Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

** **

**For the quarterly period ended July 3, 2010**

** **

**OR**

** **

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**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(§ 232.405 of this chapter) during the preceding 12 months (or forsuch shorter period 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 August 2, 2010, 12,771,174 common shareswere outstanding.

 

 

 

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Tableof Contents

 

CACHE, INC. AND SUBSIDIARIES

 

INDEX

** **
| PART I. FINANCIAL  INFORMATION | 3                                                                                                                                   |
|------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
|                                     |                                                                                                                                |   |
| Item 1.                             | Condensed Consolidated  Financial Statements (unaudited)                                                                            | 3 |
|                                     | Condensed Consolidated  Balance Sheets as of July 3, 2010, January 2, 2010 and June 27,  2009                             | 3 |
|                                     | Condensed Consolidated  Statements of Operations for the twenty-six and thirteen week periods ended  July 3, 2010 and June 27, 2009 | 4-5 |
|                                     | Condensed  Consolidated Statements of Cash Flows for the twenty-six week periods ended  July 3, 2010 and June 27, 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    | 19                                                                                                                                  |
|                                     |                                                                                                                                |   |
| Item 6.                             | Exhibits                                                                                                                            | 19 |
|                                     |                                                                                                                                |   |
| SIGNATURES                               | 20                                                                                                                                  |

 

2

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Table of Contents

 

**PART I - FINANCIAL INFORMATION**

 

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

 

**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                                                      | ** ** | **July 3,********2010** | ** **      | **January 2,********2010** | ** ** | **June 27,********2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-----------------|---------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                      | ** ** | **(Unaudited)**              | ** **      | **(Audited)**                   | ** ** | **(Unaudited)**          | ** ** |
| **ASSETS**                                                                                                                                      | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| **Current assets:**                                                                                                                             | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| **Cash and equivalents**                                                                                                                        | ** ** | **$**                        | **3,742,000**   | ** **                      | **$**      | **5,516,000**            | ** ** | **$** | **2,815,000** | ** ** |
| **Marketable securities**                                                                                                                       | ** ** | **24,665,000**               | ** **      | **29,999,000**                  | ** ** | **30,513,000**           | ** ** |
| **Certificates of deposit —  restricted**                                                                                                  | ** ** | **2,500,000**                | ** **      | **1,500,000**                   | ** ** | **1,500,000**            | ** ** |
| **Receivables, net**                                                                                                                            | ** ** | **2,614,000**                | ** **      | **3,411,000**                   | ** ** | **2,653,000**            | ** ** |
| **Income tax receivable, net**                                                                                                                  | ** ** | **81,000**                   | ** **      | **3,438,000**                   | ** ** | **534,000**              | ** ** |
| **Inventories, net**                                                                                                                            | ** ** | **20,408,000**               | ** **      | **16,599,000**                  | ** ** | **22,420,000**           | ** ** |
| **Prepaid expenses and other  current assets**                                                                                                  | ** ** | **6,370,000**                | ** **      | **4,943,000**                   | ** ** | **2,109,000**            | ** ** |
| **Total current assets**                                                                                                                        | ** ** | **60,380,000**               | ** **      | **65,406,000**                  | ** ** | **62,544,000**           | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| **Equipment and leasehold  improvements, net**                                                                                                  | ** ** | **28,204,000**               | ** **      | **31,713,000**                  | ** ** | **38,415,000**           | ** ** |
| **Goodwill**                                                                                                                                    | ** ** | **9,092,000**                | ** **      | **9,092,000**                   | ** ** | **9,092,000**            | ** ** |
| **Intangible assets, net**                                                                                                                      | ** ** | **102,000**                  | ** **      | **102,000**                     | ** ** | **1,245,000**            | ** ** |
| **Other assets**                                                                                                                                | ** ** | **5,249,000**                | ** **      | **4,684,000**                   | ** ** | **2,399,000**            | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| **Total assets**                                                                                                                                | ** ** | **$**                        | **103,027,000** | ** **                      | **$**      | **110,997,000**          | ** ** | **$** | **113,695,000** | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                  | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| **Current liabilities:**                                                                                                                        | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| **Accounts payable**                                                                                                                            | ** ** | **$**                        | **7,547,000**   | ** **                      | **$**      | **7,624,000**            | ** ** | **$** | **5,559,000** | ** ** |
| **Note payable**                                                                                                                                | ** ** | **1,569,000**                | ** **      | **1,408,000**                   | ** ** | **1,282,000**            | ** ** |
| **Accrued compensation**                                                                                                                        | ** ** | **2,354,000**                | ** **      | **2,668,000**                   | ** ** | **1,316,000**            | ** ** |
| **Accrued liabilities**                                                                                                                         | ** ** | **8,848,000**                | ** **      | **11,783,000**                  | ** ** | **8,647,000**            | ** ** |
| **Total current liabilities**                                                                                                                   | ** ** | **20,318,000**               | ** **      | **23,483,000**                  | ** ** | **16,804,000**           | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| **Note payable**                                                                                                                                | ** ** | **630,000**                  | ** **      | **1,425,000**                   | ** ** | **2,518,000**            | ** ** |
| **Other liabilities**                                                                                                                           | ** ** | **14,736,000**               | ** **      | **15,806,000**                  | ** ** | **16,430,000**           | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| **Commitments and contingencies**                                                                                                               | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| **STOCKHOLDERS’ EQUITY**                                                                                                                   | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| **Common stock, par value $.01;  authorized, 40,000,000, 40,000,000 and 20,000,000 shares;  issued 16,453,373, 16,433,373 and 16,410,036** | ** ** | **164,000**                  | ** **      | **164,000**                     | ** ** | **164,000**              | ** ** |
| **Additional paid-in capital**                                                                                                                  | ** ** | **47,799,000**               | ** **      | **47,555,000**                  | ** ** | **47,272,000**           | ** ** |
| **Retained earnings**                                                                                                                           | ** ** | **59,175,000**               | ** **      | **62,359,000**                  | ** ** | **70,302,000**           | ** ** |
| **Treasury stock 3,682,199, shares, at cost**                                                                                                   | ** ** | **(39,795,000**              | **)**           | **(39,795,000**                 | **)**      | **(39,795,000**          | **)**      |
| **Total stockholders’ equity**                                                                                                             | ** ** | **67,343,000**               | ** **      | **70,283,000**                  | ** ** | **77,943,000**           | ** ** |
| ** **                                                                                                                                      | ** ** | ** **                   | ** **      | ** **                      | ** ** | ** **               | ** ** |
| **Total liabilities and  stockholders’ equity**                                                                                            | ** ** | **$**                        | **103,027,000** | ** **                      | **$**      | **110,997,000**          | ** ** | **$** | **113,695,000** | ** ** |

