| FOSSIL INC Item 1A Risk Factors The statements contained in this Annual Report on Form 10-K and incorporated by reference ( "e Annual Report "e ) that are not historical facts, including, but not limited to, statements regarding our expected financial position, business and financing plans found in "e Item 1 |
| Managementapstas Discussion and Analysis of Financial Condition and Results of Operations, "e constitute "e forward-looking statements "e within the meaning of the Private Securities Litigation Reform Act of 1995 |
| The words "e may, "e "e believes, "e "e expects, "e "e plans, "e "e intends, "e "e anticipates "e and similar expressions identify forward-looking statements |
| The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements |
| Our actual results may differ materially due to the risks and uncertainties discussed in this Annual Report, including those discussed below |
| Accordingly, readers of the Annual Report should consider 18 _________________________________________________________________ these facts in evaluating the information and are cautioned not to place undue reliance on the forward-looking statements contained herein |
| We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise |
| Risk Factors Relating to Our Business Our success depends upon our ability to anticipate and respond to changing fashion trends |
| Our success depends upon our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner |
| The purchasing decisions of consumers are highly subjective and can be influenced by many factors, such as brand image, marketing programs and product design |
| Our success depends, in part, on our ability to anticipate, gauge and respond to these changing consumer preferences in a timely manner while preserving the authenticity and quality of our brands |
| Although we attempt to stay abreast of emerging lifestyle and fashion trends affecting accessories and apparel, any failure by us to identify and respond to such trends could adversely affect consumer acceptance of our existing brand names and product lines, which in turn could adversely affect sales of our products |
| If we misjudge the market for our products, we may be faced with a significant amount of unsold finished goods inventory |
| Our success depends upon our ability to continue to develop innovative products |
| Our success also depends upon our ability to continue to develop innovative products in the respective markets in which we compete |
| If we are unable to successfully introduce new products, or if our competitors introduce superior products, customers may purchase certain products we produce from our competitors, which could adversely affect our revenues and results of operations |
| We have recently expanded and intend to further expand the scope of our product offerings, and new products introduced by us may not achieve consumer acceptance comparable to that of our existing product lines |
| We have recently expanded and intend to further expand the scope of our product offerings |
| As is typical with new products, market acceptance of new designs and products we may introduce is subject to uncertainty |
| In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured |
| If trends shift away from our products, or if we misjudge the market for our product lines, we may be faced with significant amounts of unsold inventory or other conditions which could have a material adverse effect on our results of operations |
| The failure of new product designs or new product lines to gain market acceptance could also adversely affect our business and the image of our brands |
| Achieving market acceptance for new products may also require substantial marketing efforts and expenditures to expand consumer demand |
| These requirements could strain our management, financial and operational resources |
| If we do not continue to develop innovative products that provide better design and performance attributes than the products of our competitors and that are accepted by consumers, or if our future product lines misjudge consumer demands, we may lose consumer loyalty, which could result in a decline in our revenues and market share |
| The effects of economic cycles, terrorism, acts of war and retail industry conditions may adversely affect our business |
| Our business is subject to economic cycles and retail industry conditions |
| Purchases of discretionary fashion accessories, such as our watches, handbags, sunglasses and other products, tend to decline during recessionary periods when disposable income is low and consumers are hesitant to use available credit |
| In addition, acts of terrorism, acts of war and military action both in the United States and 19 _________________________________________________________________ abroad can have a significant effect on economic conditions and may negatively affect our ability to procure our products from manufacturers for sale to our customers |
| Any significant declines in general economic conditions, public safety concerns or uncertainties regarding future economic prospects that affect consumer spending habits could have a material adverse effect on consumer purchases of our products |
| Seasonality of our business may adversely affect our net sales and operating income |
| Our quarterly results of operations have fluctuated in the past and may continue to fluctuate as a result of a number of factors, including seasonal cycles, the timing of new product introductions, the timing of orders by our customers and the mix of product sales demand |
| Our business is seasonal by nature |
| A significant portion of our net sales and operating income are generated during the fourth quarter of our fiscal year, which includes the Christmas season |
| The amount of net sales and operating income generated during the fourth quarter depends upon the anticipated level of retail sales during the Christmas season, as well as general economic conditions and other factors beyond our control |
| In addition, the amount of net sales and operating income generated during the first quarter depends in part upon the actual level of retail sales during the Christmas season |
