Edgar Filing: FOSSIL INC

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

		For the quarterly period ended: October 7, 2006

		OR

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

Commission file number:0-19848

FOSSIL, INC.

(Exact name of registrant as specified in its charter)

Delaware		75-2018505
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2280 N. Greenville Avenue, Richardson, Texas 75082

(Address of principal executive offices)

(Zip Code)

(972) 234-2525

(Registrant's telephone number, including area code)

Indicate by check mark whether 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 o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

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

Yes o No x

The number of shares of registrant's common stock outstanding as of July 27, 2007: 68,241,027

EXPLANATORY NOTE

In June 2006, as a result of the wide-scale scrutiny of employee stock option grant practices, including a report issued on June 13, 2006 by UBS Securities LLC mentioning Fossil, Inc. (the “Company”), we began a review of our historical stock option practices in order to determine whether there were any improprieties related to the timing of our past stock option grants. On November 14, 2006, the Company announced that a committee made up of five independent members of its Board of Directors (the “Special Committee”) commenced a voluntary review of the Company’s equity granting practices. The Special Committee was ultimately reconstituted on February 8, 2007, to consist of two independent members of the Board of Directors. The Special Committee’s voluntary review was undertaken with assistance from independent legal counsel, Weil, Gotshal & Manges LLP, and forensic accounting assistance from FTI Consulting, Inc. On May 7, 2007, the Company announced that the Special Committee had completed its review and had delivered its final report to the Board on May 4, 2007. As a result of deficiencies identified by the Special Committee relating to the Company’s equity granting practices, the Company’s management commenced a more thorough evaluation of the appropriateness of accounting measurement dates used to determine the amounts of compensation charges and related tax effects previously disclosed in filings with the U.S. Securities and Exchange Commission (the “SEC”). The Company also announced on May 7, 2007 that, although this evaluation was still in process, based on preliminary estimates; the Company and its Audit Committee concluded that the cumulative impact of related errors on previously issued financial statements would result in the restatement of the Company’s previously issued financial statements.

Unrelated to the Special Committee’s review, management also identified that certain grants previously awarded to employees as incentive stock options should have been treated as non-qualified stock options. Due to different tax requirements associated with the exercise of incentive stock option versus a non-qualified stock option, the Company has determined that certain employer and employee FICA taxes and employee withholding taxes were not properly withheld at the time such options were exercised by its employees.

In addition to the errors related to stock-based compensation discussed above, the Company has also corrected certain previously identified prior period errors that the Company believed were not material to the Company’s consolidated financial statements, both individually and when considered in the aggregate.

The Company has restated its retained earnings balance at the beginning and the end of fiscal year 2005 to include a reduction of $9.2 million and $11.6 million, respectively, related to the after tax impact of additional stock-based compensation expense and correction of other accounting errors from 1993 through 2005. This amount represents approximately 2.4% of the previously reported ending fiscal year 2005 retained earnings balance.

On this Form 10-Q, the Company is restating its condensed consolidated balance sheet as of December 31, 2005, the condensed consolidated statements of income and comprehensive income for the thirteen and thirty-nine week periods ended October 1, 2005 and the condensed consolidated statement of cash flows for the thirty-nine week period ended October 1, 2005 as a result of the errors discussed above.

The effect of the restatement on the condensed consolidated statements of income and comprehensive income for the thirteen and thirty-nine week periods ended October 1, 2005 includes: (i) an approximate $466,000 decrease in pre-tax income related to the correction of measurement dates used in the Company’s historical equity granting practices, (ii) an approximate $364,000 decrease in pre-tax income related to additional employer and employee FICA taxes due, including interest thereon, related to reclassifying certain incentive stock options to non-qualified stock options, (iii) an approximate $979,000 increase in pre-tax income to reverse the impact of certain sales returns recorded in fiscal year 2005 that should have been recorded in fiscal year 2004, (iv) an approximate $207,000 decrease in pre-tax income related to the adjustment of accrued management fees that should have been eliminated at the end of fiscal year 2004, (v) an approximate $1.4 million increase in pre-tax income related to the correction of an error in the Company’s analysis of store impairment, (vi) an approximate $1.5 million increase in income tax expense to correct errors related to certain tax contingency reserves, released in fiscal year 2005, that should have been released in fiscal year 2004 and (vii) an approximate $452,000 increase in income tax expense related to items (i) through (v) above.

The Company has recorded the full impact of the adjustments related to additional stock-based compensation and correction of the other prior period errors and the related tax effects, as they relate to the first and second quartes of fiscal years 2006 and 2005, in the third quarter of fiscal years 2006 and 2005, as the Company believes the impact is not material to any relevant quarter. Therefore, the third quarter net income and diluted earnings per share have been reduced by $355,000 and $0.01, respectively, for fiscal year 2006 and $653,000 and $0.01, respectively, for fiscal year 2005 related to such prior quarter adjustments.

In the Company’s Form 10-K for the year ended January 6, 2007 (the “2006 Form 10-K”), filed with the SEC contemporaneously with this Form 10-Q, the Company has restated its consolidated balance sheet at December 31, 2005 (including retained earnings at the beginning of the fiscal year) and its consolidated statements of income and comprehensive income and cash flows for the years ended December 31, 2005, January 1, 2005 and the notes related thereto. Additionally, in the 2006 Form 10-K, the Company has restated the selected financial data for the years ended December 31, 2005, January 1, 2005, January 3, 2004 and January 4, 2003 included in Item 6 and the third and fourth quarters of 2005 included in “Selected Quarterly Financial Data” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q affected by the restatement will not be amended and therefore should not be relied upon.

