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 April 25, 2009





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





For the
transition period from   
to





Commission
File Number: 001-05893





FREDERICK’S OF HOLLYWOOD
GROUP INC.


(Exact
name of Registrant as specified in its charter)





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





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





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








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





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




Yes x                                No   ̈




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




Yes   ̈                                No   ̈




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




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


(do not
check if a smaller reporting company)




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




Yes   ̈                                No  x




The
number of common shares outstanding on May 29, 2009 was
26,377,490.








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 April 25, 2009 (Unaudited) and July 26, 2008
      (Audited)
                        3Consolidated
      Statements of Operations (Unaudited) for the Three and Nine Months Ended
      April 25, 2009 and April 26, 2008
                        4Consolidated
      Statements of Cash Flows (Unaudited) for the Nine Months Ended April 25,
      2009 and April 26, 2008
                        5Notes
      to Consolidated Unaudited Financial Statements
                        6 –
      13Item
      2.
                        Management’s
      Discussion and Analysis of Financial
                        14
      – 26Condition
      and Results of OperationsItem
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        26Item
      4T.
                        Controls
      and Procedures
                        26
      – 27PART
      II.
                        Other
      InformationItem
      1
                        Legal
      Proceedings
                        28Item
      1A.
                        Risk
      Factors
                        28Item
      4.
                        Submission
      of Matters to a Vote of Security Holders
                        28Item
      6.
                        Exhibits
                        28Signatures
                        29


2


PART  I.   FINANCIAL
INFORMATION





Item
1.  Financial Statements





FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED
BALANCE SHEETS


(In
Thousands, Except Share Data)


April 25,
                    
                    
                    July 26,2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Audited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                    
                    $
                    1,833
                    
                    
                    $
                    1,988Accounts
      receivable
                    
                    
                    3,787
                    
                    
                    
                    5,788Income
      tax receivable
                    
                    
                    155
                    
                    
                    
                    112Merchandise
      inventories
                    
                    
                    23,576
                    
                    
                    
                    24,572Prepaid
      expenses and other current assets
                    
                    
                    2,769
                    
                    
                    
                    3,515Deferred
      income tax assets
                    
                    
                    2,144
                    
                    
                    
                    2,766Total
      current assets
                    
                    
                    34,264
                    
                    
                    
                    38,741PROPERTY
      AND EQUIPMENT, Net
                    
                    
                    22,481
                    
                    
                    
                    22,576GOODWILL
                    
                    
                    -
                    
                    
                    
                    19,100INTANGIBLE
      AND OTHER ASSETS
                    
                    
                    26,415
                    
                    
                    
                    27,265TOTAL
      ASSETS
                    
                    $
                    83,160
                    
                    
                    $
                    107,682LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Revolving
      credit facility and term loans
                    
                    $
                    11,986
                    
                    
                    $
                    11,093Current
      portion of long-term debt
                    
                    
                    5
                    
                    
                    
                    50Accounts
      payable and other accrued expenses
                    
                    
                    21,755
                    
                    
                    
                    20,709Total
      current liabilities
                    
                    
                    33,746
                    
                    
                    
                    31,852DEFERRED
      RENT AND TENANT ALLOWANCES
                    
                    
                    4,508
                    
                    
                    
                    3,846LONG
      TERM DEBT-related party
                    
                    
                    13,136
                    
                    
                    
                    12,561OTHER
                    
                    
                    12
                    
                    
                    
                    55DEFERRED
      INCOME TAX LIABILITIES
                    
                    
                    11,180
                    
                    
                    
                    11,802TOTAL
      LIABILITIES
                    
                    
                    62,582
                    
                    
                    
                    60,116PREFERRED
      STOCK, $.01 par value – authorized, 10,000,000 shares at April 25, 2009
      and July 26, 2008; issued and outstanding 3,629,325 shares of Series A
      preferred stock at April 25, 2009 and July 26, 2008
                    
                    
                    7,500
                    
                    
                    
                    7,500COMMITMENTS
      AND CONTINGENCIES ( NOTE 8 )
                    
                    
                    -
                    
                    
                    
                    -SHAREHOLDERS’
      EQUITY:Common
      stock, $.01 par value – authorized, 200,000,000 shares at April 25, 2009
      andJuly
      26, 2008; issued and outstanding 26,348,870 shares at April 25, 2009 and26,141,194
      shares at July 26, 2008
                    
                    
                    263
                    
                    
                    
                    261Additional
      paid-in capital
                    
                    
                    60,233
                    
                    
                    
                    59,558Accumulated
      deficit
                    
                    
                    (47,351
                    )
                    
                    
                    (19,744
                    )Accumulated
      other comprehensive loss
                    
                    
                    (67
                    )
                    
                    
                    (9
                    )TOTAL
      SHAREHOLDERS’ EQUITY
                    
                    
                    13,078
                    
                    
                    
                    40,066TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                    
                    $
                    83,160
                    
                    
                    $
                    107,682





See notes
to consolidated unaudited financial statements.


3





FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)


(In
Thousands, Except Per Share Amounts)





Three Months Ended
              
              
              Nine Months EndedApril 26,April 25,
              
              
              April 26,
              
              
              April 25,
              
              
              20082009
              
              
              2008
              
              
              2009
              
              
              (see Note 2)Net
      sales
              
              $
              46,766
              
              
              $
              60,841
              
              
              $
              141,847
              
              
              $
              140,140Cost
      of goods sold, buying and occupancy
              
              
              28,915
              
              
              
              39,025
              
              
              
              91,025
              
              
              
              86,247Gross
      profit
              
              
              17,851
              
              
              
              21,816
              
              
              
              50,822
              
              
              
              53,893Selling,
      general and administrative expenses
              
              
              19,459
              
              
              
              23,365
              
              
              
              57,646
              
              
              
              60,523Goodwill
      impairment
              
              
              -
              
              
              
              -
              
              
              
              19,100
              
              
              
              -Operating
      loss
              
              
              (1,608
              )
              
              
              (1,549
              )
              
              
              (25,924
              )
              
              
              (6,630
              )Interest
      expense, net
              
              
              337
              
              
              
              436
              
              
              
              1,186
              
              
              
              1,703Loss
      before income tax provision
              
              
              (1,945
              )
              
              
              (1,985
              )
              
              
              (27,110
              )
              
              
              (8,333
              )Income
      tax provision
              
              
              24
              
              
              
              -
              
              
              
              65
              
              
              
              -Net
      loss
              
              
              (1,969
              )
              
              
              (1,985
              )
              
              
              (27,175
              )
              
              
              (8,333
              )Less:
      Preferred stock dividends
              
              
              151
              
              
              
              141
              
              
              
              432
              
              
              
              141Net
      loss applicable to common shareholders
              
              $
              (2,120
              )
              
              $
              (2,126
              )
              
              $
              (27,607
              )
              
              $
              (8,474
              )Basic
      net loss per share
              
              $
              (0.08
              )
              
              $
              (0.08
              )
              
              $
              (1.05
              )
              
              $
              (0.51
              )Diluted
      net loss per share
              
              $
              (0.08
              )
              
              $
              (0.08
              )
              
              $
              (1.05
              )
              
              $
              (0.51
              )Weighted
      average shares outstanding – basic
              
              
              26,343
              
              
              
              25,981
              
              
              
              26,235
              
              
              
              16,592Weighted
      average shares outstanding – diluted
              
              
              26,343
              
              
              
              25,981
              
              
              
              26,235
              
              
              
              16,592





See notes
to consolidated unaudited financial statements.


4


FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(In
Thousands)


Nine
      Months EndedApril
      26,April
      25,
              
              
              20082009
              
              
              (see
      Note 2)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (27,175
              )
              
              $
              (8,333
              )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activitiesGoodwill
      impairment
              
              
              19,100
              
              
              
              -Depreciation
      and amortization
              
              
              4,436
              
              
              
              3,427Provision
      for sales allowances and doubtful accounts
              
              
              (296
              )
              
              
              216Issuance
      of common stock for directors’ fees
              
              
              39
              
              
              
              1Stock-based
      compensation expense
              
              
              637
              
              
              
              1,306Loss
      on disposal of property and equipment
              
              
              59
              
              
              
              151Amortization
      of deferred financing costs
              
              
              34
              
              
              
              63Non-cash
      accrued interest on long term debt – related party
              
              
              575
              
              
              
              545Amortization
      of deferred rent and tenant allowances
              
              
              543
              
              
              
              475Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              1,841
              
              
              
              (3,664
              )Merchandise
      inventories
              
              
              996
              
              
              
              3,251Prepaid
      expenses and other current assets
              
              
              746
              
              
              
              811Income
      tax receivable
              
              
              (43
              )
              
              
              -Other
      assets
              
              
              13
              
              
              
              39Accounts
      payable and other accrued expenses
              
              
              599
              
              
              
              (1,131
              )Tenant
      improvements allowances
              
              
              575
              
              
              
              289Net
      cash provided by (used in) operating activities
              
              
              2,679
              
              
              
              (2,554
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
              
              
              (3,682
              )
              
              
              (7,041
              )Cash
      paid for transaction costs
              
              
              -
              
              
              
              (1,529
              )Cash
      acquired in merger
              
              
              -
              
              
              
              160Net
      cash used in investing activities
              
              
              (3,682
              )
              
              
              (8,410
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      borrowings under revolving line of credit
              
              
              893
              
              
              
              2,235Proceeds
      from rights offering
              
              
              -
              
              
              
              20,000Repayment
      of capital lease obligation
              
              
              (45
              )
              
              
              (15
              )Repayment
      of note payable – bank
              
              
              -
              
              
              
              (10,588
              )Payments
      of long term debt – related party
              
              
              -
              
              
              
              (100
              )Payment
      of deferred financing cost
              
              
              -
              
              
              
              (141
              )Cash
      paid for issuance costs
              
              
              -
              
              
              
              (412
              )Net
      cash provided by financing activities
              
              
              848
              
              
              
              10,979NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              (155
              )
              
              
              15CASH
      AND CASH EQUIVALENTS:Beginning
      of period
              
              
              1,988
              
              
              
              1,898End
      of period
              
              $
              1,833
              
              
              $
              1,913SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during period for:Interest
              
              $
              549
              
              
              $
              1,644Taxes
              
              $
              37
              
              
              $
              162




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. (formerly Movie Star, 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 April 25, 2009 and the results of
operations and cash flows for the nine months ended April 25, 2009 and April 26,
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 26, 2008 consolidated balance
sheet is from the Company’s audited financial statements.  The results
of operations for the three and nine months ended April 25, 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 26, 2008 included in the Company’s 2008 Annual Report on Form 10-K
filed with the Securities and Exchange Commission (“SEC”) on October 24,
2008.




