SCHEDULE 14A
(Rule 14a-101)

 

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

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

Check the appropriate box:

FREDERICK’S OF HOLLYWOOD GROUP INC.

(Name of Registrant as Specified in Its Charter)

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

Payment of Filing Fee (Check the appropriate box):

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

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

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

$3,161,435.25

$407.19

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PRELIMINARY COPY — SUBJECT TO COMPLETION

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

[•], 2014

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

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

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

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

The Rollover Shareholders, as a group, may be deemed to beneficially own 89,682,683 shares, or 88.6%, of our common stock, including 62,004,004 shares that they have the right to acquire pursuant to convertible preferred stock, warrants and options held by them.

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

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

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

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

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

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

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

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

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

Sincerely,
  

Thomas J. Lynch
Chairman and Chief Executive Officer

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

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

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

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

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

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

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

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

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

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below) caused the Company to enter into the Merger Agreement and is making the recommendations to the Company’s shareholders set forth herein.

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

Immediately prior to the merger, the Consortium Members and Mr. Harley (collectively, the “Rollover Shareholders”) will cause all of their shares of our capital stock to be contributed to Parent in exchange for an increase in their equity interests in Parent. As a result of the merger, the Company will be privately owned and will be controlled by the Rollover Shareholders through their beneficial ownership of Parent. The Consortium Members and Mr. Harley, as a group, may be deemed to beneficially own 89,682,683 shares, or approximately 88.6%, of the Company’s Common Stock, including 62,004,004 shares that they have the right to acquire pursuant to convertible preferred stock, warrants and options held by them.

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

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

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

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

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and the adoption of the Merger Agreement, but will not affect the vote regarding the non-binding, advisory proposal to approve compensation that may become payable to the Company’s named executive officers in connection with the merger or the adjournment of the special meeting to solicit additional proxies, if necessary.

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

BY ORDER OF THE BOARD OF DIRECTORS
  

Thomas Rende
Secretary

Dated [•], 2014
Hollywood, California

YOUR VOTE IS IMPORTANT

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

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

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SUMMARY TERM SHEET			1
The Parties to the Merger Agreement			1
The Merger Proposal			2
The Special Meeting			3
Record Date and Quorum			3
Required Vote			3
Providing Voting Instructions by Proxy			4
Abstentions			5
Certain Effects of the Merger			5
Treatment of Company Awards and Warrants			5
Conditions to the Merger			6
When the Merger Will be Completed			7
Reasons for the Merger; Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger			7
Opinion of the Lead Director’s Financial Advisor			7
Purpose and Reasons of the Rollover Shareholders, Parent and Merger Sub for the Merger			7
Positions of the Rollover Shareholders, Parent and Merger Sub as to the Fairness of the Merger			8
Financing			8
Interests of the Company’s Directors and Executive Officers in the Merger			8
Material United States Federal Income Tax Considerations			9
Anticipated Accounting Treatment of the Merger			9
Dissenters’ Rights			9
Limited Solicitation			9
Termination			11
Litigation			12
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER			13
SPECIAL FACTORS			17
The Parties to the Merger			17
The Company			17
Parent			17
Merger Sub			17
Background of the Merger			17
Reasons for the Merger; Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger			26
The Lead Director			26
The Board of Directors			30
Opinion of the Lead Director’s Financial Advisor			32
Purpose and Reasons of the Rollover Shareholders, Parent and Merger Sub for the Merger			37
Positions of the Rollover Shareholders to the Fairness of the Merger			38
Positions of Parent and Merger Sub as to the Fairness of the Merger			41
Plans for the Company after the Merger			41
Certain Effects of the Merger			41
Financing of the Merger			45
Rollover Financing			45
Debt Financing			45
Interests of the Company’s Directors and Executive Officers in the Merger			47
Interests of the Non-Employee Directors			47

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Interests of Executive Officers			48
Compensation of the Lead Director			50
Indemnification of Directors and Officers			50
Material United States Federal Income Tax Considerations			50
U.S. Holders			51
Rollover Shareholders			51
Non-U.S. Holders			52
Regulatory Approvals			52
Anticipated Accounting Treatment of the Merger			52
Fees and Expenses			53
Litigation			53
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION			54
THE SPECIAL MEETING			55
Date, Time and Place			55
Record Date and Quorum			55
Required Vote			55
Voting; Proxies; Revocation			56
Attendance			56
Voting in Person			56
Providing Voting Instructions by Proxy			56
Revocation of Proxies			57
Abstentions			57
Adjournments and Postponements			58
Solicitation of Proxies			58
THE MERGER AGREEMENT			59
Explanatory Note Regarding the Merger Agreement			59
Structure of the Merger			59
When the Merger Becomes Effective			59
Effect of the Merger on the Common Stock			60
Treatment of Stock Options and Other Stock-Based Awards			60
Dissenting Shares			61
Payment for the Common Stock in the Merger			61
Representations and Warranties			61
Conduct of Business Pending the Merger			63
Other Covenants and Agreements			65
Indemnification; Directors’ and Officers’ Insurance			65
Access and information			66
Efforts to Consummate			66
Limited Solicitation			66
Shareholder Litigation			68
SEC Reports			68
Conditions to the Merger			69
Termination			69
Fees and Expenses			70
Payment or Reimbursement of Fees and Expenses by the Company			71
Payment or Reimbursement of Fees and Expenses by Parent			71
Amendments and Waivers			71
Equitable Remedies			71
Vote Required and Board Recommendation			72

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AGREEMENTS INVOLVING THE COMPANY’S SECURITIES; TRANSACTIONS BETWEEN THE ROLLOVER SHAREHOLDERS AND THE COMPANY			73
Agreements Involving the Company’s Securities			73
Voting Agreement			73
Rollover Agreement			73
Purchase and Sale Agreement			74
Series B Convertible Preferred Stock Transaction			74
Series A Convertible Preferred Stock Transaction			77
Non-Employee Director Compensation to William F. Harley III and Peter Cole			79
Transactions between the Rollover Shareholders and the Company			79
PROVISIONS FOR PUBLIC SHAREHOLDERS			80
IMPORTANT INFORMATION CONCERNING THE COMPANY			80
Company Background			80
Directors and Executive Officers			80
Prior Public Offerings			82
Additional Financial and Business Information			82
Ratio of Earnings to Fixed Charges			82
Book Value Per Share			83
Market Price of the Company’s Common Stock			83
Security Ownership of Certain Beneficial Owners and Management			84
Ownership of Parent Following the Merger			86
Transactions in Common Stock			86
THE ADJOURNMENT PROPOSAL			87
Vote Required and Board Recommendation			87
ADVISORY VOTE REGARDING MERGER-RELATED COMPENSATION PROPOSAL			88
Vote Required and Board Recommendation			88
DISSENTERS’ RIGHTS			89
MULTIPLE SHAREHOLDERS SHARING ONE ADDRESS			92
SUBMISSION OF SHAREHOLDER PROPOSALS			92
WHERE YOU CAN FIND ADDITIONAL INFORMATION			93
Annex A Agreement and Plan of Merger			A-1
Annex B Opinion of Cassel Salpeter & Co. LLC			B-1
Annex C Voting Agreement			C-1
Annex D Rollover Agreement			D-1
Annex E Purchase and Sale Agreement			E-1
Annex F-1 Annual Report on Form 10-K for the Fiscal Year Ended July 27, 2013			F-1-1
Annex F-2 Amendment No. 1 to Annual Report on Form 10-K/A for the Fiscal Year Ended July 27, 2013			F-2-1
Annex G Quarterly Report on Form 10-Q for the Fiscal Quarter Ended October 26, 2013			G-1
Annex H New York Business Corporation Law Sections 623 and 910			H-1

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SUMMARY TERM SHEET

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

The Parties to the Merger Agreement

Frederick’s of Hollywood Group Inc.

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

Through our subsidiaries, we sell women’s apparel and related products under our proprietary Frederick’s of Hollywood® brand. Sales are predominantly through our U.S. mall-based specialty retail stores and our catalog and retail website at www.fredericks.com. As of October 26, 2013, we operated 112 Frederick’s of Hollywood stores in 28 states and during fiscal year 2013 mailed approximately 4,300,000 catalogs. See “Important Information Concerning the Company — Company Background” beginning on page 80.

Additional information about the Company is contained in our annual report on Form 10-K for the fiscal year ended July 27, 2013 and the amendment to the annual report attached to this proxy statement as Annexes F-1 and F-2 and in our public filings. See “Where You Can Find Additional Information” beginning on page 93.

FOHG Holdings, LLC

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

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

HGI Funding is a Delaware limited liability company and a wholly-owned subsidiary of Harbinger Group Inc., or “HGI.” HGI is a diversified holding company focused on obtaining controlling equity stakes in companies that operate across a diversified set of industries. HGI Funding was formed on January 12, 2011 to manage a portion of HGI’s available cash by investing in equity and debt instruments and to acquire positions in potential acquisition targets. TKZ is a Delaware limited liability company that was formed by Michael Tokarz in 2002 for the purpose of making various investments. TTG is a Delaware limited liability company that was formed in 2004 by Michael Tokarz for the purpose of investing in the Company.

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

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

Immediately prior to the effective time of the Merger, the Rollover Shareholders will cause all of their shares of our capital stock to be contributed to Parent in exchange for an increase in their equity interests in Parent. The Rollover Shareholders, as a group, may be deemed to beneficially own 89,682,683 shares, or 88.6%, of our common stock, par value $0.01 per share (“Common Stock”), including 62,004,004 shares that they have the right to acquire pursuant to convertible preferred stock, warrants and options held by them. Parent has not engaged in any business other than in connection with the transactions described in this proxy statement. For more information on Parent and the holdings of the Rollover Shareholders, see “Special Factors — The Parties to the Merger” beginning on page 17.

FOHG Acquisition Corp.

FOHG Acquisition Corp., which we refer to as “Merger Sub,” is a New York corporation. The address of Merger Sub’s principal executive office is 450 Park Avenue, 30^th Floor, New York, NY 10022. Merger Sub is a wholly-owned subsidiary of Parent and was formed solely for the purpose of engaging in the Merger and other related transactions. Parent owns 100% of the capital stock of Merger Sub. Merger Sub has not engaged in any business other than in connection with the transactions described in this proxy statement. See “Special Factors — The Parties to the Merger” beginning on page 17.

The Merger Proposal (Page 59 and Annex A)

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

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

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

On September 26, 2013, HGI Funding, TTG, TTZ, Fursa and Arsenal jointly delivered a non-binding proposal letter to our Board of Directors for the acquisition of all of our publicly held Common Stock in a “going private” transaction with us. We refer to HGI Funding, TTG, TTZ, Fursa and Arsenal as the “Consortium Members.” The Board of Directors delegated authority to Milton Walters, our lead independent, disinterested member of our Board of Directors, who we refer to as the “Lead Director,” to consider and negotiate the terms and conditions of the Merger with the Consortium Members and to make a

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

The Special Meeting (Page 55)

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

Record Date and Quorum (Page 55)

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

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

Required Vote (Page 55)

For the Company to complete the Merger, under New York law and the Merger Agreement, shareholders holding at least two-thirds of the aggregate voting power of our Common Stock outstanding at the close of business on the record date must vote “FOR” the approval of the Merger and adoption of the Merger Agreement, which we refer to as the “Shareholder Approval.”

