Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended October 2, 2010**

 

**OR**

 

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

 

**For the transition periodfrom            to            **

 

**Commission File Number: 0-10345**

 

**CACHE, INC.**

(Exact name of registrant as specified in itsCharter)

 

| **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’s telephone number, includingarea code)

 

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tofiling requirements for the past 90 days.  Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post suchfiles). Yes o  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

As of November 1, 2010, 12,792,844 commonshares were outstanding.

 

 

 

----

Table ofContents

 

CACHE, INC. AND SUBSIDIARIES

 

INDEX

** **
| PART I. FINANCIAL INFORMATION | 3                                                                                                                                                           |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                    |                                                                                                                                                        |   |
| Item 1.                            | Condensed Consolidated  Financial Statements (unaudited)                                                                                                    | 3 |
|                                    | Condensed  Consolidated Balance Sheets as of October 2, 2010, January 2, 2010  and September 26, 2009                                        | 3 |
|                                    | Condensed  Consolidated Statements of Operations for the thirty-nine and thirteen week  periods ended October 2, 2010 and September 26, 2009 | 4-5 |
|                                    | Condensed  Consolidated Statements of Cash Flows for the thirty-nine week periods ended  October 2, 2010 and September 26, 2009                   | 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                                                                                                 | 18 |
| Item 4.                            | Controls and  Procedures                                                                                                                                    | 18 |
|                                    |                                                                                                                                                        |   |
| PART II. OTHER  INFORMATION   | 18                                                                                                                                                          |
|                                    |                                                                                                                                                        |   |
| Item 6.                            | Exhibits                                                                                                                                                    | 19 |
|                                    |                                                                                                                                                        |   |
| SIGNATURES                              | 20                                                                                                                                                          |

 

2

----

Table of Contents

 

**PART I - FINANCIAL INFORMATION**

 

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

 

**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                           | ** ** | **October 2,********2010** | ** **     | **January 2,********2010** | ** ** | **September 26,********2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|----------------|---------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                           | ** ** | **(Unaudited)**                 | ** **     | **(Audited)**                   | ** ** | **(Unaudited)**                    | ** ** |
| **ASSETS**                                                                                                           | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| **Current assets:**                                                                                                  | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| **Cash and equivalents**                                                                                             | ** ** | **$**                           | **2,483,000**  | ** **                      | **$**      | **5,516,000**                      | ** ** | **$** | **5,329,000** | ** ** |
| **Marketable securities**                                                                                            | ** ** | **21,865,000**                  | ** **     | **29,999,000**                  | ** ** | **27,376,000**                     | ** ** |
| **Certificates of deposit —  restricted**                                                                       | ** ** | **2,500,000**                   | ** **     | **1,500,000**                   | ** ** | **1,500,000**                      | ** ** |
| **Receivables, net**                                                                                                 | ** ** | **2,020,000**                   | ** **     | **3,411,000**                   | ** ** | **2,713,000**                      | ** ** |
| **Income tax receivable, net**                                                                                       | ** ** | **81,000**                      | ** **     | **3,438,000**                   | ** ** | **2,225,000**                      | ** ** |
| **Inventories, net**                                                                                                 | ** ** | **19,243,000**                  | ** **     | **16,599,000**                  | ** ** | **20,434,000**                     | ** ** |
| **Prepaid expenses and other  current assets**                                                                       | ** ** | **6,041,000**                   | ** **     | **4,943,000**                   | ** ** | **1,117,000**                      | ** ** |
| **Total current assets**                                                                                             | ** ** | **54,233,000**                  | ** **     | **65,406,000**                  | ** ** | **60,694,000**                     | ** ** |
| ** **                                                                                                           | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| **Equipment and leasehold  improvements, net**                                                                       | ** ** | **26,836,000**                  | ** **     | **31,713,000**                  | ** ** | **35,724,000**                     | ** ** |
| **Goodwill**                                                                                                         | ** ** | **9,092,000**                   | ** **     | **9,092,000**                   | ** ** | **9,092,000**                      | ** ** |
| **Intangible assets, net**                                                                                           | ** ** | **102,000**                     | ** **     | **102,000**                     | ** ** | **1,012,000**                      | ** ** |
| **Other assets**                                                                                                     | ** ** | **7,965,000**                   | ** **     | **4,684,000**                   | ** ** | **4,274,000**                      | ** ** |
| ** **                                                                                                           | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| **Total assets**                                                                                                     | ** ** | **$**                           | **98,228,000** | ** **                      | **$**      | **110,997,000**                    | ** ** | **$** | **110,796,000** | ** ** |
| ** **                                                                                                           | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                       | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| ** **                                                                                                           | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| **Current liabilities:**                                                                                             | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| **Accounts payable**                                                                                                 | ** ** | **$**                           | **8,949,000**  | ** **                      | **$**      | **7,624,000**                      | ** ** | **$** | **7,676,000** | ** ** |
| **Note payable**                                                                                                     | ** ** | **1,751,000**                   | ** **     | **1,408,000**                   | ** ** | **1,294,000**                      | ** ** |
| **Accrued compensation**                                                                                             | ** ** | **1,222,000**                   | ** **     | **2,668,000**                   | ** ** | **2,862,000**                      | ** ** |
| **Accrued liabilities**                                                                                              | ** ** | **9,321,000**                   | ** **     | **11,783,000**                  | ** ** | **8,246,000**                      | ** ** |
| **Total current liabilities**                                                                                        | ** ** | **21,243,000**                  | ** **     | **23,483,000**                  | ** ** | **20,078,000**                     | ** ** |
| ** **                                                                                                           | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| **Note payable**                                                                                                     | ** ** | **476,000**                     | ** **     | **1,425,000**                   | ** ** | **2,199,000**                      | ** ** |
| **Other liabilities**                                                                                                | ** ** | **14,103,000**                  | ** **     | **15,806,000**                  | ** ** | **17,202,000**                     | ** ** |
| ** **                                                                                                           | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| **Commitments and contingencies**                                                                                    | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| ** **                                                                                                           | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| **STOCKHOLDERS’ EQUITY**                                                                                        | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| ** **                                                                                                           | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| **Common stock, par value $.01;  authorized, 40,000,000 shares; issued 16,475,043, 16,433,373 and  16,410,036** | ** ** | **165,000**                     | ** **     | **164,000**                     | ** ** | **164,000**                        | ** ** |
| **Additional paid-in capital**                                                                                       | ** ** | **47,888,000**                  | ** **     | **47,555,000**                  | ** ** | **47,428,000**                     | ** ** |
| **Retained earnings**                                                                                                | ** ** | **54,148,000**                  | ** **     | **62,359,000**                  | ** ** | **63,520,000**                     | ** ** |
| **Treasury stock 3,682,199 shares, at cost**                                                                         | ** ** | **(39,795,000**                 | **)**          | **(39,795,000**                 | **)**      | **(39,795,000**                    | **)**      |
| **Total stockholders’ equity**                                                                                  | ** ** | **62,406,000**                  | ** **     | **70,283,000**                  | ** ** | **71,317,000**                     | ** ** |
| ** **                                                                                                           | ** ** | ** **                      | ** **     | ** **                      | ** ** | ** **                         | ** ** |
| **Total liabilities and  stockholders’ equity**                                                                 | ** ** | **$**                           | **98,228,000** | ** **                      | **$**      | **110,997,000**                    | ** ** | **$** | **110,796,000** | ** ** |

 

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

 

3

----

Table of Contents

 

