Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended October 4, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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. Yes ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See 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 o

Non-accelerated filer ý (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). Yes o    No ý

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 12, 2008 was 21,170,520.



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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 "anticipates," "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 failure to execute, or the timing of execution of, anticipated customer contracts; deteriorating
economic conditions and decreases
in consumer spending; the Company or others may discover that the Company's products must be recalled because of defects; consumers, retailers, shareholders and/or others may bring litigation or other
claims against the Company related to its products that may cause it to incur substantial costs to resolve; interruptions of supply from our Asian product manufacturers; lost production capacity,
production errors and quality control errors at our product manufacturers; political instability or changing conditions in 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; material
changes in customers' inventory and working capital policies; 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 uncertainty of the litigation process including the risk of an unfavorable result in current or future litigation; depending upon market conditions, the
Company may not complete the stock buyback program; interest rate fluctuations; the Company's credit insurance may not cover all of our outstanding accounts receivable; 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 or
update or revise except as may be required under applicable law.

2

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Table of Contents

FGX International Holdings Limited  Form 10-Q  Index



PAGEPART I: FINANCIAL INFORMATION

4Item 1. Financial Statements

4Condensed Consolidated Balance Sheets at October 4, 2008
(unaudited) and
December 29, 2007

4Condensed Consolidated Statements of Operations for the three
and nine months
ended October 4, 2008 and September 29, 2007 (unaudited)

5Condensed Consolidated Statements of Cash Flows for the nine
months ended
October 4, 2008 and September 29, 2007 (unaudited)

6Notes to Condensed Consolidated Financial
Statements

7Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations

14Item 3. Quantitative and Qualitative Disclosures About Market
Risk

23Item 4. Controls and Procedures

24PART II: OTHER INFORMATION

24Item 1. Legal Proceedings

24Item 1A. Risk Factors

25Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds

25Item 3. Default Upon Senior Securities

25Item 4. Submission of Matters To a Vote of Security
Holders

26Item 5. Other Information

26Item 6. Exhibits

26SIGNATURES

27Exhibit List

28


3

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PART IFINANCIAL INFORMATION

ITEM 1.    Financial Statements.

FGX INTERNATIONAL HOLDINGS LIMITED

Condensed Consolidated Balance Sheets

October 4, 2008 (unaudited) and December 29, 2007

(in thousands)

October 4,
2008

December 29,
2007ASSETSCurrent assets:Cash

$
1,969

$
4,567Accounts receivable, less allowances of $26,629 and $15,839 at October 4, 2008 and December 29, 2007, respectively


37,789


53,001Inventories


34,486


33,226Prepaid expenses and other current assets


13,745


11,001Deferred tax assets


11,026


10,841Total current assets


99,015


112,636Property, plant and equipment, net


19,991


21,349Other assets:Goodwill


25,357


25,357Intangible assets, net of accumulated amortization of $28,217 and $24,330 at October 4, 2008 and December 29, 2007, respectively


40,981


44,868Other assets


7,433


7,645Total assets

$
192,777

$
211,855LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Revolving line of credit

$
10,000

$
20,000Current maturities of long-term obligations


13,305


7,661Accounts payable


21,583


27,364Accrued expenses


20,212


26,167Accrued income taxes


25


956Total current liabilities


65,125


82,148Long-term obligations, less current maturities


81,666


92,778Deferred tax liabilities


9,307


9,260Other long term liabilities


8,034


9,174Minority interest


1,533


1,162Commitments and contingencies (note 9)Shareholders' equity:Common stock, no par value. Authorized 101,000 shares; issued 21,800 shares and outstanding 21,170 shares at October 4, 2008; issued 21,934 shares and
outstanding 21,304 shares at December 29, 2007





Additional paid-in capital


96,406


96,180Accumulated other comprehensive income


313


943Accumulated deficit


(67,094
)

(77,277
)Treasury stock, at cost, 630 shares at October 4, 2008 and December 29, 2007


(2,513
)

(2,513
)Total shareholders' equity


27,112


17,333Total liabilities and shareholders' equity

$
192,777

$
211,855


See accompanying notes to condensed consolidated financial statements.

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FGX INTERNATIONAL HOLDINGS LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three and nine months ended October 4, 2008 and September 29, 2007

(unaudited, in thousands, except per share amounts)

Three months ended

Nine months endedOctober 4,
2008

September 29,
2007

October 4,
2008

September 29,
2007Net sales

$
59,103

$
53,919

$
189,891

$
177,682Cost of goods sold


25,880


24,762


87,243


82,887Gross profit


33,223


29,157


102,648


94,795Operating expenses:Selling expenses


18,406


16,134


58,652


52,797General and administrative expenses


5,927


4,998


18,844


15,033Amortization of acquired intangibles


1,295


1,543


3,886


4,629Abandoned lease charge











1,865Operating income


7,595


6,482


21,266


20,471Other income (expense):Interest expense


(1,478
)

(6,037
)

(4,700
)

(17,373
)Other income (expense), net


(198
)

56


(144
)

180Income before income taxes and minority interest


5,919


501


16,422


3,278Income tax expense (benefit)


1,909


539


5,869


(327
)Income before minority interest


4,010


(38
)

10,553


3,605Minority interest income (expense)


(103
)

20


(370
)

(206
)Net income (loss)

$
3,907

$
(18
)
$
10,183

$
3,399Basic earnings per share

$
0.18

$
(0.00
)
$
0.48

$
0.23Basic weighted average shares outstanding


21,171


14,638


21,225


14,764Diluted earnings per share

$
0.18

$
(0.00
)
$
0.48

$
0.23Diluted weighted average shares outstanding


21,316


14,638


21,361


14,826


See
accompanying notes to condensed consolidated financial statements.