2.           Merger




On
December 18, 2006, the Company entered into an Agreement and Plan of Merger and
Reorganization (the “Merger Agreement”), as amended, with Fred Merger Corp., a
wholly-owned subsidiary of the Company, and FOH Holdings, Inc., a Delaware
corporation (“FOH Holdings”).  On January 28, 2008, the Company
consummated its merger with FOH Holdings (the “Merger”).  As a result,
FOH Holdings became a wholly-owned subsidiary of the
Company.  Following the Merger, the Company changed its name from
Movie Star, Inc. to Frederick’s of Hollywood Group Inc.  References
herein to “Movie Star” refer to the Company prior to the Merger.




The
Merger was accounted for under the purchase method of accounting as a reverse
acquisition.  Accordingly, for accounting and financial reporting
purposes, the Company was treated as the acquired company, and FOH Holdings was
treated as the acquiring company.  The historical financial
information presented for the periods and dates prior to January 28, 2008 is
that of FOH Holdings and its subsidiaries, and for periods subsequent to January
28, 2008 is that of the merged company.  In addition, the Company
adopted FOH Holdings’ fiscal year end, which is the last Saturday of
July.




Immediately
prior to the Merger, the Company completed a one-for-two reverse stock split of
its outstanding common stock.  All share and per share data referred
to in this Form 10-Q has been retroactively restated to reflect the reverse
stock split.




The
following condensed pro forma information (herein referred to as the “pro forma
information”) assumes the Merger had occurred as of July 29,
2007.  The pro forma information has been prepared for comparative
purposes only and is not necessarily indicative of the actual results that would
have been attained had the Merger occurred as of the beginning of the period
presented, nor is it indicative of the Company’s future
results.  Furthermore, the unaudited pro forma information does not
reflect management’s estimate of any revenue-enhancing opportunities or
anticipated cost savings that may occur as a result of the integration and
consolidation of the two companies.




The pro
forma information set forth below reflects nonrecurring transactions related to
Movie Star merger related fees of approximately $917,000 for the nine months
ended April 26, 2008.  Merger related fees are legal fees and
accounting costs for due diligence.  These fees were expensed as a
result of the Merger being treated as a reverse acquisition.




(unaudited)
                          Nine Months Ended($ in thousands except per share amounts)
                        
                        April 26, 2008Net
      sales
                        
                        $
                        167,819Net
      loss
                        
                        
                        (9,820
                        )Net
      loss applicable to common shareholders
                        
                        $
                        (10,242
                        )Basic
      loss per share
                        
                        $
                        (0.46
                        )Diluted
      loss per share
                        
                        $
                        (0.46
                        )


6




3.             Summary
of Significant Accounting Policies




Revenue Recognition –The
Company records revenue at the point of sale for stores, at the time of
estimated receipt by the customer for catalog and Internet sales, 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 consumers in the
period of sale based on prior experience.  If actual returns are
greater than those 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
April 25, 2009 and April 26, 2008, total other revenues recorded in net sales in
the accompanying consolidated statements of operations were $2,638,000 and
$2,841,000, respectively.  For the nine months ended April 25, 2009
and April 26, 2008, total other revenues recorded in net sales in the
accompanying consolidated statements of operations were $7,149,000 and
$8,104,000, 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 are carried as
a liability until redeemed.  To date, the Company has not recognized
any revenue associated with breakage from the gift certificates, gift cards or
store credits because they do not have expiration dates.




Accounts Receivable/Allowance for
Doubtful Accounts and Sales Discounts – The Company’s accounts
receivable, which is primarily attributable to the wholesale division, 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
April 25, 2009 and July 26, 2008, accounts receivable was net of allowances of
$684,000 and $979,000, respectively.  Management believes its
allowance for doubtful accounts and sales discounts to be appropriate, and
actual results should not differ materially from those determined using
necessary estimates.  However, if the financial condition of the
Company’s customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be
required.  Also, if market conditions were to worsen, management may
take actions to increase customer incentive offerings, possibly resulting in an
incremental allowance at the time the incentive is offered.




Merchandise Inventories –
Retail store inventories are valued at the lower of cost or market using the
retail inventory first-in, first-out (“FIFO”) method, and wholesale, catalog and
Internet 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
$1,159,000 at April 25, 2009 and $1,312,000 at July 26, 2008.




Deferred Catalog Costs–
Deferred catalog costs represent direct-response advertising that is capitalized
and amortized over its expected period of future
benefit.  Direct-response advertising consists primarily of product
catalogs of FOH Holdings’ mail order subsidiary.  The capitalized
costs of the advertising are amortized over the expected revenue stream
following the mailing of the respective catalog, which is generally six
months.  The realizability of the deferred catalog costs are also
evaluated as of each balance sheet date by comparing the capitalized costs for
each catalog, on a catalog by catalog basis, to the probable remaining future
net revenues.  Direct-responseadvertising
costs of $1,925,000 and $2,297,000 are included in prepaid expenses and other
current assets in the accompanying consolidated balance sheets at April 25, 2009
and July 26, 2008, 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.


7




Impairment of Long-Lived
Assets – The Company reviews long-lived assets, including property and
equipment and its amortizable intangible assets, for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may not
be recoverable based on undiscounted cash flows.  If long-lived assets
are impaired, an impairment loss is recognized and is measured as the amount by
which the carrying value exceeds the estimated fair value of the
assets.  No impairment was recorded for the nine months ended April
25, 2009 and April 26, 2008.




Goodwill and Intangible Assets– The Company has certain intangible assets and had goodwill. 
Intangible assets consist of trademarks, principally the Frederick’s of
Hollywood trade name, customer relationships, favorable leases and domain names
recognized in accordance with purchase accounting.  Goodwill represented
the portion of the purchase price that could not be attributed to specific
tangible or identified intangible assets recorded in connection with purchase
accounting.  Goodwill was not deductible for tax purposes.  The
Company amortizes customer relationships and favorable leases over estimated
useful lives of four years and the remaining lease term,
respectively.  The customer relationships and favorable leases are
amortized on a straight-line basis.  The Company has determined the
trademarks and domain names to have indefinite lives.  Financial
Accounting Standards Board (“FASB”) Statement No. 142, “Goodwill and Other Intangible
Assets,” (“SFAS 142”) requires the Company to not amortize goodwill and
certain other indefinite life intangible assets, but to test those intangible
assets for impairment annually and between annual tests when circumstances or
events have occurred that may indicate a potential impairment has
occurred.  SFAS 142 requires goodwill to be allocated to reporting
units.  As the Company’s market capitalization was significantly below its
book value at January 24, 2009, the Company performed an impairment
analysis.  The Company determined that the goodwill balances on both
the retail and wholesale segments were impaired as a result of its current and
future projected financial results due to the poor macroeconomic outlook and a
reduction in wholesale business with Walmart.  Accordingly, the
Company recorded a goodwill impairment charge of $19,100,000 in the second
quarter of fiscal 2009.  After recognizing the impairment charge, the
Company has no remaining goodwill on its consolidated balance
sheet.




Accounting for Stock-Based
Compensation – The Company follows the provisions of FASB Statement No.
123(R), “Share-Based
Payment,” which requires the measurement and recognition of compensation
expense for all share-based payment awards to employees and directors based on
estimated fair values on the grant date.




The value
of each stock option is estimated on the date of grant using the Black-Scholes
option-pricing model.  The fair value generated by the Black-Scholes
model may not be indicative of the future benefit, if any, that may be received
by the option holder.  The following assumptions were used for options
granted during the nine months ended April 25, 2009 and April 26,
2008:




Nine months endedApril 25,
                  
                  
                  April 26,2009
                  
                  
                  2008Risk-free
      interest rate
                  
                  
                  1.99% - 3.34%
                  
                  
                  
                  2.8 - 4.5%Expected
      life (years)
                  
                  
                  5 – 7
                  
                  
                  
                  6.3 – 7.0Expected
      volatility
                  
                  
                  60 – 72%
                  
                  
                  
                  60 - 61%Dividend
      yield
                  
                  
                  0.0%
                  
                  
                  
                  0.0%





During
the nine months ended April 25, 2009, the Company granted to two of its officers
and certain other employees options to purchase an aggregate of 127,500 shares
of common stock under the 2000 Performance Equity Plan and 360,000 shares of
common stock under the 1988 Non-Qualified Stock Option Plan.  These
options are identified as follows:







Number
                    
                    Exercise
                    
                    Vestingof Options
                    
                    Price
                    
                    Period120,000
                    
                    $
                    0.38
                    
                    immediately
      vested25,000
                    
                    $
                    0.96
                    
                    in
      full after six months25,000
                    
                    $
                    0.37
                    
                    monthly
      over six months240,000
                    
                    $
                    0.38
                    
                    50%
      at January 2, 2010 and 50% at January 2, 201157,500
                    
                    $
                    0.87
                    
                    20%
      each year over 5 years20,000
                    
                    $
                    0.17
                    
                    20%
      each year over 5
years


8


During
the nine months ended April 26, 2008, the Company granted to one of its officers
and certain other employees options to purchase an aggregate of 263,514 shares
of common stock under the FOH Holdings’ 2003 Employee Equity Incentive
Plan.  Options to purchase 93,511 shares are exercisable at an
exercise price of $4.52 per share and options to purchase 170,003 shares are
exercisable at an exercise price of $3.10 per share.  Of the total,
42,501 options vested immediately, 127,502 options vest 33% each year over three
years, and 93,511 options vest 20% each year over five years.




In
addition, during the nine months ended April 26, 2008, the Company granted to
three of its officers and certain other employees options to purchase an
aggregate of 441,250 shares of common stock under the Movie Star 2000
Performance Equity Plan.  Options to purchase 426,250 shares are
exercisable at $3.10 per share and options to purchase 15,000 shares are
exercisable at $2.80 per share.  Of the total, 376,250 options vested
immediately, 50,000 options vest over six months and 15,000 options vest 20%
each year over five years.




