Table of Contents

 

 

 

**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 September 26, 2009** |
| ** **                                                  | ** **                                                                                    |
| **OR**                                                      |
| ** **                                                  | ** **                                                                                    |
| **o**                                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition periodfrom            to            **

 

**Commission File Number: 0-10345**

 

**CACHE, INC.**

(Exact name ofregistrant as specified in its Charter)

 

| **Florida**                               | ** ** | **59-1588181**                     |
|-------------------------------------------|------------|------------------------------------|
| (State  or other jurisdiction of          |       | (IRS  Employer Identification No.) |
| incorporation  or organization)           |       |                               |
|                                      |       |                               |
| **1440  Broadway, New York, New York**    | ** ** | **10018**                          |
| (Address  of principal executive offices) |       | (zip  code)                        |

 

**212-575-3200**

(Registrant’stelephone number, including area code)

 

 

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

 

**Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to filing requirements for thepast 90 days.  Yes **x No o

 

**Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post suchfiles).  Yes **o No o

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o No x

 

As of October 31,2009, 12,751,174 common shares were outstanding.

 

 

 

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Table of Contents

 

CACHE, INC. AND SUBSIDIARIES

 

INDEX

** **
| PART I. FINANCIAL INFORMATION |                                                                                                                                                           | 3      |
|-----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                    |                                                                                                                                                           |   |   |
| Item 1.                            | Condensed  Consolidated Financial Statements (unaudited)                                                                                                       |   | 3 |
|                                    | Condensed Consolidated Balance Sheets as of September 26, 2009,  December 27, 2008 and September 27, 2008                                       |   | 3 |
|                                    | Condensed Consolidated Statements of Operations for  the thirty-nine and thirteen week periods ended September 26,  2009 and September 27, 2008 |   | 4 |
|                                    | Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods  ended September 26, 2009 and September 27, 2008                    |   | 6 |
|                                    | Notes to the Condensed Consolidated Financial  Statements                                                                                                      |   | 7 |
| Item 2.                            | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                                                    |   | 12 |
| Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                    |   | 19 |
| Item 4.                            | Controls  and Procedures                                                                                                                                       |   | 19 |
|                                    |                                                                                                                                                           |   |   |
| PART II. OTHER INFORMATION    |                                                                                                                                                           | 20     |
|                                    |                                                                                                                                                           |   |   |
| Item 1A.                                | Risk Factors                                                                                                                                                   |   | 20 |
| Item 4.                                 | Submission  of Matters to a Vote of Security Holders                                                                                                           |   | 20 |
| Item 6.                            | Exhibits                                                                                                                                                       |   | 20 |
|                                    |                                                                                                                                                           |   |   |
| SIGNATURES                              |                                                                                                                                                           | 21     |

 

2

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Table of Contents

 

**PART I - FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS(UNAUDITED)**

 

**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                           | ** ** | **September 26,********2009** | ** **      | **December 27,********2008** | ** ** | **September 27,********2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|-----------------|-----------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                           | ** ** | **(Unaudited)**                    | ** **      | **(Audited)**                     | ** ** | **(Unaudited)**                    | ** ** |
| **ASSETS**                                                                                                           | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| **Current assets:**                                                                                                  | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| **Cash and equivalents**                                                                                             | ** ** | **$**                              | **5,329,000**   | ** **                        | **$**      | **4,835,000**                      | ** ** | **$** | **2,023,000** | ** ** |
| **Marketable securities**                                                                                            | ** ** | **27,376,000**                     | ** **      | **25,153,000**                    | ** ** | **23,570,000**                     | ** ** |
| **Certificates of deposit —  restricted**                                                                       | ** ** | **1,500,000**                      | ** **      | **—**                        | ** ** | **—**                         | ** ** |
| **Receivables, net**                                                                                                 | ** ** | **2,713,000**                      | ** **      | **3,898,000**                     | ** ** | **4,848,000**                      | ** ** |
| **Income tax receivables**                                                                                           | ** ** | **2,225,000**                      | ** **      | **5,883,000**                     | ** ** | **—**                         | ** ** |
| **Inventories, net**                                                                                                 | ** ** | **20,434,000**                     | ** **      | **22,321,000**                    | ** ** | **33,802,000**                     | ** ** |
| **Prepaid expenses and other  current assets**                                                                       | ** ** | **1,117,000**                      | ** **      | **1,795,000**                     | ** ** | **5,611,000**                      | ** ** |
| **Total current assets**                                                                                             | ** ** | **60,694,000**                     | ** **      | **63,885,000**                    | ** ** | **69,854,000**                     | ** ** |
| ** **                                                                                                           | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| **Equipment and leasehold  improvements, net**                                                                       | ** ** | **35,724,000**                     | ** **      | **43,320,000**                    | ** ** | **46,393,000**                     | ** ** |
| **Goodwill**                                                                                                         | ** ** | **9,092,000**                      | ** **      | **9,092,000**                     | ** ** | **10,089,000**                     | ** ** |
| **Intangible assets, net**                                                                                           | ** ** | **1,012,000**                      | ** **      | **1,304,000**                     | ** ** | **1,334,000**                      | ** ** |
| **Other assets**                                                                                                     | ** ** | **4,274,000**                      | ** **      | **1,924,000**                     | ** ** | **389,000**                        | ** ** |
| ** **                                                                                                           | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| **Total assets**                                                                                                     | ** ** | **$**                              | **110,796,000** | ** **                        | **$**      | **119,525,000**                    | ** ** | **$** | **128,059,000** | ** ** |
| ** **                                                                                                           | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                       | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| ** **                                                                                                           | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| **Current liabilities:**                                                                                             | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| **Accounts payable**                                                                                                 | ** ** | **$**                              | **7,676,000**   | ** **                        | **$**      | **6,375,000**                      | ** ** | **$** | **8,931,000** | ** ** |
| **Note payable**                                                                                                     | ** ** | **1,294,000**                      | ** **      | **1,259,000**                     | ** ** | **1,248,000**                      | ** ** |
| **Accrued compensation**                                                                                             | ** ** | **2,862,000**                      | ** **      | **1,713,000**                     | ** ** | **2,682,000**                      | ** ** |
| **Accrued liabilities**                                                                                              | ** ** | **8,246,000**                      | ** **      | **11,077,000**                    | ** ** | **10,366,000**                     | ** ** |
| **Total current liabilities**                                                                                        | ** ** | **20,078,000**                     | ** **      | **20,424,000**                    | ** ** | **23,227,000**                     | ** ** |
| ** **                                                                                                           | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| **Note payable**                                                                                                     | ** ** | **2,199,000**                      | ** **      | **3,143,000**                     | ** ** | **3,450,000**                      | ** ** |
| **Other liabilities**                                                                                                | ** ** | **17,202,000**                     | ** **      | **16,795,000**                    | ** ** | **16,335,000**                     | ** ** |
| **Deferred income taxes, net**                                                                                       | ** ** | **—**                         | ** **      | **—**                        | ** ** | **133,000**                        | ** ** |
| ** **                                                                                                           | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| **Commitments and contingencies**                                                                                    | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| ** **                                                                                                           | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| **STOCKHOLDERS’ EQUITY**                                                                                        | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| ** **                                                                                                           | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| **Common stock, par value $.01;  authorized, 40,000,000 shares; issued 16,410,036, 16,410,036 and  16,410,036** | ** ** | **164,000**                        | ** **      | **164,000**                       | ** ** | **164,000**                        | ** ** |
| **Additional paid-in capital**                                                                                       | ** ** | **47,428,000**                     | ** **      | **47,155,000**                    | ** ** | **47,075,000**                     | ** ** |
| **Retained earnings**                                                                                                | ** ** | **63,520,000**                     | ** **      | **71,053,000**                    | ** ** | **76,581,000**                     | ** ** |
| **Treasury stock, 3,682,199, 3,372,000 and 3,167,000 shares, at cost**                                               | ** ** | **(39,795,000**                    | **)**           | **(39,209,000**                   | **)**      | **(38,906,000**                    | **)**      |
| **Total stockholders’ equity**                                                                                  | ** ** | **71,317,000**                     | ** **      | **79,163,000**                    | ** ** | **84,914,000**                     | ** ** |
| ** **                                                                                                           | ** ** | ** **                         | ** **      | ** **                        | ** ** | ** **                         | ** ** |
| **Total liabilities and  stockholders’ equity**                                                                 | ** ** | **$**                              | **110,796,000** | ** **                        | **$**      | **119,525,000**                    | ** ** | **$** | **128,059,000** | ** ** |

 

**Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these statements.**

 

3

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**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE THIRTY-NINE WEEKS ENDED**

**(Unaudited)**

 
| ** **                                         | ** ** | **September 26,  2009** | ** **      | **September 27,  2008** | ** ** |
|----------------------------------------------------|------------|------------------------------|-----------------|------------------------------|------------|
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Net sales**                                      | ** ** | **$**                        | **154,813,000** | ** **                   | **$**      | **199,820,000** | ** ** |
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Cost of sales, including buying  and occupancy** | ** ** | **93,574,000**               | ** **      | **111,599,000**              | ** ** |
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Gross profit**                                   | ** ** | **61,239,000**               | ** **      | **88,221,000**               | ** ** |
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Expenses**                                       | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Store operating expenses**                       | ** ** | **57,840,000**               | ** **      | **71,741,000**               | ** ** |
| **General and administrative  expenses**           | ** ** | **13,341,000**               | ** **      | **16,676,000**               | ** ** |
| **Store exit costs**                               | ** ** | **—**                   | ** **      | **2,757,000**                | ** ** |
| **Employee separation charge  (Note 13)**          | ** ** | **2,121,000**                | ** **      | **—**                   | ** ** |
| **Total expenses**                                 | ** ** | **73,302,000**               | ** **      | **91,174,000**               | ** ** |
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Operating loss**                                 | ** ** | **(12,063,000**              | **)**           | **(2,953,000**               | **)**      |
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Other income (expense):**                        | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Interest expense**                               | ** ** | **(146,000**                 | **)**           | **(189,000**                 | **)**      |
| **Interest income**                                | ** ** | **178,000**                  | ** **      | **612,000**                  | ** ** |
| **Total other income, net**                        | ** ** | **32,000**                   | ** **      | **423,000**                  | ** ** |
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Loss before income taxes**                       | ** ** | **(12,031,000**              | **)**           | **(2,530,000**               | **)**      |
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Income tax benefit**                             | ** ** | **(4,498,000**               | **)**           | **(936,000**                 | **)**      |
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Net loss**                                       | ** ** | **$**                        | **(7,533,000**  | **)**                        | **$**      | **(1,594,000** | **)** |
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Basic loss per share**                           | ** ** | **$**                        | **(0.59**       | **)**                        | **$**      | **(0.12** | **)** |
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Diluted loss per share**                         | ** ** | **$**                        | **(0.59**       | **)**                        | **$**      | **(0.12** | **)** |
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Basic weighted average shares  outstanding**     | ** ** | **12,810,000**               | ** **      | **13,372,000**               | ** ** |
| ** **                                         | ** ** | ** **                   | ** **      | ** **                   | ** ** |
| **Diluted weighted average shares  outstanding**   | ** ** | **12,810,000**               | ** **      | **13,372,000**               | ** ** |

