UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q




x           Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
quarterly period ended January 23, 2010





 ̈           Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





For the
transition period from   
to





Commission
File Number: 001-05893





FREDERICK’S OF HOLLYWOOD
GROUP INC.


(Exact
name of Registrant as specified in its charter)





New York
                
                13-5651322(State
      or other jurisdiction of
                
                (I.R.S.
      Employerincorporation
      or organization)
                
                Identification
      Number)





1115 Broadway, New York, NY
                    
                    10010(Address
      of principal executive offices)
                    
                    (Zip
      Code)





Registrant’s
telephone number, including area code (212) 798-4700





(Former
      name, former address, and former fiscal year, if changed since last
      report.)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Yes x                                No   ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).




Yes   ̈                                No   ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act:




Large
      accelerated filer   ̈
            Accelerated
      filer   ̈Non-accelerated
      filer   ̈
            Smaller
      reporting company  x


(do not
check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)




Yes   ̈                                No  x




The
number of common shares outstanding on March 8, 2010 was
26,429,658.





FREDERICK’S
OF HOLLYWOOD GROUP INC.


QUARTERLY
REPORT ON FORM 10-Q


TABLE OF
CONTENTS





PagePART
      I.
                          Financial
      InformationItem
      1.
                          Financial
      StatementsConsolidated
      Balance Sheets at January 23, 2010 (Unaudited) and July 25, 2009
      (Audited)
                          
                          3Consolidated
      Statements of Operations (Unaudited) for the Three and Six Months Ended
      January 23, 2010 and January 24, 2009
                          
                          4Consolidated
      Statements of Cash Flows (Unaudited) for the Six Months Ended January 23,
      2010 and January 24, 2009
                          
                          5Notes
      to Consolidated Unaudited Financial Statements
                          
                          6 –
      13Item
      2.
                          Management’s
      Discussion and Analysis of Financial Condition
      and Results of Operations
                          
                          14
      – 26Item
      3.
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          
                          27Item
      4.
                          Controls
      and Procedures
                          
                          27PART
      II.
                          Other
      InformationItem
      1.
                          Legal
      Proceedings
                          
                          28Item
      1A.
                          Risk
      Factors
                          
                          28Item
      6.
                          Exhibits
                          
                          28Signatures
                          
                          29


2


PART  I.   FINANCIAL
INFORMATION





Item
1.  Financial Statements


FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED  BALANCE
SHEETS


(In
Thousands, Except Share Data)





January
      23,
                      
                      
                      July
      25,2010
                      
                      
                      2009(Unaudited)
                      
                      
                      (Audited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                      
                      $
                      460
                      
                      
                      $
                      555Accounts
      receivable
                      
                      
                      3,090
                      
                      
                      
                      2,643Income
      tax receivable
                      
                      
                      102
                      
                      
                      
                      172Merchandise
      inventories
                      
                      
                      22,384
                      
                      
                      
                      21,836Prepaid
      expenses and other current assets
                      
                      
                      3,239
                      
                      
                      
                      2,543Deferred
      income tax assets
                      
                      
                      2,429
                      
                      
                      
                      3,117Total
      current assets
                      
                      
                      31,704
                      
                      
                      
                      30,866PROPERTY
      AND EQUIPMENT, Net
                      
                      
                      18,698
                      
                      
                      
                      20,663INTANGIBLE
      AND OTHER ASSETS
                      
                      
                      25,663
                      
                      
                      
                      26,108TOTAL
      ASSETS
                      
                      $
                      76,065
                      
                      
                      $
                      77,637LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIENCY)CURRENT
      LIABILITIES:Revolving
      credit and bridge facilities
                      
                      $
                      12,440
                      
                      
                      $
                      9,245Accounts
      payable and other accrued expenses
                      
                      
                      26,547
                      
                      
                      
                      22,723Deferred
      revenue from gift cards
                      
                      
                      1,897
                      
                      
                      
                      1,692Total
      current liabilities
                      
                      
                      40,884
                      
                      
                      
                      33,660DEFERRED
      RENT AND TENANT ALLOWANCES
                      
                      
                      5,037
                      
                      
                      
                      4,707LONG
      TERM DEBT – related party
                      
                      
                      13,744
                      
                      
                      
                      13,336OTHER
                      
                      
                      100
                      
                      
                      
                      16DEFERRED
      INCOME TAX LIABILITIES
                      
                      
                      11,465
                      
                      
                      
                      12,153TOTAL
      LIABILITIES
                      
                      
                      71,230
                      
                      
                      
                      63,872PREFERRED
      STOCK, $.01 par value – authorized, 10,000,000 shares at January 23, 2010
      and July 25, 2009; issued and outstanding 3,629,325 shares of Series A
      preferred stock at January 23, 2010 and July 25, 2009
                      
                      
                      7,500
                      
                      
                      
                      7,500COMMITMENTS
      AND CONTINGENCIES (NOTE 7)
                      
                      
                      -
                      
                      
                      
                      -SHAREHOLDERS’
      EQUITY (DEFICIENCY):Common
      stock, $.01 par value – authorized, 200,000,000 shares at January 23, 2010
      and July 25, 2009; issued and outstanding 26,418,185 shares at January 23,
      2010 and 26,394,158 shares at July 25, 2009
                      
                      
                      264
                      
                      
                      
                      263Additional
      paid-in capital
                      
                      
                      60,835
                      
                      
                      
                      60,444Accumulated
      deficit
                      
                      
                      (63,690
                      )
                      
                      
                      (54,375
                      )Accumulated
      other comprehensive loss
                      
                      
                      (74
                      )
                      
                      
                      (67
                      )TOTAL
      SHAREHOLDERS’ EQUITY (DEFICIENCY)
                      
                      
                      (2,665
                      )
                      
                      
                      6,265TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)
                      
                      $
                      76,065
                      
                      
                      $
                      77,637





See notes
to consolidated unaudited financial statements.


3


FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)


(In
Thousands, Except Per Share Amounts)





Three
      Months Ended
                  
                  
                  Six
      Months EndedJanuary
      23,
                  
                  
                  January
      24,
                  
                  
                  January
      23,
                  
                  
                  January
      24,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      sales
                  
                  $
                  41,321
                  
                  
                  $
                  52,516
                  
                  
                  $
                  78,529
                  
                  
                  $
                  95,081Cost
      of goods sold, buying and occupancy
                  
                  
                  27,286
                  
                  
                  
                  34,223
                  
                  
                  
                  51,892
                  
                  
                  
                  62,110Gross
      profit
                  
                  
                  14,035
                  
                  
                  
                  18,293
                  
                  
                  
                  26,637
                  
                  
                  
                  32,971Selling,
      general and administrative expenses
                  
                  
                  18,141
                  
                  
                  
                  18,812
                  
                  
                  
                  34,694
                  
                  
                  
                  38,187Goodwill
      impairment
                  
                  
                  -
                  
                  
                  
                  19,100
                  
                  
                  
                  -
                  
                  
                  
                  19,100Operating
      loss
                  
                  
                  (4,106
                  )
                  
                  
                  (19,619
                  )
                  
                  
                  (8,057
                  )
                  
                  
                  (24,316
                  )Interest
      expense, net
                  
                  
                  589
                  
                  
                  
                  421
                  
                  
                  
                  950
                  
                  
                  
                  849Loss
      before income tax provision
                  
                  
                  (4,695
                  )
                  
                  
                  (20,040
                  )
                  
                  
                  (9,007
                  )
                  
                  
                  (25,165
                  )Income
      tax provision
                  
                  
                  23
                  
                  
                  
                  21
                  
                  
                  
                  47
                  
                  
                  
                  41Net
      loss
                  
                  
                  (4,718
                  )
                  
                  
                  (20,061
                  )
                  
                  
                  (9,054
                  )
                  
                  
                  (25,206
                  )Less:
      Preferred stock dividends
                  
                  
                  142
                  
                  
                  
                  140
                  
                  
                  
                  261
                  
                  
                  
                  281Net
      loss applicable to common shareholders
                  
                  $
                  (4,860
                  )
                  
                  $
                  (20,201
                  )
                  
                  $
                  (9,315
                  )
                  
                  $
                  (25,487
                  )Basic
      net loss per share
                  
                  $
                  (0.18
                  )
                  
                  $
                  (0.77
                  )
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.97
                  )Diluted
      net loss per share
                  
                  $
                  (0.18
                  )
                  
                  $
                  (0.77
                  )
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.97
                  )Weighted
      average shares outstanding – basic
                  
                  
                  26,417
                  
                  
                  
                  26,192
                  
                  
                  
                  26,412
                  
                  
                  
                  26,182Weighted
      average shares outstanding – diluted
                  
                  
                  26,417
                  
                  
                  
                  26,192
                  
                  
                  
                  26,412
                  
                  
                  
                  26,182





See notes
to consolidated unaudited financial statements.


4





FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED  STATEMENTS
OF CASH FLOWS


(Unaudited)


(In
Thousands)




Six
      Months EndedJanuary
      23,
                    2010
                  
                  
                  January
      24,
                    2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                  
                  $
                  (9,054
                  )
                  
                  $
                  (25,206
                  )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesGoodwill
      impairment
                  
                  
                  -
                  
                  
                  
                  19,100Depreciation
      and amortization
                  
                  
                  2,782
                  
                  
                  
                  3,006Provision
      for sales allowances and doubtful accounts
                  
                  
                  (59
                  )
                  
                  
                  157Issuance
      of common stock for directors’ fees
                  
                  
                  30
                  
                  
                  
                  25Stock-based
      compensation expense
                  
                  
                  362
                  
                  
                  
                  440Amortization
      of deferred financing costs
                  
                  
                  87
                  
                  
                  
                  25Noncash
      accrued interest on long term debt – related party
                  
                  
                  408
                  
                  
                  
                  385Amortization
      of deferred rent and tenant allowances
                  
                  
                  224
                  
                  
                  
                  389Loss
      on disposal of property and equipment
                  
                  
                  169
                  
                  
                  
                  5Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  (282
                  )
                  
                  
                  (1,349
                  )Merchandise
      inventories
                  
                  
                  (548
                  )
                  
                  
                  (2,969
                  )Prepaid
      expenses and other current assets
                  
                  
                  (696
                  )
                  
                  
                  (734
                  )Income
      tax receivable
                  
                  
                  70
                  
                  
                  
                  (43
                  )Other
      assets
                  
                  
                  127
                  
                  
                  
                  35Accounts
      payable and other accrued expenses
                  
                  
                  3,436
                  
                  
                  
                  3,733Deferred
      revenue from gift cards
                  
                  
                  205
                  
                  
                  
                  (426
                  )Tenant
      improvements allowances
                  
                  
                  -
                  
                  
                  
                  571Net
      cash used in operating activities
                  
                  
                  (2,739
                  )
                  
                  
                  (2,856
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                  
                  
                  (458
                  )
                  
                  
                  (2,919
                  )Net
      cash used in investing activities
                  
                  
                  (458
                  )
                  
                  
                  (2,919
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      borrowings under revolving line of credit
                  
                  
                  1,195
                  
                  
                  
                  5,683Proceeds
      on bridge facility
                  
                  
                  2,000
                  
                  
                  
                  -Repayment
      of capital lease obligation
                  
                  
                  (18
                  )
                  
                  
                  (30
                  )Payment
      of deferred financing costs
                  
                  
                  (75
                  )
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  3,102
                  
                  
                  
                  5,653NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                  
                  
                  (95
                  )
                  
                  
                  (122
                  )CASH
      AND CASH EQUIVALENTS:Beginning
      of period
                  
                  
                  555
                  
                  
                  
                  791End
      of period
                  
                  $
                  460
                  
                  
                  $
                  669SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during period for:Interest
                  
                  $
                  466
                  
                  
                  $
                  424Taxes
                  
                  $
                  46
                  
                  
                  $
                  31




See notes
to consolidated unaudited financial statements.


5


FREDERICK’S
OF HOLLYWOOD GROUP INC.


NOTES
TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS




1.
            Interim
      Financial Statements




In the
opinion of Frederick’s of Hollywood Group Inc. (the “Company”), the accompanying
consolidated unaudited financial statements contain all adjustments (consisting
of normal recurring accruals) necessary to present fairly the Company’s
financial position as of January 23, 2010 and the results of operations and cash
flows for the six months ended January 23, 2010 and January 24,
2009.




The
consolidated unaudited financial statements and notes are presented as required
by Form 10-Q and do not contain certain information included in the Company’s
year-end financial statements. The July 25, 2009 consolidated balance sheet is
from the Company’s audited financial statements. The results of operations for
the three and six months ended January 23, 2010 are not necessarily indicative
of the results to be expected for the full year. This Form 10-Q should be read
in conjunction with the Company’s audited consolidated financial statements and
accompanying notes for the year ended July 25, 2009 included in the Company’s
2009 Annual Report on Form 10-K filed with the Securities and Exchange
Commission (“SEC”) on October 23, 2009.