Subject to the terms of the Voting Agreement, as defined in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Voting Agreement” beginning on page 73, the Rollover Shareholders have agreed to vote all shares of our Common Stock they beneficially own (and any shares acquired by them after the date of the Voting Agreement) in favor of approving the Merger and adopting the Merger Agreement. As of the record date, there were 39,273,254 shares of our Common Stock outstanding, of which the Rollover Shareholders own 27,678,679 shares of Common Stock, representing in the aggregate approximately 70.5% of the issued and outstanding shares of Common Stock. This amount excludes the 62,004,004 shares of Common Stock that the Rollover Shareholders have the right to acquire pursuant to convertible preferred stock, warrants and options held by them. Because the Rollover Shareholders beneficially hold more than two-thirds of our outstanding shares of Common Stock as of the record date, they can satisfy the required vote under New York law and the Merger Agreement to approve the Merger and adopt the Merger Agreement without the affirmative vote of any of our other shareholders.

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

The directors and Executive Officers have informed the Company that as of date of this proxy statement, they intend to vote in favor of the approval of the Merger and adoption of the Merger Agreement. All references to the Board of Directors in this proxy statement relating to the Board of Directors’ recommendation and/or approval and adoption of the Merger Agreement, the related agreements and the Merger exclude Messrs. Harley and Lynch. Mr. Harley is a Rollover Shareholder. Mr. Lynch, our chief executive officer, has received a new employment agreement which will take effect if the Merger is completed. Under the employment agreement, he will receive an equity interest in Parent in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders

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and are subject to vesting and other terms. Messrs. Harley and Lynch recused themselves from all discussions by the Board of Directors relating to the Merger negotiations (except to the extent their presence was specifically requested by the Lead Director) and all deliberations by the Board of Directors with respect to the approval of the Merger and adoption of the Merger Agreement and the related agreements.

Shareholders holding at least a majority of the shares of Common Stock voted at the Special Meeting must vote “FOR” the non-binding, advisory proposal regarding compensation that may become payable to the Company’s named executive officers (as defined in Item 402 of Regulation S-K) in connection with the Merger (as described in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger — Interests of Executive Officers” beginning on page 48), which we refer to as the “Merger-Related Compensation Proposal,” in order for the proposal to be approved. Approval of the Merger-Related Compensation Proposal is not a condition to the completion of the Merger, and the vote with respect to the Merger-Related Compensation Proposal is advisory only and will not be binding on the Parent or the Company. Because the Rollover Shareholders beneficially hold more than a majority of our outstanding shares of Common Stock as of the record date, they can approve or disapprove the Merger-Related Compensation Proposal regardless of how any other shareholder votes.

Shareholders holding at least a majority of the shares of Common Stock voted at the Special Meeting must vote “FOR” the proposal to adjourn the special meeting, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Merger and adopt the Merger Agreement, which we refer to as the “Adjournment Proposal”, in order for the proposal to be approved. The Adjournment Proposal will be presented to our shareholders at the Special Meeting only if the shares of Common Stock voting in favor of the proposal to approve the Merger and adopt the Merger Agreement are not sufficient to approve the proposal. Because the Rollover Shareholders beneficially hold more than a majority of our outstanding shares of Common Stock as of the record date, they can approve or disapprove the Adjournment Proposal regardless of how any other shareholder votes.

Providing Voting Instructions by Proxy

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

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

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Abstentions

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

Certain Effects of the Merger (Page 41)

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

Treatment of Company Awards and Warrants (Page 60)

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

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

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

Each Company stock option and restricted share award held by Mr. Harley and each warrant held by Mr. Harley and the other Rollover Shareholders, as of the Effective Time, will be cancelled on the terms and conditions set forth in the Rollover Agreement, as defined in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Rollover Agreement” beginning on page 73.

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Conditions to the Merger (Page 69)

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

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

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

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For the purposes of this proxy statement, “Ancillary Agreements” refers collectively to the Voting Agreement, the Rollover Agreement and the Purchase Agreement, as defined in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities” beginning on page 73.

When the Merger Will be Completed

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

Reasons for the Merger; Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger (Page 26)

The Board of Directors (other than Messrs. Harley and Lynch), after receiving the recommendation of the Lead Director, unanimously recommends that the shareholders of the Company vote “FOR” the proposal to approve the Merger and adopt the Merger Agreement. For a description of the reasons considered by the Lead Director and the Board of Directors, see “Special Factors — Reasons for the Merger; Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger” beginning on page 26.

Opinion of the Lead Director’s Financial Advisor (Page 32 and Annex B)

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

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

Purpose and Reasons of the Rollover Shareholders, Parent and Merger Sub for the Merger (Page 37)

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

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For a full description of the purpose and reasons of the Rollover Shareholders, Parent and Merger Sub for the Merger, see “Special Factors — Purpose and Reasons of Parent, Merger Sub and the Rollover Shareholders for the Merger” beginning on page 37.

Positions of the Rollover Shareholders, Parent and Merger Sub as to the Fairness of the Merger (Page 38 and Page 41)

The Rollover Shareholders, Parent and Merger Sub believe that the Merger is substantively and procedurally fair to the Company’s shareholders (other than the Rollover Shareholders, Parent and any of their respective affiliates or associates). See “Special Factors — Positions of the Rollover Shareholders as to the Fairness of the Merger” beginning on page 38 and “Special Factors — Positions of the Parent and Merger Sub as to the Fairness of the Merger” beginning on page 41.

Financing (Page 45)

The Company and Parent estimate that the total financing required to complete the Merger and related transactions and pay related fees and expenses will be approximately $24,805,281, which consists of $20,783,846 in rollover equity, $3,161,435 in merger consideration payable in cash to the Public Shareholders and holders of Company stock options and an estimated $860,000 in fees and expenses. The Company and Parent expect this amount to be provided through a combination of (i) the rollover of Common Stock, Series A Convertible Preferred Stock and Series B Convertible Preferred Stock by the Rollover Shareholders and (ii) debt financing (up to $6,000,000 of which may be used for the Merger), which is available to us under our existing credit facility with Salus CLO 2012-1, Ltd., or “Salus CLO,” and Salus Capital Partners, LLC, or “Salus.” We refer to Salus CLO and Salus collectively as the “Lenders.”

Interests of the Company’s Directors and Executive Officers in the Merger (Page 47)

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

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

Material United States Federal Income Tax Considerations (Page 50)

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

Anticipated Accounting Treatment of the Merger (Page 52)

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

Dissenters’ Rights (Page 89)

Sections 623 and 910 of the NYBCL provide that if the Merger is consummated, holders of shares of our Common Stock entitled to vote on the approval of the Merger and adoption of the Merger Agreement who object to such actions in writing prior to or at the Special Meeting, but before the vote, and who follow the procedures specified in Section 623 (as summarized in “Dissenters’ Rights” beginning on page 89) will have the right to receive cash payment of the fair value of their shares of Common Stock if the proposed Merger is completed. The express procedures of Section 623 must be followed precisely; if they are not, holders of shares of our Common Stock will lose their right to dissent. As described more fully below, such “fair value” would potentially be determined in judicial proceedings, the result of which cannot be predicted. We cannot assure you that holders of shares of our Common Stock exercising dissenters’ rights will receive consideration equal to or greater than the merger consideration.

Limited Solicitation (Page 66)

Generally, under the Merger Agreement, we may not solicit alternative Takeover Proposals (as defined in the Merger Agreement and as described below in “The Merger Agreement — Other Covenants and Agreements — Limited Solicitation” beginning on page 66), but we may engage in a limited solicitation of certain designated parties that were agreed upon among Parent, Merger Sub and the Company as a result of the negotiations of the Merger Agreement by the Lead Director.

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

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However, prior to the receipt of the Shareholder Approval, the Company or the Lead Director may, in response to a bona fide written Takeover Proposal that did not result from a breach of the above paragraph, contact the party that submitted such Takeover Proposal to clarify the terms and conditions thereof and, subject to compliance with the provisions outlined in subsequent paragraphs below and provided that the Lead Director determines in good faith, after consultation with its outside legal counsel and financial advisors, that such Takeover Proposal constitutes or could reasonably be expected to lead to a Superior Proposal (as such term is defined in the Merger Agreement, as described in “The Merger Agreement — Other Covenants and Agreements — Limited Solicitation” beginning on page 66):

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

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

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

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As described in “The Merger Agreement — Other Covenants and Agreements — Limited Solicitation” beginning on page 66, nothing in the Merger Agreement will prohibit the Company, the Board of Directors or the Lead Director from complying with securities laws in respect of any Takeover Proposal, including making any disclosure to the shareholders of the Company. However, any public disclosure by the Company relating to a Takeover Proposal shall be deemed to be a Change in the Company Recommendation unless the Board of Directors expressly publicly reaffirms its approval of or recommendation to approve the Merger and adopt the Merger Agreement in such disclosure, or in the case of a “stop, look and listen” or similar communication, in a subsequent disclosure.

Other than as otherwise described in “The Merger Agreement — Other Covenants and Agreements —  Limited Solicitation” beginning on page 66, neither the Board of Directors nor any committee thereof nor the Lead Director will, directly or indirectly, effect a Change in the Company Recommendation, take any formal action or make any recommendation or public statement in connection with a tender offer or exchange offer other than a recommendation against such offer or a temporary “stop, look and listen” communication or approve any agreement, arrangement or understanding relating to, or that may reasonably be expected to lead to, any Takeover Proposal.

Termination (Page 69)

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

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

Litigation (Page 53)

On January 24, 2014, a purported shareholder of the Company filed a putative class action law suit in New York state court against the Board of Directors, the Company, Parent and Merger Sub. The action is Paul v. Cole et al. (N.Y. Sup. Ct. Jan. 24, 2014). The complaint alleges that the members of the Board of Directors breached their fiduciary duty to maximize shareholder value by pursuing the Merger through a flawed process and for inadequate consideration. The complaint is more fully described in “Special Factors — Litigation” beginning on page 53. Each of the defendants denies any allegations of wrongdoing. The defendants believe that the plaintiffs’ claims are without merit and intend to vigorously defend against the allegations.

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

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

Q:  What is the proposed transaction?

A:  The proposed transaction is the Merger of Merger Sub with and into the Company pursuant to the Merger Agreement, with the Company surviving as a wholly-owned subsidiary of Parent. Parent is an entity formed by the Consortium Members for the purposes of acquiring us in the proposed transaction. The Rollover Shareholders hold 100% of the outstanding equity of Parent. Following the Effective Time, the Company will be privately held by the Rollover Shareholders (and by Mr. Lynch, upon his receipt of an equity interest in Parent, pursuant to his new employment agreement, in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms). See “The Merger Agreement” beginning on page 59.

Q:  What will I receive in the Merger?

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

Q:  Where and when is the Special Meeting?