 

**Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these statements.**

 

4

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**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**FOR THE THIRTEEN WEEKS ENDED**

**(Unaudited)**

 
| ** **                                         | ** ** | **September 26,  2009** | ** **     | **September 27,  2008** | ** ** |
|----------------------------------------------------|------------|------------------------------|----------------|------------------------------|------------|
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Net sales**                                      | ** ** | **$**                        | **44,941,000** | ** **                   | **$**      | **58,139,000** | ** ** |
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Cost of sales, including buying  and occupancy** | ** ** | **30,727,000**               | ** **     | **32,525,000**               | ** ** |
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Gross profit**                                   | ** ** | **14,214,000**               | ** **     | **25,614,000**               | ** ** |
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Expenses**                                       | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Store operating expenses**                       | ** ** | **18,590,000**               | ** **     | **23,040,000**               | ** ** |
| **General and administrative  expenses**           | ** ** | **4,357,000**                | ** **     | **4,805,000**                | ** ** |
| **Store exit costs**                               | ** ** | **—**                   | ** **     | **449,000**                  | ** ** |
| **Employee separation charge  (Note 13)**          | ** ** | **2,121,000**                | ** **     | **—**                   | ** ** |
| **Total expenses**                                 | ** ** | **25,068,000**               | ** **     | **28,294,000**               | ** ** |
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Operating loss**                                 | ** ** | **(10,854,000**              | **)**          | **(2,680,000**               | **)**      |
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Other income (expense):**                        | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Interest expense**                               | ** ** | **(48,000**                  | **)**          | **(58,000**                  | **)**      |
| **Interest income**                                | ** ** | **52,000**                   | ** **     | **125,000**                  | ** ** |
| **Total other income, net**                        | ** ** | **4,000**                    | ** **     | **67,000**                   | ** ** |
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Loss before income taxes**                       | ** ** | **(10,850,000**              | **)**          | **(2,613,000**               | **)**      |
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Income tax benefit**                             | ** ** | **(4,067,000**               | **)**          | **(967,000**                 | **)**      |
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Net loss**                                       | ** ** | **$**                        | **(6,783,000** | **)**                        | **$**      | **(1,646,000** | **)** |
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Basic loss per share**                           | ** ** | **$**                        | **(0.53**      | **)**                        | **$**      | **(0.12** | **)** |
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Diluted loss per share**                         | ** ** | **$**                        | **(0.53**      | **)**                        | **$**      | **(0.12** | **)** |
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Basic weighted average shares  outstanding**     | ** ** | **12,748,000**               | ** **     | **13,229,000**               | ** ** |
| ** **                                         | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Diluted weighted average shares  outstanding**   | ** ** | **12,748,000**               | ** **     | **13,229,000**               | ** ** |

 

**Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these statements.**

 

5

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**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THE THIRTY-NINE WEEKS ENDED**

**(Unaudited)**

 
| ** **                                                                                             | ** ** | **September 26,  2009** | ** **     | **September 27,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------|----------------|------------------------------|------------|
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Net loss**                                                                                           | ** ** | **$**                        | **(7,533,000** | **)**                        | **$**      | **(1,594,000** | **)** |
| **Adjustments to reconcile net  loss to net cash********provided  by (used in) operating activities:** | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Depreciation and amortization**                                                                      | ** ** | **8,757,000**                | ** **     | **9,406,000**                | ** ** |
| **Write down of equipment and  leasehold improvements, net of deferred rent**                          | ** ** | **—**                   | ** **     | **1,570,000**                | ** ** |
| **Employee separation charge**                                                                         | ** ** | **2,121,000**                | ** **     | **—**                   | ** ** |
| **Provision for sales allowance  and doubtful accounts, net**                                          | ** ** | **(57,000**                  | **)**          | **(8,000**                   | **)**      |
| **Stock-based compensation**                                                                           | ** ** | **273,000**                  | ** **     | **224,000**                  | ** ** |
| **Non-cash interest expense**                                                                          | ** ** | **48,000**                   | ** **     | **58,000**                   | ** ** |
| **Deferred income taxes**                                                                              | ** ** | **(2,343,000**               | **)**          | **50,000**                   | ** ** |
| **Gift card breakage**                                                                                 | ** ** | **(173,000**                 | **)**          | **(222,000**                 | **)**      |
| **Amortization of deferred income  for co-branded credit card**                                        | ** ** | **(319,000**                 | **)**          | **—**                   | ** ** |
| **Amortization of deferred rent**                                                                      | ** ** | **(1,549,000**               | **)**          | **(1,713,000**               | **)**      |
| **Excess tax benefit from  stock-based compensation**                                                  | ** ** | **—**                   | ** **     | **(155,000**                 | **)**      |
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Change in assets and  liabilities:**                                                                 | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Decrease (increase) in  receivables and income tax receivables**                                     | ** ** | **4,900,000**                | ** **     | **(52,000**                  | **)**      |
| **Decrease (increase) in  inventories**                                                                | ** ** | **1,887,000**                | ** **     | **(3,255,000**               | **)**      |
| **Decrease (increase) in prepaid  expenses and other current assets**                                  | ** ** | **671,000**                  | ** **     | **(2,995,000**               | **)**      |
| **Increase (decrease) in accounts  payable**                                                           | ** ** | **1,301,000**                | ** **     | **(1,579,000**               | **)**      |
| **Decrease in accrued  liabilities, accrued compensation and other liabilities**                       | ** ** | **(951,000**                 | **)**          | **(78,000**                  | **)**      |
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Net cash provided by (used in)  operating activities**                                               | ** ** | **7,033,000**                | ** **     | **(343,000**                 | **)**      |
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Purchase of marketable  securities**                                                                 | ** ** | **(31,040,000**              | **)**          | **(29,482,000**              | **)**      |
| **Maturities of marketable  securities**                                                               | ** ** | **28,817,000**               | ** **     | **48,799,000**               | ** ** |
| **Certificates of deposit —  restricted**                                                         | ** ** | **(1,500,000**               | **)**          | **—**                   | ** ** |
| **Purchase of equipment and  leasehold improvements**                                                  | ** ** | **(1,278,000**               | **)**          | **(8,920,000**               | **)**      |
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Net cash provided by (used in)  investing activities**                                               | ** ** | **(5,001,000**               | **)**          | **10,397,000**               | ** ** |
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Proceeds from the issuance of  common stock**                                                        | ** ** | **—**                   | ** **     | **561,000**                  | ** ** |
| **Excess tax benefit from  stock-based compensation**                                                  | ** ** | **—**                   | ** **     | **155,000**                  | ** ** |
| **Repayment of note payable**                                                                          | ** ** | **(952,000**                 | **)**          | **(1,294,000**               | **)**      |
| **Repurchase of common stock**                                                                         | ** ** | **(586,000**                 | **)**          | **(14,696,000**              | **)**      |
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Net cash used in financing  activities**                                                             | ** ** | **(1,538,000**               | **)**          | **(15,274,000**              | **)**      |
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Net increase (decrease) in cash  and equivalents**                                                   | ** ** | **494,000**                  | ** **     | **(5,220,000**               | **)**      |
| **Cash and equivalents, at  beginning of period**                                                      | ** ** | **4,835,000**                | ** **     | **7,243,000**                | ** ** |
| **Cash and equivalents, at end of  period**                                                            | ** ** | **$**                        | **5,329,000**  | ** **                   | **$**      | **2,023,000** | ** ** |
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Supplemental disclosure of cash  flow information:**                                                 | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| ** **                                                                                             | ** ** | ** **                   | ** **     | ** **                   | ** ** |
| **Interest paid**                                                                                      | ** ** | **$**                        | **152,000**    | ** **                   | **$**      | **205,000** | ** ** |
| **Income taxes paid**                                                                                  | ** ** | **$**                        | **269,000**    | ** **                   | **$**      | **1,901,000** | ** ** |
| **Accrued equipment and leasehold  improvements**                                                      | ** ** | **$**                        | **10,000**     | ** **                   | **$**      | **564,000** | ** ** |

 

**Theaccompanying Notes to Condensed Consolidated Financial Statements are anintegral part of these statements.**

 

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**CACHE, INC.**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****             ****BASIS OF PRESENTATION**

 

References to the “Company,”“we,” “us,” or “our” means Cache, Inc., together with its wholly-ownedsubsidiaries, except as expressly indicated or unless the context otherwiserequires. We own and operate women’s apparel specialty stores under the tradename “Cache” and “Cache Luxe”. As of September 26, 2009, we operated 284Cache and five Cache Luxe stores.

 

The accompanyingunaudited condensed consolidated financial statements include all knownadjustments necessary for a fair presentation of the results of the interimperiods as required by accounting principles generally accepted in the UnitedStates. These adjustments consist primarily of normal recurring accruals andestimates that impact the carrying value of assets and liabilities. Actualresults may materially differ from these estimates.

 

These condensedconsolidated financial statements should be read in conjunction with theCompany’s audited consolidated financial statements for the year ended December 27,2008, which are included in the Company’s Annual Report on Form 10-K withrespect to such period filed with the Securities and Exchange Commission. Allsignificant intercompany accounts and transactions have been eliminated. The December 27,2008 condensed consolidated balance sheet amounts are derived from the Company’saudited consolidated financial statements.