In
September and October 2009, the Company’s senior revolving credit facility (the
“Facility”) with Wells Fargo Retail Finance II, LLC (“Senior Lender”) was
amended to provide for a $2.0 million bridge facility to be repaid upon the
earlier of August 1, 2010 and the consummation of a financing in which the
Company receives net proceeds of at least $4.4 million (a “Recapitalization
Event”). Unless the Company consummates a Recapitalization Event by August 1,
2010, the Company will be in violation of a covenant under the Facility. If such
violation is not waived by the Senior Lender, it will constitute an event of
default. There can be no assurance that the Company will be able to consummate a
Recapitalization Event and repay the bridge facility as required under the
Facility or, if these events do not occur, that the Senior Lender will continue
the Facility. See Note 6.




The
Company has evaluated subsequent events through the date the financial
statements were issued. One such event took place which requires disclosure as
follows:




On
February 1, 2010, the Company entered into a Debt Exchange and Preferred Stock
Conversion Agreement (“Exchange and Conversion Agreement”) with accounts and
funds managed by and/or affiliated with Fursa Alternative Strategies LLC, the
holders of the Company’s long term debt – related party (the “Tranche C Debt”)
and Series A Preferred Stock. Fursa also is one of the Company’s largest
shareholders. These holders are collectively referred to in this Form 10-Q as
“Fursa.” See Note 6.




Pursuant
to the Exchange and Conversion Agreement, Fursa has agreed to exchange the
Tranche C Debt, together with all accrued interest, and to convert the Series A
Preferred Stock, together with accrued dividends, for a number of shares of
common stock equal to 50% of the aggregate value of the Tranche C Debt
(including accrued interest) and the Series A Preferred Stock (including accrued
dividends) as of the closing date of the transaction divided by $1.3319, which
represents the volume weighted average price of the common stock for the five
(5) trading days prior to and the five (5) trading days including and after the
public announcement of the execution of the Exchange and Conversion Agreement
(the “Conversion Price”).




Upon the
closing of the transaction, the Company will also issue to Fursa three, five and
seven-year warrants, each to purchase 500,000 shares of common stock (for an
aggregate of 1,500,000 shares of common stock) at exercise prices of 150%, 175%
and 200% of the Conversion Price, respectively, but not less than the closing
price of the Company’s common stock on the closing of the transaction. The
warrants will be exercisable for cash or on a cashless basis, at Fursa’s option.
At any time after the first anniversary of the issuance date, the Company may
redeem the warrants, in whole but not in part, upon not less than twenty (20)
business days’ written notice to Fursa, at a redemption price of $0.01 per
share, if the last sale price of the common stock is at least 200% of the
exercise price of the warrants for 10 consecutive trading days ending on the day
prior to the date on which notice of redemption is given to Fursa.




The
Company has also agreed to register for re-sale the shares of common stock
(including those underlying the warrants) that Fursa will receive as a result of
the transaction on a registration statement with the Securities and Exchange
Commission. However, Fursa has agreed not to publicly sell, transfer or assign
any shares it owns for a period of 12 months from the closing date of the
transaction; provided that Fursa may sell up to an aggregate of 250,000 shares
of common stock each month after the closing date.


6




The
consummation of the transaction is subject to shareholder approval. The Company
anticipates holding its annual meeting of shareholders during the fourth fiscal
quarter of 2010 and expects to consummate the transaction as soon as practicable
once shareholder approval is obtained. Together with the warrants and the shares
of common stock that Fursa will receive at the closing, Fursa’s aggregate
beneficial ownership of the Company’s common stock will increase from
approximately 36% to approximately 51%. This transaction will not constitute a
Recapitalization Event under the Facility.




The
following unaudited pro forma balance sheet gives effect to the transaction
contemplated by the Exchange and Conversion Agreement as if it had occurred on
January 23, 2010 and includes accrued interest of $260,000 on the Tranche C Debt
and $1,126,000 of accrued dividends related to the Series A Preferred Stock,
which are included in current liabilities.




January
      23, 2010Actual
                  
                  
                  Unaudited
                    Pro
      Forma
                    Adjustments
                  
                  
                  Pro
      FormaTotal
      assets
                  
                  $
                  76,065
                  
                  
                  $
                  -
                  
                  
                  $
                  76,065Current
      liabilities
                  
                  $
                  40,884
                  
                  
                  
                  (1,386
                  )
                  
                  
                  39,498Long
      term debt – related party
                  
                  
                  13,744
                  
                  
                  
                  (13,744
                  )
                  
                  
                  -Other
      long term liabilities
                  
                  
                  16,602
                  
                  
                  
                  -
                  
                  
                  
                  16,602Preferred
      stock
                  
                  
                  7,500
                  
                  
                  
                  (7,500
                  )
                  
                  
                  -Shareholders’
      equity
                  
                  
                  (2,665
                  )
                  
                  
                  22,630
                  
                  
                  
                  19,965Total
      liabilities and shareholders’ equity
                  
                  $
                  76,065
                  
                  
                  $
                  -
                  
                  
                  $
                  76,065




2.
            Summary
      of Significant Accounting Policies




Revenue Recognition –The
Company records revenue at the point of sale for retail stores (“Stores”), at
the time of estimated receipt by the customer for catalog and website sales
(referred to collectively as “Direct”), and at the time of shipment to its
wholesale customers.  Outbound shipping charges billed to customers
are included in net sales.  The Company records an allowance for
estimated returns from its retail customers in the period of sale based on prior
experience.  At January 23, 2010 and July 25, 2009, the allowance for
estimated returns from the Company’s retail customers was $1,184,000 and
$947,000, respectively.  If actual returns are greater than expected,
additional sales returns may be recorded in the future.  Retail sales
are recorded net of sales taxes collected from customers at the time of the
transaction.




The
Company records other revenues for shipping revenues, as well as for commissions
earned on direct sell-through programs on a net basis as the Company acts as an
agent on behalf of the related vendor.  For the three months ended
January 23, 2010 and January 24, 2009, total other revenues recorded in net
sales in the accompanying consolidated statements of operations were $2,269,000
and $2,388,000, respectively.  For the six months ended January 23,
2010 and January 24, 2009, total other revenues recorded in net sales in the
accompanying consolidated statements of operations were $4,027,000 and
$4,512,000, respectively.




Gift
certificates and gift cards sold are carried as a liability and revenue is
recognized when the gift certificate or card is redeemed.  Customers
may receive a store credit in exchange for returned goods, which is carried as a
liability until redeemed.  To date, the Company has not recognized any
revenue associated with breakage from gift certificates, gift cards or store
credits because they do not have expiration dates.


7




Accounts Receivable/Allowance for
Doubtful Accounts and Sales Discounts – The Company’s accounts receivable
is comprised primarily of the retail segment’s amounts due from commercial
credit card companies and the wholesale segment’s trade receivables. Credit card
receivables of $1,218,000 and $1,156,000 at January 23, 2010 and July 25, 2009,
respectively, represent amounts due from commercial credit card companies, such
as Visa, MasterCard and American Express, which are generally received within a
few days of the related transactions. The Company’s trade accounts receivable is
net of allowance for doubtful accounts and sales discounts. An allowance for
doubtful accounts is determined through the analysis of the aging of accounts
receivable at the date of the financial statements. An assessment of the
accounts receivable is made based on historical trends and an evaluation of the
impact of economic conditions. This amount is not significant, primarily due to
the Company’s history of minimal bad debts. An allowance for sales discounts is
based on discounts relating to open invoices where trade discounts have been
extended to customers, costs associated with potential returns of products, as
well as allowable customer markdowns and operational charge backs, net of
expected recoveries. These allowances are included as a reduction to net sales
and are part of the provision for allowances included in accounts receivable.
The foregoing results from seasonal negotiations and historic deduction trends,
net of expected recoveries and the evaluation of current market conditions. As
of January 23, 2010 and July 25, 2009, accounts receivable was net of allowances
of $574,000 and $633,000, respectively. The wholesale accounts receivable as of
January 23, 2010, net of the $574,000 allowance, was $1,472,000 and as of July
25, 2009, net of the $633,000 allowance, was $1,263,000. The Company believes
its allowance for doubtful accounts and sales discounts to be appropriate, and
actual results should not differ materially from those determined using
necessary estimates. However, if the financial condition of the Company’s
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. Also, if market conditions
were to worsen, management may take actions to increase customer incentive
offerings, possibly resulting in an incremental allowance at the time the
incentive is offered.




Merchandise Inventories –
Store inventories are valued at the lower of cost or market using the retail
inventory first-in, first-out (“FIFO”) method, and wholesale and Direct
inventories are valued at the lower of cost or market, on an average cost basis
that approximates the FIFO method. Freight costs are included in inventory and
vendor promotional allowances are recorded as a reduction in inventory cost.
These inventory methods inherently require management judgments and estimates,
such as the amount and timing of permanent markdowns to clear unproductive or
slow-moving inventory, which may impact the ending inventory valuations and
gross margins. Markdowns are recorded when the sales value of the inventory has
diminished. Factors considered in the determination of permanent markdowns
include current and anticipated demand, customer preferences, age of the
merchandise and fashion trends. Additionally, the Company reserves for planned
but unexecuted markdowns as well as estimated amounts equal to the difference
between the cost of inventory and the estimated market value based upon
assumptions about future demand, market conditions and the age of the inventory.
If actual market conditions are less favorable than those projected by
management, additional inventory reserves may be required. Historically,
management has found its inventory reserves to be appropriate, and actual
results generally do not differ materially from those determined using necessary
estimates. Inventory reserves were $1,204,000 at January 23, 2010 and $1,557,000
at July 25, 2009.




Deferred Catalog Costs–
Deferred catalog costs represent direct-response advertising that is capitalized
and amortized over its expected period of future benefit. Direct-response
advertising consists primarily of product catalogs of FOH Holdings’ mail order
subsidiary. The capitalized costs of the advertising are amortized over the
expected revenue stream following the mailing of the respective catalog, which
is generally six months. The realization of the deferred catalog costs are also
evaluated as of each balance sheet date by comparing the capitalized costs for
each catalog, on a catalog by catalog basis, to the probable remaining future
net revenues. Direct-responseadvertising costs of $2,545,000 and $1,751,000 are included in prepaid
expenses and other current assets in the accompanying consolidated balance
sheets at January 23, 2010 and July 25, 2009, respectively. The Company believes
that it has appropriately determined the expected period of future benefit as of
the date of its consolidated financial statements. However, should actual sales
results differ from expected sales, deferred catalog costs may be written off on
an accelerated basis.




Impairment of Long-Lived
Assets – The Company reviews long-lived assets, including property and
equipment and its amortizable intangible assets, for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may not
be recoverable based on undiscounted cash flows.  The Company reviews its
indefinite lived intangible assets for impairment annually and in between annual
tests when circumstances or events have occurred that may indicate a potential
impairment has occurred.  If long-lived assets are impaired, an
impairment loss is recognized and is measured as the amount by which the
carrying value exceeds the estimated fair value of the
assets.  Management believes they have appropriately determined future
cash flows and operating performance; however, should actual results differ from
those expected, additional impairment may be required.  No impairment
was recorded for the six months ended January 23, 2010 and January 24, 2009
related to these long-lived assets.


