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 October 24, 2009





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: 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
              incorporation
      or organization)
            (I.R.S.
      Employer
              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
o


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    o                  No
o


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  o
            Accelerated
      filer oNon-accelerated
      filer o
            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     o                 No x


The
number of common shares outstanding on December 7, 2009 was
26,418,185.








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 October 24, 2009 (Unaudited) and July 25, 2009
      (Audited)
                  3Consolidated
      Statements of Operations (Unaudited) for the Three Months Ended October
      24, 2009 and October 25, 2008
                  4Consolidated
      Statements of Cash Flows (Unaudited) for the Three Months Ended October
      24, 2009 and October 25, 2008
                  5Notes
      to Consolidated Unaudited Financial Statements
                  6 –
      12Item
      2.
                  Management’s
      Discussion and Analysis of Financial
                  13
      – 24Condition
      and Results of OperationsItem
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  24Item
      4T.
                  Controls
      and Procedures
                  24
      – 25PART
      II.
                  Other
      InformationItem
      1
                  Legal
      Proceedings
                  25Item
      1A.
                  Risk
      Factors
                  25Item
      6.
                  Exhibits
                  25Signatures
                  26





2


PART  I.   FINANCIAL
INFORMATION





Item
1.  Financial Statements


FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED  BALANCE
SHEETS


(In
Thousands, Except Share Data)





October
      24,
                  
                  
                  July
      25,2009
                  
                  
                  2009(Unaudited)
                  
                  
                  (Audited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                  
                  $
                  306
                  
                  
                  $
                  555Accounts
      receivable
                  
                  
                  5,406
                  
                  
                  
                  2,643Income
      tax receivable
                  
                  
                  93
                  
                  
                  
                  172Merchandise
      inventories
                  
                  
                  23,649
                  
                  
                  
                  21,836Prepaid
      expenses and other current assets
                  
                  
                  3,364
                  
                  
                  
                  2,543Deferred
      income tax assets
                  
                  
                  2,576
                  
                  
                  
                  3,117Total
      current assets
                  
                  
                  35,394
                  
                  
                  
                  30,866PROPERTY
      AND EQUIPMENT, Net
                  
                  
                  19,854
                  
                  
                  
                  20,663INTANGIBLE
      AND OTHER ASSETS
                  
                  
                  25,925
                  
                  
                  
                  26,108TOTAL
      ASSETS
                  
                  $
                  81,173
                  
                  
                  $
                  77,637LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Revolving
      credit and bridge facilities
                  
                  $
                  14,931
                  
                  
                  $
                  9,245Accounts
      payable and other accrued expenses
                  
                  
                  26,612
                  
                  
                  
                  24,415Total
      current liabilities
                  
                  
                  41,543
                  
                  
                  
                  33,660DEFERRED
      RENT AND TENANT ALLOWANCES
                  
                  
                  4,958
                  
                  
                  
                  4,707LONG
      TERM DEBT – related party
                  
                  
                  13,538
                  
                  
                  
                  13,336OTHER
                  
                  
                  6
                  
                  
                  
                  16DEFERRED
      INCOME TAX LIABILITIES
                  
                  
                  11,612
                  
                  
                  
                  12,153TOTAL
      LIABILITIES
                  
                  
                  71,657
                  
                  
                  
                  63,872PREFERRED
      STOCK, $.01 par value – authorized, 10,000,000 shares at October 24, 2009
      and July 25, 2009; issued and outstanding 3,629,325 shares of Series A
      preferred stock at October 24, 2009 and July 25, 2009
                  
                  
                  7,500
                  
                  
                  
                  7,500COMMITMENTS
      AND CONTINGENCIES (NOTE 7)
                  
                  
                  -
                  
                  
                  
                  -SHAREHOLDERS’
      EQUITY:Common
      stock, $.01 par value – authorized, 200,000,000 shares at October 24, 2009
      and July 25, 2009; issued and outstanding 26,409,217 shares at October 24,
      2009 and 26,394,158 shares at July 25, 2009
                  
                  
                  264
                  
                  
                  
                  263Additional
      paid-in capital
                  
                  
                  60,647
                  
                  
                  
                  60,444Accumulated
      deficit
                  
                  
                  (58,830
                  )
                  
                  
                  (54,375
                  )Accumulated
      other comprehensive loss
                  
                  
                  (65
                  )
                  
                  
                  (67
                  )TOTAL
      SHAREHOLDERS’ EQUITY
                  
                  
                  2,016
                  
                  
                  
                  6,265TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                  
                  $
                  81,173
                  
                  
                  $
                  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 EndedOctober
      24,
                    2009
                  
                  
                  October
      25,
                    2008Net
      sales
                  
                  $
                  37,208
                  
                  
                  $
                  42,565Cost
      of goods sold, buying and occupancy
                  
                  
                  24,606
                  
                  
                  
                  27,887Gross
      profit
                  
                  
                  12,602
                  
                  
                  
