Attached files

file filename
EX-2.4 - EXHIBIT 2.4 - FGX International Holdings LTDa2195311zex-2_4.htm
EX-10.3 - EXHIBIT 10.3 - FGX International Holdings LTDa2195311zex-10_3.htm
EX-10.2 - EXHIBIT 10.2 - FGX International Holdings LTDa2195311zex-10_2.htm
EX-10.4 - EXHIBIT 10.4 - FGX International Holdings LTDa2195311zex-10_4.htm
EX-31.2 - EXHIBIT 31.2 - FGX International Holdings LTDa2195311zex-31_2.htm
EX-10.7 - EXHIBIT 10.7 - FGX International Holdings LTDa2195311zex-10_7.htm
EX-32.1 - EXHIBIT 32.1 - FGX International Holdings LTDa2195311zex-32_1.htm
EX-10.6 - EXHIBIT 10.6 - FGX International Holdings LTDa2195311zex-10_6.htm
EX-10.8 - EXHIBIT 10.8 - FGX International Holdings LTDa2195311zex-10_8.htm
EX-10.1 - EXHIBIT 10.1 - FGX International Holdings LTDa2195311zex-10_1.htm
EX-10.5 - EXHIBIT 10.5 - FGX International Holdings LTDa2195311zex-10_5.htm
EX-31.1 - EXHIBIT 31.1 - FGX International Holdings LTDa2195311zex-31_1.htm
EX-32.2 - EXHIBIT 32.2 - FGX International Holdings LTDa2195311zex-32_2.htm

Use these links to rapidly review the document
TABLE OF CONTENTS

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 3, 2009

or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                            

Commission File Number: 001-33760

FGX International Holdings Limited
(Exact name of Registrant as specified in its charter)

British Virgin Islands
(State or other jurisdiction of incorporation)
  98-0475043
(IRS Employer Identification Number)

500 George Washington Highway
Smithfield, RI 02917

(Address of principal executive offices, including zip code)

(401) 231-3800
(Registrant's telephone number, including area code)

        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. ý Yes    o 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). o Yes    o 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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). o Yes    ý No

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

        The number of ordinary shares outstanding as of November 5, 2009 was 22,124,566.


Table of Contents


Forward-Looking Statements

        This report and the information incorporated by reference in it include forward-looking statements. These include, but are not limited to, statements about our expectations, hopes, beliefs, intentions or strategies regarding the future, as well as statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions. They may refer, without limitation, to retail and brand initiatives, upcoming product releases, operational improvements, market growth or acceptance of our products, and future revenue, costs, results of operations, or profitability. The words "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "possible," "potential," "predict," "project," "should," "would" and similar expressions may, but are not necessary to, identify forward-looking statements.

        The forward-looking statements contained or incorporated by reference in this report are based on our current expectations and beliefs concerning future developments and their potential effects on us and speak only as of the date of this report. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other factors that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to: the effect of current adverse economic conditions and low levels of consumer confidence and the resulting adverse impact on consumer discretionary spending, which could reduce our sales; adverse changes in our customers' inventory and working capital policies; the bankruptcy or other lack of commercial success of one or more of our significant customers; the Company's ability to successfully integrate acquired businesses including Corinne McCormack, Inc. and Eye-Bar Inc.; the actual charges incurred for product returns and markdowns related to the divestiture of the costume jewelry business may be greater than expected; we or others may discover that our products must be recalled because of defects; unexpected product returns and related claims pertaining to current or prior periods; the concentration of manufacturing of our products in China, which increases our vulnerability to disruptions in that region; interruptions of supply from our Asian product manufacturers; political instability or changing conditions in manufacturing or transportation services in foreign countries; other risks associated with our international operations, including foreign currency exchange rate fluctuations and the impact of quotas, tariffs, or other restrictions on the importation or exportation of our products; a material reduction, cessation, or postponement of purchases by our customers; failure to comply with federal or state regulation of the distribution or sale of our products; the expense and uncertainty of the litigation process including the risk of an unfavorable result in current or future litigation; adverse interest rate fluctuations; our credit insurance does not cover all of our outstanding accounts receivable; unknown potential effects of outbreaks of communicable diseases, including the swine flu, on our business; and disruption due to weather, fire or other unforeseen circumstances in our principal distribution center, as well as those factors described or referred to under the heading "Risk Factors" below. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable law.

2


Table of Contents


FGX International Holdings Limited
Form 10-Q
Index

PART I—FINANCIAL INFORMATION

  4

ITEM 1.

 

Financial Statements

  4

 

Condensed Consolidated Balance Sheets at October 3, 2009 and January 3, 2009 (unaudited)

  4

 

Condensed Consolidated Statements of Operations for the three and nine months ended October 3, 2009 and October 4, 2008 (unaudited)

  5

 

Condensed Consolidated Statements of Cash Flows for the nine months ended October 3, 2009 and October 4, 2008 (unaudited)

  6

 

Notes to Condensed Consolidated Financial Statements

  7

ITEM 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  15

ITEM 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  24

ITEM 4.

 

Controls and Procedures

  25

PART II—OTHER INFORMATION

 
25

ITEM 1.

 

Legal Proceedings

  25

ITEM 1A.

 

Risk Factors

  25

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  25

ITEM 3.

 

Defaults Upon Senior Securities

  25

ITEM 4.

 

Submission of Matters to a Vote of Security Holders

  26

ITEM 5.

 

Other Information

  26

ITEM 6.

 

Exhibits

  26

SIGNATURES

  27

Exhibit List

  28

3


Table of Contents


PART I—FINANCIAL INFORMATION

        

ITEM 1.    Financial Statements.

        


FGX INTERNATIONAL HOLDINGS LIMITED

Condensed Consolidated Balance Sheets

October 3, 2009 and January 3, 2009

(unaudited, in thousands)

 
  October 3, 2009   January 3, 2009  

ASSETS

             

Current assets:

             
   

Cash

  $ 6,561   $ 2,097  
   

Accounts receivable, less allowances of $26,781 and $23,854 at October 3, 2009 and January 3, 2009, respectively

    33,434     50,746  
   

Inventories

    28,125     35,543  
   

Prepaid expenses and other current assets

    17,311     15,761  
   

Deferred tax assets

    16,678     16,013  
   

Current assets of discontinued operations

        4,253  
           
     

Total current assets

    102,109     124,413  

Property, plant and equipment, net

    16,481     20,543  

Other assets:

             
   

Goodwill

    45,684     44,928  
   

Intangible assets, net of accumulated amortization of $33,176 and $29,642 at October 3, 2009 and January 3, 2009, respectively

    65,322     68,856  
   

Other assets

    13,293     11,905  
   

Noncurrent assets of discontinued operations

        2,370  
           
     

Total assets

  $ 242,889   $ 273,015  
           

LIABILITIES AND SHAREHOLDERS' EQUITY

             

Current liabilities:

             
   

Revolving line of credit

  $ 28,000   $ 37,500  
   

Current maturities of long-term obligations

    17,016     15,199  
   

Accounts payable

    14,160     30,324  
   

Accrued expenses

    25,790     26,836  
   

Accrued income taxes

        6,005  
   

Current liabilities of discontinued operations

    4,617     2,494  
           
     

Total current liabilities

    89,583     118,358  
           

Long-term obligations, less current maturities

    64,815     77,863  

Deferred tax liabilities

    18,668     18,156  

Other long term liabilities

    14,766     15,284  

Commitments and contingencies (note 10)

             

Shareholders' equity:

             
 

FGX International Holdings Limited shareholders' equity Common stock, no par value. Authorized 101,000 shares; issued 22,886 shares and outstanding 22,123 shares at October 3, 2009 and January 3, 2009

         
   

Additional paid-in capital

    109,311     107,048  
   

Accumulated other comprehensive loss

    (2,417 )   (2,611 )
   

Accumulated deficit

    (51,276 )   (60,259 )
   

Treasury stock, at cost, 630 shares at October 3, 2009 and January 3, 2009

    (2,513 )   (2,513 )
           
       

Total FGX International Holdings Limited shareholders' equity

    53,105     41,665  
           
   

Noncontrolling interest

    1,952     1,689  
           
     

Total shareholders' equity

    55,057     43,354  
           
       

Total liabilities and shareholders' equity

  $ 242,889   $ 273,015  
           

See accompanying notes to condensed consolidated financial statements.