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FGX INTERNATIONAL HOLDINGS LIMITED

Condensed Consolidated Statements of Cash Flows

Nine months ended October 4, 2008 and September 29, 2007

(unaudited, in thousands)

Nine months endedOctober 4,
2008

September 29,
2007Cash flows from operating activities:Net income

$
10,183

$
3,399Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization


15,124


13,979Noncash stock option compensation


1,709


514Minority interest


370


206Deferred income taxes


(286
)

(1,354
)Loss on disposal of property, plant, and equipment


377


Changes in assets and liabilities:Accounts receivable


14,989


15,866Inventories


(1,911
)

(1,112
)Prepaid expenses and other current assets


(2,897
)

(10,024
)Other assets


1,919


(2,159
)Non-current assets


(1,547
)

(1,293
)Accounts payable


(5,558
)

(15,532
)Accrued expenses and other long-term liabilities


(6,608
)

(2,441
)Accrued income taxes


(999
)

(1,739
)Net cash provided by (used in) operating activities


24,865


(1,690
)Cash flows from investing activities:Purchases of property, plant and equipment


(10,511
)

(11,220
)Net cash used in investing activities


(10,511
)

(11,220
)Cash flows from financing activities:Net repayments under revolving line of credit


(10,000
)

(8,000
)Proceeds from issuance of long-term obligations





20,000Payments on long-term obligations


(5,468
)

(5,526
)Redemption of common stock





(76
)Stock repurchase


(1,484
)

Net cash (used in) provided by financing activities


(16,952
)

6,398Effect of exchange rate changes on cash





53Net decrease in cash


(2,598
)

(6,459
)Cash, beginning of period


4,567


9,663Cash, end of period

$
1,969

$
3,204


See
accompanying notes to condensed consolidated financial statements.

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FGX International Holdings Limited        Notes to Condensed Consolidated Financial Statements        (in thousands, except per share amounts)

(1) REPORTING ENTITY AND NATURE OF BUSINESS

FGX International Holdings Limited (the "Company") is a leading designer and marketer of non-prescription reading glasses, sunglasses and costume jewelry with distribution
primarily in the mass merchandise, chain drug store and chain grocery store channels 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 4, 2008 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending January 3, 2009.

The
Company's accounting policies are the same as those described in Note 3 to the financial statements for the fiscal year ended December 29, 2007 included in the
Company's Annual Report on Form 10-K.

The
Company's current fiscal year will end on January 3, 2009 and will include 53 weeks. The third quarter of 2008 included 14 weeks while the third quarter of 2007
included 13 weeks. Accordingly, the nine month period of 2008 included 40 weeks while the nine month period of 2007 included 39 weeks.

The
accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the fiscal
year ended December 29, 2007 included in the Company's Annual Report on Form 10-K.

(2) RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements("SFAS No. 157"), which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is applicable for the Company as
of December 30, 2007, the first day of fiscal 2008. The FASB issued FASB Staff Position FAS 157-b,Effective Date of FASB Statement
No. 157, which deferred the effective date of the Statement for certain nonfinancial assets and liabilities until fiscal 2009. The impact of the adoption of
SFAS 157 was not material to the Company's condensed consolidated financial statements and the adoption of the items deferred until fiscal 2009 are not expected to be material.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities("SFAS
No. 159"). SFAS No. 159 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure certain financial instruments at fair value.
SFAS No. 159 was effective in the first quarter of 2008. The adoption of

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FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(in thousands, except per share amounts)

(2) RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

SFAS
No. 159 did not have a material impact on our condensed consolidated balance sheet and results of operations.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" (SFAS No. 141R). SFAS No. 141R establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS
No. 141R changes the accounting for acquisitions by eliminating the step acquisition model, providing that contingent consideration be recognized at the time of acquisition (instead of being
recognized when it is probable), disallowing the capitalization of transaction costs, and changing when restructurings related to acquisitions can be recognized. SFAS No. 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective for the Company for acquisitions made after the
January 1, 2009 effective date.

In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements("SFAS
No. 160"), which requires noncontrolling (minority) interests in subsidiaries to be initially measured at fair value and presented as a separate component of shareholders' equity. Current
practice is to present noncontrolling interests as a liability or other item outside of equity. This Statement is required to be applied prospectively after the beginning of fiscal 2009, although the
presentation and disclosure requirements are required to be applied on a retrospective basis. The Company does not expect the adoption of SFAS No. 160 to have a material impact on its condensed
consolidated balance sheet or results of operations.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133("SFAS 161"), which requires enhanced disclosures about the Company's derivative and hedging activities. SFAS 161 will be effective as of the
beginning of the Company's 2009 fiscal year. The Company is currently evaluating the impact of the adoption of the enhanced disclosures required by SFAS 161.

(3) OTHER COMPREHENSIVE INCOME

Other comprehensive income for the three and nine months ended October 4, 2008 and September 29, 2007 consist of the following:

Three Months Ended

Nine Months EndedOctober 4,
2008

September 29,
2007

October 4,
2008

September 29,
2007(unaudited)Net income (loss)

$
3,907

$
(18
)
$
10,183

$
3,399Foreign currency translation adjustments


(879
)

159


(813
)

352Gain (loss) on cash flow hedging activities


(604
)




183


Comprehensive income

$
2,424

$
141

$
9,553

$
3,751


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FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(in thousands, except per share amounts)

(4) NET INCOME PER SHARE

The Company calculates net income per share in accordance with SFAS No. 128,Earnings Per Share. 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 stock options, warrants, restricted stock and similar awards, 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 EndedOctober 4,
2008

September 29,
2007

October 4,
2008

September 29,
2007(unaudited)Net income (loss)

$
3,907

$
(18
)
$
10,183

$
3,399Shares used in computing basic net income (loss) per share


21,171


14,638


21,225


14,764Effect of dilutive securities


145





136


62Shares used in computing diluted net income (loss) per share


21,316


14,638


21,361


14,826Basic earnings per share

$
0.18

$


$
0.48

$
0.23Diluted earnings per share

$
0.18

$


$
0.48

$
0.23Antidilutive potential common shares excluded from the computation above


782


711


782


622


(5) 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. During the three months ended October 4, 2008, the Company did not repurchase any shares. During the nine months ended October 4, 2008, the Company
repurchased a total of 133,788 ordinary shares for an aggregate purchase price of approximately $1.5 million. All of these purchases were made in the open market and repurchased shares were
returned to the status of authorized and unissued. At October 4, 2008, the Company had approximately $10.5 million of remaining availability under the $12.0 million share
repurchase program.