 

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

 

3

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**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**FOR THE TWENTY-SIX WEEKS ENDED**

**(Unaudited)**

 
| ** **                                         | ** ** | **July 3,  2010** | ** **      | **June 27,  2009** | ** ** |
|----------------------------------------------------|------------|------------------------|-----------------|-------------------------|------------|
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Net sales**                                      | ** ** | **$**                  | **105,125,000** | ** **              | **$**      | **109,872,000** | ** ** |
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Cost of sales, including buying  and occupancy** | ** ** | **63,477,000**         | ** **      | **62,848,000**          | ** ** |
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Gross profit**                                   | ** ** | **41,648,000**         | ** **      | **47,024,000**          | ** ** |
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Expenses**                                       | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Store operating expenses**                       | ** ** | **37,807,000**         | ** **      | **39,251,000**          | ** ** |
| **General and administrative  expenses**           | ** ** | **9,015,000**          | ** **      | **8,985,000**           | ** ** |
| **Total expenses**                                 | ** ** | **46,822,000**         | ** **      | **48,236,000**          | ** ** |
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Operating loss**                                 | ** ** | **(5,174,000**         | **)**           | **(1,212,000**          | **)**      |
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Other income (expense):**                        | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Interest expense**                               | ** ** | **(67,000**            | **)**           | **(98,000**             | **)**      |
| **Interest income**                                | ** ** | **85,000**             | ** **      | **127,000**             | ** ** |
| **Total other income, net**                        | ** ** | **18,000**             | ** **      | **29,000**              | ** ** |
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Loss before income taxes**                       | ** ** | **(5,156,000**         | **)**           | **(1,183,000**          | **)**      |
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Income tax benefit**                             | ** ** | **(1,972,000**         | **)**           | **(432,000**            | **)**      |
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Net loss**                                       | ** ** | **$**                  | **(3,184,000**  | **)**                   | **$**      | **(751,000** | **)** |
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Basic loss per share**                           | ** ** | **$**                  | **(0.25**       | **)**                   | **$**      | **(0.06** | **)** |
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Diluted loss per share**                         | ** ** | **$**                  | **(0.25**       | **)**                   | **$**      | **(0.06** | **)** |
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Basic weighted average shares  outstanding**     | ** ** | **12,771,000**         | ** **      | **12,841,000**          | ** ** |
| ** **                                         | ** ** | ** **             | ** **      | ** **              | ** ** |
| **Diluted weighted average shares  outstanding**   | ** ** | **12,771,000**         | ** **      | **12,841,000**          | ** ** |