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

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

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

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

A:  For the Company to complete the Merger, under New York law, shareholders holding at least two-thirds of the aggregate voting power of the Common Stock outstanding at the close of business on the record date must vote “FOR” the approval of the Merger and adoption of the Merger Agreement. Subject to the terms of the Voting Agreement between us, Parent and the Rollover Shareholders, the Rollover Shareholders have agreed to vote all shares of our Common Stock they beneficially own (and any shares acquired by them after the date of the Voting Agreement) in favor of approving the Merger and adopting the Merger Agreement. See “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Voting Agreement” beginning on page 73. As of the record date, the Rollover Shareholders own 27,678,679 shares of Common Stock, representing in the aggregate approximately 70.5% of the issued and outstanding shares of Common Stock. This amount excludes the 62,004,004 shares of Common Stock that the Rollover Shareholders have the

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right to acquire pursuant to convertible preferred stock, warrants and options held by them. Because the Rollover Shareholders beneficially hold more than two-thirds of our outstanding shares of Common Stock as of the record date, they can satisfy the required vote under New York law and the Merger Agreement to approve the Merger and adopt the Merger Agreement without the affirmative vote of any of our other shareholders.

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

See “The Special Meeting — Required Vote” beginning on page 55.

Q:  What vote of our shareholders is required to approve the Adjournment Proposal?

A:  Approval of the Adjournment Proposal requires the affirmative vote of the holders of a majority of the shares of Common Stock voted at the Special Meeting. The Adjournment Proposal will be presented to our shareholders at the Special Meeting only if the shares of Common Stock voting in favor of the proposal to approve the Merger and adopt the Merger Agreement are not sufficient to approve the proposal. Because the Rollover Shareholders beneficially hold more than a majority of our outstanding shares of Common Stock as of the record date, they can approve or disapprove the Adjournment Proposal regardless of how any other shareholder votes.

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

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

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

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

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

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

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

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

A:  The Board of Directors (other than Messrs. Harley and Lynch, who recused themselves from all deliberations relating to the recommendation and approval of the Merger and adoption of the Merger Agreement), acting upon the recommendation of the Lead Director, unanimously recommends that our shareholders vote “FOR” the approval of the Merger and adoption of the Merger Agreement and “FOR” the

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approval of the Merger-Related Compensation Proposal. You should read “Special Factors — Reasons for the Merger; Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger” beginning on page 26 for a discussion of the factors that the Lead Director and Board of Directors considered in deciding to recommend the approval of the Merger and adoption of the Merger Agreement. See also “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 47 ..

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

A:  The Common Stock is currently registered under the Securities Exchange Act of 1934, as amended, or the “Exchange Act”, and is quoted on the OTCQB under the symbol “FOHL.” As a result of the Merger, the Company will cease to be a publicly traded company and will be wholly owned by Parent. Following the consummation of the Merger, the registration of the Common Stock and our reporting obligations under the Exchange Act will be terminated upon application to the SEC. In addition, upon the consummation of the Merger, the Common Stock will no longer be quoted on any quotation system, including the OTCQB. See “Special Factors — Plans for the Company after the Merger” beginning on page 41.

Q:  What happens if the Merger is not consummated?

A:  If the Shareholder Approval is not obtained or if the Merger is not consummated for any other reason, the Merger will not be effected and the Company’s shareholders will not receive any payment for their shares. Instead, the Company will remain a public company and its shares of Common Stock will continue to be quoted on the OTCQB. Under specified circumstances, the Company may be required to reimburse Parent and Merger Sub for their costs and expenses and pay a termination fee. See “The Merger Agreement —  Termination” beginning on page 69 and “The Merger Agreement — Fees and Expenses” beginning on page 70. The Company’s results of operations and financial condition raise substantial doubt about its ability to continue as a going concern. If the Company is unsuccessful in consummating the Merger, it will need to raise additional capital through debt or equity financings, strategic relationships or other arrangements. Additional financing may not be available in amounts or on terms acceptable to the Company or at all, and if available, may be at prices and on terms that may not be as favorable as they would be without a going concern qualification. An inability to obtain additional financing may result in the Company’s voluntary or involuntary bankruptcy.

Q:  What do I need to do now?

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

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

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

A:  No. After the Merger is completed, you will be sent a letter of transmittal with detailed written instructions for exchanging your shares of Common Stock for the merger consideration. If your shares of Common Stock are held in “street name” by your broker, bank or other nominee, you may receive

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instructions from your broker, bank or other nominee as to what action, if any, you need to take to effect the surrender of your “street name” shares in exchange for the merger consideration. Do not send in your certificates now.

Q:  Can I revoke my voting instructions?

A:  Yes. You can revoke your voting instructions at any time before your proxy is voted at the Special Meeting. If you are a shareholder of record, you may revoke your proxy by notifying the Company’s Corporate Secretary in writing at Frederick’s of Hollywood Group Inc., Attn: Secretary, 6255 Sunset Boulevard, 6^th Floor, Hollywood, California 90028, or by submitting a new proxy by telephone, the Internet or mail, in each case, dated after the date of the proxy being revoked. In addition, you may revoke your proxy by attending the Special Meeting and voting in person (simply attending the Special Meeting will not cause your proxy to be revoked). Please note that if you hold your shares in “street name” and you have instructed a broker, bank or other nominee to vote your shares, the above-described options for revoking your voting instructions do not apply, and instead you must follow the instructions received from your broker, bank or other nominee to revoke your voting instructions. See “The Special Meeting — Voting; Proxies; Revocation —  Revocation of Proxies” beginning on page 57.

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

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

Q:  Who will count the votes?

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

Q:  Who can help answer my other questions?

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

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SPECIAL FACTORS

The Parties to the Merger

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

The Company

For information regarding the Company, see “Important Information Concerning the Company —  Company Background” beginning on page 80.

Parent

Parent is a new Delaware limited liability company that was formed by HGI Funding to pursue the transaction contemplated by the non-binding consortium term sheet agreement among the Consortium Members. The Rollover Shareholders collectively hold 100% of the issued and outstanding equity of Parent. Immediately prior to the Effective Time, the Rollover Shareholders will cause all of their shares of our capital stock to be contributed to Parent in exchange for an increase in their equity interests in Parent. The Rollover Shareholders, as a group, may be deemed to beneficially own 89,682,683 shares, or 88.6%, of our Common Stock, including 62,004,004 shares that they have the right to acquire pursuant to convertible preferred stock, warrants and options held by them. Parent has not engaged in any business other than in connection with the Merger and the other related transactions contemplated thereby.

Merger Sub

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

Background of the Merger

Introduction

Our Board of Directors and management regularly evaluate the Company’s business and operations, long-term strategic goals and alternatives and prospects. Over the past six years, in connection with the ongoing evaluation of strategic alternatives, our Board of Directors received financial updates from management and reviewed the significant factors that have materially adversely impacted our financial performance. During the period, we suffered from the economic recession, a protracted recovery and a downturn in consumer spending. We lost customers, particularly in California, the location of many of our stores, and faced rising operating costs, difficulties in paying vendors and significant long-term lease costs. Competition also increased from retailers including the GAP, H&M, Aerie and Victoria’s Secret, the leader in our industry. As a result, our Board of Directors authorized management to take numerous steps to improve the Company’s financial performance. We reduced our workforce, wages and capital expenditures, sold our wholesale division and negotiated margin assistance with vendors. We also negotiated more favorable lending terms and eventually replaced our lender.

From fiscal year 2007 to 2013, annual operating expenses were reduced by approximately $40,000,000. To sustain our operations and finance growth, we completed capital raises of approximately $38,000,000 during this period. These capital raises were accomplished through a $20,000,000 rights offering and a $3,000,000 private placement of common stock, followed by the $15,000,000 placement of the Series A and Series B Convertible Preferred Stock described below. We also converted approximately $23,000,000 of debt and preferred stock into common stock. Despite these efforts, the Company incurred net operating losses of approximately $114,000,000 from fiscal years 2008 through 2013 and has not reported an operating profit since fiscal year 2007. Through fiscal years 2008 to 2013, we continued to suffer from negative working capital and, in many years, deficit equity.

In April 2012, we received two unsolicited acquisition inquiries. Our Board of Directors authorized management to retain the investment banking firm, Allen & Company LLC, or “Allen & Co.,” to assist in evaluating and negotiating the expressions of interest. Allen & Co. also was retained to undertake a broad

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effort to explore strategic alternatives. Neither the marketing process to approximately 120 parties nor the two initial unsolicited expressions of interest described in further detail below produced any proposals that our Board of Directors believed were viable and in the best interests of the Company’s shareholders.

When negotiations related to the unsolicited acquisition inquiries concluded, at the suggestion of one of our Lenders, Salus, we contacted HGI concerning a strategic transaction. Salus is a subsidiary of HGI, the parent company of Parent. The contact resulted in our $10,000,000 Series B Convertible preferred stock and warrant sale to Five Island Asset Management, LLC, a subsidiary of HGI, which we refer to as “Five Island.” These preferred shares and warrants convert into a majority interest in the Company. HGI Funding, as successor in interest to Five Island, subsequently proposed the Merger, along with our two largest shareholders, to the Company, leading to the Merger Agreement. Our Board of Directors, upon recommendation of the Lead Director, determined that the Merger is in the best interests of our unaffiliated shareholders. The Company’s Public Shareholders, including its directors (other than Mr. Harley) and Executive Officers, own 11,594,575, or approximately 29.5%, of our outstanding Common Stock as of January 22, 2014, and will receive $0.27 per share, or an aggregate of approximately $3,100,000, upon the closing of the Merger. Shares of Common Stock owned by the members of our Board of Directors (other than Mr. Harley) and by our Executive Officers will receive the same treatment in the Merger as the shares of Common Stock owned by the unaffiliated shareholders. As of October 26, 2013, we had shareholders’ deficiency of $(24,641,000) or $(0.63) per outstanding share and a working capital deficit of $(19,258,000) or $(0.49) per outstanding share.

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

Series A Convertible Preferred Stock Transaction and New Credit Facility

Throughout fiscal year 2012, the Company’s business continued to be adversely affected by limited working capital. The Company was also in arrears with its vendors. Accordingly, members of management focused on negotiating vendor allowances, raising capital and pursuing other strategic transaction possibilities. Because of the Company’s financial condition, it was difficult to attract new investors. As an alternative, management engaged in discussions with the Company’s largest shareholders — Michael Tokarz, who controls TTG and TKZ, and William F. Harley III, a member of our Board of Directors who controls Fursa and Arsenal — regarding further investment in the Company. These discussions ultimately led to TTG’s purchase on May 23, 2012 of $5,000,000 of the Company’s Series A Convertible Preferred Stock. As required by the Series A Convertible Preferred Stock purchase agreement, the proceeds of the transaction were used to settle vendor accounts payable. We obtained approximately $4,900,000 of vendor allowances during the fiscal quarter ended April 28, 2012.

In addition to the Series A Convertible Preferred Stock investment, on May 31, 2012, the Company secured a new $24,000,000 credit facility with the Lenders.

Evaluation of Strategic Transactions

In April 2012, we received two unsolicited acquisition inquiries. One did not specify a transaction structure or indicate any consideration. No subsequent interest was expressed by this submitting party. Our Board of Directors determined to engage an investment banking firm to assist in evaluating the other expression of interest, and to seek strategic alternatives on behalf of the Company to enhance shareholder value. In May 2012, after considering several investment banking firms, we retained Allen & Co. and publicly announced their retention. With the assistance of Allen & Co., we prepared confidential evaluation materials regarding the Company, our business and our management.