(6) CREDIT AGREEMENT

The Company has a senior secured credit facility ("December 2007 Credit Agreement") that is comprised of (a) a $75.0 million revolving credit facility (the "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
("Term Loan Facility"). Interest rates for borrowings under the credit facility are determined based upon the Company's 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

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FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(in thousands, except per share amounts)

(6) CREDIT AGREEMENT (Continued)

base
rate for base rate borrowings, depending upon the Company's leverage ratio. Amounts due under both facilities are collateralized by a pledge of 100% of the Company's tangible and intangible
assets. The Company will also 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 4, 2008, the Term Loan Facility bears interest at LIBOR plus 1.75% (5.52% as of October 4, 2008). 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. As of October 4, 2008, the Company had outstanding indebtedness of $94.4 million under our Term Loan Facility and $10.0 million outstanding under the
Revolving Credit Facility. Our borrowing availability under the Revolving Credit Facility was $64.7 million.

The
December 2007 Credit Agreement requires the Company to comply with a leverage ratio covenant and a fixed charge ratio covenant. This facility contains customary affirmative and
negative covenants that, among other things, limit the ability of the Company, and their respective subsidiaries to pay certain dividends; incur additional indebtedness or liens; make certain
investments, restricted payments, or acquisitions and dispositions; and enter into certain transactions with affiliates. The Company must also comply with certain administrative covenants, including
furnishing audited financial statements to
the lenders within 90 days of fiscal year end. As of October 4, 2008, the Company was in compliance with the required covenants.

(7) SWAP AGREEMENT

On March 10, 2008, the Company entered into an interest rate swap agreement (the "Swap") to manage our exposure to floating interest rate risk on our Term Loan Facility. The Swap
has 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 under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities("SFAS 133") and the Company will record the effective portion of any change in the
fair value as other comprehensive income (loss), and reclassify the gains and losses to interest expense during the hedged interest payment period.

(8) INCOME TAXES

The Company adopted the provisions of FIN No. 48,Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
No. 109, Accounting for Income Taxes("FIN 48") on December 31, 2006, the first day of the 2007 fiscal year. The interpretation addresses the determination
of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater

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FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(in thousands, except per share amounts)

(8) INCOME TAXES (Continued)

than
fifty percent likelihood of being realized upon ultimate settlement. As of October 4, 2008, the Company has a gross tax liability for uncertain tax benefits of $4.4 million, of
which approximately $1.5 million would decrease the effective tax rate in the period in which each of the benefits is recognized and the remainder would be offset by the reversal of related
deferred tax assets. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense, which is consistent with the recognition of these items
in prior reporting periods. As of October 4, 2008, the Company had accrued approximately $0.8 million of interest and penalties related to our uncertain tax positions. The Company does
not anticipate significant changes to the total amount of unrecognized tax benefits within the next 12 months.

The
Company's major tax jurisdiction is the United States. As of October 4, 2008, the federal tax years that remain subject to examination in the United States are 2005 through
2007.

(9) COMMITMENTS AND CONTINGENCIES

Litigation

In February 2005, the Company reached an agreement to settle a patent infringement action commenced in 1992 by Magnivision (formerly
known as Al-Site and then owned by its founding family, which retained the rights to the litigation and any litigation proceeds) against an entity which is now a subsidiary of the Company
relating to the use of certain display devices for eyeglasses. The United States District Court for the Central District of California entered a final judgment on the agreed settlement and a series of
subsequent orders clarifying certain of the terms thereof. Pursuant to the agreed settlement, the Company was obligated to pay the plaintiff $11.0 million. However, there was a cost sharing
agreement in place which provided that an unrelated third party was to pay approximately $7.9 million of the $11.0 million final judgment. The unrelated third party participated in the
settlement proceedings with the court, and an affiliate of the third party guaranteed payments on amounts due under the cost sharing agreement directly with the plaintiff. As a result of the cost
sharing agreement, and a credit of $2.0 million, which the court allowed for a prejudgment payment the Company had previously made to the plaintiff, the total remaining obligation under the
agreed settlement, as construed by the court, was approximately $1.1 million. This amount was paid by the Company as of the end of fiscal 2005. The court scheduled a three year monthly payment
plan in May 2005 and all payments were timely made. However, the Company remained legally liable for the outstanding balance on the agreed upon settlement even though it was being paid by the third
party. This third party was paid in full in May 2008, and the Company has no remaining liability related to this agreed upon settlement.

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.

(10) RELATED PARTY TRANSACTIONS

Prior to our initial public offering on October 24, 2007, the Company paid a quarterly fixed management fee (management fees) to our principal shareholder, Berggruen Holdings
North

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FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(in thousands, except per share amounts)

(10) RELATED PARTY TRANSACTIONS (Continued)

America Ltd.
(BH). The amount incurred was $0.1 million for the three months ended September 29, 2007 and $0.3 million for the nine months ended September 29, 2007.
The fee incurred is included in "General and administrative expenses" in the accompanying condensed consolidated statements of operations. The Company also reimbursed BH approximately
$0.08 million during the three months ended September 29, 2007 for fees BH paid for services provided by an interim managing director for the Company's U.K. subsidiary. The Company did
not have any monies accrued and payable to BH as of October 4, 2008 and December 29, 2007.

(11) ENTERPRISE-WIDE DISCLOSURES

The Company markets its products primarily to customers in the mass merchandise retail channel.
Although the Company closely monitors the creditworthiness of its customers, a substantial portion of its customers' ability to meet their financial obligations is dependent on economic conditions
germane to the retail industry. At its discretion, the Company may sell product to customers in bankruptcy. The Company maintains a credit insurance policy on its primary domestic customers.

The
Company currently purchases substantially its entire inventory from certain suppliers in Asia. There are other suppliers of the inventory items purchased and management believes that
these suppliers could provide similar inventory at fairly comparable terms. However, a change in suppliers could cause a delay in the Company's distribution process and a possible loss of sales, which
would adversely affect operating results.

(12) SEGMENTS

The Company operates primarily in the eyewear and costume jewelry markets. The Company's four reportable segments are Non-Prescription Reading Glasses, Sunglasses and
Prescription Frames, Costume Jewelry and International. 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, Sunglasses and Prescription Frames and Costume Jewelry 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 our 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,
accounts receivable, prepaid expenses, deferred income taxes, other assets, and property, plant and equipment.