| The seasonality of our business may adversely affect our net sales and operating income during the first and fourth quarter of our fiscal year |
| We maintain an inventory of selected products that we anticipate will be in high demand |
| We may be unable to sell the products we have ordered in advance from manufacturers or that we have in our inventory |
| Inventory levels in excess of customer demand may result in inventory write-downs or the sale of excess inventory at discounted or closeout prices |
| These events could significantly harm our operating results and impair the image of our brands |
| Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which might result in unfilled orders, negatively impact customer relationships, diminish brand loyalty and result in lost revenues, any of which could harm our business |
| The loss of any of our license agreements, pursuant to which a number of our products are produced, may result in the loss of significant revenues and may adversely affect our business |
| A portion of our growth in sales and net income is, and is expected to continue to be, derived from the sales of products produced under license agreements with third parties |
| Under these license agreements, we generally have the right to produce, market and distribute certain products utilizing the brand names of other companies |
| We sell products under certain licensed brands, including: ADIDAS, EMPORIO ARMANI, BURBERRY, DIESEL, DKNY, MARC JACOBS and MICHAEL Michael Kors |
| Sales of our licensed products amounted to 26dtta7prca of our sales for fiscal year 2005, with certain license agreements accounting for a significant portion of our revenues |
| Our material license agreements have various expiration dates between 2007 and 2012 |
| In addition, certain license agreements may require us to make minimum royalty payments, subject us to restrictive covenants or require us to comply with certain other obligations and may be terminated by the licensor if these or other conditions are not met or upon certain events |
| We may not be able to continue to meet our obligations or fulfill the conditions under these agreements in the future |
| In addition, we may be unable to renew our existing license agreements beyond the current term or obtain new license agreements to replace any lost license agreements on similar economic terms or at all |
| The failure by us to maintain or renew one or more of our existing material license agreements could result in a significant decrease in our revenues and have a material adverse affect on our results of operations |
| 20 _________________________________________________________________ Our license agreements may require minimum royalty commitments regardless of the level of product sales under these agreements |
| With respect to our license agreements, we have in the past experienced, and could again in the future experience, instances where minimum royalty commitments under these agreements exceeded royalties payable based upon our sales of such licensed products |
| We also have several agreements in effect at the end of fiscal year 2005 which expire on various dates from December 2007 through December 2012 that require us to pay royalties ranging from 3prca to 20prca of defined net sales |
| Fluctuations in the price, availability and quality of raw materials could cause delay and increase costs |
| Fluctuations in the price, availability and quality of the raw materials used by us in our products, or used by our third-party manufacturers, could have a material adverse effect on our cost of sales or ability to meet our customers &apos demands |
| The price and availability of such raw materials may fluctuate significantly, depending on many factors, including natural resources, increased freight costs, increased labor costs and weather conditions |
| In the future, we may not be able to pass all or a portion of such higher raw materials prices on to our customers |
| We rely on third-party manufacturers and problems with, or loss of, our suppliers or raw materials could harm our business and results of operations |
| All of our apparel, jewelry and leather goods and certain of our watch products are produced by independent manufacturers |
| We do not have long-term contracts with these manufacturers |
| In addition, we face the risk that these third-party manufacturers with whom we contract to produce our products may not produce and deliver our products on a timely basis, or at all |
| As a result, we cannot be certain that these manufacturers will continue to manufacture products for us or that we will not experience operational difficulties with our manufacturers, such as reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, shortages of raw materials, failures to meet production deadlines or increases in manufacturing costs |
| The failure of any manufacturer to perform to our expectations could result in supply shortages for certain products and harm our business |
| Access to suppliers that are not Fossil subsidiaries is not guaranteed because we do not maintain long-term contracts but instead rely on long-standing business relationships, which may not continue in the future |
| A majority of our watch products are currently sourced or manufactured to our specifications by four factories located in China and Hong Kong, which are either wholly-owned or majority-owned by us, and, to a lesser extent, by owned or independent manufacturers in China, Hong Kong and Switzerland |
| Certain of our other products are currently manufactured to our specifications by independent manufacturers in international locations, including China, Hong Kong, Italy, Korea, Mexico and Taiwan |
| We have no long-term contracts with these independent manufacturing sources and compete with other companies for production facilities |
| All transactions between us and our independent manufacturing sources are conducted on the basis of purchase orders |