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

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Between June and October 2012, Allen & Co. contacted approximately 120 parties, including retailers, private equity firms and family offices. Approximately 30 expressed an interest and executed non-disclosure agreements to receive the confidential evaluation materials and gain access to the Company’s electronic data room. In response to Allen & Co.’s request in early October 2012 of approximately 12 remaining interested parties to submit proposals, Allen & Co received indications of interest from only three parties. Two were from private equity firms and contemplated pre-packaged bankruptcy filings, and a third was from a domestic specialty retailer that had previously submitted an indication of interest in April 2012.

Prior to engaging in any negotiations with the interested parties, our Board of Directors, with the advice of counsel, considered its fiduciary duties to the Company and its shareholders. Accordingly, our Board of Directors addressed the potential for conflicts of interest that members of our Board of Directors may have as significant shareholders of or, with respect to Mr. Lynch, as an employee of, the Company. Our Board of Directors determined that only one director, Mr. Walters, could be considered entirely disinterested and independent. In November 2012, our Board of Directors appointed Mr. Walters to serve as Lead Director with the intention that he would act in this capacity to negotiate transactions where potential conflicts of interest could arise.

From November 2012 to March 2013, our Board of Directors, management and Allen & Co. met numerous times to evaluate a total of six indications of interest — the three received in October 2012 plus three additional indications of interest subsequently received from parties unaffiliated with the Company. The two indications of interest that contemplated a pre-packaged bankruptcy process were considered by our Board of Directors, but rejected as not in the best interests of our shareholders. Our Board of Directors, management and Allen & Co. engaged in negotiations with the other four parties. We sometimes refer to these parties collectively as the “Proposing Parties.” The following is a summary of our negotiations with each of the Proposing Parties:

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With respect to each proposal, and with the assistance of Allen & Co. and Graubard Miller, our Board of Directors and management considered, among other things, the financial condition and financing resources of each Proposing Party and positive and negative aspects of each of their respective proposals, in order to evaluate the relative benefit, if any, to the Company’s shareholders.

Our Board of Directors and management also constantly monitored the Company’s difficult and weakening financial condition and the limited financial resources available to implement positive business changes. Our Board of Directors and management analyzed whether any proposal was a better alternative to the Company remaining a stand-alone entity, including whether the Company should file for bankruptcy and obtain debtor-in-possession financing. Our Board of Directors deliberated on each of these possibilities at length and consulted with bankruptcy counsel, considering the best interests of the Company and its shareholders.

Despite extensive negotiations during this period, the Company was unable to reach definitive terms with any of the Proposing Parties that the Board of Directors believed would produce value for the Company’s shareholders.

Negotiations Relating to HGI and the Consortium

During the Company’s strategic alternative evaluation process conducted with Allen & Co. described above, the Company provided regular status updates to its Lenders regarding progress in the negotiations with the Proposing Parties. In late February 2013, we advised the Lenders that negotiations with the Specialty Retailer were continuing, but progress was limited. The Lenders also were informed that the Company’s exclusivity agreement with the Specialty Retailer was expiring on February 27, 2013. After the expiration of the exclusivity period, the Lenders suggested that Mr. Lynch meet with Philip Falcone, the Chief Executive Officer of HGI, the parent company of the Lenders and Parent, to discuss a potential strategic transaction.

On March 1, 2013, Mr. Lynch met with Mr. Falcone to discuss a strategic transaction between the Company and HGI or one of its subsidiaries. On the evening of March 1, 2013, HGI submitted a non-binding term sheet to the Company providing for a $10,000,000 investment in the Company through the issuance of Series B Convertible Preferred Stock and warrants, which would result in HGI obtaining a controlling interest in the Company.

On March 3, 2013, our Board of Directors held a special meeting to review the Series B Convertible Preferred Stock term sheet and to discuss other options available to the Company. Members of management, Mr. Tokarz, representatives of Allen & Co. and Graubard Miller were in attendance. Our Board of Directors and representatives of Graubard Miller reviewed the Board’s fiduciary obligations to the Company and its shareholders to review of the HGI term sheet and other available alternatives. Our Board of Directors addressed the proposed terms of the Series B Convertible Preferred Stock transaction, which included HGI’s ability to acquire a majority of the Company’s Common Stock upon conversion of the Series B Convertible Preferred Stock, their receipt of quarterly dividends and additional terms including, but not limited to, anti-dilution adjustment, liquidation preference and the ability to appoint members of the Board of Directors. The term sheet also contained a seven-day exclusivity period.

Representatives of Allen & Co. then reviewed the Company’s other alternatives. First, they reviewed the potential transaction with the Specialty Retailer, the lack of progress in the negotiations, and the low likelihood of closing a transaction with them quickly enough to address our acute financial condition. Allen & Co. also discussed our filing for bankruptcy, the challenges in obtaining debtor-in-possession financing and the uncertain outcome of a bankruptcy process. Our Board of Directors and management reviewed their prior discussions with bankruptcy counsel, and the Board determined that there did not appear to be a benefit to the Company and its shareholders to filing for bankruptcy at this time. They also considered the potential dilutive consequences of the Series B Convertible Preferred Stock transaction. Our Board of Directors then gave further consideration to the Series B Convertible Preferred Stock term sheet, and developed a list of items to negotiate, including, among other things, a fixed, rather than a floating, conversion price, a lower interest rate

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on the cash and payment-in-kind dividends, and redemption rights. Our Board of Directors instructed management and Graubard Miller to communicate the Company’s position to HGI and Milbank, Tweed, Hadley & McCloy LLP, or “Milbank,” HGI’s counsel.

On March 4, 2013, our Board of Directors held a special meeting to consider a revised draft of the Series B Convertible Preferred Stock term sheet. Members of management, Mr. Tokarz, representatives of Allen & Co. and Graubard Miller were in attendance. They discussed the changes made to the term sheet earlier in the day in response to discussions with HGI and Milbank. Because the issuance of the Series B Convertible Preferred Stock would affect the rights of the Company’s Series A Convertible Preferred Stock, Mr. Tokarz, an affiliate of the holder of the Series A Convertible Preferred Stock, excused himself from the meeting. After further review and consideration of the term sheet, our Board of Directors (with Mr. Eisel abstaining because his law firm represented Mr. Tokarz, including in the Series A Convertible Preferred Stock transaction) authorized management to enter into the non-binding term sheet with HGI. Our Board of Directors also determined management should terminate negotiations with the Specialty Retailer. Later on March 4, 2013, a member of management executed the non-binding term sheet and delivered it to HGI.

On March 7, 2013, members of management and HGI had a call to discuss the Company’s financial condition. The Company provided HGI with a draft of its Quarterly Report on Form 10-Q for the fiscal quarter ended January 27, 2013 and explained the reasons for the decrease in sales as compared to the prior year. They also discussed the possibility of HGI providing additional funding in the months following the consummation of the proposed Series B Convertible Preferred Stock transaction.

Between March 4 and March 15, 2013, members of our management and HGI worked with Graubard Miller and Milbank to negotiate and prepare the Series B Convertible Preferred Stock transaction documentation.

On March 11, 2013, our Board of Directors held a special meeting to review the terms of the Series B Convertible Preferred Stock transaction documents. Members of management and representatives of Allen & Co. were in attendance. Among other things, they discussed the redemption and conversion rights of the Series B Convertible Preferred Stock as compared to the Series A Convertible Preferred Stock, the waiver of anti-dilution and redemption rights by the holder of the Series A Convertible Preferred Stock in connection with the Series B transaction, the representations and warranties contained in the Series B Convertible Preferred Stock purchase agreement and minority shareholder protections. After further discussion, our Board of Directors determined that there were open points to be addressed before they could approve the transaction, and instructed management to work with HGI and Milbank to address them.

On March 14, 2013, the Specialty Retailer submitted another unsolicited revised offer letter to the Company. Our Board of Directors immediately convened a special meeting to review the terms. Members of management and representatives of Allen & Co. and Graubard Miller were in attendance. Our Board of Directors and a representative of Graubard Miller discussed the Board’s fiduciary obligation to the Company and its shareholders to address the offer letter, notwithstanding the Company’s negotiations with HGI. They also discussed whether the Specialty Retailer could close quickly enough, or at all, based on prior unsuccessful negotiations, and the risks related to further delay, including bankruptcy. Our Board of Directors considered ways to mitigate these risks and address the Company’s need for additional capital, and, in turn, required the Specialty Retailer to provide a binding commitment letter for, among other things, the price to be paid to unaffiliated shareholders and the provision of interim financing. Our Board of Directors also requested an immediate timeline for completion, which was vital given the Company’s tenuous financial condition. Representatives of the Company, Allen & Co. and Graubard Miller held discussions with the Specialty Retailer throughout the day. Despite these efforts, the Specialty Retailer was unable to satisfy any of the Company’s requirements. Accordingly, after extensive discussion, a majority of our Board of Directors approved the Series B Convertible Preferred Stock transaction with Five Island, and authorized management to execute the transaction agreements.

The closing of the Series B Convertible Preferred Stock transaction took place on March 15, 2013. After expenses, the Company received approximately $9,350,000 of net proceeds. Following the closing, the Company terminated its engagement with Allen & Co., and they did not provide any further financial advisory services or participate in any subsequent negotiations on the Company’s behalf.

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

Subsequent to the April 24, 2013 Board of Directors meeting, the Company’s management, representatives of HGI and the Lenders discussed providing the Company with additional temporary financial support with an advance under the Company’s existing credit facility. On May 23, 2013, the revolving credit agreement with the Lenders was amended to increase the Company’s line of credit by $5,000,000. Concurrently with the execution of the amendment, the Company paid to the Lenders in cash a one-time fee of $50,000 and agreed to an increase in the Lender’s collateral monitoring fee from $4,500 to $12,500 per month.

On June 26, 2013, our Board of Directors and members of management met with a representative of HGI. The purpose of the meeting was to reiterate the Company’s need for additional financing and the amounts required to satisfy its business objectives as previously discussed at the April 24, 2013 Board of Directors meeting.

On July 23, 2013, our Board of Directors held a regularly scheduled meeting. Members of management and representatives of HGI were in attendance. They reviewed a proposed amendment to the Company’s credit agreement to temporarily remove the facility’s existing $1,500,000 availability block and discussed the Company’s weakening financial condition. After discussion, our Board of Directors concluded that even with the removal of the $1,500,000 availability block as contemplated by the proposed amendment, the Company will continue to have limited liquidity. Representatives of HGI informed our Board of Directors that they understood the importance of working with the Lenders to increase the availability under the Company’s credit facility, that the amendment was intended to be an interim solution, and that they were working on a more permanent solution for the Company and its business.

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

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

At a special meeting held on August 7, 2013, our Board of Directors discussed the Five Island proposal and the Board of Directors’ fiduciary obligations to the Company and its shareholders in connection with its consideration of the proposed transaction. As our Board of Directors had done previously in connection with its review of strategic alternatives for the Company, Mr. Walters, the only disinterested, independent director, was appointed by the Board of Directors to serve as Lead Director in connection with the Board’s review and negotiation of the proposal submitted to the Company by Five Island.

