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EX-21 - FREDERICK'S OF HOLLYWOOD GROUP INC /NY/ | v199695_ex21.htm |
EX-32 - FREDERICK'S OF HOLLYWOOD GROUP INC /NY/ | v199695_ex32.htm |
EX-23.1 - FREDERICK'S OF HOLLYWOOD GROUP INC /NY/ | v199695_ex23-1.htm |
EX-31.2 - FREDERICK'S OF HOLLYWOOD GROUP INC /NY/ | v199695_ex31-2.htm |
EX-31.1 - FREDERICK'S OF HOLLYWOOD GROUP INC /NY/ | v199695_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended July 31, 2010
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ___________ to _________
Commission
File Number 1-5893
FREDERICK’S
OF HOLLYWOOD GROUP INC.
(Exact
name of registrant as specified in its charter)
New
York
|
13-5651322
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
|
1115
Broadway, New York, New York
|
10010
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (212) 798-4700
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
|
Name of each exchange on which
registered
|
|
Common
Stock, $.01 par value
|
NYSE
Amex
|
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 ¨ 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 ¨ 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 ¨
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 ¨ No ¨
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 ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller reporting
company x
|
(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 ¨ No x
As of
January 23, 2010 (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 Amex of $1.31),
held by non-affiliates of the registrant, was $7,998,257.
As of
October 11, 2010, there were 38,326,913 common shares
outstanding.
FREDERICK’S
OF HOLLYWOOD GROUP INC.
2010
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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8
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ITEM
1B. – UNRESOLVED STAFF COMMENTS
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12
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|
ITEM
2. – PROPERTIES
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12
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|
ITEM
3. – LEGAL PROCEEDINGS
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13
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ITEM
4. – [REMOVED AND RESERVED]
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13
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PART
II
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14
|
|
ITEM
5. – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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14
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|
ITEM
6. – SELECTED FINANCIAL DATA
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14
|
|
ITEM
7. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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15
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ITEM
7A. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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24
|
|
ITEM
8. – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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25
|
|
ITEM
9. –CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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49
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ITEM
9A. – CONTROLS AND PROCEDURES
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49
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ITEM
9B. – OTHER INFORMATION
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50
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PART
III
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50
|
|
ITEM
10. – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
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50
|
|
ITEM
11. – EXECUTIVE COMPENSATION
|
50
|
|
ITEM
12. – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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50
|
|
ITEM
13. – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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50
|
|
ITEM
14. – PRINCIPAL ACCOUNTING FEES AND SERVICES
|
50
|
|
PART
IV
|
51
|
|
ITEM
15. – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
|
51
|
ii
PART
I
Forward
Looking Statements
When used in this
Form 10-K for the year ended
July 31, 2010 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; our ability to complete a sale of our wholesale business; 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; and foreign government regulations and risks of doing business
abroad.
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.
Following
the merger and through the fiscal year ended July 31, 2010, we conducted our
business through two operating divisions representing two distinct business
reporting segments: the multi-channel retail division, which includes our
retail stores, catalogs and website operations, and the wholesale division,
which until July 31, 2010 included our wholesale operations in the United States
and Canada.
During
the fourth quarter of fiscal year 2010, we made a strategic decision to divest
our wholesale business due to continuing losses and in order to focus on our
core retail operations. This decision was driven by a number of
factors. These factors include, but are not limited to, a dramatic
reduction in our business with Walmart, which historically represented a
significant portion of our wholesale business. This reduction was
primarily the result of Walmart producing its own merchandise, selecting
competing vendors, and shifting its focus to product categories that differed
from the products Walmart historically purchased from us. We also lost a
significant amount of business from other retail customers that began producing
products themselves and selecting vendors with branding
capabilities.
The
wholesale 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 business is generally not
discussed in this Item 1. –
“Business” of this report.
Our
principal executive offices are currently located at 1115 Broadway, New York,
New York 10010 and our telephone number is (212) 798-4700. Our retail
corporate office is located at 6255 Sunset Boulevard, Los Angeles, California
90028 and its telephone number is (323) 466-5151. Effective January 1,
2011, we will be relocating our principal executive offices to our California
retail corporate office. 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.
1
Our Business
Frederick’s
of Hollywood Group Inc., through its subsidiaries, sells women’s intimate
apparel and related products under its proprietary Frederick’s
of Hollywood® brand
predominantly through its U.S. mall-based Frederick’s of Hollywood 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 31, 2010, we
operated 126 Frederick’s of Hollywood stores nationwide and during fiscal year
2010 mailed approximately 15.3 million catalogs.
The
popularity of the Frederick’s
of Hollywood brand
among consumers has enabled us to initiate a strategy during fiscal year 2010 to
leverage our brand and expand our product offerings and channels of distribution
by entering into product licensing agreements. Our licensed
merchandise categories currently include swimwear, sexy Halloween costumes,
jewelry and accessories. Certain swimwear styles are currently available
through our website and catalog. Select Frederick’s of Hollywood stores
will begin carrying licensed products in December 2010, with a more extensive
roll out to additional stores during Summer 2011.
Operating
Initiatives
Throughout fiscal years 2009 and 2010,
we operated under challenging macroeconomic
conditions, which had a negative impact on our
revenues, gross margins and earnings. Our efforts remain focused on continuing to implement changes in
our business strategy that we believe over time will both increase revenues and
reduce costs. However, we cannot be certain that
these initiatives will be successful. These key initiatives
include:
|
·
|
Developing
the Frederick’s of Hollywood brand into a sexy lifestyle
brand.
|
|
o
|
Product licensing
agreements. During the fourth quarter of fiscal year 2010, we
entered into four separate multi-year licensing agreements with licensees
to manufacture, distribute and market swimwear, sexy Halloween costumes,
jewelry and accessories under the Frederick’s of
Hollywood®
brand. In addition to selling these products through our retail
stores, catalog and website, these agreements provide an economical and
efficient opportunity for us to access a broad distribution network of
retailers. During fiscal year 2011, we have been and will continue
to work closely with our licensees to assist them in coordinating their
product offerings.
|
|
o
|
Licensing
initiatives. In addition to our currently licensed product
categories, we will continue to partner with companies capable of
providing high quality products and a strong distribution network that
will help us to advance as one of the premier sexy lifestyle brands.
Other domestic and international licensing opportunities include intimate
apparel and other product categories such as bed and bath items,
fragrance, shoes, headwear and handbags. We also are exploring
opportunities with international partners to expand in areas such as South
Korea, the Middle East, Brazil, Japan, China and
Canada.
|
|
·
|
Continuing
to Evolve our Catalog and Website
Operations.
|
|
o
|
Catalog. Due to a
combination of rising paper, production and mailing costs and our website
being the primary source of Direct customer orders, our catalog operations
have been evolving over the past few years to serve as a medium to drive
traffic to our website and stores rather than as a revenue
generator. We have been steadily reducing catalog circulation after
testing various cost effective alternatives such as targeted emails,
postcards and smaller-sized catalogs called “persona books” that are more
personalized and tailored to the recipients’ purchasing behaviors.
With positive customer response rates, the page count of our full-sized
catalogs has been reduced and complemented by a series of persona books
featuring merchandise that can be purchased both in stores and on the
website. Persona books are supported by supplemental targeted
emails, post cards and folios. We expect to replace all of our
full-sized catalogs with persona books beginning in the third quarter of
fiscal year 2011.
|
2
|
o
|
e-Commerce. As
our catalog operations have evolved, we have been able to reduce catalog
costs reallocate resources to our website and online marketing
efforts. During fiscal year 2011, we intend to continue to increase
our online presence and drive more traffic to the website through search,
affiliate and social media advertising and shopping comparison site
optimization. We also are focused on increasing visitors’ time spent
on the website by further enhancing functionality and content and
improving the customer experience through initiatives such as customer
product reviews, mobile friendly site access and adding rich media to
provide customers with more robust product
views.
|
Market and Products
We sell women’s intimate apparel and related products under our
proprietary Frederick’s of
Hollywood® brand through our retail stores,
catalog and website. Our customer target is women primarily between the
ages of 18 and 35. Our major in-house merchandise categories are foundations
(including bras, corsets,
shapewear and panties),
lingerie (including daywear and sleepwear), Ready to Wear (dresses,
swimwear and sportswear, offered primarily through our Direct channel) and fragrance and accessories
(including shoes,
personal care products and
novelties). Retail
prices range from approximately $6.00 for panties up to approximately $99.00 for
dresses. Certain
merchandise in these categories, particularly in foundations and lingerie, is
marketed as collections of related items to increase the average
sale amount. Our product lines and
color pallets are updated seasonally to satisfy our customers’ desire for
fashionable merchandise and to keep our selections fresh and
appealing.
The following table shows the percentage
of sales that each of these product
categories represented for the year ended July 31, 2010:
Product Category
|
% of
Retail
Sales
|
|||
Foundations
|
46 | % | ||
Lingerie
|
36 | % | ||
Fragrance
and Accessories
|
9 | % | ||
Ready
to Wear
|
9 | % | ||
Total
|
100 | % |
Product Development and
Merchandising
Our product development efforts focus on
satisfying customer demand for current trends and identifying new fashion trends
and opportunities. In this regard, select members of our merchandising/design team travel throughout the United States,
Europe and Asia to identify fashion trends and new product opportunities.
Those employees then work with merchandise vendors to develop products
that meet those trends.
Our merchandise planners monitor and
analyze the sales performance of products offered in our retail stores, catalog
and website. We use our website and store locations
nationwide to test new
items and promotional strategies that may, in turn, develop into
successful programs.
Store Operations
We operated 126 Frederick’s of Hollywood retail stores
as of September
10, 2010. 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, including 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.
Our retail
stores showcase the full range of our branded merchandise. Select stores will
begin carrying licensed products in December 2010, with a more extensive roll
out to additional stores during Summer 2011. Depending on the size, our new and
remodeled Frederick’s of Hollywood stores are either designed in the contemporary “Modern Hollywood” format, which is used for smaller
stores, or the sophisticated “Red Carpet” format, which is used in stores with a
larger footprint. Using these designs, we seek to maximize the sales and margin
performance of our selling space while creating a unique and attractive shopping
experience for our retail customers. 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, overall mall performance in terms of traffic, average sales per
square foot for the
mall and the proposed location within the
mall.
3
During fiscal year 2010, we opened two new stores and closed six underperforming stores, five of which were closed upon
expiration of the respective leases. We continuously monitor store
performance and from time to time either close underperforming stores or
negotiate with landlords to modify lease terms. As we are continuing to
focus on improving the profitability of our existing stores, we do not intend to
open or do any major remodeling of any stores during fiscal year 2011, and
expect to close one underperforming store when the lease
expires.
Direct Operations
We have an extensive history – dating
back to the first Frederick’s of Hollywood catalog produced in 1947 – of
offering provocative, women’s intimate apparel directly to the consumer.
Today, we continue to market our products directly to consumers through our
catalog and website, including actively marketing to our recent Direct
purchasers of Frederick’s of Hollywood products. We also partner with Internet search engines and
participate in online marketing affiliate and social media
advertising programs to
increase traffic to our website. We
estimate that over 80% of all Direct orders are placed online
through our website.
Catalog
We currently mail five major Frederick’s
of Hollywood catalogs (fall, holiday, spring preview, spring and summer), as
well as several sale and re-mail catalogs, annually. During fiscal year
2010, we mailed approximately 15.3 million catalogs to approximately 4.7 million households, down from
approximately 17.6 million catalogs mailed in fiscal year 2009. We expect
to further reduce annual catalog circulation to approximately 13 million in fiscal year
2011.
Due to a combination of rising paper,
production and mailing costs and our website being the primary source of Direct customer orders, our catalog operations have been evolving over the past few years to serve as a
medium to drive traffic to our
website and
stores rather than as a revenue generator. We have been steadily reducing catalog circulation
after testing various cost effective alternatives such
as targeted emails, postcards and smaller-sized catalogs called “persona
books” that are more
personalized and tailored
to the recipients’ purchasing behaviors. These targeted mailings represented
approximately 10% of our total mailings in fiscal year 2010. With positive customer response rates, the page count of our
full-sized catalogs has
been reduced and complemented by a series of persona books featuring merchandise that can be
purchased both in stores and on the website. Persona books are supported by supplemental targeted
emails, post cards and folios. We expect to replace all of our full-sized
catalogs with persona books beginning in the third quarter of fiscal year
2011.
All creative and copy design for our
catalogs is coordinated by
our in-house design staff. Catalogs are designed approximately four months
before their respective mailing dates. Photography is conducted on location or
in studios. We utilize outside vendors to print and mail the
catalogs. Our catalogs are currently mailed only within the United
States.
Website
We began
selling Frederick’s
of Hollywood products on
our website,
www.fredericks.com,
in 1997.
In addition to the website’s value as an important distribution channel and
source of revenue, it is also a key marketing tool we use to test new products,
build brand equity and increase retail store traffic.
Our current e-commerce web platform is
hosted by a third-party service provider. Since launching the platform in
fiscal year 2009, we have improved the visual presentation of our website, added
functionality with optimized navigation and search capabilities and merchandise
recommendations based on the customer’s shopping habits. To build
frequency of page views, alternative content such as the “Films by Frederick’s”
section was introduced, which features behind the scenes photo shoot footage and
styling tips. During fiscal year 2011, we intend to continue to increase
our online presence and drive more traffic to the website through search,
affiliate and social media advertising and shopping comparison site
optimization. We also are focused on increasing visitors’ time spent on
the website by further enhancing functionality and content and improving the
customer experience through initiatives such as customer product reviews, mobile
friendly site access and adding rich media to provide customers with more robust
product views.
All creative and copy design for
our website is coordinated by our in-house design
staff.
4
Licensing
During
the fourth quarter of fiscal year 2010, we began to selectively license the
Frederick’s of
Hollywood brand name and logo to be included on products sold by other
companies in order to increase and broaden our customer base. Through
licensing agreements, we combine our consumer insight, design and marketing
skills with the specific product competencies of our licensing partners to
create, build and expand our product offerings. We pursue opportunities in
new product categories that we believe to be complementary to our existing
products. Our licensed merchandise categories currently include swimwear,
sexy Halloween costumes, jewelry and accessories. Certain swimwear styles
are currently available through our website and catalog. Select Frederick’s of
Hollywood stores will begin carrying licensed products in December 2010, with a
more extensive roll out to additional stores during Summer 2011.
We grant
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 upon 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 2010, we purchased products from over 80 vendors. Our top ten vendors, including our wholesale
division, accounted for
approximately 74% of the dollar value of those
purchases. Our
wholesale division accounted for approximately 11% of the dollar value of such
purchases in fiscal year 2010. In fiscal year 2011, with the
discontinuation of our wholesale operations, we will instead source these
products from third-party vendors. We had two external suppliers that individually accounted for 10% or more
of total purchases in fiscal year 2010. One domestic supplier
accounted for approximately 11% of total purchases and one foreign supplier
based in Canada accounted for approximately 22% of total purchases in fiscal
year 2010. The Canadian supplier represented approximately 70% of the products purchased from foreign
suppliers in fiscal year 2010. 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.
