##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended October 25, 2008
 o
    
    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 1-5893
 FREDERICKS OF HOLLYWOOD GROUP INC.
  New York
    
    13-5651322(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)1115 Broadway, New York, NY
    
    10010(Address of principal executive offices)
    
    (Zip Code)
  (Former name, former address, and former fiscal year, if changed since last report.)
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
  o þ




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##### 



PagePART I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets at October 25, 2008 (Unaudited) and July 26, 2008 (Audited)
    
    
    3Consolidated Statements of Operations (Unaudited) for the Three Months Ended October 25, 2008 and October 27, 2007
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended October 25, 2008 and October 27, 2007
    
    
    5Notes to Consolidated Unaudited Financial Statements
    
    
    7  13Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14  23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4T. Controls and Procedures
    
    
    23  24PART II. Other InformationItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 6. Exhibits
    
    
    25Signatures
    
    
    26EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32: CERTIFICATION
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
  
 
 October 25,
    
    
    July 26,2008
    
    
    2008(Unaudited)
    
    
    (Audited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    2,199
    
    
    $
    1,988Accounts receivable
    
    
    6,659
    
    
    
    5,788Income tax receivable
    
    
    142
    
    
    
    112Merchandise inventories
    
    
    30,734
    
    
    
    24,572Prepaid expenses and other current assets
    
    
    3,618
    
    
    
    3,515Deferred income tax assets
    
    
    2,511
    
    
    
    2,766Total current assets
    
    
    45,863
    
    
    
    38,741PROPERTY AND EQUIPMENT, Net
    
    
    23,404
    
    
    
    22,576GOODWILL
    
    
    19,100
    
    
    
    19,100INTANGIBLE AND OTHER ASSETS
    
    
    26,907
    
    
    
    27,265TOTAL ASSETS
    
    $
    115,274
    
    
    $
    107,682LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Revolving credit facility and term loans
    
    $
    20,327
    
    
    $
    11,093Current portion of long-term debt
    
    
    35
    
    
    
    50Accounts payable and other accrued expenses
    
    
    23,993
    
    
    
    20,709Total current liabilities
    
    
    44,355
    
    
    
    31,852DEFERRED RENT
    
    
    4,131
    
    
    
    3,846LONG TERM DEBT-related party
    
    
    12,752
    
    
    
    12,561OTHER
    
    
    38
    
    
    
    55DEFERRED INCOME TAX LIABILITIES
    
    
    11,547
    
    
    
    11,802TOTAL LIABILITIES
    
    
    72,823
    
    
    
    60,116PREFERRED STOCK, $.01 par value  authorized,
10,000,000 shares at October 25, 2008 and July 26,
2008; issued and outstanding 3,629,325 shares of
Series A preferred stock at October 25, 2008 and July
26, 2008
    
    
    7,500
    
    
    
    7,500COMMITMENTS AND CONTINGENCIES ( NOTE 8 )
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Common stock, $.01 par value  authorized,
200,000,000 shares at October 25, 2008 and July
26, 2008; issued and outstanding 26,172,094
shares at October 25, 2008 and 26,141,194
shares at July 26, 2008
    
    
    262
    
    
    
    261Additional paid-in capital
    
    
    59,811
    
    
    
    59,558Accumulated deficit
    
    
    (25,030
    )
    
    
    (19,744
    )Accumulated other comprehensive loss
    
    
    (92
    )
    
    
    (9
    )TOTAL SHAREHOLDERS EQUITY
    
    
    34,951
    
    
    
    40,066TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    115,274
    
    
    $
    107,682
  3




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##### Table of Contents



Three Months EndedOctober 25,
    
    
    October 27,2008
    
    
    2007(see Note 2)Net sales
    
    $
    42,565
    
    
    $
    37,187Cost of goods sold, buying and occupancy
    
    
    27,887
    
    
    
    21,849Gross profit
    
    
    14,678
    
    
    
    15,338Selling, general and administrative expenses
    
    
    19,375
    
    
    
    18,639Operating loss
    
    
    (4,697
    )
    
    
    (3,301
    )Interest expense, net
    
    
    428
    
    
    
    626Loss before income tax provision
    
    
    (5,125
    )
    
    
    (3,927
    )Income tax provision
    
    
    20
    
    
    
    Net loss
    
    
    (5,145
    )
    
    
    (3,927
    )Less: Preferred stock dividends
    
    
    141
    
    
    