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

On September 27, 2013, the Company issued a press release announcing that the Consortium’s proposal had been received. Also on that day, our Board of Directors held a special meeting to discuss the proposal and authorized the Lead Director to negotiate the terms and conditions of the proposed transaction and to hire his own legal and financial advisors. Members of management reviewed with our Board of Directors the Company’s financial condition, and informed them that the Lenders were preparing an amendment to the credit agreement to increase the Company’s line of credit by an additional $5,000,000, which was expected to close quickly.

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

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

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

On October 8, 2013, our Board of Directors held a special meeting to consider a proposed amendment to the Company’s credit agreement, which would provide an immediate $5,000,000 advance to the Company and up to an additional $6,000,000 advance to become available upon the closing of the proposed going private Merger transaction with the Consortium to be used to cover Merger related expenses, including the merger consideration to the Company’s Public Shareholders. The Lead Director informed our Board of Directors that he had retained Cassel Salpeter and provided the Board of Directors with an update on the October 4, 2013 meeting with representatives of the Consortium.

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

On October 11, 2013, Milbank distributed a first draft of the Merger Agreement to the Lead Director and Graubard Miller. Between October 11 and December 18, 2013, representatives of the Consortium and the Lead Director and their respective counsel negotiated and revised the draft Merger Agreement.

On October 11, 2013, the Lead Director and Mr. Lynch met with representatives of the Consortium at HGI’s offices to negotiate the per share merger consideration for shares held by the Company’s Public Shareholders. Mr. Rende participated in the meeting by phone. The Lead Director rejected the Consortium’s

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$0.23 per share offer and presented his arguments as to why the Company’s Public Shareholders should receive a higher price. Representatives of the Consortium asked for the Lead Director’s input on the latest draft of the Merger Agreement before continuing merger consideration discussions.

On October 15, 2013, the Lead Director and Messrs. Lynch and Rende met with representatives of the Consortium at HGI’s offices. The Lead Director stressed the importance of closing the proposed transaction expeditiously given the Company’s deteriorating financial condition and proposed that the Consortium consider alternative transaction structures such as a tender offer. The Consortium representatives rejected that proposal but indicated that they would continue to consider increasing the merger consideration to be paid to the Company’s Public Shareholders while simultaneously negotiating the other Merger Agreement terms.

On October 16, 2013, representatives of the Consortium communicated to the Lead Director and Mr. Lynch that they would agree to a 10% increase in the per share merger consideration to be paid to the Company’s Public Shareholders.

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

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

On October 21, 2013, Mr. Lynch met with representatives of the Lenders and HGI at the Lenders’ offices in Boston. Mr. Rende participated by phone. They discussed the Company’s financial condition and Mr. Lynch provided a general business update.

On October 24, 2013, the Lead Director and Messrs. Lynch and Rende met with a representative of the Consortium to continue negotiations on the proposed going private transaction. The Lead Director proposed including a “majority of the minority” voting provision in the Merger Agreement, which was rejected by the Consortium’s representative. The Consortium representative indicated that the Consortium was willing to consider adding other shareholder protections such as a limited “go shop” provision (along with the payment of a termination fee if the Company accepts a superior proposal). After discussion, the Consortium representative suggested a meeting including the Lead Director, members of the Company’s management, representatives of the Consortium, Milbank and Graubard Miller to settle any outstanding Merger Agreement issues and to complete the merger consideration negotiations.

On October 29, 2013, the Lead Director, representatives of the Company and the Consortium, Milbank and Graubard Miller met at Milbank’s offices. The participants resolved open issues in the Merger Agreement, including, among other things, the addition of a limited “go shop” provision. The Consortium representative indicated that the limited “go shop” was in lieu of a further increase in the merger consideration. The Lead Director presented arguments in favor of an increase in merger consideration, including that the Company had agreed to move forward without a “majority of minority” vote, and the Consortium representative agreed to address a further merger consideration increase with the Consortium.

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On October 30, 2013, the Company opened its virtual data room to representatives of the Consortium and Milbank.

On November 6, 2013, Milbank and Graubard Miller had a call to discuss the termination provisions in the Merger Agreement.

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

Also on November 8, 2013, Milbank circulated drafts of the ancillary transaction agreements, including the Voting Agreement, Rollover Agreement and Series A Preferred Stock Purchase and Sale Agreement.

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

On November 15, 2013, the Lead Director and a representative of the Consortium had a call to discuss the Voting Agreement. Upon request of the Lead Director, the draft of the Voting Agreement was modified to terminate upon termination of the Merger Agreement. The Lead Director also continued to request an increase in the merger consideration to be paid to the Company’s Public Shareholders.

On November 21, 2013, the Consortium representative provided its final offer for a transaction with the Company. Under the terms of the final offer, Parent would acquire all of the Company’s outstanding Common Stock of the Public Shareholders in a merger transaction with per share merger consideration of $0.27, which the Lead Director accepted. The Consortium representative conditioned the final offer on the completion of a review of the change of control payments contained in employment agreements of certain Company executives and the negotiation of employment terms for Mr. Lynch to serve as Chief Executive Officer following the completion of the Merger.

Between November 22, 2013 and December 17, 2013, representatives of the Company, Graubard Miller, the Consortium and Milbank reviewed the employment agreement change of control payments and resolved all related issues. From December 3, 2013 to December 17, 2013, representatives of the Parent and Mr. Lynch negotiated an employment agreement for Mr. Lynch to take effect following, and only in the event of, the completion of the Merger.

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

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

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

Later that day, a special meeting of the Board of Directors was convened with all directors present. Members of management and representatives of Graubard Miller were in attendance. Messrs. Harley and Lynch recused themselves from the deliberations and left the meeting because they have interests in the Merger different from the interests of the Company’s unaffiliated shareholders generally, as described in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 47. The Lead Director first summarized the basic terms of the proposed Merger Agreement and Merger. He then reviewed the history of the Company’s efforts to obtain funding and execute strategic alternatives to address the challenges the Company has faced with its business, including the Consortium’s proposed going private transaction. The Lead Director next reviewed the timeline, process and progress of the negotiations with the Consortium, and, among other things, discussed his efforts to obtain the highest merger consideration for the Company’s unaffiliated shareholders. A representative from Graubard Miller then reviewed our Board of Directors’ fiduciary obligations to the Company and its shareholders in connection with its consideration of the proposed going private transaction. He then provided a detailed review of the terms of the Merger Agreement, including, among other things, the termination provisions and the nature of the “fiduciary outs” contained in the draft Merger Agreement. Our Board of Directors considered the positive and negative factors and risks in connection with the proposed Merger transaction as discussed in “Special Factors — Reasons for the Merger; Recommendation of the Lead Director and of the Board of Directors; Fairness of the Merger” beginning on page 26. Our Board of Directors, on the basis of the Lead Director’s recommendation, with the unanimous vote of all present, adopted resolutions: declaring the Merger Agreement and the transactions contemplated thereby, including the Merger, to be advisable, and fair to and in the best interests of the Company’s unaffiliated shareholders; approving and adopting the Merger Agreement; and authorizing certain Company officers to take necessary actions to effect the transactions contemplated by the Merger Agreement, including the preparation of this proxy statement, solicitation of shareholder approval of the Merger Agreement, holding a special meeting of shareholders for such purpose, and preparing and filing documents required by applicable law.

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

The Merger Agreement generally provides that we may not solicit alternative Takeover Proposals (as defined in the Merger Agreement and described in “The Merger Agreement — Other Covenants and Agreements — Limited Solicitation” on page 66), but we may engage in a limited solicitation of certain designated parties. Accordingly, all 12 of the designated parties were contacted to determine whether they would be interested in a transaction with us that would be superior to the transaction with Parent and Merger Sub. The Lead Director received inquiries from two of the parties, who we refer to as the “Limited Solicitation Parties,” requesting more information. We notified Parent of the inquiries as required under the Merger Agreement and, as of the date of this proxy statement, have entered into a non-disclosure agreement with one of these parties. The party that executed the confidentiality agreement has been given access to the Company’s electronic data room and the opportunity to communicate with management.

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

The Lead Director

As described above, the Board of Directors delegated to the Lead Director the exclusive authority to review, evaluate, reject, negotiate and, if appropriate, make a recommendation to the Board of Directors regarding the proposal from the Consortium Members or any alternative thereto. The Lead Director evaluated, with the assistance of its legal and financial advisors, the Merger Agreement and the Merger and, on December 18, 2013, determined that the transactions contemplated by the Merger Agreement and the Ancillary Agreements, including the Merger, are advisable, and fair to, and in the best interests of, the unaffiliated shareholders of the Company.

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

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

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

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

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

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In the course of reaching his decision to recommend to the Board of Directors that they approve the Merger Agreement, the Lead Director considered the liquidation value of the Company in the event the Merger was not consummated, based on the going concern opinion provided by the Company’s auditors in their audit report. The Lead Director did not conduct a separate going concern valuation, because he believed that the valuation methodologies used by his financial advisor and the qualitative considerations described above collectively assessed going concern value.

Further, as described in “Special Factors — Background of the Merger” beginning on page 17, since the Company has not received any firm or economically viable offers concerning a potential acquisition of the Company or similar fundamental transaction during the past two years from any party (other than the offer from the Consortium Members that led to the Merger Agreement), the consideration of any alternative or recent firm or economically viable offers was not a factor available for the Lead Director to consider. However, the Lead Director did consider that no firm or economically viable offers resulted from the marketing efforts in which the Company engaged during 2012 and 2013 with the assistance of a nationally recognized investment banking firm.

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

The Board of Directors

The Board of Directors consists of five directors, one of whom, Mr. Lynch, is an employee of the Company, and two of whom, Messrs. Harley and Lynch, have interests in the Merger different from the

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interests of the unaffiliated shareholders of the Company generally. The Board of Directors delegated to the Lead Director the exclusive authority to review, evaluate, reject, negotiate and, if appropriate, make a recommendation to the Board of Directors regarding the proposal from the Consortium Members or any alternative thereto. On December 18, 2013, on the basis of the Lead Director’s recommendation and the other factors described below, the Board of Directors unanimously (with Messrs. Harley and Lynch recusing themselves from the deliberations because they have interests in the Merger different from the interests of the unaffiliated shareholders of the Company generally, as described in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger — Interests of Executive Officers” beginning on page 48):

In determining that the Merger Agreement is advisable, and fair to and in the best interests of the unaffiliated shareholders of the Company, and approving the Merger Agreement, the Merger and the other transactions contemplated thereby, and recommending that the Company’s shareholders vote for the approval of the Merger and the adoption of the Merger Agreement, the Board of Directors (excluding Messrs. Harley and Lynch) expressly and unanimously adopted the analysis of the Lead Director, which is discussed above. Messrs. Harley and Lynch recused themselves from all deliberations concerning the Merger Agreement, the Merger and the other transactions contemplated thereby because they have interests in the Merger different from the interests of the unaffiliated shareholders of the Company generally, as described in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger — Interests of Executive Officers” beginning on page 48. Accordingly, the members of the Board of Directors who deliberated on the Merger Agreement, the Merger and the other transactions contemplated thereby were the Lead Director and Messrs. John Eisel and Peter Cole.