For additional information regarding this restatement, see Note 2, “Restatement of Consolidated Financial Statements” to the accompanying unaudited condensed consolidated financial statements and the section entitled “Restatement of Consolidated Financial Statements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FOSSIL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

AMOUNTS IN THOUSANDS

	October 7,			December 31,
	2006			2005
				(as restated – See Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$	69,379		$	58,222
Securities available for sale		7,077			6,553
Accounts receivable – net of allowances of $33.9 million and $32.1 million for 2006 and 2005, respectively		168,718			141,193
Inventories - net		269,902			241,009
Deferred income tax assets		18,301			18,808
Prepaid expenses and other current assets		42,245			41,387
Total current assets		575,622			507,172
Investments		11,014			9,352
Property, plant and equipment – net of accumulated depreciation of $104,179 and $83,880 for 2006 and 2005, respectively		168,096			147,243
Goodwill		42,588			40,667
Intangible and other assets – net of accumulated amortization of $3,647 and $2,413 for 2006 and 2005, respectively		44,899			40,708
Total assets	$	842,219		$	745,142
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	54,650		$	8,552
Accounts payable		60,794			60,628
Accrued expenses:
Accrued accounts payable		21,668			20,028
Compensation		27,773			22,259
Accrued royalties		10,328			8,316
Co-op advertising		6,455			15,178
Other		21,986			16,550
Income taxes payable		34,045			29,159
Total current liabilities		237,699			180,670
Deferred income tax liabilities		30,926			28,936
Other long-term liabilities		7,744			6,692
Total long-term liabilities		38,670			35,628
Minority interest in subsidiaries		5,617			2,527
Stockholders’ equity:
Common stock, 67,710 and 68,319 shares issued for 2006 and 2005, respectively		677			683
Additional paid-in capital		50,909			47,675
Retained earnings		494,291			475,504
Accumulated other comprehensive income		15,322			7,676
Treasury stock at cost, 54 shares		(966	)		-
Deferred compensation		-			(5,221	)
Total stockholders’ equity		560,233			526,317
Total liabilities and stockholders’ equity	$	842,219		$	745,142

See notes to condensed consolidated financial statements.

FOSSIL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

UNAUDITED

AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA

	For the 13 Weeks Ended			For the 13 Weeks Ended			For the 40 Weeks Ended			For the 39 Weeks Ended
	October 7, 2006			October 1, 2005			October 7, 2006			October 1, 2005
				(as restated – See Note 2)						(as restated – See Note 2)

Net sales	$	299,697		$	260,171		$	823,160		$	718,916
Cost of sales		151,591			123,961			415,007			344,291
Gross profit		148,106			136,210			408,153			374,625

Operating expenses:
Selling and distribution		82,341			72,705			246,995			214,319
General and administrative		32,812			26,783			95,018			82,776
Total operating expenses		115,153			99,488			342,013			297,095

Operating income		32,953			36,722			66,140			77,530
Interest expense		1,009			33			2,556			115
Other expense – net		3			2,304			541			7,237
Income before income taxes		31,941			34,385			63,043			70,178
Provision for income taxes		10,400			12,691			20,547			14,937
Net income	$	21,541		$	21,694		$	42,496		$	55,241

Other comprehensive income, net of taxes:
Currency translation adjustment		(2,542	)		(624	)		8,629			(12,364	)
Unrealized gain (loss) on securities available for sale		308			307			(53	)		390
Forward contracts hedging intercompany foreign currency payments – change in fair values		1,223			277			(929	)		2,687
Total comprehensive income	$	20,530		$	21,654		$	50,143		$	45,954

Earnings per share:
Basic	$	0.32		$	0.31		$	0.63		$	0.78
Diluted	$	0.31		$	0.30		$	0.62		$	0.76
Weighted average common shares outstanding:
Basic		67,127			70,563			67,116			70,688
Diluted		68,691			72,437			68,537			72,757

See notes to condensed consolidated financial statements.

FOSSIL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

AMOUNTS IN THOUSANDS

	For the 40 Weeks Ended			For the 39 Weeks Ended
	October 7, 2006			October 1, 2005
				(as restated – See Note 2)
Operating activities:
Net income	$	42,496		$	55,241
Noncash items affecting net income:
Minority interest in subsidiaries		3,269			3,686
Equity in earnings of joint venture		(1,247	)		(1,124	)
Depreciation and amortization		23,730			19,377
Stock-based compensation		4,037			1,829
Excess tax benefits from stock-based compensation		(1,312	)		2,429
Loss (gain) on disposal of assets		28			(556	)
Decrease in allowance for doubtful accounts		(1,771	)		(983	)
Increase in allowance for returns - net of related inventory		75			895
Deferred income taxes		2,448			(16,324	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(27,507	)		1,641
Inventories		(24,910	)		(78,280	)
Prepaid expenses and other current assets		(858	)		(9,162	)
Accounts payable		(1,656	)		12,047
Accrued expenses		6,738			(8,908	)
Income taxes payable		6,197			(654	)
Net cash from (used in) operating activities		29,757			(18,846	)
Investing activities:
Business acquisitions, net of cash acquired		(7,227	)		(4,429	)
Additions to property, plant and equipment		(39,589	)		(43,126	)
Purchase of securities available for sale		(475	)		(837	)
Increase in intangible and other assets		(1,855	)		(2,002	)
Net cash used in investing activities		(49,146	)		(50,394	)
Financing activities:
Proceeds from exercise of stock options		4,355			4,484
Acquisition and retirement of common stock		(25,930	)		(17,354	)
Excess tax benefits from stock-based compensation		1,312			-
Distribution of minority interest earnings		(186	)		(3,945	)
Net borrowings of / (payments on) short-term debt		45,649			(12,657	)
Net cash from (used in) financing activities		25,200			(29,472	)
Effect of exchange rate changes on cash and cash equivalents		5,346			(4,581	)
Net increase (decrease) in cash and cash equivalents		11,157			(103,293	)
Cash and cash equivalents:
Beginning of period		58,222			185,430
End of period	$	69,379		$	82,137

See notes to condensed consolidated financial statements.