    Net loss available to common shareholders
    
    $
    (5,286
    )
    
    $
    (3,927
    )Basic net loss per share
    
    $
    (0.20
    )
    
    $
    (0.33
    )Diluted net loss per share
    
    $
    (0.20
    )
    
    $
    (0.33
    )Weighted average shares outstanding  basic
    
    
    26,171
    
    
    
    11,845Weighted average shares outstanding  diluted
    
    
    26,171
    
    
    
    11,845
  4




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Three Months EndedOctober 25,
    
    
    October 27,2008
    
    
    2007(see Note 2)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (5,145
    )
    
    $
    (3,927
    )Adjustments to reconcile net loss to net cash used in operating activitiesProvision for sales allowances and doubtful accounts
    
    
    75
    
    
    
    Issuance of common stock for directors fees
    
    
    12
    
    
    
    Stock-based compensation expense
    
    
    242
    
    
    
    51Loss on disposal of property and equipment
    
    
    
    
    
    
    2Amortization of deferred financing costs
    
    
    15
    
    
    
    23Depreciation and amortization
    
    
    1,470
    
    
    
    894Noncash accrued interest on long term debt  related party
    
    
    191
    
    
    
    180Amortization of deferred rent and lease incentives
    
    
    186
    
    
    
    245Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,253
    )
    
    
    47Merchandise inventories
    
    
    (6,162
    )
    
    
    (3,251
    )Prepaid expenses and other current assets
    
    
    (103
    )
    
    
    (1,177
    )Income tax receivable
    
    
    (30
    )
    
    
    (46
    )Other assets
    
    
    45
    
    
    
    66Accounts payable, accrued expense, and other
    
    
    3,187
    
    
    
    5,286Tenant improvements allowances
    
    
    406
    
    
    
    205Net cash used in operating activities
    
    
    (6,864
    )
    
    
    (1,402
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (2,140
    )
    
    
    (1,958
    )Cash paid for transaction costs
    
    
    
    
    
    
    (1,302
    )Net cash used in investing activities
    
    
    (2,140
    )
    
    
    (3,260
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of capital lease obligation
    
    
    (19
    )
    
    
    Cash paid for issuance costs
    
    
    
    
    
    
    (234
    )Net borrowings under revolving line of credit
    
    
    9,234
    
    
    
    5,767Net cash provided by financing activities
    
    
    9,215
    
    
    
    5,533NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    211
    
    
    
    871CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    1,988
    
    
    
    1,898End of period
    
    $
    2,199
    
    
    $
    2,769
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Three Months EndedOctober 25,
    
    
    October 27,2008
    
    
    2007(see Note 2)SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during period for:Interest
    
    $
    168
    
    
    $
    192Taxes
    
    $
    26
    
    
    $
    87
   6




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##### Table of Contents



1. Interim Financial Statements
   2. Merger
      (unaudited)For the three 
months ended($ in thousands except per share amounts)
    
    October 27, 2007Net sales
    
    $
    48,485Net loss
    
    
    (6,081
    )Net loss available to common shareholders
    
    $
    (6,222
    )Basic loss per share
    
    $
    (0.31
    )Diluted loss per share
    
    $
    (0.31
    )
 7




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##### Table of Contents



3. Summary of Significant Accounting Policies
 Revenue Recognition 
   Accounts Receivable/Allowance for Doubtful Accounts and Sales Discounts
 Merchandise Inventories
 Deferred Catalog Costs
 8




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Impairment of Long-Lived Assets
 Goodwill and Intangible Assets Goodwill and Other Intangible Assets
 Accounting for Stock-Based Compensation Share-Based Payment
  Three Months EndedOctober 25, 2008
    
    October 27, 2007Risk-free interest rate
    
    
    3.15%  3.64
    %
    
    
    4.5
    %Expected life (years)
    
    
    5  7
    
    
    
    6.27Expected volatility
    
    
    60  61
    %
    
    
    61
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
   Income Taxes
 Supplemental Disclosure of Noncash Financing Transactions
 9




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##### Table of Contents



4. Effect of New Accounting Standards
 Fair Value Measures Accounting for Leases
 Fair Value Option for Financial Assets and
Financial Liabilities Accounting for Certain Investments in Debt and
Equity Securities
 Noncontrolling Interests in Consolidated Financial
Statements  An Amendment of ARB No. 51
 Business Combinations
 Disclosures about Derivative Instruments and Hedging
Activities  an amendment of FASB Statement No. 133
 The Hierarchy of Generally Accepted Accounting Principles The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles
 Accounting for Financial Guarantee Insurance Contractsan
interpretation of FASB Statement No. 60
 10