 

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

 

4

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**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**FOR THE THIRTEEN WEEKS ENDED**

**(Unaudited)**

 
| ** **                                         | ** ** | **July 3,  2010** | ** **     | **June 27,  2009** | ** ** |
|----------------------------------------------------|------------|------------------------|----------------|-------------------------|------------|
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Net sales**                                      | ** ** | **$**                  | **56,575,000** | ** **              | **$**      | **56,866,000** | ** ** |
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Cost of sales, including buying  and occupancy** | ** ** | **31,642,000**         | ** **     | **31,636,000**          | ** ** |
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Gross profit**                                   | ** ** | **24,933,000**         | ** **     | **25,230,000**          | ** ** |
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Expenses**                                       | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Store operating expenses**                       | ** ** | **19,148,000**         | ** **     | **19,663,000**          | ** ** |
| **General and administrative  expenses**           | ** ** | **4,341,000**          | ** **     | **4,249,000**           | ** ** |
| **Total expenses**                                 | ** ** | **23,489,000**         | ** **     | **23,912,000**          | ** ** |
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Operating income**                               | ** ** | **1,444,000**          | ** **     | **1,318,000**           | ** ** |
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Other income (expense):**                        | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Interest expense**                               | ** ** | **(32,000**            | **)**          | **(47,000**             | **)**      |
| **Interest income**                                | ** ** | **41,000**             | ** **     | **60,000**              | ** ** |
| **Total other income, net**                        | ** ** | **9,000**              | ** **     | **13,000**              | ** ** |
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Income before income taxes**                     | ** ** | **1,453,000**          | ** **     | **1,331,000**           | ** ** |
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Income tax provision**                           | ** ** | **556,000**            | ** **     | **486,000**             | ** ** |
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Net income**                                     | ** ** | **$**                  | **897,000**    | ** **              | **$**      | **845,000** | ** ** |
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Basic earnings per share**                       | ** ** | **$**                  | **0.07**       | ** **              | **$**      | **0.07** | ** ** |
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Diluted earnings per share**                     | ** ** | **$**                  | **0.07**       | ** **              | **$**      | **0.07** | ** ** |
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Basic weighted average shares  outstanding**     | ** ** | **12,771,000**         | ** **     | **12,728,000**          | ** ** |
| ** **                                         | ** ** | ** **             | ** **     | ** **              | ** ** |
| **Diluted weighted average shares  outstanding**   | ** ** | **12,809,000**         | ** **     | **12,728,000**          | ** ** |

 

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

 

5

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**CACHE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**FOR THE TWENTY-SIX WEEKS ENDED**