                  14,678Selling,
      general and administrative expenses
                  
                  
                  16,553
                  
                  
                  
                  19,375Operating
      loss
                  
                  
                  (3,951
                  )
                  
                  
                  (4,697
                  )Interest
      expense, net
                  
                  
                  361
                  
                  
                  
                  428Loss
      before income tax provision
                  
                  
                  (4,312
                  )
                  
                  
                  (5,125
                  )Income
      tax provision
                  
                  
                  24
                  
                  
                  
                  20Net
      loss
                  
                  
                  (4,336
                  )
                  
                  
                  (5,145
                  )Less:
      Preferred stock dividends
                  
                  
                  119
                  
                  
                  
                  141Net
      loss applicable to common shareholders
                  
                  $
                  (4,455
                  )
                  
                  $
                  (5,286
                  )Basic
      net loss per share
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.20
                  )Diluted
      net loss per share
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.20
                  )Weighted
      average shares outstanding – basic
                  
                  
                  26,407
                  
                  
                  
                  26,171Weighted
      average shares outstanding – diluted
                  
                  
                  26,407
                  
                  
                  
                  26,171





See notes
to consolidated unaudited financial statements.


4





FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED  STATEMENTS
OF CASH FLOWS


(Unaudited)


(In
Thousands)


Three
      Months EndedOctober
      24,
                    2009
                  
                  
                  October
      25,
                    2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                  
                  $
                  (4,336
                  )
                  
                  $
                  (5,145
                  )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesProvision
      for sales allowances and doubtful accounts
                  
                  
                  (196
                  )
                  
                  
                  75Issuance
      of common stock for directors’ fees
                  
                  
                  12
                  
                  
                  
                  12Stock-based
      compensation expense
                  
                  
                  191
                  
                  
                  
                  242Amortization
      of deferred financing costs
                  
                  
                  30
                  
                  
                  
                  15Depreciation
      and amortization
                  
                  
                  1,395
                  
                  
                  
                  1,470Noncash
      accrued interest on long term debt – related party
                  
                  
                  202
                  
                  
                  
                  191Amortization
      of deferred rent and tenant allowances
                  
                  
                  151
                  
                  
                  
                  186Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  (2,467
                  )
                  
                  
                  (1,493
                  )Merchandise
      inventories
                  
                  
                  (1,813
                  )
                  
                  
                  (6,162
                  )Prepaid
      expenses and other current assets
                  
                  
                  (821
                  )
                  
                  
                  (103
                  )Income
      tax receivable
                  
                  
                  79
                  
                  
                  
                  (30
                  )Other
      assets
                  
                  
                  112
                  
                  
                  
                  45Accounts
      payable and other accrued expenses
                  
                  
                  1,916
                  
                  
                  
                  3,187Tenant
      improvements allowances
                  
                  
                  -
                  
                  
                  
                  406Net
      cash used in operating activities
                  
                  
                  (5,545
                  )
                  
                  
                  (7,104
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                  
                  
                  (315
                  )
                  
                  
                  (2,140
                  )Net
      cash used in investing activities
                  
                  
                  (315
                  )
                  
                  
                  (2,140
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      borrowings under revolving line of credit
                  
                  
                  3,686
                  
                  
                  
                  9,234Proceeds
      on bridge facility
                  
                  
                  2,000
                  
                  
                  
                  -Repayment
      of capital lease obligation
                  
                  
                  -
                  
                  
                  
                  (19
                  )Payment
      of deferred financing costs
                  
                  
                  (75
                  )
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  5,611
                  
                  
                  
                  9,215NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                  
                  
                  (249
                  )
                  
                  
                  (29
                  )CASH
      AND CASH EQUIVALENTS:Beginning
      of period
                  
                  
                  555
                  
                  
                  
                  791End
      of period
                  
                  $
                  306
                  
                  
                  $
                  762SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during period for:Interest
                  
                  $
                  150
                  
                  
                  $
                  168Taxes
                  
                  $
                  24
                  
                  
                  $
                  26





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 October 24, 2009 and the results of operations and cash
flows for the three months ended October 24, 2009 and October 25,
2008.
  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 months ended October 24, 2009 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.  See Note
6.
  The
Company has evaluated subsequent events through December 7, 2009, which is the
date the financial statements were issued, and has concluded that no such events
or transactions took place which would require disclosure herein.
  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 October 24, 2009 and July 25, 2009, the allowance for
estimated returns from the Company’s retail customers was $1,094,000 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
October 24, 2009 and October 25, 2008, total other revenues recorded in net
sales in the accompanying consolidated statements of operations were
$1,758,000 and $2,124,000, 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.
  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 $1,334,000 and $1,156,000 at
October 24, 2009 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
October 24, 2009 and July 25, 2009, accounts receivable was net of allowances of
$437,000 and $633,000, respectively.  The wholesale accounts
receivable as of October 24, 2009, net of the $437,000 allowance, was $3,763,000
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.
   6
  