4


Table of Contents


FGX INTERNATIONAL HOLDINGS LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three and nine months ended October 3, 2009 and October 4, 2008

(unaudited, in thousands, except per share amounts)

 
  Three months ended   Nine months ended  
 
  October 3, 2009   October 4, 2008   October 3, 2009   October 4, 2008  

Net sales

  $ 60,580   $ 53,295   $ 194,541   $ 175,329  

Cost of goods sold

    24,646     22,395     86,052     78,207  
                   
   

Gross profit

    35,934     30,900     108,489     97,122  

Operating expenses:

                         
 

Selling expenses

    15,708     17,312     58,033     54,580  
 

General and administrative expenses

    6,910     5,879     20,954     18,706  
 

Amortization of acquired intangibles

    1,178     1,295     3,534     3,886  
                   
   

Operating income

    12,138     6,414     25,968     19,950  

Other income (expense):

                         
 

Interest expense

    (1,086 )   (1,478 )   (3,680 )   (4,700 )
 

Other income (expense), net

    91     (198 )   179     (144 )
                   
   

Income from continuing operations before income taxes

    11,143     4,738     22,467     15,106  

Income tax expense

    4,234     1,460     8,577     5,341  
                   
   

Income from continuing operations

    6,909     3,278     13,890     9,765  

Discontinued operations, net of tax

    (78 )   732     (4,644 )   788  
                   
   

Net income

    6,831     4,010     9,246     10,553  

Less: Net income attributable to noncontrolling interest

    131     103     262     370  
                   
   

Net income attributable to FGX International Holdings Limited

  $ 6,700   $ 3,907   $ 8,984   $ 10,183  
                   

Income from continuing operations attributable to FGX International Holdings Limited:

                         
 

Income from continuing operations

  $ 6,909   $ 3,278   $ 13,890   $ 9,765  
 

Less: Net income attributable to noncontrolling interest

    131     103     262     370  
                   
   

Income from continuing operations attributable to FGX International Holdings Limited

  $ 6,778   $ 3,175   $ 13,628   $ 9,395  
                   

Basic earnings per share:

                         
 

Income from continuing operations attributable to FGX International Holdings Limited

  $ 0.30   $ 0.15   $ 0.62   $ 0.44  
 

Discontinued operations, net of tax

        0.03     (0.21 )   0.04  
                   
 

Basic earnings per share attributable to FGX International Holdings Limited shareholders

  $ 0.30   $ 0.18   $ 0.41   $ 0.48  
                   

Diluted earnings per share:

                         
 

Income from continuing operations attributable to FGX International Holdings Limited

  $ 0.30   $ 0.15   $ 0.61   $ 0.44  
 

Discontinued operations, net of tax

      $ 0.03     (0.21 ) $ 0.04  
                   
 

Diluted earnings per share attributable to FGX International Holdings Limited shareholders

  $ 0.30   $ 0.18   $ 0.40   $ 0.48  
                   

Basic weighted average shares outstanding

   
22,123
   
21,171
   
22,123
   
21,225
 
                   

Diluted weighted average shares outstanding

    22,418     21,316     22,337     21,361  
                   

See accompanying notes to condensed consolidated financial statements.

5


Table of Contents


FGX INTERNATIONAL HOLDINGS LIMITED

Condensed Consolidated Statements of Cash Flows

Nine months ended October 3, 2009 and October 4, 2008

(unaudited, in thousands)

 
  Nine months ended  
 
  October 3, 2009   October 4, 2008  

Cash flows from operating activities:

             
 

Net income

  $ 9,246   $ 10,553  
   

Less: discontinued operations, net of tax

    (4,644 )   788  
           
 

Income from continuing operations

    13,890     9,765  
 

Adjustments to reconcile net income to net cash provided by operating activities:

             
   

Depreciation and amortization

    13,654     14,918  
   

Stock-based compensation

    2,263     1,709  
   

Deferred income taxes

    (148 )   (286 )
   

Loss on disposal of property, plant, and equipment

    296     368  
 

Changes in assets and liabilities:

             
   

Accounts receivable, net

    20,603     17,472  
   

Inventories

    7,752     (1,788 )
   

Prepaid expenses and other current assets

    (4,622 )   (3,091 )
   

Other assets

    (880 )   444  
   

Accounts payable

    (16,195 )   (6,389 )
   

Accrued expenses and other long-term liabilities

    (3,304 )   (6,268 )
   

Accrued income taxes

    (5,891 )   (999 )
 

Net cash provided by (used in) operating activities of discontinued operations

    4,058     (990 )
           
     

Net cash provided by operating activities

    31,476     24,865  

Cash flows from investing activities:

             
 

Purchases of property, plant and equipment

    (6,175 )   (10,070 )
 

Net cash provided by (used in) investing activities of discontinued operations

        (441 )
           
     

Net cash used in investing activities

    (6,175 )   (10,511 )
           

Cash flows from financing activities:

             
 

Net repayments under revolving line of credit

    (9,500 )   (10,000 )
 

Payments on long-term obligations

    (11,230 )   (5,468 )
 

Share repurchases

        (1,484 )
           
     

Net cash used in financing activities

    (20,730 )   (16,952 )
           

Effect of exchange rate changes on cash

    (107 )    
           
   

Net increase (decrease) in cash

    4,464     (2,598 )

Cash, beginning of period

    2,097     4,567  
           

Cash, end of period

  $ 6,561   $ 1,969  
           

See accompanying notes to condensed consolidated financial statements.

6


Table of Contents


FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1) Reporting Entity and Nature of Business

        FGX International Holdings Limited (the "Company") is a leading designer and marketer of non-prescription reading glasses and sunglasses with distribution primarily through mass retail channels, which include mass merchandisers, chain drug stores, chain grocery stores and variety stores in North America and the United Kingdom. The Company is incorporated as a business company under the laws of the British Virgin Islands.

        The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including only adjustments which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, operating results for the three and nine months ended October 3, 2009 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending January 2, 2010.

        The accompanying unaudited condensed consolidated financial statements reflect the reclassification of the Company's costume jewelry business as discontinued operations as a result of the decision in the second quarter of 2009 to divest that business.

        The Company has evaluated subsequent events through November 6, 2009, the date the accompanying financial statements were issued.

        The Company's accounting policies are the same as those described in Note 3 to the financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

        The Company's third quarter of 2009 included 13 weeks while the third quarter of 2008 included 14 weeks. Accordingly, the nine month period of 2009 included 39 weeks while the nine month period of 2008 included 40 weeks.

        The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

(2) Recent Accounting Pronouncements

        In June 2009, the FASB issued the FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles (the "ASC"). The ASC became the single official source of authoritative, nongovernmental U.S. GAAP. The ASC did not change GAAP but reorganizes the literature. The ASC is effective for interim and annual periods ending after September 15, 2009, and the Company adopted the ASC during the three months ended October 3, 2009.

        In August 2009, the FASB issued authoritative guidance regarding accounting and disclosures related to the fair value measurement of liabilities. The new guidance establishes valuation techniques

7


Table of Contents


FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

(2) Recent Accounting Pronouncements (Continued)


in circumstances in which a quoted price in an active market for the identical liability is not available. Additionally, it clarifies appropriate valuation techniques when restrictions exist that prevent the transfer of liabilities measured at fair value. Finally, it provides further guidance on the classification of liabilities measured at fair value within the fair value hierarchy. The new guidance is effective for interim periods ending after August 26, 2009. The adoption of the guidance did not have a material impact on the Company's results of operations or financial position.

(3) Discontinued Operations

        In the second quarter of 2009, the Company's Board of Directors voted to divest the costume jewelry business. The costume jewelry business qualified for held for sale treatment in the second quarter of 2009. The Company recorded pre-tax charges totaling $5.0 million, including estimated future product returns of $3.6 million, inventory write-downs of $0.8 million, display fixture write-offs of $0.3 million and other costs of $0.3 million related to the divestiture. The Company has presented the results of operations and financial position of this business in discontinued operations in the Consolidated Statements of Operations, Consolidated Balance Sheets and Consolidated Statements of Cash Flows for all periods presented. On July 23, 2009, the Company completed a sale of assets related to its costume jewelry business for consideration of approximately $1.3 million, and no significant costs are expected to be incurred in future periods.