FOSSIL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1.	FINANCIAL STATEMENT POLICIES

Basis of Presentation. The condensed consolidated financial statements include the accounts of Fossil, Inc., a Delaware corporation, and its wholly and majority-owned subsidiaries (the “Company”). The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s financial position as of October 7, 2006, and the results of operations for the thirteen-week periods ended October 7, 2006 (“Third Quarter”) and October 1, 2005 (“Prior Year Quarter”), respectively and the forty week period ended October 7, 2006 (“Year To Date Period”) and the thirty-nine week period ended October 1, 2005 (“Prior Year YTD Period”), respectively. The Company noted that fiscal 2006 is a 53-week year as compared to a 52-week year in fiscal 2005. This extra week was included in the first quarter of fiscal year 2006.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the annual report on Form 10-K for the year ended January 6, 2007, (the “2006 Form 10-K”), filed by the Company pursuant to the Securities Exchange Act of 1934 contemporaneously with this Form 10-Q. Operating results for the forty week period ended October 7, 2006, are not necessarily indicative of the results to be achieved for the full year.

Cash Equivalents are considered all highly liquid investments with original maturities at date of purchase of three months or less.

Securities Available for Sale consists of debt securities with original maturities exceeding three months and mutual fund investments. By policy, the Company invests primarily in high-grade marketable securities. Unrealized holding gains (losses) are included in accumulated other comprehensive income (loss) as a component of stockholders’ equity.

Inventories are stated at the lower of average cost, including any applicable duty and freight charges, or market.

Investments in which the Company has significant influence over the investee are accounted for utilizing the equity method. If the company does not have significant influence over the investee, the cost method is utilized.

Property, Plant and Equipment is stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the assets of thirty years for buildings, five years for furniture and fixtures and three to six years for computer equipment and software. Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life.

Property, equipment and other long-lived assets are evaluated for impairment whenever events or conditions indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows related to the asset.

Goodwill and Other Intangible Assets include the cost in excess of net tangible assets acquired (goodwill), trademarks, tradenames, customer lists and patents. Trademarks, customer lists and patents are amortized using the straight-line method over the estimated useful lives of generally seven to twenty years. Goodwill and other indefinite-lived intangible assets such as tradenames are tested at least annually for impairment rather than amortized. Impairment testing compares the carrying amount of the asset with its fair value. Fair value is estimated based on the market approach and discounted cash flows. When the carrying amount of the asset exceeds its fair value, an impairment charge would be recorded.

Cumulative Translation Adjustment is included as a component of other comprehensive income (loss) and reflects the unrealized adjustments resulting from translating the financial statements of foreign subsidiaries. The functional currency of the Company’s foreign subsidiaries is the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at the average rates prevailing during the year. Changes in exchange rates that affect cash flows and the related receivables or payables are recognized as transaction gains and losses in the determination of net income.

Revenues are recognized at the point the goods leave the Company’s distribution center for the customer. Because the majority of the Company’s customers pay freight and do not have stated rights of inspection, title transfers at the point in time the goods leave the Company’s dock. The Company accepts limited returns and may request that a customer return a product if the customer has an excess of any style that the Company has identified as being a poor performer for that customer or geographic location. The Company continually monitors returns and maintains a provision for estimated returns based upon historical experience and any specific issues identified. While returns have historically been within management’s expectations and the provisions established, future return rates may differ from those experienced in the past. Any significant increase in product damages or defects and the resulting credit returns could have an adverse impact on the operating results for the period or periods in which such returns materialize.

Cost of Sales includes raw material costs, assembly labor, assembly overhead including depreciation expense, assembly warehousing costs and shipping and handling costs related to the movement of finished goods from assembly locations to sales distribution centers and from sales distribution centers to customer locations. Additionally, cost of sales includes customs duties, product packaging cost, royalty cost associated with sales of licensed products, molding and tooling costs and inventory shrink and damages.

Selling, Distribution and AdministrativeExpenses includes sales and distribution labor costs, distribution costs from sales distribution centers to customer locations, sales distribution center warehouse costs, depreciation expense related to sales centers, point-of-sale expenses, advertising expenses and administrative support labor and ”back office” or support costs such as treasury, legal, information services, accounting, internal audit, human resources and executive management costs.

Advertising Costs for in-store and media advertising as well as co-op advertising, internet costs associated with affiliation fees and promotional allowances are expensed as incurred.

Minority Interest in Subsidiaries, included within other expense-net represents the minority stockholders’ share of the net income (loss) of various consolidated subsidiaries. The minority interest in the consolidated balance sheets reflects the minority owner’s proportionate interest in the equity of the various consolidated subsidiaries.

Business. Fossil is a design, development, marketing and distribution company that specializes in consumer products predicated on fashion and value. The Company’s principal offerings include an extensive line of fashion watches sold under the Company’s proprietary FOSSIL®, RELIC®, MW®, MW MICHELE®, and ZODIAC® brands as well as licensed brands for some of the most prestigious companies in the world, including ADIDAS®, BURBERRY®, DIESEL®, DKNY® and EMPORIO ARMANI®. The Company also offers complementary lines of handbags, small leather goods, belts, and sunglasses under the FOSSIL and RELIC brands, jewelry under the FOSSIL, DIESEL, EMPORIO ARMANI, and MICHELE brands and FOSSIL apparel. The Company’s centralized infrastructure in design/development and production/sourcing allows it to leverage the strength of its branded watch and jewelry portfolio over an extensive global distribution network. The Company’s products are sold primarily through department stores and other major retailers, both domestically and in over 90 countries worldwide.

Foreign Currency Hedging Instruments. The Company’s foreign subsidiaries periodically enter into forward contracts principally to hedge the future payment of intercompany inventory transactions with the U.S. company. At October 7, 2006, the Company’s foreign subsidiaries had forward contracts to sell (i) 33.5 million Euro for approximately $42.6 million, expiring through June 2007 and (ii) 4.7 million British Pounds for approximately $9 million, expiring through March 2007. If the Company’s foreign subsidiaries were to settle their Euro and British Pound based contracts at the reporting date, the net result would be a net gain of approximately $200,000, net of taxes, as of October 7, 2006. The net decrease in fair value for the Year To Date Period of approximately $900,000 and the net increase in fair value for the Prior Year YTD Period of approximately $2.7 million is included in other comprehensive income. The net decrease for the Year To Date Period consisted of net losses from these hedges of $100,000, and net gains of $800,000 reclassified into earnings.

