 26, 2012
|
Milton J. Walters
|
|
|
|
|
Fredericks of Hollywood Grp. (AMEX:FOH)
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Fredericks of Hollywood Grp. (AMEX:FOH)
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