  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 accrues for planned but unexecuted
markdowns.  If actual market conditions are less favorable than those
projected by management, additional inventory reserves may be
required.  Historically, management has found its inventory reserves
to be appropriate, and actual results generally do not differ materially from
those determined using necessary estimates.  Inventory reserves were
$1,280,000 at October 24, 2009 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 $2,551,000 and $1,751,000 are included in prepaid expenses and other
current assets in the accompanying consolidated balance sheets at October 24,
2009 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 three months ended October 24, 2009 and October 25,
2008.
  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.
   7
  
  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.  No options were granted during the three months
ended October 24, 2009.  The following assumptions were used for
options granted during the three months ended October 25, 2008:
  Risk-free
      interest rate
                    
                    3.15%
      - 3.64%Expected
      life (years)
                    
                    5 –
      7Expected
      volatility
                    
                    60
      – 61%Dividend
      yield
                    
                    0.0%
  During
the three months ended October 25, 2008, 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 vest 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.  It is not practicable to estimate the fair value of long-term debt
and preferred stock owed to a principal shareholder as a result of the
related-party nature.
  Supplemental Disclosure of Noncash
Financing Transactions– The
Company had outstanding accounts payable and accrued expenses of $99,000 and
$20,000 at October 24, 2009 and July 25, 2009, respectively, and $388,000 and
$248,000 at October 24, 2008 and July 26, 2008, respectively, related to
purchases of property and equipment.  During the three months ended
October 24, 2009 and October 25, 2008, the Company also accrued dividends of
$119,000 and $141,000, respectively, on its Series A Preferred
Stock.
  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.
   8
  
  In
April 2009, the FASB issued new disclosure requirements relating to the
fair value of financial instruments of publicly traded companies for
interim and annual financial statements.  These requirements became
effective for interim and annual periods ending after June 15,
2009.  The Company adopted this guidance for its October 24, 2009
financial statements and provided the necessary additional disclosure in its
interim consolidated financial statements in Note 2, “Fair Value of Financial
Instruments.”
  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 interim and
annual periods beginning after November 15, 2009. 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):
  October
      24,
                  
                  
                  July
      25,2009
                  
                  
                  2009Raw
      materials
                  
                  $
                  1,259
                  
                  
                  $
                  1,457Work-in
      process
                  
                  
                  251
                  
                  
                  
                  249Finished
      goods
                  
                  
                  22,139
                  
                  
                  
                  20,130$
                  23,649
                  
                  
                  $
                  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 EndedOctober
      24,
                
                
                October
      25,2009
                
                
                2008Net
      loss
                
                $
                (4,455
                )(a)
                
                $
                (5,286
                )(b)BASIC:Basic
      weighted average number of shares outstanding
                
                
                26,407
                
                
                
                26,171Basic
      net loss per share
                
                $
                (0.17
                )
                
                $
                (0.20
                )DILUTED:Basic
      weighted average number of shares outstanding
                
                
                26,407
                
                
                
                26,171Shares
      issuable upon conversion of stock options
                
                
                -
                
                
                
                -Total
      average number of equivalent shares outstanding
                
                
                26,407
                
                
                
                26,171Diluted
      net loss per share
                
                $
                (0.17
                )
                
                $
                (0.20
                )
 
 ______________________________________________
 (a)
              Includes
      Series A preferred stock dividends of
$119.
 (b)
              Includes
      Series A preferred stock dividends of
$141.
 
 There
were 248,000 potentially dilutive shares at a prices ranging from $0.17 to $1.56
per share that were not included in the computation of diluted net loss per
share for the three months ended October 24, 2009 since their effect would have
been anti-dilutive.  There were no potentially dilutive shares for the
three months ended October 25, 2008 because all of the outstanding options had
exercise prices greater than the average market price for the
quarter.
   9
  
  6.           Financing
  Revolving
Credit and Bridge Facilities
  The
Company and its U.S. subsidiaries (collectively, the “borrowers”) have a senior
credit facility (the “Facility”) with the 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 the option of
the Company so long as the borrowers are in compliance with the terms of the
Facility.  The actual amount of credit available under the Facility is
determined using measurements based on the borrowers’ receivables, inventory and
other measures.  The Facility is secured by a first priority security
interest in the assets of the borrowers.  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 borrowers utilized the accordion feature under the
Facility to increase the borrowing limit from $25 million to $30
million.  In utilizing the accordion feature, the borrowers’ 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 (a “Recapitalization
Event”). 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 a 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.
  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
  ·
              “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
October 24, 2009, the Company had $12,931,000 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 three months ended October 24, 2009, borrowings under
the Facility (excluding the bridge facility) peaked at $14,231,000 and the
average borrowing during the period was approximately $11,407,000.  In
addition, at October 24, 2009, the Company had $1,334,000 of outstanding letters
of credit under the Facility.
  As of
October 25, 2008, the Company had $20,327,000 outstanding under the Facility at
a rate 4.25%.  For the three months ended October 25, 2008, borrowings
under the Facility peaked at $20,385,000 and the average borrowing during the
period was approximately $15,066,000.  In addition, the Company had
$2,854,000 of outstanding letters of credit under the Facility as of October 25,
2008.
   10
  