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

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Opinion of the Lead Director’s Financial Advisor

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

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

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

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

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

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

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

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liabilities (including any contingent, derivative, or off-balance-sheet assets and liabilities). Cassel Salpeter did not attempt to confirm whether the Company has good title to its assets. Cassel Salpeter’s role in reviewing any information was limited solely to performing such reviews as Cassel Salpeter deemed necessary to support its own advice and analysis and was not on behalf of the Lead Director, the Board of Directors, the Company or any other party.

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

Management of the Company advised Cassel Salpeter that (i) the Company had been and was currently experiencing significant liquidity issues, (ii) the Company only had a limited amount of availability under its line of credit for operations, and (iii) if the Company’s merchandise vendors did not continue to ship new product without being paid in full for their past due invoices, the Company would not have sufficient capital resources to fund its planned activities beyond December 31, 2013. Management of the Company also advised Cassel Salpeter that the Company would require substantial additional capital to operate on a standalone basis in accordance with the Company business plan underlying the Company Projections and the Company had not been able to, and did not expect to be able to, identify or otherwise access any sources of equity or debt financing for the future operations of the Company prior to the date that it would exhaust its remaining cash resources, if ever. Management of the Company advised Cassel Salpeter that the inability of the Company to continue as a going concern would likely result in a voluntary or involuntary bankruptcy, restructuring or liquidation of the Company in which the Company could receive less than the value at which its assets were carried on the Company’s consolidated financial statements, and holders of Company Common Stock would likely receive little or no value and would likely lose all or substantially all of their investment in the Company.

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

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

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

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

Selected Companies Analysis

Cassel Salpeter considered certain financial data for the Company and selected companies with publicly traded equity securities Cassel Salpeter deemed relevant. The selected companies with publicly traded equity securities were:

The financial data reviewed included:

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

Total Invested Capital Multiple of

High

Mean

Median

Low

LTM Revenue

0.59x

0.33x

0.27x

0.15x

CY 2013 P Revenue

0.59x

0.35x

0.28x

0.16x

FY 2014 P Revenue

0.56x

0.31x

0.27x

0.16x

FY 2014 P EBITDA

12.5x

7.1x

6.7x

3.3x

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

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

Selected Transactions Analysis

Cassel Salpeter considered certain financial data for the Company and the financial terms of the following business transactions Cassel Salpeter deemed relevant. The selected transactions were:

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

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

Enterprise Value as a Multiple of

High

Mean

Median

Low

LTM Revenue

1.86x

0.87x

1.00x

0.09

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

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

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

Other Matters Relating to Cassel Salpeter’s Opinion

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

Cassel Salpeter received a fee of $75,000 for rendering its opinion, no portion of which was contingent upon the completion of the Merger. In addition, the Company agreed to reimburse Cassel Salpeter for certain expenses incurred by it in connection with its engagement and to indemnify Cassel Salpeter and its related parties for certain liabilities that may arise out of its engagement or the rendering of its opinion.

Cassel Salpeter is a recognized investment banking firm which is regularly engaged in providing financial advisory services in connection with mergers and acquisitions. The Lead Director selected Cassel Salpeter to

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act as the its financial advisor in connection with the Merger on the basis of Cassel Salpeter’s experience in similar transactions and its reputation in the investment community.

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

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

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

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

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

The Merger will also allow the Rollover Shareholders to maintain a significant portion of their investment in the Company through their obligations to make an equity investment in Parent via the rollover of their existing holdings of Common Stock and Preferred Stock as described in “Special Factors —  Financing of the Merger — Rollover Financing” beginning on page 45.

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

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

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

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

As described below, the Rollover Shareholders believe that the Merger is fair to the unaffiliated shareholders of the Company on the basis of (i) the factors as described in “Special Factors — Reasons for the Merger; Recommendation of the Lead Director and the Board of Directors; Fairness of the Merger” beginning on page 26, which factors the Rollover Shareholders agree with and adopt, and (ii) the additional factors described below. In this section and in “Special Factors — Positions of Parent and Merger Sub as to the Fairness of the Merger” beginning on page 41, we refer to the “Board” to mean the “Board of Directors other than Messrs. Harley and Lynch, who recused themselves from all discussions by the Board of Directors relating to the Merger negotiations (except to the extent their presence was specifically requested by the Lead Director) and all deliberations by the Board of Directors with respect to the approval of the Merger and adoption of the Merger Agreement and related agreements.”

None of the Rollover Shareholders participated in the deliberations of the Lead Director or the Board regarding, or received advice from the Company’s legal advisor or the Lead Director’s financial advisor as to, the fairness of the Merger. As described in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 47, and in “Special Factors — Certain Effects of the Merger” beginning on page 41, the Rollover Shareholders have interests in the Merger different from those of the unaffiliated shareholders of the Company by virtue of the Rollover Shareholders’ obligation to make an equity investment in Parent via the rollover of their existing holdings of Common Stock and Preferred Stock.

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

Based on the Rollover Shareholders’ knowledge and analysis of available information regarding the Company, as well as discussions with members of the Company’s senior management regarding the Company and its business and the factors considered by, and the analysis and resulting conclusions of, the Board and the Lead Director described in “Special Factors — Reasons for the Merger; Recommendation of the Lead Director and the Board of Directors; Fairness of the Merger” beginning on page 26, with which the Rollover Shareholders agree and which analysis and resulting conclusions the Rollover Shareholders adopt, the Rollover Shareholders believe that the Merger is substantively fair to the unaffiliated shareholders of the Company. In particular, the Rollover Shareholders considered the following:

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

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

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

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

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

Positions of Parent and Merger Sub as to the Fairness of the Merger

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

Neither Parent nor Merger Sub participated in the deliberations of the Lead Director or the Board regarding, or received advice from the Company’s legal advisor or the Lead Director’s legal or financial advisors as to, the fairness of the Merger to the Company’s unaffiliated shareholders. As entities beneficially owned by Mr. Harley and/or the other Rollover Shareholders, Parent and Merger Sub considered the same factors considered by, and adopted the analysis and resulting conclusions of, the Rollover Shareholders, as described in “Special Factors — Positions of the Rollover Shareholders as to the Fairness of the Merger” beginning on page 38. Based on the information and factors set forth in the foregoing discussion, as well as Parent and Merger Sub’s knowledge and analysis of available information regarding the Company, as well as discussions with members of the Company’s senior management regarding the Company and its business and the factors considered by, and the analysis and resulting conclusions of, the Board and the Lead Director described in “Special Factors — Reasons for the Merger; Recommendation of the Lead Director and the Board of Directors; Fairness of the Merger” beginning on page 26 (including, without limitation, the Board’s and Lead Director’s analysis with respect to the Company’s going concern value), with which Parent and Merger Sub agree and which analysis and resulting conclusions Parent and Merger Sub adopt, Parent and Merger Sub believe that the Merger is fair to the unaffiliated shareholders of the Company. Parent and Merger Sub believe that the foregoing information and factors provide a reasonable basis for their belief that the Merger is fair to the unaffiliated shareholders of the Company. This belief should not, however, be construed as a recommendation to any Company shareholder to approve the Merger or adopt the Merger Agreement. Parent and Merger Sub do not make any recommendation as to how shareholders of the Company should vote their shares of Common Stock relating to the Merger.

Plans for the Company after the Merger

After the Effective Time, Parent anticipates that the Company will continue its current operations, except that it will (i) cease to be an independent public company and will instead be a wholly owned subsidiary of Parent and (ii) have significantly more debt than it currently has. There are no current plans to repay the debt taken out to finance the Merger, which is due on May 31, 2015 if the Merger is consummated. If the Merger is consummated, the Common Stock will cease to be quoted on the OTCQB and will cease to be registered under the Exchange Act (via termination of registration pursuant to Section 12(g) of the Exchange Act). After the Effective Time, the directors of Merger Sub immediately prior to the Effective Time will become the directors of the Company, and the officers of the Company immediately prior to the Effective Time will remain the officers of the Company, in each case until the earlier of their resignation or removal or until their respective successors are duly elected or appointed and qualified, as the case may be. Parent has entered into a new employment agreement with Thomas J. Lynch, the chief executive officer of the Company, but has not entered into a new employment agreement with any other Executive Officer.

Certain Effects of the Merger

If the Shareholder Approval is obtained and the other conditions to the Closing are either satisfied or waived, Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent. Except for the Rollover Shareholders (and Mr. Lynch, upon his receipt of an equity interest in Parent, pursuant to his new employment agreement, in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to

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vesting and other terms), none of our current shareholders will have any ownership interest in, or be a shareholder of, the Company after the completion of the Merger. As a result, our current shareholders (other than the Rollover Shareholders and Mr. Lynch) will no longer benefit from any increase in our value, nor will they bear the risk of any decrease in our value. Following the Merger, Parent (and Mr. Lynch) will benefit from any increase in our value and also will bear the risk of any decrease in our value.

Upon the consummation of the Merger:

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Following the Merger, the entire equity in the Company, as the surviving corporation, will be owned by Parent. If the Merger is completed, the Rollover Shareholders (and Mr. Lynch, upon his receipt of an equity interest in Parent, pursuant to his new employment agreement, in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms) will be the sole beneficiaries of our future earnings and growth, if any, and will be entitled to vote on corporate matters affecting the Company following the Merger. Similarly, the Rollover Shareholders (and Mr. Lynch, upon his receipt of such equity interest) will also bear the risks of ongoing operations, including the risks of any decrease in our value after the Merger and the operational and other risks related to the incurrence by the Company, as the surviving corporation, of additional debt as described below in “Special Factors — Financing of the Merger” beginning on page 45.

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

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

		Ownership of the Company Prior to the Merger												Ownership of the Company After the Merger
Rollover Shareholder		Ownership Percentage(1)				Interest in the Net Book Value/ (Shareholders’ Deficiency) of the Company(2)				Interest in the Net Earnings/(Loss) of the Company(3)				Ownership Percentage				Interest in the Net Book Value/ (Shareholders’ Deficiency) of the Company(2)				Interest in the Net Earnings/(Loss) of the Company(3)
HGI Funding, LLC			—				—				—				62.0	%		$	(10,789	)		$	(14,542	)
Tokarz Investments, LLC			21.4	%		$	(3,716	)		$	(5,009	)			12.1	%		$	(2,112	)		$	(2,847	)
TTG Apparel, LLC			4.5	%		$	(783	)		$	(1,055	)			10.9	%		$	(1,890	)		$	(2,547	)
Arsenal Group, LLC			28.9	%		$	(5,033	)		$	(6,784	)			9.7	%		$	(1,696	)		$	(2,285	)
Fursa Alternative Strategies LLC			14.5	%		$	(2,522	)		$	(3,399	)			4.9	%		$	(850	)		$	(1,145	)
William F. Harley III			1.2	%		$	(210	)		$	(283	)			0.4	%		$	(65	)		$	(87	)
Thomas J. Lynch(4)			1.5	%		$	(265	)		$	(357	)			—				—				—

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

A primary benefit of the Merger to the unaffiliated shareholders of the Company will be the right of such shareholders to receive a cash payment of $0.27, without interest, for each share of Common Stock held by

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such shareholders, representing a premium of approximately 50% to the closing price of the Common Stock on September 27, 2013, the last trading day before the announcement by the Consortium Members of their proposal to acquire all outstanding shares of Common Stock not owned by him, as well as a premium of approximately 46% over the average closing price of the Company’s Common Stock for the 45 trading days prior to that date.