Earnings Per Share. The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS:

	For the 13 Weeks Ended October 7, 2006		For the 13 Weeks Ended October 1, 2005		For the 40 Weeks Ended October 7, 2006		For the 39 Weeks Ended October 1, 2005

	IN THOUSANDS, EXCEPT PER SHARE DATA
Numerator:
Net income	$	21,541	$	21,694	$	42,496	$	55,241
Denominator:
Basic EPS computation:
Weighted average common shares outstanding		67,127		70,563		67,116		70,688

Basic EPS	$	0.32	$	0.31	$	0.63	$	0.78

Diluted EPS computation:
Denominator:
Basic weighted average common shares outstanding		67,127		70,563		67,116		70,688
Dilutive effect of stock-based compensation		1,564		1,874		1,421		2,069
		68,691		72,437		68,537		72,757

Diluted EPS	$	0.31	$	0.30	$	0.62	$	0.76

Approximately 900,000, 900,000, 1.7 million and 700,000 weighted average shares issuable under stock-based awards were not included in the diluted earnings per share calculation at the end of the Third Quarter, Prior Year Quarter, Year To Date Period and Prior YTD Period, respectively, because they were antidilutive. These common share equivalents may be dilutive in future earnings per share calculations.

Goodwill. The changes in the carrying amount of goodwill, which is not subject to amortization, are as follows:

Goodwill by Segment
IN THOUSANDS	United States		Europe			Other International			Direct to Consumer		Total

Balance at January 1, 2005	$	21,097	$	17,213		$	1,502		$	-	$	39,812
Acquisitions		-		994			1,303			-		2,297
Currency		702		(2,079	)		(65	)		-		(1,442	)
Balance at December 31, 2005		21,799		16,128			2,740			-		40,667
Acquisitions		-		-			1,026			-		1,026
Currency		-		938			(43	)		-		895
Balance at October 7, 2006	$	21,799	$	17,066			3,723		$	-	$	42,588

New Accounting Standards. In June 2006, the Financial Accounting Standards Board ("FASB") released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 supplements FASB Statement No. 109, Accounting for Income Taxes, by defining the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than not" to be sustained by the taxing authority. Tax benefits, associated with positions taken or to be taken on tax returns where there is uncertainty as to whether the position will be challenged by the taxing authorities, will be impacted by FIN 48.

FIN 48 is effective for the Company's fiscal year 2007. FIN 48 establishes a two-step process for the recognition and measurement of the amount of benefit to be recorded in the financial statements for tax positions taken or expected to be taken in a tax return. This process requires the enterprise first to determine whether is it more likely than not that the tax position taken will be sustained upon examination by the taxing authority, including resolution of any appeals or litigation, on the basis of the technical merits of the position. FIN 48 requires that an enterprise measure the amount of recognizable tax benefit for each tax position meeting the recognition threshold as the largest amount that is greater than 50 percent likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The cumulative effects of applying this interpretation will result in a decrease of $6.1 million to the fiscal year 2007 opening balance of retained earnings as a change in accounting principle.

In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements (“SFAS 157”). This Standard provides guidance for using fair value to measure assets and liabilities. Under SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and is required to be adopted beginning January 6, 2008. The Company is currently evaluating the effect the adoption of SFAS 157 will have on its consolidated results of operations and financial condition but does not expect such adoption to have a material impact.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“SFAS 159”). The fair value option permits entities to choose to measure eligible financial instruments at fair value at specified election dates. The entity will report unrealized gains and losses on the items on which it has elected the fair value option in earnings. SFAS 159 is effective beginning in the Company's fiscal year 2008. The Company is currently evaluating the effect the adoption of SFAS 159 will have on its consolidated results of operations and financial condition but does not expect such adoption to have a material impact.

2.	RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

Restatement Adjustments

Following an internal review into the Company’s equity granting practices from fiscal years 1993 through 2006, the Company and its Audit Committee concluded that the Company’s consolidated financial statements for the thirteen and thirty-nine week periods ended October 1, 2005, and its fiscal years ended December 31, 2005 and January 1, 2005 as well as the selected financial data for the years ended December 31, 2005, January 1, 2005, January 3, 2004 and January 4, 2003 should be restated. This restatement is related to the recognition of additional stock-based compensation expense and the related tax effects resulting from equity grants awarded from fiscal years 1993 through 2005 that were incorrectly accounted for under generally accepted accounting principles in the United States of America. This decision was based on a determination that the equity grant dates were selected in error because the grant price and the number of shares individual employees were entitled to receive were not determined with finality on the original grant date and therefore the measurement date, as defined by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, for determining the accounting treatment of certain equity grants differed from the date used by the Company in preparing its consolidated financial statements. In analyzing the historical annual mass grant process, new hire grants and other equity grants from fiscal years 1993 through 2006, the Company reviewed historical circumstances and patterns related to its equity granting practices, the requirements of its Long-Term Incentive Plan for employees (the "LTIP”), Board of Directors meeting minutes, the minutes of its Compensation Committee or resolutions related to actions taken by the Compensation Committee, Form 4’s, payroll information including documentation associated with annual performance reviews, new hires and promotions and other evidence including Company e-mail and related correspondence to determine the most appropriate measurement dates. After comparing the newly determined most appropriate measurement dates to the original grant dates used by the Company in preparing its historical consolidated financial statements, the Company determined that certain equity grants were awarded at exercise prices below the fair market value of the Company’s common stock on the measurement date. As a result, the Company has recorded additional pre-tax stock-based compensation expense of approximately $466,000, related to the correction of measurement dates in the restatement of its unaudited condensed consolidated statements of income and comprehensive income for the thirteen and thirty-nine week periods ended October 1, 2005.

The summary of evidence the Company relied upon to determine the most appropriate measurement dates for stock option grants to employees from 1993 to 2006 is detailed below.