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##### Table of Contents



5. Merchandise Inventories
  October 25,
    
    
    July 26,2008
    
    
    2008Raw materials
    
    $
    2,242
    
    
    $
    1,945Work-in process
    
    
    200
    
    
    
    291Finished goods
    
    
    28,292
    
    
    
    22,336$
    30,734
    
    
    $
    24,572
 6. Net Loss Per Share
  Three Months EndedOctober 25,
    
    
    October 27,2008
    
    
    2007Net loss
    
    $
    (5,286
    ) (a)
    
    $
    (3,927
    )BASIC:Basic weighted average number of shares outstanding
    
    
    26,171
    
    
    
    11,845Basic net loss per share
    
    $
    (0.20
    )
    
    $
    (0.33
    )DILUTED:Basic weighted average number of shares outstanding
    
    
    26,171
    
    
    
    11,845Shares issuable upon conversion of stock options
    
    
    
    
    
    
    Total average number of equivalent shares outstanding
    
    
    26,171
    
    
    
    11,845Diluted net loss per share
    
    $
    (0.20
    )
    
    $
    (0.33
    )
 
 (a)
    
    Includes preferred stock dividends of $141.  7. Financing
 Revolving Credit Facility
   11




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Long Term Debt- related party
  Preferred Stock
  8. Commitments and Contingencies
    9. Segments
  12




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##### Table of Contents



Three Months EndedOctober 25,
    
    
    October 27,($ in thousands)
    
    2008
    
    
    2007Net Sales:Retail
    
    $
    33,129
    
    
    $
    37,187Wholesale
    
    
    9,436
    
    
    
    Total net sales
    
    $
    42,565
    
    
    $
    37,187Operating Loss:Retail
    
    $
    (2,145
    )
    
    $
    (3,301
    )Wholesale
    
    
    (2,088
    )
    
    
    Total operating loss
    
    $
    (4,233
    )
    
    $
    (3,301
    )Less Unallocated Corporate Expenses:Corporate expenses
    
    $
    464
    
    
    $
    Interest expense
    
    
    428
    
    
    
    626Total unallocated expenses
    
    $
    892
    
    
    $
    626Net loss before income tax provision
    
    $
    (5,125
    )
    
    $
    (3,927
    )Total AssetsRetail
    
    $
    72,782Wholesale
    
    
    42,492Total Assets
    
    $
    115,274
 13




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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
fiscal year ended July 26, 2008. 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
     
    
    Movie Star, Inc. or Movie Star refers to the business, operations and financial
results of Movie Star, Inc. prior to the closing of the merger;
    
    FOH Holdings or Fredericks of Hollywood refers to the business, operations and
financial results of FOH Holdings, Inc., a privately-held Delaware corporation, prior
to the closing of the merger and after the merger, as the context requires; and
    
    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
  14




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® www.fredericks.com
   Fiscal 2009 Initiatives
  
    
    Reducing operating expenses.While the macroeconomic environment continues to
present challenges to both our retail and wholesale divisions, following the
consummation of the merger, we have taken and are continuing to take a number of
actions to reduce operating expenses, which include reducing personnel through the
elimination of executive and support positions, decreasing the use of outside
consultants, and consolidating employee benefits and insurance. Since the consummation
of the merger, other than store personnel, we have terminated approximately 15% of our
domestic employees and have transitioned certain manufacturing support functions
previously performed by some of these employees to our facility in the Philippines.
This net reduction in workforce has resulted in an annualized net salary savings of
approximately $3.8 million.
    
    Consolidating Functions. During fiscal year 2008, the wholesale division accounted
for approximately 6% of the dollar value of our retail divisions merchandise
purchases. We will continue to vertically integrate our retail and wholesale
operations when complementary in order to derive additional margin benefits. To this
end, we have been evaluating our entire organization to determine where we can improve
operational efficiencies and have begun to consolidate both companies merchandising
and design, distribution, information technology and finance functions. We also have
been transitioning manufacturing support functions to our manufacturing facility in the
Philippines.
    