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

In connection with the Merger, the Rollover Shareholders (and Mr. Lynch), and any permitted assignee or designee of the foregoing, will receive benefits and be subject to obligations that are different from, or in addition to, the benefits received by our unaffiliated shareholders generally. The primary benefits of the Merger to the Rollover Shareholders (and Mr. Lynch), based on their ownership of all the equity interests in Parent, include their interest in our potential future earnings and growth which, if they successfully execute their business strategies, could be substantial. Additionally, following the Merger, we will be a private company, and as such will be relieved of the burdens imposed on companies with publicly traded equity, including the requirements and restrictions on trading that our directors, officers and beneficial owners of more than 10% of the shares of our Common Stock face as a result of the provisions of Section 16 of the Exchange Act and the requirement of furnishing a proxy statement in connection with shareholders’ meetings pursuant to Section 14(a) of the Exchange Act. Termination of registration of our Common Stock under the Exchange Act will also substantially reduce the information required to be furnished by the Company to the public and the SEC. It is estimated that the Company will save approximately $700,000 per year as a result of no longer being a publicly traded company. Additionally, following the Merger, the Rollover Shareholders will control the surviving corporation. Additional anticipated benefits to the Rollover Shareholders include receiving tax-free treatment with respect to the contribution of shares of Common Stock in the transaction pursuant to the Rollover Agreement discussed in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Rollover Agreement” beginning on page 73. As a result of the Merger, the Rollover Shareholders (and Mr. Lynch) may also become the beneficiaries of the Company’s future use of net operating loss carryforwards, which, as of July 27, 2013, equaled approximately $80,000,000, although ownership changes, as defined in Section 382 of the Code, may potentially limit the amount of net operating loss carryforwards that may be utilized annually to offset future taxable income (which income may be higher following the Merger due in part to the cost savings noted above relating to the Company’s avoidance of costs associated with being a publicly traded company).

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

In connection with the Merger, the Executive Officers will receive benefits and be subject to obligations that are different from, or in addition to, the benefits and obligations of the Company’s unaffiliated shareholders generally, as described above with respect to Mr. Lynch and as described generally in more detail in “Special Factors — Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 47. Such incremental benefits are expected to include, among others, Mr. Lynch continuing as an executive officer of the surviving corporation and receiving, pursuant to his new employment agreement, an equity interest in Parent in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms. Additionally, Thomas Rende, if he does not continue as executive officer of the surviving corporation, will receive certain “change in control” payments.

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

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

Financing of the Merger

The Company and Parent estimate that the total financing required to complete the Merger and related transactions and pay related fees and expenses will be approximately $24,805,281, which consists of $20,783,846 in rollover equity, $3,161,435 in merger consideration payable in cash to the Public Shareholders and holders of Company stock options and an estimated $860,000 in fees and expenses. Parent expects this amount to be provided through a combination of the proceeds of:

Rollover Financing

On December 18, 2013, the Rollover Shareholders entered into the Rollover Agreement with Parent, pursuant to which the Rollover Shareholders collectively committed to contribute, immediately prior to the consummation of the Merger, an aggregate amount of 27,678,679 shares of Common Stock, 56,778 shares of Series A Convertible Preferred Stock and 107,576 shares of Series B Convertible Preferred Stock to Parent (the equivalent of a $20,783,846 investment based on the per share merger consideration of $0.27 and valuing the convertible preferred stock on an as-converted basis) in exchange for an increase in their equity interests in Parent. The obligations of the Rollover Shareholders pursuant to the Rollover Agreement are conditioned upon the satisfaction or waiver of the conditions to the obligations of Parent to complete the Merger contained in the Merger Agreement.

The Rollover Agreement is further described in “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities” beginning on page 73.

Debt Financing

The Company is party to that certain Credit and Security Agreement, dated as of May 31, 2012, which, as amended, supplemented, modified and in effect on the date of this proxy statement, we refer to as the “Credit Agreement,” with FOH Holdings, Inc., Frederick’s of Hollywood, Inc., Frederick’s of Hollywood Stores, Inc. and Hollywood Mail Order, LLC, each a direct or indirect subsidiary of the Company, and which we refer to as the “Borrowers,” and the Lenders.

The Credit Agreement, among other things, provides for a line of credit of up to $35,000,000, which includes two tranches of “first in last out” advances. The second such tranche, or the “Second Tranche,” in the amount of $11,000,000, represents (i) $5,000,000 that was advanced to the Company on October 10, 2013

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to provide short term working capital and (ii) up to $6,000,000 that may be advanced upon consummation of the Merger, at the Borrowers’ option, subject to the terms and conditions of the Credit Agreement, in order to finance the payment of the merger consideration and for other fees, expenses, costs and obligations incurred by Borrowers in connection with the Merger, or the “Merger Advance.” The Company will pay an additional origination fee in an amount equal to $60,000, which will be due and payable on the earliest of (A) the date on which the Lender funds the Merger Advance, (B) the occurrence of an Event of Default under the Credit Agreement, or (C) April 10, 2014, if the Merger has not occurred by such date.

The $5,000,000 advance is to be repaid on April 10, 2014 if the Merger is not consummated by that date, or May 31, 2015 if the Merger is consummated on or before April 10, 2014. The $6,000,000 advance, if made, plus any additional amount that the Lender may elect to advance in its sole discretion, is to be repaid on May 31, 2015. The unpaid principal of the Second Tranche will bear interest, payable monthly, in arrears, at an amount equal to the LIBOR Rate (as defined in the Credit Agreement) in effect from time to time plus 11.5% per annum, but not less than 14% per annum regardless of fluctuations in the LIBOR Rate. Following the consummation of the Merger, so long as no “Event of Default” (as defined in the Credit Agreement) has occurred and is continuing, a portion of the interest payable on the Second Tranche equal to 6% per annum (or such lesser amount as the Borrowers may elect) shall be capitalized, compounded and added to the unpaid amount of the total obligations due under the credit facility on each interest payment date and shall also accrue interest at the applicable rate and will be due and payable in cash on May 31, 2015.

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

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

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

The Lenders are affiliates of HGI, HGI Funding and Parent. Salus commenced operations in December 2011 and is a subsidiary of HGI engaged primarily in the business of providing secured asset-based loans across a variety of industries. Salus CLO is a collateralized loan obligation vehicle of Salus providing for the issuance of collateralized obligations. The Lenders under the Credit Agreement have in the past engaged, and may in the future engage, in transactions with and perform services, including commercial banking, financial advisory and investment banking services, for the Company and its affiliates in the ordinary course of business for which they have received or will receive customary fees and expenses.

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

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

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

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

At the Effective Time, shares of Common Stock held by the members of the Board of Directors (other than Mr. Harley) and our Executive Officers will be converted into the right to receive the merger consideration in the same manner as all outstanding shares of Common Stock held by the unaffiliated shareholders of the Company, as described in “Special Factors — Certain Effects of the Merger” beginning on page 41.

Interests of the Non-Employee Directors

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

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

Mr. Harley and the other Rollover Shareholders will contribute, immediately prior to the consummation of the Merger, their shares of our capital stock beneficially owned by them (after taking into account the transfer of shares of Series A Convertible Preferred Stock from TTG to HGI Funding pursuant to the Purchase Agreement) to Parent in exchange for an increase in their equity interests in Parent. Following the Merger, the Company will be 100% beneficially owned by Mr. Harley and the other Rollover Shareholders (and Mr. Lynch, upon his receipt of an equity interest in Parent, pursuant to his new employment agreement, in the form of incentive units that are part of a separate series of units from those being issued to the Rollover Shareholders and are subject to vesting and other terms), and any permitted assignee or designee thereof. For a description of the treatment of the Common Stock beneficially owned by Mr. Harley in the Merger and a discussion of Mr. Harley’s continuing interest in the Company as a Rollover Shareholder, see “Special Factors — Certain Effects of the Merger” beginning on page 41. Each Company stock option and restricted share award held by Mr. Harley and each warrant held by Mr. Harley and the other Rollover Shareholders, as of the Effective Time, will be cancelled on the terms and conditions set forth in the Rollover Agreement between Parent and the Rollover Shareholders.

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

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Interests of Executive Officers

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

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

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

Named Executive Officer Merger-Related Compensation Table

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

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applicable SEC disclosure rules, and such compensation is subject to a non-binding, advisory vote of the Company’s shareholders, as described below in “Advisory Vote Regarding Merger-Related Compensation Proposal” beginning on page 88.

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

Employment Agreements

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

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

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

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

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

Compensation of the Lead Director

At a meeting of the Board of Directors held on October 16, 2013, the Board authorized the Company to pay Milton Walters $5,000 per month for a minimum of four months effective September 1, 2013 as compensation for serving in his capacity as Lead Director.

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

Indemnification of Directors and Officers

For a description of the indemnification of directors and officers by the Company following the Merger, see “The Merger Agreement — Other Covenants and Agreements — Indemnification; Directors’ and Officers’ Insurance” beginning on page 65.

Material United States Federal Income Tax Considerations

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

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

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

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

U.S. Holders

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

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

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

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

Rollover Shareholders

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

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

Non-U.S. Holders

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

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

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

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

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

Regulatory Approvals

No regulatory approvals are required in connection with the merger.

Anticipated Accounting Treatment of the Merger

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

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Fees and Expenses

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

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

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

Except as described in “The Merger Agreement — Fees and Expenses” beginning on page 70, all costs and expenses incurred in connection with the Merger, the Merger Agreement and the transactions contemplated thereby will be paid by the party incurring or required to incur such expenses.

Litigation

On January 24, 2014, a purported shareholder of the Company filed a putative class action law suit in New York state court against the Board of Directors, the Company, Parent and Merger Sub. The action is Paul v. Cole et al. (N.Y. Sup. Ct. Jan. 24, 2014). The complaint alleges that the members of the Board of Directors breached their fiduciary duty to maximize shareholder value by pursuing the Merger through a flawed process and for inadequate consideration. The complaint further alleges that (i) the Merger took advantage of a temporary depression in the market price of the Common Stock that occurred due to its delisting from the NYSE MKT LLC, (ii) the Board of Directors acquiesced to unreasonable deal protection devices, and (iii) the merger process employed by the Board of Directors was unfair because the process did not include a right for minority shareholders to approve the Merger and the Lead Director was not positioned to effectively advocate for the minority shareholders. The complaint further alleges that Merger Sub colluded in or aided and abetted the breaches by the Board of Directors. The complaint seeks, among other things, a declaration that the Merger Agreement was entered in breach of the Board of Directors’ fiduciary duties and is therefore unenforceable, an injunction against soliciting votes on the Merger Agreement and an award of costs and disbursements of the action, including attorneys fees. Each of the defendants denies any allegations of wrongdoing. The defendants believe that the plaintiffs’ claims are without merit and intend to vigorously defend against the allegations.