 

The Company’s fiscal year(“fiscal year” or “fiscal”) refers to the applicable 52 or 53 weekperiod. The year ended December 27, 2008 (“fiscal 2008”) was a 52-weekyear and the year ending January 2, 2010 (“fiscal 2009”) is a 53-weekyear.

 

**2.****             ****STOCK BASED COMPENSATION**

 

TheCompany’s stock-based award program historically included only stock options.Pursuant to the stock option and performance incentive plan approved at the annual meeting of the shareholders on July 21,2009, the Company granted 219,000 shares of restricted stock awards toemployees who hold various positions within the Company.  Two-thirds of these restricted stock awardscontingently vest over a three year period, based on the Company meetingperformance goals, and one-third vest equally on an annual basis over therequisite service period.

 

Stock-basedcompensation expensefor all stock-based awards program, including grants of stock options, isrecorded in accordance with “*Compensation-StockCompensation*”, Topic 718 of the Financial Accounting Standards BoardAccounting Standards Codification (“FASB ASC”). During the 39 and 13-week periods ended September 26, 2009, theCompany recognized approximately $273,000 and $156,000, respectively, instock-based compensation expense and, for the same periods ended September 27,2008, the Company recognized approximately $224,000 and $75,000,respectively.  The grant date fair valuefor stock options is calculated using the Black-Scholes option valuation model.The Company did not grant any options during the 39 and 13-week periods ended September 26,2009 and no excess tax benefits were recognized from the exercise of stockoptions during the same period. During the 39-week period ended September 27,2008, the Company granted 15,000 options and recognized $155,000 in excess taxbenefits from the exercise of stock options. No options were granted and noexcess tax benefits from the exercise of stock options was recognized duringthe 13-week period ended September 27, 2008.

 

The fair value of therestricted stock granted on July 21, 2009 was $3.65, which is equal to theclosing market price of the underlying common stock.  Of the 219,000 shares granted, 23,337 vestedas of September 26, 2009. The total grant-date fair value of restrictedstock that vested as of September 26, 2009 was $85,000.

 

The weighted-average fairvalue of options granted during the 39 and 13-week periods ended September 27,2008 was $3.14. The grant date fair value is calculated using the Black-Scholesoption valuation model. The following assumptions were used during fiscal 2008:

 
| Expected dividend rate  |   | $     | 0.00   |   |
|-------------------------|--------|-------|--------|--------|
| Expected volatility     |   | 36.06 | %      |
| Risk free interest rate |   | 2.64  | %      |
| Expected lives (years)  |   | 4.00  |   |

 

**3.****             ****BASIC AND DILUTED EARNINGS PERSHARE**

 

Inaccordance with “*Earnings Per Share*”, Topic 260 ofthe FASB ASC, basic earnings per share has been computed based upon theweighted average of common shares outstanding. Diluted earnings per share giveseffect to outstanding stock options. Earningsper common share has been computed as follows:

 

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| ** **                                                                       | ** ** | **39-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                       | ** ** | **September 26,**  | ** ** | **September 27,**  | ** ** | **September 26,** | ** ** | **September 27,** | ** ** |
| ** **                                                                       | ** ** | **2009**                | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net loss                                                                         |       | $                       | (7,533,000 | )                       | $          | (1,594,000 | ) | $ | (6,783,000 | ) | $ | (1,646,000 | ) |
| Basic weighted number of  average shares outstanding                             |       | 12,810,000              |       | 13,372,000              |       | 12,748,000 |   | 13,229,000 |   |
| Incremental shares from  assumed issuances of stock options and restricted stock |       | —                  |       | —                  |       | — |   | — |   |
|                                                                             |       |                    |       |                    |       |   |   |   |   |
| Diluted weighted average  number of shares outstanding                           |       | 12,810,000              |       | 13,372,000              |       | 12,748,000 |   | 13,229,000 |   |
|                                                                             |       |                    |       |                    |       |   |   |   |   |
| Net loss per share - Basic                                                       |       | $                       | (0.59      | )                       | $          | (0.12 | ) | $ | (0.53 | ) | $ | (0.12 | ) |
| - Diluted                                                                        |       | $                       | (0.59      | )                       | $          | (0.12 | ) | $ | (0.53 | ) | $ | (0.12 | ) |

 

TheCompany excluded unvested restricted stock and stock options to purchase779,338 and 732,675 common shares from the computation of diluted earnings pershare for the 39 and 13-week periods ended September 26, 2009 and September 27,2008, respectively, due to the net loss incurred by the Company.

 

**4.****             ****RECENTACCOUNTING PRONOUNCEMENTS**

 

In June 2009, new authoritativeguidance regarding “*Accounting for Transfersof Financial Assets”*wasissued. This statement improves the information that a reporting entityprovides in its financial reports about a transfer of financial assets; theeffects of a transfer on its financial position, financial performance and cashflows; and a continuing interest in transferred financial assets. In addition,this guidance amends various concepts addressed by the authoritative guidance “*Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities”*, including removing theconcept of qualified special purpose entities. This guidance, which must beapplied to transfers occurring on or after the effective date becomes effectivefor interim and annual periods beginning after November 15, 2009. TheCompany does not expect to have a material impact on its consolidated financialstatements upon adoption.

 

In June 2009,authoritative guidance regarding amended standards for determining whether toconsolidate a variable interest entity wasissued. Among other accounting and disclosure requirements, thisguidance replaces the quantitative-based risks and rewards calculation fordetermining which enterprise has a controlling financial interest in a variableinterest entity with an approach focused on identifying which enterprise hasthe power to direct the activities of a variable interest entity and theobligation to absorb losses of the entity or the right to receive benefits fromthe entity. This guidance becomes effective for interim and annual periodsbeginning after November 15, 2009. The Company does not expect to have amaterial impact on its consolidated financial statements upon adoption.

 

In August 2009, amendedauthoritative guidance regarding “*Measuring Liabilities atFair Value*” was issued. This amended standard clarifies that incircumstances in which a quoted price in an active market for theidentical liability is not available, the reporting entity is required to usethe quoted price of the identical liability when traded as an asset, quotedprices for similar liabilities, or quoted prices for similar liabilities whentraded as assets. If these quoted prices are not available, the reportingentity is required to use another valuation technique, such as an income approach or a market approach. Theseamended standards are effective for the Company beginning in the fourth quarterof fiscal year 2009 and are not expected to have a material impact on theCompany’s consolidated financial statements upon adoption.

 

In October 2009, newauthoritative guidance regarding “Revenue *Recognition —Multiple-Deliverable Revenue Arrangements*” was issued. This guidanceimpacts the determination of when the individual deliverables includedin a multiple-element arrangement may be treated as separate units ofaccounting. Additionally, this new standards modifies the manner in which thetransaction consideration is allocated across the separately identifieddeliverables by no longer permitting the residual method of allocatingarrangement consideration. This guidance is effective in fiscal year beginningon or after June 15, 2010, however early adoption is permitted. The Company does not expect to have amaterial impact on its consolidated financial statements upon adoption.

 

InOctober 2009, new authoritativeguidance regarding “*Software — Certain RevenueArrangements That Include Software Elements*” was issued. This guidanceamends the scope of pre-existing software revenue guidance by removing from theguidance non-software components of tangible products and certain softwarecomponents of tangible products. This new standard is effective in fiscal yearbeginning on or after June 15, 2010, however early adoption is permitted. The Company does not expect to have amaterial impact on its consolidated financial statements upon adoption.

 

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**5.****             ****FAIRVALUE MEASUREMENT**

 

In accordance with “*Fair Value Measurementsand Disclosures*”, Topic 820 of the FASB ASC, which defines fairvalue as the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date (exit price). Topic 820 of the FASB ASC establishes a fairvalue hierarchy, which prioritizes the inputs used in measuring fair value intothree broad levels as follows:

 

·                  Level 1 — Unadjusted quotedmarket prices in active markets for identical assets or liabilities that theCompany has the ability to access at the measurement date.

 

·                  Level 2 — Quoted prices forsimilar assets or liabilities in active markets, quoted prices for identical orsimilar assets or liabilities in markets that are not active, inputs other thanquoted prices that are observable for the asset or liability (i.e., interestrates, yield curves, etc.) and inputs that are derived principally from orcorroborated by observable market data by correlation or other means.

 

·                  Level 3 — Unobservableinputs that reflect assumptions about what market participants would use inpricing assets or liabilities based on the best information available.

 

As of September 26,2009, the Company’s marketable securities primarily consist of short-termUnited States Treasury bills. The Company classifies its short-term investmentsas held-to-maturity. Held-to-maturity securities are those securities in whichthe Company has the ability and intent to hold the securities until maturity.Because the Company’s held-to-maturity securities mature within one year of thepurchase date, the securities are classified as short-term marketablesecurities. Held-to-maturity debt securities are recorded at amortized cost,adjusted for the amortization or accretion of premiums or discounts and suchcarrying values approximate fair value. A decline in the market value of anyheld-to-maturity security below cost that is deemed to be other than temporaryresults in a reduction in carrying amount to fair value. The impairment ischarged to earnings and a new cost basis for the security is established.

 

“*Financial Instruments*”, Topic 825 of the FASB ASC, providesentities the option to measure many financial instruments and certain otheritems at fair value. Entities that choose the fair value option will recognizeunrealized gains and losses on items for which the fair value option waselected in earnings at each subsequent reporting date. The Company hascurrently chosen not to elect the fair value option for any items that are notalready required to be measured at fair value in accordance with Topic 825 ofthe FASB ASC.

 

The fair value of ourmarketable securities, which was determined based upon Level 1 inputs, totaled$27.4 million, $25.2 million and $23.6 million as of September 26, 2009, December 27,2008 and September 27, 2008, respectively. For the fiscal periods ended September 26,2009, December 27, 2008 and September 27, 2008, the aggregate amountof marketable securities (maturing greater than 90 days and less than one year)totaled approximately $27.4 million, $25.2 million and $23.6 million,respectively. The Company noted small variances between the book value and fairvalue due to the remaining unamortized premiums. As a result, no impairment hasoccurred for the fiscal periods presented herein. Premiums and discounts areamortized or accreted over the life of the related held-to-maturityinvestments. Interest income is recognized when earned.