We also have long-standing
relationships with several independent buying agents to monitor the production,
quality and timely distribution of our products from our vendors.
To assure adequate sources,
each major product category is sourced
from three or four vendors. Each one is capable of filling our total
requirements. We also
test products from new suppliers and develop those suppliers into more important suppliers 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 intimate apparel brand names. Our primary
advertising medium includes our catalog, website and mall presence. A consistent brand image is
maintained across the Stores and Direct channels and we believe the concurrent
operation of retail stores, a catalog and a website 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.
During fiscal year 2010, we entered the social
networking arena with the launch of Frederick’s of Hollywood Facebook and
Twitter communities, which are actively engaging a rapidly growing group
of loyal followers, strengthening our connection with
customers and maximizing
customer awareness of the latest fashion trends and promotions. We also post behind the scenes footage
from our catalog photo shoots on YouTube as a way to further increase our online
presence.
5
As
a specific merchandising initiative, we have increased our presence in the
bridal arena by redesigning and expanding the bridal section of our website, “My
Day, My Way,” to cover four different occasions of the bridal experience –
bridal shower, bachelorette party, wedding and honeymoon – in order to increase
the number of purchasers participating in bridal purchasing, the frequency of
purchases throughout the bridal experience and the assortment
of items purchased beyond lingerie to include ready-to-wear, shoes and
swimwear. We also launched www.OhyesIdo.com,
a microsite and bridal blog with content focused on the sexy
bride.
We also increase brand awareness with the announcement of new product
launches, such as the
“sneak preview” of the 2011 swimwear line, and the arrival of seasonal collections
through public relations activities. 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 168,000 square foot facility in Phoenix,
Arizona to operate a distribution center, customer contact center and
information technology center. The majority of shipments received for
retail stores are allocated to individual stores
and shipped within a few days. A portion of inventory is held in the
distribution center as replenishment inventory to be distributed based on sales
performance. Catalog and website 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.
Our customer contact center provides
toll-free
retail order placement and
customer services, as well as email customer support
services. The customer contact center is open
seven days per week.
We believe our contact center capacity is adequate to
handle projected call volumes for the next several years.
Information
Technology
We maintain information technology
systems to support our product development and design, merchandising, marketing, planning, store
operations, call
center,
inventory, order management and fulfillment, finance, accounting and human resources.
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 regarding markdowns and allocation of merchandise.
We
sell Frederick’s of Hollywood intimate apparel and related products on our
website, www.fredericks.com.
Customer orders are captured and processed on the website, which interfaces with
our in-house systems for order management and fulfillment. In
fiscal year 2009, we launched a new e-commerce web platform 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
to improve navigation, visual presentation and our customers’ overall
online
shopping experience for intimate
apparel and related products.
Trademarks and Service
Marks
We have a variety of trademark applications and
registrations in the United States and foreign countries. Several registered United States
trademarks that are material to the marketing of our products include
Frederick’s of
Hollywood®, Frederick’s®, Fredericks.com®, The Original Sex
Symbol®, Hollywood Exxtreme
Cleavage® and Get
Cheeky®. 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.
Import and Import
Restrictions
Transactions with our foreign
suppliers and our domestic
suppliers that source products internationally are subject to the risks of doing
business outside of the United States. Our operations are subject to
constraints imposed by agreements between the United States and the foreign
countries in which we do business. These agreements often impose quotas on
the amount and type of goods that can be imported into the United States from
these countries. Such agreements also allow the United States to impose,
at any time, restraints on the importation of categories of merchandise that,
under the terms of the agreements, are not subject to specified limits.
Our products are also subject to United States customs duties and, in the
ordinary course of business, we are from time to time subject to claims by the
United States Customs Service for duties and other charges. The United
States and the countries in which our products are
manufactured may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adversely adjust presently prevailing quotas, duty or tariff
levels, which could adversely affect our operations and our ability to continue
to import products at current or increased levels. We cannot predict the
likelihood or frequency of any such events occurring.
6
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 sale of intimate apparel, personal care
and beauty products is a highly competitive business with numerous competitors,
including individual and chain fashion specialty stores, department stores and
discount retailers.
This business 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
factors in retail store sales. Our catalog and website businesses
compete with numerous
national and regional catalog and online merchants. Image presentation, fulfillment and the
factors affecting retail store sales discussed above are the principal
competitive factors in catalog and online sales.
We believe that we have significant competitive strengths
relative to our competition because of our widely recognized brand, presence in
shopping malls
and direct marketing
expertise. However, a number of our competitors are larger and have
significantly greater financial, marketing and other resources than we do, and there can be no assurance that
we will be able to compete successfully
with them in the future.
Employees
As of September 10, 2010, we had 582 full-time employees and 597 part-time employees, including 130 full-time employees and
one part-time employee of the wholesale division, which operations have been
classified as discontinued operations in our consolidated financial statements
appearing elsewhere in this report. 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.
7
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.
Throughout fiscal years 2009 and 2010,
there was significant deterioration in the global financial markets and economic
environment, which we believe 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 revenues 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 intimate 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 Frederick’s of Hollywood’s 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. In addition, we will incur
additional costs if we need to redesign our product offerings. 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.
For the
year ended July 31, 2010, we had a working capital deficiency of
$2,530,000. We plan to rely on available borrowings under our revolving
credit facility, along with our projected operating cash flows and the proceeds
from the sale of the wholesale division, 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.
Discontinuing
our wholesale business could negatively impact our financial condition and
results of operations.
During
the fourth quarter of fiscal year 2010, we made a strategic decision to
discontinue our wholesale business due to continuing losses. We believe
discontinuing these operations will allow us to reduce losses, focus on our core
retail operations and implement our strategy to expand our domestic and
international licensing program. However, if we are unable to sell our
wholesale business, it could cause us to incur significant expenses to shut down
the operations, which could adversely affect our financial condition and results
of operations.
8
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, Linda LoRe, our President, 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. Frederick’s of Hollywood 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 on reasonable
terms, our 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 or enter into leases for new stores on favorable terms, our 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
product;
|
|
·
|
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, AZ
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.
9
As we build our licensing business, we
will increasingly rely on
licensees for revenues, supply of products and compliance with our standards.
We license our trademarks to third
parties for various products and we intend to expand our licensing programs.
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.
The
failure to upgrade information technology systems as necessary could have an
adverse effect on our operations.
Some of our information technology
systems, which are primarily utilized to manage information necessary to price
and ship products, manage inventory and generate reports to evaluate business
operations, are dated and are comprised of multiple applications, rather than
one overarching state-of-the-art system. Modifications involve replacing legacy
systems with successor systems, making changes to legacy systems or acquiring
new systems with new functionality. If we are unable to effectively
implement these systems and update them where necessary, this could have a
material adverse effect on our business, financial condition and results of
operations.
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.
We sell Frederick’s of Hollywood
products through three channels: retail specialty stores, mail order catalogs
and our e-commerce website. We have historically operated these channels
separately and account for sales and use tax separately. Currently, our mail
order and e-commerce subsidiaries collect and pay sales tax to the relevant
state taxing authority on sales made to residents in any state in which we have
a physical presence. Our retail subsidiaries are periodically audited by state
government authorities. It is possible that one or more states may disagree with
our method of assessing and remitting these taxes, including sales tax on
catalog and e-commerce 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 trademark 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.
10
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 31, 2010, the closing
sale prices of our common stock on the NYSE Amex ranged from $0.74 to $1.10 per
share and the closing sale price of our common stock on October 11, 2010 was
$0.85 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;
|
|
·
|
sales
of a substantial amount of our common
stock;
|
|
·
|
low
trading volume; and
|
|
·
|
other
events or factors that are beyond our
control.
|
Any negative change in the public’s
perception of the prospects of 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.
11
ITEM
1B. – UNRESOLVED STAFF COMMENTS
None.
ITEM
2. – PROPERTIES
Continuing
Operations
We lease approximately 27,000 square
feet of space for our retail corporate offices at 6255 Sunset Boulevard, Los
Angeles, CA for an annual base rent of approximately $785,000 pursuant to a
lease that expires in February 2015.
We lease approximately 168,000 square
feet of space for our retail distribution and customer contact center at 5005 S.
40th Street, Phoenix, AZ for an annual base
rent of approximately $1,300,000 pursuant to a lease that expires in March
2018.
Our 126 Frederick’s of Hollywood retail 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 2011 and 2020. 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. As a part of our
normal-course operations, we will continue to close certain underperforming
retail stores upon the expiration of such store leases. See “Business –
Store
Operations.”
The following table sets forth the
locations of Frederick’s of Hollywood retail stores as of September
10, 2010.
Arizona
|
4
|
Massachusetts
|
4
|
Oklahoma
|
2
|
||
California
|
44
|
Michigan
|
3
|
Oregon
|
2
|
||
Connecticut
|
1
|
Minnesota
|
2
|
Pennsylvania
|
1
|
||
Florida
|
15
|
Missouri
|
1
|
South
Carolina
|
1
|
||
Georgia
|
4
|
Nevada
|
5
|
Tennessee
|
1
|
||
Hawaii
|
1
|
New
Hampshire
|
1
|
Texas
|
12
|
||
Illinois
|
4
|
New
Jersey
|
1
|
Virginia
|
2
|
||
Indiana
|
1
|
New
Mexico
|
1
|
Washington
|
1
|
||
Kansas
|
1
|
New
York
|
6
|
Wisconsin
|
1
|
||
Maryland
|
1
|
Ohio
|
3
|
Typically, when space is leased for a
retail 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 for the conduct of our
business.
Discontinued
Operations
We lease approximately 31,000 square
feet of space for our corporate offices and wholesale divisional sales office at
1115 Broadway, New York, NY pursuant to a lease that expires in December
2010. In connection with the discontinuation of our wholesale operations,
we do not intend to renew this lease following its expiration. Our
remaining obligations under the lease are approximately $516,000.
Effective January 1, 2011, our corporate offices will be relocated to
California.
We lease approximately 3,000 square feet
of space for the wholesale division showroom at 180 Madison Avenue, New York, NY
pursuant to a lease that expires in May 2011. In connection with the
discontinuation of our wholesale operations, we do not intend to renew this
lease upon its expiration. Our remaining obligations under the lease are
approximately $99,000.
12
We lease approximately 212,000 square
feet of space for manufacturing support and warehousing and distribution in
Poplarville, MS pursuant to a lease that expires in November 2010. In
connection with the discontinuation of our wholesale operations, we do not
intend to renew this lease, and we are in the process of consolidating all of
our distribution operations into our Phoenix, AZ facility. We have no
remaining obligations under this lease.
We lease
approximately 19,000 square feet of space in Rizal, TayTay, Philippines, which
housed our manufacturing operations until June 2010 and currently is used for
manufacturing support and office space. The lease expires in January 2011
and we do not intend to renew this lease upon its expiration. Our
remaining obligations under the lease are approximately $21,000.
ITEM
3. – LEGAL PROCEEDINGS
We 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. – [REMOVED AND RESERVED]
13
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
Amex 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 31, 2010
|
||||||||
First
Quarter
|
$ | 2.54 | $ | 0.83 | ||||
Second
Quarter
|
1.80 | 1.05 | ||||||
Third
Quarter
|
1.74 | 1.06 | ||||||
Fourth
Quarter
|
1.11 | 0.70 | ||||||
Year
Ended July 25, 2009
|
||||||||
First
Quarter
|
$ | 1.10 | $ | 0.51 | ||||
Second
Quarter
|
0.56 | 0.16 | ||||||
Third
Quarter
|
0.65 | 0.12 | ||||||
Fourth
Quarter
|
0.85 | 0.51 |
On October 11, 2010, the closing sale price of our common
stock was $0.85.
Holders
As of October 11, 2010, there were approximately 780 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 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 revenues
and earnings, if any, capital requirements, general financial condition and such
other factors as our board may consider. In addition, certain covenants in our
Facility (defined below) with Wells Fargo Retail Finance II, LLC (“Wells Fargo”)
and our Term Loan (defined below) with Hilco Brands, LLC (“Hilco”) substantially
restrict payment of cash dividends.
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.”
14
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 intimate
apparel and related products under its proprietary Frederick’s
of Hollywood® brand
predominantly through its U.S. mall-based Frederick’s of Hollywood 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 31, 2010, we
operated 126 Frederick’s of Hollywood stores nationwide and during fiscal year
2010 mailed approximately 15.3 million catalogs.
Financial
information for the fiscal years ended July 31, 2010 and July 25, 2009 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 and goodwill;
|
|
·
|
estimation of expected customer
merchandise returns;
|
|
·
|
estimation of the net deferred
income tax asset valuation allowance;
and
|
|
·
|
estimation of deferred catalog
costs and the amount of future benefit to be derived from the
catalogs.
|
Revenue Recognition – We
record revenue at the point of sale for Stores and at the time of estimated
receipt by the customer for Direct sales. Outbound shipping charges billed
to customers are included in net sales. We record an allowance for
estimated returns from our retail consumers in the period of sale based on prior
experience. At July 31, 2010 and July 25, 2009, the allowance for
estimated returns from our retail customers was $868,000 and $947,000,
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.
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. Store and
Direct inventories consist entirely of finished goods. Freight costs are included in inventory
and vendor promotional allowances are recorded as a reduction in inventory
cost.
15
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 as well as 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. Additionally, we accrue for planned but unexecuted markdowns. If actual
market conditions are less favorable than those projected by management,
additional inventory reserves may be required. 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 $278,000 and $297,000 at July 31,
2010 and July 25, 2009, respectively.
Deferred Catalog
Costs – Deferred catalog
costs represent direct-response advertising that is capitalized and amortized
over its expected period of future benefit. Direct-response advertising consists
primarily of product catalogs of FOH Holdings’ mail order subsidiary. The
capitalized costs of the advertising are amortized over the expected revenue
stream following the mailing of the respective catalog, which is generally six
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 net
revenues. Direct-response
advertising costs of $1,488,000 and
$1,751,000 are included in
prepaid expenses and other current assets in the accompanying consolidated balance sheets at July 31, 2010
and July 25, 2009,
respectively. Management believes that they have appropriately determined
the expected period of future benefit as of the date of its 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 and our amortizable intangible assets, 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 years ended July 31, 2010
and July 25, 2009, we recorded an impairment of property and equipment of
$1,705,000 and $174,000, respectively.
Goodwill and
Intangible Assets –
We have certain intangible assets
and previously had goodwill. Intangible assets consist of
trademarks, principally the Frederick’s of Hollywood trade name and domain
names. We have determined the trademarks and domain
names to have indefinite lives. Applicable accounting
literature requires
us not to 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.
We previously had goodwill, but recorded
an impairment charge of
$6,678,000 in the second quarter of
fiscal year 2009. After recognizing the
impairment charge, we
have no remaining goodwill
on our consolidated balance
sheet.