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

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

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

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THE SPECIAL MEETING

Date, Time and Place

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

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

Record Date and Quorum

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

The presence at the Special Meeting, in person or by proxy, of the holders of a majority of shares of Common Stock outstanding on the record date will constitute a quorum, permitting the Company to conduct its business at the Special Meeting. Any shares of Common Stock held in treasury by the Company or by any of our subsidiaries are not considered to be outstanding for purposes of determining a quorum. Once a share is represented at the Special Meeting, it will be counted for the purpose of determining a quorum at the Special Meeting and any adjournment of the Special Meeting. However, if a new record date is set for the adjourned Special Meeting, then a new quorum will have to be established. Proxies received but marked as abstentions will be included in the calculation of the number of shares considered to be present at the Special Meeting. Broker non-votes, as described in “The Special Meeting — Voting; Proxies; Revocation — Providing Voting Instructions by Proxy” beginning on page 56, also will count for purposes of determining the presence of a quorum if the shares are being voted with respect to any matter at the Special Meeting.

Required Vote

For the Company to complete the Merger, under New York law and the Merger Agreement, shareholders holding at least two-thirds of the aggregate voting power of our Common Stock outstanding at the close of business on the record date must vote “FOR” the approval of the Merger and adoption of the Merger Agreement.

Subject to the terms of the Voting Agreement between us, Parent and the Rollover Shareholders, the Rollover Shareholders have agreed to vote all shares of our Common Stock they beneficially own (and any shares acquired by them after the date of the Voting Agreement) in favor of approving the Merger and adopting the Merger Agreement. See “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Voting Agreement” beginning on page 73. As of the record date, there were 39,273,254 shares of our Common Stock outstanding, of which the Rollover Shareholders own 27,678,679 shares of Common Stock, representing in the aggregate approximately 70.5% of the issued and outstanding shares of Common Stock. This amount excludes the 62,004,004 shares of Common Stock that the Rollover Shareholders have the right to acquire pursuant to convertible preferred stock, warrants and options held by them. Because the Rollover Shareholders beneficially hold more than two-thirds of our outstanding shares of Common Stock as of the record date, they can satisfy the required vote under New York law and the Merger Agreement to approve the Merger and adopt the Merger Agreement without the affirmative vote of any of our other shareholders.

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

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

Shareholders holding at least a majority of the shares of Common Stock voted at the Special Meeting must vote “FOR” the Adjournment Proposal, in order for such proposal to be approved. The Adjournment Proposal will be presented to our shareholders at the Special Meeting only if the shares of Common Stock voting in favor of the proposal to approve the Merger and adopt the Merger Agreement are not sufficient to approve such proposal. Because the Rollover Shareholders beneficially hold more than a majority of our outstanding shares of Common Stock as of the record date, they can approve or disapprove the Adjournment Proposal regardless of how any other shareholder votes.

Voting; Proxies; Revocation

Attendance

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

Voting in Person

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

Providing Voting Instructions by Proxy

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

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

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

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

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

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

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

Revocation of Proxies

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

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

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

Abstentions

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

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Adjournments and Postponements

Although it is not currently expected, the Special Meeting may be adjourned or postponed for the purpose of soliciting additional proxies. In the event that there is present, in person or by proxy, sufficient favorable voting power to secure the vote of the shareholders of the Company necessary to approve the Merger and adopt the Merger Agreement, the Company does not anticipate that it will adjourn or postpone the Special Meeting unless it is advised by counsel that failure to do so could reasonably be expected to result in a violation of applicable law. Any signed proxies received by the Company in which no voting instructions are provided on such matter will be voted in favor of an adjournment in these circumstances. Any adjournment or postponement of the Special Meeting for the purpose of soliciting additional proxies will allow the Company’s shareholders who have already sent in their proxies to revoke them at any time prior to their use at the Special Meeting as adjourned or postponed.

Solicitation of Proxies

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

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THE MERGER AGREEMENT

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

Explanatory Note Regarding the Merger Agreement

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

Additional information about the Company may be found elsewhere in this proxy statement and the Company’s other public filings. See “Where You Can Find Additional Information” beginning on page 93.

Structure of the Merger

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

When the Merger Becomes Effective

The Closing of the Merger will take place on a date to be specified by the Parent after the satisfaction or waiver of the conditions to Closing stated in the Merger Agreement (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions) or at such other time as the parties may agree in writing, but if Parent fails to specify a Closing Date, the Closing Date shall be no later than three business days after such conditions have been satisfied or waived (or April 30, 2014, if earlier). The Merger will become effective at the time, which we refer to as the Effective Time, when

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the Company and Parent file a certificate of Merger with the Department of State of the State of New York or at such later date or time as Parent and the Company agree in writing and specify in the certificate of Merger.

Effect of the Merger on the Capital Stock

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

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

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

Treatment of Stock Options and Other Stock-Based Awards

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

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

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

Each Company stock option and restricted share award held by Mr. Harley and each warrant held by Mr. Harley and the other Rollover Shareholders, as of the Effective Time, will be cancelled on the terms and conditions set forth in the Rollover Agreement between Parent and the Rollover Shareholders. See

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“Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Rollover Agreement” beginning on page 73.

Dissenting Shares

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

Payment for the Common Stock in the Merger

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

Representations and Warranties

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

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

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

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

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

Conduct of Business Pending the Merger

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

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Other Covenants and Agreements

Indemnification; Directors’ and Officers’ Insurance

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

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

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

Access and information

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

Efforts to Consummate

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

Limited Solicitation

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

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

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

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

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

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

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

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

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

For purposes of this proxy statement:

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

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

Shareholder Litigation

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

SEC Reports

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

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Conditions to the Merger

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

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

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

Termination

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

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Fees and Expenses

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

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Payment or Reimbursement of Fees and Expenses by the Company

If the Merger Agreement is terminated by Parent because of a Change in the Company Recommendation, as described in “The Merger Agreement — Termination” beginning on page 69, the Company will reimburse Parent for its expenses (not to exceed $300,000 in the aggregate). If the Merger Agreement is terminated by the Company because the Board of Directors, upon the recommendation of the Lead Director, causes the Company to enter into an agreement related to a Superior Proposal, as described in “The Merger Agreement — Termination” beginning on page 69, the Company will reimburse Parent for its expenses (not to exceed $300,000 in the aggregate) and will pay Parent a termination fee of $300,000. Parent’s right to receive such reimbursement of expenses and/or such termination fee, as applicable, shall be the sole and exclusive remedy in the event of a termination of the Merger Agreement as described, except in the event of a willful or intentional material breach of any provision of the Merger Agreement by the Company.

Payment or Reimbursement of Fees and Expenses by Parent

If the Merger Agreement is terminated by the Company because Parent or Merger Sub breached or failed to perform in any material respect any of its representations, warranties, covenants or agreements contained in the Merger Agreement, as described in “The Merger Agreement — Termination” beginning on page 69, and (i) such breach was material and knowing, willful or intentional and (ii) at the time of such termination, the Company is then ready, willing and able to consummate the merger and the conditions to Parent and Merger Sub’s obligations under the Merger Agreement have been satisfied or waived, Parent will reimburse the Company for its expenses (not to exceed $300,000 in the aggregate) and will pay the Company a termination fee in an amount equal to $300,000. If the Merger Agreement is terminated by the Company because Parent or Merger Sub breached or failed to perform in any material respect any of its representations, warranties, covenants or agreements contained in the Merger Agreement, as described in “The Merger Agreement —  Termination” beginning on page 69, in circumstances other than those set forth in the preceding sentence, Parent will reimburse the Company for its expenses (not to exceed $300,000 in the aggregate). The Company’s right to terminate and receive such reimbursement of expenses and/or such termination fee, as applicable, shall be the sole and exclusive monetary remedy of the Company. In the event the Merger Agreement is terminated as described, under no circumstances shall the Company be permitted or entitled to receive any injunction, specific performance or other equitable relief.

Amendments and Waivers

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

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

Equitable Remedies

The Company will not be entitled to receive both equitable remedies and the reimbursement of expenses and/or a termination fee, as described in “The Merger Agreement — Fees and Expenses — Payment or Reimbursement of Fees and Expenses by Parent” beginning on page 71. Parent and/or Merger Sub shall be entitled to an injunction or injunctions to prevent breaches of the Merger Agreement or to enforce specifically the performance of the terms hereof in addition to any other remedies to which they are entitled at law or in

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

Vote Required and Board Recommendation

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

Subject to the terms of the Voting Agreement between us, Parent and the Rollover Shareholders, the Rollover Shareholders have agreed to vote all shares of our Common Stock they beneficially own (and any shares acquired by them after the date of the Voting Agreement) in favor of approving the Merger and adopting the Merger Agreement. See “Agreements Involving the Company’s Securities; Transactions Between the Rollover Shareholders and the Company — Agreements Involving the Company’s Securities — Voting Agreement” beginning on page 73. As of the record date, there were 39,273,254 shares of our Common Stock outstanding, of which the Rollover Shareholders own 27,678,679 shares of Common Stock, representing in the aggregate approximately 70.5% of the outstanding shares of Common Stock. This amount excludes the 62,004,004 shares of Common Stock that the Rollover Shareholders have the right to acquire pursuant to convertible preferred stock, warrants and options held by them. Because the Rollover Shareholders beneficially hold more than two-thirds of our outstanding shares of Common Stock as of the record date, they can satisfy the required vote under New York law and the Merger Agreement to approve the Merger and adopt the Merger Agreement without the affirmative vote of any of our other shareholders.

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

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

Agreements Involving the Company’s Securities

Voting Agreement

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

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

As of the record date, there were 39,273,254 shares of our Common Stock outstanding, of which the Rollover Shareholders own 27,678,679 shares of Common Stock, representing in the aggregate approximately 70.5% of the outstanding shares of Common Stock. This amount excludes the 62,004,004 shares of Common Stock that the Rollover Shareholders have the right to acquire pursuant to convertible preferred stock, warrants and options held by them.

Rollover Agreement

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

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

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

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

Purchase and Sale Agreement

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

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

Series B Convertible Preferred Stock Transaction

Purchase Agreement

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

Series B Convertible Preferred Stock

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

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

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

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

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

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

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

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

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

Liquidation Rights.  Upon the occurrence of an Acquisition or Asset Transfer (each as defined in the Series B Certificate of Amendment) or upon any bankruptcy, liquidation, dissolution or winding up of the Company, whether voluntary or involuntary (any such Acquisition, Asset Transfer, bankruptcy, liquidation, dissolution or winding up, a “Series B Liquidation Event”), the holders of Series B Convertible Preferred Stock will be entitled to receive, in preference to the holders of any security not ranking by its terms senior to or on parity with the Series B Convertible Preferred Stock, including the common stock and any Junior Preferred Stock, an amount equal to: (i) the stated value of the Series B Convertible Preferred Stock plus all accrued but unpaid dividends thereon, multiplied by (ii) (A) 1.09, if the Series B Liquidation Event occurs no later than March 15, 2014, (B) 1.05, if the Liquidation Event occurs after March 15, 2014 but no later than March 15, 2015, or (C) 1.00, if the Series B Liquidation Event occurs after March 15, 2015.

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

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

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

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

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

Registration Rights

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

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Shareholder Meeting

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

Amendments to By-laws

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

Series B Directors

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

Consent and Waiver of Holder of Series A Convertible Preferred Stock

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

Additional Information

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

Series A Convertible Preferred Stock Transaction

Purchase Agreement