 

**Fair Value of Financial Instruments**

 

The carrying amounts of certificates of deposit,accounts receivable, accounts payable and accrued liabilities approximate theirestimated fair values due to their short-term nature. The Company’s notepayable due to certain of its former executives, which the Company recorded inconnection with the acquisition of Adrienne Victoria Designs, Inc. (“AVD”) (previousowners of AVD; see Note 13) includes imputed interest at 5% as the fair marketvalue of this note is not readily determinable because comparable instrumentsdo not exist. The 5% imputed interest represented the Company’s average returnon its investment portfolio, at the inception of the note.

 

**6.****             ****RECEIVABLES**

 
| ** **               | ** ** | **September 26,** | ** ** | **December 27,** | ** ** | **September 27,** | ** ** |
|--------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **               | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2008**               | ** ** |
| Construction allowances  |       | $                      | 177,000    |                  | $          | 536,000                |       | $ | 607,000 |   |
| Third party credit card  |       | 1,960,000              |       | 2,382,000             |       | 2,727,000              |       |
| Accounts receivable, net |       | 101,000                |       | 184,000               |       | 369,000                |       |
| Other                    |       | 475,000                |       | 796,000               |       | 1,145,000              |       |
|                     |       | $                      | 2,713,000  |                  | $          | 3,898,000              |       | $ | 4,848,000 |   |

 

Accounts receivable, net includes sales from our wholesaledivision - Mary L., which are recorded net of any returns, chargebacks,discounts and allowances. The Company recorded approximately $560,000 andutilized $625,000 of provisions for sales allowances and doubtful accountsduring the 39-week period ended September 26, 2009, which resulted in anaggregate reserve amount of $46,000, as of September 26, 2009.

 

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AtSeptember 26, 2009, the Company estimated to receive $2.2 million, whichrepresents the federal and state income tax refunds expected to be receivedfrom its fiscal 2008 and 2009 tax returns. During the 39-week period ended September 26,2009, the Company received payments of $5.4 million against the $5.9 millionreceivable, which was recorded for fiscal 2008. For the 39-week period ended September 26,2009, the Company expects to receive refunds of $1.8 million, which isestimated based on the net loss incurred for fiscal 2009 that is available forcarry back. During fiscal 2008, the Company recorded income tax receivables of$5.9 million, which resulted from estimated tax payments of$2.5 million made during fiscal 2008 and 2007 combined with a refund of$3.4 million, generated as a result of the carry back on the net lossincurred for fiscal 2008.

 

**7.****             ****INVENTORIES**

 
| ** **      | ** ** | **September 26,** | ** ** | **December 27,** | ** ** | **September 27,** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **      | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2008**               | ** ** |
| Raw materials   |       | $                      | 1,911,000  |                  | $          | 2,136,000              |       | $ | 2,896,000 |   |
| Work in process |       | 1,505,000              |       | 1,614,000             |       | 2,591,000              |       |
| Finished goods  |       | 17,018,000             |       | 18,571,000            |       | 28,315,000             |       |
|            |       | $                      | 20,434,000 |                  | $          | 22,321,000             |       | $ | 33,802,000 |   |

 

**8.****             ****EQUIPMENT****ANDLEASEHOLD IMPROVEMENTS**

 
| ** **                                      | ** ** | **September 26,** | ** ** | **December 27,** | ** ** | **September 27,** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2008**               | ** ** |
|                                            |       |                   |       |                  |       |                   |       |
| Leasehold improvements                          |       | $                      | 53,011,000 |                  | $          | 53,480,000             |       | $ | 54,168,000 |   |
| Furniture, fixtures and equipment               |       | 38,164,000             |       | 51,789,000            |       | 52,201,000             |       |
|                                            |       | 91,175,000             |       | 105,269,000           |       | 106,369,000            |       |
| Less: accumulated depreciation and amortization |       | (55,451,000            | )          | (61,949,000           | )          | (59,976,000            | )          |
|                                            |       | $                      | 35,724,000 |                  | $          | 43,320,000             |       | $ | 46,393,000 |   |

 

**9.****             ****GOODWILL****AND****INTANGIBLE ASSETS**

 

In accordance with “*Intangibles -Goodwill andOther”*, Topic 350 of the FASB ASC, the Company’s goodwill andits indefinite-lived intangible assets are reviewed annually for impairment ormore frequently, if impairment indicators arise. The annual valuation processis performed during the fourth quarter of each year. The carrying values ofgoodwill as of September 26, 2009, December 27, 2008 and September 27,2008 were $9.1 million, $9.1 million and $10.1 million, respectively.

 

The Company recorded agoodwill impairment charge of $997,000 during the fourth quarter of fiscal2008. The carrying amounts of intangible assets as of September 26, 2009, December 27,2008 and September 27, 2008 are as follows:

 
| ** **                          | ** ** | **September 26,** | ** ** | **December 27,** | ** ** | **September 27,** | ** ** |
|-------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                          | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2008**               | ** ** |
| Indefinite-lived intangible assets: |       |                   |       |                  |       |                   |       |
| Trademarks-Cache                    |       | $                      | 102,000    |                  | $          | 102,000                |       | $ | 102,000 |   |
| Trademarks-Mary L                   |       | 620,000                |       | 620,000               |       | 620,000                |       |
|                                |       | 722,000                |       | 722,000               |       | 722,000                |       |
|                                |       |                   |       |                  |       |                   |       |
| Definite-lived intangible assets:   |       |                   |       |                  |       |                   |       |
| Customer relationships              |       | 300,000                |       | 300,000               |       | 300,000                |       |
| Non-compete agreements              |       | —                 |       | 300,000               |       | 300,000                |       |
| Favorable market lease              |       | 160,000                |       | 160,000               |       | 160,000                |       |
|                                |       | 460,000                |       | 760,000               |       | 760,000                |       |
| Less: accumulated amortization      |       | (170,000               | )          | (178,000              | )          | (148,000               | )          |
|                                |       | 290,000                |       | 582,000               |       | 612,000                |       |
|                                |       |                   |       |                  |       |                   |       |
| Total intangible assets, net        |       | $                      | 1,012,000  |                  | $          | 1,304,000              |       | $ | 1,334,000 |   |

 

During the third quarter offiscal 2009, the Company took a charge of $204,000 for the remaining net bookvalue of its definite-lived intangible asset - Non-compete agreements, whichwere acquired in connection with acquisition of AVD. This charge resulted froman 

 

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employee separationagreement (see Note 13) that the Company entered into with certain of itsformer executives during the 13-week period ended September 26, 2009.

 

**10.****      ****ACCRUEDLIABILITIES**

 
| ** **                                                                    | ** ** | **September 26,** | ** ** | **December 27,** | ** ** | **September 27,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2008**               | ** ** |
| Operating expenses                                                            |       | $                      | 1,927,000  |                  | $          | 2,469,000              |       | $ | 2,243,000 |   |
| Taxes, including income taxes                                                 |       | 1,555,000              |       | 2,593,000             |       | 1,905,000              |       |
| Group insurance                                                               |       | 502,000                |       | 656,000               |       | 625,000                |       |
| Sales return reserve                                                          |       | 411,000                |       | 550,000               |       | 597,000                |       |
| Leasehold additions                                                           |       | 10,000                 |       | 216,000               |       | 564,000                |       |
| Gift cards, merchandise credit cards and other  customer deposits and credits |       | 3,077,000              |       | 3,644,000             |       | 3,532,000              |       |
| Store exit costs (Note 12)                                                    |       | 254,000                |       | 616,000               |       | 622,000                |       |
| Deferred income                                                               |       | 510,000                |       | 333,000               |       | 278,000                |       |
|                                                                          |       | $                      | 8,246,000  |                  | $          | 11,077,000             |       | $ | 10,366,000 |   |

 

Leasehold additions generally represent a liabilityto general contractors for a final 10% payable on construction contracts forstore construction or renovations.

 

**11.****      ****BANK DEBT**

 

OnMay 27, 2009, the Company entered into a one year credit facility withBank of America (the “Bank”). Under this facility, the Company may direct theBank to issue letters of credit up to a total of $1,425,000. Any outstandingletters of credit under this facility are collateralized by granting to thebank a security interest in various certificates of deposit held by the Companyand its subsidiaries with the Bank amounting to a total of $1,500,000. This oneyear credit facility will expire on May 1, 2010.

 

Anycertificates of deposit collateralized against this line of credit are reportedas restricted funds. Based on the expiry dates of the letters of creditsissued, the restricted cash has been reported as either Current or Non-Current.When the expiry date is within one year of the reporting period end date thenthe certificates of deposit are reported as Current, and when the expiry dateis beyond one year the certificates of deposit are reported as Non-Current.

 

Therewere outstanding letters of credit of $1.1 million under this facility at September 26,2009.

 

**12.****      ****STORE EXIT COSTS**

 

During fiscal 2008, the Company recorded a pre-taxcharge of $2.8 million, net of deferred rent, for asset write down and storeclosing costs for 16 underperforming stores, of which $2.3 million was recordedfor 14 stores during the first quarter of fiscal 2008. As of December 27,2008, there was a total liability of $695,000 remaining for lease terminationand severance costs. The following table identifies the activity during fiscal2009.

 
| ** **              | ** ** | **Liability  Balance  Beginning of Year** | ** ** | **Utilization** | ** ** | **Liability  Balance  End of Period** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|-----------------|------------|-------------------------------------------------|------------|
| Severance               |       | $                                                   | 79,000     |            | $          | 52,000                                          |       | $ | 27,000 |   |
| Lease termination costs |       | 616,000                                             |       | 362,000         |       | 254,000                                         |       |
|                    |       | $                                                   | 695,000    |            | $          | 414,000                                         |       | $ | 281,000 |   |

 

The Company has closed 11 underperforming stores asof September 26, 2009 and expects to close the remaining stores over thebalance of fiscal 2009. The Company does not expect to incur significantadditional exit costs upon the closing of these stores.