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.
Due to the merger, we
underwent a change in control under Section 382 of the Internal Revenue Code
and, therefore, certain
pre-merger net operating
loss carryforwards will be limited.
16
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.
During
the fourth quarter of fiscal year 2010, we made a strategic decision to divest
our wholesale business due to continuing losses and in order to focus on our
core retail operations. This decision was driven by a number of factors. These
factors include, but are not limited to, a dramatic reduction in our business
with Walmart, which historically represented a significant portion of our
wholesale business. This reduction was primarily the result of Walmart producing
its own merchandise, selecting competing vendors, and shifting its focus to
product categories that differed from the products Walmart historically
purchased from us. We also lost a significant amount of business from other
retail customers that began producing products themselves and selecting vendors
with branding capabilities.
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 31, 2010
|
July 25, 2009
|
|||||||||||||||
(53 weeks)
|
(52 weeks)
|
|||||||||||||||
Net
sales
|
$ | 133,855 | 100.0 | % | $ | 141,810 | 100.0 | % | ||||||||
Cost
of goods sold, buying and occupancy
|
84,180 | 62.9 | % | 88,244 | 62.2 | % | ||||||||||
Gross
profit
|
49,675 | 37.1 | % | 53,566 | 37.8 | % | ||||||||||
Selling,
general and administrative expenses
|
55,079 | 41.2 | % | 58,589 | 41.3 | % | ||||||||||
Goodwill
impairment
|
- | - | 6,678 | 4.7 | % | |||||||||||
Impairment
of long-lived assets
|
1,705 | 1.3 | % | 174 | 0.1 | % | ||||||||||
Operating
loss
|
(7,109 | ) | (5.3 | )% | (11,875 | ) | (8.4 | )% | ||||||||
Interest
expense, net
|
1,651 | 1.2 | % | 1,531 | 1.1 | % | ||||||||||
Loss
from continuing operations before income tax provision
|
(8,760 | ) | (6.5 | )% | (13,406 | ) | (9.5 | )% | ||||||||
Income
tax provision
|
47 | 0.4 | % | 87 | 0.0 | % | ||||||||||
Loss
from continuing operations
|
(8,807 | ) | (6.6 | )% | (13,493 | ) | (9.5 | )% | ||||||||
Loss
from discontinued operations, net of tax provision
|
(12,357 | ) | (9.2 | )% | (20,554 | ) | (14.5 | )% | ||||||||
Net
loss
|
(21,164 | ) | (15.8 | )% | (34,047 | ) | (24.0 | )% | ||||||||
Less:
Preferred stock dividends
|
430 | 584 | ||||||||||||||
Net
loss applicable to common shareholders
|
$ | (21,594 | ) | $ | (34,631 | ) |
17
Fiscal
Year 2010 Compared to Fiscal Year 2009
Our fiscal year is the 52 or 53-week
period ending on the last Saturday in July. Our consolidated financial
statements for fiscal years 2010 and 2009 consist of the 53-week period ended
July 31, 2010 and the 52-week period ended July 25, 2009,
respectively.
Net
Sales
Net sales for the year ended July 31,
2010 decreased to $133,855,000 as compared to $141,810,000 for the year ended July 25, 2009, and were as
follows (in thousands, except for percentages):
Year Ended
|
||||||||||||||||
July 31, 2010
|
July 25, 2009
|
Decrease
|
% of decrease
from prior year
|
|||||||||||||
Stores
|
$ | 84,280 | $ | 89,863 | $ | (5,583 | ) | (6.2 | )% | |||||||
Direct (catalog and
website)
|
49,575 | 51,947 | (2,372 | ) | (4.6 | )% | ||||||||||
Total net sales
|
$ | 133,855 | $ | 141,810 | $ | (7,955 | ) | (5.6 | )% |
Total store sales decreased by $5,583,000, or 6.2%, for the year ended July 31, 2010 as compared to the year ended July 25, 2009.
Comparable store sales
decreased by $4,589,000, or 5.5%, for the year ended July 31, 2010 as compared
to the year ended July 25, 2009. The decrease in sales is primarily due
to a decrease in consumer spending resulting from the challenging macroeconomic
environment, and more specifically to the severe economic downturn of the
regional economies in states where our stores are concentrated, including
California, Nevada and Florida.
Direct sales, which are comprised of
sales from our catalog and website operations, decreased by $2,372,000, or 4.6%,
for the year ended July 31, 2010 as compared to the year ended July 25, 2009.
The decrease is
attributable to a reduction in the number of orders placed by our
Direct customers, which was primarily due to a reduction in consumer discretionary
spending and a strategic
decision to reduce catalog circulation from 17.6 million to 15.3 million in an
effort to reduce catalog costs. We plan to continue to reduce catalog
circulation while simultaneously increasing our web-based marketing
efforts.
Gross Profit
Gross margin (gross profit as a
percentage of net sales)
for the year ended July 31, 2010 was 37.1% as compared to 37.8% for the year ended July 25, 2009. The largest contributors to
the decrease in gross margin were the following:
|
·
|
Product costs as a percentage of
sales increased by 0.1 percentage points for the year ended July 31, 2010
as compared to the year ended July 25,
2009.
|
|
·
|
Occupancy costs, which consist of
rent, common area maintenance, utilities and real estate taxes, decreased
by $736,000 for the year ended July 31, 2010 as compared to the year ended
July 25, 2009; however, as a percentage of sales, occupancy costs
increased by 0.4 percentage points as a result of lower retail
sales. The decrease in occupancy costs for the year ended July
31, 2010 is attributable to reductions in real estate management, repair
and maintenance costs and other related expenses.
|
Selling, General and Administrative
Expenses
Year Ended
|
||||||||||||
July 31, 2010
|
July 25, 2009
|
Decrease
|
||||||||||
(in thousands)
|
||||||||||||
Retail
|
$ | 52,904 | $ | 56,305 | $ | (3,401 | ) | |||||
Corporate executive
office
|
2,175 | 2,284 | (109 | ) | ||||||||
Total
|
$ | 55,079 | $ | 58,589 | $ | (3,510 | ) |
Selling, general and administrative
expenses for the year ended July 31, 2010 decreased by $3,510,000 to
$55,079,000, or 41.1% of sales, from $58,589,000, or 41.3% of sales, for the
year ended July 25, 2009. This decrease is primarily attributable
to the following:
18
|
·
|
Expenses related to retail corporate overhead decreased by
$598,000, which was primarily due to a
decrease in salaries and salary-related costs of $273,000 resulting from a reduction in full-time
personnel, partially offset by an increase in temporary personnel to fill
various positions, a
reduction in consulting fees of $176,000 and a decrease in recruitment fees of $67,000.
|
|
·
|
Store selling, general and
administrative expenses decreased by $1,148,000, which was primarily due
to decreases in (1) store salaries and salary-related costs of
$656,000, which is the result of
reductions in store staffing requirements, and decreases in
earned incentives due
to lower sales and (2) store support costs of $621,000
due to reductions in personnel, fewer district sales meetings and
corresponding reductions in travel
expenses.
|
|
·
|
Direct selling, general and
administrative expenses decreased by $2,266,000, primarily as a result of
a $2,128,000
reduction in catalog costs and a $1,051,000 decrease in marketing expense. These decreases were partially
offset by a lawsuit
we settled in the
prior year related to
the unsuccessful launch of a new website platform in fiscal year 2008,
pursuant to which we received a lump sum cash payment and other non-cash
consideration totaling $756,000. The reduction in catalog costs
was due to a planned
strategic decrease in circulation and our continued roll out of various
cost effective alternatives to full size catalogs such as targeted emails, postcards and
persona
books. The decrease in marketing expenses
was due to lower commissions earned by online marketing affiliates and
lower Internet search engine fees. We expect catalog costs to
continue to decline in fiscal year 2011, but web-based marketing expenses
to increase as we increase our focus on web-based marketing
initiatives.
|
|
·
|
The expenses related to the
corporate executive office decreased by $109,000 to $2,175,000 for the
year ended July 31, 2010 from $2,284,000 for the year ended July 25,
2009. These expenses include costs associated with our Chief
Executive Officer, Chief Financial Officer and Board of
Directors.
|
Goodwill Impairment
As our market capitalization was
significantly below our book value at January 24, 2009, we performed an
impairment analysis. We determined that the goodwill balance
was impaired as a result of our current and
future projected financial results due to the poor macroeconomic
outlook. Accordingly, we recorded a goodwill impairment charge
of $6,678,000 in the second
quarter ended January 24, 2009. After recognizing the
impairment charge in fiscal
year 2009, we
had no remaining goodwill on our
consolidated balance sheet. Accordingly, no goodwill
impairment charge was recorded in fiscal year 2010.
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 25,
2009, we identified one underperforming store that we concluded was impaired and
recorded an impairment charge of $174,000 related to that store. At
July 31, 2010, we identified nine additional underperforming stores that we
concluded were impaired due to sustained historical losses at those stores and
recorded an impairment charge of $1,705,000 related to those
stores.
Interest Expense,
Net
During the year ended July 31,
2010, net interest expense
was $1,651,000 as compared to $1,531,000 for the year ended July 31, 2009. This $120,000 increase is the result of higher interest rates, partially offset
by overall lower borrowing levels as compared to the prior
year.
Income Tax Provision
Our effective tax rate is less than
1% for each of the years ended July 31, 2010
and July 25, 2009, respectively. Our income tax provision for the years
ended July 31, 2010 and July 25, 2009 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 trademarks, which have an
indefinite life.
19
Discontinued
Operations
During
the fourth quarter of fiscal year 2010, we made a strategic decision to divest
our wholesale business due to continuing losses and in order to focus on our
core retail operations. Our wholesale operations are classified as
discontinued operations for all periods presented in the consolidated financial
statements appearing elsewhere in this report. The loss from
discontinued operations, net of tax, decreased by $8,197,000 from $20,554,000
for the year ended July 25, 2009 to $12,357,000 for the year ended July 31,
2010. This decrease was primarily due to the goodwill impairment
charge of $12,422,000 recorded in the second quarter of fiscal year
2009. During fiscal year 2010, we recorded an impairment charge to
fixed assets of $428,000 and a write-down of intangible assets of
$5,351,000. Revenues from discontinued operations decreased by
$14,347,000 from $34,500,000 for the year ended July 25, 2009 to $20,153,000 for
the year-ended July 31, 2010.
Liquidity
and Capital Resources
Cash
Used in Operations
Net cash
provided by operating activities for the year ended July 31, 2010 was
$2,171,000, resulting primarily from the following:
|
·
|
non-cash
expenses of $4,207,000 for depreciation and
amortization;
|
|
·
|
a
non-cash impairment of long-lived assets of $1,705,000, which was due to
the impairment of the property and equipment related to nine of our retail
stores;
|
|
·
|
non-cash
stock-based compensation expense of $767,000;
and
|
|
·
|
a
decrease in merchandise inventories of $4,293,000, which was due to a
higher inventory level at July 25, 2009 than was optimal for the business
and the late delivery of products from our vendors as a result of our past
due payments in July 2010. Product deliveries have returned to
normal levels subsequent to receiving the funds of our Term Loan described
below.
|
These improvements in cash flow were
partially offset by net losses for the year ended July 31, 2010 of $8,807,000
from continuing operations and $12,357,000 from discontinued
operations.
Cash
Used in Investing Activities
Net cash
used in investing activities for the year ended July 31, 2010 was $874,000,
which resulted primarily from expenditures for new stores of $438,000, store
equipment purchases of $167,000 and other general corporate expenditures
totaling $269,000.
Cash Used
in Financing Activities
Net
cash used in financing activities for the year ended July 31, 2010 was
$1,316,000, resulting primarily from $7,000,000 under the Term Loan (defined
below) and net proceeds of $2,742,000 from the sale of common stock in the
Private Placement (defined below). These cash inflows were reduced by
our net borrowings of $5,976,000 under the Facility (defined below), and
$4,660,000 of cash restricted for repayment of the Facility.
Private
Placement
On March
16, 2010, we completed a private placement to accredited investors of 2,907,051
shares of common stock at $1.05 per share, raising total gross proceeds of
approximately $3,052,000 (“Private Placement”). The investors in the
Private Placement also received two-and-a-half year Series A warrants to
purchase up to an aggregate of 1,162,820 shares of common stock at an exercise
price of $1.25 per share, and five-year Series B warrants to purchase up to an
aggregate of 1,162,820 shares of common stock at an exercise price of $1.55 per
share. Both warrants became exercisable on September 16, 2010, the six-month
anniversary of the closing date. Each of the Series A and Series B warrants are
callable for $0.01 per warrant commencing 30 days after their initial exercise
date if our stock price exceeds $2.25 per share and $3.10 per share,
respectively, for seven consecutive trading days and the average daily volume
during such period exceeds 100,000 shares per trading day. Additionally, the
Series B warrants may be exercised by the holders on a cashless
basis.
20
Avalon
Securities Ltd. (“Avalon”) acted as placement agent in the
transaction. Upon the closing, we paid Avalon approximately $198,000
in cash commissions and issued to Avalon and its designees warrants to purchase
an aggregate of 218,030 shares of common stock at an exercise price of $1.21 per
share. Except for the exercise price, these warrants are identical to
the Series B warrants issued to investors in the Private
Placement. In addition, we paid approximately $111,000 in other fees
related to the Private Placement, $41,000 of which was paid to Avalon in
consulting fees.
As a
result of the Private Placement, pursuant to the anti-dilution adjustment
provisions contained in our Amended and Restated Certificate of Incorporation
governing the terms of our Series A Preferred Stock (defined below), the number
of shares of common stock issuable upon conversion of the Series A Preferred
Stock was increased from 1,512,219 shares to 1,622,682 shares. All of
the outstanding shares of Series A Preferred Stock were converted into common
stock pursuant to the Exchange and Conversion Agreement (defined
below). Additionally, pursuant to the anti-dilution adjustment
provisions contained in the warrants issued to Fursa Alternative Strategies LLC
and Tokarz Investments, LLC in connection with our merger with FOH Holdings, the
number of shares of common stock issuable upon exercise of such warrants was
increased from an aggregate of 596,592 shares to an aggregate of 635,076 shares
and the exercise price of such warrants was decreased from $3.52 per share to
$3.31 per share.
Revolving
Credit Facility
We and certain of our
subsidiaries have a senior credit facility, as amended (the “Facility”)
with Wells Fargo, which matures on January 28, 2012. The Facility
originally was for a maximum amount of $50 million comprised of a $25 million
line of credit with a $15 million sub-limit for letters of credit, and up to an
additional $25 million commitment in increments of $5 million at our option so
long as we are in compliance with the terms of the Facility. The Facility
also originally was secured by a first priority security interest in all of our
assets.
The actual amount of credit available
under the Facility is determined using measurements based on our receivables,
inventory and other measures. The applicable percentages used in
calculating the borrowing base under the Facility were reduced on March 16, 2010
following the closing of the Private Placement. Interest is 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. There also is a fee of 50 basis points on any unused portion
of the Facility.