        Summarized results of the Company's discontinued operations are as follows:

 
  Three Months Ended   Nine Months Ended  
 
  October 3, 2009   October 4, 2008   October 3, 2009   October 4, 2008  
 
  (in thousands)
 

Net sales

  $ 59   $ 5,808   $ 4,656   $ 14,562  
                   

Income (loss) from discontinued operations before tax

  $ (301 ) $ 1,180   $ (7,646 ) $ 1,316  

Provision (benefit) for income taxes

    (223 )   448     (3,002 )   528  
                   

Income (loss) from discontinued operations, net of tax

  $ (78 ) $ 732   $ (4,644 ) $ 788  
                   

8


Table of Contents


FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

(3) Discontinued Operations (Continued)

        The major classes of assets and liabilities of operations from discontinued operations are as follows:

 
  As of
October 3, 2009
  As of
January 3, 2009
 
 
  (in thousands)
 

Accounts receivable

  $   $ 1,517  

Inventories

        2,680  

Prepaid expenses and other current assets

        56  
           
 

Current assets of discontinued operations

        4,253  
           

Property, plant and equipment, net

        468  

Goodwill

        1,819  

Other assets

        83  
           
 

Noncurrent assets of discontinued operations

        2,370  
           
   

Total assets of discontinued operations

  $   $ 6,623  
           

Accounts payable

  $   $ 1,640  

Accrued expenses

    4,617     854  
           
 

Current liabilities of discontinued operations

  $ 4,617   $ 2,494  
           

(4) Comprehensive Income

        Comprehensive income for the three and nine months ended October 3, 2009 and October 4, 2008 consist of the following:

 
  Three Months Ended   Nine Months Ended  
 
  October 3, 2009   October 4, 2008   October 3, 2009   October 4, 2008  
 
  (in thousands)
 

Net income

  $ 6,831   $ 4,010   $ 9,246   $ 10,553  

Other comprehensive income, net of tax

                         
 

Foreign currency translation adjustments

    (52 )   (879 )   174     (813 )
 

Gain (loss) on cash flow hedging activities

    (54 )   (604 )   19     183  
                   
 

Total comprehensive income, net of tax

    6,725     2,527     9,439     9,923  
 

Less: Comprehensive income attributable to noncontrolling interest

    131     103     262     370  
                   

Comprehensive income attributable to the Company

  $ 6,594   $ 2,424   $ 9,177   $ 9,553  
                   

9


Table of Contents


FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

(5) Net Income Per Share

        The Company calculates net income per share in accordance with the Earnings Per Share Topic of FASB ASC. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of common shares outstanding and potentially dilutive securities outstanding during the period. Potentially dilutive securities include restricted stock units and stock options, using the treasury stock method. Securities are excluded from the computations of diluted net income per share if their effect would be antidilutive.

 
  Three Months Ended   Nine Months Ended  
 
  October 3, 2009   October 4, 2008   October 3, 2009   October 4, 2008  
 
  (in thousands, except per share amounts)
 

Net income attributable to the Company

  $ 6,700   $ 3,907   $ 8,984   $ 10,183  
                   

Shares used in computing basic net income per share

    22,123     21,171     22,123     21,225  

Effect of dilutive securities

    295     145     214     136  
                   

Shares used in computing diluted net income per share

    22,418     21,316     22,337     21,361  
                   

Basic earnings per share attributable to the Company's shareholders

  $ 0.30   $ 0.18   $ 0.41   $ 0.48  
                   

Diluted earnings per share attributable to the Company's shareholders

  $ 0.30   $ 0.18   $ 0.40   $ 0.48  
                   

Antidilutive potential common shares excluded

    1,219     782     1,602     782  
                   

(6) Share Repurchase Program

        In February 2008, the Board of Directors of the Company authorized a $12.0 million ordinary share repurchase program for a one-year period or until earlier terminated by the Company's Board of Directors. In February 2009, the share repurchase program was extended to February 2010. During the three months and nine months ended October 3, 2009, the Company did not repurchase any shares. At October 3, 2009, the Company had approximately $10.5 million of remaining availability under the $12.0 million share repurchase program.

(7) Credit Agreement

        The Company is party to a senior secured credit facility ("December 2007 Credit Agreement") that is comprised of (a) a $75.0 million revolving credit facility, which may be increased with the consent of our existing or additional lenders by up to an additional $50.0 million; and (b) a $100.0 million term loan facility. Interest rates for borrowings under the credit facility are determined based upon the Company's defined leverage ratio. Interest rates were initially priced at 1.75% above the London Interbank Offered Rate (LIBOR) and then range from 1.00% to 2.25% above LIBOR for Eurodollar-based borrowings, and from 0.00% to 1.25% above the defined base rate (higher of prime rate or the Federal Funds rate plus 0.5%) for base rate borrowings, depending upon the Company's

10


Table of Contents


FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

(7) Credit Agreement (Continued)


leverage ratio. The term loan facility is due in 20 consecutive quarterly graduating installments ranging from $1.9 million to $8.1 million, which commenced on March 31, 2008. The term loan facility and the revolving credit facility will mature on December 19, 2012. Amounts due under both facilities are collateralized by a pledge of 100% of the Company's tangible and intangible assets. The Company also is required to pay commitment and other customary fees. These commitment fees will range from 0.20% to 0.50% per annum depending upon the Company's leverage ratio.

        As of October 3, 2009, the Company had outstanding indebtedness of $81.3 million under the term loan facility, $28.0 million outstanding under the revolving credit facility and $0.3 million committed under standby letters of credit. Our borrowing availability under the revolving credit facility was $46.7 million. The interest rate on the term loan facility was at the three-month LIBOR rate plus 1.75% (2.04% in aggregate as of October 3, 2009). The interest rate on $20.0 million of the revolving credit facility is at the one-month LIBOR rate plus 1.75% (2.0% in aggregate as of October 3, 2009). The remaining balance of the revolving credit facility is subject to an interest rate of prime plus 0.75% (4.0% in aggregate as of October 3, 2009).

        The December 2007 Credit Agreement contains covenants limiting, among other things, mergers, consolidations, liquidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens and other encumbrances; dividends and other restricted payments; payment and modification of material subordinated debt instruments; transactions with affiliates; changes in fiscal year; negative pledge clauses; restrictions on subsidiary distributions; sale and leaseback transactions; factoring arrangements and changes in lines of business; and capital expenditures. The Company must also comply with certain administrative covenants, including furnishing audited financial statements to the lenders within 90 days of fiscal year end. This facility also requires the Company to comply with a leverage ratio covenant and a fixed charge ratio covenant. As of October 3, 2009, the Company was in compliance with the required covenants.

(8) Swap Agreement

        On March 10, 2008, the Company entered into an interest rate swap agreement (the "Swap") to manage its exposure to floating interest rate risk on its term loan facility. The Swap had an initial notional amount of approximately $49.1 million and is scheduled to decline to reflect certain scheduled principal payments under the term loan facility. Currently, the Company is borrowing under the term loan facility at a floating interest rate based on 3-month LIBOR (plus 1.75% under the terms of our term loan facility) and will pay under the Swap a fixed interest rate of 3.22% (plus 1.75% under the terms of our term loan facility) through December 19, 2012.

        The Swap has been designated as a cash flow hedge in accordance with the Derivatives and Hedging Topic of FASB ASC and the Company records the effective portion of any change in the fair value as other comprehensive income (loss), net of tax.

11


Table of Contents


FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

(8) Swap Agreement (Continued)

        The following table summarizes the balance of the Swap, the Company's only derivative instrument, based on fair value:

 
  As of October 3, 2009   As of January 3, 2009  
 
  Balance sheet
classification
  Fair
value
  Balance sheet
classification
  Fair
value
 
 
  (in thousands)
 

Derivatives designated as hedging instruments:

                     

Interest rate swap agreement

  Other long-term liabilities   $ 1,465   Other long-term liabilities   $ 1,497  
                   

Total

      $ 1,465       $ 1,497  
                   

        The following table summarizes the effects of the Swap:

 
  Amount of gains (losses) recognized in other comprehensive income  
 
  Three months ended   Nine months ended  
 
  October 3, 2009   October 4, 2008   October 3, 2009   October 4, 2008  
 
  (in thousands)
 

Derivatives designated as cash flow hedges:

                         

Interest rate swap agreement, net of tax

    (54 )   (604 )   19     183  
                   

Total gains (losses)

    (54 )   (604 )   19     183  
                   

(9) Income Taxes

        The Company and its subsidiaries file income tax returns in the United States and various state and international jurisdictions. The Company's major tax jurisdiction is the United States. As of October 3, 2009, the federal tax years that remain subject to examination in the United States were 2005 through 2008. The Company believes it is reasonably likely that approximately $2.6 million of unrecognized tax benefits and related interest and penalties will reverse within the next twelve months. Approximately $1.9 million of the $2.6 million relates to the utilization of net operating losses and interest on guaranteed third-party debt by an acquired entity and would be offset by the reversal of an indemnification receivable from the seller.