  The
Facility contains customary representations and warranties, affirmative and
negative covenants and events of default.  The borrowers also agreed
to maintain specified minimum availability reserves in lieu of financial
covenants, fixed charge coverage and overall debt ratios.  At October
24, 2009, the Company was in compliance with its minimum availability reserve
requirements.
  Long
Term Debt – Related Party
 As of
October 24, 2009, the Company had $13,538,000 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.
  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 the option of the holders into an aggregate of
1,512,219 shares of common stock, subject to adjustment.  As of October 24,
2009, the Company had accrued dividends of $985,000.  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 later to occur of (a) January 7,
2010 and (b) 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.
  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 solely
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 3%
and 6% of wholesale net sales for the three months ended October 24, 2009 and
October 25, 2008 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.
  11
  
 Net sales, operating loss and total
assets for each segment are as follows:
 (in
      thousands)
                  
                  Three
      Months EndedOctober
      24,
                  
                  
                  October
      25,2009
                  
                  
                  2008Net
      Sales:Retail
                  
                  $
                  31,114
                  
                  
                  $
                  33,129Wholesale
                  
                  
                  6,094
                  
                  
                  
                  9,436Total net
sales
                  
                  $
                  37,208
                  
                  
                  $
                  42,565Operating
      Loss:Retail
                  
                  $
                  (1,754
                  )
                  
                  $
                  (2,145
                  )Wholesale
                  
                  
                  (1,699
                  )
                  
                  
                  (2,088
                  )Total operating
      loss
                  
                  $
                  (3,453
                  )
                  
                  $
                  (4,233
                  )Less
      Unallocated Corporate Expenses:Corporate
    expenses
                  
                  $
                  498
                  
                  
                  $
                  464Interest expense
                  
                  
                  361
                  
                  
                  
                  428Total unallocated
      expenses
                  
                  $
                  859
                  
                  
                  $
                  892Loss
      before income tax provision
                  
                  $
                  (4,312
                  )
                  
                  $
                  (5,125
                  )Total
      AssetsRetail
                  
                  $
                  62,995
                  
                  
                  $
                  72,782Wholesale
                  
                  
                  18,178
                  
                  
                  
                  42,492Total Assets
                  
                  $
                  81,173
                  
                  
                  $
                  115,274
 
 
 
  12
  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 October 24, 2009,
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.
   13
  
  Fiscal
2010 Operating Initiatives
  Throughout fiscal years 2008 and 2009,
we operated under challenging macroeconomic conditions, which had a negative
impact on our revenues, gross margins and earnings.  Our efforts
remain focused on continuing to implement changes in our business strategy 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:
  ·
              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.  The new focused product lines are heavily influenced
      by our retail creative and design teams under the leadership of our
      Executive Vice President of Product Development and Production, who is
      responsible for managing the product development and design functions for
      both divisions.  As one of our key strategic initiatives for
      fiscal year 2010, we will continue to offer products under the wholesale
      brand name, Cinema Etoile® as
      well as develop Frederick’s of Hollywood brand extension opportunities
      with select wholesale customers.
  ·
              More focused marketing
      efforts.
  o
              Catalog.Due
      to rising paper, production and mailing costs, we reduced annual catalog
      circulation from approximately 20.4 million in fiscal year 2007 to
      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.  During the first quarter of fiscal year 2010, catalog
      circulation decreased by 13% compared to the first quarter of fiscal year
      2009, and we anticipate an overall 3% 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 more personalized “look
      books.”
  o
              eCommerce.As
      part of our program to improve search marketing, we retained a new search
      marketing agency during the first quarter of fiscal year
      2010.  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.  The increased functionality of www.fredericks.com
      platform, together with improved customer acquisition and retention
      capabilities, will enable us to provide customers with an enhanced online
      shopping experience.
  ·
              Continuing to reduce operating
      expenses.  While the macroeconomic environment continues
      to present challenges to both our retail and wholesale divisions,
      following the consummation of the merger in January 2008, 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, excluding
      store personnel, we have reduced our domestic workforce by approximately
      25% and have transitioned certain manufacturing support functions
      previously performed by some of these employees to our facility in the
      Philippines.  This net reduction in our domestic workforce has
      resulted in an annualized net salary savings of more than $4.5 million and
      an additional savings of approximately $1.0 million in benefits and other
      related costs.  During fiscal year 2010, we intend to further
      reduce our domestic workforce by transitioning certain sourcing and
      production functions to our Philippines facility and our new office in
      Hong Kong, which we expect to result in more than $500,000 of annualized
      savings.
  ·
              Continuing to consolidate
      functions.  The wholesale division accounted for
      approximately 6% and 8% of the dollar value of the retail division’s
      merchandise purchases for fiscal years 2008 and 2009, respectively, and we
      expect this percentage to continue to increase as we integrate our retail
      and wholesale operations where complementary in order to derive additional
      margin benefits.
   14
  