On November 4, 2008, we utilized the
accordion feature under the Facility to increase the borrowing limit from $25
million to $30 million. In utilizing the accordion feature, our
minimum availability reserve increased by $375,000 (7.5% of the $5,000,000
increase) to $2,250,000 (7.5% of the $30,000,000) and we incurred a one-time
closing fee of $12,500.
On September 21, 2009, the Facility was
amended to provide for a $2,000,000 bridge facility at an annual interest rate
of LIBOR plus 10% (the “Bridge Loan”), to be repaid upon the earlier of December
7, 2009 and the consummation of a financing in which we received net proceeds of
at least $4,900,000. On October 23, 2009, the Facility was further amended
to extend the December 7, 2009 repayment date to August 1, 2010 and to reduce
the net proceeds that we were required to receive to an aggregate of
$4,400,000.
On July 30, 2010, we repaid the Bridge
Loan with proceeds from the Term Loan described below. In connection
therewith, the Facility was amended to, among other things, (i) reduce the line
of credit commitment from $25 million to $20 million and (ii) provide for the
Facility to be secured by a second priority interest in all of our intellectual
property and a first priority security interest in substantially all of our
other assets.
In connection with the amendments to
the Facility described above, we incurred a one-time amendment fee of $150,000,
one half of which was paid in connection with the September 2009 amendment to
the Facility and the remainder was paid subsequent to the fiscal year ended July
31, 2010 following the repayment of the Bridge Loan.
As of July 31, 2010, we had (i)
$2,269,000 outstanding under the Facility at a Base Rate of 5.0% and (ii)
$1,000,000 outstanding under the Facility at a LIBOR Rate of
3.43%. For the year ended July 31, 2010, borrowings under the
Facility (including the Bridge Loan) peaked at $16,996,000 and the average
borrowing during the period was approximately $11,435,000. In
addition, at July 31, 2010, we had $1,664,000 of outstanding letters of credit
under the Facility.
As of July 25, 2009, we had $9,245,000
outstanding under the Facility at a rate of 3.0%. For the year ended
July 25, 2009, borrowings under the Facility peaked at $26,436,000 and the
average borrowing during the period was approximately $14,404,000. In
addition, at July 25, 2009, we had $1,528,000 of outstanding letters of credit
under the Facility.
21
The
Facility contains customary representations and warranties, affirmative and
restrictive covenants and events of default. The restrictive
covenants limit our 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, dispose of
inventory, incur certain lease obligations, make capital expenditures, pay
dividends, redeem or repurchase outstanding equity and issue capital
stock. In lieu of financial covenants, fixed charge coverage and
overall debt ratios, we also are required to maintain specified minimum
availability reserves. At July 31, 2010, we were in compliance with the
Facility’s covenants and minimum availability reserve requirements.
Term
Loan
On July 30, 2010, we and certain of our
subsidiaries entered into a financing agreement (the “Hilco Financing
Agreement”) with the lending parties from time to time a party thereto and
Hilco, as lender and also as arranger and agent. The Hilco Financing
Agreement provides for a term loan in the aggregate principal amount of
$7,000,000 (“Term Loan”). From the Term Loan proceeds, $2,000,000 was
used to repay the Bridge Loan with the balance to be available to us for
additional working capital.
One-half of the principal amount of the
Term Loan, together with accrued interest, is payable by us on July 30, 2013
(the “Initial Maturity Date”) and the other half of the principal amount of the
Term Loan, together with accrued interest, is payable on July 30, 2014 (the
“Maturity Date”). The Term Loan bears interest at a fixed rate of
9.0% per annum (“Regular Interest”) and an additional 6.0% per annum compounded
annually (“PIK Interest”). Regular Interest is payable quarterly, in
arrears, on the first day of each calendar quarter, commencing on October 1,
2010 and at maturity. PIK Interest is payable on the Initial Maturity
Date and the Maturity Date, with us having the right, at the end of any calendar
quarter, to pay all or any portion of the then accrued PIK
Interest.
The Term Loan is secured by a first
priority security interest in all of our intellectual property and a second
priority security interest in substantially all of our other assets, all in
accordance with the terms and conditions of a Security Agreement between us and
Hilco entered into concurrently with the Hilco Financing
Agreement. Also, concurrently with the Hilco Financing Agreement,
Hilco and Wells Fargo entered into an Intercreditor Agreement, acknowledged by
us, setting forth, among other things, their respective rights and obligations
as to the collateral covered by the Security Agreement. Our
obligations under the Hilco Financing Agreement are also guarantied by one of
our wholly-owned subsidiaries that is not a borrower under the Hilco Financing
Agreement.
The Hilco Financing Agreement and other
loan documents contain customary representations and warranties, affirmative and
negative covenants and events of default substantially similar to those
contained in the Facility, except that the Hilco Financing Agreement contains a
debt service coverage ratio covenant, which becomes effective commencing for the
fiscal year ending July 30, 2011. The restrictive covenants limit our
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, dispose of inventory, incur
certain lease obligations, make capital expenditures, pay dividends, redeem or
repurchase outstanding equity and issue capital stock. We paid a
one-time fee of $280,000 in connection with the closing of the Term
Loan.
Long-Term
Debt – Related Party, Series A Preferred Stock and Warrants
Background
Series A Preferred
Stock. On January 28, 2008, we issued an aggregate of
3,629,325 shares of Series A 7.5% Convertible Preferred Stock (“Series A
Preferred Stock”) to Fursa in exchange for a $7,500,000 portion of the debt owed
by FOH Holdings and its subsidiaries. The Series A Preferred Stock
was convertible at any time at the option of the holders into an aggregate of
1,512,219 shares of common stock, subject to adjustment. Pursuant to
the anti-dilution adjustment provisions contained in our Amended and
Restated Certificate of Incorporation governing the terms of the Series A
Preferred Stock, following the Private Placement, the number of shares of common
stock issuable upon conversion of the Series A Preferred Stock was increased
from 1,512,219 shares to 1,622,682 shares. As of July 25, 2009, the
Company had accrued dividends of $865,000.
Warrants. Also
on January 28, 2008, as sole consideration for their commitments to act as
standby purchasers in connection with our $20 million rights offering, we issued
to Fursa and Tokarz warrants to purchase an aggregate of 596,592 shares of
common stock, subject to adjustment. Pursuant to the anti-dilution
adjustment provisions contained in the warrants, following the Private
Placement, the number of shares of common stock issuable upon exercise of the
warrants was increased from an aggregate of 596,592 shares to an aggregate of
635,076 shares and the exercise price was decreased from $3.52 per share to
$3.31 per share. The warrants expire on January 28,
2011.
22
Tranche C
Debt. As of July 25, 2009, we also had $13,586,000 of secured
long-term debt (including accrued interest) due to Fursa (“Tranche C Debt”),
which was scheduled to mature on July 28, 2012. This debt bore
interest at the fixed rate of 7% per annum with 1% payable in cash and 6%
payable in kind. The Tranche C Debt was secured by substantially all
of our assets and was second in priority to the Facility. The Tranche
C Debt contained customary representations and warranties, affirmative and
restrictive covenants and events of default substantially similar to, and no
more restrictive than, those contained in the Facility.
Exchange of Long-Term Debt – Related
Party and Preferred Stock Conversion
On May 18, 2010, we completed the
transactions contemplated by the Debt Exchange and Preferred Stock Conversion
Agreement, dated as of February 1, 2010 (“Exchange and Conversion Agreement”),
with accounts and funds managed by and/or affiliated with Fursa. At
the closing, we issued to Fursa an aggregate of 8,664,373 shares of common stock
upon exchange of approximately $14,285,000 of outstanding Tranche C Debt and
accrued interest, and conversion of approximately $8,795,000 of Series A
Preferred Stock, including accrued dividends, representing all of the
outstanding shares of Series A Preferred Stock, at an effective price of
approximately $2.66 per share.
We also issued to Fursa three, five and
seven-year warrants, each to purchase 500,000 shares of common stock (for an
aggregate of 1,500,000 shares of common stock) at exercise prices of $2.00,
$2.33 and $2.66 per share, respectively. The warrants are exercisable
for cash or on a cashless basis, at Fursa’s option. At any time after
the first anniversary of the issuance date, we may redeem the warrants, in whole
but not in part, upon not less than 20 business days’ written notice to Fursa,
at a redemption price of $0.01 per share, if the last sale price of the common
stock is at least 200% of the exercise price of the warrants for 10 consecutive
trading days ending on the day prior to the date on which notice of redemption
is given to Fursa. Following the transaction, Fursa’s aggregate
beneficial ownership of our common stock increased from approximately 33% to
approximately 47%. As Fursa is a related party, the transaction resulted
in an increase to shareholders’ equity of $23,080,000.
Future
Financing Requirements
For the
year ended July 31, 2010, our working capital deficiency decreased by $264,000
to ($2,530,000). As our business continues to be effected by limited working
capital, management plans to carefully manage our working capital and continue
to look for ways to improve our working capital position. Management
believes that the available borrowings under the Facility, along with our
projected operating cash flows and the proceeds from the sale of the wholesale
division, will be sufficient to cover our working capital requirements and
capital expenditures through the end of fiscal year 2011. Our ability
to achieve our fiscal year 2011 business plan is critical to maintaining
adequate liquidity. There can be no assurance that we will be
successful in our efforts.
We expect that our capital expenditures
for fiscal year 2011 will be approximately $1,500,000, 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.
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. None of the new accounting standards are anticipated to
materially impact us.
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.
We do not
believe that our operating results have been materially affected by inflation
during the preceding three years. There can be no assurance, however,
that our operating results will not be affected by inflation in the
future.
23
Imports
Transactions
with our foreign suppliers and our domestic suppliers that source products
internationally are subject to the risks of doing business outside of the United
States. Our operations are subject to constraints imposed by agreements
between the United States and the foreign countries in which we do
business. These agreements often impose quotas on the amount and type of
goods that can be imported into the United States from these
countries. Such agreements also allow the United States to impose, at
any time, restraints on the importation of categories of merchandise that, under
the terms of the agreements, are not subject to specified limits. Our
products are also subject to United States customs duties and, in the ordinary
course of business, we are from time to time subject to claims by the United
States Customs Service for duties and other charges. The United States and
the countries in which our products are manufactured may, from time to time,
impose new quotas, duties, tariffs or other restrictions, or adversely adjust
presently prevailing quotas, duty or tariff levels, which could adversely affect
our operations and our ability to continue to import products at current or
increased levels. We cannot predict the likelihood or frequency of any
such events occurring.
ITEM 7A. – QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risks
We are
exposed to interest rate risk associated with our Facility. As of
July 31, 2010, interest accrued at an agreed to reference rate, which was the
Wells Fargo prime rate plus 175 basis points for “Base Rate” loans and the LIBOR
rate plus 300 basis points for “LIBOR Rate” loans. At July 31, 2010,
we had $2,269,000 outstanding under the Facility at a Base Rate of 5.0%, (ii)
$1,000,000 outstanding under the Facility at a LIBOR Rate of
3.43%. For the year ended July 31, 2010, borrowings under the
Facility peaked at $16,996,000 and the average borrowing during the period was
approximately $11,435,000.
An
increase in the interest rate of 100 basis points would have increased the
interest on the Facility borrowings by approximately $32,690 for the year ended
July 31, 2010.
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.
24
ITEM
8. – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
AND
SUPPLEMENTARY DATA
Item
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
26
|
|
Consolidated
Balance Sheets at July 31, 2010 and July 25, 2009
|
27
|
|
Consolidated
Statements of Operations for the years ended July 31, 2010 and July 25,
2009
|
28
|
|
Consolidated
Statements of Shareholders’ Equity for the years ended July 31, 2010 and
July 25, 2009
|
29
|
|
Consolidated
Statements of Cash Flows for the years ended July 31, 2010 and July 25,
2009
|
30-31
|
|
Notes
to Consolidated Financial Statements
|
32-47
|
|
Financial
Statement Schedule:
|
||
For
the fiscal years ended July 31, 2010 and July 25, 2009:
|
||
II
– Valuation and Qualifying Accounts
|
48
|
25
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 31, 2010 and July 25, 2009 and the
related consolidated statements of operations, shareholders’ equity 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 31, 2010 and July 25, 2009. 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 31, 2010 and July 25, 2009, 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
22, 2010
|
26
CONSOLIDATED
BALANCE SHEETS
JULY
31, 2010 AND JULY 25, 2009
(In
Thousands, Except Share Data)
July
31,
|
July
25,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 536 | $ | 555 | ||||
Restricted
cash
|
4,660 | - | ||||||
Accounts
receivable
|
1,127 | 1,380 | ||||||
Income
tax receivable
|
127 | 172 | ||||||
Merchandise
inventories
|
10,951 | 15,244 | ||||||
Prepaid
expenses and other current assets
|
2,298 | 2,543 | ||||||
Deferred
income tax assets
|
875 | 3,117 | ||||||
Current
assets of discontinued operations
|
4,185 | 7,855 | ||||||
Total
current assets
|
24,759 | 30,866 | ||||||
PROPERTY
AND EQUIPMENT, Net
|
13,861 | 19,460 | ||||||
INTANGIBLE
AND OTHER ASSETS
|
19,392 | 19,161 | ||||||
LONG-TERM
ASSETS OF DISCONTINUED OPERATIONS
|
960 | 8,150 | ||||||
TOTAL
ASSETS
|
$ | 58,972 | $ | 77,637 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Revolving
credit facility
|
$ | 3,269 | $ | 9,245 | ||||
Deferred
revenue from gift cards
|
1,781 | 1,692 | ||||||
Accounts
payable and other accrued expenses
|
20,198 | 20,214 | ||||||
Current
liabilities of discontinued operations
|
2,041 | 2,509 | ||||||
Total
current liabilities
|
27,289 | 33,660 | ||||||
DEFERRED
RENT AND TENANT ALLOWANCES
|
4,926 | 4,707 | ||||||
TERM
LOAN
|
7,002 | - | ||||||
LONG-TERM
DEBT—related party
|
- | 13,336 | ||||||
OTHER
LONG-TERM LIABILITIES
|
70 | 16 | ||||||
DEFERRED
INCOME TAX LIABILITIES
|
8,377 | 12,153 | ||||||
TOTAL
LIABILITIES
|
47,664 | 63,872 | ||||||
PREFERRED
STOCK, $.01 par value – authorized, 10,000,000 shares at July 31, 2010 and
July 25, 2009; issued and outstanding, none at July 31, 2010 and 3,629,325
shares of Series A preferred stock at July 25, 2009
|
- | 7,500 | ||||||
COMMITMENTS
AND CONTINGENCIES (NOTES 9 AND 11)
|
- | - | ||||||
SHAREHOLDERS’
EQUITY:
|
||||||||
Common
stock, $.01 par value – authorized, 200,000,000 shares at July 31, 2010
and July 25, 2009; issued and outstanding 38,343,199 shares at July 31,
2010 and 26,394,158 shares at July 25, 2009
|
383 | 263 | ||||||
Additional
paid-in capital
|
86,977 | 60,444 | ||||||
Accumulated
deficit
|
(75,969 | ) | (54,375 | ) | ||||
Accumulated
other comprehensive loss
|
(83 | ) | (67 | ) | ||||
TOTAL
SHAREHOLDERS’ EQUITY
|
11,308 | 6,265 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 58,972 | $ | 77,637 |
See notes
to consolidated financial statements.