    Continuing to reduce catalog circulation. As a result of rising paper, production
and mailing costs, we have continued to reduce Fredericks of Hollywoods annual
catalog circulation from approximately 26.3 million in fiscal year 2006 to
approximately 20.4 million in fiscal year 2007 to approximately 18.7 million in fiscal
year 2008. Through improved analysis and monitoring of our customer base, we are
continuing to reduce catalog circulation by targeting a more defined customer.
Accordingly, we expect to further reduce catalog circulation by approximately 3% in
fiscal year 2009. We are also endeavoring to expand our Internet customer base through
various methods, including partnering with Internet search engines and participating in
affiliate programs. Following an unsuccessful transition to a new web platform during
fiscal year 2008, we have focused our efforts on replacing our website with a
state-of-the-art e-commerce system hosted by a third-party service provider, which we
expect will be operational in early calendar year 2009. We believe our upgraded and
enhanced website, combined with improved customer acquisition and retention
capabilities, will enable www.fredericks.com to provide customers with an enhanced
pleasurable online shopping experience for intimate apparel and related products.
    
    Reducing planned store openings. Following the consummation of the merger in
January 2008, we had anticipated that we would open, relocate and/or remodel
approximately 40 to 50 new stores over three years. However, due to uncertain economic
conditions and our poor operating performance in fiscal year
 15




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2008, we have revised our retail store expansion plans for fiscal year 2009 to include
only three store openings and one store remodeling. We also expect to close two stores
when the leases expire. We continuously evaluate our longer-term store expansion plans
and intend to make appropriate adjustments as business conditions permit.
 Critical Accounting Policies and Estimates
     
    
    determination of the appropriate amount and timing of markdowns to clear
unproductive or slow-moving retail inventory and overall inventory obsolescence;
    
    determination of appropriate levels of reserves for accounts receivable
allowances and sales discounts;
    
    estimation of future cash flows used to assess the recoverability of long-lived
assets, including trademarks and goodwill;
    
    estimation of expected customer merchandise returns;
    
    estimation of the net deferred income tax asset valuation allowance; and
    
    estimation of deferred catalog costs and the amount of future benefit to be
derived from the catalogs.
 Accounts Receivable/Allowance for Doubtful Accounts and Sales Discounts
 Merchandise Inventories
 16




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Deferred Catalog Costs
 Impairment of Long-Lived Assets
 Goodwill and Intangible Assets  Goodwill and Other Intangible Assets
 Income Taxes
 Effect of New Accounting Standards
 Results of Operations
   17




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Three Months EndedOctober 25, 2008(1)
    
    
    October 27, 2007Net sales
    
    $
    42,565
    
    
    
    100.0
    %
    
    $
    37,187
    
    
    
    100.0
    %Cost of goods sold, buying and occupancy
    
    
    27,887
    
    
    
    65.5
    %
    
    
    21,849
    
    
    
    58.8
    %Gross profit
    
    
    14,678
    
    
    
    34.5
    %
    
    
    15,338
    
    
    
    41.2
    %Selling, general and administrative expenses
    
    
    19,375
    
    
    
    45.5
    %
    
    
    18,639
    
    
    
    50.1
    %Operating loss
    
    
    (4,697
    )
    
    
    (11.0
    )%
    
    
    (3,301
    )
    
    
    (8.9
    )%Interest expense, net
    
    
    428
    
    
    
    1.0
    %
    
    
    626
    
    
    
    1.7
    %Loss before income tax provision
    
    
    (5,125
    )
    
    
    (12.0
    )%
    
    
    (3,927
    )
    
    
    (10.6
    )%Income tax provision
    
    
    20
    
    
    
    
    %
    
    
    
    
    
    
    
    %Net loss
    
    
    (5,145
    )
    
    
    (12.0
    )%
    
    
    (3,927
    )
    
    
    (10.6
    )%Less: Preferred stock dividends
    
    
    141
    
    
    
    
    
    
    
    Net loss available to common shareholders
    
    $
    (5,286
    )
    
    
    
    
    
    $
    (3,927
    )
 
 (1)
    
    Reflects the merged entity. See Note 2 to the consolidated financial statements contained
elsewhere in this report. Net Sales
  Three Months EndedOctober 25,
    
    
    October 27,
    
    
    Increase/(decrease)2008
    
    
    2007
    
    
    from prior yearNet Sales:Retail Stores
    
    $
    21,211
    
    
    $
    24,055
    
    
    $
    (2,844
    )Retail Direct (catalog and internet)
    
    
    11,918
    
    
    
    13,132
    
    
    
    (1,214
    )Total Retail
    
    
    33,129
    
    
    
    37,187
    
    
    
    (4,058
    )Total Wholesale
    
    
    9,436
    
    
    
    
    
    
    
    9,436Total net sales
    
    $
    42,565
    
    
    $
    37,187
    
    
    $
    5,378
  
    
    Total store sales decreased by $2,844,000 or 11.8% for the three months ended
October 25, 2008 compared to the three months ended October 27, 2007.
    