| Our future success will depend upon our ability to maintain close relationships with our current suppliers and to develop long-term relationships with other suppliers that satisfy our requirements for price, quality and production flexibility |
| 21 _________________________________________________________________ If an independent manufacturer or license partner of ours fails to use acceptable labor practices, our business could suffer |
| We have no control over the ultimate actions or labor practices of our independent manufacturers |
| The violation of labor or other laws by one of our independent manufacturers, or by one of our license partners, or the divergence of an independent manufacturerapstas or license partnerapstas labor practices from those generally accepted as ethical in the United States or country in which the violation or divergence occurred, could interrupt or otherwise disrupt the shipment of finished products to us or damage our reputation |
| Any of these, in turn, could have a material adverse effect on our financial condition and results of operations |
| As a result, should one of our independent manufacturers be found in violation of state or international labor laws, we could suffer financial or other unforeseen consequences |
| We extend unsecured credit to our customers and are therefore vulnerable to any financial difficulties they may face |
| We sell our merchandise primarily to department stores and specialty retail stores in over 90 countries worldwide |
| We extend credit based on an evaluation of each customerapstas financial condition, usually without requiring collateral |
| Should any of our larger customers experience financial difficulties, we could curtail business with such customers or assume more credit risk relating to such customers &apos receivables |
| Our inability to collect on our trade accounts receivable relating to such customers could have a material adverse effect on the amount of revenues that we receive |
| We do not maintain long-term contracts with our customers and are unable to control their purchasing decisions |
| We do not maintain long-term purchasing contracts with our customers and therefore have no contractual leverage over their purchasing decisions |
| A decision by a major department store or other significant customer to decrease the amount of merchandise purchased from us or to cease carrying our products could have a material adverse effect on our revenues and operating strategy |
| Our ability to continue our sales growth is dependent upon the implementation of our growth strategy, which we may not be able to achieve |
| During recent years, we have experienced rapid and substantial growth in sales |
| Our ability to continue this growth is dependent on the successful implementation of our business strategy |
| This includes diversification of our product offerings, expansion of our company-owned Fossil retail and outlet locations and certain strategic acquisitions |
| If we are not successful in the expansion of our product offerings or our new products are not profitable or do not generate sales comparable to those of our existing businesses, our results of operations could be negatively impacted |
| Another element of our business strategy is to place increased emphasis on growth in selected international markets |
| If our brand names and products do not achieve a high degree of consumer acceptance in these markets, our revenues could be adversely affected |
| We also operate stores under the FOSSIL brand and have historically expanded our company-owned FOSSIL retail and outlet locations to further strengthen our brand image |
| As of December 31, 2005, we operated 171 stores, with a majority of the stores located in the United States |
| The costs associated with leasehold improvements to current stores and the costs associated with opening new stores could materially increase our costs of operation, particularly if we decide to open more stores on a yearly basis than our historical averages |
| We could be negatively impacted if we fail to successfully integrate the businesses we acquire |
| As part of our growth strategy, we have made certain acquisitions, domestically and internationally, including acquisitions of FOSSIL stores operated under license agreements, acquisitions of certain 22 _________________________________________________________________ watch brands, and acquisitions of independent distributors of our products |
| The integration of these and future acquisitions may not be successful or generate sales increases |
| When we have acquired businesses, we have acquired businesses that we believe could enhance our business opportunities and our growth prospects |
| All acquisitions involve risks that could materially adversely affect our business and operating results |
| These risks include: • distracting management from our business operations; • losing key personnel and other employees; • costs, delays, and inefficiencies associated with integrating acquired operations and personnel; • the impairment of acquired assets and goodwill; and • acquiring the contingent and other liabilities of the businesses we acquire |
| In addition, acquired businesses may not provide us with increased business opportunities, or result in the growth that we anticipate |
| Furthermore, integrating acquired operations is a complex, time-consuming, and expensive process |
| Combining acquired operations with us may result in lower overall operating margins, greater stock price volatility, and quarterly earnings fluctuations |
| Cultural incompatibilities, career uncertainties, and other factors associated with such acquisitions may also result in the loss of employees |
| Failure to acquire and successfully integrate complementary practices, or failure to achieve the business synergies or other anticipated benefits, could materially adversely affect our business and results of operations |
| Our competitors are established companies that have greater experience than us in a number of crucial areas, including design and distribution |
| There is intense competition in each of the businesses in which we compete |