27
FREDERICK’S
OF HOLLYWOOD GROUP INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED JULY 31, 2010 AND JULY 25, 2009
(In
Thousands, Except Per Share Amounts)
Year Ended
|
||||||||
July 31,
|
July 25,
|
|||||||
2010
(53 weeks)
|
2009
(52 weeks)
|
|||||||
Net
sales
|
$ | 133,855 | $ | 141,810 | ||||
Cost
of goods sold, buying and occupancy
|
84,180 | 88,244 | ||||||
Gross
profit
|
49,675 | 53,566 | ||||||
Selling,
general and administrative expenses
|
55,079 | 58,589 | ||||||
Goodwill
impairment
|
- | 6,678 | ||||||
Impairment
of long-lived assets
|
1,705 | 174 | ||||||
Operating
loss
|
(7,109 | ) | (11,875 | ) | ||||
Interest
expense, net
|
1,651 | 1,531 | ||||||
Loss
before income tax provision
|
(8,760 | ) | (13,406 | ) | ||||
Income
tax provision
|
47 | 87 | ||||||
Net
loss from continuing operations
|
(8,807 | ) | (13,493 | ) | ||||
Net
loss from discontinued operations, net of tax (benefit)/provision of
$(1,462) and $45 for the years ended July 31, 2010 and July 25, 2009,
respectively
|
(12,357 | ) | (20,554 | ) | ||||
Net
loss
|
(21,164 | ) | (34,047 | ) | ||||
Less:
Preferred stock dividends
|
430 | 584 | ||||||
Net
loss applicable to common shareholders
|
$ | (21,594 | ) | $ | (34,631 | ) | ||
Basic
net loss per share from continuing operations
|
$ | (.32 | ) | $ | (.54 | ) | ||
Basic
net loss per share from discontinued operations
|
(.42 | ) | (.78 | ) | ||||
Total
basic net loss per share applicable to common shareholders
|
$ | (.74 | ) | $ | (1.32 | ) | ||
Diluted
net loss per share from continuing operations
|
$ | (.32 | ) | $ | (.54 | ) | ||
Diluted
net loss per share from discontinued operations
|
(.42 | ) | (.78 | ) | ||||
Total
diluted net loss per share applicable to common
shareholders
|
$ | (.74 | ) | $ | (1.32 | ) | ||
Weighted
average shares outstanding – basic
|
29,272 | 26,272 | ||||||
Weighted
average shares outstanding – diluted
|
29,272 | 26,272 |
See notes
to consolidated financial statements.
28
FREDERICK’S
OF HOLLYWOOD GROUP INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS
ENDED JULY 31, 2010 AND JULY 25, 2009
(In
Thousands, Except Share Amounts)
Accumulated
|
||||||||||||||||||||||||
Additional
|
Other
|
|||||||||||||||||||||||
Common Stock
|
Paid-in
|
Accumulated
|
Comprehensive
|
|||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Total
|
|||||||||||||||||||
BALANCE,
JULY 26, 2008
|
26,141,194 | $ | 261 | $ | 59,558 | $ | (19,744 | ) | $ | (9 | ) | $ | 40,066 | |||||||||||
Net
loss
|
(34,047 | ) | (34,047 | ) | ||||||||||||||||||||
Cumulative
translation adjustment
|
- | - | - | - | (58 | ) | (58 | ) | ||||||||||||||||
Comprehensive
loss
|
(34,105 | ) | ||||||||||||||||||||||
Stock
based compensation
|
- | - | 826 | - | - | 826 | ||||||||||||||||||
Issuance
of common stock
|
117,483 | 1 | (1 | ) | - | - | - | |||||||||||||||||
Issuance
of common stock for directors’ fees
|
118,813 | 1 | 55 | - | - | 56 | ||||||||||||||||||
Stock
options exercised
|
16,668 | - | 6 | - | - | 6 | ||||||||||||||||||
Accrued
dividend on preferred stock
|
- | - | - | (584 | ) | - | (584 | ) | ||||||||||||||||
BALANCE,
JULY 25, 2009
|
26,394,158 | 263 | 60,444 | (54,375 | ) | (67 | ) | 6,265 | ||||||||||||||||
Net
loss
|
- | - | - | (21,164 | ) | - | (21,164 | ) | ||||||||||||||||
Cumulative
translation adjustment
|
- | - | - | - | (16 | ) | (16 | ) | ||||||||||||||||
Comprehensive
loss
|
(21,180 | ) | ||||||||||||||||||||||
Stock
based compensation
|
- | - | 767 | - | - | 767 | ||||||||||||||||||
Private
placement of common stock:
|
||||||||||||||||||||||||
Issuance
of common stock
|
2,907,051 | 29 | 3,023 | - | - | 3,052 | ||||||||||||||||||
Private
placement fees
|
- | - | (310 | ) | - | - | (310 | ) | ||||||||||||||||
Conversion
of preferred stock and long-term debt – related party
|
8,664,373 | 87 | 22,993 | - | - | 23,080 | ||||||||||||||||||
Issuance
of common stock
|
325,000 | 3 | (3 | ) | - | - | - | |||||||||||||||||
Issuance
of common stock for directors’ fees
|
52,617 | 1 | 63 | - | - | 64 | ||||||||||||||||||
Accrued
dividend on preferred stock
|
- | - | - | (430 | ) | - | (430 | ) | ||||||||||||||||
BALANCE,
JULY 31, 2010
|
38,343,199 | $ | 383 | $ | 86,977 | $ | (75,969 | ) | $ | (83 | ) | $ | 11,308 |
See notes
to consolidated financial statements.
29
FREDERICK’S
OF HOLLYWOOD GROUP INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED JULY 31, 2010 AND JULY 25, 2009
(In
Thousands)
|
July
31,
|
July
25,
|
||||||
2010
(53
weeks)
|
2009
(52
weeks)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (21,164 | ) | $ | (34,047 | ) | ||
Net
loss from discontinued operations
|
(12,357 | ) | (20,554 | ) | ||||
Net
loss from continuing operations
|
(8,807 | ) | (13,493 | ) | ||||
Adjustments
to reconcile net loss from continuing operations to net cash provided by
operating activities:
|
||||||||
Goodwill
impairment
|
- | 6,678 | ||||||
Depreciation
and amortization
|
4,207 | 4,441 | ||||||
Issuance
of common stock for directors’ fees
|
64 | 56 | ||||||
Stock-based
compensation expense
|
767 | 826 | ||||||
Impairment
of long-lived assets
|
1,705 | 174 | ||||||
Loss
on disposal of property and equipment
|
254 | 60 | ||||||
Amortization
of deferred financing costs
|
188 | 44 | ||||||
Non-cash
interest on long-term debt – related party
|
721 | 775 | ||||||
Amortization
of deferred rent and tenant allowances
|
113 | 732 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
264 | 132 | ||||||
Merchandise
inventories
|
4,293 | 362 | ||||||
Prepaid
expenses and other current assets
|
245 | 972 | ||||||
Income
tax receivable
|
45 | (60 | ) | |||||
Other
assets
|
132 | 120 | ||||||
Accounts
payable and other accrued expenses
|
(1,274 | ) | 3,963 | |||||
Deferred
revenue from gift cards
|
89 | 101 | ||||||
Tenant
improvements allowances
|
96 | 575 | ||||||
Net
cash used in operating activities of discontinued
operations
|
(931 | ) | (920 | ) | ||||
Net
cash provided by operating activities
|
2,171 | 5,538 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases
of property and equipment
|
(816 | ) | (3,676 | ) | ||||
Net
cash used in investing activities of discontinued
operations
|
(58 | ) | (206 | ) | ||||
Net
cash used in investing activities
|
(874 | ) | (3,882 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Net
borrowings under revolving line of credit
|
(5,976 | ) | (1,848 | ) | ||||
Cash
transferred into a restricted account
|
(4,660 | ) | - | |||||
Proceeds
on bridge facility
|
2,000 | - | ||||||
Repayment
of bridge facility
|
(2,000 | ) | - | |||||
Proceeds
from sale of common stock
|
3,052 | - | ||||||
Cash
paid for issuance costs
|
(310 | ) | 6 | |||||
Repayment
of capital lease obligation
|
54 | - | ||||||
Proceeds
from term loan
|
7,000 | - | ||||||
Payment
of deferred financing costs
|
(476 | ) | - | |||||
Net
cash used in financing activities of discontinued
operations
|
- | (50 | ) | |||||
Net
cash used in financing activities
|
(1,316 | ) | (1,892 | ) | ||||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(19 | ) | (236 | ) | ||||
CASH
AND CASH EQUIVALENTS:
|
||||||||
Beginning
of period
|
555 | 791 | ||||||
End
of period
|
$ | 536 | $ | 555 |
(Continued)
30
FREDERICK’S
OF HOLLYWOOD GROUP INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED JULY 31, 2010 AND JULY 25, 2009
(In
Thousands)
Year Ended
|
||||||||
July 31,
2010
(53 weeks)
|
July 25,
2009
(52 weeks)
|
|||||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid during period for:
|
||||||||
Interest
|
$ | 879 | $ | 688 | ||||
Taxes
|
$ | 119 | $ | 107 |
(Concluded)
See notes
to consolidated financial statements.
31
FREDERICK’S
OF HOLLYWOOD GROUP INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
THE
COMPANY AND BASIS OF PRESENTATION
|
Frederick’s
of Hollywood Group Inc. (the “Company”), through its subsidiaries,
sells women’s intimate 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.”
The
Company also designs, manufactures, distributes and sells women’s intimate
apparel to mass merchandisers, specialty and department stores, discount
retailers, national and regional chains and direct mail catalog marketers
throughout the United States and Canada. However, during the fourth
quarter of fiscal year 2010, the Company made a strategic decision to divest its
wholesale business due to continuing losses and in order to focus on its core
retail operations. These operations are classified herein as
discontinued operations (See Note 3).
On
December 18, 2006, the Company entered into an Agreement and Plan of Merger and
Reorganization, as amended, with Fred Merger Corp., a wholly-owned subsidiary of
the Company, and FOH Holdings, Inc., a Delaware corporation (“FOH
Holdings”). On January 28, 2008, the Company consummated its merger
with FOH Holdings (the “Merger”). As a result, FOH Holdings became a
wholly-owned subsidiary of the Company. Following the Merger, the
Company changed its name from Movie Star, Inc. to Frederick’s of Hollywood Group
Inc. References herein to “Movie Star” refer to the Company prior to
the Merger.
2.
|
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 revenues 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 and other intangible
assets;
|
|
·
|
estimation
of expected customer merchandise
returns;
|
|
·
|
estimation
of the net deferred income tax asset valuation allowance;
and
|
|
·
|
estimation
of deferred catalog costs and the 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 2010 and 2009 consist of the 53-week period ended July 31, 2010 and the
52-week period ended July 25, 2009, 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 31, 2010, the Company had $4,660,000 in restricted cash that can only be
used to reduce its revolving credit facility (See Note 9).
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
$970,000 and $1,156,000 at July 31, 2010 and July 25, 2009,
respectively.
32
Merchandise
Inventories – Retail 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. Store and Direct inventories
consist entirely of finished goods. Freight costs are included in
inventory and vendor promotional 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. Additionally, the Company accrues for planned but unexecuted
markdowns. If actual market conditions are less favorable than those
projected by management, additional inventory reserves may be
required. 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
$278,000 and $297,000 at July 31, 2010 and July 25, 2009,
respectively.
Deferred Catalog
Costs – Deferred catalog costs represent direct-response advertising that
is capitalized and amortized over its expected period of future
benefit. Direct-response advertising consists primarily of product
catalogs of FOH Holdings’ mail order subsidiary. The capitalized
costs of the advertising are amortized over the expected revenue stream
following the mailing of the respective catalog, which is generally six
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
net revenues. Direct-response advertising
costs of $1,488,000 and $1,751,000 are included in prepaid expenses and other
current assets in the accompanying consolidated balance sheets at July 31, 2010
and July 25, 2009, respectively. Management believes that they have
appropriately determined the expected period of future benefit as of the date of
its 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 31, 2010 and July 25, 2009 were $9,775,000 and $11,903,000,
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 $188,000 and $44,000 for the years
ended July 31, 2010 and July 25, 2009, respectively, and were included
in interest expense in the accompanying consolidated statements of
operations.
Impairment of
Long-Lived Assets – The Company reviews long-lived assets, including
property and equipment and its amortizable intangible assets, 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. 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 $1,705,000 and $174,000 for the years ended July 31, 2010 and July
25, 2009, respectively.
Goodwill and
Intangible Assets – The Company
has certain intangible assets and had goodwill. Intangible assets consist
of trademarks, principally the Frederick’s of Hollywood trade name, customer
relationships and domain names recognized in accordance with purchase
accounting. Goodwill represented the portion of the purchase price that
could not be attributed to specific tangible or identified intangible assets
recorded in connection with purchase accounting. Goodwill was not
deductible for tax purposes. The customer relationships were
amortized by an accelerated method based upon customer retention
rates.
33
The
Company has determined the trademarks and domain names to have indefinite
lives. Applicable accounting guidance requires the Company to not
amortize goodwill and certain other 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.
As the
Company’s market capitalization was significantly below its book value at
January 24, 2009, the Company performed an impairment analysis. The
Company determined that the goodwill balance was impaired as a result of its
then current and future projected financial results due to the poor
macroeconomic outlook. Accordingly, the Company recorded a goodwill
impairment charge of $6,678,000 in the second quarter of fiscal year
2009. After recognizing the impairment charge, the Company had no
remaining goodwill on its consolidated balance sheet.
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 debt approximates fair value
because the transactions contemplated by the financing agreement relating to
this debt was consummated on July 30, 2010 (See Note 9).
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.
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 literature 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 at the point of sale for Stores and at the time of
estimated receipt by the customer for Direct sales. Outbound shipping
charges billed to customers are included in net sales. The Company
records an allowance for estimated returns from its retail consumers in the
period of sale based on prior experience. At July 31, 2010 and July
25, 2009, the allowance for estimated returns from the
Company's retail customers was $868,000 and $947,000,
respectively. If actual returns are greater than those expected,
additional sales returns may be recorded in the future. Sales are
recorded net of sales taxes collected from customers at the time of the
transaction.