**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**FOR THE THIRTY-NINE WEEKS ENDED**

**(Unaudited)**

 
| ** **                                         | ** ** | **October 2,  2010** | ** **      | **September 26,  2009** | ** ** |
|----------------------------------------------------|------------|---------------------------|-----------------|------------------------------|------------|
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Net sales**                                      | ** ** | **$**                     | **150,649,000** | ** **                   | **$**      | **154,813,000** | ** ** |
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Cost of sales, including buying  and occupancy** | ** ** | **93,099,000**            | ** **      | **93,574,000**               | ** ** |
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Gross profit**                                   | ** ** | **57,550,000**            | ** **      | **61,239,000**               | ** ** |
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Expenses:**                                      | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Store operating expenses**                       | ** ** | **55,766,000**            | ** **      | **57,840,000**               | ** ** |
| **General and administrative  expenses**           | ** ** | **15,048,000**            | ** **      | **13,341,000**               | ** ** |
| **Employee separation charge**                     | ** ** | **—**                | ** **      | **2,121,000**                | ** ** |
| **Total expenses**                                 | ** ** | **70,814,000**            | ** **      | **73,302,000**               | ** ** |
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Operating loss**                                 | ** ** | **(13,264,000**           | **)**           | **(12,063,000**              | **)**      |
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Other income (expense):**                        | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Interest expense**                               | ** ** | **(94,000**               | **)**           | **(146,000**                 | **)**      |
| **Interest income**                                | ** ** | **117,000**               | ** **      | **178,000**                  | ** ** |
| **Total other income, net**                        | ** ** | **23,000**                | ** **      | **32,000**                   | ** ** |
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Loss before income taxes**                       | ** ** | **(13,241,000**           | **)**           | **(12,031,000**              | **)**      |
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Income tax benefit**                             | ** ** | **(5,030,000**            | **)**           | **(4,498,000**               | **)**      |
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Net loss**                                       | ** ** | **$**                     | **(8,211,000**  | **)**                        | **$**      | **(7,533,000** | **)** |
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Basic loss per share**                           | ** ** | **$**                     | **(0.64**       | **)**                        | **$**      | **(0.59** | **)** |
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Diluted loss per share**                         | ** ** | **$**                     | **(0.64**       | **)**                        | **$**      | **(0.59** | **)** |
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Basic weighted average shares  outstanding**     | ** ** | **12,774,000**            | ** **      | **12,810,000**               | ** ** |
| ** **                                         | ** ** | ** **                | ** **      | ** **                   | ** ** |
| **Diluted weighted average shares  outstanding**   | ** ** | **12,774,000**            | ** **      | **12,810,000**               | ** ** |

 

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

 

4

----

Table of Contents

 

**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE THIRTEEN WEEKS ENDED**

**(Unaudited)**

 
| ** **                                         | ** ** | **October 2,  2010** | ** **     | **September 26,  2009** | ** ** |
|----------------------------------------------------|------------|---------------------------|----------------|------------------------------|------------|
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Net sales**                                      | ** ** | **$**                     | **45,524,000** | ** **                   | **$**      | **44,941,000** | ** ** |
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Cost of sales, including buying  and occupancy** | ** ** | **29,622,000**            | ** **     | **30,727,000**               | ** ** |
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Gross profit**                                   | ** ** | **15,902,000**            | ** **     | **14,214,000**               | ** ** |
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Expenses:**                                      | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Store operating expenses**                       | ** ** | **17,959,000**            | ** **     | **18,590,000**               | ** ** |
| **General and administrative  expenses**           | ** ** | **6,033,000**             | ** **     | **4,357,000**                | ** ** |
| **Employee separation charge**                     | ** ** | **—**                | ** **     | **2,121,000**                | ** ** |
| **Total expenses**                                 | ** ** | **23,992,000**            | ** **     | **25,068,000**               | ** ** |
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Operating loss**                                 | ** ** | **(8,090,000**            | **)**          | **(10,854,000**              | **)**      |
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Other income (expense):**                        | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Interest expense**                               | ** ** | **(27,000**               | **)**          | **(48,000**                  | **)**      |
| **Interest income**                                | ** ** | **32,000**                | ** **     | **52,000**                   | ** ** |
| **Total other income, net**                        | ** ** | **5,000**                 | ** **     | **4,000**                    | ** ** |
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Loss before income taxes**                       | ** ** | **(8,085,000**            | **)**          | **(10,850,000**              | **)**      |
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Income tax benefit**                             | ** ** | **(3,058,000**            | **)**          | **(4,067,000**               | **)**      |
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Net loss**                                       | ** ** | **$**                     | **(5,027,000** | **)**                        | **$**      | **(6,783,000** | **)** |
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Basic loss per share**                           | ** ** | **$**                     | **(0.39**      | **)**                        | **$**      | **(0.53** | **)** |
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Diluted loss per share**                         | ** ** | **$**                     | **(0.39**      | **)**                        | **$**      | **(0.53** | **)** |
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Basic weighted average shares  outstanding**     | ** ** | **12,780,000**            | ** **     | **12,748,000**               | ** ** |
| ** **                                         | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Diluted weighted average shares  outstanding**   | ** ** | **12,780,000**            | ** **     | **12,748,000**               | ** ** |

 

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

 

5

----

Table of Contents

 

**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**FOR THE THIRTY-NINE WEEKS ENDED**

**(Unaudited)**

 
| ** **                                                                                             | ** ** | **October 2,  2010** | ** **     | **September 26,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------|----------------|------------------------------|------------|
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Net loss**                                                                                           | ** ** | **$**                     | **(8,211,000** | **)**                        | **$**      | **(7,533,000** | **)** |
| **Adjustments to reconcile net  loss to net cash********provided  by (used in) operating activities:** | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Depreciation and amortization**                                                                      | ** ** | **7,040,000**             | ** **     | **8,757,000**                | ** ** |
| **Employee separation charge**                                                                         | ** ** | **—**                | ** **     | **2,121,000**                | ** ** |
| **Provision for sales allowance  and doubtful accounts, net**                                          | ** ** | **(53,000**               | **)**          | **(57,000**                  | **)**      |
| **Stock-based compensation**                                                                           | ** ** | **311,000**               | ** **     | **273,000**                  | ** ** |
| **Non-cash interest expense on  note payable**                                                         | ** ** | **28,000**                | ** **     | **48,000**                   | ** ** |
| **Deferred income taxes**                                                                              | ** ** | **(5,039,000**            | **)**          | **(2,343,000**               | **)**      |
| **Gift card breakage**                                                                                 | ** ** | **(145,000**              | **)**          | **(173,000**                 | **)**      |
| **Amortization of deferred income  for co-branded credit card**                                        | ** ** | **(490,000**              | **)**          | **(319,000**                 | **)**      |
| **Amortization of deferred rent**                                                                      | ** ** | **(2,067,000**            | **)**          | **(1,549,000**               | **)**      |
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Change in assets and  liabilities:**                                                                 | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Decrease in receivables and  income tax receivables**                                                | ** ** | **4,826,000**             | ** **     | **4,900,000**                | ** ** |
| **Decrease (increase) in  inventories**                                                                | ** ** | **(2,685,000**            | **)**          | **1,887,000**                | ** ** |
| **Decrease in prepaid expenses  and other current assets**                                             | ** ** | **683,000**               | ** **     | **671,000**                  | ** ** |
| **Increase in accounts payable**                                                                       | ** ** | **1,325,000**             | ** **     | **1,301,000**                | ** ** |
| **Decrease in accrued  liabilities, accrued compensation and other liabilities**                       | ** ** | **(2,726,000**            | **)**          | **(951,000**                 | **)**      |
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Net cash provided by (used in)  operating activities**                                               | ** ** | **(7,203,000**            | **)**          | **7,033,000**                | ** ** |
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Purchase of marketable  securities**                                                                 | ** ** | **(14,501,000**           | **)**          | **(31,040,000**              | **)**      |
| **Maturities of marketable  securities**                                                               | ** ** | **22,635,000**            | ** **     | **28,817,000**               | ** ** |
| **Certificates of deposit —  restricted**                                                         | ** ** | **(1,000,000**            | **)**          | **(1,500,000**               | **)**      |
| **Purchase of equipment and leasehold  improvements**                                                  | ** ** | **(2,455,000**            | **)**          | **(1,278,000**               | **)**      |
| **Proceeds from insurance  recovery**                                                                  | ** ** | **125,000**               | ** **     | **—**                   | ** ** |
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Net cash provided by (used in)  investing activities**                                               | ** ** | **4,804,000**             | ** **     | **(5,001,000**               | **)**      |
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Repayment of note payable**                                                                          | ** ** | **(634,000**              | **)**          | **(952,000**                 | **)**      |
| **Repurchase of common stock**                                                                         | ** ** | **—**                | ** **     | **(586,000**                 | **)**      |
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Net cash used in financing  activities**                                                             | ** ** | **(634,000**              | **)**          | **(1,538,000**               | **)**      |
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Net increase (decrease) in cash  and equivalents**                                                   | ** ** | **(3,033,000**            | **)**          | **494,000**                  | ** ** |
| **Cash and equivalents, at beginning  of period**                                                      | ** ** | **5,516,000**             | ** **     | **4,835,000**                | ** ** |
| **Cash and equivalents, at end of  period**                                                            | ** ** | **$**                     | **2,483,000**  | ** **                   | **$**      | **5,329,000** | ** ** |
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Supplemental disclosure of cash  flow information:**                                                 | ** ** | ** **                | ** **     | ** **                   | ** ** |
| ** **                                                                                             | ** ** | ** **                | ** **     | ** **                   | ** ** |
| **Interest paid**                                                                                      | ** ** | **$**                     | **67,000**     | ** **                   | **$**      | **152,000** | ** ** |
| **Income taxes paid**                                                                                  | ** ** | **$**                     | **119,000**    | ** **                   | **$**      | **269,000** | ** ** |
| **Accrued equipment and leasehold  improvements**                                                      | ** ** | **$**                     | **51,000**     | ** **                   | **$**      | **10,000** | ** ** |