    Comparable store sales decreased by $2,859,000 or 12.7% for the three months ended
October 25, 2008 compared to the three months ended October 27, 2007. Comparable
store sales are defined as net sales for stores that have been open for one complete
year.
    
    Direct sales, which are comprised of sales from our catalog and website operations,
decreased by $1,214,000 or 9.2% for the three months ended October 25, 2008 compared
to the three months ended
 18




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October 27, 2007. In the prior year, sales were negatively
impacted by an unsuccessful transition to a new web platform.
  Three months ended
    
    
    Three months endedCustomer
    
    October 25, 2008
    
    
    October 27, 2007Walmart
    
    $
    1,494
    
    
    
    15.9
    %
    
    $
    7,786
    
    
    
    50.8
    %All other U.S. customers
    
    
    7,344
    
    
    
    77.8
    %
    
    
    7,271
    
    
    
    47.4
    %Total U.S. customers
    
    
    8,838
    
    
    
    93.7
    %
    
    
    15,057
    
    
    
    98.2
    %Canada
    
    
    598
    
    
    
    6.3
    %
    
    
    283
    
    
    
    1.8
    %Total
    
    $
    9,436
    
    
    
    100.0
    %
    
    $
    15,340
    
    
    
    100.0
    %
 
 (1)
    
    Information provided for comparative purposes only.  Customer
    
    October 25, 2008
    
    
    October 27, 2007(1)Walmart
    
    $
    8,228
    
    
    
    42.1
    %
    
    $
    23,099
    
    
    
    67.3
    %All other U.S. customers
    
    
    11,012
    
    
    
    56.4
    %
    
    
    10,849
    
    
    
    31.6
    %Total U.S.
    
    
    19,240
    
    
    
    98.5
    %
    
    
    33,948
    
    
    
    98.9
    %Canada
    
    
    302
    
    
    
    1.5
    %
    
    
    357
    
    
    
    1.1
    %Total
    
    $
    19,542
    
    
    
    100.0
    %
    
    $
    34,305
    
    
    
    100.0
    %
  Gross Profit
   
    
    Product costs as a percentage of sales increased by 1.2 percentage points for the
three months ended October 25, 2008 as compared to the three months ended October 27,
2007. The increase was primarily the result of higher markdowns.
    
    Occupancy costs, which consist of rent, common area maintenance, utilities and real
estate taxes, increased by $220,000 or 4.3% for the three months ended October 25, 2008
as compared to the three months ended October 27, 2007. This increase was primarily
due to net increases in rents and common area costs, which resulted from the addition
of stores in higher-end malls with higher annual rents with the potential for higher
sales, and the elimination of stores in lower-end malls that have lower rents and lower
sales potential, as well as the renewal of leases at a higher annual cost.
    
    Depreciation increased by $164,000 or 25.9% for the three months ended October 25,
2008 as compared to the three months ended October 27, 2007. This increase was due to
an increased investment in new and remodeled stores.
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##### Table of Contents




    
    These increases were partially offset by a decrease in freight and shipping costs of
$191,000 or 8.2% for the three months ended October 25, 2008 as compared to the three
months ended October 27, 2007. This decrease was primarily due to lower sales.
 Selling, General and Administrative Expenses
   
    
    The addition of the selling, general and administrative expenses for the wholesale
division following the consummation of the merger. These expenses were $4,719,000 of the
total selling, general and administrative expenses for the three months ended October 25,
2008.
    
    Unallocated expenses related to our corporate executive office totaling $464,000 were
also added to selling, general and administrative expenses following the consummation of
the merger. These costs include costs associated with our Executive Chairman, Chief
Financial Officer and our board of directors.
  