The
Company records other revenues for shipping revenues, as well as for commissions
earned on direct sell-through programs on a net basis as the Company acts as an
agent on behalf of the related vendor. For the years ended July 31, 2010 and
July 25, 2009, total other revenues recorded in net sales in the accompanying
consolidated statements of operations were $8,017,000 and $9,037,000,
respectively.
34
Gift
certificates and gift cards sold are carried as a liability and revenue is
recognized when the gift certificate or card is redeemed. Store
credits may be given to customers in exchange for returned goods and are
carried as a liability until redeemed. To date, the Company has not recognized
any revenue associated with breakage from the gift certificates, gift cards or
store credits because they do not have expiration dates.
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.
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 store, catalog, and internet selling 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 31, 2010 and July 25, 2009, the Company recorded
advertising costs of approximately
$4,473,000 and $4,917,000, respectively.
Net Loss Per
Share – Basic net loss per share is computed by dividing net loss
applicable to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted net loss per share also
includes the dilutive effect of potential common shares outstanding during the
period from stock options, warrants and convertible preferred
stock.
Foreign Currency
Translation – The assets and liabilities of the Company’s Canadian
subsidiary, Cinejour Lingerie Inc. (“Cinejour”), are translated into U.S.
dollars at current exchange rates on the balance sheet date and revenue and
expenses are translated at average exchange rates for the respective
years. The net exchange differences resulting from these translations
are recorded as a translation adjustment which is a component of shareholders’
equity. Cinejour’s functional currency is 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 $20,000 and $248,000 at
July 25, 2009 and July 26, 2008, respectively, relating to purchases of property
and equipment. At July 31, 2010, there are no amounts outstanding in
accounts payable and accrued expenses relating to purchases of property and
equipment. During the year ended July 31, 2010, the Company acquired
equipment through a capital lease for $167,000. Also during the years ended July
31, 2010 and July 25, 2009, the Company accrued dividends of $430,000 and
$584,000, respectively, on its Series A 7.5% Convertible Preferred Stock
(“Series A Preferred Stock”). During the year ended July 31, 2010,
the Company completed an exchange of long-term debt – related party and
conversion of Series A Preferred Stock, including accrued interest and
dividends, that resulted in a noncash adjustment to shareholders’ equity of
$23,080,000 (See Note 10).
Segment
Reporting – The Company
has one reportable segment representing the aggregation of its three operating
segments (retail stores, catalog, and Internet). The three operating
segments have been aggregated and are presented as one reportable segment, based
on their similar economic characteristics, products, production processes, and
target customers.
Concentrations – The Company
has two major vendors that individually exceeded 10% of total purchases in
fiscal year 2010. These suppliers combined represented approximately 33.1% and
individually accounted for approximately 22.4% and 10.8% of total purchases in
fiscal year 2010. The Company does not believe that the loss of any
one of these vendors would adversely impact its operations.
35
Reclassifications
– We have revised our previously reported consolidated balance sheet for
the year ended July 25, 2009 to separate the “deferred revenue from gift cards”
from “accounts payable and other accrued expenses.” Consistent with
the change in presentation, we have also revised our consolidated statement of
cash flows for the year ended July 25, 2009 to reflect the change in deferred
revenue from gift cards. These reclassifications are not considered
material to the consolidated financial statements.
Recently Issued
Accounting
Pronouncements – In
June 2009, the Financial Accounting Standards Board (“FASB”) amended its
guidance on accounting for variable interest entities which replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity
with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses
of the entity or the right to receive benefits from the entity. The new guidance
becomes effective for annual periods beginning after November 15, 2009 and for
interim periods within those fiscal years. The Company does not expect the
adoption of this guidance, effective August 1, 2010, to have a material impact
on its consolidated financial statements.
3.
|
DISCONTINUED
OPERATIONS
|
During
the fourth quarter of fiscal year 2010, the Company made a strategic decision to
divest its wholesale business to focus on its core retail
operations. The plan of disposition is expected to be completed prior
to the end of the next fiscal year. Therefore the Company has
reclassified its consolidated financial statements to reflect the divesting of
its wholesale operations and to segregate the revenues, costs and expenses,
assets and liabilities and cash flows of this business. The net
operating results, net assets and liabilities and net cash flows of the
wholesale operations have been reported as “discontinued operations” in the
accompanying consolidated financial statements.
Revenues
from discontinued operations were $20,153,000 and $34,500,000 for the years
ended July 31, 2010 and July 25, 2009, respectively. Net losses from
discontinued operations were approximately $12,357,000, net of a tax benefit of
$1,462,000 for the year ended July 31, 2010, and $20,554,000, net of a tax
provision of $45,000 for the year ended July 25, 2009.
The loss
from discontinued operations for the year ended July 31, 2010 included an
impairment charge to fixed assets of $428,000 and a write-down of intangible
assets of $5,351,000. For the year ended July 25, 2009, the loss from
discontinued operations included a write-down of goodwill of
$12,422,000.
The
current liabilities of the discontinued operations are comprised of accounts
payable and accrued expenses. The components of the assets of the
discontinued operations at July 31, 2010 and July 25, 2009 consist of the
following (in thousands):
2010
|
2009
|
|||||||
Accounts
receivable, net
|
$ | 1,452 | $ | 1,263 | ||||
Merchandise
inventories
|
2,733 | 6,592 | ||||||
Current
assets of discontinued operations
|
$ | 4,185 | $ | 7,855 | ||||
Intangible
assets, net
|
$ | 915 | $ | 6,947 | ||||
Property
and equipment
|
45 | 1,203 | ||||||
Long-term
assets of discontinued operations
|
$ | 960 | $ | 8,150 |
4.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment at July 31, 2010 and July 25, 2009 consist of the following
(in thousands):
2010
|
2009
|
|||||||
Furniture
and fixtures
|
$ | 5,600 | $ | 6,290 | ||||
Computer
equipment and software
|
4,867 | 5,454 | ||||||
Leasehold
improvements.
|
19,097 | 21,064 | ||||||
Construction
in progress
|
224 | 290 | ||||||
29,788 | 33,098 | |||||||
Less
accumulated depreciation and amortization
|
15,927 | 13,638 | ||||||
Property
and equipment – net
|
$ | 13,861 | $ | 19,460 |
36
Depreciation
and amortization expense related to property and equipment was $4,207,000 and
$4,441,000 for the years ended July 31, 2010 and July 25, 2009,
respectively.
5.
|
INTANGIBLE
ASSETS
|
The
following summarizes the Company’s intangible assets at July 31, 2010 and July
25, 2009 (in thousands):
2010
|
2009
|
|||||||
Trademarks
|
$ | 18,090 | $ | 18,090 | ||||
Customer
relationships
|
- | 889 | ||||||
Domain
names
|
169 | 169 | ||||||
18,259 | 19,148 | |||||||
Less
accumulated amortization on customer relationships
|
- | 889 | ||||||
Intangibles
– net.
|
$ | 18,259 | $ | 18,259 |
Aggregate
amortization expense for the customer relationships was $126,000 for the year
ended July 25, 2009. As of July 25, 2009, all remaining intangible
assets have an indefinite life.
6.
|
PREPAID
EXPENSES AND OTHER CURRENT ASSETS AND ACCOUNTS PAYABLE AND OTHER ACCRUED
EXPENSES
|
Prepaid
expenses and other current assets and accounts payable and other accrued
expenses at July 31, 2010 and July 25, 2009 consist of the following (in
thousands):
2010
|
2009
|
|||||||
Prepaid
expenses and other current assets:
|
||||||||
Deferred
catalog costs
|
$ | 1,488 | $ | 1,751 | ||||
Other
|
810 | 792 | ||||||
Total
|
$ | 2,298 | $ | 2,543 | ||||
Accounts
payable and accrued expense:
|
||||||||
Accounts
payable
|
$ | 13,332 | $ | 10,552 | ||||
Accrued
payroll and benefits
|
1,035 | 578 | ||||||
Accrued
vacation
|
1,308 | 1,371 | ||||||
Accrued
preferred stock dividend
|
- | 865 | ||||||
Return
reserves
|
946 | 1,091 | ||||||
Accrued
rent
|
51 | 1,431 | ||||||
Sales
and other taxes payable
|
687 | 627 | ||||||
Miscellaneous
accrued expense and other
|
2,839 | 3,699 | ||||||
Total
|
$ | 20,198 | $ | 20,214 |
7.
|
INCOME
TAXES
|
The
provision for income taxes on continuing operations for the years ended July 31,
2010 and July 25, 2009 consists of the following (in thousands):
Year Ended
|
||||||||
July 31, 2010
|
July 25, 2009
|
|||||||
Current:
|
||||||||
Federal
|
$ | (33 | ) | $ | - | |||
State
|
79 | 86 | ||||||
Foreign
|
1 | 1 | ||||||
$ | 47 | $ | 87 |
37
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 31, 2010 and July 25, 2009 are as follows:
Year Ended
|
||||||||
July 31, 2010
|
July 25, 2009
|
|||||||
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
|
1.2 | 2.0 | ||||||
Goodwill
impairment
|
0.0 | (20.9 | ) | |||||
Income
from debt conversion (see Note 10)
|
(20.5 | ) | - | |||||
Other
nondeductible expense
|
(0.3 | ) | (0.3 | ) | ||||
Valuation
allowance
|
(14.9 | ) | (15.4 | ) | ||||
Effective
tax rate
|
(0.5 | )% | (0.6 | )% |
The major
components of the Company’s net deferred income tax liability at July 31, 2010
and July 25, 2009, inclusive of deferred income taxes related to continuing and
discontinued operations, are as follows (in thousands):
July 31,
2010
|
July 25,
2009
|
|||||||
Deferred
tax assets:
|
||||||||
Merchandise
inventories
|
$ | 1,223 | $ | 1,981 | ||||
Net
operating loss and other tax attribute carryforwards
|
16,949 | 13,606 | ||||||
Accrued
vacation and bonuses
|
653 | 625 | ||||||
Deferred
rent
|
1,452 | 1,347 | ||||||
Deferred
revenue
|
712 | 677 | ||||||
Stock
based compensation
|
1,465 | 1,158 | ||||||
Other
|
502 | 584 | ||||||
Valuation
allowance
|
(22,081 | ) | (16,861 | ) | ||||
875 | 3,117 | |||||||
Deferred
tax liabilities:
|
||||||||
Trademark
|
(7,502 | ) | (9,036 | ) | ||||
Difference
between book and tax basis of fixed assets
|
(574 | ) | (1,965 | ) | ||||
Customer
relationship
|
(100 | ) | (979 | ) | ||||
Other
|
(201 | ) | (173 | ) | ||||
(8,377 | ) | (12,153 | ) | |||||
Net
deferred income tax liability
|
$ | (7,502 | ) | $ | (9,036 | ) |
As a
result of cumulative losses, management concluded that it is not more likely
than not that the Company will realize certain deferred income tax assets.
As a result, the Company established a valuation allowance in fiscal years
2010 and 2009 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
liability on trademarks which is not expected to reverse in the same periods as
the deferred tax assets. Therefore, as of July 31, 2010 and July 25, 2009,
valuation allowances have been recorded in the amounts of $22,081,000 and
$16,861,000, respectively. The valuation allowance increased by $5,220,000
and $5,957,000 for the years ended July 31, 2010 and July 25, 2009,
respectively.
The
Company has a federal net operating loss carryforward of $42,372,000 at July 31,
2010 that will expire from 2024 to 2030. The Company also has state net
operating loss carryforwards in various states that have different
expiration dates depending on the state.
38
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 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.
Although
the Company acquired FOH Holdings, for tax purposes Movie Star was considered to
have been acquired. Accordingly, the Company has also concluded that it
underwent a change in control under Section 382 with respect to the acquisition
of 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 31, 2010 is as follows (in thousands):
Unrecognized
tax benefit as of July 26, 2009
|
$ | 1,236 | ||
Increases:
|
||||
Tax
positions in current period
|
171 | |||
Tax
positions in prior period
|
- | |||
Decreases:
|
||||
Tax
positions in prior periods
|
(18 | ) | ||
Lapse
of statute limitations
|
- | |||
Settlements
|
- | |||
Unrecognized
tax benefit as of July 31, 2010
|
$ | 1,389 |
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 31, 2010, 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 2011 provision for income taxes related
to unrecognized tax benefits.
The
Company is subject to examination by taxing authorities in the various
jurisdictions in which it files tax returns. FOH Holdings is periodically under
examination by the Internal Revenue Service. 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 has 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.
39
8.
|
UNREGISTERED
SALE OF EQUITY SECURIITIES
|
On March
16, 2010, the Company completed a private placement (“Private Placement”)
to accredited investors of 2,907,051 shares of common stock at $1.05 per share,
raising total gross proceeds of approximately $3,052,000. The investors in
the Private Placement also received two-and-a-half year Series A warrants to
purchase up to an aggregate of 1,162,820 shares of common stock at an exercise
price of $1.25 per share, and five-year Series B warrants to purchase up to an
aggregate of 1,162,820 shares of common stock at an exercise price of $1.55 per
share. Both warrants became exercisable on September 16, 2010, the six-month
anniversary of the closing date. Each of the Series A and Series B
warrants are callable for $0.01 per warrant commencing 30 days after their
initial exercise date if the Company’s stock price exceeds $2.25 per share and
$3.10 per share, respectively, for seven consecutive trading days and the
average daily volume during such period exceeds 100,000 shares per trading day.
Additionally, the Series B warrants may be exercised by the holders on a
cashless basis.
Avalon
Securities Ltd. (“Avalon”) acted as placement agent in the
transaction. Upon the closing, the Company paid Avalon approximately
$198,000 in cash commissions and issued to Avalon and its designees warrants to
purchase an aggregate of 218,030 shares of common stock at an exercise price of
$1.21 per share. Except for the exercise price, these warrants are
identical to the Series B warrants issued to investors in the Private
Placement. In addition, the Company paid approximately $111,000 in other
fees related to the Private Placement, $41,000 of which was paid to Avalon in
consulting fees.
Pursuant
to the anti-dilution adjustment provisions contained in the Company’s Amended
and Restated Certificate of Incorporation governing the terms of the Company’s
Series A Preferred Stock, following the Private Placement, the number of shares
of common stock issuable upon conversion of the Series A Preferred Stock was
increased from 1,512,219 shares to 1,622,682 shares. All of the
outstanding shares of Series A Preferred Stock were converted into common stock
in connection with the Exchange and Conversion Agreement (defined
below). Additionally, pursuant to the anti-dilution adjustment
provisions contained in the warrants issued to Fursa Alternative Strategies LLC
(“Fursa”) and Tokarz Investments, LLC. (“Tokarz”), the number of shares of
common stock issuable upon exercise of such warrants was increased from an
aggregate of 596,592 shares to an aggregate of 635,076 shares and the exercise
price of such warrants was decreased from $3.52 per share to $3.31 per
share.