	Number		Percent			Number of		Percent
Evidence Relied Upon	of Grants		of Total			Options		of Total

Payroll information		2,794		44.8	%		6,714,275		34.4	%
Board of Directors meeting minutes		1,212		19.4	%		6,138,796		31.4	%
Company e-mail		1,209		19.4	%		2,862,825		14.6	%
Compensation Committee meeting minutes		458		7.4	%		555,735		2.8	%
International management meetings		275		4.4	%		732,236		3.7	%
Company equity grant administration database		81		1.3	%		271,842		1.4	%
Form 4		27		0.4	%		815,093		4.2	%
All other evidence		183		2.9	%		1,454,112		7.5	%
Total		6,239		100.0	%		19,544,914		100.0	%

In addition to adjustments for stock-based compensation related to the determination of measurement dates discussed above, the Company is correcting other errors in its condensed consolidated statements of income and comprehensive income for the thirteen and thirty-nine week periods ended October 1, 2005. An approximate $364,000 decrease in pre-tax income related to additional employer and employee FICA taxes due, including interest thereon, was recorded in connection with the Company’s correction of reclassifying certain incentive stock options to non-qualified stock options. This restatement also includes the following adjustments for corrections not previously recorded as the Company believed the amounts of these errors, both individually and in the aggregate, were not material to the Company’s consolidated financial statements for the thirteen and thirty-nine week periods ended October 1, 2005: (i) an approximate net $979,000 increase in pre-tax income to reverse the impact of certain sales returns recorded in fiscal year 2005 that should have been recorded in fiscal year 2004, which had the effect of increasing net sales, cost of sales and selling and distribution expenses by approximately $2.7 million, $1.2 million and $454,000, respectively, (ii) an approximate $207,000 decrease in pre-tax income to adjust accrued liabilities related to certain management fees that should have been eliminated at the end of fiscal year 2004, (iii) an approximate $1.4 million increase in pre-tax income related to the correction of an error in the Company’s analysis for store impairment related to an improper application of FASB Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which had the effect of reducing depreciation and amortization expense and loss on disposal of assets by approximately $617,000 and $756,000, respectively, (iv) an approximate $1.5 million increase in income tax expense to correct the impact of certain tax contingency reserves, released in fiscal year 2005, that should have been released in fiscal year 2004, primarily related to foreign tax liabilities previously recorded for potential tax exposure related to the Company's reorganization of its German subsidiary in fiscal year 2004, and (v) an approximate $452,000 increase in income tax expense resulting from the impact of pre-tax adjustments related to additional stock-based compensation expense and other corrections described above.

The Company has recorded the full impact of the adjustments related to additional stock-based compensation and correction of other prior period errors and the related tax effects, as they relate to the first and second quarters of fiscal years 2006 and 2005, in the third quarter of fiscal years 2006 and 2005, as the Company believes the impact is not material to any relevant quarter. Therefore, the third quarter net income and diluted earnings per share have been reduced by $355,000 and $0.01, respectively, for fiscal year 2006 and $653,000 and $0.01, respectively, for fiscal year 2005 related to such prior quarter adjustments.

The Company is restating its condensed consolidated balance sheet at December 31, 2005 to include: (i) an increase in cash and cash equivalents and a decrease in accounts receivable-net of $765,000 to correct an error related to the timing of posting certain credit card settlement payments, (ii) a $1.3 million increase to deferred income tax assets, a $1.1 million decrease to income taxes payable and a $114,000 decrease to deferred income tax liabilities related to the tax effect of additional stock-based compensation expense from fiscal year 1993 through fiscal year 2005 and the net impact of expenses related to the correction of other errors and adjustments to certain tax contingency reserves during such period from fiscal year 2001 through fiscal year 2005, (iii) a $907,000 decrease in property, plant and equipment-net and a $900,000 decrease in accrued expenses related to the correction of an error in the Company’s analysis for store impairment, (iv) a $2.3 million increase in accrued expenses related to additional employer and employee FICA taxes due, including interest thereon, in connection with the Company reclassifying certain incentive stock options to non-qualified stock options, (v) a $12.5 million increase in additional paid-in capital and a $754,000 decrease in deferred compensation related to the impact of adjustments to additional stock-based compensation expense, (vi) an adjustment from other current liabilities to other long term liabilities of approximately $5.5 million related to deferred rent, and (vii) a $11.6 million adjustment to retained earnings relating to the after-tax impact of additional stock-based compensation expense and the net impact of expenses related to the correction of other errors from fiscal year 1993 through fiscal year 2005.

Additionally, for the thirteen and thirty-nine week periods ending October 1, 2005, the Company is restating for $766,000 and $2.3 million, respectively, of expenses previously disclosed as selling and distribution expenses to general and administrative expenses. These expenses were comprised of certain administrative expenses related to the Company's Retail Worldwide segment.

For its previously disclosed basic weighted average common shares outstanding included in the Company’s statements of income and comprehensive income for the thirteen and thirty-nine week periods ended October 1, 2005, the Company’s restatement includes an approximate 349,000 share and 365,000 share reduction, respectively, to correct an error related to the improper inclusion of unvested restricted shares in such previously reported amounts.

In connection with the Company’s voluntary review of its equity granting practices and the resulting correction of measurement dates for certain equity awards, the Company reviewed the implications of Section 162(m) which prohibits tax deductions for non-performance based compensation paid to the chief executive officer and the four highest compensated officers in excess of one million dollars in a taxable year. The Company concluded that no adjustments are required to its previously filed financial statements in connection with the provisions of Section 162(m).