Restricted
Shares and Share Grants




During
the nine months ended April 25, 2009, the Company issued to one officer 100,000
shares of restricted common stock pursuant to the terms and conditions of the
Company’s 2000 Performance Equity Plan at a price of $0.38 per
share.  50,000 shares will vest on January 2, 2010, provided that this
officer is employed by the Company and that he has purchased an aggregate of
250,000 shares of common stock in the open market in accordance with the terms
of a 10b5-1 trading plan to be entered into by this officer during the first
open window period that such plan can be entered into in accordance with the
terms of the Company’s insider trading policy (the “stock purchase”). If this
officer does not complete the stock purchase by January 2, 2010, then the
50,000 shares will not vest on such date; however, all 100,000 shares will vest
on January 2, 2011 provided that this officer is employed by the Company
and has completed the stock purchase by such date.




During
the nine months ended April 26, 2008, the Company issued an aggregate of 290,006
non-plan shares of restricted common stock to one officer and certain other
employees at a weighted average price of $3.19 per share. These shares vest 50%
on December 31, 2009 and 25% each on December 31, 2010 and 2011.




In
addition, during the nine months ended April 26, 2008, the Company issued 24,194
fully vested shares of common stock to one officer at a price of $3.10 per
share.




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 Merger, the Company may have had a change
in control under Section 382 of the Internal Revenue Code and, therefore, its
net operating loss carryforwards may be limited.




Supplemental Disclosure of Noncash
Financing Transactions– The
Company had outstanding accounts payable and accrued expenses of $163,000 and
$248,000 at April 25, 2009 and July 26, 2008, respectively, related to purchases
of property and equipment.  During the nine months ended April 25,
2009, the Company also accrued a dividend of $432,000 on its Series A Preferred
Stock.




The
Company had outstanding accounts payable and accrued expenses of $595,000 and
$661,000 at April 26, 2008 and July 28, 2007, respectively, relating to
purchases of property and equipment, and $2,000 and $1,428,000 at April 26, 2008
and July 28, 2007, respectively relating to unpaid transaction costs related to
the Merger described in Note 2.  In addition, during the nine months
ended April 26, 2008, FOH Holdings had $161,000 of leasehold improvements paid
on its behalf by a landlord.  In connection with the Merger, the
Company issued 11,894,591 shares of common stock in exchange for the net assets
of Movie Star.  In addition, during the three and nine months ended April
26, 2008, the Company accrued a dividend of $141,000 on its Series A Preferred
Stock.




4.           Effect
of New Accounting Standards




In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”
(“SFAS 157”).  SFAS 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value
measurements.   In February 2008, the FASB issued FASB Staff
Positions (“FSP”) 157-1, which amends SFAS 157 to remove leasing transactions
accounted for under SFAS 13, “Accounting for Leases” and
FSP 157-2, which deferred the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis to fiscal years
beginning after November 15, 2008. The Company adopted SFAS 157 on July 27,
2008.  The adoption of SFAS 157 for financial assets and liabilities
did not have a material impact on the Company’s consolidated financial
statements because the Company does not maintain investments or
derivatives.  The Company does not believe the adoption of SFAS 157
for nonfinancial assets and liabilities, effective July 26, 2009, will have a
material impact on its consolidated financial
statements.


9




In
April 2009, the FASB issued FSP 157-4, “Determining Fair Value When the
Volume and Level of Activity for theAsset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly” (“FSP 157-4”). FSP 157-4 amends SFAS No.157, “Fair Value Measurements,” to provide additional
guidance on estimating fair value when the volume and level of activity for an
asset or liability significantly decreased in relation to market activity for
the asset or liability. The FSP also provides additional guidance on
circumstances that may indicate that a transaction is not orderly. FSP 157-4
becomes effective for interim and annual periods ending after June 15, 2009
with early application permitted for periods ending after March 15, 2009.
The Company does not expect FSP 157-4 to have a material impact on its
consolidated financial statements upon adoption.




In
February 2007, the FASB issued SFAS 159, “TheFair Value Option for Financial
Assets and Financial Liabilities,” (“SFAS 159”), which amends the
accounting for assets and liabilities in financial statements in accordance with
SFAS 115, “Accounting for
Certain Investments in Debt and Equity Securities.”  SFAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value.  SFAS 159 does not affect any existing accounting
literature that requires certain assets and liabilities to be carried at fair
value.  Entities that choose the fair value option will recognize
unrealized gains and losses on items for which the fair value option was elected
in earnings at each subsequent reporting date.  The Company adopted
SFAS 159 on July 27, 2008.  The Company has currently chosen not to
elect the fair value option for any items that are not already required to be
measured at fair value in accordance with accounting principles generally
accepted in the United States.




In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51” (“SFAS
160”).  SFAS 160 establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  Earlier adoption is prohibited.  The Company does not
have any noncontrolling interests in subsidiaries and believes that SFAS 160
will not have a material impact on its consolidated financial
statements.




In
December 2007, the FASB issued SFAS 141 (Revised 2007), “Business Combinations” (“SFAS
141R”).  SFAS 141R establishes principles and requirements for the
reporting entity in a business combination, including recognition and
measurement in the financial statements of the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree.  SFAS 141R also establishes disclosure requirements to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination.  SFAS 141R applies prospectively
to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008, and interim periods within those fiscal years.




In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133” (“SFAS 161”).  SFAS 161 requires enhanced
disclosures about how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for, and how they
affect an entity’s financial position, financial performance, and cash
flows.  SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. Effective January 27, 2009, the Company adopted
SFAS 161, which did not have a material impact on its consolidated financial
statements.




In May
2008, the FASB issued SFAS 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60”
(“SFAS 163”). SFAS 163 requires recognition of an insurance claim liability
prior to an event of default when there is evidence that credit deterioration
has occurred in an insured financial obligation. SFAS 163 is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and all interim periods within those fiscal years. Early application is
not permitted. The Company’s adoption of SFAS 163 will not have a material
impact on its consolidated financial statements.




In
April 2009, the FASB issued FSP 107-1, “Interim Disclosures About Fair Value
of Financial Instruments” (“FSP 107-1”). FSP 107-1 amends SFAS
No.107, “Disclosures about
Fair Value of Financial Instruments”, to require disclosures about fair
value of financial instruments for interim periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion
No. 28, “Interim
Financial Reporting”, to require those disclosures in summarized
financial information at interim reporting periods. FSP 107-1 becomes
effective for interim and annual periods ending after June 15, 2009 with
early application permitted for periods ending after March 15, 2009. The
Company does not expect FSP 107-1 to have a material impact on its consolidated
financial statements upon adoption.


10




In
April 2009, the FASB issued FSP 115-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP 115-2”). FSP 115-2
provides new guidance on the recognition of Other-Than-Temporary-Impairments
(“OTTI”) and provides some new disclosure requirements. FSP 115-2 becomes
effective for interim and annual periods ending after June 15, 2009 with
early application permitted for periods ending after March 15, 2009. The
Company does not expect FSP 115-2 to have a material impact on its consolidated
financial statements upon adoption.




In May
2009, the FASB issued SFAS 165, “Subsequent Events” (“SFAS
165”).  SFAS 165 provides general standards for the accounting and
reporting of subsequent events that occur between the balance sheet date and
issuance of financial statements.  SFAS 165 requires the issuer to
recognize the effects, if material, of subsequent events in the financial
statements if the subsequent event provides additional evidence about conditions
that existed as of the balance sheet date.  The issuer must also
disclose the date through which subsequent events have been evaluated and the
nature of any nonrecognized subsequent events.  Nonrecognized
subsequent events include events that provide evidence about conditions that did
not exist as of the balance sheet date, but which are of such a nature that they
must be disclosed to keep the financial statements from being
misleading.  The statement is effective for financial reporting
periods ending after June 15, 2009.




5.           Merchandise Inventories




Merchandise
inventories consist of the following (in thousands):




April
      25,
                      
                      
                      July
      26,2009
                      
                      
                      2008Raw
      materials
                      
                      $
                      1,182
                      
                      
                      $
                      1,945Work-in
      process
                      
                      
                      112
                      
                      
                      
                      291Finished
      goods
                      
                      
                      22,282
                      
                      
                      
                      22,336$
                      23,576
                      
                      
                      $
                      24,572




6.           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 income per share has been computed by
dividing the applicable net income available to common shareholders by the
weighted average number of shares outstanding and common share
equivalents.  The Company’s calculation of basic and diluted net loss
per share is as follows (in thousands, except per share amounts):




Three
      Months Ended
              
              
              Nine
      Months EndedApril
      25,
              
              
              April
      26,
              
              
              April
      25,
              
              
              April
      26,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      loss
              
              $
              (2,120
              )(a)
              
              $
              (2,126
              )(c)
              
              $
              (27,607
              )(b)
              
              $
              (8,474
              )(c)BASIC:Basic
      weighted average number of shares outstanding
              
              
              26,343
              
              
              
              25,981
              
              
              
              26,235
              
              
              
              16,592Basic
      net loss per share
              
              $
              (0.08
              )
              
              $
              (0.08
              )
              
              $
              (1.05
              )
              
              $
              (0.51
              )DILUTED:Basic
      weighted average number of shares outstanding
              
              
              26,343
              
              
              
              25,981
              
              
              
              26,235
              
              
              
              16,592Shares
      issuable upon conversion of stock options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      average number of equivalent shares outstanding
              
              
              26,343
              
              
              
              25,981
              
              
              
              26,235
              
              
              
              16,592Diluted
      net loss per share
              
              $
              (0.08
              )
              
              $
              (0.08
              )
              
              $
              (1.05
              )
              
              $
              (0.51
              )





(a)
            Includes Series A preferred stock dividends of $151.


(b)
            Includes Series A preferred stock dividends of $432.


(c)
            Includes Series A preferred stock dividends of $141.




There
were 5,000 and 2,000 potentially dilutive shares at a price of $0.17 per share
that were not included in the computation of diluted net loss per share for the
three and nine months ended April 25, 2009, respectively, since their effect
would have been anti-dilutive.  There were 346,000 and 301,000
potentially dilutive shares at prices ranging from $1.12 to $2.80 per share that
were not included in the computation of diluted net loss per share for the three
and nine months ended April 26, 2008, respectively, since their effect would
have been anti-dilutive.