(10) Commitments and Contingencies

    Litigation

        In the ordinary course of business, the Company is party to various types of litigation. The Company maintains insurance to mitigate certain of these risks. The Company believes it has meritorious defenses to all litigation currently pending or threatened, and, in its opinion, none will have a material effect on the Company's financial position or results of operations.

(11) Segments

        The Company operates primarily in the eyewear market. The Company's three reportable segments are Non-Prescription Reading Glasses, Sunglasses and Prescription Frames, and International.

12


Table of Contents


FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

(11) Segments (Continued)


These segments have been determined based upon the nature of the products offered and availability of discrete financial information, and are consistent with the way the Company organizes and evaluates financial information internally for the purposes of making operating decisions and assessing performance.

        The Non-Prescription Reading Glasses and Sunglasses and Prescription Frames segments represent sales of these product lines in the United States. The International segment sells similar product lines outside the United States. The Company measures profitability of its segments based on gross profit.

        Expenditures for additions to long-lived assets are not tracked or reported by the operating segments, except for display fixtures. Depreciation expense on display fixtures is specific to each segment. Non-display fixture depreciation is not allocable to a specific segment and is included in corporate and unallocated. Amortization of intangible assets that relate to acquired businesses is included in the specific segment to which they relate. The identifiable assets of the International segment consist of assets of the Company's international subsidiaries. For the other reportable segments the identifiable assets include inventories and intangible assets. The Company does not segregate other assets on a product line basis for internal management reporting and therefore, such information is not presented. Assets included in corporate and unallocated principally are cash,

13


Table of Contents


FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

(11) Segments (Continued)


accounts receivable, prepaid expenses, deferred income taxes, other assets, and property, plant and equipment.

 
  Three Months Ended   Nine Months Ended  
 
  October 3, 2009   October 4, 2008   October 3, 2009   October 4, 2008  
 
  (in thousands)
 

Segment Net Sales

                         

Non-prescription Reading Glasses

  $ 32,242   $ 36,501   $ 91,631   $ 95,054  

Sunglasses and Prescription Frames

    17,682     10,425     79,128     54,219  

International

    10,656     6,369     23,782     26,056  
                   

Total Net Sales

  $ 60,580   $ 53,295   $ 194,541   $ 175,329  

Gross Profit

                         

Non-prescription Reading Glasses

  $ 20,188   $ 23,089   $ 56,413   $ 57,705  

Sunglasses and Prescription Frames

    8,178     3,526     36,712     22,628  

International

    7,568     4,285     15,364     16,789  
                   

Total Gross Profit

  $ 35,934   $ 30,900   $ 108,489   $ 97,122  

Segment Profits (Losses)

                         

Non-prescription Reading Glasses

  $ 16,565   $ 16,474   $ 43,881   $ 40,204  

Sunglasses and Prescription Frames

    2,581     107     19,760     13,031  

International

    4,896     857     6,857     5,358  

Corporate / Unallocated expenses

    (11,904 )   (11,024 )   (44,530 )   (38,643 )
                   

Operating Income

  $ 12,138   $ 6,414   $ 25,968   $ 19,950  

Depreciation

                         

Non-prescription Reading Glasses

  $ 1,125   $ 1,794   $ 3,675   $ 5,093  

Sunglasses and Prescription Frames

    1,214     1,142     3,845     3,223  

International

    366     363     1,684     1,971  

Corporate / Unallocated

    309     251     916     745  
                   

Total Depreciation

  $ 3,014   $ 3,550   $ 10,120   $ 11,032  

Amortization of Intangibles

                         

Non-prescription Reading Glasses

  $ 908   $ 1,295   $ 2,724   $ 3,886  

Sunglasses and Prescription Frames

    270         810      
                   

Total Amortization of Intangibles

  $ 1,178   $ 1,295   $ 3,534   $ 3,886  

 

 
  As of
October 3, 2009
  As of
January 3, 2009
 
 
  (in thousands)
 

Identifiable Assets

             

Non-prescription Reading Glasses

  $ 65,196   $ 71,282  

Sunglasses and Prescription Frames

    69,147     72,672  

International

    19,140     16,095  

Corporate / Unallocated

    89,406     112,966  
           

Total Identfiable Assets

  $ 242,889   $ 273,015  

(12) Subsequent event

        On October 28, 2009, we acquired all of the outstanding stock of Corinne McCormack, Inc. and Eye-Bar Inc. in exchange for $1.45 million in cash.

14


Table of Contents

ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

        Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.

        We are a leading designer and marketer of non-prescription reading glasses and sunglasses with a portfolio of established, highly recognized eyewear brands including Foster Grant(1) and Magnivision. We sell our Foster Grant brand in the U.S. popular priced sunglasses market and both our Foster Grant and Magnivision brands in the domestic non-prescription reading glasses market. Our products are sourced through low-cost Asian manufacturers and sold primarily through mass channels, which include mass merchandisers, chain drug stores, chain grocery stores and variety stores. Some of our products are sold to ophthalmic retailers, mid-tier department stores and other specialty retailers.

        With the acquisition of Dioptics Medical Products in November 2008, we added a portfolio of proprietary brands of sunglasses and associated eye care products and accessories, including the SolarShield and PolarEyes brands. These products and accessories are primarily sold through mass merchandisers and chain drug stores, as well as medical supply stores and ophthalmic retailers.

        With the acquisition of Corinne McCormack in October 2009, we added the Corinne McCormack brand of eyewear and accessories. These products are sold to better specialty and department stores.

        Our company-owned portfolio also includes the Anarchy, Angel and Gargoyles brands, which target different demographic groups and distribution channels at a premium price point (generally $50-$170). We believe our premium brands have a strong niche consumer appeal. We promote these brands through endorsements from well-recognized action sports athletes and sponsorship of action sports events.

        To complement our proprietary brands, we market both popular priced and premium eyewear under nationally-recognized licensed brands including Ironman Triathlon, Levi Strauss Signature, Body Glove, Rawlings and C9 by Champion. We also sell a line of prescription frames.

        We believe that we have the capital structure in place that will enable us to enhance our market leadership positions through the continued investment in our core brands. We will seek to continue to add to our domestic and international customer base as well as consider selective acquisitions that fit strategically into our business model. Our future results may be negatively affected by risks and trends, including without limitation those referred to in Part II, Item 1A., "Risk Factors" and elsewhere in this report.

Recent Developments

        On October 28, 2009, we acquired all of the outstanding stock of Corinne McCormack, Inc. and Eye-Bar Inc. in exchange for $1.45 million in cash.

        In the second quarter of 2009, we decided to divest the costume jewelry business to focus on the core optical business segments. The costume jewelry business qualified for held for sale treatment in the second quarter of 2009. We recorded pre-tax charges in the second quarter of 2009 totaling $5.0 million, including estimated future product returns of $3.6 million, inventory write-downs of $0.8 million, display fixture write-offs of $0.3 million and other costs of $0.3 million related to the


(1)
Foster Grant®, Magnivision®, Anarchy®, Angel™, Gargoyles®, SolarShield®, PolarEyes® and Corinne McCormack® are our trademarks. Ironman Triathlon®, Levi Strauss Signature®, Body Glove®, Rawlings® and C9 by Champion® are used under license and are the property of their respective owners. The ® and ™ symbols included here are deemed to apply to each instance of the respective mark in this report.

15


Table of Contents

    divestiture, and a $1.8 million pre-tax goodwill impairment in the first quarter of 2009. The Company has presented the results of operations and financial position of this business in discontinued operations in the Consolidated Statements of Operations, Consolidated Balance Sheets and Consolidated Statements of Cash Flows for all periods presented. On July 23, 2009, we completed a sale of assets related to the costume jewelry business for consideration of approximately $1.3 million, and no significant costs are expected to be incurred in future periods.

Overview

        The following is a summary of the Company's operating results for the three and nine months ended October 3, 2009:

    Net sales increased 13.7% to $60.6 million in the current quarter from $53.3 million in the same period in 2008 and increased 11.0% to $194.5 million in the first nine months of 2009 from $175.3 million in the first nine months of 2008. The year-over-year increase was driven by sales by Dioptics Medical Products, acquired in November 2008, and organic growth, offset by the September 2008 discontinuation of an opening price point program at a major customer.