| Our moderately priced watch business competes with a number of established manufacturers, importers and distributors such as Guess?, Anne Klein II, Kenneth Cole and Swatch |
| Our fine premium branded and designer watch business competes with a number of established manufacturers, importers and distributors such as Gucci, Rado, Raymond Weil, Seiko and Swiss Army |
| In addition, our leather goods, sunglass, jewelry and apparel businesses compete with a large number of established companies that have significantly greater experience than us in designing, developing, marketing and distributing such products |
| In all of our businesses, we compete with numerous manufacturers, importers and distributors who may have significantly greater financial, distribution, advertising and marketing resources than us |
| Our competitors include distributors that import watches, accessories and apparel from abroad, domestic companies that have established foreign manufacturing relationships and companies that produce accessories and apparel domestically |
| Our results of operations and market position may be adversely affected by our competitors and their competitive pressures in the watch, fashion accessory and apparel industries |
| We have key facilities in the United States and overseas, the loss or regulation of any of which could harm our business |
| Our administrative and distribution operations in the United States are conducted primarily from four separate facilities located in the Dallas, Texas area |
| Our operations internationally are conducted from various administrative, distribution and manufacturing facilities outside of the United States, particularly in Germany, Hong Kong and Switzerland |
| The complete or temporary loss of use of all or part of these facilities could have a material adverse effect on our business |
| Our warehouse and distribution facilities in Dallas and Richardson, Texas are operated in a special purpose subzone established by the US Department of Commerce Foreign Trade Zone Board |
| Although the subzone allows us certain tax advantages, the subzone is highly regulated by the US 23 _________________________________________________________________ Customs Service |
| This level of regulation may cause disruptions or delays in the distribution of our products out of these facilities |
| Under some circumstances, the US Customs Service has the right to shut down the entire subzone and, therefore, our entire warehouse and distribution facilities |
| During the time that the subzone is shut down, we may be unable to meet adequately the supply requests of our customers and our retail locations, which could have an adverse effect on our sales, relationships with our customers, and results of operation, especially if the shut down were to occur during our third or fourth quarter |
| Our implementation of a new enterprise resource planning system could disrupt our computer system and divert management time |
| We have recently implemented an enterprise resource planning system from SAP AG, a German software company |
| Over the next few years, we intend to replace our existing enterprise resource planning systems and other principal financial systems with software systems provided by SAP AG We implemented the new enterprise resource planning system in our US, Canada, Germany and France locations and over the next few years intend to replace our existing enterprise resource planning systems and principal financial systems at certain of our international subsidiaries with software systems provided by SAP AG Our current expansion plans may place significant strain on our management, working capital, financial and management control systems and staff |
| The failure to maintain or upgrade financial and management control systems, to recruit additional staff or to respond effectively to difficulties encountered during expansion could have a material adverse effect on our ability to respond to trends in our target markets, market our products and meet customer deadlines |
| The sustained disruption or failure of our systems due to force majeure or as part of an upgrade, conversion or other systems maintenance could result in the same adverse effects |
| Changes in the mix of product sales demand could negatively impact our gross profit margins |
| Our gross profit margins are impacted by our sales mix |
| Both international and licensed watch sales generally provide gross margins in excess of our historical consolidated gross profit margin, while accessory products generally provide gross profit margins below our historical consolidated gross profit margin |
| If future sales from our international businesses and licensed watch businesses do not increase at a faster rate than our domestic accessory business, our gross profit margins may grow at a slower pace, cease to grow, or decrease relative to our historical consolidated gross profit margin |
| Our industry is subject to pricing pressures that may adversely impact our financial performance |
| We manufacture many of our products offshore because such products generally cost less to make, primarily because labor costs are lower |
| Many of our competitors also source their product requirements offshore to achieve lower costs, possibly in locations with lower costs than our offshore operations, and those competitors may use these cost savings to reduce prices |
| To remain competitive, we must adjust our prices from time to time in response to these industry-wide pricing pressures |
| Our financial performance may be negatively affected by these pricing pressures if: • we are forced to reduce our prices and we cannot reduce our production costs; or • our production costs increase and we cannot increase our prices |
| Our failure or inability to protect or enforce our intellectual property may harm our business |
| Our trademarks, patents and other intellectual property rights are important to our success and competitive position |