 

**13.****      ****EMPLOYEESEPARATION CHARGE**

 

On September 23,2009, the Company entered into separation agreements with two of its thenexecutives. The agreements taken together provide for the Company to makepayments to these former executives a sum of $1.9 million in the aggregatethrough the first half of fiscal 2012. During the third quarter of fiscal 2009, the Company recorded a pre-taxcharge of $2.1 million, which includes future payments of $1.9 million, a charge of$204,000 for the remaining net book value of the non-compete 

 

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agreements(see Note 9) and a charge of $23,000 for the vested portion of stock-awardsthat the Company purchased back from these former executives. The charge of$204,000 was due to the Company releasing these former executives from thenon-compete clause contained in the employment agreements that these executivesentered into with the Company in connection with the acquisition of AVD.

 

TheCompany has classified its severance liability of $1.9 million under “Accruedcompensation” ($679,000) for the current portion and under “Other liabilities”($1.2 million) for the long-term portion in the accompanying consolidatedbalance sheet.

 

Pursuantto one of these separation agreements, one executive may receive payments of upto $500,000 in the aggregate, based on the achievement by the Company over thenext 4 years of certain net income targets set forth in the separationagreement.  As of September 26,2009, no accrual was recorded for this earn-out provision. The previousagreement with this former executive provided for contingent payments of up to$5.5 million based on certain performance targets. Under the terms of theseparation agreement, the Company is released from this contingent obligationentirely.

 

**14.****      ****COMMITMENTSAND CONTINGENCIES**

 

As indicated in Note 13,on September 23, 2009, the Company entered into a separation agreementwith its then executives. Pursuant to one of these separationagreements, the former executive may receive payments of up to $500,000 in theaggregate, based on the achievement by the Company over the next 4 years ofcertain net income targets set forth in the agreement.  As of September 26, 2009, no accrual wasrecorded for this earn-out provision.

 

TheCompany is exposed to a number of asserted and unasserted potentialclaims.  Management does not believe thatthe resolution of any of these matters will result in a material loss.  The Company had no guarantees, subleases orassigned lease obligations as of September 26, 2009, December 27,2008 or September 27, 2008.

 

**15.****      ****SUBSEQUENTEVENTS**

 

The Company has evaluatedsubsequent events through November 5, 2009, which is the date thefinancial statements were issued, and has concluded that no such events ortransactions took place, which would require a disclosure herein.

 

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

 

Exceptfor the historical information contained in this Form 10-Q, the mattersaddressed herein are forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended.  Forward-looking statements represent theCompany’s expectation or belief concerning future events.  Without limiting the foregoing, the words “believes,”“thinks,” “anticipates,” “estimates,” “plans,” “expects” and similarexpressions are intended to identify forward-looking statements.  The Company cautions that forward-lookingstatements are subject to risks, uncertainties, assumptions and other importantfactors that could cause actual results to differ materially, or otherwise,from those expressed or implied in the forward-looking statements, including,without limitation, macroeconomic factors that have affected the retail sector,including changes in national, regional and local economic conditions,employment levels and consumer spending patterns, and the other risks detailedfrom time to time in the Company’s most recent Form 10-K, Forms 10-Q andother reports filed with the Securities and Exchange Commission. Continuedweakness in or a further worsening of the economy generally or in a number ofour markets could adversely affect our financial position and results ofoperations, cause us to reduce the number and frequency of new store openings,slow our re-modeling of existing locations or cause us to increase storeclosings. Other unknown or unpredictable factors also could harm the Company’sbusiness, financial condition and results. Consequently, there can be no assurance that actual results ordevelopments anticipated by the Company will be realized or, even ifsubstantially realized, that they will have the expected consequences to, oreffects on, the Company.  The Companyundertakes no obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise, except tothe extent required by applicable securities laws.

 

**RESULTS OF OPERATIONS**

 

The following table sets forth our results ofoperations for the 39 and 13-week periods ended September 26, 2009 and September 27,2008, respectively, expressed as a percentage of net sales.

 

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| ** **                          | ** ** | **39-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **September 26,**  | ** ** | **September 27,**  | ** ** | **September 26,** | ** ** | **September 27,** | ** ** |
| ** **                          | ** ** | **2009**                | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales                               |       | 100.0                   | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |
| Cost of sales                       |       | 60.4                    |       | 55.9                    |       | 68.4 |   | 55.9 |   |
| Gross profit                        |       | 39.6                    |       | 44.1                    |       | 31.6 |   | 44.1 |   |
| Store operating expenses            |       | 37.4                    |       | 35.9                    |       | 41.4 |   | 39.6 |   |
| General and administrative expenses |       | 8.6                     |       | 8.3                     |       | 9.7 |   | 8.3 |   |
| Store exit costs                    |       | 0.0                     |       | 1.4                     |       | 0.0 |   | 0.8 |   |
| Employee separation charge          |       | 1.4                     |       | 0.0                     |       | 4.7 |   | 0.0 |   |
| Operating loss                      |       | (7.8                    | )          | (1.5                    | )          | (24.2 | ) | (4.6 | ) |
| Interest expense                    |       | (0.1                    | )          | (0.1                    | )          | (0.1 | ) | (0.1 | ) |
| Interest income                     |       | 0.1                     |       | 0.3                     |       | 0.1 |   | 0.2 |   |
| Loss before income taxes            |       | (7.8                    | )          | (1.3                    | )          | (24.1 | ) | (4.5 | ) |
| Income tax benefit                  |       | (2.9                    | )          | (0.5                    | )          | (9.0 | ) | (1.7 | ) |
| Net loss                            |       | (4.9                    | )%         | (0.8                    | )%         | (15.1 | )% | (2.8 | )% |

 

Weuse a number of key indicators of financial condition and operating performanceto evaluate the performance of our business, some of which are set forth in thefollowing table:

 
| ** **                                             | ** ** | **39-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **September 26,**  | ** ** | **September 27,**  | ** ** | **September 26,** | ** ** | **September 27,** | ** ** |
| ** **                                             | ** ** | **2009**                | ** ** | **2008**                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Total store count, at end of period                    |       | 289                     |       | 295                     |       | 289 |   | 295 |   |
| Net sales increase (decrease)                          |       | (22.5                   | )%         | 2.0                     | %          | (22.7 | )% | (4.0 | )% |
| Comparable store sales increase (decrease)             |       | (21.8                   | )%         | 1.0                     | %          | (21.7 | )% | (3.9 | )% |
| Average sales per transaction decrease                 |       | (14.0                   | )%         | (1.5                    | )%         | (21.2 | )% | (1.2 | )% |
| Average number of transactions increase (decrease)     |       | (9.1                    | )%         | 2.5                     | %          | (0.7 | )% | (2.8 | )% |
| Net sales per average square foot                      |       | $                       | 250        |                    | $          | 319 |   | $ | 74 |   | $ | 93 |   |
| Total square footage, at end of period (in  thousands) |       | 584                     |       | 596                     |       | 584 |   | 596 |   |
|                                                        |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

Net sales

 

During the 39-week period ended September 26,2009, net sales decreased to $154.8 million from $199.8 million, a decrease of$45.0 million, or 22.5%, as compared to the same 39-week period last year.  This reflects $41.3 million of reduced netsales, as a result of a 21.8% decrease in comparable store sales, a decrease of$1.9 million of net sales from our Mary L. division, and a decrease of $1.9million from our non-comparable store sales, which was offset by a smallincrease in income recognized from our co-branded credit card. The decrease innet sales is due primarily to the ongoing economic crisis, which resulted in a dramaticreduction in mall traffic where Cache stores are primarily located. Thedecrease in net sales in fiscal 2009 at Cache stores reflected a 9.1% decreasein sales transactions and a 14.0% decrease in average dollars per transaction.

 

During the 13-week period ended September 26,2009, net sales decreased to $44.9 million from $58.1 million, a decrease of$13.2 million, or 22.7%, as compared to the same 13-week period last year.  This reflects $12.1 million of reduced netsales, as a result of a 21.7% decrease in comparable store sales, a decrease of$174,000 of net sales from our Mary L. division, and a decrease of $1.0 millionfrom our non-comparable store sales, which was offset by a small increase inincome recognized from our co-branded credit card. The decrease in net salesfor the fiscal 2009 13-week period was due to the same reasons stated above.The decrease in net sales in the quarter at Cache stores reflected a 0.7%decrease in sales transactions and a 21.2% decrease in average dollars per transaction.

 

Gross profit

 

During the 39-week period ended September 26,2009, gross profit decreased to $61.2 million from $88.2 million, a decrease of$27.0 million, or 30.6%, as compared to the same 39-week period last year.  This decrease was primarily due to lower netsales, as described above for the 39-week period for net sales. As a percentageof net sales, gross profit decreased to 39.6% from 44.2% for the fiscal 200939-week period, as compared to the prior year period. This decrease as apercentage of net sales was primarily driven by deleveraging of store occupancycosts resulting from lower sales. The decrease in net sales was partiallyoffset by a decrease in production costs, primarily due to improved sourcingand lower freight costs and higher initial mark ups, as compared to the prioryear.

 

During the 13-week period ended September 26,2009, gross profit decreased to $14.2 million from $25.6 million, a decrease of$11.4 million, or 44.5%, as compared to the same 13-week period last year.  This decrease was primarily due to lower netsales, as described 

 

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above for the 39-week period for net sales. As a percentageof net sales, gross profit decreased to 31.6% from 44.1% for the current13-week period, as compared to the prior year period. This decrease as apercentage of net sales was primarily driven by deleveraging of store occupancycosts resulting from lower sales.  Thedecrease in net sales was partially offset by lower freight costs and higherinitial mark ups as compared to the prior year.