11




7.           Financing




Revolving
Credit Facility




On
January 28, 2008, in connection with the Merger, the Company and its U.S.
subsidiaries (collectively, the “borrowers”) entered into an amended and
restated senior credit facility (the “Facility”) that amended the existing
revolving credit facility (“Old Facility”) between FOH Holdings and Wells Fargo
Retail Finance II, LLC (“Senior Lender”).  The Facility extended the
maturity date of the Old Facility to 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
will be 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. On November 4, 2008, the
borrowers utilized the accordion feature under the Facility to increase the
current borrowing limit under the Facility from $25 million to $30
million.  In utilizing the accordion feature, the borrowers’ minimum
availability reserve under the Facility 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.  All other material terms
of the Facility remain unchanged.




Interest
accrues at an agreed to reference rate, which shall be, at the borrowers’
election, either the Wells Fargo prime rate less 25 basis points or LIBOR plus
150 basis points.  Interest is payable monthly, in
arrears.  In addition, the Facility provides for certain customary
fees to be paid, which include (i) a 25 basis point fee on the amount of any
increase in the Facility above $25 million, (ii) a 25 basis point fee on any
unused portion of the Facility, (iii) a $2,000 monthly service fee and (iv)
letter of credit fees on stand-by letters of credit and documentary letters of
credit.




As of
April 25, 2009, the Company had $11,986,000 outstanding under the Facility at a
rate of 3.0%.  For the nine months ended April 25, 2009, borrowings
under the Facility peaked at $26,386,000 and the average borrowing during the
period was approximately $15,771,000.  In addition, the Company had
$1,808,000 of outstanding letters of credit under the Facility as of April 25,
2009.




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 April
25, 2009, the Company was in compliance with its minimum availability reserve
requirements.




Long
Term Debt – Related Party




As of
April 25, 2009, the Company had $13,136,000 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.”  In connection with the Merger and the amendment of the Old
Facility with the Senior Lender, Fursa extended the maturity date of the Tranche
C Debt to 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




On
January 28, 2008, in connection with the Merger, the Company issued an aggregate
of 3,629,325 shares of Series A 7.5% Convertible Preferred Stock to Fursa in
exchange for a $7,500,000 portion of the debt owed by FOH Holdings and its
subsidiaries.  The Series A Preferred Stock 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 April 25, 2009, the Company has
accrued dividends of $714,000.  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
Company’s credit 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.


12




8.           Commitments
and Contingencies




The
Company has certain contingent liabilities resulting from litigation and claims
incidental to the ordinary course of business that the Company believes will not
have a material adverse effect on its future consolidated financial position,
results of operations or cash flows.




In
November 2008, Frederick’s of Hollywood, Inc. and MarketLive, Inc., a California
corporation, participated in a mediation in an attempt to resolve the claims
brought in May 2008 in the Superior Court of California, County of Los Angeles
by Frederick’s of Hollywood against MarketLive in connection with MarketLive’s
alleged failure to create an e-commerce platform for Frederick’s of Hollywood
that worked properly and had appropriate security, and MarketLive’s related
cross-claims.  In December 2008, the parties entered into a
confidential settlement agreement, without either party admitting liability,
pursuant to which Frederick’s of Hollywood received a lump sum cash payment and
other non-cash consideration.  The case was subsequently dismissed
with prejudice.




The
Company is involved from time to time in litigation incidental to its
business.  The Company believes that the outcome of any other
litigation will not have a material adverse effect on its results of operations
or financial condition.




9.           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 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 1% and 3% of
wholesale net sales for the three and nine months ended April 25, 2009,
respectively.


Sales and
transfers between segments generally are recorded at cost and treated as
transfers of inventory, and all intercompany revenues are eliminated in
consolidation.  Each segment’s performance is evaluated based upon
operating income or loss.  Corporate overhead expenses (exclusive of
expenses for senior management, certain other corporate-related expenses and
interest) are allocated to the segments based upon specific usage or other
allocation methods.


Net
sales, operating loss and total assets for each segment are as
follows:


($ in thousands)
                
                Three Months Ended
                
                
                Nine Months EndedApril 25,
                
                
                April 26,
                
                
                April 25,
                
                
                April 26,2009
                
                
                2008
                
                
                2009
                
                
                2008(1)Net
      Sales:Retail
                
                $
                39,397
                
                
                $
                40,549
                
                
                $
                110,878
                
                
                $
                119,848Wholesale
                
                
                7,369
                
                
                
                20,292
                
                
                
                30,969
                
                
                
                20,292Total
      net sales
                
                $
                46,766
                
                
                $
                60,841
                
                
                $
                141,847
                
                
                $
                140,140Operating
      Income (Loss):Retail
                
                $
                1,248
                
                
                $
                (925
                )
                
                $
                (7,341
                )
                
                $
                (6,006
                )Wholesale
                
                
                (2,182
                )
                
                
                396
                
                
                
                (16,886
                )
                
                
                396Total
      operating loss
                
                $
                (934
                )
                
                $
                (529
                )
                
                $
                (24,227
                )
                
                $
                (5,610
                )Less
      Unallocated Corporate Expenses:Corporate
      expenses
                
                $
                674
                
                
                $
                1,020
                
                
                $
                1,697
                
                
                $
                1,020Interest
      expense
                
                
                337
                
                
                
                436
                
                
                
                1,186
                
                
                
                1,703Total
      unallocated expenses
                
                $
                1,011
                
                
                $
                1,456
                
                
                $
                2,883
                
                
                $
                2,723Loss
      before income tax provision
                
                $
                (1,945
                )
                
                $
                (1,985
                )
                
                $
                (27,110
                )
                
                $
                (8,333
                )Total
      AssetsRetail
                
                
                
                
                
                
                
                
                
                $
                62,233Wholesale
                
                
                
                
                
                
                
                
                
                
                20,927Total
      Assets
                
                
                
                
                
                
                
                
                
                $
                83,160





(1)
              Only
      includes historical information for the wholesale division for the three
      months ended April 26, 2008 and not for the first six months of fiscal
      year 2008.  See Note
2.


13


ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




Forward
Looking Statements




When used in this Form 10-Q of
Frederick’s of Hollywood Group Inc. and in our future filings with the
Securities and Exchange Commission (“SEC”), the words or phrases “will likely
result,” “management expects” or “we expect,” “will continue,” “is anticipated,”
“estimated” or similar expressions are intended to identify “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995.  Readers are cautioned not to place undue reliance on any
such forward-looking statements, each of which speaks only as of the date
made.  We have no obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.




Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or
projected.  These risks are included in “Item 1: Business,” “Item 1A:
Risk Factors” and “Item 7: Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of our Form 10-K for the fiscal year ended
July 26, 2008.  In assessing forward-looking statements contained
herein, readers are urged to carefully read those statements.  Among
the factors that could cause actual results to differ materially are:
competition; business conditions and industry growth; rapidly changing consumer
preferences and trends; general economic conditions; large variations in sales
volume with significant customers; addition or loss of significant customers;
continued compliance with government regulations; loss of key personnel; labor
practices; product development; management of growth; increases of costs of
operations or inability to meet efficiency or cost reduction objectives; timing
of orders and deliveries of products; and foreign government regulations and
risks of doing business abroad.




Corporate
History




Frederick’s of Hollywood Group Inc.
(formerly, Movie Star, Inc.) (the “Company”) is a New York corporation
incorporated on April 10, 1935.  On January 28, 2008, the Company
consummated its 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.”




The merger was accounted for as a
reverse acquisition, which means that for accounting and financial reporting
purposes, the Company was treated as the acquired company, and FOH Holdings was
treated as the acquiring company. Therefore, the historical financial
information presented for the periods and dates prior to January 28, 2008 is
that of FOH Holdings and its subsidiaries, and for periods subsequent to January
28, 2008 is that of the merged company.




Immediately prior to the merger, we
completed a one-for-two reverse stock split of our outstanding common
stock.  All share and per share data referred to in this Form 10-Q has
been retroactively restated to reflect the reverse stock split.




Unless otherwise indicated, as used in
this Form 10-Q:




·
              “Movie
      Star, Inc.” or “Movie Star” refers to the business, operations and
      financial results of Movie Star, Inc. prior to the closing of the
      merger;


·
              “FOH
      Holdings” or “Frederick’s of Hollywood” refers to the business, operations
      and financial results of FOH Holdings, Inc., a privately-held Delaware
      corporation, prior to the closing of the merger and after the merger, as
      the context requires; and


·
              the
      “Company,” “we,” “our” or “us” refers to the operations and financial
      results of Frederick’s of Hollywood Group Inc., together with FOH
      Holdings, Inc. and its subsidiaries on a consolidated basis after the
      closing of the merger.


Overview




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.


14




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 April 25, 2009, we
operated 130 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.




Financial
information about the retail segment for the three and nine months ended April
25, 2009 and April 26, 2008 and about the wholesale segment for the three and
nine months ended April 25, 2009 and the three months ended April 26, 2008 is
included in the consolidated financial statements contained elsewhere in this
report.




Fiscal
2009 Initiatives




Our efforts remain focused on
implementing 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.  These key initiatives
include:




·
            Reducing 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 workforce has resulted in an
      annualized net salary savings of approximately $4.5 million and an
      additional savings of approximately $1.0 million in benefits and other
      related costs.




·
            Consolidating
      functions.  The wholesale division accounted for
      approximately 6% and 8% of the dollar value of the retail division’s
      merchandise purchases for fiscal year 2008 and the nine months ended April
      25, 2009, respectively, and we expect this percentage to increase as we
      continue to vertically integrate our retail and wholesale operations where
      complementary in order to derive additional margin benefits.  To
      this end, we have continued the consolidation of the retail and wholesale
      divisions’ merchandising and design, distribution, information technology
      and finance functions.  We also are continuing to transition
      manufacturing support functions to our manufacturing facility in the
      Philippines.




·
            Management
      changes.  We recently restructured our senior management
      team to lead us in streamlining our consolidation efforts and providing
      for the coordinated operation of the retail and wholesale divisions. In
      addition, we hired new personnel in the Philippines, including a Senior
      Vice President of Manufacturing, to assist us in maintaining product
      quality and timely delivery to our customers and our retail division, as
      well as transitioning manufacturing support functions to the
      Philippines.