8


The
Company previously had goodwill, which represented the portion of the purchase
price that could not be attributed to specific tangible or identified intangible
assets recorded in connection with purchase accounting.  At January
24, 2009, since the Company’s market capitalization was significantly below its
book value, the Company performed an impairment analysis and determined
that the goodwill balances on both the retail and wholesale segments were
impaired as a result of its current and future projected financial results
due to the poor macroeconomic outlook and a reduction in wholesale business with
Walmart.  Accordingly, the Company recorded a goodwill impairment charge of
$19,100,000.  After recognizing the impairment charge, the Company has
no remaining goodwill on its consolidated balance sheet as of January 24,
2009.
  Accounting for Stock-Based
Compensation – The Company measures and recognizes compensation expense
for all share-based payment awards to employees and directors based on estimated
fair values on the grant date.  The Company recognizes the expense on
a straight-line basis over the requisite vesting period.
  The value
of each stock option is estimated on the date of grant using the Black-Scholes
option-pricing model.  The fair value generated by the Black-Scholes
model may not be indicative of the future benefit, if any, that may be received
by the option holder.  The following assumptions were used for options
granted during the six months ended January 23, 2010 and January 24,
2009:
  Six Months EndedJanuary 23,
                            
                            
                            January 24,2010
                            
                            
                            2009Risk-free
      interest rate
                            
                            
                            3.00% - 3.04%
                            
                            
                            
                            3.31% - 3.34%Expected
      life (years)
                            
                            
                            7
                            
                            
                            
                            5 –
      7Expected
      volatility
                            
                            
                            79%
                            
                            
                            
                            60
      – 62%Dividend
      yield
                            
                            
                            0.0%
                            
                            
                            
                            0.0%
  During
the six months ended January 23, 2010, the Company granted to four of its
employees options to purchase an aggregate of 87,500 shares of common stock
under the 2000 Performance Equity Plan.  Options to purchase 37,500
shares are exercisable at $1.16 per share and vest 20% each year over five
years.  Options to purchase 50,000 shares are exercisable at $1.12 per
share and vest 20% each year over five years.
  During
the six months ended January 24, 2009, the Company granted to one of its
officers and certain other employees options to purchase an aggregate of 82,500
shares of common stock under the 2000 Performance Equity
Plan.  Options to purchase 25,000 shares are exercisable at $.96 per
share and vested in six months, and options to purchase 57,500 shares are
exercisable at $.87 per share and vest 20% each year over five
years.
  Income Taxes – Income taxes
are accounted for under an asset and liability approach that requires the
recognition of deferred income tax assets and liabilities for the expected
future consequences of events that have been recognized in the Company’s
financial statements and income tax returns.  The Company provides a
valuation allowance for deferred income tax assets when it is considered more
likely than not that all or a portion of such deferred income tax assets will
not be realized.  Due to the Company’s merger with FOH Holdings, Inc.
in January 2008, the Company underwent a change in control under Section 382 of
the Internal Revenue Code and, therefore, certain pre-merger net operating loss
carry-forwards will be limited.
  Fair Value of Financial Instruments– The Company believes the carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses and the bridge facility
approximate fair value due to their short maturity.  The carrying amount of
the revolving line of credit approximates fair value, as these borrowings have
variable rates that reflect currently available terms and conditions for similar
debt.  The Company did not estimate the fair value of its long term debt
and Series A Preferred Stock owed to Fursa because (i) these related party
instruments are not traded and, therefore, no quoted market prices exist upon
which to base an estimate of fair value and (ii) there are no readily
determinable similar instruments on which to base an estimate of fair
value.  In addition, the Company believes that the long term
relationship it has developed and maintained with Fursa and the accommodations
that the Company has received from Fursa are factors that also contribute to the
impracticality in estimating fair value. See Note 1.
  Supplemental Disclosure of Noncash
Financing Transactions– During
the three months ended January 23, 2010 the Company acquired equipment through a
capital lease for $167,000. Also, at January 23, 2010 and January 24, 2009,
the Company had accrued dividends of $261,000 and $281,000, respectively, on its
Series A Preferred Stock.  The Company had outstanding accounts
payable and accrued expenses of $20,000 at July 25, 2009 and $331,000 and
$248,000 at January 24, 2009 and July 26, 2008, respectively, related to
purchases of property and equipment.
  9
  3.
              Effect
      of New Accounting Standards
  In June
2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Codification (“ASC”) became the single official source of authoritative U.S.
generally accepted accounting principles recognized by the FASB to be applied by
nongovernmental entities.  The ASC supersedes all existing non-SEC
accounting and reporting standards.  The ASC is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009.  The Company adopted the ASC effective for its
October 24, 2009 financial statements.
  In
September 2006, the FASB issued new accounting guidance that defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.  In February 2008, the FASB deferred the
effective date of the new accounting guidance for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually) to
fiscal years beginning after November 15, 2008. The Company’s adoption of this
new guidance for its non-financial assets and liabilities, effective July 26,
2009, did not have a material impact on the Company’s consolidated financial
statements.
  In
December 2007, the FASB issued new accounting and disclosure guidance related to
noncontrolling interests in a subsidiary.  This new guidance was
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008.  The adoption of this new
guidance, effective July 26, 2009, did not have a material impact on the
Company’s consolidated financial statements.
  In
June 2009, the FASB amended its guidance on accounting for variable
interest entities which replaces the quantitative-based risks and rewards
calculation for determining which enterprise has a controlling financial
interest in a variable interest entity with an approach focused on identifying
which enterprise has the power to direct the activities of a variable interest
entity and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. The new guidance becomes effective for annual periods
beginning after November 15, 2009 and interim periods within those fiscal
years. The Company does not expect the adoption of this guidance to have a
material impact on its consolidated financial statements.
  4.
              Merchandise Inventories
  Merchandise
inventories consist of the following (in thousands):
  January 23,
                    
                    
                    July 25,2010
                    
                    
                    2009Raw
      materials
                    
                    $
                    1,072
                    
                    
                    $
                    1,457Work-in
      process
                    
                    
                    289
                    
                    
                    
                    249Finished
      goods
                    
                    
                    21,023
                    
                    
                    
                    20,130$
                    22,384
                    
                    
                    $
                    21,836
  5.
              Net
      Loss Per Share
  Basic net
loss per share has been computed by dividing the net loss applicable to common
shareholders by the weighted average number of shares
outstanding.  Diluted net loss per share has been computed by dividing
the net loss applicable to common shareholders by the weighted average number of
shares outstanding and common share equivalents.  The Company’s
calculation of basic and diluted net loss per share is as follows (in thousands,
except per share amounts):
  Three Months Ended
                
                
                Six Months EndedJanuary 23,
                
                
                January 24,
                
                
                January 23,
                
                
                January 24,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      loss
                
                $
                (4,860
                )(a)
                
                $
                (20,201
                )(b)
                
                $
                (9,315
                )(c)
                
                $
                (25,487
                )(d)BASIC:Basic
      weighted average number of shares outstanding
                
                
                26,417
                
                
                
                26,192
                
                
                
                26,412
                
                
                
                26,182Basic
      net loss per share
                
                $
                (0.18
                )
                
                $
                (0.77
                )
                
                $
                (0.35
                )
                
                $
                (0.97
                )DILUTED:Basic
      weighted average number of shares outstanding
                
                
                26,417
                
                
                
                26,192
                
                
                
                26,412
                
                
                
                26,182Shares
      issuable upon conversion of stock options
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      average number of equivalent shares outstanding
                
                
                26,417
                
                
                
                26,192
                
                
                
                26,412
                
                
                
                26,182Diluted
      net loss per share
                
                $
                (0.18
                )
                
                $
                (0.77
                )
                
                $
                (0.35
                )
                
                $
                (0.97
                )
  
 (a)
              Includes
      Series A preferred stock dividends of
$142.
 (b)
              Includes
      Series A preferred stock dividends of
$140.
 (c)
              Includes
      Series A preferred stock dividends of
$261.
 (d)
              Includes
      Series A preferred stock dividends of
$281.
  10
  For the
three and six months ended January 23, 2010, there were 200,000 and 224,000
potentially dilutive shares of common stock issuable upon exercise of stock
options at prices ranging from $0.17 to $1.56 per share that were not included
in the computation of diluted net loss per share since their effect would have
been anti-dilutive.
  In
addition, for the six months ended January 23, 2010 and January 24, 2009, there
were 1,677,000 and 2,416,000 shares of common stock issuable upon exercise of
stock options, respectively, 598,000 shares of common stock issuable upon the
exercise of warrants and 1,512,000 shares of common stock issuable upon the
conversion of the Company’s Series A Preferred Stock that also were not included
in the computation of diluted net loss per share since the respective exercise
and conversion prices of these instruments exceeded the average market price of
the common stock during the respective periods.
  6.
              Financing
  Revolving
Credit and Bridge Facilities
  The
Company’s and its U.S. subsidiaries’ Facility matures on January 28,
2012.
  The
Facility is for a maximum amount of $50 million comprised of a $25 million line
of credit with a $15 million sub-limit for letters of credit, and up to an
additional $25 million commitment in increments of $5 million at the option of
the Company so long as the Company is in compliance with the terms of the
Facility.  The actual amount of credit available under the Facility is
determined using measurements based on the Company’s receivables, inventory and
other measures.  The Facility is secured by a first priority security
interest in the assets of the Company and its U.S.
subsidiaries.  Interest is payable monthly, in arrears, at interest
rates that were increased effective September 21, 2009 in connection with the
second amendment to the Facility described below.
  On
November 4, 2008, the Company utilized the accordion feature under the Facility
to increase the borrowing limit from $25 million to $30 million.  In
utilizing the accordion feature, the Company’s minimum availability reserve
increased by $375,000 (7.5% of the $5,000,000 increase) to $2,250,000 (7.5% of
the $30,000,000) and the Company incurred a one-time closing fee of
$12,500.
  On
September 21, 2009, the Facility was amended to provide for a $2.0 million
bridge facility at an annual interest rate of LIBOR plus 10%, to be repaid upon
the earlier of December 7, 2009 and the consummation of a financing in which the
Company receives net proceeds of at least $4.9 million. On October 23, 2009, the
Facility was further amended to extend the December 7, 2009 repayment date to
August 1, 2010 and to reduce the net proceeds that the Company is required to
receive in the Recapitalization Event to at least $4.4 million.  The
Company’s failure to complete a Recapitalization Event by August 1, 2010 will
result in a violation of a covenant under the Facility.  If such
violation is not waived by the Senior Lender, it will constitute an event of
default.
  In
connection with the September and October 2009 amendments, the interest rates on
“Base Rate” loans and “LIBOR Rate” loans under the Facility were increased as
follows:
  ·
              “Base
      Rate” loan interest rates were increased from the Wells Fargo prime rate
      less 25 basis points to the Wells Fargo prime rate plus 175 basis points;
      and
  11
  ·
              “LIBOR
      Rate” loan interest rates were increased from LIBOR plus 150 basis points
      to LIBOR plus 300 basis points.
  The fee
on any unused portion of the Facility was also increased from 25 basis points to
50 basis points.  In addition, upon a Recapitalization Event, the
applicable percentages used in calculating the borrowing base under the Facility
will be reduced.
  In
connection with the amendments, the Company incurred a one-time amendment fee of
$150,000, one half of which has been paid and the remainder will be paid upon
the Recapitalization Event.  All other material terms of the Facility
remain unchanged.
  As of
January 23, 2010, the Company had $10,440,000 outstanding under the Facility at
a rate of 5.0% and $2,000,000 outstanding under the bridge facility at a rate of
10.25%.  For the six months ended January 23, 2010, borrowings under
the Facility (including the bridge facility) peaked at $16,996,000 and the
average borrowing during the period was approximately $13,451,000.  In
addition, at January 23, 2010, the Company had $846,000 of outstanding letters
of credit under the Facility.
  As of
January 24, 2009, the Company had $16,776,000 outstanding under the Facility at
a rate of 3.0%.  For the six months ended January 24, 2009, borrowings
under the Facility peaked at $26,386,000 and the average borrowing during the
period was approximately $17,509,000.  In addition, the Company had
$1,995,000 of outstanding letters of credit under the Facility as of January 24,
2009.
  The
Facility contains customary representations and warranties, affirmative and
restrictive covenants and events of default.  The restrictive
covenants limit the Company’s ability to create certain liens, make certain
types of borrowings and investments, liquidate or dissolve, engage in mergers,
consolidations, significant asset sales and affiliate transactions, dispose of
inventory, incur certain lease obligations, make capital expenditures, pay
dividends, redeem or repurchase outstanding equity and issue capital
stock.  In lieu of financial covenants, fixed charge coverage and
overall debt ratios, the Company also is required to maintain specified minimum
availability reserves. At January 23, 2010, the Company was in compliance with
the Facility’s covenants and minimum availability reserve
requirements.
  Long
Term Debt – Related Party
  As of
January 23, 2010, the Company and its U.S. subsidiaries had the Tranche C Debt
in the amount of $13,744,000 due to Fursa.  The Tranche C Debt matures
on July 28, 2012.  This debt bears interest at the fixed rate of 7%
per annum with 1% payable in cash and 6% payable in kind.
  The
Tranche C Debt is secured by substantially all of the Company’s assets and is
second in priority to the Facility.  The Tranche C Debt contains
customary representations and warranties, affirmative and restrictive covenants
and events of default substantially similar to, and no more restrictive than,
those contained in the Facility.  At January 23, 2010, the Company was
in compliance with the covenants contained in the term loan agreement, as
amended, governing the Tranche C Debt.
  On
February 1, 2010, the Company entered into the Exchange and Conversion Agreement
with Fursa as discussed in Note 1.
  Preferred
Stock
  The
Company has 3,629,325 shares of Series A 7.5% Convertible Preferred Stock
outstanding, which are owned by Fursa.  The Series A Preferred Stock
is convertible at any time at Fursa’s option into an aggregate of 1,512,219
shares of common stock, subject to adjustment.  As of January 23, 2010, the
Company had accrued dividends of $1,126,000.  Holders of Series A
Preferred Stock, in preference to the holders of common stock or any other
junior securities, will be entitled to receive, when, as and if declared by the
Company’s board of directors, but only out of funds that are legally available
therefor, cumulative dividends at the rate of 7.5% per annum of the sum of the
original issue price and any accumulated and unpaid dividends thereon on each
outstanding share of Series A Preferred Stock.  Such dividends will be
payable in additional shares of Series A Preferred Stock or in cash, at the
Company’s option, and will be payable in arrears in equal amounts (with the
first payment to be prorated based on the actual issue date) on the tenth
business day after the end of each of the Company’s fiscal quarters of each year
commencing on the first of these dates to occur after the first issuance of
Series A Preferred Stock.  On the six-month anniversary of the
maturity date (or any extensions thereof) of the Facility, the Company is
required to redeem all of the then outstanding Series A Preferred Stock by
paying in cash in exchange for the shares of Series A Preferred Stock to be
redeemed on such date a sum equal to the original issue price per share of
Series A Preferred Stock (as adjusted for any stock dividends, combinations,
splits, recapitalizations and the like) plus accumulated but unpaid
dividends with respect to such shares; provided, that if, on the 60th day
prior to the date of redemption, the current market value is greater than the
original issue price (as adjusted for stock dividends, combinations, splits,
recapitalizations and the like) plus accumulated and unpaid
dividends with respect to such shares, then all of the outstanding shares of
Series A Preferred Stock will be automatically converted to common stock on the
date of redemption.  On February 1, 2010, the Company entered into the
Exchange and Conversion Agreement with Fursa as discussed in Note
1.
  12
  7.
              Commitments
      and Contingencies
  The
Company is involved from time to time in litigation incidental to its
business.  The Company believes that the outcome of such litigation
will not have a material adverse effect on its results of operations or
financial condition.
  8.
              Segments
  The
Company has two reportable segments – retail and wholesale.  Each
segment primarily sells women’s intimate apparel through different distribution
channels.  The retail segment sells products through the Company’s
retail stores, as well as its catalog and e-commerce website.  The
retail segment sells products purchased from the Company’s outside suppliers and
from the wholesale segment.  The wholesale segment is engaged in the
design, manufacture, distribution and sale of women’s intimate apparel to mass
merchandisers, specialty and department stores, discount retailers, national and
regional chains and direct mail catalog marketers throughout the United States
and Canada.  Canadian sales represented approximately 5% and 4% of
wholesale net sales for the six months ended January 23, 2010 and January 24,
2009, respectively.
 Sales and
transfers between segments generally are recorded at cost and treated as
transfers of inventory, and all intercompany revenues are eliminated in
consolidation.  Each segment’s performance is evaluated based upon
operating income or loss.  Corporate overhead expenses (exclusive of
expenses for senior management, certain other corporate-related expenses and
interest) are allocated to the segments based upon specific usage or other
allocation methods.
 Net sales, operating loss and total
assets for each segment are as follows:
 ($ in thousands)
                  