 

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

 

6

----

Tableof Contents

 

**CACHE, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**1.****             ****BASIS OFPRESENTATION**

 

Referencesto the “Company,” “we,” “us,” or “our” means Cache, Inc., together withits wholly-owned subsidiaries, except as expressly indicated or unless thecontext otherwise requires. Under the trade name “Cache”, we operated 281 women’sapparel specialty stores, as of October 2, 2010.

 

Theaccompanying unaudited condensed consolidated financial statements include allknown adjustments necessary for a fair presentation of the results of theinterim periods as required by accounting principles generally accepted in theUnited States. These adjustments consist primarily of normal recurring accrualsand estimates that impact the carrying value of assets and liabilities. Actualresults may materially differ from these estimates.

 

Thesecondensed consolidated financial statements should be read in conjunction withthe Company’s audited consolidated financial statements for the year endedJanuary 2, 2010, which are included in the Company’s Annual Report onForm 10-K with respect to such period filed with the Securities andExchange Commission. All significant intercompany accounts and transactionshave been eliminated. The January 2, 2010 condensed consolidated balancesheet amounts are derived from the Company’s audited consolidated financialstatements.

 

TheCompany’s fiscal year (“fiscal year” or “fiscal”) refers to the applicable52 or 53 week period. The year ended January 2, 2010 (“fiscal2009”) was a 53-week year and the year ending January 1, 2011 (“fiscal2010”) is a 52-week year.

 

**2.****             ****STOCKBASED COMPENSATION**

 

Stock-basedcompensation expense for all stock-based awards programs, including grants ofstock options, is recorded in accordance with “*Compensation-StockCompensation*”, Topic 718 of the Financial Accounting Standards BoardAccounting Standards Codification (“FASB ASC”). During the 39 and 13-weekperiods ended October 2, 2010, the Company recognized approximately $311,000and $113,000, respectively, in stock-based compensation expense and for thesame periods ended September 26, 2009, the Company recognized approximately$273,000 and $156,000 respectively. The grant date fair value for stock optionsis calculated using the Black-Scholes option valuation model. The Companygranted 40,000 options during the 39-week period ended October 2, 2010, ascompared to no options being granted during the 39-week period ended September26, 2009.  No excess tax benefits wererecognized from the exercise of stock options during fiscal 2010 and 2009.During the first quarter of fiscal 2010, 20,000 shares of the Company’s commonstock were issued for services to its board members. The total fair value ofthe issued common stock was approximately $92,000 of which, approximately$69,000 and $23,000 were included in stock-based compensation expense for the39 and 13-week periods ended October 2, 2010, respectively. The remaining costis expected to be recognized over the remainder of fiscal 2010.

 

Duringthe 39 and 13-week periods ended October 2, 2010, the Company grantedrestricted stock awards representing 214,000 and 202,000 shares respectively,of the Company’s common stock, which had a weighted-average grant date fairvalue of $5.52 and $5.48, respectively. Two-thirds of these restricted stockawards will contingently vest over a four year period, based on the Companymeeting performance goals, and one-third will vest over the requisite serviceperiod.

 

Theweighted-average grant date fair value of options granted during the 39-weekperiod ended October 2, 2010 was $1.79. The grant date fair value is calculatedusing the Black-Scholes option valuation model. The following assumptions wereused during the 39-week period ended October 2, 2010:

 
| Expected dividend rate  |   | $             | 0.00   |   |
|-------------------------|--------|---------------|--------|--------|
| Expected volatility     |   | 59.53 - 59.61 | %      |
| Risk free interest rate |   | 1.48 - 1.50   | %      |
| Expected lives (years)  |   | 3.00          |   |

 

7

----

Table of Contents

 

**3.****             ****BASICAND DILUTED EARNINGS PER SHARE**

 

Basicloss per share has been computed based upon the weighted average of commonshares outstanding. Diluted loss per share also includes the dilutive effect ofpotential common shares (dilutive stock options and unvested restricted stockawards) outstanding during the period. Lossper common share has been computed as follows:

 
| ** **                                             | ** ** | **39-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **October 2,**     | ** ** | **September 26,**  | ** ** | **October 2,** | ** ** | **September 26,** | ** ** |
| ** **                                             | ** ** | **2010**                | ** ** | **2009**                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net loss                                               |       | $                       | (8,211,000 | )                       | $          | (7,533,000 | ) | $ | (5,027,000 | ) | $ | (6,783,000 | ) |
| Basic weighted number of average shares  outstanding   |       | 12,774,000              |       | 12,810,000              |       | 12,780,000 |   | 12,748,000 |   |
| Diluted weighted average number of shares  outstanding |       | 12,774,000              |       | 12,810,000              |       | 12,780,000 |   | 12,748,000 |   |
|                                                   |       |                    |       |                    |       |   |   |   |   |
| Net loss per share - Basic                             |       | $                       | (0.64      | )                       | $          | (0.59 | ) | $ | (0.39 | ) | $ | (0.53 | ) |
| - Diluted                                              |       | $                       | (0.64      | )                       | $          | (0.59 | ) | $ | (0.39 | ) | $ | (0.53 | ) |

 

Optionsand unvested restricted common shares of 1,069,001 and 779,338 were excludedfrom the computation of diluted loss per share for the 39-week periods offiscal 2010 and 2009, respectively, because of the net loss incurred by theCompany.

 

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

 

InJuly 2010, Financial Accounting Standards Board (“FASB”) issued AccountingStandards Update (“ASU”) 2010-20, *Receivables (Topic310)Disclosures about the Credit Quality of Financing Receivables and theAllowance for Credit Losses*, which improves the disclosures that anentity provides about the credit quality of its financing receivables and therelated allowance for credit losses. As a result of these amendments, an entityis required to disaggregate by portfolio segment or class certain existingdisclosures and provide certain new disclosures about its financing receivablesand related allowance for credit losses. ASU 2010-20 is effective for financialstatements issued for interim and annual periods ending on or after December15, 2010 except for disclosures about activity that occurs during a reportingperiod, which are effective for interim and annual reporting periods beginningon or after December 15, 2010. The Company does not expect the adoption of ASU2010-20 to have a material impact on its consolidated financial statements.

 

InApril 2010, FASB issued Accounting ASU 2010-18, *Receivables(Topic 310) Effect of a Loan Modification When the Loan is Part of a PoolThat Is Accounted for as a Single Asset,*which provides thatmodification of loans that are accounted for within a pool will not result inthe removal of those loans from the pool even if the modification of thoseloans would be considered a troubled debt restructuring. An entity will berequired to consider whether the pool of assets in which the loan is includedis impaired, if expected cash flows for the pool change. ASU 2010-18 iseffective prospectively in the first interim or annual period ending on orafter July 15, 2010. Effective October 2, 2010, the Company adopted ASU2010-18, which did not have any impact on its consolidated financialstatements.