CONSOLIDATED BALANCE SHEETS

AMOUNTS IN THOUSANDS

Fiscal Year	December 31, 2005
Assets	As Reported			Adjustments			As Restated
Current assets:
Cash and cash equivalents	$	57,457		$	765		$	58,222
Securities available for sale		6,553		-				6,553
Accounts receivable - net		141,958			(765	)		141,193
Inventories - net		241,009			-			241,009
Deferred income tax assets		17,505			1,303			18,808
Prepaid expenses and other current assets		41,387		-				41,387
Total current assets		505,869			1,303			507,172

Investments		9,352			-			9,352
Property, plant and equipment - net		148,150			(907	)		147,243
Goodwill		40,667			-			40,667
Intangible and other assets - net		40,708			-			40,708
Total assets	$	744,746		$	396		$	745,142

Liabilities and Stockholders' Equity
Current liabilities:
Short-term debt	$	8,552		$	-		$	8,552
Accounts payable		60,628			-			60,628
Accrued expenses:
Accrued accounts payable		20,928			(900	)		20,028
Compensation		19,956			2,303			22,259
Accrued royalties		8,316			-			8,316
Co-op advertising		15,178			-			15,178
Other		22,014			(5,464	)		16,550
Income taxes payable		30,228			(1,069	)		29,159
Total current liabilities		185,800			(5,130	)		180,670

Deferred income tax liabilities		29,050			(114	)		28,936
Other long term liabilities		1,220			5,472			6,692
Total long-term liabilities		30,270			5,358			35,628

Minority interest in subsidiaries		2,527		-				2,527
Stockholders' equity:
Common stock, 68,319 shares issued		683		-				683
Additional paid-in capital		35,161			12,514			47,675
Retained earnings		487,097			(11,593	)		475,504
Accumulated other comprehensive income		7,675		1				7,676
Deferred compensation		(4,467	)		(754	)		(5,221	)
Total stockholders' equity		526,149			168			526,317
Total liabilities and stockholders' equity	$	744,746		$	396		$	745,142

The impact to beginning retained earnings at January 3, 2004, by fiscal year, for adjustments related to stock-based compensation expense and the correction of other prior period errors is as follows:

	Stock-Based Compensation					Correction of Other Errors
Amounts in thousands	Pre-tax			Income Tax		Pre-tax			Income Tax
	Amount			Effect		Amount			Effect

Effect of restatement on net income by fiscal year:
1993	$	(4	)	$	1	$	-		$	-		$	(3	)
1994		(147	)		36		-			-			(111	)
1995		(498	)		130		-			-			(368	)
1996		(715	)		187		-			-			(528	)
1997		(714	)		187		-			-			(527	)
1998		(912	)		239		-			-			(673	)
1999		(971	)		254		-			-			(717	)
2000		(1,315	)		343		-			-			(972	)
2001		(1,140	)		298		-			(1	)		(843	)
2002		(1,520	)		308		220			(187	)		(1,179	)
2003		(1,643	)		339		(1,336	)		381			(2,259	)
Total effect of restatement on beginning retained earnings at January 3, 2004	$	(9,579	)	$	2,322	$	(1,116	)	$	193		$	(8,180	)

For fiscal year 1993 through fiscal year 2001, adjustments to stock-based compensation presented above, net of taxes, represent all of the stock-based compensation included in the Company’s net income for the respective periods. The Company’s net income for fiscal years 2002, 2003, 2004 and 2005 includes stock-based compensation, net of tax, of $1.5 million, $2.0 million, $2.4 million and $3.1 million, respectively, inclusive of the amounts of stock-based compensation, net of taxes, presented in the table above.

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

AMOUNTS IN THOUSANDS

	For the 13 Weeks ended October 1, 2005

	As Reported			Adjustments			As Restated

Net sales	$	257,519		$	2,652		$	260,171
Cost of sales		122,741			1,220			123,961
Gross profit		134,778			1,432			136,210

Operating expenses:
Selling and distribution		73,634			(929	)		72,705
General and administrative		25,946			837			26,783
Total operating expenses		99,580			(92	)		99,488

Operating income		35,198			1,524			36,722
Interest expense		30			3			33
Other expense - net		2,097			207			2,304

Income before income taxes		33,071			1,314			34,385
Provision for income taxes		10,724			1,967			12,691

Net income	$	22,347		$	(653	)	$	21,694

Other comprehensive income (loss), net of taxes:
Currency translation adjustment		(625	)		1			(624	)
Unrealized gain (loss) on marketable investments		307			-			307
Forward contracts hedging intercompany foreign currency payments - change in fair values		277			-			277

Total comprehensive income	$	22,306		$	(652	)	$	21,654

Earnings per share:
Basic	$	0.32			n/a		$	0.31
Diluted	$	0.30			n/a		$	0.30
Weighted average common shares outstanding:
Basic		70,912			(349	)		70,563
Diluted		73,605			(1,168	)		72,437

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

AMOUNTS IN THOUSANDS

	For the 39 Weeks ended October 1, 2005

	As Reported			Adjustments			As Restated

Net sales	$	716,264		$	2,652		$	718,916
Cost of sales		343,071			1,220			344,291
Gross profit		373,193			1,432			374,625

Operating expenses:
Selling and distribution		216,763			(2,444	)		214,319
General and administrative		80,424			2,352			82,776
Total operating expenses		297,187			(92	)		297,095

Operating income		76,006			1,524			77,530
Interest expense		112			3			115
Other expense - net		7,030			207			7,237

Income before income taxes		68,864			1,314			70,178
Provision for income taxes		12,970			1,967			14,937

Net income	$	55,894		$	(653	)	$	55,241

Other comprehensive income (loss), net of taxes:
Currency translation adjustment		(12,365	)		1			(12,364	)
Unrealized gain (loss) on marketable investments		390			-			390
Forward contracts hedging intercompany foreign currency payments - change in fair values		2,687			-			2,687

Total comprehensive income	$	46,606		$	(652	)	$	45,954

Earnings per share:
Basic	$	0.79			n/a		$	0.78
Diluted	$	0.76			n/a		$	0.76
Weighted average common shares outstanding:
Basic		71,053			(365	)		70,688
Diluted		73,997			(1,240	)		72,757