| We are devoted to the establishment and protection of our trademarks, patents and other intellectual property rights in those countries where we believe it is important to our ability to sell our products |
| However, we cannot be certain that the actions we have taken will result in enforceable rights, will be adequate to protect our products in every country where we may want to sell 24 _________________________________________________________________ our products, will be adequate to prevent imitation of our products by others or will be adequate to prevent others from seeking to prevent sales of our products as a violation of the trademarks, patents or other intellectual property rights of others |
| The inability or failure to obtain trademark, patent or other intellectual property rights could materially harm our business |
| Additionally, we rely on the patent, trademark and other intellectual property laws of the United States and other countries to protect our proprietary rights |
| Even if we are successful in obtaining appropriate trademark, patent and other intellectual property rights, we may be unable to prevent third parties from using our intellectual property without our authorization, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States |
| Because we sell our products internationally and are dependent on foreign manufacturing in Hong Kong and China, we are significantly dependent on foreign countries to protect our intellectual property |
| The use of our intellectual property or similar intellectual property by others could reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business |
| Further, if it became necessary for us to resort to litigation to protect our intellectual property rights, any proceedings could be burdensome and costly and we may not prevail |
| Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products |
| We cannot be certain that our products do not and will not infringe the intellectual property rights of others |
| We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the intellectual property rights of third parties by us or our customers in connection with their use of our products |
| Any such claims, whether or not meritorious, could result in costly litigation and divert the efforts of our personnel |
| Moreover, should we be found liable for infringement, we may be required to enter into licensing agreements (if available on acceptable terms or at all) or to pay damages and cease making or selling certain products |
| Moreover, we may need to redesign or rename some of our products to avoid future infringement liability |
| Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling our products |
| An increase in product returns could negatively impact our operating results |
| We recognize revenues as sales when merchandise is shipped and title transfers to the customer |
| We permit the return of damaged or defective products and accept limited returns and will request that a customer return a product if we feel the customer has an excess of any style that we have identified as being a poor performer for that customer or geographic location |
| Accordingly, we provide allowances for the estimated amounts of these returns at the time of revenue recognition based on historical experience |
| Any significant increase in product damages or defects and the resulting credit returns could have a material adverse impact on our operating results for the period or periods in which such returns materialize |
| There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected |
| We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 |
| These provisions provide for the identification of material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America |
| Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls and disclosure controls will prevent all error and all fraud |
| A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met |
| In addition, the 25 _________________________________________________________________ design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs |
| 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, in our company have been detected |
| These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes |
| Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls |
| The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions |
| Over time, a control may be inadequate because of changes in conditions, such as growth of the company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate |
| Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected |
| In addition, discovery and disclosure of a material weakness, by definition, could have a material adverse impact on our financial statements |
| This could in turn negatively affect our ability to access public debt or equity markets for capital |
| Factors Relating to Our International Operations Factors affecting international commerce and our international operations may seriously harm our financial condition |
| We generate a significant portion of our revenues from outside of the United States, and we anticipate that revenue from our international operations could account for an increasingly larger portion of our revenues |
| Our international operations are directly related to, and dependent on, the volume of international trade and foreign market conditions |
| International commerce and our international operations are subject to many risks, some of which are discussed in more detail below, including: • recessions in foreign economies; • the adoption and expansion of trade restrictions; • limitations on repatriation of earnings; • difficulties in protecting our intellectual property or enforcing our intellectual property rights under the laws of other countries; • longer receivables collection periods and greater difficulty in collecting accounts receivable; • difficulties in managing foreign operations; • social, political and economic instability; • unexpected changes in regulatory requirements; • our ability to finance foreign operations; • tariffs and other trade barriers; and • US government licensing requirements for exports |