                  Three Months Ended
                  
                  
                  Six Months EndedJanuary 23,
                  
                  
                  January 24,
                  
                  
                  January 23,
                  
                  
                  January 24,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      Sales:Retail
                  
                  $
                  36,743
                  
                  
                  $
                  38,352
                  
                  
                  $
                  67,857
                  
                  
                  $
                  71,481Wholesale
                  
                  
                  4,578
                  
                  
                  
                  14,164
                  
                  
                  
                  10,672
                  
                  
                  
                  23,600Total
      net sales
                  
                  $
                  41,321
                  
                  
                  $
                  52,516
                  
                  
                  $
                  78,529
                  
                  
                  $
                  95,081Operating
      Loss:Retail
                  
                  $
                  (1,184
                  )
                  
                  $
                  (6,444
                  )
                  
                  $
                  (2,938
                  )
                  
                  $
                  (8,589
                  )Wholesale
                  
                  
                  (2,439
                  )
                  
                  
                  (12,616
                  )
                  
                  
                  (4,138
                  )
                  
                  
                  (14,704
                  )Total
      operating loss
                  
                  $
                  (3,623
                  )
                  
                  $
                  (19,060
                  )
                  
                  $
                  (7,076
                  )
                  
                  $
                  (23,293
                  )Less
      Unallocated Corporate Expenses:Corporate
      expenses
                  
                  $
                  483
                  
                  
                  $
                  559
                  
                  
                  $
                  981
                  
                  
                  $
                  1,023Interest
      expense
                  
                  
                  589
                  
                  
                  
                  421
                  
                  
                  
                  950
                  
                  
                  
                  849Total
      unallocated expenses
                  
                  $
                  1,072
                  
                  
                  $
                  980
                  
                  
                  $
                  1,931
                  
                  
                  $
                  1,872Loss
      before income tax provision
                  
                  $
                  (4,695
                  )
                  
                  $
                  (20,040
                  )
                  
                  $
                  (9,007
                  )
                  
                  $
                  (25,165
                  )Total
      AssetsRetail
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  61,642
                  
                  
                  $
                  66,148Wholesale
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  14,423
                  
                  
                  
                  26,280Total
      Assets
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  76,065
                  