    Income from continuing operations attributable to the Company increased 113.5% to $6.8 million in the current quarter from $3.2 million in the third quarter of 2008 and increased 45.1% to $13.6 million in the first nine months of 2009 from $9.4 million in the first nine months of 2008. The increase was driven by increased sales, partially offset by the addition of Dioptics' operating costs.

    Net income attributable to the Company's shareholders increased 71.5% to $6.7 million in the current quarter from $3.9 million in the third quarter of 2008 and decreased 11.8% to $9.0 million in the first nine months of 2009 from $10.2 million in the first nine months of 2008. The increase in the quarter was driven by sales growth, while the decrease in the nine-month period was driven by the loss from the discontinued costume jewelry operations.

    Earnings per diluted share increased to $0.30 in the current quarter from $0.18 in the third quarter of 2008 and decreased to $0.40 in the first nine months of 2009 from $0.48 in the first nine months of 2008 due to the changes in net income described above.

    Interest expense decreased $0.4 million, or 26.5%, from $1.5 million in the third quarter of 2008 to $1.1 million in the current quarter and decreased $1.0 million, or 21.7%, from $4.7 million in the first nine months of 2008 to $3.7 million in the first nine months of 2009. The decreases were the result of lower interest rates.

    Cash flow provided by operating activities was $31.5 million in the first nine months of 2009 compared to $24.9 million in the prior year period.

16


Table of Contents


Results of Operations

        The following table sets forth, for the periods indicated, selected statement of operations data as a percentage of net sales:

 
  Three Months Ended   Nine Months Ended  
 
  October 3, 2009   October 4, 2008   October 3, 2009   October 4, 2008  

Net sales

    100.0 %   100.0 %   100.0 %   100.0 %

Cost of goods sold

    40.7     42.0     44.2     44.6  
                   

Gross profit

    59.3     58.0     55.8     55.4  

Operating expenses:

                         
 

Selling expenses

    25.9     32.5     29.9     31.1  
 

General and administrative expenses

    11.4     11.0     10.8     10.7  
 

Amortization of acquired intangibles

    2.0     2.4     1.8     2.2  
                   
   

Operating income

    20.0     12.1     13.3     11.4  

Other income (expense):

                         
 

Interest expense

    (1.8 )   (2.8 )   (1.9 )   (2.7 )
 

Other income, net

    0.2     (0.4 )   0.1     (0.1 )
                   
   

Income from continuing operations before income taxes

    18.4     8.9     11.5     8.6  

Income tax expense

    7.0     2.7     4.4     3.0  
                   
 

Income from continuing operations

    11.4     6.2     7.1     5.6  

Discontinued operations, net of tax

    (0.1 )   1.3     (2.4 )   0.4  
                   
 

Net income

    11.3     7.5     4.7     6.0  

Less: Net income attributable to noncontrolling interest

    0.2     0.2     0.1     0.2  
                   

Net income attributable to the Company

    11.1 %   7.3 %   4.6 %   5.8 %
                   

        The following table sets forth, for the periods indicated, selected segment data as a percentage of net sales:

 
  Three Months Ended   Nine Months Ended  
Segment
  October 3, 2009   October 4, 2008   October 3, 2009   October 4, 2008  
 
  (unaudited, dollars in thousands)
 

Net sales

                                                 

Non-prescription Reading Glasses

  $ 32,242     53.2 % $ 36,501     68.5 % $ 91,631     47.1 % $ 95,054     54.2 %

Sunglasses and Prescription Frames

    17,682     29.2     10,425     19.6     79,128     40.7     54,219     30.9  

International

    10,656     17.6     6,369     11.9     23,782     12.2     26,056     14.9  
                                   

Total net sales

  $ 60,580     100.0 % $ 53,295     100.0 % $ 194,541     100.0 % $ 175,329     100.0 %
                                   

17


Table of Contents

        The following table sets forth, for the periods indicated, selected operating results by segment:

 
  Three Months Ended   Nine Months Ended  
Segment
  October 3, 2009   October 4, 2008   October 3, 2009   October 4, 2008  
 
  (unaudited, dollars in thousands)
 

Non-prescription Reading Glasses

                                                 
 

Net sales

  $ 32,242     100.0 % $ 36,501     100.0 % $ 91,631     100.0 % $ 95,054     100.0 %
 

Cost of goods sold

    12,054     37.4     13,412     36.7     35,218     38.4     37,349     39.3  
                                   
 

Gross profit

  $ 20,188     62.6 % $ 23,089     63.3 % $ 56,413     61.6 % $ 57,705     60.7 %
                                   

Sunglasses and Prescription Frames

                                                 
 

Net sales

  $ 17,682     100.0 % $ 10,425     100.0 % $ 79,128     100.0 % $ 54,219     100.0 %
 

Cost of goods sold

    9,504     53.7     6,899     66.2     42,416     53.6     31,591     58.3  
                                   
 

Gross profit

  $ 8,178     46.3 % $ 3,526     33.8 % $ 36,712     46.4 % $ 22,628     41.7 %
                                   

International

                                                 
 

Net sales

  $ 10,656     100.0 % $ 6,369     100.0 % $ 23,782     100.0 % $ 26,056     100.0 %
 

Cost of goods sold

    3,088     29.0     2,084     32.7     8,418     35.4     9,267     35.6  
                                   
 

Gross profit

  $ 7,568     71.0 % $ 4,285     67.3 % $ 15,364     64.6 % $ 16,789     64.4 %
                                   

Three Months Ended October 3, 2009 Compared to Three Months Ended October 4, 2008

        Net Sales.    Net sales increased by $7.3 million, or 13.7%, from $53.3 million in the three months ended October 4, 2008 to $60.6 million in the three months ended October 3, 2009.

        In the non-prescription reading glasses segment, net sales decreased by $4.3 million, or 11.7%, from $36.5 million in the three months ended October 4, 2008 to $32.2 million in the three months ended October 3, 2009. This decrease in net sales was due to a shift in timing of program updates at two major customers to the second quarter of 2009 that in 2008 occurred in the third quarter. These program updates contributed $5.4 million of net sales in the third quarter of 2008. In addition, sales were negatively impacted by the loss of an opening price point program at a major customer that contributed $1.5 million in the third quarter of 2008, partially offset by organic growth.

        In the sunglasses and prescription frames segment, net sales increased by $7.3 million, or 69.6%, from $10.4 million in the three months ended October 4, 2008 to $17.7 million in the three months ended October 3, 2009. This increase was due to $6.9 million in sales by Dioptics Medical Products, which was acquired in November 2008, as well as organic growth.

        In the international segment, net sales increased by $4.3 million, or 67.3%, from $6.4 million in the three months ended October 4, 2008 to $10.7 million in the three months ended October 3, 2009. This increase in net sales was attributed to a $5.8 million reading glasses roll-out at a major customer in Canada, partially offset by an approximately $1.1 million impact of unfavorable foreign exchange rates.

        Gross Profit.    Gross profit increased $5.0 million, or 16.3%, from $30.9 million in the three months ended October 4, 2008 to $35.9 million in the three months ended October 3, 2009. As a percentage of net sales, gross profit increased from 58.0% to 59.3% during the corresponding periods.

        In the non-prescription reading glasses segment, gross profit decreased by $2.9 million, or 12.6%, from $23.1 million in the three months ended October 4, 2008 to $20.2 million in the three months ended October 3, 2009. As a percentage of net sales, gross profit decreased from 63.3% in the third quarter of 2008 to 62.6% during the current quarter. The decrease in gross profit as a percentage of net sales was due to the discontinuation of a high gross margin opening price point program at a major retailer, partially offset by lower product costs and a change in pricing structure at a major customer.

18


Table of Contents

        In the sunglasses and prescription frames segment, gross profit increased by $4.7 million, or 131.9%, from $3.5 million in the three months ended October 4, 2008 to $8.2 million in the three months ended October 3, 2009. As a percentage of net sales, gross profit increased from 33.8% to 46.3% during the corresponding periods. This increase in gross profit as a percentage of net sales was due to sales of the higher gross margin Dioptics products (9.6 percentage points), as well as lower product costs.