| The occurrence or consequences of any of these risks may restrict our ability to operate in the affected regions and decrease the profitability of our international operations, which may seriously harm our financial condition |
| 26 _________________________________________________________________ We depend on independent distributors to sell our products in certain international markets |
| We sell our products in certain international markets mainly through independent distributors |
| If a distributor fails to meet annual sales goals, it may be difficult and costly to locate an acceptable substitute distributor |
| If a change in our distributors becomes necessary, we may experience increased costs, as well as a substantial disruption in, and a resulting loss of, sales |
| Foreign currency fluctuations could adversely impact our financial condition |
| We generally purchase our products in US dollars |
| However, we source a significant amount of our products overseas and, as such, the cost of these products purchased by our subsidiaries may be affected by changes in the value of the currencies, including the Australian Dollar, British Pound, Canadian Dollar, Chinese Yuan, Euro, Japanese Yen, Malaysian Ringgit and Singapore Dollar |
| Due to our dependence on manufacturing operations in China, changes in the value of the Chinese Yuan may have a material impact on our supply channels and our manufacturing costs, including component and assembly costs |
| Changes in the currency exchange rates may also affect the relative prices at which we and our foreign competitors sell products in the same market |
| Although we utilize forward contracts to mitigate foreign currency risks (mostly relating to the Euro and the British Pound), if we are unsuccessful in mitigating these risks, foreign currency fluctuations may have a material adverse impact on the results of our operations |
| Because we are dependent on foreign manufacturing we are vulnerable to changes in economic and social conditions in Asia and disruptions in international travel and shipping |
| Because a substantial portion of our watches and certain of our handbags, sunglasses and other products are manufactured in Hong Kong and China, our success will depend to a significant extent upon future economic and social conditions existing in Hong Kong and China |
| If the manufacturing sources in Hong Kong and China were disrupted for any reason, we would need to arrange for the manufacture and shipment of products by alternative sources |
| Because the establishment of new manufacturing relationships involves numerous uncertainties, including those relating to payment terms, costs of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery, we are unable to predict whether such relationships would be on terms that we regard as satisfactory |
| Any significant disruption in our relationships with our manufacturing sources located in Hong Kong and China would have a material adverse effect on our ability to manufacture and distribute our products |
| Restrictions on travel to and from these and other regions, similar to those imposed during the outbreak of Severe Acute Respiratory Syndrome in 2003, commonly known as SARS, and any delays or cancellations of customer orders or the manufacture or shipment of our products on account of SARS or other syndromes could have a material adverse effect on our ability to meet customer deadlines and timely distribute our products in order to match consumer tastes |
| Risks associated with foreign government regulations and US trade policy may affect our foreign operations and sourcing |
| Our businesses are subject to risks generally associated with doing business abroad, such as foreign governmental regulation in the countries in which our manufacturing sources are located, primarily Hong Kong and other parts of China |
| While we have not experienced any material issues with foreign governmental regulations that would impact our arrangements with our foreign manufacturing sources, we believe that this issue is of particular concern with regard to China due to the less mature nature of the Chinese market economy and the historical involvement of the Chinese government in industry |
| If regulation were to render the conduct of business in a particular country undesirable or impracticable, or if our current foreign manufacturing sources were for any other reason to cease doing business with us, such a development could have a material adverse effect on our product sales and on our supply, manufacturing and distribution channels |
| 27 _________________________________________________________________ Our business is also subject to the risks associated with US and foreign legislation and regulations relating to imports, including quotas, duties, tariffs or taxes, and other charges or restrictions on imports, which could adversely affect our operations and our ability to import products at current or increased levels |
| We cannot predict whether additional US and foreign customs quotas, duties (including antidumping or countervailing duties), tariffs, taxes or other charges or restrictions, requirements as to where raw materials must be purchased, additional workplace regulations or other restrictions on our imports will be imposed upon the importation of our products in the future or adversely modified, or what effect such actions would have on our costs of operations |
| For example, our products imported to the United States are subject to US customs duties and, in the ordinary course of our business, we may from time to time be subject to claims by the US Customs Service for duties and other charges |
| Factors that may influence the modification or imposition of these restrictions include the determination by the US Trade Representative that a country has denied adequate intellectual property rights or fair and equitable market access to US firms that rely on intellectual property, trade disputes between the United States and a country that leads to withdrawal of "e most favored nation "e status for that country and economic and political changes within a country that are viewed unfavorably by the US government |