  ·
              Carefully monitoring store
      performance.  Due to uncertain economic conditions and
      our poor operating performance, we only opened three new stores and
      relocated one store during fiscal year 2009.  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 three
      months ended October 24, 2009 and we expect to remodel one store and close
      six underperforming stores through the remainder of the fiscal
      year.
  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
October 24, 2009 and July 25, 2009, the allowance for estimated returns from our
retail customers was $1,094,000 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 October 24, 2009 and
October 25, 2008, total other revenues recorded in net sales in the consolidated
statements of operations contained elsewhere in this report were $1,758,000 and
$2,124,000, 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.
   15
  
  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 $1,334,000 and $1,156,000 at October 24, 2009 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 October 24, 2009 and July 25, 2009,
accounts receivable was net of allowances of $437,000 and $633,000,
respectively.  The wholesale accounts receivable as of October 24,
2009, net of the $437,000 allowance, was $3,763,000 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 accrue for planned but unexecuted
markdowns.  If actual market conditions are less favorable than those
projected by management, additional inventory reserves may be
required.  Historically, management has found its inventory reserves
to be appropriate, and actual results generally do not differ materially from
those determined using necessary estimates.  Inventory reserves were
$1,280,000 at October 24, 2009, 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 $2,551,000 and $1,751,000 are included in prepaid expenses and other
current assets in the accompanying consolidated balance sheets at October 24,
2009 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 months ended October 24, 2009 and October 25, 2008.
   16
  
  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):
  Three
      Months EndedOctober
      24, 2009
                  
                  
                  October
      25, 2008Net
      sales
                  
                  $
                  37,208
                  
                  
                  
                  100.0
                  %
                  
                  $
                  42,565
                  
                  
                  
                  100.0
                  %Cost
      of goods sold, buying and occupancy
                  
                  
                  24,606
                  
                  
                  
                  66.1
                  %
                  
                  
                  27,887
                  
                  
                  
                  65.5
                  %Gross
      profit
                  
                  
                  12,602
                  
                  
                  
                  33.9
                  %
                  
                  
                  14,678
                  
                  
                  
                  34.5
                  %Selling,
      general and administrative expenses
                  
                  
                  16,553
                  
                  
                  
                  44.5
                  %
                  
                  
                  19,375
                  
                  
                  
                  45.5
                  %Operating
      loss
                  
                  
                  (3,951
                  )
                  
                  
                  (10.6
                  )%
                  
                  
                  (4,697
                  )
                  
                  
                  (11.0
                  )%Interest
      expense, net
                  
                  
                  361
                  
                  
                  
                  1.0
                  %
                  
                  
                  428
                  
                  
                  
                  1.0
                  %Loss
      before income tax provision
                  
                  
                  (4,312
                  )
                  
                  
                  (11.6
                  )%
                  
                  
                  (5,125
                  )
                  
                  
                  (12.0
                  )%Income
      tax provision
                  
                  
                  24
                  
                  
                  
                  0.1
                  %
                  
                  
                  20
                  
                  
                  
                  -
                  %Net
      loss
                  
                  
                  (4,336
                  )
                  
                  
                  (11.7
                  )%
                  
                  
                  (5,145
                  )
                  
                  
                  (12.1
                  )%Less:
      Preferred stock dividends
                  
                  
                  119
                  
                  
                  
                  
                  
                  
                  
                  141Net
      loss applicable to common shareholders
                  
                  $
                  (4,455
                  )
                  
                  
                  
                  
                  
                  $
                  (5,286
                  )
 
   17
  Net
Sales
  Net sales
for the three months ended October 24, 2009 decreased to $37,208,000 as compared
to $42,565,000 for the three months ended October 25, 2008, and were comprised
of retail and wholesale sales as follows (in thousands):
  Three
      Months EndedNet
      sales:
                  
                  October
      24, 2009
                  
                  
                  October
      25, 2008
                  
                  
                  (Decrease)Retail
      Stores
                  
                  $
                  20,395
                  
                  
                  $
                  21,211
                  
                  
                  $
                  (816
                  )Retail
      Direct (catalog and website)
                  
                  
                  10,719
                  
                  
                  
                  11,918
                  
                  
                  
                  (1,199
                  )Total
      retail
                  
                  
                  31,114
                  
                  
                  
                  33,129
                  
                  
                  
                  (2,015
                  )Total
      wholesale
                  
                  
                  6,094
                  
                  
                  
                  9,436
                  
                  
                  