                  
                  $
                  92,428
  13
  ITEM
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  Forward-Looking
Statements
  When used in this Form 10-Q of
Frederick’s of Hollywood Group Inc. and in our future filings with the
Securities and Exchange Commission (“SEC”), the words or phrases “will likely
result,” “management expects” or “we expect,” “will continue,” “is anticipated,”
“estimated” or similar expressions are intended to identify “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995.  Readers are cautioned not to place undue reliance on any
such forward-looking statements, each of which speaks only as of the date
made.  We have no obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
  Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or
projected.  These risks are included in “Item 1: Business,” “Item 1A:
Risk Factors” and “Item 7: Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of our Form 10-K for the year ended July
25, 2009.  In assessing forward-looking statements contained herein,
readers are urged to carefully read those statements.  Among the
factors that could cause actual results to differ materially are: competition;
business conditions and industry growth; rapidly changing consumer preferences
and trends; general economic conditions; large variations in sales volume with
significant customers; addition or loss of significant customers; continued
compliance with government regulations; loss of key personnel; labor practices;
product development; management of growth; increases of costs of operations or
inability to meet efficiency or cost reduction objectives; timing of orders and
deliveries of products; and foreign government regulations and risks of doing
business abroad.
  Corporate
History
  Frederick’s of Hollywood Group Inc.
(the “Company”) is a New York corporation incorporated on April 10, 1935. On
January 28, 2008, the Company consummated a merger with FOH Holdings, Inc., a
privately-held Delaware corporation (“FOH Holdings”).  As a result of
the transaction, FOH Holdings became a wholly-owned subsidiary of the
Company.  FOH Holdings is the parent company of Frederick’s of
Hollywood, Inc.  Upon consummation of the merger, the Company changed
its name from Movie Star, Inc. to Frederick’s of Hollywood Group Inc. and its
trading symbol on the NYSE Amex was changed to “FOH.”
  Unless otherwise indicated, as used
in this Form 10-Q, the “Company,” “we,” “our” or “us” refers to the operations
and financial results of Frederick’s of Hollywood Group Inc., together with FOH
Holdings, Inc. and its subsidiaries on a consolidated basis after the closing of
the merger.
  Overview
  As a
merged company, we conduct our business through two operating divisions that
represent two distinct business reporting segments:  the multi-channel
retail division and the wholesale division.  We believe this method of
segment reporting reflects both the way our business segments are managed and
the way each segment’s performance is evaluated.  The retail segment
includes our Frederick’s of Hollywood retail stores, catalog and website
operations.  The wholesale segment includes our wholesale operations
in the United States and Canada.
  Through
our multi-channel retail division, we sell women’s intimate apparel and related
products under our proprietary Frederick’s of Hollywood® brand
exclusively through our mall-based specialty retail stores in the United States,
which we refer to as “Stores,” and through our catalog and website at www.fredericks.com,
which we refer to collectively as “Direct.”  As of January 23, 2010,
we operated 132 Frederick’s of Hollywood stores nationwide.
  Through our wholesale division, we
design, manufacture, source, distribute and sell women’s intimate apparel to
mass merchandisers, specialty and department stores, discount retailers,
national and regional chains, and direct mail catalog marketers throughout the
United States and Canada.
  14
  Fiscal
2010 Operating Initiatives
  Our efforts remain focused on
continuing to implement changes in our business strategy as described below that
we believe over time will both increase revenues and reduce costs.  Some of
these initiatives have had an immediate impact on our operating results and we
expect that others will take more time.  However, we cannot be certain
that these initiatives will be successful.  These key initiatives
include:
  ·
              Capitalizing on the
      Frederick’s of Hollywood
brand.
  o
              Developing Frederick’s of
      Hollywood brand extension opportunities.During the
      fourth quarter of fiscal year 2009, we developed a branding/product
      development strategy targeting our wholesale division’s mass merchandising
      customers.  We are now in the process of implementing this
      strategy.  To that end, we have created new product lines that
      are heavily influenced by our retail creative and design
      teams.  We plan on using the wholesale brand name, Cinema
      Etoile®,
      for some of these products and to strategically use the Frederick’s of
      Hollywood brand name and brand extensions for other products sold to
      select wholesale customers.
  o
              Entering into licensing
      arrangements.  During the second quarter of fiscal year
      2010, we launched a licensing program for the Frederick’s of Hollywood
      brand by hiring a leading licensing firm to manage our global licensing
      initiatives.  We are currently in discussions with several
      potential licensees.
  ·
              More focused marketing
      efforts.
  o
              Catalog.  Due
      to rising paper, production and mailing costs, we reduced annual catalog
      circulation from approximately 18.7 million in fiscal year 2008 to
      approximately 17.6 million in fiscal year 2009.  We achieved this
      reduction by targeting customers through improved analysis and monitoring
      of their purchasing habits and by executing a more focused marketing
      strategy.  Our continued efforts to execute this strategy resulted in
      a 5% decrease in catalog circulation for the first half of fiscal year
      2010 compared to the first half of fiscal year 2009, and we anticipate an
      overall 6% reduction for the full fiscal year.  Also during the first
      quarter of fiscal year 2010, we began rolling out various cost effective
      alternatives to full size catalog mailings such as postcards, gift guides
      and personalized “look books,” which represented approximately 10% of
      mailings during the first half of fiscal year
  2010.
  o
              eCommerce.During
      the third quarter of fiscal year 2009, we launched a new e-commerce web
      platform hosted by a third-party service provider.  We believe the
      new platform provides a stable foundation upon which we can continue to
      upgrade and enhance our website, www.fredericks.com.  We also
      retained a new search marketing agency during the first quarter of fiscal
      year 2010 as part of our program to improve search marketing.  We are
      also exploring ways in which to increase conversion rates of an average of
      15 million unique website visitors monthly, primarily through site
      marketing and promotions, which we believe will afford us the opportunity
      to reach customers internationally.
  ·
              Continuing to reduce operating
      expenses.  While the macroeconomic environment continues
      to present challenges to both our retail and wholesale divisions, on an
      operational basis (which includes our wholesale division for the period
      prior to the merger from August 2007 through January 2008), we have
      reduced our selling, general and administrative expenses from
      approximately $91,000,000 in the fiscal year ended July 26, 2008 to
      $74,496,000 in the fiscal year ended July 25, 2009 and have reduced
      expenses in the first six months of fiscal 2010 by an additional
      $3,493,000.  We are continuing to focus on reducing expenses and
      expect further reductions in fiscal years 2010 and 2011.  These
      cuts include reducing personnel through the elimination of executive and
      support positions, transitioning certain manufacturing support functions
      previously performed by some of these employees to our facilities in the
      Philippines and Hong Kong, decreasing the use of outside consultants, and
      consolidating employee benefits and
insurance.
  15
 ·
              Carefully monitoring store
      performance.  We continuously monitor store performance
      and from time to time close underperforming stores.  During
      fiscal year 2009, we closed six underperforming stores upon expiration of
      the respective leases.  For fiscal year 2010, we intend to
      continue to focus on improving the profitability of our existing
      stores.  We opened two stores during the six months ended
      January 23, 2010 and currently expect to close six underperforming stores
      through the remainder of the fiscal year upon expiration of the respective
      leases.
  Critical
Accounting Policies and Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the appropriate
application of certain accounting policies, many of which require estimates and
assumptions about future events and their impact on amounts reported in the
financial statements and related notes.  Since future events and their
impact cannot be determined with certainty, the actual results will inevitably
differ from our estimates.  Such differences could be material to the
financial statements.
  Management
believes that the application of accounting policies, and the estimates
inherently required by the policies, are reasonable.  These accounting
policies and estimates are constantly re-evaluated, and adjustments are made
when facts and circumstances dictate a change.  Historically,
management has found the application of accounting policies to be appropriate,
and actual results generally do not differ materially from those determined
using necessary estimates.
  Our
accounting policies are more fully described in Note 2 to the consolidated
financial statements contained elsewhere in this report. Management has
identified certain critical accounting policies that are described
below.
  Our most significant areas of
estimation and assumption are:
  ·
              determination
      of appropriate levels of reserves for accounts receivable allowances and
      sales discounts;
  ·
              estimation
      of expected customer merchandise
returns;
  ·
              determination
      of the appropriate amount and timing of markdowns to clear unproductive or
      slow-moving retail inventory and overall inventory
      obsolescence;
  ·
              estimation
      of deferred catalog costs and the amount of future benefit to be derived
      from the catalogs;
  ·
              estimation
      of future cash flows used to assess the recoverability of long-lived
      assets, including trademarks and goodwill;
and
  ·
              estimation
      of the net deferred income tax asset valuation
  allowance.
  Revenue Recognition –We
record revenue at the point of sale for Stores, at the time of estimated receipt
by the customer for Direct sales, and at the time of shipment to our wholesale
customers.  Outbound shipping charges billed to customers are included
in net sales.  We record an allowance for estimated returns from our
retail customers in the period of sale based on prior experience.  At
January 23, 2010 and July 25, 2009, the allowance for estimated returns from our
retail customers was $1,184,000 and $947,000, respectively.  If actual
returns are greater than expected, additional sales returns may be recorded in
the future.  Retail sales are recorded net of sales taxes collected
from customers at the time of the transaction.
  We record
other revenues for shipping revenues, as well as for commissions earned on
direct sell-through programs on a net basis as we act as an agent on behalf of
the related vendor.  For the three months ended January 23, 2010 and
January 24, 2009, total other revenues recorded in net sales in the consolidated
statements of operations contained elsewhere in this report were $2,269,000 and
$2,388,000, respectively.  For the six months ended January 23, 2010
and January 24, 2009, total other revenues recorded in net sales in the
consolidated statements of operations contained elsewhere in this report were
$4,027,000 and $4,512,000, respectively.
  Gift
certificates and gift cards sold are carried as a liability and revenue is
recognized when the gift certificate or card is redeemed.  Customers
may receive a store credit in exchange for returned goods, which is carried as a
liability until redeemed.  To date, we have not recognized any revenue
associated with breakage from gift certificates, gift cards or store credits
because they do not have expiration dates.
  16
  Accounts Receivable/Allowance for
Doubtful Accounts and Sales Discounts – Our accounts receivable is
comprised primarily of the retail segment’s amounts due from commercial credit
card companies and the wholesale segment’s trade receivables.  Credit
card receivables of $1,218,000 and $1,156,000 at January 23, 2010 and July 25,
2009, respectively, represent amounts due from commercial credit card companies,
such as Visa, MasterCard and American Express, which are generally received
within a few days of the related transactions.  Our trade accounts
receivable is net of allowance for doubtful accounts and sales
discounts.  An allowance for doubtful accounts is determined through
the analysis of the aging of accounts receivable at the date of the financial
statements.  An assessment of the accounts receivable is made based on
historical trends and an evaluation of the impact of economic
conditions.  This amount is not significant, primarily due to our
history of minimal bad debts.  An allowance for sales discounts is
based on discounts relating to open invoices where trade discounts have been
extended to customers, costs associated with potential returns of products, as
well as allowable customer markdowns and operational charge backs, net of
expected recoveries.  These allowances are included as a reduction to
net sales and are part of the provision for allowances included in accounts
receivable.  The foregoing results from seasonal negotiations and
historic deduction trends, net of expected recoveries and the evaluation of
current market conditions.  As of January 23, 2010 and July 25, 2009,
accounts receivable was net of allowances of $574,000 and $633,000,
respectively.  The wholesale accounts receivable as of January 23,
2010, net of the $574,000 allowance, was $1,472,000 and as of July 25, 2009, net
of the $633,000 allowance, was $1,263,000.  We believe our allowance
for doubtful accounts and sales discounts are appropriate, and actual results do
not differ materially from those determined using necessary
estimates.  However, if the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.  Also, if market conditions
were to worsen, management may take actions to increase customer incentive
offerings, possibly resulting in an incremental allowance at the time the
incentive is offered.
  Merchandise Inventories –
Retail store inventories are valued at the lower of cost or market using the
retail inventory first-in, first-out (“FIFO”) method, and wholesale and Direct
inventories are valued at the lower of cost or market, on an average cost basis
that approximates the FIFO method.  Freight costs are included in
inventory and vendor promotional allowances are recorded as a reduction in
inventory cost.  These inventory methods inherently require management
judgments and estimates, such as the amount and timing of permanent markdowns to
clear unproductive or slow-moving inventory, which may impact the ending
inventory valuations as well as gross margins.  Markdowns are recorded
when the sales value of the inventory has diminished.  Factors
considered in the determination of permanent markdowns include current and
anticipated demand, customer preferences, age of the merchandise and fashion
trends.  Additionally, we reserve for planned but unexecuted markdowns
as well as estimated amounts equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand, market conditions and the age of the inventory.  If actual
market conditions are less favorable than those projected by management,
additional inventory reserves may be required.  Historically,
management has found its inventory reserves to be appropriate, and actual
results generally do not differ materially from those determined using necessary
estimates.  Inventory reserves were $1,204,000 at January 23, 2010, and
$1,557,000 at July 25, 2009.
  Deferred Catalog Costs –
Deferred catalog costs represent direct-response advertising that is capitalized
and amortized over its expected period of future
benefit.  Direct-response advertising consists primarily of product
catalogs of FOH Holdings’ mail order subsidiary.  The capitalized
costs of the advertising are amortized over the expected revenue stream
following the mailing of the respective catalog, which is generally six
months.  The realization of the deferred catalog costs are also
evaluated as of each balance sheet date by comparing the capitalized costs for
each catalog, on a catalog by catalog basis, to the probable remaining future
net revenues.  Direct-responseadvertising
costs of $2,545,000 and $1,751,000 are included in prepaid expenses and other
current assets in the accompanying consolidated balance sheets at January 23,
2010 and July 25, 2009, respectively. We believe that we have appropriately
determined the expected period of future benefit as of the date of our
consolidated financial statements; however, should actual sales results differ
from expected sales, deferred catalog costs may be written off on an accelerated
basis.
  Impairment of Long-Lived
Assets – We review long-lived assets, including property and equipment
and our amortizable intangible assets, for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable based on undiscounted cash flows.  We review our
indefinite lived intangible assets for impairment annually and in between annual
tests when circumstances or events have occurred that may indicate a potential
impairment has occurred.  If long-lived assets are impaired, an
impairment loss is recognized and is measured as the amount by which the
carrying value exceeds the estimated fair value of the assets. Management
believes they have appropriately determined future cash flows and operating
performance; however, should actual results differ from those expected,
additional impairment may be required.  No impairment was recorded for
the three and six months ended January 23, 2010 and January 24, 2009 related to
these long-lived assets.
  17
  We
previously had goodwill which represented the portion of the purchase price that
could not be attributed to specific tangible or identified intangible assets
recorded in connection with purchase accounting.  At January 24, 2009,
since our market capitalization was significantly below its book value, we
performed an impairment analysis and determined that the goodwill balances
on both the retail and wholesale segments were impaired as a result of its
current and future projected financial results due to the poor macroeconomic
outlook and a reduction in wholesale business with Walmart.  Accordingly,
we recorded a goodwill impairment charge of $19,100,000.  After
recognizing the impairment charge, we have no remaining goodwill on our
consolidated balance sheet as of January 24, 2009.
  Income Taxes– Income taxes
are accounted for under an asset and liability approach that requires the
recognition of deferred income tax assets and liabilities for the expected
future consequences of events that have been recognized in our financial
statements and income tax returns.  We provide a valuation allowance
for deferred income tax assets when it is considered more likely than not that
all or a portion of such deferred income tax assets will not be realized. Due to
the merger, we underwent a change in control under Section 382 of the Internal
Revenue Code and, therefore, certain pre-merger net operating loss carryforwards
will be limited.
  Results
of Operations
  Management
considers certain key indicators when reviewing our results of operations and
liquidity and capital resources.  Because the results of operations
for both our retail and wholesale divisions are subject to seasonal variations,
retail sales are reviewed against comparable store sales for the similar period
in the prior year and wholesale sales are reviewed in conjunction with our
backlog of orders to determine the total position for the year.  When
reviewing sales, a material factor that we consider is the gross profit
percentage.  We also consider our selling, general and administrative
expenses as a key indicator in evaluating our financial
performance.  Inventory, accounts receivable and our outstanding
borrowings are the main indicators we consider when we review our liquidity and
capital resources, particularly the size and age of the inventory and accounts
receivable.  We review all of our key indicators against the prior
year and our operating projections in order to evaluate our operating
performance and financial condition.
  The
following table sets forth each specified item as a dollar amount and as a
percentage of net sales in each fiscal period, and should be read in conjunction
with the consolidated financial statements included elsewhere in this report (in
thousands, except for percentages, which percentages may not add due to
rounding):
  Three Months Ended
                      
                      
                      Six Months EndedJanuary 23, 2010
                      
                      
                      January 24, 2009
                      
                      
                      January 23, 2010
                      
                      
                      January 24, 2009Net
      sales
                      
                      $
                      41,321
                      
                      
                      
                      100.0
                      %
                      
                      $
                      52,516
                      
                      
                      
                      100.0
                      %
                      
                      $
                      78,529
                      
                      
                      
                      100.0
                      %
                      
                      $
                      95,081
                      
                      
                      
                      100.0
                      %Cost
      of goods sold, buying and occupancy
                      
                      
                      27,286
                      
                      
                      
                      66.0
                      %
                      
                      
                      34,223
                      
                      
                      
                      65.2
                      %
                      
                      
                      51,892
                      
                      
                      
                      66.1
                      %
                      
                      
                      62,110
                      
                      
                      
                      65.3
                      %Gross
      profit
                      
                      
                      14,035
                      
                      
                      
                      34.0
                      %
                      
                      
                      18,293
                      
                      
                      
                      34.8
                      %
                      
                      
                      26,637
                      
                      
                      
                      33.9
                      %
                      
                      
                      32,971
                      
                      
                      
                      34.7
                      %Selling,
      general and administrative expenses
                      
                      
                      18,141
                      
                      
                      
                      43.9
                      %
                      
                      
                      18,812
                      
                      
                      
                      35.8
                      %
                      
                      
                      34,694
                      
                      
                      
                      44.2
                      %
                      
                      
                      38,187
                      
                      
                      
                      40.2
                      %Goodwill
      impairment
                      
                      
                      -
                      
                      
                      
                      0.0
                      %
                      
                      
                      19,100
                      
                      
                      
                      36.4
                      %
                      
                      
                      -
                      
                      
                      
                      0.0
                      %
                      
                      
                      19,100
                      
                      
                      
                      20.1
                      %Operating
      loss
                      
                      
                      (4,106
                      )
                      
                      
                      (9.9
                      )%
                      
                      
                      (19,619
                      )
                      
                      
                      (37.4
                      )%
                      
                      
                      (8,057
                      )
                      
                      
                      (10.3
                      )%
                      
                      
                      (24,316
                      )
                      
                      
                      (25.6
                      )%Interest
      expense, net
                      
                      
                      589
                      
                      
                      
                      1.4
                      %
                      
                      
                      421
                      
                      
                      
                      0.8
                      %
                      
                      
                      950
                      
                      
                      
                      1.2
                      %
                      
                      
                      849
                      
                      
                      
                      0.9
                      %Loss
      before income tax provision
                      
                      
                      (4,695
                      )
                      
                      
                      (11.4
                      )%
                      
                      
                      (20,040
                      )
                      
                      
                      (38.2
                      )%
                      
                      
                      (9,007
                      )
                      
                      
                      (11.5
                      )%
                      
                      
                      (25,165
                      )
                      
                      
                      (26.5
                      )%Income
      tax provision
                      
                      
                      23
                      
                      
                      
                      0.1
                      %
                      
                      
                      21
                      
                      
                      
                      0.0
                      %
                      
                      
                      47
                      
                      
                      
                      0.1
                      %
                      
                      
                      41
                      
                      
                      
                      0.0
                      %Net
      loss
                      
                      
                      (4,718
                      )
                      
                      
                      (11.4
                      )%
                      
                      
                      (20,061
                      )
                      
                      
                      (38.2
                      )%
                      
                      
                      (9,054
                      )
                      
                      
                      (11.5
                      )%
                      
                      
                      (25,206
                      )
                      
                      
                      (26.5
                      )%Less:
      Preferred stock dividends
                      
                      
                      142
                      
                      
                      
                      
                      
                      
                      
                      140
                      
                      
                      
                      
                      
                      
                      
                      261
                      
                      
                      
                      
                      
                      
                      
                      281Net
      loss applicable to common shareholders
                      
                      $
                      (4,860
                      )
                      
                      
                      
                      
                      
                      $
                      (20,201
                      )
                      
                      
                      
                      
                      
                      $
                      (9,315
                      )
                      
                      
                      
                      
                      
                      $
                      (25,487
                      )
  18
  Net
Sales
  Net sales
for the three and six months ended January 23, 2010 decreased to
$41,321,000 and $78,529,000, respectively, as compared to $52,516,000 and
$95,081,000 for the three and six months ended January 24, 2009, respectively,
and were comprised of retail and wholesale sales as follows (in
thousands):
  Three Months Ended
                  