    
    Store selling, general and administrative expenses decreased by $897,000, which was
primarily due to decreases in (1) store salaries and salary-related costs of $362,000,
which is the result of reductions in store staffing requirements, and decreases in earned
incentives as a result of lower sales, (2) credit card fees of $121,000 due to lower sales
and (3) store operations costs of $212,000 due to reductions in personnel, fewer district
sales meetings and corresponding reductions in travel expenses.
    
    Direct selling, general and administrative expenses decreased by $745,000, primarily as
a result of lower catalog costs of $450,000, a decrease of $159,000 in costs relating to
our fulfillment center and lower equipment maintenance costs. The reduction in catalog
costs was due to a 16% decrease in circulation, partially offset by the accelerated
expensing of catalog costs as compared to the prior year due to a lower expectation of
future sales volume. The decrease in the fulfillment center costs was due to lower sales.
The decrease in equipment maintenance costs was due to the maintenance of one website
platform instead of two separate platforms in the prior year as a result of an unsuccessful
transition to a new platform. These decreases were partially offset by an increase in
marketing expenses of $105,000 due to an increase in Internet search engine costs and
photography costs.
    
    Expenses related to our California corporate office decreased by $1,366,000. This
decrease was primarily due to a decrease in accounting fees of $757,000, which was
attributable to the accelerated audit of FOH Holdings fiscal 2007 year end financial
statements in the prior year. Contributing to the decrease was a reduction in professional
fees of $378,000, which was primarily attributable to consultants hired to assist with the
restatement of FOH Holdings financial statements for prior periods, as well as other
general overhead reductions. The decrease was partially offset by an increase in stock
compensation expense of $115,000, which resulted from the issuance of stock options and
restricted stock grants in accordance with three employees equity incentive agreements in
connection with the merger (including the Chief Executive Officer of the retail division).
    
    Brand marketing expenses decreased by $1,439,000 to $215,000. The decrease was
primarily due to brand marketing expenses incurred in connection with a fashion show and
charity auction that were held in October 2007 and not held in the current year. Brand
marketing is used to increase brand awareness through the announcement of new product
launches, the arrival of seasonal collections and the opening of new stores. This is
accomplished primarily through public relations activities, including press releases and
media events.
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##### Table of Contents



Interest Expense, Net
  Income Tax Provision  Continuing Operations
   Liquidity and Capital Resources
 Cash Used in Operations
  
    
    a net loss of $5,145,000 for the three months ended October 25, 2008;
    
    an increase in merchandise inventories of $6,162,000 due to normal seasonal
fluctuations in the finished goods inventory levels; and
    
    an increase in accounts receivable of $1,253,000, which was due to higher wholesale
sales during the last two months (September and October) of the three months ended
October 25, 2008 as compared to the last two months (June and July) of the three months
ended July 26, 2008.
  
    
    non-cash expenses of $1,470,000 for depreciation and amortization;
    
    non-cash stock-based compensation expense of $242,000;
    
    a non-cash expense for deferred rent and lease incentives of $186,000;
    
    an increase in accounts payable and accrued expenses of $3,187,000 due to normal
seasonal fluctuations; and
    
    $406,000 received from landlords for tenant improvement allowances.
 Cash Used in Investing Activities
  Cash Provided by Financing Activities
  Revolving Credit Facility
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##### Table of Contents



Long Term Debt  Related Party
  Preferred Stock
  Future Financing Requirements
    Off Balance Sheet Arrangements
  Effect of New Accounting Standards
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##### Table of Contents



Seasonality and Inflation
   Imports
  
 ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risks
   Foreign Currency Risks
  
 ITEM 4T  CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
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Internal Control Over Financial Reporting
  Changes in Internal Control Over Financial Reporting
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PART II OTHER INFORMATION
 
 ITEM 1  LEGAL PROCEEDINGS
   
 ITEM 1A  RISK FACTORS
  
 ITEM 6  EXHIBITS
 Exhibit No.
    
    Description31.1
    
    Certification by Principal Executive Officer31.2
    
    Certification by Chief Financial Officer and Principal Accounting Officer32
    
    Section 1350 Certification
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SIGNATURES
  FREDERICKS OF HOLLYWOOD GROUP INC.Date: December 9, 2008
    By:
    /s/ Peter ColePETER COLEPrincipal Executive OfficerDate: December 9, 2008
    By:
    /s/ Thomas RendeTHOMAS RENDEChief Financial Officer and
Principal Accounting Officer 26