CONSOLIDATED STATEMENT OF CASH FLOWS

AMOUNTS IN THOUSANDS

	For the 39 Weeks Ended October 1, 2005
	As Reported			Adjustments			As Restated
Operating Activities:
Net income	$	55,894		$	(653	)	$	55,241
Noncash items affecting net income:
Minority interest in subsidiaries		3,686			-			3,686
Equity in earnings of joint venture		(1,124	)		-			(1,124	)
Depreciation and amortization		19,994			(617	)		19,377
Stock-based compensation		1,363			466			1,829
Excess tax benefits from stock-based compensation		2,429			-			2,429
Loss (gain) on disposal of assets		200			(756	)		(556	)
Decrease in allowance for doubtful accounts		(983	)		-			(983	)
Increase in allowance for returns net of related inventory		895			-			895
Deferred income taxes		(16,608	)		284			(16,324	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		5,107			(3,466	)		1,641
Inventories		(79,500	)		1,220			(78,280	)
Prepaid expenses and other current assets		(9,162	)		-			(9,162	)
Accounts payable		12,047			-			12,047
Accrued expenses		(10,746	)		1,838			(8,908	)
Income taxes payable		(2,338	)		1,684			(654	)
Net cash used in operating activities		(18,846	)	-				(18,846	)

Investing Activities:
Business acquisitions, net of cash acquired		(4,429	)		-			(4,429	)
Additions to property, plant and equipment		(43,126	)		-			(43,126	)
Purchase of securities available for sale		(837	)		-			(837	)
Increase in intangible and other assets		(2,002	)		-			(2,002	)
Net cash used in investing activities		(50,394	)	-				(50,394	)

Financing Activities:
Proceeds from exercise of stock options		4,484			-			4,484
Acquisition and retirement of common stock		(17,354	)		-			(17,354	)
Distribution of minority interest earnings		(3,945	)		-			(3,945	)
Net payments on short-term debt		(12,657	)		-			(12,657	)
Net cash used in financing activities		(29,472	)		-			(29,472	)

Effect of exchange rate changes on cash and cash equivalents		(4,581	)	-				(4,581	)
Net decrease in cash and cash equivalents		(103,293	)	-				(103,293	)
Cash and cash equivalents:
Beginning of year		185,430			-			185,430
End of year	$	82,137		$	-		$	82,137

3.	INVENTORIES

Inventories-net consist of the following:
	October 7,			December 31,
	2006			2005
	IN THOUSANDS
Components and parts	$	12,028		$	14,763
Work-in-process		2,738			4,807
Finished merchandise on hand		218,976			192,121
Merchandise at Company stores		31,548			23,206
Merchandise from estimated customer returns		20,187			18,509
		285,477			253,406
Inventory reserve for obsolescence		(15,575	)		(12,397	)
Inventories-net	$	269,902		$	241,009

4.	SHORT-TERM DEBT

On September 21, 2006 the Company executed (i) a third amendment to its U.S.-based revolving line of credit, (“Third Amendment”), with Wells Fargo Bank, National Association (“Wells Fargo”), in connection with the annual renewal of this credit facility. While the material terms of this facility remain in effect, this Third Amendment modified the quick ratio included in the financial covenants.

As a result of the Company’s inability to file timely its required financial statements with the Securities and Exchange Commission due to the review of its equity granting practices, on December 21, 2006 the Company and Wells Fargo executed a Fourth Amendment to its revolving line of credit modifying certain financial and non-financial covenants. These modifications include a restriction on the Company relating to future common stock repurchases. The Company anticipates the restriction related to common stock repurchases to be lifted contemporaneously with the filing of its 2006 Form 10-K. The Company is in compliance with all covenants related to its amended Loan Agreement at October 7, 2006.

TAXES

Income Taxes. The Company’s income tax expense for the Third Quarter and Prior Year Quarter was $10.4 million and $12.7 million, respectively, resulting in an effective income tax rate of 32.6% and 36.9%, respectively. For the Year To Date Period, the Company’s income tax expense of $20.5 million resulted in an effective income tax rate of 32.6%. For the comparable Prior Year YTD Period, income tax expense of $14.9 million resulted in an effective income tax rate of 21.3%. The lower effective tax rate in the Prior Year YTD Period was a result of the Company’s ability, pursuant to the American Jobs Creation Act of 2004, to reduce previously recorded deferred tax liabilities by repatriating foreign earnings at an effective tax rate substantially below the statutory rate at which these deferred tax liabilities were established.

Other Taxes. The Company also reviewed the consequences of issuing in-the-money stock options under Section 409A of the Internal Revenue Code ("Section 409A"). The Company plans to reimburse its employees for any tax liability, including interest and penalties, arising under Section 409A relating to in-the-money stock options exercised by such employees subsequent to December 31, 2005 up to a certain date. The Company estimates such reimbursement to employees will approximate $766,000 and expects to record this charge in fiscal year 2007. The Company intends to offer option holders the opportunity to amend certain vested and un-exercised options that were granted in-the-money to avoid any future adverse tax consequences under Section 409A. The Company also anticipates giving such option holders (excluding executive officers) a cash bonus for the increase in the exercise price. The Company estimates it will make cash payments totaling approximately $2.0 million in fiscal year 2008 to option holders. The Company will record such bonuses as additional compensation expense in fiscal year 2007. The Company will account for any modification of stock options in accordance with SFAS No. 123R, Share-Based Payment ("SFAS No. 123R"). The financial impact of this modification is not yet known but is expected to be recorded in fiscal year 2007.

Prior to December 31, 2006, the Company’s executive officers elected to revise the original grant price of any in-the-money stock options that were vested and unexercised as of December 31, 2005 to the fair market value of the Company’s common stock on the measurement date to avoid the adverse tax consequences of Section 409A. For all stock option grants awarded to the Company’s executive officers for which the original grant price was incorrect, and that have been exercised to date, the Company will request that such officers reimburse to the Company an amount equal to the difference between the original grant price and the fair market value of the Company’s common stock on the measurement date multiplied by the number of shares of common stock so exercised, net of any allocable portion of income taxes paid in connection with such exercise. The Company estimates this reimbursement to approximate $734,000 and will record such amounts as additional paid-in capital upon receipt of such reimbursement.