12

---



Table of Contents

FGX International Holdings Limited

Notes to Condensed Consolidated Financial Statements (Continued)

(in thousands, except per share amounts)

(12) SEGMENTS (Continued)

Three Months Ended

Nine Months EndedOctober 4,
2008

September 29,
2007

October 4,
2008

September 29,
2007(unaudited)Segment Net SalesNon-prescription Reading Glasses

$
36,501

$
30,935

$
95,054

$
86,073Sunglasses and Prescription Frames


10,425


8,698


54,219


45,208Costume Jewelry


5,151


6,770


12,855


17,804International


7,026


7,516


27,763


28,597Total Net Sales

$
59,103

$
53,919

$
189,891

$
177,682Gross ProfitNon-prescription Reading Glasses

$
23,089

$
19,098

$
57,705

$
50,358Sunglasses and Prescription Frames


3,526


2,836


22,628


18,506Costume Jewelry


1,973


2,915


4,523


7,918International


4,635


4,308


17,792


18,013Total Gross Profit

$
33,223

$
29,157

$
102,648

$
94,795Segment Profits (Losses)Non-prescription Reading Glasses

$
16,474

$
13,606

$
40,204

$
34,545Sunglasses and Prescription Frames


107


402


13,031


10,412Costume Jewelry


1,608


1,951


2,392


4,924International


1,060


703


5,989


6,314Corporate / Unallocated expenses


(11,653
)

(10,180
)

(40,350
)

(35,724
)Income from Operations

$
7,596

$
6,482

$
21,266

$
20,471DepreciationNon-prescription Reading Glasses

$
1,794

$
1,413

$
5,093

$
3,988Sunglasses and Prescription Frames


1,142


996


3,223


2,817Costume Jewelry


68


28


143


77International


384


393


2,033


1,757Corporate / Unallocated


251


238


745


711Total

$
3,639

$
3,068

$
11,237

$
9,350Amortization of IntangiblesNon-prescription Reading Glasses

$
1,295

$
1,543

$
3,886

$
4,629








Total

$
1,295

$
1,543

$
3,886

$
4,629




As of
October 4,
2008

As of
December 29,
2007(unaudited)Identifiable AssetsNon-prescription Reading Glasses

$
72,815

$
75,075Sunglasses and Prescription Frames


16,600


16,909Costume Jewelry


4,577


4,454International


16,514


21,598Corporate / Unallocated


82,271


93,819Total

$
192,777

$
211,855


13

---





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, sunglasses and costume jewelry with a portfolio of established, highly recognized eyewear brands
includingFosterGrantandMagnivision. We sell our FosterGrantbrand in the U.S. popular priced sunglasses
market and both ourFosterGrantand Magnivisionbrands 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.
We also sell costume jewelry to mass merchandisers, chain drug stores and variety stores and have recently begun offering more replenishable jewelry items at mid-tier department stores.

Our
company-owned portfolio also includes theAnarchy,Angeland Gargoylesbrands, 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 professional surfing
contests and similar sporting events.

To
complement our proprietary brands, we market both popular priced and premium eyewear under nationally-recognized licensed brands includingIronman Triathlon,
Levi Strauss Signature, Body Glove, C9 by ChampionandDaytona International Speedway.In addition, we sell a line of
prescription frames, which we introduced in 2004 to supplement our product line.

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 set forth in Part II, Item 1A., "Risk Factors", and elsewhere in this report.

Summary of Results

The following is a summary of the Company's operating results for the three and nine months ended October 4,
2008:



14

---



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 EndedOctober 4,
2008

September 29,
2007

October 4,
2008

September 29,
2007Net sales


100.0
%

100.0
%

100.0
%

100.0
%Cost of goods sold


43.8


45.9


45.9


46.6Gross profit


56.2


54.1


54.1


53.4Operating expenses:Selling expenses


31.1


29.9


30.9


29.7General and administrative expenses


10.0


9.3


9.9


8.5Amortization of acquired intangibles


2.2


2.9


2.1


2.6Abandoned lease charge











1.0Operating income


12.9


12.0


11.2


11.6Other income (expense):Interest expense


(2.5
)

(11.2
)

(2.5
)

(9.8
)Other income, net


(0.4
)

0.1


(0.1
)

0.1Income before income taxes and minority interest


10.0


0.9


8.7


1.9Income tax expense (benefit)


3.2


1.0


3.1


0.2Income before minority interest


6.8


(0.1
)

5.6


2.1Minority interest expense


(0.2
)




(0.2
)

(0.1
)Net income


6.6
%


%

5.4
%

2.0
%


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

Three Months Ended

Nine Months EndedSegment

October 4,
2008

September 29,
2007

October 4,
2008

September 29,
2007Non-prescription reading glasses

$
36,501


61.8
%
$
30,935


57.4
%
$
95,054


50.1
%
$
86,073


48.5
%Sunglasses and prescription frames


10,425


17.6


8,698


16.1


54,219


28.5


45,208


25.4Costume jewelry


5,151


8.7


6,770


12.6


12,855


6.8


17,804


10.0International


7,026


11.9


7,516


13.9


27,763


14.6


28,597


16.1Net sales

$
59,103


100.0
%
$
53,919


100.0
%
$
189,891


100.0
%
$
177,682


100.0
%


15

---



Table of Contents

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

Three Months Ended

Nine Months EndedSegment

October 4,
2008

September 29,
2007

October 4,
2008

September 29,
2007Non-prescription reading glassesNet sales

$
36,501


100.0
%
$
30,935


100.0
%
$
95,054


100.0
%
$
86,073


100.0
%Cost of goods sold


13,412


36.7


11,837


38.3


37,349


39.3


35,715


41.5Gross profit

$
23,089


63.3
%
$
19,098


61.7
%
$
57,705


60.7
%
$
50,358


58.5
%Sunglasses and prescription framesNet sales

$
10,425


100.0
%
$
8,698


100.0
%
$
54,219


100.0
%
$
45,208


100.0
%Cost of goods sold


6,899


66.2


5,862


67.4


31,591


58.3


26,702


59.1Gross profit

$
3,526


33.8
%
$
2,836


32.6
%
$
22,628


41.7
%
$
18,506


40.9
%Costume jewelryNet sales

$
5,151


100.0
%
$
6,770


100.0
%
$
12,855


100.0
%
$
17,804


100.0
%Cost of goods sold


3,178


61.7


3,855


56.9


8,332


64.8


9,886


55.5Gross profit

$
1,973


38.3
%
$
2,915


43.1
%
$
4,523


35.2
%
$
7,918


44.5
%InternationalNet sales

$
7,026


100.0
%
$
7,516


100.0
%
$
27,763


100.0
%
$
28,597


100.0
%Cost of goods sold


2,391


34.0


3,208


42.7


9,971


35.9


10,584


37.0Gross profit

$
4,635


66.0
%
$
4,308


57.3
%
$
17,792


64.1
%
$
18,013


63.0
%


Three Months Ended October 4, 2008 Compared to Three Months Ended September 29, 2007

Net Sales.Net sales increased by $5.2 million, or 9.6%, from $53.9 million in the three months ended September 29, 2007 to
$59.1 million in the three months ended October 4, 2008.