 

InApril 2010, FASB issued ASU 2010-13, *Compensation — StockCompensation (Topic 718) Effect of Denominating the Exercise Price of aShare-Based Payment Award in the Currency of the Market in Which the UnderlyingEquity Security Trades,*which clarifies that an employee share-basedpayment award with an exercise price denominated in the currency of a market inwhich a substantial portion of the entity’s equity shares trades should not beconsidered to contain a condition that is not a market, performance or servicecondition. ASU 2010-13 is effective for fiscal years beginning on or afterDecember 15, 2010, early adoption is permitted. The Company does notexpect the adoption of ASU 2010-18 to have a material impact on itsconsolidated financial statements.

 

InJanuary 2010, FASB issued ASU 2010-06, *ImprovingDisclosures about Fair Measurements*, which provides amendments tosubtopic 820-10 that require separate disclosure of significant transfers inand out of Level 1 and Level 2 fair value measurements and thepresentation of separate information regarding purchases, sales, issuances andsettlements for Level 3 fair value measurements. Additionally, ASU 2010-06provides amendments to subtopic 820-10 that clarify existing disclosures aboutthe level of disaggregation and inputs and valuation techniques. ASU 2010-06 iseffective for financial statements issued for interim and annual periods endingafter December 15, 2009, except for the disclosures about purchases,sales, issuances and settlements in the rollforward of activity in Level 3fair value measurements, which are effective for interim and annual periodsending after December 15, 2010. The Company does not expect the adoptionof ASU 2010-06 to have a material impact on its consolidated financialstatements.

 

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

 

“*Fair ValueMeasurements and Disclosures*”, Topic 820 of the FASB ASC, definesfair value as the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement 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:

 

8

----

Table of Contents

 

·                  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 or corroboratedby 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 October 2, 2010, theCompany’s marketable securities primarily consist of short-term United StatesTreasury bills. The Company classifies its short-term investments asheld-to-maturity. Held-to-maturity securities are those securities in which theCompany 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.

 

“*FinancialInstruments*”, Topic 825 of the FASB ASC, provides entities theoption to measure many financial instruments and certain other items at fairvalue. Entities that choose the fair value option will recognize unrealizedgains and losses on items for which the fair value option was elected inearnings at each subsequent reporting date. The Company has currently chosennot to elect the fair value option for any items that are not already requiredto be measured at fair value in accordance with Topic 825 of the FASB ASC.

 

The fair value of ourmarketable securities, which was determined based upon Level 1 inputs, totaled$21.9 million, $30.0 million and $27.4 million as of October 2, 2010,January 2, 2010 and September 26, 2009, respectively. For the fiscalperiods ended October 2, 2010, January 2, 2010 and September 26, 2009, theaggregate amount of marketable securities (maturing greater than 90 days and lessthan one year) totaled approximately $21.9 million, $30.0 million and $27.4million, respectively. The Company noted small variances between the book valueand fair value due to the remaining unamortized premiums. As a result, noimpairment has occurred for the fiscal periods presented herein. Premiums anddiscounts are amortized or accreted over the life of the relatedheld-to-maturity investments. Interest income is recognized when earned.

 

**Fair Valueof Financial Instruments**

 

The carrying amounts ofcertificates of deposit, accounts receivable, accounts payable and accruedliabilities approximate their estimated fair values due to their short-termnature. The Company’s note payable includes imputed interest at 5% as the fairmarket value of this note is not readily determinable because comparableinstruments do not exist. The 5% imputed interest represented the Company’saverage return on its investment portfolio, at the inception of the note.

 

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

 
| ** **               | ** ** | **October 2,** | ** ** | **January 2,** | ** ** | **September 26,** | ** ** |
|--------------------------|------------|---------------------|------------|---------------------|------------|------------------------|------------|
| ** **               | ** ** | **2010**            | ** ** | **2010**            | ** ** | **2009**               | ** ** |
| Construction allowances  |       | $                   | 126,000    |                | $          | 507,000                |       | $ | 177,000 |   |
| Third party credit cards |       | 1,598,000           |       | 2,142,000           |       | 1,960,000              |       |
| Accounts receivable, net |       | —              |       | 62,000              |       | 101,000                |       |
| Other                    |       | 296,000             |       | 700,000             |       | 475,000                |       |
|                     |       | $                   | 2,020,000  |                | $          | 3,411,000              |       | $ | 2,713,000 |   |

 

AtOctober 2, 2010, the Company’s income tax receivable was $81,000, whichrepresents the federal and state income tax refunds the Company expects toreceive from its fiscal 2009 tax returns. During the 39-week period endedOctober, 2010, the Company received payments of $3.3 million against the $3.4million receivable, which was recorded in fiscal 2009. During fiscal 2009, theCompany recorded income tax receivables of $3.4 million, which resultedfrom estimated tax payments of approximately $200,000 made during fiscal 2009and 2008 combined with a refund of $3.2 million, generated as a result ofthe carry back on the net loss incurred for fiscal 2009.

 

9

----

Table of Contents

 

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

 
| ** **      | ** ** | **October 2,** | ** ** | **January 2,** | ** ** | **September 26,** | ** ** |
|-----------------|------------|---------------------|------------|---------------------|------------|------------------------|------------|
| ** **      | ** ** | **2010**            | ** ** | **2010**            | ** ** | **2009**               | ** ** |
| Raw materials   |       | $                   | 1,410,000  |                | $          | 1,253,000              |       | $ | 1,911,000 |   |
| Work in process |       | 1,631,000           |       | 1,160,000           |       | 1,505,000              |       |
| Finished goods  |       | 16,202,000          |       | 14,186,000          |       | 17,018,000             |       |
|            |       | $                   | 19,243,000 |                | $          | 16,599,000             |       | $ | 20,434,000 |   |

 

**8.****             ****EQUIPMENTAND LEASEHOLD IMPROVEMENTS**

 
| ** **                                      | ** ** | **October 2,** | ** ** | **January 2,** | ** ** | **September 26,** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2010**            | ** ** | **2010**            | ** ** | **2009**               | ** ** |
|                                            |       |                |       |                |       |                   |       |
| Leasehold improvements                          |       | $                   | 51,315,000 |                | $          | 51,861,000             |       | $ | 53,011,000 |   |
| Furniture, fixtures and equipment               |       | 34,648,000          |       | 33,913,000          |       | 38,164,000             |       |
|                                            |       | 85,963,000          |       | 85,774,000          |       | 91,175,000             |       |
| Less: accumulated depreciation and amortization |       | (59,127,000         | )          | (54,061,000         | )          | (55,451,000            | )          |
|                                            |       | $                   | 26,836,000 |                | $          | 31,713,000             |       | $ | 35,724,000 |   |

 

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

 

In accordance with “*Intangibles -Goodwill and Other”*, Topic 350 of the FASB ASC,the Company’s goodwill and its indefinite-lived intangible assets are reviewedannually for impairment or more frequently, if impairment indicators arise. Theannual valuation process is performed during the fourth quarter of each year.The carrying value of goodwill as of October 2, 2010, January 2, 2010 andSeptember 26, 2009 was $9.1 million.