·
            More focused marketing
      efforts.  As a result of rising paper, production and
      mailing costs, we reduced annual catalog circulation from approximately
      26.3 million in fiscal year 2006 to approximately 20.4 million in fiscal
      year 2007 to approximately 18.7 million in fiscal year 2008.  As
      we have been able to target customers through improved analysis and
      monitoring of their purchasing habits and by executing a more focused
      marketing strategy, we expect to further reduce catalog circulation by
      approximately 6% to approximately 17.6 million for fiscal year
      2009.  At the same time, we are endeavoring to expand our
      Internet customer base through various methods, including partnering with
      Internet search engines and participating in affiliate
      programs.  During the fiscal 2009 third quarter, we replaced our
      website with a state-of-the-art e-commerce system hosted by a third-party
      service provider.  We believe that, following an initial
      transition period, our upgraded and enhanced website, www.fredericks.com,
      combined with improved customer acquisition and retention capabilities,
      will enable us to provide customers with an enhanced pleasurable online
      shopping experience for intimate apparel and related
    products.




15




·
            Reducing planned store
      openings.  Following the consummation of the merger in
      January 2008, we had anticipated that we would open, relocate and/or
      remodel approximately 40 to 50 new stores over three
      years.  However, due to uncertain economic conditions and our
      poor operating performance in fiscal year 2008, we revised our retail
      store expansion plans for fiscal year 2009 to include only three store
      openings and one store remodeling.  In addition, during the
      fiscal 2009 third fiscal quarter, we closed six underperforming stores at
      the end of the applicable lease termination dates.  We do not
      expect to close any additional stores prior to the end of fiscal year
      2009.  We continuously evaluate our longer-term store expansion
      plans and intend to make appropriate adjustments as business conditions
      permit.




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 our
consolidated 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 our audited consolidated
financial statements and accompanying notes for the year ended July 26, 2008
included in our Annual Report on Form 10-K filed with the SEC on October 24,
2008.  Management has identified certain critical accounting policies
that are described below.




Our most significant areas of
estimation and assumption are:




·
            determination
      of the appropriate amount and timing of markdowns to clear unproductive or
      slow-moving retail inventory and overall inventory
      obsolescence;




·
            determination
      of appropriate levels of reserves for accounts receivable allowances and
      sales discounts;




·
            estimation
      of future cash flows used to assess the recoverability of long-lived
      assets, including trademarks and
goodwill;




·
            estimation
      of expected customer merchandise
returns;




·
            estimation
      of the net deferred income tax asset valuation allowance;
    and




·
            estimation
      of deferred catalog costs and the amount of future benefit to be derived
      from the catalogs.




Accounts Receivable/Allowance for
Doubtful Accounts and Sales Discounts –Accounts receivable, which is
primarily attributable to the wholesale division, 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 April 25, 2009 and July 26, 2008,
accounts receivable was net of allowances of $684,000 and $979,000,
respectively.  Management 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 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.




16




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, catalog and
Internet 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, 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
$1,159,000 at April 25, 2009, and $1,312,000 at July 26, 2008.




Deferred Catalog Costs–
Deferred catalog costs represent direct-response advertising that is capitalized
and amortized over its expected period of future
benefit.  Direct-response advertising consists primarily of product
catalogs of FOH Holdings’ mail order subsidiary.  The capitalized
costs of the advertising are amortized over the expected revenue stream
following the mailing of the respective catalog, which is generally six
months.  The realizability of the deferred catalog costs are also
evaluated as of each balance sheet date by comparing the capitalized costs for
each catalog, on a catalog by catalog basis, to the probable remaining future
net revenues.  Direct-response advertising costs of $1,925,000
and $2,297,000 are included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets at April 25, 2009 and July 26, 2008,
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.  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.  No impairment was recorded for the three and nine months
ended April 25, 2009 and April 26, 2008.




Goodwill and Intangible
Assets – We have certain intangible assets and had
goodwill.  Intangible assets consist of trademarks, principally the
Frederick’s of Hollywood trade name, customer relationships, favorable leases
and domain names recognized in accordance with purchase
accounting.  Goodwill represented the portion of the purchase price
that could not be attributed to specific tangible or identified intangible
assets recorded in connection with purchase accounting.  Goodwill was
not deductible for tax purposes.  We amortize customer relationships
and favorable leases over estimated useful lives of four years and the remaining
lease term, respectively.  The customer relationships and favorable
leases are amortized on a straight-line basis.  We have determined the
trademarks and domain names to have indefinite lives.  Financial
Accounting Standards Board (“FASB”) Statement No. 142, “Goodwill and Other Intangible
Assets,” (“SFAS 142”) requires us to not amortize goodwill and certain
other indefinite life intangible assets, but to test those intangible assets for
impairment annually and between annual tests when circumstances or events have
occurred that may indicate a potential impairment has
occurred.  SFAS 142 requires goodwill to be allocated to
reporting units.  As our market capitalization was significantly below
our book value at January 24, 2009, we performed an impairment
analysis.  We determined that the goodwill balances on both the retail
and wholesale segments were impaired as a result of our current and future
projected financial results due to the poor macroeconomic outlook and a
reduction in wholesale business with Walmart.  Accordingly, we
recorded a goodwill impairment charge of $19,100,000 in the second quarter of
fiscal year 2009 and we have no remaining goodwill on our consolidated balance
sheet.




Income Taxes– Income taxes
are accounted for under an asset and liability approach that requires the
recognition of deferred income tax assets and liabilities for the expected
future consequences of events that have been recognized in our financial
statements and income tax returns.  We provide a valuation allowance
for deferred income tax assets when it is considered more likely than not that
all or a portion of such deferred income tax assets will not be
realized.  Due to the merger, we underwent a change in control under
Section 382 of the Internal Revenue Code and, therefore, our net operating loss
carryforwards may be limited.




Results
of Operations




As a
result of the merger being accounted for as a reverse acquisition in which the
Company was treated as the acquired company, and FOH Holdings was treated as the
acquiring company, the historical financial information for periods and dates
prior to January 28, 2008 is that of FOH Holdings and its subsidiaries and for
periods subsequent to January 28, 2008 is that of the merged
company.




17


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 shows each specified item as a dollar amount and as a percentage
of net sales in each fiscal period, and should be read in conjunction with the
consolidated financial statements included elsewhere in this report (in
thousands, except for percentages, which percentages may not add due to
rounding):




Three Months Ended
                  
                  
                  Nine Months EndedApril 25, 2009
                  
                  
                  April 26, 2008
                  
                  
                  April 25, 2009
                  
                  
                  April 26, 2008(1)Net
      sales
                  
                  $
                  46,766
                  
                  
                  
                  100.0
                  %
                  
                  $
                  60,841
                  
                  
                  
                  100.0
                  %
                  
                  $
                  141,847
                  
                  
                  
                  100.0
                  %
                  
                  $
                  140,140
                  
                  
                  
                  100.0
                  %Cost
      of goods sold, buying and occupancy
                  
                  
                  28,915
                  
                  
                  
                  61.8
                  %
                  
                  
                  39,025
                  
                  
                  
                  64.1
                  %
                  
                  
                  91,025
                  
                  
                  
                  64.2
                  %
                  
                  
                  86,247
                  
                  
                  
                  61.6
                  %Gross
      profit
                  
                  
                  17,851
                  
                  
                  
                  38.2
                  %
                  
                  
                  21,816
                  
                  
                  
                  35.9
                  %
                  
                  
                  50,822
                  
                  
                  
                  35.8
                  %
                  
                  
                  53,893
                  
                  
                  
                  38.4
                  %Selling,
      general and administrative expenses
                  
                  
                  19,459
                  
                  
                  
                  41.6
                  %
                  
                  
                  23,365
                  
                  
                  
                  38.4
                  %
                  
                  
                  57,646
                  
                  
                  
                  40.6
                  %
                  
                  
                  60,523
                  
                  
                  
                  43.2
                  %Goodwill
      impairment
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  19,100
                  
                  
                  
                  13.5
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %Operating
      loss
                  
                  
                  (1,608
                  )
                  
                  
                  (3.4
                  )%
                  
                  
                  (1,549
                  )
                  
                  
                  (2.5
                  )%
                  
                  
                  (25,924
                  )
                  
                  
                  (18.3
                  )%
                  
                  
                  (6,630
                  )
                  
                  
                  (4.7
                  )%Interest
      expense, net
                  
                  
                  337
                  
                  
                  
                  0.7
                  %
                  
                  
                  436
                  
                  
                  
                  .7
                  %
                  
                  
                  1,186
                  
                  
                  
                  0.8
                  %
                  
                  
                  1,703
                  
                  
                  
                  1.2
                  %Loss
      before income tax provision
                  
                  
                  (1,945
                  )
                  
                  
                  (4.1
                  )%
                  
                  
                  (1,985
                  )
                  
                  
                  (3.3
                  )%
                  
                  
                  (27,110
                  )
                  
                  
                  (19.1
                  )%
                  
                  
                  (8,333
                  )
                  
                  
                  (5.9
                  )%Income
      tax provision
                  
                  
                  24
                  
                  
                  
                  0.0
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  65
                  
                  
                  
                  0.0
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %Net
      loss
                  
                  
                  (1,969
                  )
                  
                  
                  (4.1
                  )%
                  
                  
                  (1,985
                  )
                  
                  
                  (3.3
                  )%
                  
                  
                  (27,175
                  )
                  
                  
                  (19.1
                  )%
                  
                  
                  (8,333
                  )
                  
                  
                  (5.9
                  )%Less:
      Preferred stock dividends
                  
                  
                  151
                  
                  
                  
                  
                  
                  
                  
                  141
                  
                  
                  
                  
                  
                  
                  
                  432
                  
                  
                  
                  
                  
                  
                  
                  141Net
      loss applicable to common shareholders
                  
                  $
                  (2,120
                  )
                  
                  
                  
                  
                  
                  $
                  (2,126
                  )
                  
                  
                  
                  
                  
                  $
                  (27,607
                  )
                  
                  
                  
                  
                  
                  $
                  (8,474
                  )







(1)
            Only
      includes historical information for the wholesale division for the three
      months ended April 26, 2008 and not for the first six months of fiscal
      year 2008.  See Note 2 to the consolidated financial statements
      contained elsewhere in this report.