In
the non-prescription reading glasses segment, net sales increased by $5.6 million, or 18.1%, from $30.9 million in the three months ended
September 29, 2007 to $36.5 million in the three months ended October 4, 2008. This increase in net sales was primarily organic growth at new and existing customers.

In
the sunglasses and prescription frames segment, net sales increased by $1.7 million, or 19.5%, from $8.7 million in the three months ended September 29, 2007 to
$10.4 million in the three months ended October 4, 2008. This increase was organic growth at existing customers and higher sales related to a promotional pallet program at a major
customer.

In
the costume jewelry segment, net sales decreased by $1.6 million, or 23.5%, from $6.8 million in the three months ended September 29, 2007 to $5.2 million
in the three months ended October 4, 2008. This decrease was primarily the result of a loss of sales at a major customer.

In
the international segment, net sales decreased by $0.5 million, or 6.5%, from $7.5 million in the three months ended September 29, 2007 to $7.0 million in
the three months ended October 4, 2008. The decrease in net sales was attributed to lower sunglasses sales and higher product returns in the United Kingdom, partially offset by higher sales
across all product categories in Canada.

Gross Profit.Gross profit increased $4.1 million, or 13.9%, from $29.2 million in the three months ended September 29, 2007 to
$33.2 million in the three months ended October 4, 2008. As a percentage of net sales, gross profit increased from 54.1% to 56.2% during the corresponding periods.

16

---



Table of Contents

In the non-prescription reading glasses segment, gross profit increased by $4.0 million, or 20.9%, from $19.1 million in the three
months ended September 29, 2007 to $23.1 million in the three months ended October 4, 2008. As a percentage of net sales, gross profit increased from 61.7% in the third quarter of
2007 to 63.3% during the current quarter. The dollar increase in gross profit and the increase in gross profit as a percentage of net sales were primarily due to increased sales and a shift in product
mix to higher margin styles sold to several of our customers during the current quarter.

In
the sunglasses and prescription frames segment, gross profit increased by $0.7 million, or 24.4%, from $2.8 million in the three months ended September 29, 2007
to $3.5 million in the three months ended October 4, 2008. As a percentage of net sales, gross profit increased from 32.6% to 33.8% during the corresponding periods. The dollar increase
in gross profit was primarily due to the increase in net sales. The increase in gross profit as a percentage of net sales was primarily due to a mix of more profitable programs.

In
the costume jewelry segment, gross profit decreased by $0.9 million, or 32.3%, from $2.9 million in the three months ended September 29, 2007 to
$2.0 million in the three months ended October 4, 2008. As a percentage of net sales, gross profit decreased from 43.1% to 38.3% during the corresponding periods. The dollar decrease in
gross profit and the decrease in gross profit as a percentage of net sales were primarily due to the decrease in net sales coupled with lower margin jewelry programs representing a higher percentage
of segment net sales.

In
the international segment, gross profit increased by $0.3 million, or 7.6%, from $4.3 million in the three months ended September 29, 2007 to $4.6 million
in the three months ended October 4, 2008. As a percentage of net sales, gross profit increased from 57.3% to 66.0% in the corresponding periods. The dollar increase in gross profit and the
increase in gross profit as a percentage of net sales were primarily due to a favorable sales mix in Canada partially offset by higher product returns in the United Kingdom.

Selling Expenses.Selling expenses increased by $2.3 million, or 14.1%, from $16.1 million in the three months ended September 29, 2007 to
$18.4 million in the three months ended October 4, 2008. As a percentage of net sales, selling expenses increased from 29.9% to 31.1% in the corresponding periods. The dollar increase in
variable selling expenses was primarily due to increased field service costs of $0.8 million due to a higher number of customer store locations, incremental personnel costs of
$0.6 million to support the growth of the business, increased television and print advertising costs of $0.4 million, and higher freight costs of $0.3 million.

General and Administrative Expenses.General and administrative expenses increased by $0.9 million, or 18.6%, from $5.0 million in the three months
ended September 29, 2007 to $5.9 million in the three months ended October 4, 2008. As a percentage of net sales, general and administrative expenses increased from 9.3% to 10.0%
in the corresponding periods. This increase was primarily the result of costs associated with being a public company, which included Sarbanes-Oxley implementation costs and other consulting costs
incurred in the current quarter.

Amortization of Acquired Intangibles.Amortization of acquired intangibles decreased by $0.2 million, or 16.1%, from $1.5 million in the three months
ended September 29, 2007 to $1.3 million in the three months ended October 4, 2008. This decrease was due to certain intangible assets associated with the acquisition of
Magnivision being amortized on an accelerated basis over their economic lives.

Interest Expense.Interest expense decreased $4.6 million, or 75.5%, from $6.0 million in the three months ended September 29, 2007 to
$1.5 million in the three months ended October 4, 2008. The decreases were primarily the result of reductions in debt and lower borrowing costs.

17

---



Table of Contents

Income Taxes.Provision for income taxes was $1.9 million, or 32.3% of income before income taxes and minority interest in the three months ended
October 4, 2008, compared to $0.5 million in the three months ended September 29, 2007. The income tax rate was benefited by a reduction of $0.2 million in tax liabilities
related to uncertain tax positions, federal income return provision adjustments amounting to $0.2 million, and our current estimates of geographical mix of income before taxes and the related
tax rates in those jurisdictions. The tax provision in the third quarter of 2007 was unfavorably affected by an adjustment to foreign tax credits which was triggered by revised expectations of taxable
income in the U.S.

Net Income.For the reasons described above, our net income increased by $3.9 million, or 216.7%, from approximately break even during the three months
ended September 29, 2007 to $3.9 million for the three months ended October 4, 2008.