                  
                  Six Months EndedNet Sales:
                  
                  January23,
                      2010
                  
                  
                  January24,
                      2009
                  
                  
                  Increase/
                      (Decrease)
                  
                  
                  January23,
                      2010
                  
                  
                  January24,
                      2009
                  
                  
                  Increase/
                      (Decrease)Retail
      Stores
                  
                  $
                  22,738
                  
                  
                  $
                  24,327
                  
                  
                  $
                  (1,589
                  )
                  
                  $
                  43,133
                  
                  
                  $
                  45,538
                  
                  
                  $
                  (2,405
                  )Retail
      Direct (catalog and internet)
                  
                  
                  14,005
                  
                  
                  
                  14,025
                  
                  
                  
                  (20
                  )
                  
                  
                  24,724
                  
                  
                  
                  25,943
                  
                  
                  
                  (1,219
                  )Total
      Retail
                  
                  
                  36,743
                  
                  
                  
                  38,352
                  
                  
                  
                  (1,609
                  )
                  
                  
                  67,857
                  
                  
                  
                  71,481
                  
                  
                  
                  (3,624
                  )Total
      Wholesale
                  
                  
                  4,578
                  
                  
                  
                  14,164
                  
                  
                  
                  (9,586
                  )
                  
                  
                  10,672
                  
                  
                  
                  23,600
                  
                  
                  
                  (12,928
                  )Total
      net sales
                  
                  $
                  41,321
                  
                  
                  $
                  52,516
                  
                  
                  $
                  (11,195
                  )
                  
                  $
                  78,529
                  
                  
                  $
                  95,081
                  
                  
                  $
                  (16,552
                  )
  The
changes in retail net sales were as follows:
  ·
              Total
      store sales for the three and six months ended January 23, 2010 decreased
      by $1,589,000 or 6.5% and $2,405,000 or 5.3%, respectively, as compared to
      the three and six months ended January 24,
2009.
  ·
              Comparable
      store sales for the three and six months ended January 23, 2010 decreased
      by $1,228,000 or 5.3% and $2,034,000 or 4.7%, respectively, as compared to
      the three and six months ended January 24, 2009 as a result of a reduction
      in consumer spending.  Comparable store sales are defined as net
      sales for stores that have been open for at least one complete
      year.
  ·
              Direct
      sales, which are comprised of sales from our catalog and website
      operations, for the three and six months ended January 23, 2010 decreased
      by $20,000 or 0.1% and $1,219,000 or 4.7%, respectively, as compared to
      the three and six months ended January 24, 2009.  The decrease for
      the six month period was due to a decrease in traffic resulting from our
      planned transition to a new search marketing agency during the first
      quarter ended October 24, 2009.
  The following chart sets forth the
wholesale division’s net sales for the three and six months ended January 23,
2010 as compared to the three and six months ended January 24, 2009 (in
thousands):
  Three Months Ended
                        
                        
                        Six Months EndedNet Sales:
                        
                        January23,
                            2010
                        
                        
                        January24,
                            2009
                        
                        
                        Increase/
                            (Decrease)
                        
                        
                        January 23,
                            2010
                        
                        
                        January24,
                            2009
                        
                        
                        Increase/
                            (Decrease)Walmart
                        
                        $
                        57
                        
                        
                        $
                        7,556
                        
                        
                        $
                        (7,499
                        )
                        
                        $
                        232
                        
                        
                        $
                        9,050
                        
                        
                        $
                        (8,818
                        )All
      other U.S. customers
                        
                        
                        4,200
                        
                        
                        
                        6,277
                        
                        
                        
                        (2,077
                        )
                        
                        
                        9,924
                        
                        
                        
                        13,621
                        
                        
                        
                        (3,697
                        )Total
      U.S. customers
                        
                        
                        4,257
                        
                        
                        
                        13,833
                        
                        
                        
                        (9,576
                        )
                        
                        
                        10,156
                        
                        
                        
                        22,671
                        
                        
                        
                        (12,515
                        )Canada
                        
                        
                        321
                        
                        
                        
                        331
                        
                        
                        
                        (10
                        )
                        
                        
                        516
                        
                        
                        
                        929
                        
                        
                        
                        (413
                        )Total
                        
                        $
                        4,578
                        
                        
                        $
                        14,164
                        
                        
                        $
                        (9,586
                        )
                        
                        $
                        10,672
                        
                        
                        $
                        23,600
                        
                        
                        $
                        (12,928
                        )
  The decrease in net sales to
Walmart is primarily the result of Walmart shifting its focus to product
categories that differ from those Walmart historically purchased from
us.  Walmart is also producing its own merchandise for sale to its
customers and selecting competing vendors.  We have been working with
Walmart to develop products that accommodate these business changes and appeal
to Walmart’s customers.  However, we cannot be assured that our sales
to Walmart will return to historical levels.  The decrease in sales with
all other U.S. customers is the result of a decrease in consumer spending
resulting from the challenging macroeconomic environment, as well as our retail
customers sourcing and producing merchandise themselves and selecting competing
vendors.
  19
  The wholesale division’s backlog of
open orders by customer as of January 23, 2010 and January 24, 2009 was as
follows:
  (in thousands, except for percentages)Customer
                    
                    Backlog of
                        orders at
                        January 23,
                        2010
                    
                    
                    % of
                        total
                        orders
                    
                    
                    Backlog of
                        orders at
                        January 24,
                        2009
                    
                    
                    % of
                        total
                        orders
                    
                    
                    Increase /
                        (decrease)
                        from prior
                        year
                    
                    
                    % of
                        Increase /
                        (decrease)
                        from prior
                        yearWalmart
                    
                    $
                    2,734
                    
                    
                    
                    34.1
                    %
                    
                    $
                    1,383
                    
                    
                    
                    16.3
                    %
                    
                    $
                    1,351
                    
                    
                    
                    97.7
                    %Other
                    
                    
                    5,059
                    
                    
                    
                    63.1
                    %
                    
                    
                    6,773
                    
                    
                    
                    80.2
                    %
                    
                    
                    (1,714
                    )
                    
                    
                    (25.3
                    )%Total
      U.S.
                    
                    
                    7,793
                    
                    
                    
                    97.2
                    %
                    
                    
                    8,156
                    
                    
                    
                    96.5
                    %
                    
                    
                    (363
                    )
                    
                    
                    (4.5
                    )%Canada
                    
                    
                    226
                    
                    
                    
                    2.8
                    %
                    
                    
                    292
                    
                    
                    
                    3.5
                    %
                    
                    
                    (66
                    )
                    
                    
                    (22.6
                    )%Total
                    
                    $
                    8,019
                    
                    
                    
                    100.0
                    %
                    
                    $
                    8,448
                    
                    
                    
                    100.0
                    %
                    
                    $
                    (429
                    )
                    
                    
                    (5.1
                    )%
 
 The
backlog of orders was $8,019,000 as of January 23, 2010 and $8,448,000 as of
January 24, 2009.  Orders are booked upon receipt.  Our open
order position with Walmart as of January 23, 2010 was $2,734,000 as compared to
$1,383,000 as of January 24, 2009.  The open orders for all other U.S.
and Canadian customers at January 23, 2010 were $5,285,000 as compared to
$7,065,000 at January 24, 2009.  This decrease is the result of a decrease
in consumer spending resulting from the challenging macroeconomic environment,
as well as our retail customers sourcing and producing merchandise themselves
and selecting competing vendors.  Customers not only select different
vendors based on product design, the desirability of fabrics and styles, price,
quality and reliability of service and delivery, but also on branding
capabilities.  We believe that retail customers producing products
themselves and selecting vendors with branding capabilities are material trends
that could adversely affect our sales in the future.  Accordingly,
during the fourth quarter of fiscal year 2009, we developed a branding/product
development strategy targeting our wholesale division’s
customers.  The new focused product lines are heavily influenced by
our retail creative and design teams.  As one of our key strategic
initiatives for fiscal year 2010, we will continue to offer product under the
wholesale brand name, Cinema Etoile®, as well
as develop Frederick’s of Hollywood brand extension opportunities with select
wholesale customers.
  Gross
Profit
  Three Months Ended
                                                  
                                                  
                                                  Six Months EndedJanuary 23,
                                                  
                                                  
                                                  January 24,
                                                  
                                                  
                                                  Increase/
                                                  
                                                  
                                                  January 23,
                                                  
                                                  
                                                  January 24,
                                                  
                                                  
                                                  Increase/2010
                                                  
                                                  
                                                  2009
                                                  
                                                  
                                                  (Decrease)
                                                  
                                                  
                                                  2010
                                                  
                                                  
                                                  2009
                                                  
                                                  
                                                  (Decrease)Retail
      gross margin
                                                  
                                                  
                                                  36.7
                                                  %
                                                  
                                                  
                                                  37.7
                                                  %
                                                  
                                                  
                                                  (1.0
                                                  )%
                                                  
                                                  
                                                  36.0
                                                  %
                                                  
                                                  
                                                  37.1
                                                  %
                                                  
                                                  
                                                  (1.1
                                                  )%Wholesale
      gross margin
                                                  
                                                  
                                                  12.2
                                                  %
                                                  
                                                  
                                                  27.0
                                                  %
                                                  
                                                  
                                                  (14.8
                                                  )%
                                                  
                                                  
                                                  20.6
                                                  %
                                                  
                                                  
                                                  27.3
                                                  %
                                                  
                                                  
                                                  (6.7
                                                  )%Total
      gross margin
                                                  
                                                  
                                                  34.0
                                                  %
                                                  
                                                  
                                                  34.8
                                                  %
                                                  
                                                  
                                                  (0.8
                                                  )%
                                                  
                                                  
                                                  33.9
                                                  %
                                                  
                                                  
                                                  34.7
                                                  %
                                                  
                                                  
                                                  (0.8
                                                  )%
  Gross
margin (gross profit as a percentage of net sales) for the three and six months
ended January 23, 2010 was 34.0% and 33.9%, respectively, as compared to 34.8%
and 34.7% for the three and six months ended January 24, 2009,
respectively.  The lower total gross margin reflects a lower gross
margin for both the retail and wholesale divisions.  The largest
contributors to the decrease in gross margin for the retail division were the
following:
  ·
              Our
      product margin was lower by 1.0 percentage point and 0.7 percentage points
      for the three and six months ended January 23, 2010 as compared to the
      three and six months ended January 24, 2009, respectively.  The
      lower product margin was the result of an increase in markdowns and
      promotions to promote sales.
  ·
              Occupancy
      costs, which consist of rent, common area maintenance, utilities and real
      estate taxes, decreased by $124,000 and $386,000 for the three and six
      months ended January 23, 2010 as compared to the three and six months
      ended January 24, 2009, respectively; however, as a percentage of sales,
      occupancy costs increased by 0.2 percentage points for the three and
      six month periods as a result of lower retail sales.  The
      decrease in occupancy costs for the three and six months ended January 23,
      2010 is primarily attributable to reductions in repair and maintenance
      costs, real estate consulting fees and negotiated rent
      reductions.
  20




·
            Depreciation
      decreased by $46,000 and $63,000 for the three and six months ended
      January 23, 2010 as compared to the three and six months ended January 24,
      2009, respectively.  As a percentage of sales, depreciation remained
      the same for the three and six months ended January 23, 2010 as compared
      to the three and six months ended January 24,
  2009.




·
            Freight
      costs decreased by $140,000 and $270,000 for the three and six months
      ended January 23, 2010 as compared to the three and six months ended
      January 24, 2009, respectively.  As a percentage of sales,
      freight costs decreased by 0.2 percentage points for the three and six
      months ended January 23, 2010 as compared to the three and six months
      ended January 24, 2009, respectively. This decrease was primarily due
      to reductions in Direct sales, a reduction in the number of shipments sent
      to our stores and a reduction in expedited
  shipments.




·
            Costs
      associated with our retail distribution center decreased by $100,000 and
      $128,000 for the three and six months ended January 23, 2010 as compared
      to the three and six months ended January 24, 2009,
      respectively.  As a percentage of sales, retail distribution
      costs decreased by 0.2 percentage points for the three months ended
      January 23, 2010 as compared to the three months ended January 24, 2009
      and remained the same for the six months ended January 23, 2010 as
      compared to the six months ended January 24,
  2009.




The lower
gross margin for our wholesale division was the result of lower overall
wholesale sales, which increased the percentage of our fixed overhead production
costs as they relate to sales, manufacturing inefficiencies at our Philippines
manufacturing facility, higher markdown allowances given to our customersand an increase in
closeout sales as a percentage of total sales.