Net
Sales




Net sales
for the three months ended April 25, 2009 decreased to $46,766,000 as
compared to $60,841,000 for the three months ended April 26,
2008.  Net sales for the nine months ended April 25, 2009 increased to
$141,847,000 as compared to $140,140,000 for the nine months ended April 26,
2008.  Net sales for the three and nine months ended April 25, 2009
and April 26, 2008 were comprised of retail and wholesale sales as follows (in
thousands):




Three Months Ended
                    
                    
                    Nine Months EndedApril 25,
                        2009
                    
                    
                    April 26,
                        2008
                    
                    
                    Increase/
                        (Decrease)
                    
                    
                    April 25,
                        2009
                    
                    
                    April 26,
                        2008(1)
                    
                    
                    Increase/
                        (Decrease)Net sales:Retail
      Stores
                    
                    $
                    24,550
                    
                    
                    $
                    24,314
                    
                    
                    $
                    236
                    
                    
                    $
                    70,087
                    
                    
                    $
                    74,514
                    
                    
                    $
                    (4,427
                    )Retail
      Direct (catalog and Internet)
                    
                    
                    14,847
                    
                    
                    
                    16,235
                    
                    
                    
                    (1,388
                    )
                    
                    
                    40,791
                    
                    
                    
                    45,334
                    
                    
                    
                    (4,543
                    )Total
      retail
                    
                    
                    39,397
                    
                    
                    
                    40,549
                    
                    
                    
                    (1,152
                    )
                    
                    
                    110,878
                    
                    
                    
                    119,848
                    
                    
                    
                    (8,970
                    )Total
      wholesale
                    
                    
                    7,369
                    
                    
                    
                    20,292
                    
                    
                    
                    (12,923
                    )
                    
                    
                    30,969
                    
                    
                    
                    20,292
                    
                    
                    
                    10,677Total
      net sales
                    
                    $
                    46,766
                    
                    
                    $
                    60,841
                    
                    
                    $
                    (14,075
                    )
                    
                    $
                    141,847
                    
                    
                    $
                    140,140
                    
                    
                    $
                    1,707


18





(1)
            Only
      includes historical information for the wholesale division for the three
      months ended April 26, 2008 and not for the first six months of fiscal
      year 2008.  See Note 2 to the consolidated financial statements
      contained elsewhere in this report.




The decrease in net sales for the three
months ended April 25, 2009 as compared to the three months ended April 26, 2008
was primarily due to a reduction in wholesale net sales and,
to a lesser extent, a reduction in Direct retail net sales, which are comprised
of sales from our catalog and website operations.  The decrease in
wholesale net sales related primarily to a $13,131,000 decrease in sales to
Walmart, which is the result of Walmart shifting its focus to product categories
that differ from the main product categories that we historically have presented
to them and that Walmart has historically purchased from us, as well as Walmart
producing its own merchandise for sale to its customers and selecting competing
vendors.  We are working to develop new products to accommodate these
business changes and that appeal to the Walmart customers; however, we cannot be
assured that our sales to Walmart will return to historical
levels.  The decrease in Direct retail net sales by $1,388,000, or
8.5%, for the three months ended April 25, 2009 as compared to the three months
ended April 26, 2008 was primarily due to the transition to our new
website.  In addition,




·
            Total
      store sales increased by $236,000, or 1.0%, for the three months ended
      April 25, 2009 as compared to the three months ended April 26,
      2008.




·
            Comparable
      store sales increased by $95,000, or 0.4%, for the three months ended
      April 25, 2009 as compared to the three months ended April 26,
      2008.  Comparable store sales are defined as net sales for
      stores that have been open for at least one complete
  year.




The increase in net sales for the nine
months ended April 25, 2009 as compared to the nine months ended April 26, 2008
was primarily due to the addition of a full nine months of wholesale net sales
for the fiscal 2009 nine month period as compared to the addition of three
months of wholesale net sales following the consummation of the merger for
the fiscal 2008 nine month period, which was partially offset by a decrease
in retail net sales.  This decrease was primarily due to a decrease in
consumer spending resulting from the challenging macroeconomic
environment.  In addition,




·
            Total
      store sales decreased by $4,427,000, or 5.9%, for the nine months ended
      April 25, 2009 as compared to the nine months ended April 26,
      2008.




·
            Comparable
      store sales decreased by $4,499,000, or 6.5%, for the nine months ended
      April 25, 2009 as compared to nine months ended April 26,
      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 $4,543,000, or 10.0%, for the nine months
      ended April 25, 2009 as compared to the nine months ended April 26,
      2008.




The following chart, which is included
for comparative purposes only, includes the wholesale division’s net sales for
the three and nine months ended April 25, 2009 and April 26,
2008.  The wholesale division’s net sales that are included in the
consolidated financial statements contained elsewhere in this report only
include the three and nine months ended April 25, 2009 and the three months
ended April 26, 2008 and do not include the first six months of fiscal 2008 ($
in thousands):




Three Months Ended
                      
                      
                      Nine Months EndedApril 25,
                          2009
                      
                      
                      April 26,
                          2008
                      
                      
                      Increase/
                          (Decrease)
                      
                      
                      April 25,
                          2009
                      
                      
                      April 26,
                          2008
                      
                      
                      Increase/
                          (Decrease)Net Sales:Walmart
                      
                      $
                      1,471
                      
                      
                      $
                      14,602
                      
                      
                      $
                      (13,131
                      )
                      
                      $
                      10,521
                      
                      
                      $
                      29,682
                      
                      
                      $
                      (19,161
                      )All
      other U.S.
                      
                      
                      5,825
                      
                      
                      
                      5,413
                      
                      
                      
                      412
                      
                      
                      
                      19,446
                      
                      
                      
                      18,050
                      
                      
                      
                      1,396Total
      U.S. customers
                      
                      
                      7,296
                      
                      
                      
                      20,015
                      
                      
                      
                      (12,719
                      )
                      
                      
                      29,967
                      
                      
                      
                      47,732
                      
                      
                      
                      (17,765
                      )Canada
                      
                      
                      73
                      
                      
                      
                      277
                      
                      
                      
                      (204
                      )
                      
                      
                      1,002
                      
                      
                      
                      730
                      
                      
                      
                      272Total
                      
                      $
                      7,369
                      
                      
                      $
                      20,292
                      
                      
                      $
                      (12,923
                      )
                      
                      $
                      30,969
                      
                      
                      $
                      48,462
                      
                      
                      $
                      (17,493
                      )




19




The wholesale division’s backlog of
open orders by customer as of April 25, 2009 and April 26, 2008 was as follows
($ in thousands):




Customer
                
                April 25, 2009
                
                
                April 26, 2008Walmart
                
                $
                177
                
                
                
                3.2
                %
                
                $
                4,128
                
                
                
                28.0
                %All
      other U.S. customers
                
                
                5,129
                
                
                
                93.2
                %
                
                
                9,879
                
                
                
                67.0
                %Total
      U.S. customers
                
                
                5,306
                
                
                
                96.4
                %
                
                
                14,007
                
                
                
                95.0
                %Canada
                
                
                197
                
                
                
                3.6
                %
                
                
                728
                
                
                
                5.0
                %Total
                
                $
                5,503
                
                
                
                100.0
                %
                
                $
                14,735
                
                
                
                100.0
                %




The backlog of orders was $5,503,000
as of April 25, 2009 and $14,735,000 as of April 26, 2008.  Orders are
booked upon receipt.  Our open order position with Walmart as of April
25, 2009 was $177,000 as compared to $4,128,000 at April 26,
2008.  The reduction in the Walmart open orders is the result of
Walmart shifting its focus to product categories that differ from the main
product categories that we historically have presented to them and that Walmart
has historically purchased from us, as well as Walmart producing its own
merchandise for sale to its customers and selecting competing
vendors.  We are working to develop new products to accommodate these
business changes and appeal to their customers; however, we cannot be assured
that our sales to Walmart will return to historical levels.  The open
orders for all other U.S. customers at April 25, 2009 was $5,129,000 as compared
to $9,879,000 at April 26, 2008, which is the result of a decrease in consumer
spending resulting from the challenging macroeconomic environment, as well as
our wholesale division’s customers sourcing and producing merchandise themselves
and selecting competing vendors.  These 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 these customers producing
products themselves and selecting vendors with branding capabilities are
material trends that could adversely affect our sales in the
future.




Gross
Profit




The gross
margin (gross profit as a percentage of net sales) for the three and nine months
ended April 25, 2009 was 38.2% and 35.8% as compared to 35.9% and 38.5% for the
three and nine months ended April 26, 2008.  The increase for the
three months ended April 25, 2009 was due to a higher gross margin of 41.8% for
the retail division, partially offset by a lower gross margin 18.8% for the
wholesale division, as compared to a gross margin for the retail and wholesale
divisions of 39.6% and 28.4%, respectively, for the three months ended April 26,
2008.  The decrease for the nine months ended April 25, 2009 was the
result of a lower gross margin for both the retail and wholesale
divisions.  The gross margin for the retail and wholesale divisions
was 38.8% and 25.3% for the nine months ended April 25, 2009 as compared to
40.2% and 28.4% for the nine months ended April 26, 2008.  The decline
in the gross margin for the wholesale division was due to an increase in
closeout sales, as well as lower sales for the three-month period, which
resulted in fixed manufacturing costs representing a higher percentage of
sales.




The
largest contributors to the changes in the gross margin for the retail division
were the following:




·
            Product
      costs as a percentage of sales decreased by 1.4 percentage points and
      increased by 0.1 percentage points, respectively, for the three and nine
      months ended April 25, 2009 as compared to the three and nine months
      ended April 26, 2008.  The improvement for the three months
      ended April 25, 2009 was the result of lower markdowns taken during the
      period as compared to the three months ended April 26,
    2008.




·
            Occupancy
      costs, which consist of rent, common area maintenance, utilities and real
      estate taxes, decreased by $296,000 for the three months ended April 25,
      2009 as compared to the three months ended April 26, 2008; as a percentage
      of sales, occupancy costs decreased by 0.4 percentage
      points.  Occupancy costs decreased by $284,000 for the nine
      months ended April 25, 2009 as compared to the nine months ended April 26,
      2008; however, as a percentage of sales, occupancy costs increased by 0.8
      percentage points as a result of lower retail sales.  The
      decrease in occupancy costs for the three and nine months ended April 25,
      2009 is attributable to reductions in real estate management, repair and
      maintenance costs and other related expenses, partially offset by an
      increase in rent expense and common area maintenance
  costs.