**(Unaudited)**

 
| ** **                                                                                             | ** ** | **July 3,  2010** | ** **     | **June 27,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------|----------------|--------------------|------------|
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **Net loss**                                                                                           | ** ** | **$**                  | **(3,184,000** | **)**              | **$**      | **(751,000** | **)** |
| **Adjustments to reconcile net  loss to net cash********provided  by (used in) operating activities:** | ** ** | ** **             | ** **     | ** **         | ** ** |
| **Depreciation and amortization**                                                                      | ** ** | **4,851,000**          | ** **     | **5,691,000**      | ** ** |
| **Provision for sales allowance  and doubtful accounts, net**                                          | ** ** | **(53,000**            | **)**          | **(37,000**        | **)**      |
| **Stock-based compensation**                                                                           | ** ** | **198,000**            | ** **     | **117,000**        | ** ** |
| **Non-cash interest expense on  note payable**                                                         | ** ** | **—**             | ** **     | **47,000**         | ** ** |
| **Deferred income taxes**                                                                              | ** ** | **(2,025,000**         | **)**          | **(468,000**       | **)**      |
| **Gift card breakage**                                                                                 | ** ** | **(100,000**           | **)**          | **(123,000**       | **)**      |
| **Amortization of deferred income  for co-branded credit card**                                        | ** ** | **(313,000**           | **)**          | **(197,000**       | **)**      |
| **Amortization of deferred rent**                                                                      | ** ** | **(1,403,000**         | **)**          | **(961,000**       | **)**      |
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **Change in assets and liabilities:**                                                                  | ** ** | ** **             | ** **     | ** **         | ** ** |
| **Decrease in receivables and  income tax receivables**                                                | ** ** | **4,232,000**          | ** **     | **6,631,000**      | ** ** |
| **Increase in inventories**                                                                            | ** ** | **(3,850,000**         | **)**          | **(99,000**        | **)**      |
| **Decrease (increase) in prepaid  expenses and other current assets**                                  | ** ** | **79,000**             | ** **     | **(321,000**       | **)**      |
| **Decrease in accounts payable**                                                                       | ** ** | **(77,000**            | **)**          | **(816,000**       | **)**      |
| **Decrease in accrued  liabilities, accrued compensation and other liabilities**                       | ** ** | **(2,383,000**         | **)**          | **(1,719,000**     | **)**      |
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **Net cash provided by (used in)  operating activities**                                               | ** ** | **(4,028,000**         | **)**          | **6,994,000**      | ** ** |
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **Purchase of marketable  securities**                                                                 | ** ** | **(8,431,000**         | **)**          | **(19,063,000**    | **)**      |
| **Maturities of marketable  securities**                                                               | ** ** | **13,765,000**         | ** **     | **13,703,000**     | ** ** |
| **Proceeds from insurance  recovery**                                                                  | ** ** | **125,000**            | ** **     | **—**         | ** ** |
| **Certificates of deposit —  restricted**                                                         | ** ** | **(1,000,000**         | **)**          | **(1,500,000**     | **)**      |
| **Purchase of equipment and  leasehold improvements**                                                  | ** ** | **(1,571,000**         | **)**          | **(919,000**       | **)**      |
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **Net cash provided by (used in)  investing activities**                                               | ** ** | **2,888,000**          | ** **     | **(7,779,000**     | **)**      |
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **Repayment of note payable**                                                                          | ** ** | **(634,000**           | **)**          | **(649,000**       | **)**      |
| **Repurchase of common stock**                                                                         | ** ** | **—**             | ** **     | **(586,000**       | **)**      |
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **Net cash used in financing  activities**                                                             | ** ** | **(634,000**           | **)**          | **(1,235,000**     | **)**      |
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **Net decrease in cash and  equivalents**                                                              | ** ** | **(1,774,000**         | **)**          | **(2,020,000**     | **)**      |
| **Cash and equivalents, at  beginning of period**                                                      | ** ** | **5,516,000**          | ** **     | **4,835,000**      | ** ** |
| **Cash and equivalents, at end of  period**                                                            | ** ** | **$**                  | **3,742,000**  | ** **         | **$**      | **2,815,000** | ** ** |
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **Supplemental disclosure of cash  flow information:**                                                 | ** ** | ** **             | ** **     | ** **         | ** ** |
| ** **                                                                                             | ** ** | ** **             | ** **     | ** **         | ** ** |
| **Interest paid**                                                                                      | ** ** | **$**                  | **67,000**     | ** **         | **$**      | **105,000** | ** ** |
| **Income taxes paid**                                                                                  | ** ** | **$**                  | **82,000**     | ** **         | **$**      | **118,000** | ** ** |
| **Accrued equipment and leasehold  improvements**                                                      | ** ** | **$**                  | **114,000**    | ** **         | **$**      | **24,000** | ** ** |

 

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

 

6

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**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 284 women’sapparel specialty stores, as of July 3, 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 applicable 52 or53 week period. The year ended January 2, 2010 (“fiscal 2009”) was a53-week year and the year ending January 1, 2011 (“fiscal 2010”) is a52-week year.