 

The carrying amounts of netintangible assets as of October 2, 2010, January 2, 2010 and September 26,2009 are as follows:

 
| ** **                          | ** ** | **October 2,** | ** ** | **January 2,** | ** ** | **September 26,** | ** ** |
|-------------------------------------|------------|---------------------|------------|---------------------|------------|------------------------|------------|
| ** **                          | ** ** | **2010**            | ** ** | **2010**            | ** ** | **2009**               | ** ** |
| Indefinite-lived intangible assets: |       |                |       |                |       |                   |       |
| Trademarks-Cache                    |       | $                   | 102,000    |                | $          | 102,000                |       | $ | 102,000 |   |
| Trademarks-Mary L                   |       | —              |       | —              |       | 620,000                |       |
|                                |       | 102,000             |       | 102,000             |       | 722,000                |       |
|                                |       |                |       |                |       |                   |       |
| Definite-lived intangible assets:   |       |                |       |                |       |                   |       |
| Customer relationships              |       | —              |       | —              |       | 300,000                |       |
| Favorable market lease              |       | —              |       | —              |       | 160,000                |       |
|                                |       | —              |       | —              |       | 460,000                |       |
| Less: accumulated amortization      |       | —              |       | —              |       | (170,000               | )          |
|                                |       | —              |       | —              |       | 290,000                |       |
|                                |       |                |       |                |       |                   |       |
| Total intangible assets, net        |       | $                   | 102,000    |                | $          | 102,000                |       | $ | 1,012,000 |   |

 

Duringfiscal 2009 an impairment charge of $891,000 was recorded against the carryingvalue of intangible assets associated with the Company’s wholesaledivision—Mary L. In addition, the Company also recorded a charge of $204,000for the remaining net book value of its definite-lived intangibleasset—Non-compete agreements. This charge resulted from an employee separationagreement that the Company entered into with two of its former executive officers.

 

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

 
| ** **                                                                    | ** ** | **October 2,** | ** ** | **January 2,** | ** ** | **September 26,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | **2010**            | ** ** | **2010**            | ** ** | **2009**               | ** ** |
| Gift cards, merchandise credit cards and other  customer deposits and credits |       | $                   | 3,338,000  |                | $          | 3,817,000              |       | $ | 3,077,000 |   |
| Taxes, including income taxes                                                 |       | 2,025,000           |       | 2,807,000           |       | 1,555,000              |       |
| Operating expenses                                                            |       | 2,301,000           |       | 2,007,000           |       | 1,927,000              |       |
| Employee separation settlement                                                |       | —              |       | 1,375,000           |       | —                 |       |
| Deferred income — co-branded credit card program                         |       | 724,000             |       | 568,000             |       | 510,000                |       |
| Sales return reserve                                                          |       | 385,000             |       | 470,000             |       | 411,000                |       |
| Group insurance                                                               |       | 497,000             |       | 481,000             |       | 502,000                |       |
| Leasehold additions                                                           |       | 51,000              |       | 234,000             |       | 10,000                 |       |
| Exit costs                                                                    |       | —              |       | 24,000              |       | 254,000                |       |
|                                                                          |       | $                   | 9,321,000  |                | $          | 11,783,000             |       | $ | 8,246,000 |   |

 

10

----

Table of Contents

 

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

 

**11.****      ****OTHERLIABILITIES**

 

TheCompany’s other liabilities are comprised of the following:

 
| ** **                                            | ** ** | **October 2,  2010** | ** ** | **January 2,  2010** | ** ** | **September 26,  2009** | ** ** |
|-------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|------------------------------|------------|
| Deferred rent                                         |       | $                         | 12,232,000 |                      | $          | 13,913,000                   |       | $ | 14,130,000 |   |
| Deferred income — co-branded credit card program |       | 1,871,000                 |       | 1,893,000                 |       | 1,828,000                    |       |
| Employee separation settlement                        |       | —                    |       | —                    |       | 1,244,000                    |       |
|                                                  |       | $                         | 14,103,000 |                      | $          | 15,806,000                   |       | $ | 17,202,000 |   |

 

**12.****      ****CREDITFACILITY**

 

OnApril 22, 2010, the Company entered into a new one year credit facility withBank of America (the “Bank”). Underthis facility, the Company may direct the Bank to issue letters of credit up toa total of $2,500,000. Any outstanding letters of credit under this facilityare collateralized by granting to the Bank a security interest in variouscertificates of deposit held by the Company and its subsidiaries with the Bankamounting to a total of $2,500,000. This one year credit facility will expireon May 1, 2011.

 

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 $1.7 million under this facility atOctober 2, 2010.

 

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

 

On September 23, 2009,the Company entered into separation agreements with two of its thenexecutives.  During the third quarter offiscal 2009, the Company recorded a pre-tax charge of $2.1 million, whichincluded future payments of $1.9 million, a charge of $204,000 for theremaining net book value of the non-compete agreements and a charge of $23,000for the vested portion of stock-awards that the Company purchased back fromthese former executives.

 

Pursuant to one of theseseparation agreements, the former executive may receive payments of up to$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 agreement.  As of October 2, 2010, no accrual wasrecorded for this earn-out provision.

 

**14.****      ****INCOMETAXES**

 

The Company accounts for income taxes in accordancewith “Income Taxes”, Topic 740 of the FASB ASC. This guidance requires theCompany to recognize deferred tax liabilities and assets for the expectedfuture tax consequences of events that have been recognized in the Company’sfinancial statements or tax returns. Under this method, deferred taxliabilities and assets are determined based on the difference between thefinancial statement carrying amounts and tax bases of assets and liabilities,using applicable tax rates for the years in which the differences are expectedto reverse. At January 2, 2010, the Company maintained $4.5million of net deferred tax assets, of which approximately $919,000 related tostate tax net operating loss carry-forwards. In addition, during the 39-weekperiod ended October 2, 2010, the Company recorded an income tax benefit of$5.0 million, primarily related to the net loss incurred. The Current portionof deferred tax assets and liabilities of $2.0 million is included in prepaidexpenses and other current assets, while the Non-current portion of deferredtax assets and liabilities of $7.6 million is included in other assets, on theCompany’s accompanying condensed consolidated balance sheets. When taxcontingencies become probable, a liability for the contingent amount isestimated based upon the Company’s best estimation of the potential exposuresassociated with the timing and amount of

 

11

----

Table of Contents

 

deductions,as well as various tax filing positions. As of October 2, 2010, the Company hasrecorded a $368,000 reserve, net of federal benefit for potential taxcontingencies. As of September 26, 2009, the Company reported a reserve balanceof $428,000.

 

**15.****      ****COMMITMENTSAND CONTINGENCIES**

 

OnJune 30, 2010, Chico’s FAS, Inc. and White House|Black Market, Inc. (togetherreferred to as “Chico’s”) filed a lawsuit against the Company in the SupremeCourt of the State of New York County of New York.  The complaint alleges, among other things,that two former employees of Chico’s that are currently employed by Cachesupplied the Company with confidential information and trade secrets. TheCompany believes that Chico’s filed the lawsuit in an effort to undermine Cachein the marketplace. Their allegations were reported in a key trade publicationand in an analyst report.  The Companybelieves the allegations made by Chico’s are without merit and intends tovigorously defend against this lawsuit.

 

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 or assignedlease obligations as of October 2, 2010, January 2, 2010 or September 26,2009.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

Exceptfor the historical information contained in this Form 10-Q, the mattersaddressed herein are forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities 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, withoutlimitation, 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**

 

Thefollowing table sets forth our results of operations for the 39-week and13-week periods ended October 2, 2010 and September 26, 2009, respectively,expressed as a percentage of net sales.

 
| ** **                          | ** ** | **39-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **October 2,**     | ** ** | **September 26,**  | ** ** | **October 2,** | ** ** | **September 26,** | ** ** |
| ** **                          | ** ** | **2010**                | ** ** | **2009**                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Sales                               |       | 100.0                   | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |
| Cost of sales                       |       | 61.8                    |       | 60.4                    |       | 65.1 |   | 68.4 |   |
| Gross profit                        |       | 38.2                    |       | 39.6                    |       | 34.9 |   | 31.6 |   |
| Store operating expenses            |       | 37.0                    |       | 37.4                    |       | 39.4 |   | 41.4 |   |
| General and administrative expenses |       | 10.0                    |       | 8.6                     |       | 13.3 |   | 9.7 |   |
| Employee separation charge          |       | 0.0                     |       | 1.4                     |       | 0.0 |   | 4.7 |   |
| Operating loss                      |       | (8.8                    | )          | (7.8                    | )          | (17.8 | ) | (24.2 | ) |
| Interest expense                    |       | (0.1                    | )          | (0.1                    | )          | (0.1 | ) | (0.1 | ) |
| Interest income                     |       | 0.1                     |       | 0.1                     |       | 0.1 |   | 0.1 |   |
| Loss before income taxes            |       | (8.8                    | )          | (7.8                    | )          | (17.8 | ) | (24.1 | ) |
| Income tax benefit                  |       | (3.3                    | )          | (2.9                    | )          | (6.7 | ) | (9.0 | ) |
| Net loss                            |       | (5.5                    | )%         | (4.9                    | )%         | (11.1 | )% | (15.1 | )% |