                  (3,342
                  )Total
      net sales
                  
                  $
                  37,208
                  
                  
                  $
                  42,565
                  
                  
                  $
                  (5,357
                  )
 The
changes in retail net sales were as follows:
  ·
              Total
      store sales decreased by $816,000, or 3.9%, for the three months ended
      October 24, 2009 as compared to the three months ended October 25,
      2008.
  ·
              Comparable
      store sales decreased by $818,000, or 4.0%, for the three months ended
      October 24, 2009 as compared to the three months ended October 25,
      2008.  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, decreased by $1,199,000, or 10.1%, for the three months ended
      October 24, 2009 as compared to the three months ended October 25,
      2008.  This decrease was due to a decrease in traffic resulting
      from our planned transition to a new search marketing agency during the
      period.
  The following chart sets forth the
wholesale division’s net sales for the three months ended October 24, 2009 as
compared to the three months ended October 25, 2008 (in thousands):
  Three
      Months EndedCustomer
                
                October
      24, 2009
                
                
                October
      25, 2008Walmart
                
                $
                175
                
                
                
                2.9
                %
                
                $
                1,494
                
                
                
                15.9
                %All
      other U.S. customers
                
                
                5,725
                
                
                
                93.9
                %
                
                
                7,344
                
                
                
                77.8
                %Total
      U.S. customers
                
                
                5,900
                
                
                
                96.8
                %
                
                
                8,838
                
                
                
                93.7
                %Canada
                
                
                194
                
                
                
                3.2
                %
                
                
                598
                
                
                
                6.3
                %Total
                
                $
                6,094
                
                
                
                100.0
                %
                
                $
                9,436
                
                
                
                100.0
                %
 The
wholesale division’s backlog of open orders by customer as of October 24, 2009
and October 25, 2009 was as follows (in thousands):
  Customer
                
                Backlog
      of orders at October 24, 2009
                
                
                %
      of total orders
                
                
                Backlog
      of ordersat October 25, 2008
                
                
                %
      of totalorders
                
                
                Increase/(decrease)
      from prior year
                
                
                %
      of Increase / (decrease) from prior
yearWalmart
                
                
                $2,744
                
                
                
                28.7
                %
                
                
                $8,228
                
                
                
                42.1
                %
                
                
                $(5,484
                )
                
                
                (66.7
                )%All
      other U.S. Customers
                
                
                6,183
                
                
                
                64.5
                %
                
                
                11,012
                
                
                
                56.4
                %
                
                
                (4,829
                )
                
                
                (43.9
                )%Total
      U.S. customers
                
                
                8,927
                
                
                
                93.2
                %
                
                
                19,240
                
                
                
                98.5
                %
                
                
                (10,313
                )
                
                
                (53.6
                )%Canada
                
                
                654
                
                
                
                6.8
                %
                
                
                302
                
                
                
                1.5
                %
                
                
                352
                
                
                
                116.6
                %Total
                
                
                $9,581
                
                
                
                100.0
                %
                
                
                $19,542
                
                
                
                100.0
                %
                
                
                $(9,961
                )
                
                
                (51.0
                )%
 
  
   18
  The
backlog of orders was $9,581,000 as of October 24, 2009 and $19,542,000 as of
October 25, 2008.  Orders are booked upon receipt.  Our open
order position with Walmart as of October 24, 2009 was $2,744,000 as compared to
$8,228,000 as of October 25, 2008.  The reduction is primarily the
result of Walmart shifting its focus to product categories that differ from the
ones 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 closely with Walmart to develop
products that accommodate these business changes and appeal to Walmart’s
customers and, as a result, we received an order for approximately $2,700,000
during the three months ended October 24, 2009.  We did not receive a
significant order from Walmart in the comparable period in the prior
year.  We cannot be assured that our sales to Walmart will return to
historical levels.  The open orders for all other U.S. and Canadian
customers at October 24, 2009 was $6,837,000 as compared to $11,314,000 at
October 25, 2008, which 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 mass merchandising
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 EndedOctober
      24, 2009
                  