9.
|
FINANCING
AGREEMENTS
|
Revolving
Credit and Bridge Facilities
The
Company and certain of its subsidiaries (collectively, the
“Borrowers”) have a senior credit facility, as amended (the “Facility”)
with Wells Fargo Retail Finance II, LLC (“Wells Fargo”), which matures on
January 28, 2012. The Facility originally was for a maximum amount of $50
million comprised of a $25 million line of credit with a $15 million sub-limit
for letters of credit, and up to an additional $25 million commitment in
increments of $5 million at the option of the Company so long as the Company is
in compliance with the terms of the Facility. The Facility also originally
was secured by a first priority security interest in all of the Borrowers’
assets.
The
actual amount of credit available under the Facility is determined using
measurements based on the Company’s receivables, inventory and other
measures. The applicable percentages used in calculating the
borrowing base under the Facility were reduced on March 16, 2010 following the
closing of the Private Placement. Interest is 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. There also is a fee of 50 basis points on any unused portion
of the Facility.
On
November 4, 2008, the Company utilized the accordion feature under the Facility
to increase the borrowing limit from $25 million to $30 million. In
utilizing the accordion feature, the Company’s minimum availability reserve
increased by $375,000 (7.5% of the $5,000,000 increase) to $2,250,000 (7.5% of
the $30,000,000) and the Company incurred a one-time closing fee of
$12,500.
On
September 21, 2009, the Facility was amended to provide for a $2,000,000 bridge
facility at an annual interest rate of LIBOR plus 10% (the “Bridge Loan”), to be
repaid upon the earlier of December 7, 2009 and the consummation of a financing
in which the Company received net proceeds of at least $4,900,000. On
October 23, 2009, the Facility was further amended to extend the December 7,
2009 repayment date to August 1, 2010 and to reduce the net proceeds that the
Company was required to receive to an aggregate of $4,400,000.
On July
30, 2010, the Company repaid the Bridge Loan with proceeds from the Term Loan
described below. In connection therewith, the Facility was amended
to, among other things, (i) reduce the line of credit commitment from $25
million to $20 million and (ii) provide for the Facility to be 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.
40
In
connection with the amendments to the Facility described above, the Company
incurred a one-time amendment fee of $150,000, one half of which was paid in
connection with the September 2009 amendment to the Facility and the remainder
was paid subsequent to the fiscal year ended July 31, 2010 following the
repayment of the Bridge Loan.
As of
July 31, 2010, the Company had (i) $2,269,000 outstanding under the Facility at
a Base Rate of 5.0% and (ii) $1,000,000 outstanding under the Facility at a
LIBOR Rate of 3.43%. For the year ended July 31, 2010, borrowings
under the Facility (including the Bridge Loan) peaked at $16,996,000 and the
average borrowing during the period was approximately $11,435,000. In
addition, at July 31, 2010, the Company had $1,664,000 of outstanding letters of
credit under the Facility.
As of
July 25, 2009, the Company had $9,245,000 outstanding under the Facility at a
rate of 3.0%. For the year ended July 25, 2009, borrowings under the
Facility peaked at $26,436,000 and the average borrowing during the period was
approximately $14,404,000. In addition, at July 25, 2009, the Company
had $1,528,000 of outstanding letters of credit under the Facility.
The
Facility contains customary representations and warranties, affirmative and
restrictive covenants and events of default. The restrictive
covenants limit the Company’s 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, dispose of
inventory, incur certain lease obligations, make capital expenditures, pay
dividends, redeem or repurchase outstanding equity and issue capital
stock. In lieu of financial covenants, fixed charge coverage and
overall debt ratios, the Company also is required to maintain specified minimum
availability reserves. At July 31, 2010, the Company was in compliance with the
Facility’s covenants and minimum availability reserve requirements.
Term
Loan
On July
30, 2010, the Borrowers entered into a financing agreement (the “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 provides for a term loan in the aggregate principal
amount of $7,000,000 (“Term Loan”). From the Term Loan proceeds,
$2,000,000 was used to repay the Bridge Loan with the balance to be available to
the Borrowers for additional working capital.
One-half
of the principal amount of the Term Loan, together with accrued interest, is
payable by the Borrowers on July 30, 2013 (the “Initial Maturity Date”) and the
other half of the principal amount of the Term Loan, together with accrued
interest, is payable on July 30, 2014 (the “Maturity Date”). The Term
Loan bears interest at a fixed rate of 9.0% per annum (“Regular Interest”) and
an additional 6.0% per annum compounded annually (“PIK
Interest”). Regular Interest is payable quarterly, in arrears, on the
first day of each calendar quarter, commencing on October 1, 2010 and at
maturity. PIK Interest is 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.
The Term
Loan is 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, all in accordance with the terms and
conditions of a Security Agreement between the Borrowers and Hilco entered into
concurrently with the Hilco Financing Agreement. Also, concurrently
with the Hilco Financing Agreement, Hilco and Wells Fargo entered into an
Intercreditor Agreement, acknowledged by the Borrowers, setting forth, among
other things, their respective rights and obligations as to the collateral
covered by the Security Agreement. The obligations of the Borrowers’
under the Hilco Financing Agreement are also guaranteed by a wholly-owned
subsidiary of the Company that is not a Borrower under the Hilco Financing
Agreement.
The Hilco
Financing Agreement and other loan documents contain customary representations
and warranties, affirmative and negative covenants and events of default
substantially similar to those contained in the Facility, except that the Hilco
Financing Agreement contains a debt service coverage ratio covenant, which
becomes effective commencing for the fiscal year ending July 30,
2011. The restrictive covenants limit 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, dispose of inventory, incur certain lease
obligations, make capital expenditures, pay dividends, redeem or repurchase
outstanding equity and issue capital stock. The Company paid a
one-time fee of $280,000 in connection with the closing of the Term
Loan.
41
Future
Financing Requirements
For the
year ended July 31, 2010, our working capital deficiency decreased by $264,000
to ($2,530,000). As the Company’s business continues to be effected by limited
working capital, management plans to carefully manage working capital and
continue to look for ways to improve the Company’s working capital
position. Management believes that the available borrowings under the
Facility, along with projected operating cash flows and the proceeds from the
sale of the wholesale division, will be sufficient to cover the Company’s
working capital requirements and capital expenditures through the end of fiscal
year 2011. The Company’s ability to achieve its fiscal year 2011
business plan is critical to maintaining adequate liquidity. There
can be no assurance that the Company will be successful in its
efforts.
10.
|
LONG-TERM
DEBT – RELATED PARTY AND PREFERRED STOCK
CONVERSION
|
Background
Preferred
Stock
On
January 28, 2008, the Company issued an aggregate of 3,629,325 shares of Series
A 7.5% Convertible Preferred Stock to Fursa in exchange for a $7,500,000 portion
of the debt owed by FOH Holdings and its subsidiaries. The Series A
Preferred Stock was convertible at any time at the option of the holders into an
aggregate of 1,512,219 shares of common stock, subject to
adjustment. Pursuant to the anti-dilution adjustment provisions
contained in the Company’s Amended and Restated Certificate of Incorporation
governing the terms of the Series A Preferred Stock, following the Private
Placement, the number of shares of common stock issuable upon conversion of the
Series A Preferred Stock was increased from 1,512,219 shares to 1,622,682 shares
(see Note 8). Preferred stock dividends for the years ended July 31,
2010 and July 25, 2009 were $430,000 and $584,000, respectively. As
of July 25, 2009, the Company had accrued dividends of $865,000.
Warrants
Also on
January 28, 2008, as sole consideration for their commitments to act as standby
purchasers in connection with the Company’s $20 million rights offering, the
Company issued to Fursa and Tokarz warrants to purchase an aggregate of 596,592
shares of common stock, subject to adjustment. Pursuant to the
anti-dilution adjustment provisions contained in the warrants, following the
Private Placement, the number of shares of common stock issuable upon exercise
of the warrants was increased from an aggregate of 596,592 shares to an
aggregate of 635,076 shares and the exercise price was decreased from $3.52 per
share to $3.31 per share (see Note 8). The warrants expire on January
28, 2011.
Tranche
C Debt
As of
July 25, 2009, the Company also had $13,336,000 of secured long-term debt due to
Fursa (“Tranche C Debt”), which was scheduled to mature on July 28,
2012. This debt bore interest at the fixed rate of 7% per annum with
1% payable in cash and 6% payable in kind. In-kind interest on the Tranche C
Debt was $721,000 and $775,000 for the years ended July 31, 2010 and July 25,
2009, respectively. As of July 25, 2009, the Company had accrued the
unpaid related-party interest due in cash of $192,000 in accounts payable and
accrued expenses in the accompanying consolidated balance sheets.
Exchange
of Long-Term Debt – Related Party and Preferred Stock Conversion
On May
18, 2010, the Company completed the transactions contemplated by the Debt
Exchange and Preferred Stock Conversion Agreement, dated as of February 1, 2010
(“Exchange and Conversion Agreement”), with accounts and funds managed by and/or
affiliated with Fursa.
At the
closing, the Company issued to Fursa an aggregate of 8,664,373 shares of common
stock upon exchange of approximately $14,285,000 of outstanding Tranche C Debt
and accrued interest, and conversion of approximately $8,795,000 of Series A
Preferred Stock, including accrued dividends, representing all of the
outstanding shares of Series A Preferred Stock, at an effective price of
approximately $2.66 per share.
42
The
Company also issued to Fursa three, five and seven-year warrants, each to
purchase 500,000 shares of common stock (for an aggregate of 1,500,000 shares of
common stock) at exercise prices of $2.00, $2.33 and $2.66 per share,
respectively. The warrants are exercisable for cash or on a cashless
basis, at Fursa’s option. At any time after the first anniversary of
the issuance date, the Company may redeem the warrants, in whole but not in
part, upon not less than 20 business days’ written notice to Fursa, at a
redemption price of $0.01 per share, if the last sale price of the common stock
is at least 200% of the exercise price of the warrants for 10 consecutive
trading days ending on the day prior to the date on which notice of redemption
is given to Fursa. Following the transaction, Fursa’s aggregate
beneficial ownership of the Company’s common stock increased from approximately
33% to approximately 47%. As Fursa is a related party, the transaction resulted
in an increase to shareholders’ equity of $23,080,000.
11.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases – The Company
leases its store, warehouse, and office facilities under operating lease
agreements expiring on various dates through 2020. Some of these leases require
the Company to make periodic payments for property taxes, utilities and common
area operating expenses. 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. Aggregate minimum rental
commitments for continuing operations
under all
non-cancelable leases in effect as of
July 31, 2010 were as follows (in
thousands):
Fiscal Years Ending
|
||||
2011
|
$ | 12,093 | ||
2012
|
11,180 | |||
2013
|
10,278 | |||
2014
|
9,250 | |||
2015
|
8,002 | |||
Thereafter
|
16,279 | |||
$ | 67,082 |
Obligations
for various facilities classified as discontinued operations, which is comprised
of leases expiring during fiscal year 2011 will be $651,000 for the fiscal year
ending 2011.
Rental
expense for the years ended July 31, 2010 and July 25, 2009 consists of the
following (in thousands):
Year Ended
|
||||||||
July 31, 2010
|
July 25, 2009
|
|||||||
Minimum
rentals
|
$ | 12,738 | $ | 12,430 | ||||
Contingent
rentals
|
222 | 220 | ||||||
Total
rental expense
|
$ | 12,960 | $ | 12,650 |
Capital
Leases – In November
2009, the Company entered into a non-cancelable capital lease for store
equipment. The present value of the net minimum lease payments was
$124,000 on the consolidated balance sheet as of July 31, 2010. The
current portion of the capital lease obligation is $54,000 and is included in
accounts payable and accrued expenses on the consolidated balance sheets as of
July 31, 2010. The minimum rental commitment under capital leases is
$63,000 for the fiscal years ending 2011 and 2012 and $5,000 for the fiscal year
ending 2013.
Employment
Contracts – The Company has entered into various employment agreements
expiring at various dates through January 2014. Future commitments as
of July 31, 2010 consist of the following (in thousands):
Fiscal Years Ending
|
||||
2011
|
$ | 1,504 | ||
2012
|
$ | 1,251 | ||
2013
|
$ | 1,047 | ||
2014
|
$ | 237 | ||
$ | 4,039 |
43
State Sales
Taxes – The Company sells its products through three channels –
retail stores, mail order catalogs, and the Internet. 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 – 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.
12.
|
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 975,974 shares at an
average exercise price of $2.38 per share were outstanding as of July 31, 2010,
of which 824,380 shares were exercisable. Options to purchase 975,974
shares at an average exercise price of $2.38 per share were outstanding as of
July 25, 2009, of which 671,668 shares were exercisable. Options can
no longer be granted under the 2003 Employee Equity Incentive Plan.
In
connection with the Merger, the Company assumed Movie Star’s 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 732,500 shares at an
average exercise price of $0.96 per share were outstanding at July 31, 2010, of
which 362,500 shares were exercisable. Options to purchase 522,500
shares at an average exercise price of $0.99 per share were outstanding at July
25, 2009, of which 210,000 shares were exercisable. In fiscal years
2010 and 2009, options to purchase 210,000 and 360,000 shares, respectively,
were granted under this plan.
In
connection with the Merger, the Company assumed Movie Star’s 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 connection with the Merger, 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 681,750 shares at an average exercise
price of $2.47 per share were outstanding at July 31, 2010, of which 533,250
shares were exercisable. Options to purchase 731,750 shares at an
average exercise price of $2.47 per share were outstanding at July 25, 2009, of
which 600,750 shares were exercisable. In fiscal years 2010 and 2009,
options to purchase 62,500 and 127,500 shares, respectively, were granted under
this plan.
Subject
to shareholder approval, the Company’s Board of Directors adopted the 2010
Long-Term Incentive Equity Plan (including an Incentive Stock Option Plan) on
June 29, 2010. The 2010 Long-Term Incentive Equity Plan 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. In fiscal
year 2010, options to purchase 600,000 shares were granted to the Company’s
Chief Executive Officer at an exercise price of $0.78 per
share. These options were outstanding but not exercisable as of July
31, 2010.
44
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 25, 2009
|
2,230,224 | $ | 2.08 | ||||||||||
Exercised
|
- | - | |||||||||||
Issued
|
872,500 | $ | 0.82 | ||||||||||
Forfeited
|
(112,500 | ) | $ | 1.68 | |||||||||
Outstanding as of July 31,
2010
|
2,990,224 | $ | 1.73 |
7.0 years
|
$ | 314,000 | |||||||
Exercisable on July 31,
2010
|
1,720,130 | $ | 2.21 |
5.4 years
|
$ | 133,000 |
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 31, 2010 and July 25, 2009:
Year ended
|
||||
July 31, 2010
|
July 25, 2009
|
|||
Risk-free
interest rate
|
2.43%
- 3.00%
|
1.99%
- 3.34%
|
||
Expected
life (years)
|
7.0
|
5.0
– 7.0
|
||
Expected
volatility
|
76
– 79%
|
60
– 72%
|
||
Dividend
yield
|
0.0%
|
0.0%
|
No
options were exercised during the year ended July 31, 2010, and 16,668 options
originally granted under Movie Star’s 2000 Performance Equity Plan were
exercised at an exercise price of $0.37 per share during the year ended
July 25, 2009. The total fair value of shares vested during the years
ended July 31, 2010 and July 25, 2009 was $505,000 and $440,000,
respectively.