 

12

----

Table of Contents

 

We use a number of key indicators of financialcondition and operating performance to evaluate the performance of ourbusiness, some of which are set forth in the following table:

 
| ** **                                             | ** ** | **39-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **October 2,**     | ** ** | **September 26,**  | ** ** | **October 2,** | ** ** | **September 26,** | ** ** |
| ** **                                             | ** ** | **2010**                | ** ** | **2009**                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Total store count, at end of period                    |       | 281                     |       | 289                     |       | 281 |   | 289 |   |
| Net sales increase (decrease)                          |       | (2.7                    | )%         | (22.5                   | )%         | 1.3 | % | (22.7 | )% |
| Comparable store sales decrease                        |       | (0.6                    | )%         | (21.8                   | )%         | (0.2 | )% | (21.7 | )% |
| Average sales per transaction increase (decrease)      |       | (5.5                    | )%         | (14.0                   | )%         | 4.5 | % | (21.2 | )% |
| Average number of transactions increase (decrease)     |       | 5.3                     | %          | (9.1                    | )%         | (4.4 | )% | (0.7 | )% |
| Net sales per average square foot                      |       | $                       | 248        |                    | $          | 250 |   | $ | 75 |   | $ | 74 |   |
| Total square footage, at end of period (in  thousands) |       | 568                     |       | 584                     |       | 568 |   | 584 |   |
|                                                        |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

Netsales

 

Duringthe 39-week period ended October 2, 2010, net sales decreased to $150.6 millionfrom $154.8 million, a decrease of $4.2 million, or 2.7%, as compared to thesame 39-week period last year. This reflects a decrease of $2.6 million fromour non-comparable store sales, a decrease of $973,000 of net sales from ourMary L. division, which the Company discontinued during the first quarter offiscal 2010, $882,000 or 0.6% decrease in comparable store sales, which were offsetby a small increase in income recognized from our co-branded credit card. Thedecrease in net sales during the 39-week period of fiscal 2010 was primarilydue to macroeconomic events, which resulted in a reduction in mall trafficwhere our stores are located, coupled with a shift in consumer spendingpatterns that favored lower priced or discounted merchandise. The decrease innet sales at our stores for the 39-week period ended October 2, 2010, reflecteda 5.5% decrease in average dollars per transactions and a 5.3% increase insales transactions.

 

Duringthe 13-week period ended October 2, 2010, net sales increased to $45.5 millionfrom $44.9 million, an increase of $583,000 or 1.3%, as compared to the same13-week period last year. This reflects an increase of $660,000 from ournon-comparable store sales, $121,000 or 100.0% decrease in Mary L. sales, whichthe Company discontinued during the first quarter of fiscal 2010, in additionto essentially flat comparable store sales along with a small increase inincome recognized from our co-branded credit card. The increase in net sales inthe third quarter at our stores reflected a 4.5% increase in average dollarsper transaction, partially offset by a 4.4% decrease in sales transactions.

 

Grossprofit

 

Duringthe 39-week period ended October 2, 2010, gross profit decreased to $57.6million from $61.2 million, a decrease of $3.6 million, or 6.0%, as compared tothe same 39-week period last year. This decrease was primarily due to lower netsales, an increase in markdowns, coupled with an increase in operational costsrelated to our design, production and sourcing departments. As a percentage ofnet sales, gross profit decreased to 38.2% from 39.6% for the fiscal 201039-week period, as compared to the prior year period.

 

Duringthe 13-week period ended October 2, 2010, gross profit increased to $15.9million from $14.2 million, an increase of $1.7 million or 11.9%, as comparedto the same 13-week period last year. This increase was primarily due to lowermarkdowns. As a percentage of net sales, gross profit increased to 34.9% from31.6% for the current 13-week period, as compared to the prior year period.

 

Storeoperating expenses

 

Duringthe 39-week period ended October 2, 2010, store operating expenses decreased to$55.8 million from $57.8 million, a decrease of $2.0 million, or 3.6%, ascompared to the same 39-week period last year. Store operating expensesdecreased primarily due to a decrease in depreciation of $1.3 million, payrolland payroll related tax expenses of $971,000, store property and real estatetaxes of $503,000 and costs associated with store closing and remodeling of$199,000, partially offset by an increase in marketing expense of $1.1 million.The decrease in depreciation expense was due to certain assets being fullydepreciated as of fiscal 2009, coupled with the impairment of 23underperforming stores during the fourth quarter of fiscal 2009. The decreasein payroll and payroll related expenses was due to decrease in the number ofemployees, as compared to the 39-week period last year. The decrease in storeproperty and real estate taxes was primarily due to a decrease in the number ofstores in fiscal 2010, as compared to fiscal 2009. The increase in marketingexpense was due to an increase in spending for direct mail and costs associatedwith printed materials. As a percentage of 

 

13

----

Table of Contents

 

netsales, store operating expenses decreased to 37.0% from 37.4% for the fiscal2010 39-week period, as compared to the prior year period.

 

Duringthe 13-week period ended October 2, 2010, store operating expenses decreased to$18.0 million from $18.6 million, a decrease of $631,000, or 3.4%, as comparedto the same 13-week period last year. Store operating expenses decreasedprimarily due to a decrease in depreciation of $672,000, store property andreal estate taxes of $147,000 and costs associated with store closing andremodeling of $152,000, partially offset by an increase in marketing expensesof $460,000. The decrease in depreciation expense was due to certain assetsbeing fully depreciated in fiscal 2009, coupled with the impairment of 23underperforming stores during the fourth quarter of fiscal 2009. The decreasein store property and real estate taxes was primarily due to a decrease in thenumber of stores in fiscal 2010, as compared to fiscal 2009. The increase inmarketing expense was due to an increase in spending for direct mail and costsassociated with printed materials. As a percentage of net sales, storeoperating expenses decreased to 39.5% from 41.4% for the fiscal 2010 13-weekperiod, as compared to the prior year period.

 

Generaland administrative expenses

 

During the 39-week periodended October 2, 2010, general and administrative expenses increased to $15.0million from $13.3 million, an increase of $1.7 million or 12.8%, due to anincrease in legal fees primarily associated with the Chico’s lawsuit. See Note15 herein for additional information. As a percentage of net sales, general andadministrative expenses increased to 10.0% from 8.6% in fiscal 2010, primarilydue to the reduction in net sales in fiscal 2010 and an increase in general andadministrative expenses described above.

 

During the 13-week periodended October 2, 2010, general and administrative expenses increased to $6.0million from $4.4 million, an increase of $1.6 million or 38.5%, as compared tothe same 13-week period last year due to an increase in legal fees primarilyassociated with the Chico’s lawsuit. As a percentage of net sales, general andadministrative expenses increased to 13.3% from 9.7% in fiscal 2010, due to anincrease in general and administrative expenses.

 

Employeeseparation charge

 

Forthe 39 and 13-week periods ended September 26, 2009, the Company incurreda pre-tax charge $2.1 million ($1.3 million after tax or $0.10 per dilutedshare). The charge resulted from separation agreements entered into with itscertain then executives. The $2.1 million charge also includes a charge of$204,000 for the remaining net book value of the non-compete agreementscontained in their employment agreements with the Company, which were terminatedpursuant to the separation agreements.

 

Otherincome/(expense)

 

Duringthe 39-week period ended October 2, 2010, other income (expense) decreased to$23,000 from $32,000, a decrease of $9,000 or 28.1%, as compared to the same39-week period last year. This decrease was due to a reduction in interestexpense of $52,000 offset by a decrease in interest income of $61,000.

 

Duringthe 13-week period ended October 2, 2010, other income (expense) increased to$5,000 from $4,000, an increase of $1,000 or 25.0%, as compared to the same13-week period last year. This increase was due to a reduction in interestexpense of $21,000 offset by a reduction in interest income of $20,000.