·
            Freight
      costs decreased by $116,000 and $447,000, respectively, for the three and
      nine months ended April 25, 2009 as compared to the three and nine months
      ended April 26, 2008.  As a percentage of sales, freight costs
      decreased by 0.1 and 0.2 percentage points for the three and nine months
      ended April 25, 2009, respectively.  This decrease was due to
      reductions in direct shipments and in the number of replenishment
      shipments sent to our retail
stores.




20




·
            Depreciation
      increased by $37,000 and $248,000 for the three and nine months ended
      April 25, 2009 as compared to the three and nine months ended April 26,
      2008.  As a percentage of sales, depreciation increased by 0.1 and
      0.4 percentage points for the three and nine months ended April 25, 2009,
      respectively, as compared to the three and nine months ended April 26,
      2008.  These increases were due to additional depreciation associated
      with the construction costs for new and remodeled stores opened in fiscal
      year 2008.




Selling,
General and Administrative Expenses




Three Months Ended
                
                
                Nine Months EndedSelling, general and
                    administrative expenses:
                
                April 25,
                    2009
                
                
                April 26,
                    2008
                
                
                Increase/
                    (Decrease)
                
                
                April 25,
                    2009
                
                
                April 26,
                    2008(1)
                
                
                Increase/
                    (Decrease)Retail
                
                $
                15,218
                
                
                $
                16,980
                
                
                $
                (1,762
                )
                
                $
                43,649
                
                
                $
                54,138
                
                
                $
                (10,489
                )Wholesale
                
                
                3,567
                
                
                
                5,365
                
                
                
                (1,798
                )
                
                
                12,300
                
                
                
                5,365
                
                
                
                6,935Unallocated
      corporate executive office
                
                
                674
                
                
                
                1,020
                
                
                
                (346
                )
                
                
                1,697
                
                
                
                1,020
                
                
                
                677Total
                
                $
                19,459
                
                
                $
                23,365
                
                
                $
                (3,906
                )
                
                $
                57,646
                
                
                $
                60,523
                
                
                $
                (2,877
                )




(1)
            Only
      includes historical information for the wholesale division for the three
      months ended April 26, 2008 and not for the first six months of fiscal
      year 2008.  See Note 2 to the consolidated financial statements
      contained elsewhere in this report.




Three Months Ended April 25, 2009
Compared to Three Months Ended April 26, 2008




Selling,
general and administrative expenses for the three months ended April 25,
2009 decreased by $3,906,000 to $19,459,000, or 41.6% of sales, from
$23,365,000, or 38.4% of sales, for the three months ended April 26,
2008.  The decrease was primarily the result of decreases in selling,
general and administrative expenses for the retail division, wholesale division
and corporate executive office.




The
retail division’s selling, general and administrative expenses decreased by
$1,762,000 to $15,218,000 for the three months ended April 25, 2009 from
$16,980,000 for the three months ended April 26, 2008.  This decrease
resulted from the following:




·
            Expenses
      related to the retail division’s overhead decreased by
      $1,162,000.  This decrease was primarily due
  to:




·
            a
      $382,000 decrease in salaries and salary related costs, which resulted
      from a reduction in personnel and bonuses that were paid in the prior
      year in accordance with three employees’ equity incentive agreements in
      connection with the merger (including the Chief Executive Officer of the
      retail division);




·
            a
      $249,000 decrease in insurance expense as a result of the purchase in
      the prior year of additional policies required upon the consummation of
      the merger;




·
            a
      $175,000 reduction in professional fees, which resulted primarily from
      higher fees in the prior year for audit and tax related
      services;




·
            a
      $147,000 reduction in stock compensation expense as a result of the
      immediate vesting of a portion of stock options granted in the prior
      year.  These grants were in accordance with three employees’
      equity incentive agreements, which became effective upon the consummation
      of the merger (including the Chief Executive Officer of the retail
      division); and




·
            a
      $116,000 reduction in consulting fees, which resulted from hiring
      permanent personnel to replace third party
  consultants.




21




·
            Store
      selling, general and administrative expenses decreased by $204,000, which
      was primarily due to decreases in (1) store support costs of $181,000 due
      to reductions in personnel, fewer district sales meetings and
      corresponding reductions in travel expenses and (2) new store costs of
      $90,000, which was the result of opening new stores in the prior
      year.




·
            Direct
      selling, general and administrative expenses decreased by $320,000, which
      was primarily due to a $167,000 decrease in marketing expenses
      resulting from lower Internet related sales and a $149,000 decrease in
      salary related costs resulting from a reduction in staff at our call
      center.




The
wholesale division’s selling, general and administrative expenses decreased by
$1,798,000 to $3,567,000 for the three months ended April 25, 2009 from
$5,365,000 for the three months ended April 26, 2008.  This decrease
was primarily due to:




·
            a
      $555,000 decrease in salary and salary related costs, which resulted from
      a reduction in personnel;




·
            a
      $286,000 decrease in shipping and shipping related costs as a result of
      lower sales;




·
            a
      $98,000 decrease in employee benefit costs as a result of a reduction in
      personnel; and




·
            a
      $454,000 decrease in stock compensation expense primarily as a result of
      the immediate vesting of stock options granted in the prior year in
      connection with the merger.




The
unallocated expenses related to the corporate executive office also
decreased by $346,000 to $674,000 for the three months ended April 25, 2009 from
$1,020,000 for the three months ended April 26, 2008.  These expenses
include costs associated with our Executive Chairman, Chief Executive Officer,
Chief Financial Officer and our Board of Directors.  This reduction
was primarily related to a decrease in stock compensation expense of $396,000
primarily as a result of the immediate vesting in the prior year in connection
with the merger of (i) stock options granted to Performance Enhancement
Partners, LLC (of which our former Executive Chairman is the sole member) and
our Chief Financial Officer and (ii) restricted stock issued to our Chief
Financial Officer.




Nine
Months Ended April 25, 2009 Compared to Nine Months Ended April 26,
2008




Selling,
general and administrative expenses for the nine months ended April 25,
2009 decreased by $2,877,000 to $57,646,000, or 40.6% of sales, from
$60,523,000, or 43.2% of sales, for the nine months ended April 26,
2008.  For the nine months ended April 26, 2008, the selling, general
and administrative expenses for the wholesale division and the unallocated
expenses related to the corporate executive office only include the expenses for
the three months ended April 26, 2008 and do not include the selling, general
and administrative expenses for the first six months of fiscal year 2008, which
were approximately $9,756,000 for the wholesale division and $1,023,000 for the
corporate executive office and are provided for comparative purposes
only.




The
decrease in selling, general and administrative expenses for the nine
months ended April 25, 2009 as compared to the nine months ended April 26, 2008,
as reflected in the consolidated financial statements contained elsewhere in
this report, was primarily due to a decrease in selling, general and
administrative expenses for the retail division, partially offset by the
addition of selling, general and administrative expenses for the wholesale
division and corporate executive office.




The
retail division’s selling, general and administrative expenses decreased by
$10,489,000 to $43,649,000 for the nine months ended April 25, 2009 from
$54,138,000 for the nine months ended April 26, 2008.  This decrease
resulted from the following:




·
            Expenses
      related to the retail division’s overhead decreased by
      $3,499,000.  This decrease was primarily due
  to:




·
            a
      $1,371,000 reduction in professional fees, which resulted primarily from
      higher fees in the prior year related to accounting services
      provided in connection with the accelerated audit of the FOH
      Holdings’ fiscal 2007 year end financial statements and higher audit and
      tax related fees in the prior year;




·
            a
      $835,000 decrease in salaries and salary related costs, which resulted
      from a reduction in personnel as well as bonuses that were paid in the
      prior year in accordance with three employees’ equity incentive agreements
      in connection with the merger (including the Chief Executive Officer of
      the retail division);




22




·
            a
      $654,000 reduction in consulting fees, which resulted from hiring
      permanent personnel to replace third party consultants;
  and




·
            a
      $334,000 decrease in insurance expense as a result of the purchase in
      the prior year of additional policies required upon the consummation of
      the merger.




·
            Store
      selling, general and administrative expenses decreased by $1,566,000,
      which was primarily due to decreases in (1) store salaries and
      salary-related costs of $588,000, which is the result of reductions in
      store staffing requirements, and decreases in earned incentives due to
      lower sales, (2) store support costs of $489,000 due to reductions in
      personnel, fewer district sales meetings and corresponding reductions in
      travel expenses, (3) in-store advertising costs of $289,000, and (4)
      credit card fees of $170,000 due to lower
sales.




·
            Direct
      selling, general and administrative expenses decreased by $3,818,000,
      primarily as a result of a $1,729,000 reduction in catalog costs, a
      $399,000 decrease in costs relating to our call center and a $373,000
      decrease in equipment maintenance costs.  We also settled a
      lawsuit related to the unsuccessful launch of a new website platform in
      fiscal year 2008, pursuant to which we received a lump sum cash payment
      and other non-cash consideration totaling $756,000.  The
      reduction in catalog costs was due to a 12% decrease in circulation
      compared to the same period in the prior year.  The decrease in the
      call center costs was due to a reduction in staffing requirements related
      to lower sales and the decrease in equipment maintenance costs was due to
      the maintenance of one website platform instead of two separate platforms
      in the prior year as a result of an unsuccessful transition to a new
      platform.




·
            Brand
      marketing expenses decreased by $1,608,000 to $556,000.  The
      decrease was primarily due to brand marketing expenses incurred in
      connection with a fashion show and a charity auction that were held in the
      first quarter of fiscal year 2008 and not held in the comparable period in
      fiscal year 2009. Brand marketing is used to increase brand awareness
      through the announcement of new product launches, the arrival of seasonal
      collections and the opening of new stores.  This is accomplished
      primarily through public relations activities, including press releases
      and media events.




The
wholesale division’s selling, general and administrative expenses increased by
$6,935,000 to $12,300,000 for the nine months ended April 25, 2009 from
$5,365,000 for the nine months ended April 26, 2008.  This increase is
the result of having nine months of expenses in the current period as compared
to only three months of expenses in the same period in the prior
year.