 

Store operating expenses

 

During the 39-week period ended September 26,2009, store operating expenses decreased to $57.8 million from $71.7 million, adecrease of $13.9 million, or 19.4%, as compared to the same 39-week periodlast year. Store operating expenses decreased primarily due to the Company’sinitiatives to reduce costs and preserve cash. Due to these initiatives, theCompany achieved reductions primarily in payroll expenses ($6.3 million),advertising expense ($2.5 million), depreciation expense ($1.4 million), groupand liability insurance expense ($1.4 million) and credit card fees ($950,000).Payroll expenses were lower primarily due to a reduction in hours worked bystore employees. The decline in advertising expense was primarily due to areduction in spending for direct mail and production costs related to printedmaterials. Depreciation expense decreased as a result of certain assets beingfully depreciated prior to fiscal 2009, the closure of 16 underperformingstores, as indicated below, under “Store exit costs” and due to the Company’sdecision to reduce capital expenditures in fiscal 2009. Group and liabilityinsurance expense decreased due to changes in the Company’s medical plan,coupled with reduction in premiums for liability insurance resulting fromrenegotiated contracts. A reduction in credit card fees was noted due to adecrease in sales coupled with renegotiated contracts. As a percentage of netsales, store operating expenses increased to 37.4% from 35.9% for the fiscal2009 39-week period as compared to the prior year period, due to the reductionin sales volume in fiscal 2009.

 

During the 13-week period ended September 27,2009, store operating expenses decreased to $18.6 million from $23.0 million, adecrease of $4.4 million, or 19.3%, as compared to the same 13-week period lastyear. Store operating expenses decreased primarily due to the Company’sinitiatives to reduce costs and preserve cash. Due to these initiatives, theCompany achieved reductions primarily in payroll expenses ($1.9 million),advertising expense ($785,000), depreciation expense ($394,000), as well as,group and liability insurance ($706,000). The decreases in payroll,advertising, depreciation and insurance expenses were due to the reasons notedin the preceding paragraph. As a percentage of net sales, store operatingexpenses increased to 41.4% from 39.6% for the fiscal 2009 13-week period ascompared to the prior year period, due to the reduction in sales volume infiscal 2009.

 

General and administrative expenses

 

During the 39-week periodended September 26, 2009, general and administrative expenses decreased to$13.3 million from $16.7 million, a decrease of $3.4 million, or 20.0%, ascompared to the same 39-week period last year. The decrease in general andadministrative expenses was primarily due to the Company’s initiatives toreduce costs and preserve cash. In total, payroll expenses decreased by $1.4million, primarily due to the one time charges associated with managementchanges incurred during fiscal 2008 in the amount of $616,000, combined with areduction of base salaries paid to several of the Company’s officers and areduction in headcount. In addition, shipping and commission expenses paid inconnection with our Mary L. division decreased by $549,000, due to a decreasein Mary L. sales and also due to a discontinuation of outsourced shippingservices for Mary L. products, which are now being shipped through the Company’sprimary carrier. Travel expense decreased by $617,000 due to a reduction intravel by corporate and regional management, as well as, a decrease inprofessional fees for $537,000 due to reduced legal activity in fiscal 2009. Asa percentage of net sales, general and administrative expenses increased to8.6% from 8.3% in fiscal 2009, due to the reduction in sales volume in fiscal2009.

 

During the 13-week periodended September 26, 2009, general and administrative expenses decreased to$4.4 million from $4.8million, a decrease of $448,000, or 9.3%, as compared tothe same 13-week period last year. The decrease in general and administrativeexpenses was primarily due to the Company’s initiatives to reduce costs andpreserve cash. In total, payroll expenses decreased by $104,000, primarily dueto a reduction of base salaries paid to several of the Company’s officerscombined with a reduction in headcount. Additional decreases in expenses werenoted for travel expense of $115,000, due to a reduction in travel by corporateand regional management, as well as, a reduction in professional fees of$90,000. As a percentage of net sales, general and administrative expensesincreased to 9.7% from 8.3% in fiscal 2009, due to the reduction in salesvolume in fiscal 2009.

 

Store exit costs

 

The Company did not incur any store exit costs duringfiscal 2009. During the 39-week period ended September 27, 2008, theCompany recorded a pre-tax charge of $2.8 million ($1.7 million after tax or$0.13 per diluted share) for 16 underperforming stores, of which we closed sixstores during fiscal 2008 and an additional five stores during the 39-weekperiod ended September 26, 2009. The remaining stores will close over thebalance of fiscal 2009. The Company does not expect to incur significantadditional costs

 

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upon the closing of these stores. Included in the exitcosts is a write down of equipment and leasehold improvements, as well as,furniture and fixtures, in the amount of $2.3 million, severance accrual of$198,000 and lease termination costs for $990,000. These costs were offset bythe reversal of $750,000 of deferred rents. Store exit costs of $449,000 wererecorded during the 13-week period ended September 27, 2008, foradditional store closure costs.

 

Employee separation charge

 

For the 39 and 13-weekperiods ended September 26, 2009, the Company incurred a pre-tax charge$2.1 million ($1.3 million after tax or $0.10 per diluted share). The chargeresulted from separation agreements entered into with its then executives. The$2.1 million charge also includes a charge of $204,000 for theremaining net book value of the non-compete agreements contained in theiremployment agreements with the Company, which were terminated pursuant to theseparation agreements. See Note 13 herein for additional information.

 

Other income/expense

 

During the 39-week period ended September 26,2009, other income (expense) decreased to $32,000 from $423,000, a decrease of$391,000 or 92.4%, as compared to the same 39-week period last year. Thisdecrease was due to a reduction in interest income of $434,000, primarilycaused by lower interest rates in fiscal 2009.

 

During the 13-week period ended September 26,2009, other income (expense) decreased to $4,000 from $67,000, a decrease of$63,000 or 94.0%, as compared to the same 13-week period last year. Thisdecrease was due to a reduction in interest income of $73,000, primarily causedby lower interest rates, in fiscal 2009.

 

Income taxes

 

During the 39-week period ended September 26, 2009, income taxbenefit increased to $4.5 million from $936,000, an increase of $3.6 million or380.6%, as compared to the same 39-week period last year. During the 13-weekperiod ended September 26, 2009, income tax benefit increased to $4.1million from $967,000, an increase of $3.1 million or 320.6%, as compared tothe same 13-week period last year. The income tax benefits recorded in fiscalyear 2009 and 2008 were attributable to the carry back of operating lossesincurred by the Company in both years, as discussed above. The estimatedeffective tax rate for fiscal 2009 is projected to be 37.4%, as compared to thefiscal 2008 estimate of 37.0%.

 

Net loss

 

As a result of the factors discussed above, net lossof $7.5 million and $6.8 million was recorded during the 39 and 13-week periodsended September 26, 2009, respectively. In fiscal 2008, net loss of $1.6million was recorded during each of the 39 and 13-week periods ended September 27,2008.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s cash requirements are primarily forworking capital, inventory for new stores, construction of new stores,remodeling of existing stores and to improve and enhance our informationtechnology systems. We have historically satisfied our cash requirementsprincipally through cash flow from operations. During the 39-week period ended September 26,2009, we generated $7.0 million of cash flow from operations, as compared to$343,000 used for the same period in fiscal 2008. We expect to continue to meetour operating cash requirements primarily through cash flows from operatingactivities, existing cash and equivalents, and short-term investments. At September 26,2009, we had working capital of $40.6 million, cash and marketable securitiesof $34.2 million and $3.5 million in third party debt outstanding related tothe purchase of AVD, excluding the amounts due in connection with the employeeseparation charge recorded during the 13-week period ended September 26, 2009(see Note 13). The cash and marketable securities at September 26, 2009included certificates of deposit of $1.5 million that have been placed by theCompany as collateral against a one year credit facility.

 

The following table sets forth our cash flows for theperiods indicated:

 
| ** **                                           | ** ** | **39-Weeks Ended**            | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **September 26,********2009** | ** ** | **September 27,********2008** | ** ** |
| Net cash provided by (used in) operating  activities |       | $                                  | 7,033,000  |   | $ | (343,000 | ) |
| Net cash provided by (used in) investing  activities |       | (5,001,000                         | )          | 10,397,000 |   |
| Net cash used in financing activities                |       | (1,538,000                         | )          | (15,274,000 | ) |
| Net increase (decrease) in cash and equivalents      |       | $                                  | 494,000    |   | $ | (5,220,000 | ) |

 

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During the 39-week period ended September 26,2009, cash and equivalents increased by $494,000, primarily due to decreases inreceivables and income tax receivables ($4.9 million), as a result of cashcollected on the income tax receivable recorded during fiscal 2008. Decrease ininventories ($1.9 million) and an increase in accounts payable ($1.3 million)also contributed to the net increase in cash and equivalents. Inventoriesdecreased primarily due to Company’s efforts to better align the inventory tothe decreased sales volumes at stores. These increases in cash were offset bynet purchases of marketable securities ($2.2 million), certificates of deposit— restricted ($1.5 million) used as collateral for outstanding letters of credit,as well as, purchases of equipment and leasehold improvements ($1.3 million)for our new and remodeled stores. Decreases were also noted from repurchases ofcommon stock ($586,000) and repayment of a note payable ($952,000) inconnection with the acquisition of AVD.

 

During fiscal 2009, the Company had repurchased inthe open market a total of 310,199 shares at a cost of $586,000, or an averageof $1.89 per share. This brings the total repurchase, since inception of thebuyback program in 2007, to 3,682,000 shares, at a cost of $39.8 million or anaverage of $10.81 per share.

 

OnMay 27, 2009, the Company entered into a one year credit facility withBank of America (the “Bank”). Under this facility, the Company may direct theBank to issue letters of credit up to a total of $1,425,000. Any outstandingletters of credit under this facility are collateralized by granting to thebank a security interest in various certificates of deposit held by the Companyand its subsidiaries with the Bank amounting to a total of $1,500,000. This oneyear credit facility will expire on May 1, 2010.

 

The Company had outstanding letters of credit of$1.1 million, $585,000 and $550,000 at September 26, 2009, December 27,2008 and September 27, 2008, respectively.

 

#### **Inflation / Recession**

 

The Company does not believe that its sales revenue oroperating results have been materially impacted by inflation during the pasttwo fiscal years. There can be no assurance, however, that our sales revenue oroperating results will not be impacted by inflation in the future.

 

Ongoing macroeconomic conditions continue to affectthe sales volume and profitability levels of our company.  Furthermore, we believe that continuinglimitations on the availability of consumer credit, especially of credit cards,continue to adversely affect customer demand for our products, which adverselyaffect our business, financial condition and results of operations.