 

Incometaxes

 

Duringthe 39-week period ended October 2, 2010, an income tax benefit of $5.0 millionwas recorded, as compared to an income tax benefit of $4.5 million in the same39-week period last year. During the 13-week period ended October 2, 2010, anincome tax benefit of $3.1 million was recorded, as compared to an income taxbenefit of $4.1 million in the same 13-week period last year. The estimatedeffective tax rate for fiscal 2010 is projected to be 38.3%, as compared to thefiscal 2009 estimate of 37.4%.

 

Netloss

 

Asa result of the factors discussed above, net loss of $8.2 million and $5.0million were recorded during the 39 and 13-week periods ended October 2, 2010,respectively. In fiscal 2009, net loss of $7.5 million and $6.8 million wererecorded during the 39 and 13-week periods ended September 26, 2009, respectively.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s cashrequirements are primarily for working capital, inventory for new stores,construction of new stores, remodeling of existing stores and to improve andenhance our information technology systems. We have historically satisfied ourcash 

 

14

----

Table of Contents

 

requirements principallythrough cash flow from operations. During the 39-week period ended October 2,2010, we used $7.2 million of cash flow from operations, as compared to $7.0million generated during the same period in fiscal 2009. We expect to continueto meet our operating cash requirements primarily through cash flows fromoperating activities, existing cash and equivalents, and short-terminvestments. At October 2, 2010, we had working capital of $33.0 million, cashand marketable securities of $26.8 million and $2.2 million in third party debtoutstanding related to the purchase of Adrienne Victoria Designs, Inc. (“AVD”).The cash and marketable securities at October 2, 2010, included certificates ofdeposit of $2.5 million, that have been placed by the Company as collateralagainst a one year credit facility.

 

The following table setsforth our cash flows for the periods indicated:

 
| ** **                                           | ** ** | **39-Weeks Ended**         | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **October 2,********2010** | ** ** | **September26,********2009** | ** ** |
| Net cash provided by (used in) operating  activities |       | $                               | (7,203,000 | ) | $ | 7,033,000 |   |
| Net cash provided by (used in) investing activities  |       | 4,804,000                       |       | (5,001,000 | ) |
| Net cash used in financing activities                |       | (634,000                        | )          | (1,538,000 | ) |
| Net increase (decrease) in cash and equivalents      |       | $                               | (3,033,000 | ) | $ | 494,000 |   |

 

During the 39-week period ended October 2, 2010,cash and equivalents decreased by $3.0 million, primarily as a result of theoperating loss incurred during fiscal 2010. Decrease in accrued liabilities,accrued compensation and other liabilities ($2.7 million) is principally due topayment on the remaining $1.4 million owed to one of the Company’s formerexecutive, as part of an employee separation agreement entered into in fiscal2009. Seasonal increase in inventories ($2.7 million) coupled with the purchaseof equipment and leasehold improvements ($2.5 million), also contributed to thedecrease in cash and equivalents. These decreases in cash were offset by netmaturities of marketable securities ($8.1 million), combined with a decrease inreceivables and income tax receivables ($4.8 million), primarily due to $3.3million collected from income tax receivable recorded in fiscal 2009.

 

OnApril 22, 2010, the Company entered into a one year credit facility with Bankof America (the “Bank”). Under this facility, the Company may direct the Bankto issue letters of credit up to a total of $2,500,000. Any outstanding lettersof credit under this facility are collateralized by granting to the Bank asecurity interest in various certificates of deposit held by the Company andits subsidiaries with the Bank amounting to a total of $2.5 million.  This one year credit facility will expire onMay 1, 2011.

 

TheCompany had outstanding letters of credit of $1.7 million, $660,000 and $1.1million at October 2, 2010, January 2, 2010 and September 26, 2009,respectively.

 

Inflation / Recession

 

The Company does not believethat its sales revenue or operating results have been materially impacted byinflation during the past two fiscal years. There can be no assurance, however,that our sales revenue or operating results will not be impacted by inflationin the future.

 

Ongoing macroeconomicconditions continue to affect the sales volume and profitability levels of ourCompany.  Furthermore, we believe thatcontinuing limitations on the availability of consumer credit, especially ofcredit cards, continue to adversely affect customer demand for our products,which adversely affect our business, financial condition and results ofoperations.

 

Many of our suppliers relyon working capital financing to fund their operations.  As a result of current economic conditions,lenders continue to maintain stringent credit standards and terms. To theextent that any of our suppliers are unable to obtain adequate credit or theirborrowing costs increase, the supplier may cease operations, we may experiencedelays in obtaining products, the suppliers may increase their wholesale pricesto us or they may modify payment terms in a manner that is unfavorable tous.  Any of the foregoing or otherunforeseen circumstances could adversely affect our net sales or gross margins,which could adversely affect our business, financial condition and results ofoperations.

 

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 not a party to any material off-balance sheet financingarrangements.

 

15

----

Tableof Contents

 

Critical Accounting Policies and Estimates

 

TheCompany’s accounting policies are more fully described in Note 1 of the Notesto Consolidated Financial Statements in our fiscal 2009 Form 10-K.  As disclosed in Note 1 of the Notes toConsolidated Financial Statements, the preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America (“GAAP”), which requires management to make estimates andassumptions about future events that affect the amounts reported in theconsolidated financial statements and accompanying notes. Since future eventsand their effects cannot be determined with absolute certainty, actual resultsmay differ from those estimates. Weevaluate our estimates and judgments on an ongoing basis and predicate thoseestimates and judgments on historical experience and on various other factorsthat are believed to be reasonable under the circumstances.  Actual results may differ from theseunder different assumptions or conditions.

 

TheCompany’s management believes the following critical accounting policies, amongothers, affect its more significant judgments and estimates used in preparationof the Consolidated Financial Statements.

 

*Inventories.*Our finishedgoods inventories at our retail stores are valued at the lower of cost ormarket using the retail inventory method. Under the retail inventory method (“RIM”),the valuation of inventories at cost and the resulting gross margins arecalculated by applying a calculated cost to retail ratio to the retail value ofinventories. RIM is an averaging method that is widely used in the retailindustry due to its practicality. Additionally, it is recognized that the useof RIM will result in valuing inventories at the lower of cost or market ifmarkdowns are currently taken as a reduction of the retail value ofinventories. Inherent in the RIM calculation are certain significant managementjudgments including, among others, merchandise markon, markups, and markdowns,which significantly impact the ending inventory valuation at cost as well asthe resulting gross margins. We take markdowns due to changes in fashion andstyle, based on the following factors: (i) supply on hand,(ii) historical experience and (iii) our expectations as to futuresales. We do not anticipate any significant change in our markdown strategythat would cause a significant change in our earnings. We believe that our RIMprovides an inventory valuation, which results in a carrying value at the lowerof cost or market. Inventories other than finished goods at retail stores,called production inventory, primarily consists of piece goods, trim andwork-in-process. It is the Company’s policy to value the production inventory,which makes up approximately 15.8% of Company’s total inventory, at lower ofcost or market value using first-in-first-out valuation method. The Companyreviews the inventory for factors such as age, obsolescence, potential use, orother factors that may indicate a decline in its value. The Company records areserve against the cost of the production inventory to account for any declinein its value.

 

*Finite long-lived assets.  *The Company’s judgmentregarding the existence of impairment indicators is based on market andoperational performance. We assess the impairment of long-lived assets,primarily fixed assets, whenever events or changes in circumstances indicatethat the carrying value may not be recoverable and exceeds the fair marketvalue. Factors we consider important which could trigger an impairment reviewinclude the following:

 

·                  significantchanges in the manner of our use of assets or the strategy for our overallbusiness;

 

·                  significantnegative industry or economic trends;

 

·                  store closings;or

 

·                  underperformingbusiness trends.