Selling,
General and Administrative Expenses




(in thousands)
                    
                    Three Months Ended
                    
                    
                    Six Months EndedJanuary23,
                        2010
                    
                    
                    January24,
                        2009
                    
                    
                    Increase/
                        (Decrease)
                    
                    
                    January 23,
                        2010
                    
                    
                    January24,
                        2009
                    
                    
                    Increase/
                        (Decrease)Retail
                    
                    $
                    14,661
                    
                    
                    $
                    14,239
                    
                    
                    $
                    422
                    
                    
                    $
                    27,373
                    
                    
                    $
                    28,431
                    
                    
                    $
                    (1,058
                    )Wholesale
                    
                    
                    2,997
                    
                    
                    
                    4,014
                    
                    
                    
                    (1,017
                    )
                    
                    
                    6,340
                    
                    
                    
                    8,733
                    
                    
                    
                    (2,393
                    )Unallocated
      corporate executive office
                    
                    
                    483
                    
                    
                    
                    559
                    
                    
                    
                    (76
                    )
                    
                    
                    981
                    
                    
                    
                    1,023
                    
                    
                    
                    (42
                    )Total
                    
                    $
                    18,141
                    
                    
                    $
                    18,812
                    
                    
                    $
                    (671
                    )
                    
                    $
                    34,694
                    
                    
                    $
                    38,187
                    
                    
                    $
                    (3,493
                    )




Selling,
general and administrative expenses for the three months ended January 23, 2010
decreased by $671,000 to $18,141,000 or 43.9% of sales, from $18,812,000 or
35.8% of sales for the three months ended January 24, 2009.  Selling,
general and administrative expenses for the six months ended January 23, 2010
decreased by $3,493,000 to $34,694,000 or 44.2% of sales, from $38,187,000 or
40.2% of sales for the six months ended January 24, 2009.




The
retail division’s selling, general and administrative expenses increased by
$422,000 to $14,661,000 for the three months ended January 23, 2010 from
$14,239,000 for the three months ended January 24, 2009.  This
increase resulted primarily from the following:




·
            Store
      selling, general and administrative expenses decreased by $217,000, which
      was primarily due to a decrease in salaries and salary-related costs of
      $386,000 and lower telephone costs of approximately $120,000, partially
      offset by a loss on the disposal of telephone equipment of $169,000 and
      related cancelation fees of $190,000.  The decrease in salaries
      and salary-related costs is the result of lower store coverage
      requirements as well as a reduction in head count as compared to the same
      period in the prior year.  The lower telephone costs were the
      result of the cancelation of a telephone contract that required us to
      maintain a more expensive connection between our stores and our retail
      division corporate office.  As a result of the conversion to the
      new system, we expect our annual savings to be in excess of
      $500,000.




·
            Direct
      selling, general and administrative expenses increased by $590,000,
      primarily as a result of a lawsuit we settled in the prior year related to
      the unsuccessful launch of a website platform in fiscal year 2008,
      pursuant to which we received a lump sum cash payment and other non-cash
      consideration totaling $756,000.  Absent this benefit in the
      prior year, Direct selling, general and administrative expenses would have
      decreased by $167,000, which was the result of a decrease in marketing
      expenses of $301,000 and catalog costs of $127,000, partially offset by an
      increase in equipment maintenance costs of $156,000 associated with our
      new website platform.  The decrease in marketing expenses was
      primarily due to a reduction in search engine fees and affiliate
      commissions.


21




The
retail division’s selling, general and administrative expenses decreased by
$1,058,000 to $27,373,000 for the six months ended January 23, 2010 from
$28,431,000 for the six months ended January 24, 2009.  This decrease
resulted primarily from the following:




·
            Expenses
      related to the retail division’s overhead decreased by $514,000, which was
      primarily due to a decrease in salaries and salary related costs of
      $101,000, which resulted from a reduction in full-time personnel,
      partially offset by an increase in temporary personnel to fill various
      positions and a decrease in personnel recruitment of $74,000, which
      resulted from fewer new hires than in the prior
  year.




·
            Store
      selling, general and administrative expenses decreased by $214,000, which
      was primarily due to a decrease in salaries and salary-related costs of
      $275,000 and lower telephone costs of approximately $109,000, partially
      offset by a loss on the disposal of telephone equipment of $169,000 and
      related cancelation fees of $190,000.  The decrease in salaries
      and salary-related costs is the result of lower coverage requirements as
      well as a reduction in head count as compared to the same period in the
      prior year.  The lower telephone costs were the result of the
      cancelation of a telephone contract that required us to maintain a more
      expensive connection between our stores and our retail division corporate
      office.  As a result of the conversion to the new system, we
      expect our annual savings to be in excess of
  $500,000.




·
            Direct
      selling, general and administrative expenses decreased by $424,000,
      primarily as a result of a $982,000 reduction in catalog costs and a
      $610,000 reduction in marketing expenses.  The reduction in
      catalog costs was due to a 5% decrease in circulation compared to the same
      period in the prior year and our roll out of various cost effective
      alternatives to full size catalog mailings such as postcards, gift guides
      and more personalized “look books.”  The decrease in marketing
      expenses was due to lower commissions earned by affiliates and lower
      search engine fees.  These decreases were partially offset by an
      increase in equipment maintenance costs of $315,000 associated with our
      new website platform and as a result of a lawsuit we settled in the prior
      year related to the unsuccessful launch of a website platform in fiscal
      year 2008, pursuant to which we received a lump sum cash payment and other
      non-cash consideration totaling
$756,000.




The
wholesale division’s selling, general and administrative expenses decreased by
$1,017,000 to $2,997,000 for the three months ended January 23, 2010 from
$4,014,000 for the three months ended January 24, 2009, and decreased by
$2,393,000 to $6,340,000 for the six months ended January 23, 2010 from
$8,733,000 for the six months ended January 24, 2009.  This decrease
is primarily the result of (1) a $451,000 and $960,000 reduction in salaries and
salary-related costs and related benefits of $36,000 and $117,000 for the
respective three and six month periods, which resulted from a lower headcount,
(2) a $241,000 and $430,000 decrease in shipping-related costs for the
respective three and six month periods, which resulted from lower sales and (3)
an overall general decrease in selling, general and administrative
expenses.




The
unallocated expenses related to the corporate executive office decreased by
$76,000 to $483,000 for the three months ended January 23, 2010 from $559,000
for the three months ended January 24, 2009, and decreased by $42,000 to
$981,000 for the six months ended January 23, 2010 from $1,023,000 for the six
months ended January 24, 2009.  These expenses include costs
associated with our Chief Executive Officer, Chief Financial Officer and our
Board of Directors.




Goodwill
Impairment




As our market capitalization was
significantly below our book value at January 24, 2009, we performed an
impairment analysis.  We determined that the goodwill balances on both
the retail and wholesale segments were impaired as a result of our current and
future projected financial results due to the poor macroeconomic outlook and a
reduction in wholesale business with Walmart.  Accordingly, we
recorded a goodwill impairment charge of $19,100,000.  After
recognizing the impairment charge, we had no remaining goodwill on our
consolidated balance sheet as of January 24, 2009.




22




Interest
Expense, Net




For the
three and six months ended January 23, 2010, net interest expense was $589,000
and $950,000, respectively, as compared to $421,000 and $849,000 for the three
and six months ended January 24, 2009.  The increases are primarily
the result of higher interest rates and financing fees, partially offset by
overall lower borrowing levels.




Income
Tax Provision




Our
income tax provision for the three and six months ended January 23, 2010 and
January 24, 2009 primarily represents minimum and net worth taxes due in various
states.  Due to the uncertainty of realization in future periods, no
tax benefit has been recognized on the net losses for these
periods.  Accordingly, a full valuation allowance has been established
on the current loss and all net deferred tax assets existing at the end of the
period excluding the deferred tax liability related to trademarks, which have an
indefinite life.  In addition, the future realization of tax benefits
related to certain net operating losses will be subject to limitations under
Section 382 of the Internal Revenue Code.




Liquidity
and Capital Resources




Cash
Used in Operations




Net cash
used in operating activities for the six months ended January 23, 2010 was
$2,739,000, resulting primarily from the following:




·
            a
      net loss of $9,054,000 for the six months ended January 23,
      2010;




·
            an
      increase in prepaid expenses and other current assets of $696,000, which
      was primarily due to an increase in prepaid
  advertising.




·
            an
      increase in merchandise inventories of $548,000 due to normal seasonal
      fluctuations in the finished goods inventory levels;
  and




·
            an
      increase in accounts receivable of $282,000, which was due to higher
      wholesale sales during the last two months (December and January) of the
      three months ended January 23, 2010 as compared to the last two months
      (June and July) of the year ended July 25,
2009;




These decreases in cash flow were
partially offset by:




·
            an
      increase in accounts payable and other accrued expenses of $3,436,000,
      which resulted from normal seasonal fluctuations and extended vendor
      accommodations;




·
            non-cash
      expenses of $2,782,000 for depreciation and
  amortization;




·
            non-cash
      expenses of $362,000 for stock-based
  compensation;




·
            non-cash
      expenses of $224,000 for amortization of deferred rent and tenant
      allowances; and




·
            non-cash
      accrued interest on long term related party debt of
    $408,000.




Cash
Used in Investing Activities




Cash used
in investing activities for the six months ended January 23, 2010 was $458,000,
which resulted primarily from purchases of property and equipment for the
opening of two new stores during the period as well as other general corporate
expenditures.




Cash
Provided by Financing Activities




Net cash
provided by financing activities for the six months ended January 23, 2010 was
$3,102,000, resulting primarily from net borrowings of $1,195,000 under our
revolving credit facility and $2,000,000 from our bridge facility.




23




Revolving
Credit and Bridge Facilities




We and our U.S. subsidiaries have a
senior credit facility (the “Facility”) with Wells Fargo Retail Finance II, LLC
(“Senior Lender”).  The Facility matures on January 28,
2012.




The Facility is for a maximum amount of
$50 million comprised of a $25 million line of credit with a $15 million
sub-limit for letters of credit, and up to an additional $25 million commitment
in increments of $5 million at our option so long as we are in compliance with
the terms of the Facility.  The actual amount of credit available
under the Facility is determined by using measurements based on our receivables,
inventory and other measures.  The Facility is secured by a first
priority security interest in our assets.  Interest is payable
monthly, in arrears, at interest rates that were increased in connection with
the second amendment to the Facility described below.




On November 4, 2008, the borrowers
utilized the accordion feature under the Facility to increase the borrowing
limit from $25 million to $30 million.  In utilizing the accordion
feature, our minimum availability reserve increased by $375,000 (7.5% of the
$5,000,000 increase) to $2,250,000 (7.5% of the $30,000,000) and we incurred a
one-time closing fee of $12,500.




On September 21, 2009, the Facility
was amended to provide for a $2.0 million bridge facility at an annual interest
rate of LIBOR plus 10%, to be repaid upon the earlier of December 7, 2009 and
the consummation of a financing in which we receive net proceeds of at least
$4.9 million.  On October 23, 2009, the Facility was further amended
to extend the December 7, 2009 repayment date to August 1, 2010 and to reduce
the net proceeds that we are required to receive in a financing to at least $4.4
million (a “Recapitalization Event”).  Our failure to complete a
Recapitalization Event by August 1, 2010 will result in a violation of a
covenant under the Facility.  If such violation is not waived by the
Senior Lender, it will constitute an event of default.




In connection with the September and
October amendments, the interest rates on “Base Rate” loans and “LIBOR Rate”
loans under the Facility, as amended, were increased as follows:




·
            “Base
      Rate” loan interest rates were increased from the Wells Fargo prime rate
      less 25 basis points to the Wells Fargo prime rate plus 175 basis points;
      and




·
            “LIBOR
      Rate” loan interest rates were increased from LIBOR plus 150 basis points
      to LIBOR plus 300 basis points.




The fee
on any unused portion of the Facility was also increased from 25 basis points to
50 basis points.  In addition, upon a Recapitalization Event, the
applicable percentages used in calculating the borrowing base under the Facility
will be reduced.




In
connection with the amendments, we incurred a one-time amendment fee of
$150,000, one half of which has been paid and the remainder will be paid upon
the Recapitalization Event.  All other material terms of the Facility
remain unchanged.




The
Facility contains customary representations and warranties, affirmative and
restrictive covenants and events of default.  The restrictive
covenants limit our ability to create certain liens, make certain types of
borrowings and investments, liquidate or dissolve, engage in mergers,
consolidations, significant asset sales and affiliate transactions, dispose of
inventory, incur certain lease obligations, make capital expenditures, pay
dividends, redeem or repurchase outstanding equity and issue capital
stock.  In lieu of financial covenants, fixed charge coverage and
overall debt ratios, we also are required to maintain specified minimum
availability reserves.  At January 23, 2010, we were in compliance
with the Facility’s covenants and minimum availability reserve
requirements.




As of January 23, 2010, we had
$10,440,000 outstanding under the Facility at a rate of 5.0% and $2,000,000
outstanding under the bridge facility at a rate of 10.25%.  For the
six months ended January 23, 2010, borrowings under the Facility (including the
bridge facility) peaked at $16,996,000 and the average borrowing during the
period was approximately $13,451,000.  In addition, at January 23,
2010, we had $846,000 of outstanding letters of credit under the
Facility.