 

Many of our suppliers rely on working capitalfinancing to fund their operations.  As aresult of current economic conditions, lenders continue to maintain stringentcredit standards and terms. On November 1, 2009, certain CIT entities(“CIT”) filed for bankruptcy protection. CIT provides financing and collectionservices to several of the Company’s suppliers. A CIT bankruptcy may createfinancing or other challenges to our suppliers. To the extent that any of oursuppliers are unable to obtain adequate credit or their borrowing costsincrease, the supplier may cease operations, we may experience delays inobtaining products, the suppliers may increase their wholesale prices to us orthey may modify payment terms in a manner that is unfavorable to us.  Any of the foregoing could adversely affectour net sales or gross margins, which could adversely affect our business,financial condition and results of operations.

 

#### **Off-Balance Sheet Arrangements**

 

The Company does not haveany off-balance sheet arrangements or transactions with unconsolidated, limitedpurpose entities. In the normal course of our business, we enter into operatingleases for store locations and utilize letters of credit principally for theimportation of merchandise. Other than operating lease commitments and lettersof credit we are nota party to any material off-balance sheet financing arrangements.

 

# **Critical Accounting Policies andEstimates**

 

The Company’s accountingpolicies are more fully described in Note 1 of Notes to Consolidated FinancialStatements in our fiscal 2008 Form 10-K. As disclosed in Note 1 of Notes to Consolidated Financial Statements,the preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”), whichrequires management to make estimates and assumptions about future events thataffect the amounts reported in the consolidated financial statements andaccompanying notes. Since future events and their effects cannot be determinedwith absolute certainty, actual results will differ from those estimates. We evaluate our estimates and judgments on anongoing basis and predicate those estimates and judgments on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances.  Actualresults will differ from these under different assumptions or conditions.

 

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The Company’s managementbelieves the following critical accounting policies, among others, affect itsmore significant judgments and estimates used in preparation of theConsolidated Financial Statements.

 

*Certificates of deposit — restricted.*****From time to time, the Company directsBank of America (the “Bank”) to issue letters of credit under its one yearcredit facility with the bank. These letters of credit are secured againstcertificates of deposit held by the Company at the Bank.  Any certificates of deposit used to securethe letters of credit are reported as Restricted Funds. As of September 26,2009, the Company had $1.5 million of certificates of deposit securing alloutstanding letters of credit. These certificates of deposit are reported asCurrent when the underlying letters of credit expire within one year from theend of the reporting period, or as Non-Current when the underlying letters ofcredit expire after one year from the end of the reporting period.

 

***Allowance fordoubtful accounts***. Theallowance for doubtful accounts, which is regularly reviewed, is an estimate ofprobable credit losses in the existing accounts receivable. The allowance isdetermined based on historical write-off experience and the current retailerenvironment. Balances over 90 days past due and over a specified amount arereviewed individually for collectability; other balances are considered on anaggregate basis considering the aging of balances.  Account balances are written off against theallowance when it is probable the receivable will not be recovered. There is nooff-balance sheet credit exposure related to our customers. Management believesthat the risk associated with trade accounts receivable is adequately providedfor in the allowance for doubtful accounts. During the 39-week period ended September 26, 2009, we recorded areserve of approximately $560,000 and utilized $625,000, resulting in anaggregate reserve amount of $46,000 as of September 26, 2009. As of December 27,2008, the Company reported a reserve balance of $111,000.

** **

*Inventories**.*The Company’s finished goods inventoriesat our retail stores are valued at the lower of cost or market using the retailinventory method. Under the retail inventory method (“RIM”), the valuation ofinventories at cost and the resulting gross margins are calculated by applyinga calculated cost to retail ratio to the retail value of inventories. RIM is anaveragingmethod thatis widely used in the retail industry due to its practicality. Additionally, itis recognized that the use of RIM will result in valuing inventories at thelower of cost or market if markdowns are currently taken as a reduction of theretail value of inventories. Inherent in the RIM calculation are certainsignificant management judgments including, among others, merchandise markon,markups, and markdowns, which significantly impact the ending inventory valuationat cost as well as the resulting gross margins. We take markdowns due tochanges in fashion and style, based on the following factors: (i) supplyon hand, (ii) historical experience and (iii) our expectations as tofuture sales. We do not anticipate any significant change in our markdownstrategy that would cause a significant change in our earnings. We believe thatour RIM provides an inventory valuation that results in a carrying value at thelower of cost or market. For our AVD division, which made up approximately17.3% of total inventory as of September 26, 2009, the raw materials, workin process and finished goods inventories are valued at the lower of cost ormarket value, using the first-in-first-out valuation method. The Companyensures that the raw materials, work in process and finished goods are properlyvalued by taking into account any obsolescence and recording a reserve inaccordance with our established policy.

 

***Finite-long lived assets.***  The Company’s judgment regarding the existence ofimpairment indicators is based on market and operational performance. We assessthe impairment of long-lived assets, primarily fixed assets, whenever events orchanges in circumstances indicate that the carrying value may not berecoverable and exceeds the fair market value. Factors we consider importantwhich could trigger an impairment review include the following:

 

**·**        significant changes in the manner of our use of assets orthe strategy for our overall business;

** **

**·**        significant negative industry or economic trends;

** **

**·**        store closings; or

** **

**·**        underperforming business trends.

 

The Company evaluates finite-lived assets inaccordance with “*Impairment or Disposal of Long-Lived Assets*”guidance under Topic 360 “*Property, Plant andEquipment*” of the FASB ASC. Finite-lived assets are evaluated forrecoverability in accordance with Topic 360 of the FASB ASC whenever events orchanges in circumstances indicate that an asset may have been impaired. Inevaluating an asset for recoverability, the Company estimates the future cashflows expected to result from the use and eventual disposition of the asset. Ifthe sum of the expected future cash flows (undiscounted and without interestcharges) is less than the carrying amount of the asset, an impairment loss,equal to the excess of the carrying amount over the fair market value of theasset is recognized. Various factors including future sales growth and profitmargins are included in this analysis. To the extent these future projectionsor strategies change, the conclusion regarding impairment may differ from thecurrent estimates. No impairment charges were recorded during the 39-weekperiod ended September 26, 2009 and September 27, 2008. The Companyrecorded an impairment charge of $1.1 million for 12 stores during the fourthquarter of fiscal 2008.

 

*Goodwill and Intangible Assets*. The Company evaluates its Goodwill andIntangible assets in accordance with “*Intangibles -Goodwill andOther”,*Topic 350 of the FASB ASC. This guidance requires ratable amortization of goodwill be replaced withperiodic tests of 

 

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the goodwill’s impairment. During fiscal 2007, inconnection with the acquisition of AVD, the Company recorded goodwill and otherintangible assets. The Company performs impairment testing of itssubsidiary—AVD, which considers the Company’s fair value to determine whetheran impairment charge related to the carrying value of the Company’s recordedgoodwill and other intangible assets is necessary. This is reevaluated annuallyduring the fourth quarter, or more frequently if necessary. The Companyconsiders many factors in evaluating whether the carrying value of the recordedgoodwill will be recoverable. Factors used to determine this primarily includedeclines in stock price and the market capitalization in relation to the bookvalue of the Company, discounted projected cash flows of the reporting unit andvaluation of companies comparable to the reporting unit. No impairment chargeswere recorded during the 39-week period ended September 26, 2009 and September 27,2008. The Company recorded an impairment charge of approximately $1.0 millionagainst the carrying value of AVD’s goodwill during the fourth quarter offiscal 2008.  Pursuant to the employeeseparation agreement (see Note 13), the Company recorded a pre-tax charge of$204,000 for the remaining net book value of the non-compete agreements during the 13-week period ended September 26,2009.

 

*Self Insurance.*The Company is self-insured for losses andliabilities related primarily to employee health and welfare claims up tocertain thresholds. Losses are accrued based upon our estimates of theaggregate liability for claims incurred using certain actuarial assumptionsfollowed in the insurance industry and based on Company experience. Adjustmentsto earnings resulting from changes in historical loss trends have beeninsignificant for fiscal 2009 and 2008. Further, we do not anticipate anysignificant change in loss trends, settlements or other costs that would causea significant change in our earnings. We maintain stop-loss insurance coverage,which covers us for benefits paid in excess of limits as defined in the plan.

 

*Gift Cards, Gift Certificates and Credits**.***The Company sells gift cards and giftcertificates (“Gift Cards”) and issues credits to its customers whenmerchandise is returned (“Merchandise Credit”), which do not expire. TheCompany recognizes sales from Gift Cards when they are redeemed by the customerand income when the likelihood of the Gift Card and Merchandise Credit beingredeemed by the customer is remote (“Gift Card breakage”), since the Companyhas determined that it does not have a legal obligation to remit the unredeemedvalue to the relevant jurisdiction as abandoned property. The Companydetermines Gift Card breakage income based upon historical redemption patternsand the remaining unredeemed percentage at the end of our historical data of 3.5years. Historical redemptions of Gift Cards ranged from 64% in the firstquarter to 0.03% in the fourteenth quarter subsequent to the issue date,resulting in an average of approximately 95% redeemed or 5% unredeemed GiftCards over the historical data of 3.5 years. We have determined that redemptionwould be remote based on the fact that, by the fourteenth quarter since issuedate, the redemption rate approximated 0%, indicating that the probability ofsuch cards being redeemed is remote. As such, we have recorded breakage incomebased upon this 5%, which is reviewed on a quarterly basis for propriety.Breakage income represents the balance of Gift Cards and Merchandise Credit,for which the Company believes the likelihood of redemption by the customer isremote. At that time, the Company will recognize breakage income for those GiftCards and Merchandise Credit. The Company recorded $173,000 and $222,000 ofbreakage income during the 39-week periods ended September 26, 2009 and September 27,2008, respectively.