Nine Months Ended October 4, 2008 Compared to Nine Months Ended September 29, 2007

Net Sales.Net sales increased by $12.2 million, or 6.9%, from $177.7 million in the nine months ended September 29, 2007 to
$189.9 million in the nine months ended October 4, 2008.

In
the non-prescription reading glasses segment, net sales increased by $9.0 million, or 10.4%, from $86.1 million in the nine months ended September 29,
2007 to $95.1 million in the nine months ended October 4, 2008. This increase was due to a combination of organic growth at existing customers and the rollout of new reader programs to
new customers. The year-over-year improvement was negatively impacted by a non-anniversaried rollout at a major customer during the first quarter of 2007 and the
discontinuation of the Company's opening price point program at a major customer in third quarter of fiscal 2008.

In
the sunglasses and prescription frames segment, net sales increased by $9.0 million, or 19.9%, from $45.2 million in the nine months ended September 29, 2007 to
$54.2 million in the nine months ended October 4, 2008. This increase was due to organic growth at existing customers and higher sales related to a promotional pallet program at a major
customer.

In
the costume jewelry segment, net sales decreased by $4.9 million, or 27.8%, from $17.8 million in the nine months ended September 29, 2007 to $12.9 million
in the nine months ended October 4, 2008. This decrease was primarily the result of lower sales at a major customer partially offset by increased distribution to mid-tier department
stores and the launch of a new jewelry program at an existing customer.

In
the international segment, net sales decreased by $0.8 million, or 2.9%, from $28.6 million in the nine months ended September 29, 2007 to $27.8 million in
the nine months ended October 4, 2008. This decrease was the result of lower sunglasses sales in the United Kingdom and the impact of the launch of non-prescription reading glasses
roll-outs in the United Kingdom during the first quarter of 2007 that was not repeated in 2008. These decreases were partially offset by higher sales across all product lines in Canada.

Gross Profit.Gross profit increased $7.9 million, or 8.3%, from $94.8 million in the nine months ended September 29, 2007 to
$102.6 million in the nine months ended October 4, 2008. As a percentage of net sales, gross profit increased from 53.4% to 54.1% during the corresponding periods.

In
the non-prescription reading glasses segment, gross profit increased by $7.3 million, or 14.6%, from $50.4 million in the nine months ended
September 29, 2007 to $57.7 million in the nine months ended October 4, 2008. As a percentage of net sales, gross profit increased from 58.5% to 60.7% during the corresponding
periods. The dollar increase in gross profit and the increase in gross profit as a percentage of net sales were primarily due to increased sales and a greater proportion of higher margin styles sold
to several of our customers during the first nine months of 2008 as well as favorable cost reductions negotiated with our suppliers.

18

---



Table of Contents

In
the sunglasses and prescription frames segment, gross profit increased by $4.1 million, or 22.3%, from $18.5 million in the nine months ended September 29, 2007
to $22.6 million in the nine months ended October 4, 2008. As a percentage of net sales, gross profit increased from 40.9% to 41.7% during the
corresponding periods. The dollar increase in gross profit was primarily due to the increase in net sales. The increase in gross profit as a percentage of net sales was primarily due to higher margin
styles representing a greater percentage of our net sales in the first nine months of 2008. This was partially offset by the expansion of a lower margin pallet program at a major customer.

In
the costume jewelry segment, gross profit decreased by $3.4 million, or 42.9%, from $7.9 million in the nine months ended September 29, 2007 to
$4.5 million in the nine months ended October 4, 2008. As a percentage of net sales, gross profit decreased from 44.5% to 35.2% during the corresponding periods. The dollar decrease in
gross profit was primarily due to the decrease in net sales. The decrease in gross profit as a percentage of net sales was primarily due to a shift to lower margin jewelry programs at existing
customers.

In
the international segment, gross profit decreased by $0.2 million, or 1.2%, from $18.0 million in the nine months ended September 29, 2007 to $17.8 million
in the nine months ended October 4, 2008. As a percentage of net sales, gross profit increased from 63.0% to 64.1% in the corresponding periods. The dollar decrease in gross profit was due to
the decrease in net sales. The increase in gross profit as a percentage of net sales was primarily due to favorable sales mix in Canada partially offset by higher product returns in the United
Kingdom.

Selling Expenses.Selling expenses increased by $5.9 million, or 11.1%, from $52.8 million in the nine months ended September 29, 2007 to
$58.7 million in the nine months ended October 4, 2008. As a percentage of net sales, selling expenses increased from 29.7% to 30.9% in the corresponding periods. The dollar increase in
variable selling expenses was primarily due to higher depreciation expenses of $1.8 million related to the increased number of display fixtures placed in service, increased field service costs
of $1.4 million due to the increased number of customer store locations, higher freight costs of $1.2 million, and incremental personnel costs of $1.0 million to support the
growth of the business.

General and Administrative Expenses.General and administrative expenses increased by $3.8 million, or 25.4%, from $15.0 million in the nine months
ended September 29, 2007 to $18.8 million in the nine months ended October 4, 2008. As a percentage of net sales, general and administrative expenses increased from 8.5% to 9.9%
in the corresponding periods. This increase was primarily the result of costs associated with being a public company, which included Sarbanes-Oxley implementation and other related consulting costs
incurred in the first nine months of 2008.

Amortization of Acquired Intangibles.Amortization of acquired intangibles decreased by $0.7 million, or 16.1%, from $4.6 million in the nine months
ended September 29, 2007 to $3.9 million in the nine months ended October 4, 2008. This decrease was due to certain intangible assets associated with the acquisition of
Magnivision being amortized on an accelerated basis over their economic lives.

Abandoned Lease Charge.During the nine months ended September 29, 2007, the Company recorded a $1.9 million abandoned lease charge as a result of
the continued vacancy of our Miramar, Florida facility. This charge assumes that the remaining space of this facility will remain vacant through the end of the lease term in April 2011.

Interest Expense.Interest expense decreased $12.7 million, or 72.9%, from $17.4 million in the nine months ended September 29, 2007 to
$4.7 million in the nine months ended October 4, 2008. The decreases were primarily the result of reductions in debt and lower borrowing costs.