        In the international segment, gross profit increased by $3.3 million, or 76.6%, from $4.3 million in the three months ended October 4, 2008 to $7.6 million in the three months ended October 3, 2009. As a percentage of net sales, gross profit increased from 67.3% to 71.0% in the corresponding periods. This increase in gross profit as a percentage of net sales was due to a higher margin reading glasses roll-out to a major Canadian retailer, partially offset by unfavorable foreign exchange rates.

        Selling Expenses.    Selling expenses decreased by $1.6 million, or 9.3%, from $17.3 million in the three months ended October 4, 2008 to $15.7 million in the three months ended October 3, 2009. As a percentage of net sales, selling expenses decreased from 32.5% to 25.9% in the corresponding periods. The dollar decrease in selling expenses was due to a $1.0 million decrease in freight costs, a $0.7 million decrease in depreciation, a $0.6 million decrease due to timing of advertising, and other expense reductions. These decreases were partially offset by $1.6 million of selling expenses associated with the operations of Dioptics Medical Products, which we acquired in November 2008.

        General and Administrative Expenses.    General and administrative expenses increased by $1.0 million, or 17.5%, from $5.9 million in the three months ended October 4, 2008 to $6.9 million in the three months ended October 3, 2009. As a percentage of net sales, general and administrative expenses increased from 11.0% to 11.4% in the corresponding periods. The dollar increase included $0.8 million in expenses associated with the Dioptics Medical Products business, which we acquired in November 2008.

        Amortization of Acquired Intangibles.    Amortization of acquired intangibles decreased by $0.1 million, or 9.0%, from $1.3 million in the three months ended October 4, 2008 to $1.2 million in the three months ended October 3, 2009. This decrease was due to certain intangible assets associated with the 2004 acquisition of Magnivision being amortized on an accelerated basis over their economic lives, partially offset by amortization of the newly acquired Dioptics' intangibles.

        Interest Expense.    Interest expense decreased $0.4 million, or 26.5%, from $1.5 million in the three months ended October 4, 2008 to $1.1 million in the three months ended October 3, 2009. The decrease was the result of lower interest rates.

        Income Taxes.    Provision for income taxes was $4.2 million, or 38.0% of income from continuing operations before income taxes in the three months ended October 3, 2009, compared to $1.5 million, or 30.8%, in the three months ended October 4, 2008. The change in income tax rate resulted from discrete tax events that benefited the tax rate in the third quarter of 2008, including the reduction of tax liability related to uncertain tax positions, adjustments to tax provision estimates from filing related federal and state tax returns and anticipated refunds from amended state tax returns.

        Income from Continuing Operations.    For the reasons described above, income from continuing operations increased by $3.6 million, or 110.8%, from $3.3 million during the three months ended October 4, 2008 to $6.9 million for the three months ended October 3, 2009.

        Discontinued Operations, Net of Tax.    Discontinued operations decreased $0.8 million from income of $0.7 million in the third quarter of 2008 to a loss of $0.1 million in the third quarter of 2009. This decrease is due to the divestiture of the costume jewelry business, which was completed on July 23, 2009.

19


Table of Contents

        Net Income.    For the reasons described above, net income attributable to our shareholders increased by $2.8 million, from $3.9 million during the three months ended October 4, 2008 to $6.7 million for the three months ended October 3, 2009.

Nine Months Ended October 3, 2009 Compared to Nine Months Ended October 4, 2008

        Net Sales.    Net sales increased by $19.2 million, or 11.0%, from $175.3 million in the nine months ended October 4, 2008 to $194.5 million in the nine months ended October 3, 2009.

        In the non-prescription reading glasses segment, net sales decreased by $3.5 million, or 3.6%, from $95.1 million in the nine months ended October 4, 2008 to $91.6 million in the nine months ended October 3, 2009. This decrease in net sales was due to the $5.9 million impact of the loss of an opening price point program at a major customer, a non-anniversaried program update at a major customer that contributed $3.0 million of net sales in the first nine months in 2008 and a $2.0 million reduction in a program update at a major customer compared to the first nine months of 2008, partially offset by organic growth.

        In the sunglasses and prescription frames segment, net sales increased by $24.9 million, or 45.9%, from $54.2 million in the nine months ended October 4, 2008 to $79.1 million in the nine months ended October 3, 2009. This increase was due to $26.6 million in sales by Dioptics Medical Products, which was acquired in November 2008, and the $1.3 million impact of a new sunglasses program at an existing customer, partially offset by the $4.1 million impact of the reduction of a promotional program at a major retailer.

        In the international segment, net sales decreased by $2.3 million, or 8.7%, from $26.1 million in the nine months ended October 4, 2008 to $23.8 million in the nine months ended October 3, 2009. This decrease in net sales was attributed to the approximately $4.8 million impact of unfavorable foreign exchange rates and $3.1 million of non-anniversaried roll-outs to major U.K. customers in the first half of 2008, partially offset by a $5.8 million reading glasses roll-out at a major customer in Canada in the third quarter of 2009.

        Gross Profit.    Gross profit increased $11.4 million, or 11.7%, from $97.1 million in the nine months ended October 4, 2008 to $108.5 million in the nine months ended October 3, 2009. As a percentage of net sales, gross profit increased from 55.4% to 55.8% during the corresponding periods.

        In the non-prescription reading glasses segment, gross profit decreased by $1.3 million, or 2.2%, from $57.7 million in the nine months ended October 4, 2008 to $56.4 million in the nine months ended October 3, 2009. As a percentage of net sales, gross profit increased from 60.7% to 61.6% during the corresponding periods. The increase in gross profit as a percentage of net sales was due to lower product costs and a change in pricing structure at a major customer, partially offset by the discontinuation of a high gross margin opening price point program at a major retailer.

        In the sunglasses and prescription frames segment, gross profit increased by $14.1 million, or 62.2%, from $22.6 million in the nine months ended October 4, 2008 to $36.7 million in the nine months ended October 3, 2009. As a percentage of net sales, gross profit increased from 41.7% to 46.4% during the corresponding periods. The 4.7 percentage point increase in gross profit as a percentage of net sales was due to sales of the higher gross margin Dioptics products.

        In the international segment, gross profit decreased by $1.4 million, or 8.5%, from $16.8 million in the nine months ended October 4, 2008 to $15.4 million in the nine months ended October 3, 2009. As a percentage of net sales, gross profit increased from 64.4% to 64.6% in the corresponding periods. The increase in gross profit as a percentage of net sales was due to a higher margin reading glasses roll-out to a major Canadian retailer, partially offset by unfavorable foreign exchange rates and a lower-margin reading glasses program rolled out to a new U.K. customer in 2009.

20


Table of Contents

        Selling Expenses.    Selling expenses increased by $3.4 million, or 6.3%, from $54.6 million in the nine months ended October 4, 2008 to $58.0 million in the nine months ended October 3, 2009. As a percentage of net sales, selling expenses decreased from 31.1% to 29.9% in the corresponding periods. The dollar increase in selling expenses is driven by $4.9 million associated with the operations of Dioptics Medical Products, which we acquired in November 2008, a $2.8 million increase in marketing costs driven by the television advertising campaigns that concluded at the end of the second quarter and increased field service costs of $2.9 million due to a higher number of serviced customer store locations, partially offset by a $2.9 million decrease in freight costs, a $1.4 million decrease in depreciation and other expense reductions.

        General and Administrative Expenses.    General and administrative expenses increased by $2.3 million, or 12.0%, from $18.7 million in the nine months ended October 4, 2008 to $21.0 million in the nine months ended October 3, 2009. As a percentage of net sales, general and administrative expenses increased from 10.7% to 10.8% in the corresponding periods. The dollar increase included $2.5 million in expenses associated with the Dioptics Medical Products business, which we acquired in November 2008, partially offset by a decrease in public company related costs.

        Amortization of Acquired Intangibles.    Amortization of acquired intangibles decreased by $0.4 million, or 9.1%, from $3.9 million in the nine months ended October 4, 2008 to $3.5 million in the nine months ended October 3, 2009. This decrease was due to certain intangible assets associated with the 2004 acquisition of Magnivision being amortized on an accelerated basis over their economic lives, partially offset by amortization of the newly acquired Dioptics' intangibles.

        Interest Expense.    Interest expense decreased $1.0 million, or 21.7%, from $4.7 million in the nine months ended October 4, 2008 to $3.7 million in the nine months ended October 3, 2009. The decrease was the result of lower interest rates.