6.	STOCK-BASED COMPENSATION PLANS

In December 2004, the FASB issued SFAS 123R, which replaces SFAS 123 and supersedes APB Opinion No. 25, (“APB No. 25”). SFAS 123R requires all share-based payments, including grants of employee stock options, to be recognized in the financial statements at their fair values. Under SFAS 123R, public companies are required to measure the cost of services received in exchange for stock options and similar awards based on the grant-date fair value of the award and recognize this cost in the income statement over the period during which an award recipient is required to provide service in exchange for the award. The Company adopted SFAS 123R effective fiscal year 2006. The pro forma disclosures previously permitted under SFAS 123 are no longer an alternative to financial statement recognition beginning in fiscal year 2006.

Pro forma disclosures as if the Company had adopted the fair value recognition requirements under SFAS 123 for stock option awards during the Prior Year Quarter and Prior Year YTD Period, is presented in the following table.

	For the 13 Weeks				For the 39 Weeks
	Ended October 1, 2005				Ended October 1, 2005
		IN THOUSANDS, EXCEPT PER SHARE DATA

Net income as reported		$	21,694			$	55,241
Add: Stock-based employee compensation included in reported net income, net of tax			554				1,440
Deduct fair value based compensation expense, net of tax			(5,474	)			(16,505	)
Pro forma net income		$	16,774			$	40,176

Basic earnings per share:
As reported		$	0.31			$	0.78
Pro forma under SFAS 123		$	0.24			$	0.57

Diluted earnings per share:
As reported		$	0.30			$	0.76
Pro forma under SFAS 123		$	0.23			$	0.55

Restricted Stock Plan. The 2002 Restricted Stock Plan of the Company is intended to advance the best interests of the Company, its subsidiaries and its stockholders in order to attract, retain and motivate key employees by providing them with additional incentives through the award of shares of restricted stock. To date, shares awarded under the Restricted Stock Plan have been funded with shares contributed to the Company from a significant stockholder. During the Year To Date Period and the Prior Year YTD Period, 44,200 and 53,800 shares, respectively, of stock were contributed to the Restricted Stock Plan by the stockholder and reissued by the Company to employees. As of October 7, 2006, 53,500 shares issued to employees in prior years were forfeited and are held in the Company treasury to be issued as future awards are granted. The current restricted shares outstanding contain original vesting terms that range from one to nine years. These shares were accounted for at fair value. As of October 7, 2006, the Company has available 611,050 common shares for future issuances under the Restricted Stock Plan.

Long Term Incentive Plan. An aggregate of 5,821,875 shares of common stock were initially reserved for issuance pursuant to the Long Term Incentive Plan (“LTIP”), adopted April 1993. An additional 3,037,500 shares were reserved in each of fiscal years 1995, 1998, 2001 and 2003 for issuance under the Incentive Plan. Designated employees of the Company, including officers and directors, are eligible to receive (i) stock options, (ii) stock appreciation rights, (iii) restricted or non-restricted stock awards, (iv) restricted stock units, (v) cash awards, or (vi) any combination of the foregoing. The LTIP is administered by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”). Each award issued under the LTIP terminates at the time designated by the Compensation Committee, not to exceed ten years. The current stock options, stock appreciation rights, restricted stock and restricted stock units outstanding contain original vesting terms ranging from three to five years. All stock appreciation rights and restricted stock units are settled in shares of company stock.

Nonemployee Director Stock Option Plan. An aggregate of 506,250 shares of common stock were reserved for issuance pursuant to the Nonemployee Director Stock Option Plan, adopted April 1993. An additional 112,500 shares were reserved in fiscal year 2002 for issuance under this plan. During the first year individuals are elected as nonemployee directors of the Company, they receive a grant of 5,000 nonqualified stock options. In addition, on the first day of each subsequent calendar year, each nonemployee director automatically receives a grant of an additional 4,000 nonqualified stock options as long as each individual is serving as a nonemployee director. Pursuant to this plan, 50% of the options granted will become exercisable on the first anniversary of the date of grant and in two additional installments of 25% on the second and third anniversaries. The exercise prices of options granted under this plan were not less than the fair market value of the common stock at the date of grant.

As of October 7, 2006, there was approximately $13.4 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the incentive plans. This cost is expected to be recognized over a weighted-average period of approximately 2 years.

Stock Options and Stock Appreciation Rights. The fair value of stock options and stock appreciation rights granted under the Company’s stock-based compensation plans was estimated on the date of grant using the Black-Scholes option-pricing model. The table below outlines the weighted average assumptions for these award grants:

	For the 40 Weeks Ended October 7, 2006			For the 39 Weeks Ended October 1, 2005
Risk-free interest rate		4.71	%		4.14	%
Expected term (in years)		5.42			4.99
Expected volatility		58.07	%		58.85	%
Expected dividend yield		-	%		-	%

Estimated fair value per option/ stock appreciation right granted		9.81			13.76

The expected term of the options represent the estimated period of time until exercise and is based on historical experience of similar awards. Expected stock price volatility is based on the historical volatility of the Company’s common stock. The risk-free rate is based on the implied yield available on U.S. Treasury issues with an equivalent remaining term.

The Company receives a tax deduction for certain stock option exercises/restricted stock vestings when the options/restricted shares are exercised/vested. Generally for options, the tax deduction is related to the excess of the stock price at the time the options are sold over the exercise price of the options. For restricted shares, the tax deduction is the fair market value of the stock on the date the restricted shares vest. Prior to the adoption of SFAS 123R, the Company presented all tax benefits resulting from the exercise of stock options and the vesting of restricted shares as operating cash inflows in the Condensed Consolidated Statements of Cash Flows. SFAS 123R requires the benefits of tax deductions in excess of the grant-date fair value for those options and restricted shares to be classified as financing cash inflows rather than operating cash inflows, on a prospective basis. This amount is shown as “Excess tax benefits from stock-based compensation” on the Condensed Consolidated Statements of Cash Flows and for the Year To Date Period amounted to $1.3 million.

The following table summarizes stock option and stock appreciation right activity during the Year To Date Period:

Options and Stock Appreciation Rights

Shares

Weighted