Income Taxes.Provision for income taxes was $5.9 million, or 35.7% of income before income taxes and minority interest in the nine months ended
October 4, 2008, compared to a benefit of

19

---



Table of Contents

$0.3 million
in the nine months ended September 29, 2007. The income tax rate in the current nine month period was benefited by a reduction of $0.2 million in tax liabilities
recorded in the third quarter of fiscal 2008 related to uncertain tax positions; federal and state return provision adjustments amounting to $0.2 million recorded in the third quarter of fiscal
2008; and our current estimates of geographical mix of income before taxes and the related tax rates in those jurisdictions. The tax benefit in the prior year period was the result of the release of a
portion of the valuation allowance we had previously recorded against U.S. deferred tax assets. The benefit for income taxes in the prior period was partially offset by an income tax charge resulting
from the amalgamation of our Canadian operations.

Net Income.For the reasons described above, our net income increased by $6.8 million, or 200%, from $3.4 million during the nine months ended
September 29, 2007 to $10.2 million for the nine months ended October 4, 2008.

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, proceeds from our initial public offering and borrowings under our credit facility. As of October 4, 2008, we had $2.0 million of
cash and $64.7 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 fiscal
2009. 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. These factors include the possible inability of our customers to finance
purchases of our products and the possible inability or unwillingness of consumers to continue spending at their previous levels.

Our
strategy involves making strategic business acquisitions if and when we believe that they will help grow or otherwise improve our business. To the extent we decide to pursue one or
more 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 EndedOctober 4,
2008

September 29,
2007Net cash provided by (used in):Operating activities

$
24,865

$
(1,690
)Investing activities


(10,511
)

(11,220
)Financing activities


(16,952
)

6,398Effect of exchange rates on cash balances





53Decrease in cash

$
(2,598
)
$
(6,459
)


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 30 to 120 days, while payment terms with our costume jewelry suppliers range from 30 to 60 days. As a result of increases in our
operating cash flow, we have used

20

---



Table of Contents

cash
to fund inventories, which have been offset by higher payments on our revolving credit facility and repurchases of our outstanding ordinary shares under our stock repurchase program.

Operating Activities.Net cash provided by operating activities increased by $26.6 million from a use of $1.7 million of cash in the nine months
ended September 29, 2007 to $24.9 million of cash provided in the nine months ended October 4, 2008. The increase in operating cash flow was primarily due to higher net income as
well as changes in the activities related to accounts payable, prepaid expenses and other current assets. The change in accounts payable was primarily the result of timing of payments to suppliers and
the Company's focus on paying down a portion of the outstanding indebtedness under its revolving credit facility. The change in prepaid expenses and other current assets was primarily the result of
contractual provisions of a new program with a major customer that commenced during the nine months ended September 29, 2007.

Investing Activities.Net cash used in investing activities decreased from $11.2 million in the nine months ended September 29, 2007 to
$10.5 million in the nine months ended October 4, 2008. In 2007, the higher expenditures for display fixtures was associated with supporting new business at a major customer.

Financing Activities.Net cash used in financing activities increased by $23.4 million from $6.4 million of cash provided in the nine months ended
September 29, 2007 to a use of $17.0 million of cash used in the nine months ended October 4, 2008. The increase in net cash used in financing activities was primarily due to
$20.0 million of proceeds received in the prior year period as a result of the issuance of long-term debt which did not reoccur in 2008, $1.5 million for stock repurchases in
2008 compared to $0.1 million in 2007, and $10.0 million of payments on our revolving line of credit in 2008 compared to $8.0 million of payments in 2007.

Capital Expenditures

Our capital expenditures were $10.5 million and $11.2 million for the first nine months ended October 4, 2008 and
September 29, 2007, respectively. In 2007, the higher capital expenditures were for display fixtures associated with supporting new business at a major customer. 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 4, 2008, we had outstanding commitments for capital expenditures of $2.4 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 Facility

On December 19, 2007, we refinanced our then-existing credit facility. The new facility is comprised of (a) a
$75.0 million revolving credit facility (the "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 ("Term Loan Facility"). Interest rates for borrowings under the new facility are determined based upon our 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 for
base rate borrowings depending upon the Company's 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 our tangible and intangible assets.

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We
will also 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 4, 2008, we had outstanding indebtedness of $94.4 million under our Term Loan Facility and $10.0 million outstanding under the Revolving Credit
Facility. Our borrowing availability thereunder was $64.7 million. The interest rate on the Term Loan Facility and the Revolving Credit Facility are at LIBOR plus 1.75% (5.52% as of
October 4, 2008).

Interest Rate Swap Agreement

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

Critical Accounting Estimates

The Company prepared its condensed consolidated financial statement 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 critical accounting policies are the same as those detailed in the Annual Report on Form 10-K for the fiscal year ended December 29, 2007.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements("SFAS
No. 157"), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS
No. 157 is applicable for the Company as of December 30, 2007, the first day of fiscal 2008. The FASB issued FASB Staff Position FAS 157-b, Effective Date of FASB Statement No. 157,
which deferred the effective date of the Statement for certain nonfinancial assets and liabilities
until fiscal 2009. The impact of the adoption of SFAS 157 was not material to the Company's condensed consolidated financial statements and the adoption of the items deferred until fiscal 2009
are not expected to be material.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities("SFAS
No. 159"). SFAS No. 159 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure certain financial instruments at fair value.
SFAS No. 159 was effective in the first quarter of 2008. The adoption of SFAS No. 159 did not have a material impact on our condensed consolidated balance sheet and results of
operations.

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In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" (SFAS No. 141R). SFAS No. 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. SFAS No. 141R changes the accounting for acquisitions by eliminating the step acquisition model, providing that contingent consideration be recognized at the time of
acquisition (instead of being recognized when it is probable), disallowing the capitalization of transaction costs, and changing when restructurings related to acquisitions can be recognized. SFAS
No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective for the Company for
acquisitions made after the January 1, 2009 effective date.

In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements("SFAS
No. 160"), which requires noncontrolling (minority) interests in subsidiaries to be initially measured at fair value and presented as a separate component of shareholders' equity. Current
practice is to present noncontrolling interests as a liability or other item outside of equity. This Statement is required to be applied prospectively after the beginning of fiscal 2009, although the
presentation and disclosure requirements are required to be applied on a retrospective basis. The Company does not expect the adoption of SFAS No. 160 to have a material impact on its condensed
consolidated balance sheet or results of operations.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133("SFAS 161"), which requires enhanced disclosures
about the Company's derivative and hedging activities. SFAS 161 will be effective as of the beginning of the Company's 2009 fiscal year. The Company is currently evaluating the impact of the
adoption of the enhanced disclosures required by SFAS 161.