        Income Taxes.    Provision for income taxes was $8.6 million, or 38.2% of income from continuing operations before income taxes in the nine months ended October 3, 2009, compared to $5.3 million, or 35.4%, in the nine months ended October 4, 2008. The change in income tax rate resulted from discrete tax events that benefited the tax rate in the first nine months of 2008, including the reduction of tax liability related to uncertain tax positions, adjustments to tax provision estimates from filing related federal and state tax returns and anticipated refunds from amended state tax returns.

        Income from Continuing Operations.    For the reasons described above, income from continuing operations increased by $4.1 million, or 42.2%, from $9.8 million during the nine months ended October 4, 2008 to $13.9 million for the nine months ended October 3, 2009.

        Discontinued Operations, Net of Tax.    Discontinued operations decreased $5.4 million from income of $0.8 million in the first nine months of 2008 to a loss of $4.6 million in the first nine months of 2009. We recorded pre-tax charges totaling $5.0 million, including estimated future product returns of $3.6 million, inventory write-downs of $0.8 million, display fixture write-offs of $0.3 million and other costs of $0.3 million in the second quarter of 2009 related to the divestiture of the costume jewelry business, and a $1.8 million pre-tax goodwill impairment in the first quarter of 2009. We ceased operations of the jewelry business upon completion of the sale on July 23, 2009.

        Net Income.    For the reasons described above, net income attributable to our shareholders decreased by $1.2 million from $10.2 million during the nine months ended October 4, 2008 to $9.0 million for the nine months ended October 3, 2009.

21


Table of Contents

Liquidity and Capital Resources

        Our primary liquidity needs are for working capital, capital expenditures (specifically display fixtures) and debt service. Our primary sources of cash have been cash flow from operations and borrowings under our credit facility. As of October 3, 2009, we had $6.6 million of cash and $46.7 million available under our revolving credit facility.

        We believe that our cash flow from operations, available cash and borrowings available under our credit facility will be adequate to meet our liquidity needs through at least the next twelve months. However, our ability to make scheduled payments of principal, pay the interest on or refinance our indebtedness or fund planned capital expenditures will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. In addition, current worldwide economic conditions, including, without limitation, the reduction in credit available to businesses and consumers, and the high unemployment rate and corresponding weak consumer spending, may substantially reduce demand for our products, which could have a material adverse effect on our liquidity and results of operations.

        To the extent we decide to pursue acquisitions, we may need to incur additional indebtedness or sell additional equity to finance those acquisitions.

Cash Flows

        The following table summarizes our cash flow activities for the periods indicated:

 
  Nine Months Ended  
 
  October 3, 2009   October 4, 2008  
 
  (unaudited, in thousands)
 

Net cash provided by (used in):

             
 

Operating activities

  $ 31,476   $ 24,865  
 

Investing activities

    (6,175 )   (10,511 )
 

Financing activities

    (20,730 )   (16,952 )

Effect of exchange rates on cash balances

    (107 )    
           

Net increase (decrease) in cash

  $ 4,464   $ (2,598 )
           

        We purchase finished goods from our contract manufacturers in Asia and typically take title upon delivery to the freight consolidator. Transit times range from 10 to 30 days. Our payment terms with our eyewear suppliers range from 45 to 120 days.

        Operating Activities.    Net cash provided by operating activities increased by $6.6 million from $24.9 million in the nine months ended October 4, 2008 to $31.5 million in the nine months ended October 3, 2009. This increase in operating cash flow was due to a $9.5 million increase in cash provided by activities related to inventory, a $5.0 million increase in cash provided by discontinued operations, a $4.1 million increase in net income from continuing operations and a $3.1 million increase in cash provided by the activities related to accounts receivable, partially offset by a $9.8 million increase in cash used in activities related to accounts payable and a $4.9 million increase in cash used in activities related to accrued income taxes. The change in inventory activity was a result of timing of shipments, partially offsetting a change in cash from accounts payable. The change in discontinued operations activity is due to the divestiture of the costume jewelry business. The change in accounts receivable activities is the result of timing of customer collections. The change in accounts payable activities was partially a result of timing of shipments, corresponding to an offsetting change in cash from inventory activities, and partially due to timing of payments to suppliers. The change in accrued income taxes was the result of tax payments related to the 2008 tax year and incremental estimated tax payments for the 2009 tax year.

22


Table of Contents

        Investing Activities.    Net cash used in investing activities decreased from $10.5 million in the nine months ended October 4, 2008 to $6.2 million in the nine months ended October 3, 2009. This decrease relates to fewer replacements of in-store display fixtures placed at retailers.

        Financing Activities.    Net cash used in financing activities increased by $3.7 million from $17.0 million in the nine months ended October 4, 2008 to $20.7 million in the nine months ended October 3, 2009. The increase in net cash used in financing activities was due to a $5.7 million increase in payments on long-term obligations, partially offset by $1.5 million used in stock repurchases in 2008 and a decrease of $0.5 million in net repayments under the revolving line of credit.

Capital Expenditures

        Our capital expenditures were $6.2 million and $10.1 million for the nine months ended October 3, 2009 and October 4, 2008, respectively. The decrease relates to fewer replacements of in-store display fixtures placed at retailers. The majority of our capital expenditures in both periods related to permanent display fixtures, which we provide in our customers' retail locations. We depreciate our fixtures using an estimated useful life of two to three years. The future timing and volume of such capital expenditures will be affected by new business, customer contract renewals and replacements of existing fixtures at existing retail customers.

        At October 3, 2009, we had outstanding commitments for capital expenditures of $1.8 million relating to permanent display fixtures. We intend to fund these expenditures primarily from operating cash flow and borrowings under our revolving credit facility.

Credit Agreement

        Our credit facility is comprised of (a) a $75.0 million revolving credit facility, which may be increased with the consent of our existing or additional lenders by up to an additional $50.0 million; and (b) a $100.0 million term loan facility. Interest rates for borrowings under the new facility are determined based upon our defined leverage ratio. Interest rates were initially priced at 1.75% above LIBOR and then range from 1.00% to 2.25% above LIBOR for Eurodollar-based borrowings, and from 0.00% to 1.25% above the defined base rate (higher of prime rate or the Federal Funds rate plus 0.5%) for base rate borrowings, depending upon our leverage ratio. The term loan facility is due in 20 consecutive quarterly graduating installments ranging from $1.9 million to $8.1 million. Payment of these installments commenced on March 31, 2008. The term loan facility and the revolving credit facility will mature on December 19, 2012. Amounts due under both facilities are collateralized by a pledge of 100% of our tangible and intangible assets. We are also required to pay commitment and other customary fees. These commitment fees will range from 0.20% to 0.50% per annum depending upon our leverage ratio.

        Our credit facility contains covenants limiting, among other things, mergers, consolidations, liquidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens and other encumbrances; dividends and other restricted payments; payment and modification of material subordinated debt instruments; transactions with affiliates; changes in fiscal year; negative pledge clauses; restrictions on subsidiary distributions; sale and leaseback transactions; factoring arrangements and changes in lines of business; and capital expenditures. Our credit facility also requires that we comply with leverage ratio and fixed charge coverage ratio covenants. As of October 3, 2009, we were in compliance with these covenants.

        As of October 3, 2009, we had outstanding indebtedness of $81.3 million under our term loan facility, $28.0 million outstanding under the revolving credit facility and $0.3 million committed under standby letters of credit. Our borrowing availability under the revolving credit facility was $46.7 million. Principal payments of $16.9 million under the term loan facility are scheduled in the next twelve months. The interest rate on the term loan facility is at the three-month LIBOR rate plus 1.75%

23


Table of Contents


(2.04% in aggregate as of October 3, 2009). The interest rate on $20.0 million of the revolving credit facility is at the one-month LIBOR rate plus 1.75% (2.0% in aggregate as of October 3, 2009). The remaining balance of the revolving credit facility is subject to an interest rate of prime plus 0.75% (4.0% in aggregate as of October 3, 2009).

Interest Rate Swap Agreement

        On March 10, 2008, we entered into an interest rate swap as described in Item 3 below.

Critical Accounting Estimates

        We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of net sales and expenses for the periods presented. These estimates and assumptions that management believes are the most significant ones are the same as those detailed in the Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

Off-Balance Sheet Arrangements

        As of October 3, 2009, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

ITEM 3.    Quantitative and Qualitative Disclosures about Market Risk.

        We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely affect our results of operations and financial condition.