                  
                  October
      25, 2008
                  
                  
                  DecreaseRetail
      gross margin
                  
                  
                  35.2
                  %
                  
                  
                  36.4
                  %
                  
                  
                  (1.2
                  %)Wholesale
      gross margin
                  
                  
                  27.0
                  %
                  
                  
                  27.9
                  %
                  
                  
                  (0.9
                  %)Total
      gross margin
                  
                  
                  33.9
                  %
                  
                  
                  34.5
                  %
                  
                  
                  (0.6
                  %)
  Gross
margin (gross profit as a percentage of net sales) for the three months ended
October 24, 2009 was 33.9% as compared to 34.5% for the three months ended
October 25, 2008.  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:
  ·
              Occupancy
      costs, which consist of rent, common area maintenance, utilities and real
      estate taxes, decreased by $262,000 for the three months ended October 24,
      2009 as compared to the three months ended October 25, 2008; however, as a
      percentage of sales, occupancy costs increased by 0.2 percentage points as
      a result of lower retail sales.  The decrease in occupancy costs
      for the three months ended October 24, 2009 is primarily attributable to
      reductions in repair and maintenance costs as well as real estate
      consulting fees.
  ·
              Depreciation
      decreased by $17,000 for the three months ended October 24, 2009 as
      compared to the three months ended October 25, 2008.  As a percentage
      of sales, depreciation increased by 0.1 percentage points for the three
      months ended October 24, 2009 as compared to the three months ended
      October 25, 2008.
  ·
              Freight
      costs decreased by $130,000 for the three months ended October 24, 2009 as
      compared to the three months ended October 25, 2008.  As a
      percentage of sales, freight costs decreased by 0.2 percentage points for
      the three months ended October 24, 2009 as compared to the three months
      ended October 25, 2008.  This decrease was due to reductions in
      Direct sales.
  ·
              Costs
      associated with our retail distribution center decreased by $28,000 for
      the three months ended October 24, 2009 as compared to the three months
      ended October 25, 2008; however, as a percentage of sales, retail
      distribution costs increased by 0.1 percentage
  points.
   19
  
  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.
  Selling,
General and Administrative Expenses
  (in
      thousands)
                  
                  Three
      Months EndedOctober
      24, 2009
                  
                  
                  October
      25, 2008
                  
                  
                  Increase/
      (Decrease)Retail
                  
                  
                  $12,712
                  
                  
                  
                  $14,192
                  
                  
                  
                  $(1,480
                  )Wholesale
                  
                  
                  3,343
                  
                  
                  
                  4,719
                  
                  
                  
                  (1,376
                  )Unallocated
      corporate executive office
                  
                  
                  498
                  
                  
                  
                  464
                  
                  
                  
                  34Total
                  
                  
                  $16,553
                  
                  
                  
                  $19,375
                  
                  
                  
                  $(2,822
                  )
  Selling,
general and administrative expenses for the three months ended October 24, 2009
decreased by $2,822,000 to $16,553,000, or 44.5% of sales, from $19,375,000, or
45.5% of sales, for the three months ended October 25, 2008.  This
decrease was the result of the cost cutting initiatives that we implemented
during fiscal year 2009.
  The
retail division’s selling, general and administrative expenses decreased by
$1,480,000 to $12,712,000 for the three months ended October 24, 2009 from
$14,192,000 for the three months ended October 25, 2008.  This
decrease resulted from the following:
  ·
              Expenses
      related to the retail division’s overhead decreased by $494,000, which was
      primarily due to decreases in (1) professional fees of $182,000, which
      resulted primarily from lower legal and accounting fees as well as
      recruitment fees, and (2) salaries and salary related costs of $69,000,
      which resulted from a reduction in full-time personnel, partially offset
      by an increase in temporary personnel to fill various
      positions.
  ·
              Store
      selling, general and administrative expenses increased by $3,000, which
      was primarily due to an increase in salaries and salary-related costs of
      $110,000, partially offset by a decrease in in-store advertising
      expenses.  The increase in salaries and salary-related costs is
      the result of increases in the minimum wage and store coverage
      requirements and a decrease in vacant positions compared to the same
      period in the prior year.  The decrease in in-store advertising
      expenses was due to fewer changes made to store posters and signs compared
      to the same period in the prior
year.
  ·
              Direct
      selling, general and administrative expenses decreased by $1,014,000,
      primarily as a result of a $805,000 reduction in catalog costs and a
      $309,000 reduction in marketing expenses.  The reduction in
      catalog costs was due to a 13% 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 primarily due to our planned transition to a new search
      marketing agency, which resulted in lower traffic and reduced commissions
      earned by affiliates during the transition period.  These
      decreases were partially offset by an increase in equipment maintenance
      costs of $160,000 associated with our new website platform, which is
      hosted by a third party.
  ·
              Brand
      marketing expenses increased by $25,000 for the three months ended October
      24, 2009 compared to the three months ended October 25,
      2008.  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 through public relations
      activities, including press releases and media
  events.
  The
wholesale division’s selling, general and administrative expenses decreased by
$1,376,000 to $3,343,000 for the three months ended October 24, 2009 from
$4,719,000 for the three months ended October 25, 2008.  This decrease
is primarily the result of (1) a reduction in salaries and salary related costs
of $510,000 and related benefits of $81,000, which resulted from a lower
headcount, (2) a decrease of $187,000 in shipping related costs, which resulted
from lower sales and (3) an overall general decrease in selling, general and
administrative expenses.
   20
  