Off-Balance Sheet Arrangements

As of October 4, 2008, 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 4, 2008, we had $94.4 million outstanding under the Term Loan Facility and $10.0 million
outstanding under the Revolving Credit Facility. Both facilities bore interest of 1.75% above LIBOR, or 5.52% at October 4, 2008. A hypothetical change in the interest rate of 100 basis points
would have an effect on our annual results of operations and cash flows of approximately $1.0 million.

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 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 under SFAS No. 133 and we will record the effective portion
of any change in the fair value as other comprehensive income (loss), net of tax, and reclassify the gains and losses to interest expense during the hedged interest payment period.

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

(a)   Evaluation of Disclosure Controls and Procedures

We evaluated the effectiveness of our disclosure controls and procedures, as defined in the Exchange Act, as of the end of the period covered by this report. Alec
Taylor, our Chief Executive Officer, and Anthony Di Paola, our Chief Financial Officer, participated in this evaluation. Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by the report.

Our
management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control 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.

(b)   Changes in Internal Control over Financial Reporting

As a result of the evaluation completed by our Chief Executive Officer and Chief Financial Officer, we have concluded that there were no changes during the fiscal
quarter ended October 4, 2008 in our internal control over financial reporting 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.

In February 2005, the Company reached an agreement to settle a patent infringement action commenced in 1992 by Magnivision (formerly
known as Al-Site and then owned by its founding family, which retained the rights to the litigation and any litigation proceeds) against an entity which is now a subsidiary of the Company
relating to the use of certain display devices for eyeglasses. The United States District Court for the Central District of California entered a final judgment on the agreed settlement and a series of
subsequent orders clarifying certain of the terms thereof. Pursuant to the agreed settlement, the Company is obligated to pay the plaintiff $11.0 million. However, there is a cost sharing
agreement in place which provides that an unrelated third party is paying approximately $7.9 million of the $11.0 million final judgment. The unrelated third party participated in the
settlement proceedings with the court, and an affiliate of the third party has guaranteed payments on amounts due under the cost sharing agreement directly with the plaintiff. As a result of the cost
sharing agreement, and a credit of $2.0 million, which the court allowed for a prejudgment payment the Company had previously made to the plaintiff, the total remaining obligation under the
agreed settlement, as construed by the court, was approximately $1.1 million. This amount was paid by the Company as of the end of fiscal 2005. The court scheduled a three year monthly payment
plan in May

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2005
and all payments were timely made. However, the Company remained legally liable for the outstanding balance on the agreed upon settlement even though it was being paid by the third party.
This third party obligation has since been paid in full and the company has no remaining liability related to this agreed upon settlement.

ITEM 1A.    Risk Factors.

Our Annual Report on Form 10-K for the year ended December 29, 2007 includes "Risk Factors" under
Item 1A of Part I. Except for the updated risk factors described below, there have been no material changes from the risk factors described in our Form 10-K. The
information below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K.

The recent disruptions in the national economy and the financial markets may adversely impact our revenues, results of operations, business and financial
condition.

The
recent disruptions in the national economy and financial markets, and the related reductions in the availability of credit, may result in a decline in consumer confidence and
spending and may make it more difficult for businesses to obtain financing. If such conditions persist, then there could be a significant decline in consumer spending. There can be no assurance that
government responses to the disruptions in the financial markets will restore consumer confidence, stabilize the markets or increase liquidity and the availability of credit. If our customers are
unable to obtain borrowed funds on acceptable terms, or if conditions in the economy and the financial markets do not improve, our revenues, results of operations, business and financial condition
could be adversely affected as a result.

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

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. During the three months ended October 4, 2008, the Company did not repurchase any shares. At
October 4, 2008, we had approximately $10.5 million of remaining availability under the $12.0 million share repurchase program authorized by the Board of Directors of the Company.

Period

Total
Number of
Shares
Repurchased

Average
Price
Paid per
Share

Total Number of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs

Approximate Dollar
Value of Shares that May
Yet Be Purchased Under
the Plans or ProgramsMarch 30, 2008 to
April 26, 2008











April 27, 2008 to
May 24, 2008


88,813

$
10.66


88,813

$
10,550,000May 25, 2008 to
June 28, 2008


2,975

$
10.24


2,975

$
10,519,000June 29, 2008 to
October 4, 2008










$
10,519,000Total


91,788

$
10.64


91,788

$
10,519,000


ITEM 3.    Defaults Upon Senior Securities.

Not applicable.

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

None.

ITEM 5.    Other Information.

On September 18, 2008, we executed a Director Indemnification Agreement with Charles J. Hinkaty. This Agreement is in the same
form as previously executed by each of our other directors and executive officers. The agreements provide for indemnification to the greatest extent permitted by applicable law against (a) all
expenses and liabilities incurred by any such director and executive officer who was or is a party or is threatened to be made a party to, or otherwise becomes a participant (as a witness or
otherwise) in, any proceeding (other than an action by or in the right of the registrant) by reason of the indemnitee's status with or service to the Company and (b) certain expenses if the
indemnitee was or is a party or is threatened to be made a party to, or otherwise becomes a participant (as a witness or otherwise) in any proceeding by or in the right of the Company to procure a
judgment in the indemnitee's favor by reason of the indemnitee's status with or service to the Company. Such agreements provide, among other things, that if a person to be indemnified has been
successful on the merits of any Proceeding (as defined therein), the person is entitled to be indemnified against all expenses reasonably incurred by the person in connection therewith. Such
agreements also set forth certain procedural requirements pertaining to entitlement to, and payment of, indemnification, including the right to advancement of expenses.

ITEM 6.    Exhibits.

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

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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, thereunto duly authorized.

November13,2008

FGX INTERNATIONAL HOLDINGS LIMITEDBy:

/s/ ANTHONY DI PAOLA Anthony Di PaolaTitle:

Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)


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Exhibit List

Exhibit
Number

Exhibit Description3.1

Amended and Restated Memorandum of Association(1)3.2

Amended and Restated Articles of Association(2)10.1

Form of Director and Officer Indemnification Agreement executed by Charles J. Hinkaty(3)31.1

Section 302 Certification of CEO31.2

Section 302 Certification of CFO32.1

Section 906 Certification of CEO32.2

Section 906 Certification of CFO


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