The
unallocated expenses related to the corporate executive office also
increased by $677,000 to $1,697,000 for the nine months ended April 25, 2009
from $1,020,000 for the nine months ended April 26, 2008.  These
expenses include costs associated with our Chief Executive Officer, Chief
Financial Officer, former Executive Chairman and our Board of
Directors.  This increase is the result of having nine months of
expenses in the current period as compared to only three months of expenses in
the same period in the prior year.




Goodwill
Impairment




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




Interest
Expense, Net




During
the three and nine months ended April 25, 2009, net interest expense was
$337,000 and $1,186,000 as compared to $436,000 and $1,703,000 for the three and
nine months ended April 26, 2008.  These decreases are the result of
lower interest rates as compared to the prior year, partially offset by a higher
average loan balance.




23




Income
Tax Provision




Our
income tax provision for the three and nine months ended April 25, 2009
represents estimated 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 current period
loss.  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.  Due to the merger, we may have had a change in control
under Section 382 of the Internal Revenue Code with respect to the Movie Star
entity and, therefore, the pre-merger net operating loss carryforwards of Movie
Star may be subject to annual limitations.




Liquidity
and Capital Resources




Cash
Used in Operations




Net cash
provided by operating activities for the nine months ended April 25, 2009 was
$2,679,000, resulting primarily from the following:




·
            non-cash
      expenses of $4,436,000 for depreciation and
  amortization;




·
            non-cash
      stock-based compensation expense of
$637,000;




·
            non-cash
      accrued interest on long term related party debt of
    $575,000;




·
            a
      non-cash expense for deferred rent and lease incentives of
      $543,000;




·
            a
      decrease in accounts receivable of $1,841,000, which was due to lower
      wholesale sales for the last month (April) of the nine months
      ended April 25, 2009 as compared to the last month (July) of the year
      ended July 26, 2008;




·
            a
      decrease in merchandise inventories of $996,000 due to normal seasonal
      fluctuations in the finished goods inventory
  levels;




·
            a
      decrease in prepaid expenses and other current assets of $746,000, which
      was primarily due to decreases in prepaid direct response advertising
      costs and prepaid insurance;




·
            an
      increase in accounts payable and other accrued expenses of $599,000 due to
      normal seasonal fluctuations; and




·
            $575,000
      received from landlords for tenant improvement
  allowances.




These improvements
in cash flow were partially offset by a net loss of $8,075,000 (excluding a
non-cash impairment to goodwill of $19,100,000) for the nine months ended April
25, 2009.




Cash
Used in Investing Activities




Net cash
used in investing activities for the nine months ended April 25, 2009 was
$3,682,000, which resulted primarily from expenditures for new stores of
$1,450,000, a store relocation of $374,000, our new website of $1,053,000 and
various software applications of $393,000.




Cash
Provided by Financing Activities




Net cash
provided by financing activities for the nine months ended April 25, 2009 was
$848,000, resulting primarily from net borrowings under our revolving credit
facility of $893,000.




Revolving
Credit Facility




On
January 28, 2008, in connection with the merger, we and our U.S. subsidiaries
(collectively, the “borrowers”) entered into an amended and restated senior
credit facility (the “Facility”) that amended the existing revolving credit
facility (“Old Facility”) between FOH Holdings and Wells Fargo Retail Finance
II, LLC (“Senior Lender”).  The Facility extended the maturity date of
the Old Facility to January 28, 2012.




The
Facility is for a maximum amount of $50 million comprised of a $25 million line
of credit with a $15 million sub-limit for letters of credit, and up to an
additional $25 million commitment in increments of $5 million at our option so
long as 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.  On November 4, 2008, the
borrowers utilized the accordion feature under the Facility to increase the
current borrowing limit under the Facility from $25 million to $30
million.  In utilizing the accordion feature, the borrowers’ minimum
availability reserve under the Facility 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.  All other material terms of the
Facility remain unchanged.




24




Interest
accrues at an agreed to reference rate, which shall be, at the borrowers’
election, either the Wells Fargo prime rate less 25 basis points or LIBOR plus
150 basis points.  Interest is payable monthly, in
arrears.  In addition, the Facility provides for certain customary
fees to be paid, which include (i) a 25 basis point fee on the amount of any
increase in the Facility above $25 million, (ii) a 25 basis point fee on any
unused portion of the Facility, (iii) a $2,000 monthly service fee and (iv)
letter of credit fees on stand-by letters of credit and documentary letters of
credit.




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 April
25, 2009, we were in compliance with our minimum availability reserve
requirements.




Long
Term Debt – Related Party




As of
April 25, 2009, we had $13,136,000 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 referred to herein as “Fursa”).  This debt is referred
to as “Tranche C Debt.”  In connection with the merger and the
amendment of the Old Facility with the Senior Lender, Fursa extended the
maturity date of the Tranche C Debt to 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




On
January 28, 2008, in connection with the merger, we issued an aggregate of
3,629,325 shares of our Series A 7.5% Convertible Preferred Stock to Fursa in
exchange for a $7,500,000 portion of the debt owed by FOH Holdings and its
subsidiaries.  The Series A Preferred Stock 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 April 25, 2009, we had accrued
dividends of $714,000.




Future
Financing Requirements




For the
nine months ended April 25, 2009, our working capital decreased by $6,371,000 to
$518,000, primarily due to our loss from operations.




Our sole
source of external financing consists of available borrowings under the
Facility.  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 2009.  However, in order to meet our future operating
needs beyond fiscal year 2009, we are exploring additional financing, strategic
relationships and other financial arrangements, including obtaining additional
funding from our largest shareholders.  This additional financing
might not be available on acceptable terms, or at all.  Although we
are working on a number of different strategies, we currently do not have any
agreements in place to secure such financing.  If we cannot raise
funds on acceptable terms, we may be required to curtail our operations
significantly, which could adversely affect our business.




As of
April 25, 2009, we had capital expenditures of $3,682,000, primarily for new
store openings and remodelings, as well as our new enhanced website and other
general corporate expenditures.  We do not expect that our capital
expenditures will exceed $4,000,000 for fiscal year 2009.




Off
Balance Sheet Arrangements




We are
not a party to any material off-balance sheet financing arrangements except as
described in Note 7 “Financing” included in the Notes to the consolidated
financial statements contained elsewhere in this report.




Effect
of New Accounting Standards




See Note 4, “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
impact us.




25




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) as orders from retail customers are typically placed
four to five months prior to the peak retail selling periods.




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




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 revolving credit
facility.  Interest accrues at an agreed to reference rate, which
shall be, at our election, either the Wells Fargo prime rate less 25 basis
points or LIBOR plus 150 basis points.  Outstanding borrowings were at
the rate of 3.0% at April 25, 2009.  For the nine months ended
April 25, 2009, borrowings under the revolving credit facility peaked at
$26,386,000 and the average borrowing during the period was approximately
$15,771,000.




An
increase in the interest rate of 100 basis points would have increased the
interest on the revolving credit facility borrowings by approximately $118,000
for the nine months ended April 25, 2009.




Foreign
Currency Risks




We enter into a significant amount of
purchase obligations outside of the United States, all of which are negotiated
and settled in U.S. dollars.  Therefore, on our current open purchase
order position we have no exposure to foreign currency exchange
risks.  However, fluctuations in foreign currency rates could 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 principal executive
officer and principal financial and accounting officer, as appropriate to allow
timely decisions regarding required disclosure.
 26


As
required by Rules 13a-15 and 15d-15 under the Exchange Act, our principal
executive officer and principal financial and accounting officer performed an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of April 25, 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 principal executive officer and principal financial and
accounting officer and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of our financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States.  Internal control over financial reporting includes
policies and procedures that pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; provide reasonable assurance that transactions are
recorded as necessary to permit preparation of our financial statements in
accordance with generally accepted accounting principles in the United States,
and that our receipts and expenditures are being made only in accordance with
the authorization of our board of directors and management; and provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on our financial statements.


Changes
in Internal Control Over Financial Reporting


During
the three months ended April 25, 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.
 27




PART
II                      OTHER
INFORMATION




ITEM
1 – LEGAL PROCEEDINGS




In November 2008, Frederick’s of
Hollywood, Inc. and MarketLive, Inc., a California corporation, participated in
a mediation in an attempt to resolve the claims brought in May 2008 in the
Superior Court of California, County of Los Angeles by Frederick’s of Hollywood
against MarketLive in connection with MarketLive’s alleged failure to create an
e-commerce platform for Frederick’s of Hollywood that worked properly and had
appropriate security, and MarketLive’s related cross-claims.  In
December 2008, the parties entered into a confidential settlement agreement,
without either party admitting liability, pursuant to which Frederick’s of
Hollywood received a lump sum cash payment and other non-cash
consideration.  The case was subsequently dismissed with
prejudice.




We are
involved from time to time in litigation incidental to our
business.  We believe that the outcome of any other 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 24, 2008.  Please refer to
this section for disclosures regarding the risks and uncertainties in our
business.




ITEM
4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




On April 22, 2009, we held our Annual
Meeting of Shareholders in New York City.  At the meeting, the nine
directors nominated for election were re-elected to serve for a one-year term
and until their successors are elected and qualified, receiving the number of
votes as follows:





Name
                    
                    Votes For
                    
                    Authority WithheldPeter
      Cole
                    
                    24,820,257
                    
                    533,244John
      L. Eisel
                    
                    24,845,143
                    
                    508,358William
      F. Harley
                    
                    25,067,348
                    
                    286,153Linda
      LoRe
                    
                    25,067,171
                    
                    286,330Thomas
      J. Lynch
                    
                    25,078,671
                    
                    274,830Thomas
      Rende
                    
                    23,656,387
                    
                    1,697,114Michael
      Salberg
                    
                    24,845,143
                    
                    508,358Joel
      Simon
                    
                    24,762,011
                    
                    591,490Milton
      J. Walters
                    
                    24,993,386
                    
                    360,115




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


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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:
      June 8, 2009
                By:
                /s/ Thomas J. LynchTHOMAS
      J. LYNCHChief
      Executive Officer andPrincipal
      Executive OfficerDate:
      June 8, 2009
                By:
                /s/ Thomas RendeTHOMAS
      RENDEChief
      Financial Officer andPrincipal
      Accounting Officer


29