| Future quotas, duties or tariffs may have a material adverse effect on our business, financial condition and results of operations |
| Future trade agreements could also provide our competitors with an advantage over us, or increase our costs, either of which could have a material adverse effect on our business, results of operations and financial condition |
| Substantially all of our import operations are subject to: • quotas imposed by bilateral textile agreements between the countries where our apparel-producing facilities are located and foreign countries; and • customs duties imposed by the governments where our apparel-producing facilities are located on imported products, including raw materials |
| Our apparel-producing operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, and the activities and regulations of the World Trade Organization, referred to as the WTO Generally, such trade agreements benefit our apparel business by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country |
| However, trade agreements can also impose requirements that negatively impact our apparel business, such as limiting the countries from which we can purchase raw materials and setting quotas on products that may be imported into the United States from a particular country |
| In addition, the WTO may commence a new round of trade negotiations that liberalize textile trade |
| This increased competition could have a material adverse effect on our business, results of operations and financial condition |
| Risks Relating to Our Common Stock Many factors may cause our net revenues, operating results and cash flows to fluctuate and possibly decline which may result in declines in our stock price |
| Our net revenues, operating results and cash flows may fluctuate significantly because of a number of factors, many of which are outside of our control |
| These factors may include, but may not be limited to, the following: • fluctuations in market demand for our products; • increased competition and pricing pressures; • our ability to anticipate changing customer demands and preferences; • our failure to efficiently manage our inventory levels; • our inability to manage and maintain our debt obligations; 28 _________________________________________________________________ • seasonality in our business; • changes in our, and our competitors &apos , business strategy or pricing; • the timing of certain general and administrative expenses; • completing acquisitions and the costs of integrating acquired operations; • international currency fluctuations, operating challenges and trade regulations; • acts of terrorism or acts of war; and • government regulation |
| One or more of the foregoing factors, as well as any other risk factors discussed in this Annual Report on Form 10-K, may cause our operating expenses to be unexpectedly high or result in a decrease in our revenue during any given period |
| If these or any other variables or unknowns were to cause a shortfall in revenues or earnings, an increase in our operating costs or otherwise cause a failure to meet public market expectations, our stock price may decline and our business could be adversely affected |
| Two principal stockholders own a significant amount of our outstanding common stock |
| Kosta Kartsotis, our President and CEO, and Mr |
| Tom Kartsotis, the Chairman of our Board of Directors, each own a substantial amount of our common stock |
| As a result, they are in a position to significantly influence the outcome of elections of our directors, the adoption, amendment or repeal of our bylaws and any other actions requiring the vote or consent of our stockholders, and to otherwise influence our affairs |
| Our organizational documents contain anti-takeover provisions that could discourage a proposal for a takeover of us |
| Our certificate of incorporation and bylaws, as well as the General Corporation Law of the State of Delaware, contain provisions that may have the effect of discouraging a proposal for a takeover of us |
| These include a provision in our certificate of incorporation authorizing the issuance of "e blank check "e preferred stock, the division of our Board of Directors into three classes to be elected on a staggered basis, one class each year, provisions in our bylaws establishing advance notice procedures with respect to certain stockholder proposals, and provisions requiring that action taken to remove a director without cause be approved either by an 80prca vote of the Board of Directors or an 80prca vote of the stockholders |
| Our bylaws may be amended by a vote of 80prca of the Board of Directors, subject to repeal by a vote of 80prca of the stockholders |
| In addition, Delaware law limits the ability of a Delaware corporation to engage in certain business combinations with interested stockholders |
| Finally, Messrs |
| Kartsotis have the ability, by virtue of their stock ownership, to significantly influence a vote regarding a change in control of us |
| Future sales of our common stock in the public market could adversely affect our stock price |
| Kosta Kartsotis and Mr |
| Tom Kartsotis each own a substantial amount of our common stock |
| The shares beneficially owned by Mr |
| Tom Kartsotis may be sold in the open market in the future, subject to any volume restrictions and other limitations under the Securities Act of 1933 and Rule 144 thereunder |
| We may also decide to file a registration statement enabling Messrs |
| Kartsotis to sell additional shares |
| Kartsotis of substantial amounts of our common stock in the open market, or the availability of their shares for sale, could adversely affect the price of our common stock |
| The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that those sales could 29 _________________________________________________________________ occur |
| These sales or the possibility that they may occur also could make it more difficult for us to raise funds in any equity offering in the future at a time and price that we deem appropriate |