        Our exposure to interest rate risk currently relates to amounts outstanding under our revolving and term loan credit facility. This facility is comprised of a $100.0 million term loan facility and a $75.0 million revolving credit facility. As of October 3, 2009, we had $81.3 million outstanding under the term loan facility and $28.0 million outstanding under the revolving credit facility. The term loan facility bore interest of 1.75% above three-month LIBOR, or 2.04% in aggregate, at October 3, 2009. $20.0 million of the revolving credit facility bore interest of 1.75% above one-month LIBOR, or 2.0% in aggregate, at October 3, 2009. The remaining balance of the revolving credit facility bore interest of 0.75% above prime, or 4.0% in aggregate, at October 3, 2009. A hypothetical change in the interest rate of 100 basis points would have an effect on our results of operations and cash flows of approximately $0.7 million over the next four quarters.

        On March 10, 2008, we entered into an interest rate swap agreement (the "Swap") to manage our exposure to floating interest rate risk on our credit facility. The Swap has an initial notional amount of $49.1 million and is scheduled to decline to reflect certain scheduled principal payments under the term loan facility. Currently, we are borrowing under the term loan facility at a floating interest rate based on three-month LIBOR (plus 1.75% under the terms of our term loan facility) and will pay under the Swap a fixed interest rate of 3.22% (plus 1.75% under the terms of our term loan facility) through December 19, 2012.

        The Swap has been designated as a cash flow hedge in accordance with the Derivatives and Hedging Topic of FASB ASC and we record the effective portion of any change in the fair value as other comprehensive income (loss), net of tax.

        We are subject to risk from changes in the foreign exchange rates relating to our Canadian and U.K. subsidiaries, and our Mexico joint venture. Assets and liabilities of these entities are translated to

24


Table of Contents


U.S. dollars at period-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the period. Translation adjustments are accumulated as a separate component of shareholders' equity. Gains and losses, which result from foreign currency transactions, are included as other income (expense) in the accompanying condensed consolidated statements of operations. The potential loss resulting from a hypothetical 10.0% adverse change in the quoted foreign currency exchange rate amounts would not have a material impact on our annual results of operations and cash flows.

ITEM 4.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

        We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the last day of the period covered by this report, October 3, 2009 (the "Evaluation Date"). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.

        Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control over Financial Reporting

        There were no changes during the fiscal quarter ended October 3, 2009 in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II—OTHER INFORMATION

ITEM 1.    Legal Proceedings.

        From time to time we are a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. We do not believe that we are subject to any proceedings that, individually or in the aggregate, would be expected to materially adversely affect our results of operations or financial condition.

ITEM 1A.    Risk Factors.

        There have been no material changes in our Risk Factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

        None.

ITEM 3.    Defaults Upon Senior Securities.

        None.

25


Table of Contents


ITEM 4.    Submission of Matters to a Vote of Security Holders.

        None.

ITEM 5.    Other Information.

        Effective as of November 6, 2009, FGX International Inc. ("FGX"), a subsidiary of the Company, entered into a second amendment to the existing employment agreements (the "Amendments") with each of Alec Taylor (to which amendment the Company also is a party), John H. Flynn, Jr., Anthony Di Paola, Steven Crellin, Jeffrey J. Giguere, Gerald Kitchen and Richard W. Kornhauser (collectively, the "Executives"). The Amendments include the following modifications to the underlying employment agreements: (i) increase the multiple of base salary and annual target bonus to be paid as severance in connection with a qualifying termination of employment, whether occurring prior to or after a change in control, to 2.0 for Mr. Taylor and to 1.5 for each of Messrs. Di Paola, Giguere, Kitchen, Kornhauser and Crellin (Mr. Crellin's Amendment also adds his annual target bonus to the severance calculation and requires that he execute a general release prior to receiving any severance benefits); (ii) update the definition of "Change In Control" for all Executives; and (iii) eliminate for all Executives any requirement that severance benefits be reduced by other income earned following termination of employment. Mr. Taylor's Amendment also conforms the definition of "Good Reason" in his agreement to the employment agreements of the other Executives by providing the right to resign for Good Reason if there is a material reduction in his duties, responsibilities or reporting structure.

        Effective as of November 6, 2009, FGX entered into an Employment Agreement with Robert Grow, the Company's Executive Vice President, Product Development. This agreement will continue until terminated by either party. Mr. Grow's employment agreement provides for (i) a base salary of $235,424, (ii) eligibility for an annual target bonus of 50% of base salary and (iii) certain other benefits, including health and life insurance, and an automobile allowance. The agreement also provides for a severance payment of 1.5 times Mr. Grow's base salary and annual target bonus in connection with the termination of Mr. Grow's employment (a) by FGX without "Cause" or in connection with a "Change in Control" and (b) by Mr. Grow for "Good Reason", as those terms are defined in the agreement. Payment of severance to Mr. Grow will be delayed by six months to the extent necessary to avoid payment of surtax pursuant to Section 409A of the Internal Revenue Code. If any payments or benefits to be provided to Mr. Grow would result in assessment of an excise tax under the "golden parachute" rules of the Code, such payments and benefits will be reduced to the extent necessary to avoid such taxes if this would increase the after-tax benefit to Mr. Grow. Mr. Grow is entitled to recover attorneys' fees from the Company if he prevails in a legal action to enforce provisions of his employment agreement. Mr. Grow's agreement provides that he will refrain from engaging in certain activities that are competitive with the Company and its business during his employment and for 12 months thereafter.

        The Amendments and Mr. Grow's employment agreement are attached as exhibits to this Quarterly Report on Form 10-Q.

ITEM 6.    Exhibits.

        The exhibits listed in the Exhibit Index following the signature page are filed herewith.

26


Table of Contents


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, thereunto duly authorized.

November 6, 2009   FGX INTERNATIONAL HOLDINGS LIMITED

 

 

By:

 

/s/ ANTHONY DI PAOLA

        Anthony Di Paola
    Title:   Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)

27


Table of Contents


Exhibit List

Exhibit
Number
  Exhibit Description
  2.1   Asset Purchase Agreement, dated July 23, 2009, by and between FGX International Inc. and Crimzon Rose International, LLC(1)

 

2.2

 

Purchase Order, dated July 23, 2009, issued by Head Link One Co., Limited to FGX International Inc.(1)

 

2.3

 

Customer Support Agreement, dated July 23, 2009, by and between FGX International Inc. and Crimzon Rose International, LLC(1)

 

2.4

 

Stock Purchase and Sale Agreement, dated October 28, 2009, by and among Corinne McCormack, Inc., Eye-Bar, Inc., Corinne A. McCormack and FGX International Inc.

 

3.1

 

Amended and Restated Memorandum of Association(2)

 

3.2

 

Amended and Restated Articles of Association(3)

 

10.1

 

Amendment No. 2 to the Amended and Restated Employment Agreement by and among FGX International Inc., Alec Taylor and FGX International Holdings Limited, dated as of November 6, 2009.

 

10.2

 

Amendment No. 2 to the Amended and Restated Employment Agreement by and between John H. Flynn, Jr. and FGX International Inc., dated as of November 6, 2009.

 

10.3

 

Amendment No. 2 to the Amended and Restated Employment Agreement by and between Steven Crellin and FGX International Inc., dated as of November 6, 2009.

 

10.4

 

Amendment No. 2 to the Employment Agreement by and between Anthony Di Paola and FGX International Inc., dated as of November 6, 2009.

 

10.5

 

Amendment No. 2 to the Employment Agreement by and between Jeffrey J. Giguere and FGX International Inc., dated as of November 6, 2009.

 

10.6

 

Amendment No. 2 to the Employment Agreement by and between Gerald Kitchen and FGX International Inc., dated as of November 6, 2009.

 

10.7

 

Amendment No. 2 to the Employment Agreement by and between Richard W. Kornhauser and FGX International Inc., dated as of November 6, 2009.

 

10.8

 

Employment Agreement by and between Robert Grow and FGX International Inc., dated as of November 6, 2009.

 

31.1

 

Section 302 Certification of CEO

 

31.2

 

Section 302 Certification of CFO

 

32.1

 

Section 906 Certification of CEO

 

32.2

 

Section 906 Certification of CFO

(1)
Incorporated by reference to the filing of such exhibit with out Quarterly Report on Form 10-Q for the quarterly period ended July 4, 2000 filed with the SEC on August 7, 2009.

(2)
Incorporated by reference to the filing of such exhibit with our Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2007 filed with the SEC on December 12, 2007.

(3)
Incorporated by reference to the filing of such exhibit with our Current Report on Form 8-K filed with the SEC on April 9, 2008.

28