 

*Revenue Recognition.* Sales are recognized at the “point of sale,”which occurs when merchandise is sold in an “over-the-counter” transaction orupon receipt by a customer. Sales of merchandise via our website are recognizedat the expected time of delivery to the customer. Our customers have the rightto return merchandise. Sales are reported net of actual and estimated returns.We maintain a reserve for potential product returns and record, as a reductionto sales, a provision for estimated product returns, which is determined basedon historical experience. Charges/(credits) resulting from revisions toestimates on our sales return provision were approximately $(139,000) and$(155,000) for the 39-week period ended September 26, 2009 and September 27,2008, respectively. Amounts billed to customers for shipping and handling feesare included in net sales at the time of shipment. Costs incurred at our storesfor shipping and handling are included in cost of sales. The Company recordsrevenues net of applicable sales tax.

 

In connection with theacquisition of AVD, the Company also acquired the rights to the “Mary L.”trademark. Mary L. products are sold in upper tier department stores and, as aresult, Mary L. sales are included under net sales when the merchandise isshipped to the department stores. Mary L. sales are recorded net of anyreturns, chargebacks, discounts and allowances. We also maintain a reserve as areduction to sales for potential returns, chargebacks, discounts andallowances. During the 39-week period ended September 26, 2009, werecorded a reserve of approximately $560,000 and utilized $625,000, resultingin an aggregate reserve amount of $46,000 as of September 26, 2009.

 

Under Cache’s co-brandedvisa card program, the Company receives from the issuing bank a non-refundablecredit card activation fee for each new account that is opened and activated.These fees are initially deferred and recognized in consolidated net sales asrevenue over the life of the contract. During the 39-week periods ended September 26, 2009 and September 27,2008, the Company received approximately $884,000 and $1.1 million,respectively, in connection with activated cards. The amount of fee incomerecorded in connection with activated credit cards was $319,000 and $140,000for the 39-week period ended September 26, 2009 and September 27,2008, respectively.

 

The Company also receivesfrom the issuing bank and Visa U.S.A Inc. a sales royalty, which is based on apercentage of net purchases made by cardholders at Cache or other businesses.Cache has determined that since it has not incurred any significant orrecurring costs in relation to the co-branded credit card program the salesroyalties earned in connection to the agreement will be recorded under 

 

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net sales. The fees that areincurred by the Company are cardholder incentives, which are funded from thefees paid by the issuing bank and Visa U.S.A Inc. The amount of sales royaltyincome recorded was $230,000 and $170,000 for the 39-week period ended September 26,2009 and September 27, 2008, respectively.

 

The Company also offers itscard holders a program whereby points can be earned on net purchases made withthe co-branded credit card. Five reward points are awarded for each dollarspent at Cache and one reward point is awarded for each dollar spent atnon-Cache businesses.  A cardholder whosecredit card account is not delinquent, in default or closed will beautomatically eligible to receive a $25 Cache gift card upon accrual of 2,500reward points. The issuing bank bears the cost of the reward program and isresponsible for the administration and management of the program.

 

*Income Taxes.*****The Company accounts for income taxes in accordancewith “*Income Taxes*”, Topic 740 ofthe FASB ASC. This guidance requires the Company to recognize deferred taxliabilities and assets for the expected future tax consequences of events thathave been recognized in the Company’s financial statements or tax returns.Under this method, deferred tax liabilities and assets are determined based onthe difference between the financial statement carrying amounts and tax basesof assets and liabilities, using applicable tax rates for the years in whichthe differences are expected to reverse. When tax contingencies becomeprobable, a liability for the contingent amount is estimated based upon theCompany’s best estimation of the potential exposures associated with the timingand amount of deductions, as well as various tax filing positions. As of September 26,2009, the Company has recorded a $428,000 reserve, net of federal benefit forpotential tax contingencies. No such reserves were recorded as of September 27,2008.

 

Effective December 31, 2006, the Company adoptedthe authoritative guidance regarding “*Accountingfor Uncertainty in Income Taxes*”, which prescribes a comprehensivemodel of how a company should recognize, measure, present and disclose in itsfinancial statements uncertain tax positions that the company has taken orexpects to take on a tax return. The guidance also states that a tax benefitfrom an uncertain tax position may be recognized if it is “more likely than not”that the position is sustainable, based upon its technical merits. The taxbenefit of a qualifying position is the largest amount of tax benefit that hasgreater than a 50% likelihood of being realized upon the ultimate settlementwith a taxing authority having full knowledge of all relevant information.

 

*Seasonality.* The Company experiences seasonal andquarterly fluctuations in net sales and operating income. Quarterly results ofoperations may fluctuate significantly as a result of a variety of factors, includingthe timing of new store openings, fashion trends, shifts in timing of certainholidays, economic conditions and competition. Our business is subject to seasonal influences, characterized by highestsales during the fourth quarter (October, November and December) andlowest sales during the third quarter (July, August and September). Webelieve that historical quarterly trends were disrupted in fiscal 2008 bymacroeconomic conditions during the second half of the fiscal year. Thesemacroeconomic conditions may continue to disrupt historical trends in fiscal2009.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our market risk relates primarily to changes ininterest rates. The interest rate risk involves the short-term investment ofexcess cash in short-term, investment-grade interest-bearing securities. Theseinvestments are included in cash and equivalents, marketable securities, and certificates of deposit — restricted on our balance sheet. If there are changes in interestrates, those changes would affect the investment income we earn on theseinvestments and, therefore, impact our cash flows and results of operations.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

The Company is committed to maintaining disclosurecontrols and procedures designed to ensure that information required to bedisclosed in our periodic reports filed under the Securities Exchange Act of1934, as amended (the “Exchange Act”), is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and that such information is accumulated and communicated to our management,including our chief executive officer and chief financial officer, asappropriate, to allow for timely decisions regarding required disclosure.

 

Under the supervision and with the participation ofour management, including our principal executive officer and principalfinancial officer, we conducted an evaluation of our disclosure controls andprocedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) underthe Exchange Act, as of the end of the period covered by this Report.  There are inherent limitations to theeffectiveness of any system of disclosure controls and procedures, includingthe possibility of human error and the circumvention or overriding of thecontrols and procedures.  Accordingly,even effective disclosure controls and procedures can only provide reasonableassurance of achieving their control objectives.  Based on this evaluation, our principalexecutive officer and our principal financial officer concluded that ourdisclosure controls and procedures were effective as of the end of the periodcovered by this Report.

 

There has been no change in our internal controlover financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) ofthe Exchange Act) during the 39-weeks ended September 26, 2009 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II- OTHER INFORMATION**

 

**ITEM1A.  RISK FACTORS**

 

***The FurtherSpread of H1N1 Influenza May Adversely Affect Our Business***

 

During April 2009, theWorld Health Organization issued a warning for the H1N1 virus, which is morecommonly known as “swine flu”, and after a summer hiatus, the spread of theH1N1 virus is reported to have again accelerated in recent weeks. The spread ofH1N1 influenza may adversely affect our business.  We could be adversely affected if one or morejurisdictions in which we have stores impose mandatory store closures or seekvoluntary closures.  Furthermore,shoppers may seek to avoid crowded or enclosed locations such as malls, wheresubstantially all of our stores are located. H1N1 influenza also could adversely affect our ability to adequatelystaff our stores, receive merchandise deliveries on a timely basis and/orperform functions at the corporate level. Even if H1N1 influenza does not continue to spread or does not result ina significant number of extreme illnesses or fatalities, the perceived risk ofinfection or significant health risk may adversely affect our business.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

Cache, Inc.held its annual meeting of shareholders at its headquarters in New York, NewYork on July 21, 2009.  Of the12,727,837 shares outstanding as of the record date, 11,343,663 shares wererepresented by proxy at the meeting. Proxies were solicited by Cache pursuantto Regulation 14A under the Securities Exchange Act of 1934, as amended.At the meeting, Cache’s shareholders voted on the following matters:

 

(1)                                  Proposal toelect five directors to hold office for a one-year term and until theirsuccessors are elected and qualified.

 
| ** **          | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------|------------|------------|------------|--------------|------------|
| Andrew M. Saul      |       | 7,787,365  |       | 3,556,298    |       |
| Thomas E. Reinckens |       | 10,444,588 |       | 899,075      |       |
| Gene G. Gage        |       | 8,447,548  |       | 2,896,115    |       |
| Arthur S. Mintz     |       | 8,447,548  |       | 2,896,115    |       |
| Morton J. Schrader  |       | 8,440,034  |       | 2,903,629    |       |

 

(2)                                  Proposal to approve the Company’s amendedand restated 2008 Stock Option and Performance Incentive Plan.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Not Voted** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|---------------|------------|
| 5,567,804 |       | 3,655,796   |       | 5,485       |       | 2,114,578     |       |

 

(3)                                  Proposal to approve the increase in theCompany’s authorized common stock to 40,000,000 shares.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 7,954,993 |       | 3,387,768   |       | 902         |       |

 

(4)                                  Proposal toratify the appointment of MHM Mahoney Cohen CPA’s as the Company’sindependent auditors for the fiscal year ending January 2, 2010.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 11,293,134 |       | 48,192      |       | 2,337       |       |

 

**ITEM6.  EXHIBITS**

 
| 10.1*+ |   | Agreement, dated  September 23, 2009, between Cache, Inc. and Robert Kantor                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2*+ |   | Agreement, dated  September 23, 2009, among Cache, Inc., Adrienne Kantor, Adrienne  Victoria, Inc. and Adrienne Victoria Design, Inc. |
| 31.1*  |   | Certification Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                            |
| 31.2*  |   | Certification Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                            |
| 32.1*  |   | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                            |

 

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* Filed herewith

+ Management contract or compensatory plan orarrangement

 

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**Signatures**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|   | Dated: November 5, 2009 |
|--------|------------------------------|
|   | CACHE, INC.                  |
|   |                         |   |
|   |                         |   |
|   | BY:                     | /s/  Thomas E. Reinckens |
|   |                         | Thomas  E. Reinckens |
|   |                         | *Chairman  and Chief Executive Officer* |
|   |                         | (Principal  Executive Officer) |
|   |                         |   |
|   |                         |   |
|   | BY:                          | /s/  Margaret Feeney |
|   |                         | Margaret  Feeney |
|   |                         | *Executive  Vice President and Chief Financial Officer* |
|   |                         | (Principal  Financial and Accounting Officer) |

 

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