 

TheCompany evaluates finite long-lived assets in accordance with “Impairment orDisposal of Long-Lived Assets” under Topic 360 “Property, Plant and Equipment”of the Financial Accounting Standards Board Accounting Standards Codification (“FASBASC”). Finite-lived assets are evaluated for recoverability in accordance withTopic 360 of the FASB ASC whenever events or changes in circumstances indicatethat an asset may have been impaired. In evaluating an asset forrecoverability, the Company estimates the future cash flows expected to resultfrom the use and eventual disposition of the asset. If the sum of the expectedfuture cash flows (undiscounted and without interest charges) is less than thecarrying amount of the asset, an impairment loss, equal to the excess of thecarrying amount over the fair market value of the asset is recognized. Variousfactors including future sales growth and profit margins are included in thisanalysis. To the extent these future projections or strategies change, theconclusion regarding impairment may differ from the current estimates. Noimpairment charges were recorded during the 39-week periods ended October 2,2010 and September 26, 2009. The Company recorded an impairment charge of$1.9 million for 23 underperforming stores during the fourth quarter of fiscal2009**.**

 

*Goodwill and Intangible Assets*. The Company evaluates its Goodwill and Intangible assets in accordancewith “*Intangibles -Goodwill and Other”,*Topic350 of the FASB ASC.  This guidancerequires ratable amortization of goodwill be replaced with periodic tests ofthe goodwill’s impairment. The Company performs impairment testing, whichconsiders the Company’s fair value to determine whether an impairment chargerelated to the carrying value of the Company’s recorded goodwill and otherintangible assets,

 

16

----

Table of Contents

 

associated with its AVDreporting unit, is necessary. This is reevaluated annually during the fourthquarter, or more frequently if necessary. The Company considers many factors inevaluating whether the carrying value of the recorded goodwill will berecoverable. Factors used to determine this primarily include declines in stockprice and the market capitalization in relation to the book value of theCompany, discounted projected cash flows of the reporting unit and valuation ofcompanies comparable to the reporting unit. No impairment charges were recordedduring the 39-week periods ended October 2, 2010 and September 26,2009. An impairment charge of $891,000 was recorded against the carrying valueof intangible assets associated with its wholesale division—Mary L., during thefourth quarter of fiscal 2009, related to the discontinuance of Mary L.Pursuant to the employee separation agreements entered into with two of theCompany’s then officers, the Company recorded a pre-tax charge of $204,000during the third fiscal quarter of 2009 for the remaining net book value of thenon-compete agreements contained in their employment agreements.

 

*SelfInsurance.*The Company isself-insured for losses and liabilities related primarily to employee healthand welfare claims up to certain thresholds. Losses are accrued based upon ourestimates of the aggregate liability for claims incurred using certainactuarial assumptions followed in the insurance industry and based on Companyexperience. Adjustments to earnings resulting from changes in historical losstrends have been insignificant for fiscal 2010 and 2009. Further, we do notanticipate any significant change in loss trends, settlements or other coststhat would cause a significant change in our earnings. We maintain stop-lossinsurance coverage, which covers us for benefits paid in excess of limits asdefined in the plan.

 

*GiftCards, Gift Certificates and Credits.*The Company sells gift cardsand gift certificates (“Gift Cards”) and issues credits to its customers whenmerchandise is returned (“Merchandise Credits”), 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 of3.5 years. 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 Credits. The Company recorded $145,000 and $173,000 ofbreakage income during the 39-week periods ended October 2, 2010 and September 26,2009, respectively.

 

*RevenueRecognition.*  Sales arerecognized at the “point of sale,” which occurs when merchandise is sold in an “over-the-counter”transaction or upon receipt by a customer. Sales of merchandise via our websiteare recognized at the expected time of delivery to the customer. Our customershave the right to return merchandise. Sales are reported net of actual andestimated returns. We maintain a reserve for potential product returns andrecord, as a reduction to sales, a provision for estimated product returns,which is determined based on historical experience. Charges/(credits) resultingfrom revisions to estimates on our sales return provision were approximately$(85,000) and $(139,000) for the 39-week periods ended October 2, 2010 andSeptember 26, 2009, respectively. Amounts billed to customers for shippingand handling fees are included in net sales at the time of shipment. Costsincurred at our stores for shipping and handling are included in cost of sales.The Company records revenues net of applicable sales tax.

 

The Company’s co-brandedcustomer credit card program, which was introduced during fiscal 2007, entitlesthe Company to receive from the issuing bank a non-refundable credit cardactivation fee for each new account that is opened and activated. These feesare initially deferred and recognized in consolidated net sales as revenue overthe life of the contract. During the 39-week periods ended October 2, 2010and September 26, 2009, the Company received $623,000 and $884,000,respectively, in connection with activated credit cards. The amount of feeincome recorded in connection with activated credit cards was $490,000 and$319,000 for the 39-week periods ended October 2, 2010 and September 26,2009, 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 netsales. The fees that are incurred by the Company are cardholder incentives,which are funded from the fees paid by the issuing bank and Visa U.S.A Inc. Theamount of sales royalty income recorded was $267,000 and $230,000 for the39-week periods ended October 2, 2010 and September 26, 2009,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 is 

 

17

----

Table of Contents

 

responsible for theadministration 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. At January 2, 2010, the Companymaintained $4.5 million of net deferred tax assets, of which, approximately$919,000 related to state tax net operating loss carry-forwards. In addition,during the 39-week period ended October 2, 2010, the Company recorded anincome tax benefit of $5.0 million, primarily related to the net loss incurred.When tax contingencies become probable, a liability for the contingent amountis estimated based upon the Company’s best estimation of the potentialexposures associated with the timing and amount of deductions, as well asvarious tax filing positions. As of October 2, 2010, the Company hasrecorded a $368,000 reserve, net of federal benefit for potential taxcontingencies. As of September 26, 2009, the Company reported a reservebalance of $428,000.

 

*Seasonality.* The Companyexperiences seasonal and quarterly fluctuations in net sales and operatingincome. Quarterly results of operations may fluctuate significantly as a resultof a variety of factors, including the timing of new store openings, fashiontrends, shifts in timing of certain holidays, economic conditions andcompetition.  Our business is subject toseasonal influences, characterized by highest sales during the fourth quarter(October, November and December) and lowest sales during the third quarter(July, August and September).

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

Our market risk relates primarilyto changes in interest rates. The interest rate risk involves the short-terminvestment of excess cash in short-term, investment-grade interest-bearingsecurities. These investments are included in cash and equivalents, marketablesecurities, 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**

 

TheCompany is committed to maintaining disclosure controls and procedures designedto ensure that information required to be disclosed in our periodic reportsfiled under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information isaccumulated and communicated to our management, including our chief executiveofficer and chief financial officer, as appropriate, to allow for timelydecisions regarding required disclosure.

 

Underthe supervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we conducted anevaluation of our disclosure controls and procedures, as such term is definedunder Rules 13a-15(e) and 15d-15(e) under the Exchange Act, asof the end of the period covered by this Report.  Management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework to evaluate the effectiveness of theCompany’s internal controls. 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.

 

Duringthe 13-weeks ended October 2, 2010 there has been no change in ourinternal control over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) of the Exchange Act) that hasmaterially affected, or is reasonably likely to materially affect, the Company’s  internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**ITEM 1.  LEGALPROCEEDINGS**

 

OnJune 30, 2010, Chico’s FAS, Inc. and White House|Black Market, Inc.(together referred to as “Chico’s”) filed a lawsuit against the Company in theSupreme Court of the State of New York County of New York. The complaintalleges, among other things, that two former employees of Chico’s that arecurrently employed by Cache supplied the Company with confidential informationand trade secrets. The Company believes that Chico’s filed the lawsuit in aneffort to undermine Cache in the marketplace. Their allegations were reportedin a key trade publication and in an analyst report.  The Company believes the allegations made byChico’s are without merit and intends to vigorously defend against thislawsuit.

 

18

----

Table of Contents

 

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 October 2, 2010, January 2, 2010 or September 26,2009.

 

**ITEM 6. EXHIBITS**

 
| 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. |

 

----

* Filed herewith

 

19

----

Table of Contents

 

**Signatures**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|     | Dated: November 10, 2010 |
|----------|-------------------------------|
|     | 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) |

 

20

----