A summary
of the status of the Company’s non-vested shares as of July 31, 2010, and
changes during the year ended July 31, 2010, is presented below:
Shares
(in thousands)
|
Weighted-Average
Grant
Date Fair Value
|
|||||||
Non-vested
shares:
|
||||||||
Non-vested
at July 25, 2009
|
746,692 | $ | 1.11 | |||||
Granted
|
872,500 | .44 | ||||||
Vested
|
(336,598 | ) | 1.12 | |||||
Forfeited
|
(12,500 | ) | .85 | |||||
Non-vested
at July 31, 2010
|
1,270,094 | $ | .74 |
All stock
options are granted at fair market value of the common stock at grant
date. As of July 31, 2010, there was approximately $695,000 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 2.5 years.
During
the year ended July 31, 2010, the Company granted to two of its officers and
certain other employees options to purchase an aggregate of 872,500 shares of
common stock. Options to purchase 62,500 shares were granted under
the 2000 Performance Equity Plan, options to purchase 210,000 shares were
granted under the 1988 Non-Qualified Stock Option Plan and options to purchase
600,000 shares were granted under the 2010 Long-Term Incentive Equity Plan.
The 2010 Long-Term Incentive Equity Plan is subject to shareholder
approval. These options are identified as follows:
45
Number
|
Exercise
|
||||||
of Options
|
Price
|
Vesting Period
|
|||||
600,000
|
$ | 0.78 |
25%
at January 2, 2012, 33.3% at January 2, 2013 and 41.7% at January 2,
2014
|
||||
100,000
|
$ | 0.84 |
25%
on each of the first and second anniversary dates and 50% on the third
anniversary date
|
||||
60,000
|
$ | 0.80 |
25%
on each of the first and second anniversary dates and 50% on the third
anniversary date
|
||||
50,000
|
$ | 1.12 |
20%
each year over 5 years
|
||||
37,500
|
(1)
|
$ | 1.16 |
20%
each year over 5 years
|
|||
25,000
|
$ | 0.76 |
20%
each year over 5
years
|
(1) 12,500
of these options were forfeited as of July 31, 2010.
During
the year ended July 25, 2009, the Company granted to two of its officers and
certain other employees options to purchase an aggregate of 127,500 shares of
common stock under the 2000 Performance Equity Plan and options to purchase
360,000 shares of common stock under the 1988 Non-Qualified Stock Option
Plan. These options are identified as follows:
Number
|
Exercise
|
Vesting
|
||||
of Options
|
Price
|
Period
|
||||
120,000
|
$ | 0.38 |
immediately
vested
|
|||
25,000
|
$ | 0.96 |
in
full after six months
|
|||
25,000
|
$ | 0.37 |
monthly
over six months
|
|||
240,000
|
$ | 0.38 |
50%
at January 2, 2010 and 50% at January 2, 2011
|
|||
57,500
|
$ | 0.87 |
20%
each year over 5 years
|
|||
20,000
|
$ | 0.17 |
20%
each year over 5
years
|
Restricted
Shares and Share Grants
During
the year ended July 31, 2010, the Company issued to two officers and one
employee 325,000 shares of restricted common stock pursuant to the terms and
conditions of the Company’s 2000 Performance Equity Plan. These
restricted shares are identified as follows:
Number
|
||||||
of Restricted
Shares
|
Price
|
Vesting Period
|
||||
150,000
|
$ | 0.78 |
1/3
each anniversary date January 2, 2012, 2013 and 2014
|
|||
100,000
|
$ | 0.84 |
25%
on each of the first and second anniversary dates and 50% on the third
anniversary date
|
|||
75,000
|
$ | 0.80 |
25%
on each of the first and second anniversary dates and 50% on the third
anniversary
date
|
During
the year ended July 25, 2009, the Company issued to one officer 100,000 shares
of restricted common stock pursuant to the terms and conditions of the Company’s
2000 Performance Equity Plan at a price of $0.38 per share. 50,000
shares vested on January 2, 2010 and 50,000 shares will vest on January 2, 2011
provided that this officer is employed by the Company. The vesting
was subject to the officer purchasing an aggregate of 250,000 shares of common
stock in the open market in accordance with the terms of a 10b5-1 trading
plan. The officer has completed the purchase of these
shares.
46
Total
expense related to restricted shares and share grants during the years ended
July 31, 2010 and July 25, 2009 was approximately $262,000 and $386,000,
respectively.
13.
|
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 2010. The Company’s
continuing operations made a contribution of $52,000 and the Company’s
discontinued operations made contributions of $22,000 for the year ended July
25, 2009.
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 are being
distributed to each employee according to his or her direction and the
applicable Plan rules and all participants with a balance are eligible for a
distribution. As of July 31, 2010 and July 25, 2009, there was a
balance of 41,318 and 61,933 shares of common stock, respectively, remaining in
the Plan.
14.
|
NET
LOSS PER SHARE
|
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 31,
|
July 25,
|
|||||||
2010
|
2009
|
|||||||
Net
loss from continuing operations
|
$ | (9,237 | )(a) | $ | (14,077 | )(b) | ||
Net
loss from discontinued operations
|
$ | (12,357 | ) | $ | (20,554 | ) | ||
Basic
and Diluted:
|
||||||||
Weighted
average number of shares outstanding
|
29,272 | 26,272 | ||||||
Basic
and diluted loss per share from continuing operations
|
$ | (.32 | ) | $ | (.54 | ) | ||
Basic
and diluted net loss per share from discontinued
operations
|
$ | (.42 | ) | $ | (.78 | ) | ||
Total
basic and diluted net loss per share
|
$ | (.74 | ) | $ | (1.32 | ) |
(a) Includes
preferred stock dividend of $430.
(b) Includes
preferred stock dividend of $584.
There
were 207,000 and 27,000 potentially dilutive shares that were not included in
the computation of diluted net loss per share for the years ended July 31, 2010
and July 25, 2009, respectively, since their effect would be
anti-dilutive.
For the
year ended July 31, 2010, there were 1,718,000 shares of common stock issuable
upon exercise of stock options and 4,679,000 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.
For the
year ended July 25, 2009, there were 2,348,000 shares of common stock issuable
upon exercise of stock options, 598,000 shares of common stock issuable upon the
exercise of warrants and 1,512,000 shares of common stock issuable upon the
conversion of the Company’s Series A 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.
47
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 31, 2010:
|
||||||||||||||||||||
Sales
return reserve
|
$ | 1,091 | $ | - | $ | - | $ | (145 | ) | $ | 946 | |||||||||
Deferred
tax valuation allowance
|
$ | 16,861 | $ | 9,637 | $ | - | $ | - | $ | 22,081 | ||||||||||
Inventory
reserves
|
$ | 278 | $ | 19 | $ | - | $ | - | $ | 297 | ||||||||||
FISCAL
YEAR ENDED JULY 25, 2009:
|
||||||||||||||||||||
Sales
return reserve
|
$ | 1,357 | $ | - | $ | - | $ | (266 | ) | $ | 1,091 | |||||||||
Deferred
tax valuation allowance
|
$ | 10,904 | $ | 5,957 | $ | - | $ | - | $ | 16,861 | ||||||||||
Inventory
reserves
|
$ | 237 | $ | 41 | $ | - | $ | - | $ | 278 |
48
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 31, 2010 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 31, 2010.
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 31, 2010.
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 31, 2010,
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.
49
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 2010 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.
50
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 31, 2010 and July 25, 2009
|
||
Consolidated
Statements of Operations for the years
ended July 31, 2010 and July 25, 2009
|
||
Consolidated
Statements of Shareholders’ Equity for the years
ended July 31, 2010 and July 25, 2009
|
||
Consolidated
Statements of Cash Flows for the Years
ended July 31, 2010 and July 25, 2009
|
||
Notes
to Consolidated Financial Statements
|
||
2.
|
Financial
Statement Schedule:
|
|
For
the fiscal years ended July 31, 2010 and July 25, 2009:
|
||
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.
3.
|
Exhibits:
|
EXHIBIT INDEX
EXHIBIT
NUMBER
|
EXHIBIT
|
METHOD OF FILING
|
||
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
|
||
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
|
Warrant,
dated January 28, 2008, issued to Tokarz Investments
|
Incorporated
by reference as Exhibit 4.2 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
51
EXHIBIT
NUMBER
|
EXHIBIT
|
METHOD OF FILING
|
||
4.3
|
Warrant,
dated January 28, 2008, issued to Fursa
|
Incorporated
by reference as Exhibit 4.3 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
||
4.4
|
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
|
||
4.5
|
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
|
||
4.6
|
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
|
||
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
|
2003
Employee Equity Incentive Plan
|
Incorporated
by reference as Exhibit 4.2 to Form S-8 and filed on July 28,
2008
|
||
10.4
|
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
|
||
10.5
|
Form
of 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
|
||
10.6
|
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
|
||
10.7
|
Registration
Rights Agreement, dated as of January 28, 2008, by and among the Company,
Fursa, Fursa Managed Accounts, Tokarz Investments and TTG
Apparel
|
Incorporated
by reference as Exhibit 10.3 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
||
10.8
|
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
|
52
EXHIBIT
NUMBER
|
EXHIBIT
|
METHOD OF FILING
|
||
10.9
|
Tranche
A/B and Tranche C Term Loan Agreement, dated as of June 30, 2005, by and
among Frederick’s of Hollywood, Inc., FOH Holdings, Inc., Frederick’s of
Hollywood Stores, Inc., Fredericks.com, Inc., Hollywood Mail Order, LLC,
the lending institutions listed as Tranche A/B lenders, the lending
institutions listed as Tranche C lenders, and Fursa Alternative Strategies
LLC, as agent and collateral agent for the lenders (the “Fursa Term Loan
Agreement”)
|
Incorporated
by reference as Exhibit 10.5 to Quarterly Report on Form 10-Q for the
quarter ended January 23, 2010 and filed on March 8,
2010
|
||
10.10
|
Amendment
No. 1, dated July 20, 2005, to the Fursa Term Loan
Agreement
|
Incorporated
by reference as Exhibit 10.6 to Quarterly Report on Form 10-Q for the
quarter ended January 23, 2010 and filed on March 8,
2010
|
||
10.11
|
Amendment
No. 2, dated November 23, 2005, to the Fursa Term Loan
Agreement
|
Incorporated
by reference as Exhibit 10.7 to Quarterly Report on Form 10-Q for the
quarter ended January 23, 2010 and filed on March 8,
2010
|
||
10.12
|
Amendment
No. 3, dated as of January 28, 2008, to the Fursa Term Loan
Agreement
|
Incorporated
by reference as Exhibit 10.8 to Quarterly Report on Form 10-Q for the
quarter ended January 23, 2010 and filed on March 8,
2010
|
||
10.13
|
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
|
||
10.14
|
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 Retail
Finance II, LLC (“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
|
||
10.15
|
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
|
||
10.16
|
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
|
||
10.17
|
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
|
||
10.18
|
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
|
53
EXHIBIT
NUMBER
|
EXHIBIT
|
METHOD OF FILING
|
||
10.19
|
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
|
||
10.20
|
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
|
||
10.21
|
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
|
||
10.22
|
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
|
||
10.23
|
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
|
||
10.24
|
Amended
and Restated Intercreditor and Subordination Agreement, dated as of
January 28, 2008, among the Company and its Subsidiaries party
thereto, the subordinated creditors party thereto, Fursa, as agent for
such subordinated creditors, and Wells Fargo
|
Incorporated
by reference as Exhibit 10.13 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
||
10.25
|
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
|
||
10.26
|
Securities
Purchase Agreement dated as of March 16, 2010, between the Company and
certain investors
|
Incorporated
by reference as Exhibit 10.1 to Form 8-K dated March 16, 2010 and filed on
March 22, 2010
|
||
10.27
|
Registration
Rights Agreement dated as of March 16, 2010, between the Company and
certain investors
|
Incorporated
by reference as Exhibit 10.1 to Form 8-K dated March 16, 2010 and filed on
March 22, 2010
|
||
10.28
|
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
|
||
10.29
|
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
|
||
10.30
|
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
|
||
10.31
|
Security
Agreement, dated July 30, 2010, by the Company and certain of its
Subsidiaries and Hilco
|
Incorporated
by reference as Exhibit 10.4 to Form 8-K dated July 30, 2010 and filed on
August 4, 2010
|
54
EXHIBIT
NUMBER
|
EXHIBIT
|
METHOD OF FILING
|
||
10.32
|
Agreement
for Security (Trademarks), dated July 30, 2010, by the Company
and certain of its Subsidiaries 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
|
||
10.33
|
Agreement
for Security (Copyrights), dated July 30, 2010, by the Company and certain
of its Subsidiaries 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
|
||
10.34
|
Intercreditor
Agreement, dated as of July 30, 2010, between Wells Fargo and Hilco and
acknowledged by the Company and certain of its
Subsidiaries
|
Incorporated
by reference as Exhibit 10.7 to Form 8-K dated July 30, 2010 and filed on
August 4, 2010
|
||
10.35
|
Equity
Incentive Agreement, dated as of January 28, 2008, between FOH Holdings,
Inc. and Linda LoRe
|
Incorporated
by reference as Exhibit 10.16 to Form 8-K dated January 28, 2008 and filed
on February 1, 2008
|
||
10.36
|
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
|
||
10.37
|
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
|
||
10.38
|
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
|
||
10.39
|
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.
|
||
10.40
|
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
|
||
10.41
|
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
|
||
10.42
|
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
|
||
10.43
|
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
|
||
10.44
|
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
|
55
EXHIBIT
NUMBER
|
EXHIBIT
|
METHOD OF FILING
|
||
10.45
|
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
|
||
10.46
|
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
|
||
10.47
|
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
|
||
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
|
56
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
22, 2010
|
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
22, 2010
|
||
Thomas
J. Lynch
|
(Principal
Executive Officer)
|
|||
/s/ Thomas Rende
|
Chief
Financial Officer (Principal
|
October
22, 2010
|
||
Thomas
Rende
|
Financial
and Accounting Officer)
|
|||
/s/ Linda LoRe
|
President
and Director
|
October
22, 2010
|
||
Linda
LoRe
|
||||
/s/ Peter Cole
|
Director
|
October
22, 2010
|
||
Peter
Cole
|
||||
/s/ John L. Eisel
|
Director
|
October
22, 2010
|
||
John
L. Eisel
|
||||
/s/ William F. Harley
|
Director
|
October
22, 2010
|
||
William
F. Harley
|
||||
/s/ Milton J. Walters
|
Director
|
October
22, 2010
|
||
Milton
J. Walters
|
57