  The
unallocated expenses related to the corporate executive office increased by
$34,000 to $498,000 for the three months ended October 24, 2009 from $464,000
for the three months ended October 25, 2008.  These expenses include
costs associated with our Chief Executive Officer, Chief Financial Officer and
our Board of Directors.
  Interest
Expense, Net
  During
the three months ended October 24, 2009, net interest expense was $361,000 as
compared to $428,000 for the three months ended October 25,
2008.  This $67,000 decrease is the result of lower interest rates and
overall lower borrowing levels as compared to the same period in the prior
year.
  Income
Tax Provision
  Our
income tax provision for the three months ended October 24, 2009 and October 25,
2008 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 three months ended October 24, 2009 was
$5,545,000, resulting primarily from the following:
  ·
              a
      net loss of $4,336,000 for the three months ended October 24,
      2009;
  ·
              an
      increase in accounts receivable of $2,467,000, which was due to higher
      wholesale sales during the last two months (September and October) of the
      three months ended October 24, 2009 as compared to the last two months
      (June and July) of the year ended July 25,
2009;
  ·
              an
      increase in merchandise inventories of $1,813,000 due to normal seasonal
      fluctuations in the finished goods inventory
  levels;
  ·
              an
      increase in prepaid expenses and other current assets of $821,000, which
      was primarily due to an increase in prepaid
  advertising.
  These decreases to cash flow were
partially offset by an increase in accounts payable and other accrued expenses
of $1,916,000, which resulted from normal seasonal fluctuations, non-cash
expenses of $1,395,000 for depreciation and amortization, and non-cash accrued
interest on long term related party debt of $202,000.
  Cash
Used in Investing Activities
  Net cash
used in investing activities for the three months ended October 24, 2009 was
$315,000, 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 three months ended October 24, 2009 was
$5,611,000, resulting primarily from net borrowings of $3,686,000 under our
revolving credit facility and $2,000,000 from our bridge facility.
  Revolving
Credit and Bridge Facilities
  We and our U.S. subsidiaries
(collectively, the “borrowers”) have a senior credit facility (the “Facility”)
with Wells Fargo Retail Finance II, LLC (“Senior Lender”).  The
Facility matures on January 28, 2012.
   21
  
  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 the borrowers 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
the borrowers’ receivables, inventory and other measures.  The
Facility is secured by a first priority security interest in the assets of the
borrowers.  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, the borrowers’ 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 (a “Recapitalization Event”).  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 Recapitalization Event to at least $4.4 million.  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.
  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
negative covenants and events of default.  The borrowers also agreed
to maintain specified minimum availability reserves in lieu of financial
covenants, fixed charge coverage and overall debt ratios.  At October
24, 2009, we were in compliance with our minimum availability reserve
requirements.
  As of
October 24, 2009, we had $12,931,000 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 three months ended October 24, 2009, borrowings under
the Facility (excluding the bridge facility) peaked at $14,231,000 and the
average borrowing during the period was approximately $11,407,000.  In
addition, at October 24, 2009, we had $1,334,000 of outstanding letters of
credit under the Facility.
  Long
Term Debt – Related Party
  As of
October 24, 2009, we had $13,538,000 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.
   22
  
  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 October 24, 2009, we had
accrued dividends of $985,000.  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.
  Future
Financing Requirements
  For the
three months ended October 24, 2009, our working capital decreased by $3,355,000
to ($6,149,000), primarily due to our loss from operations.  Although
our Facility does not contain any working capital covenants and we are in
compliance with our minimum availability reserve requirements, our business
continues to be effected by limited working capital and it is critical to our
business that we meet our projected operating cash flows.  We plan to
carefully manage our working capital and continue to look for ways to improve
our working capital position.
  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.
  We expect that our capital expenditures
for fiscal year 2010 will be approximately $4,100,000, 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 financial statements contained elsewhere in this
report, and Note 10 to the consolidated 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 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.
   23
  
  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.
  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
October 24, 2009, we had $12,931,000 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
or LIBOR plus 300 basis points (5.0% at October 24, 2009).  Interest
accrues on outstanding borrowings under the bridge facility at an annual
interest rate of LIBOR plus 10% (10.25% as of October 24, 2009).  For
the three months ended October 24, 2009, borrowings under the Facility
(excluding the bridge facility) peaked at $14,231,000 and the average borrowing
during the period was approximately $11,407,000.  An increase in the
interest rate of 100 basis points would have increased the interest on the
Facility and bridge facility borrowings by approximately $30,000 for the three
months ended October 24, 2009.
  Foreign
Currency Risks
  We enter into a significant amount of
purchase obligations outside of the U.S., 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
4T – 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
October 24, 2009.  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.
  24
  Changes
in Internal Control Over Financial Reporting
 During
the three months ended October 24, 2009, 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.
 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.
                  
                  Description31.1
                  
                  Certification
      by Chief Executive Officer and Principal Executive
  Officer31.2
                  
                  Certification
      by Chief Financial Officer and Principal Accounting
  Officer32
                  
                  Section
      1350 Certification
 
   25
  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:
      December 7, 2009
                By:
                /s/
      Thomas J. LynchTHOMAS
      J. LYNCH
                  Chief
      Executive Officer and
                  Principal
      Executive Officer Date:
      December 7, 2009
                  By:
                  /s/
      Thomas RendeTHOMAS
      RENDE
                    Chief
      Financial Officer and
                    Principal
      Accounting Officer
 26