24




Long
Term Debt – Related Party




As of
January 23, 2010, we had $13,744,000 of long term debt due to certain funds and
accounts affiliated with, managed by, or over which Fursa Alternative
Strategies, LLC or any of its affiliates exercises investment authority,
including, without limitation, with respect to voting and dispositive rights
(collectively, “Fursa”).  This debt is referred to as “Tranche C Debt”
and matures on July 28, 2012.  This debt bears interest at the fixed
rate of 7% per annum with 1% payable in cash and 6% payable in kind.




The Tranche C Debt is secured by
substantially all of our assets and is second in priority to the
Facility.  The Tranche C Debt contains customary representations and
warranties, affirmative and restrictive covenants and events of default
substantially similar to, and no more restrictive than, those contained in the
Facility.  At January 23, 2010, the Company was in compliance with the
covenants contained in the term loan agreement, as amended, governing the
Tranche C Debt.




On
February 1, 2010, we entered into a Debt Exchange and Preferred Stock Conversion
Agreement as discussed in “Debt Exchange and Preferred Stock
Conversion” below and in Note 1 included in the Notes to the consolidated
financial statements contained elsewhere in this report.




Preferred
Stock




We have
3,629,325 shares of Series A 7.5% Convertible Preferred Stock outstanding which
is owned by Fursa.  The Series A Preferred Stock is convertible at any
time at the option of the holders into an aggregate of 1,512,219 shares of
common stock, subject to adjustment.  As of January 23, 2010, we had
accrued dividends of $1,126,000.  For a more detailed description of
the Series A Preferred Stock, see Note 6, “Financing,” included in the
Notes to the consolidated financial statements contained elsewhere in this
report.




On
February 1, 2010, we entered into a Debt Exchange and Preferred Stock Conversion
Agreement as discussed in “Debt Exchange and Preferred Stock
Conversion” below and in Note 1 included in the Notes to the consolidated
financial statements contained elsewhere in this report.




Debt
Exchange and Preferred Stock Conversion




On
February 1, 2010, we entered into a Debt Exchange and Preferred Stock Conversion
Agreement (“Exchange and Conversion Agreement”) with Fursa to exchange the
Tranche C Debt, together with all accrued interest, and to convert the Series A
Preferred Stock, together with accrued dividends, for a number of shares of
common stock equal to 50% of the aggregate value of the Tranche C Debt
(including accrued interest) and the Series A Preferred Stock (including accrued
dividends) as of the closing date of the transaction divided by $1.3319 (the
“Conversion Price”).  Upon the closing of the transaction, we will
also issue to Fursa three, five and seven-year warrants, each to purchase
500,000 shares of common stock (for an aggregate of 1,500,000 shares of common
stock) at exercise prices of 150%, 175% and 200% of the Conversion Price,
respectively, but not less than the closing price of our common stock on the
closing of the transaction.  For a more detailed description of the
Exchange and Conversion Agreement, see Note 1 included in the Notes to the
consolidated unaudited financial statements contained elsewhere in this
report.




The
consummation of the transaction is subject to shareholder
approval.  We anticipate holding our annual meeting of shareholders
during the fourth fiscal quarter of 2010 and expect to consummate the
transaction as soon as practicable once shareholder approval is
obtained.  Together with the warrants and the shares of common stock
that Fursa will receive at the closing, Fursa’s aggregate beneficial ownership
of our common stock will increase from approximately 36% to approximately
51%.  Based on the terms of the Exchange and Conversion Agreement, as
of January 23, 2010, a total of $22,587,000 in Tranche C Debt (including accrued
interest) and Series A Preferred Stock (including accrued dividends) will be
converted into approximately 8,479,240 shares of common stock.  This
transaction will not constitute a Recapitalization Event under the
Facility.




Future
Financing Requirements




For the
six months ended January 23, 2010, our working capital decreased by $6,386,000
to ($9,180,000), primarily due to our loss from operations.  Our
Facility does not contain any working capital covenants and we are in compliance
with our minimum availability reserve requirements.  However, our
business continues to be affected by limited working capital and it is critical
to our business that we meet our projected operating cash flows.  We
plan to continue to carefully manage our working capital and look for ways to
improve our working capital position.




25




We
believe that the available borrowings under the Facility, along with our
projected operating cash flows, will be sufficient to cover our working capital
requirements and capital expenditures through the end of fiscal year
2010.  In September and October 2009, the Facility was amended to
provide for a $2.0 million bridge facility to be repaid upon the earlier of
August 1, 2010 and the consummation of a Recapitalization
Event.  Unless we consummate a Recapitalization Event by August 1,
2010, we will be in violation of a covenant under the Facility.  If
such violation is not waived by the Senior Lender, it will constitute an event
of default.  We are actively seeking to obtain additional financing in
order to comply with the requirements of the Facility.  There can be
no assurance that we will be able to consummate a Recapitalization Event and
repay the bridge facility as required under the Facility or, if these events do
not occur, that the Senior Lender will continue the Facility.




We expect that our capital expenditures
for fiscal year 2010 will be less than $2,200,000, primarily for new store
openings and remodelings, improvements to our information technology systems and
other general corporate expenditures.




Off
Balance Sheet Arrangements




We are
not a party to any material off-balance sheet financing arrangements except
relating to open letters of credit as described in Note 6, “Financing,” included in the
Notes to the consolidated unaudited financial statements contained elsewhere in
this report, and Note 10 to the consolidated audited financial statements
included in our Annual Report on Form 10-K for the year ended July 25,
2009.




Effect
of New Accounting Standards




See Note 3, “Effect of New Accounting
Standards,” included in the Notes to the consolidated unaudited financial
statements contained elsewhere in this report for a discussion of recent
accounting developments and their impact on our consolidated financial
statements.  None of the new accounting standards are anticipated to
materially impact us.




Seasonality
and Inflation




Our
retail and wholesale businesses both experience seasonal sales
patterns.  Sales and earnings for the retail division typically peak
during the second and third fiscal quarters (November through April), primarily
during the holiday season in November and December, as well as the Valentine’s
Day holiday in the month of February.  As a result, we maintain higher
inventory levels during these peak selling periods. Sales and earnings for the
wholesale division typically peak in the first and second fiscal quarters
(August through January).  Orders from the wholesale division’s
customers are typically placed four to six months prior to the expected shipment
date to such customers.




We do not
believe that our operating results have been materially affected by inflation
during the preceding three years.  There can be no assurance, however,
that our operating results will not be affected by inflation in the
future.




Imports




Transactions
with our foreign manufacturers and suppliers are subject to the risks of doing
business outside of the United States.  Our import and offshore
operations are subject to constraints imposed by agreements between the United
States and the foreign countries in which we do business.  These
agreements often impose quotas on the amount and type of goods that can be
imported into the United States from these countries.  Such agreements
also allow the United States to impose, at any time, restraints on the
importation of categories of merchandise that, under the terms of the
agreements, are not subject to specified limits.  Our imported
products are also subject to United States customs duties and, in the ordinary
course of business, we are from time to time subject to claims by the United
States Customs Service for duties and other charges.  The United
States and other countries in which our products are manufactured may, from time
to time, impose new quotas, duties, tariffs or other restrictions, or adversely
adjust presently prevailing quotas, duty or tariff levels, which could adversely
affect our operations and our ability to continue to import products at current
or increased levels.  We cannot predict the likelihood or frequency of
any such events occurring.




26




ITEM 3. – QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK




Interest
Rate Risks




We are
exposed to interest rate risk associated with our Facility and bridge
facility.  As of January 23, 2010, we had $10,440,000 outstanding
under the Facility and $2,000,000 outstanding under the bridge facility.
Interest accrues on outstanding borrowings under the Facility at an agreed to
reference rate, which was, at our election, either the Wells Fargo prime rate
plus 1.75 basis points (5.0% at January 23, 2010) or LIBOR plus 300 basis
points.  Interest accrues on outstanding borrowings under the bridge
facility at an annual interest rate of LIBOR plus 10% (10.25% as of January 23,
2010).  For the six months ended January 23, 2010, borrowings under
the Facility (including the bridge facility) peaked at $16,996,000 and the
average borrowing during the period was approximately $13,451,000.  An
increase in the interest rate of 100 basis points would have increased the
interest on the Facility and bridge facility borrowings by approximately $67,000
for the six months ended January 23, 2010.




Foreign
Currency Risks




We enter into a significant amount of
purchase obligations outside of the United States, all of which are negotiated
and settled in U.S. dollars.  Therefore, on our current open purchase
order position we have no exposure to foreign currency exchange
risks.  However, significant fluctuations in foreign currency rates
would have an impact on our future purchases.




ITEM
4. – CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures


Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in company reports filed or
submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in company reports filed or submitted under the Exchange Act is
accumulated and communicated to management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.


As
required by Rules 13a-15 and 15d-15 under the Exchange Act, our chief executive
officer and chief financial officer performed an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures as of
January 23, 2010.  Based upon their evaluation, they concluded that
our disclosure controls and procedures were effective.


Internal
Control Over Financial Reporting


Our
internal control over financial reporting is a process designed by, or under the
supervision of, our chief executive officer and chief financial officer and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of our financial reporting and
the preparation of our financial statements for external purposes in accordance
with generally accepted accounting principles in the United
States.  Internal control over financial reporting includes policies
and procedures that pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of our
assets; provide reasonable assurance that transactions are recorded as
necessary to permit preparation of our financial statements in accordance with
generally accepted accounting principles in the United States, and that our
receipts and expenditures are being made only in accordance with the
authorization of our board of directors and management; and provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on our
financial statements.


Changes
in Internal Control Over Financial Reporting


During
the three months ended January 23, 2010, there were no changes made in our
internal control over financial reporting (as such term is defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
 27




PART
      II
            OTHER
      INFORMATION




ITEM
1 – LEGAL PROCEEDINGS




We are involved from time to time in
litigation incidental to our business.  We believe that the outcome of
such litigation will not have a material adverse effect on our results of
operations or financial condition.




ITEM
1A – RISK FACTORS




There are no material changes from the
risk factors set forth in the “Risk Factors” section of our Annual Report on
Form 10-K filed with the SEC on October 23, 2009.  Please refer to
this section for disclosures regarding the risks and uncertainties in our
business.




ITEM
6 – EXHIBITS




Exhibit No.
                                        
                                        Description10.1*
                                        
                                        Amended
      and Restated Financing Agreement dated as of January 28, 2008 by and among
      the Company and certain of its Subsidiaries, as Borrowers, the financial
      institutions from time to time party thereto and Wells Fargo Retail
      Finance II, LLC, as the Arranger and Agent (“Wells Fargo Financing
      Agreement”)10.2
                                        
                                        First
      Amendment, dated as of September 9, 2008, to the Wells Fargo Financing
      Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K dated
      September 21, 2009 and filed on September 23, 2009)10.3
                                        
                                        Second
      Amendment, dated as of September 21, 2009, to the Wells Fargo Financing
      Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K dated
      September 21, 2009 and filed on September 23, 2009)10.4
                                        
                                        Third
      Amendment, dated as of October 23, 2009, to the Wells Fargo Financing
      Agreement (incorporated by reference to Exhibit 10.24 to Form 10-K for the
      fiscal year ended July 25, 2009 and filed on October 23,
    2009)10.5*
                                        
                                        Tranche
      A/B and Tranche C Term Loan Agreement, dated as of June 30, 2005, by
      andamong
      Frederick’s of Hollywood, Inc., FOH Holdings, Inc., Frederick’s of
      Hollywood Stores, Inc., Fredericks.com, Inc., Hollywood Mail Order, LLC,
      the lending institutions listed as Tranche A/B lenders, the lending
      institutions listed as Tranche C lenders, and Fursa Alternative
      Strategies LLC, as agent and collateral agent for the lenders (the “Term
      Loan Agreement”)10.6*
                                        
                                        Amendment
      No. 1, dated July 20, 2005, to the Term Loan Agreement10.7*
                                        
                                        Amendment
      No. 2, dated November 23, 2005, to the Term Loan
  Agreement10.8*
                                        
                                        Amendment
      No. 3, dated as of January 28, 2008, to the Term Loan
      Agreement31.1*
                                        
                                        Certification
      by Chief Executive Officer and Principal Executive
  Officer31.2*
                                        
                                        Certification
      by Chief Financial Officer and Principal Accounting
  Officer32*
                                        
                                        Section
      1350
Certification




*Filed
herewith.


28




SIGNATURES




Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned hereunto duly
authorized.





FREDERICK’S
      OF HOLLYWOOD GROUP INC.Date:
      March 8, 2010
              By:
              /s/ Thomas J. LynchTHOMAS
      J. LYNCHChief
      Executive Officer andPrincipal
      Executive OfficerDate:
      March 8, 2010
              By:
              /s/ Thomas RendeTHOMAS
      RENDEChief
      Financial Officer andPrincipal
      Accounting Officer


29