 

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

 

Stock-basedcompensation expense for all stock-based awards program, 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 26 and 13-week periods ended July 3, 2010, the Companyrecognized approximately $198,000 and $98,000, respectively, in stock-basedcompensation expense and for the same periods ended June 27, 2009, theCompany recognized approximately $117,000 and $59,000 respectively. The grantdate fair value for stock options is calculated using the Black-Scholes optionvaluation model. The Company granted 40,000 options during the 26-week periodended July 3, 2010, as compared to no options being granted during the 26-week period ended June 27, 2009. No excess tax benefits were recognized from the exercise of stockoptions during fiscal 2010 and 2009. During the first quarter of fiscal 2010,20,000 shares of the Company’s common stock were issued for services to itsboard members.  The total fair value of theissued common stock was approximately $92,000 of which, approximately $46,000and $23,000 were included in stock-based compensation expense for the 26 and13-week periods ended July 3, 2010, respectively. The remaining cost isexpected to be recognized during fiscal 2010.

 

Duringthe 13-week period ended July 3, 2010, the Company granted restrictedstock awards representing 12,000 shares of the Company’s common stock, whichhad a weighted average grant date fair value of $6.15. Two-thirds of theserestricted stock awards will contingently vest over a three year period, basedon the Company meeting performance goals, and one-third will vest equally on anannual basis over the requisite service period.

 

Theweighted-average grant date fair value of options granted during the 26-weekperiod ended July 3, 2010 was $1.79. The grant date fair value iscalculated using the Black-Scholes option valuation model. The followingassumptions were used during the 26-week period ended July 3, 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          |   |

 

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

 

Basicearnings (loss) per share has been computed based upon the weighted average ofcommon shares outstanding. Diluted earnings (loss) per share also include thedilutive effect of potential common shares (dilutive stock options and unvestedrestricted stock awards) outstanding during the period. Income (loss) per common share has been computed asfollows:

 
| ** **                                                                              | ** ** | **26-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                              | ** ** | **July 3,**        | ** ** | **June 27,**       | ** ** | **July 3,** | ** ** | **June 27,** | ** ** |
| ** **                                                                              | ** ** | **2010**                | ** ** | **2009**                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income (loss)                                                                       |       | $                       | (3,184,000 | )                       | $          | (751,000 | ) | $ | 897,000 |   | $ | 845,000 |   |
| Basic weighted number of average shares  outstanding                                    |       | 12,771,000              |       | 12,841,000              |       | 12,771,000 |   | 12,728,000 |   |
| Incremental shares from assumed issuances of stock  options and restricted stock awards |       | —                  |       | —                  |       | 38,000 |   | — |   |
|                                                                                    |       |                    |       |                    |       |   |   |   |   |
| Diluted weighted average number of shares  outstanding                                  |       | 12,771,000              |       | 12,841,000              |       | 12,809,000 |   | 12,728,000 |   |
|                                                                                    |       |                    |       |                    |       |   |   |   |   |
| Net income (loss) per share - Basic                                                     |       | $                       | (0.25      | )                       | $          | (0.06 | ) | $ | 0.07 |   | $ | 0.07 |   |
| - Diluted                                                                               |       | $                       | (0.25      | )                       | $          | (0.06 | ) | $ | 0.07 |   | $ | 0.07 |   |

 

Optionsand unvested restricted common shares of 926,338 and 732,675 were excluded fromthe computation of diluted loss per share for the 26-week periods of fiscal2010 and 2009, respectively, because of the net loss incurred by the Company.

 

Optionsto purchase 706,675 and 721,675 common shares were excluded from thecomputation of diluted earnings per share for the 13-week periods ended July 3,2010 and June 27, 2009, respectively, due to the anti-dilutive effectcaused by the exercise price exceeding the average market price. Unvestedrestricted common shares of 71,333 were excluded from the computation ofdiluted earnings per share for the 13-week period July 3, 2010 due tocontingent shares not meeting their performance goals.

 

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

 

InJuly 2010, Financial Accounting Standards Board (“FASB”) issued AccountingStandards Update (“ASU”) 2010-20, *Receivables (Topic 310) Disclosuresabout the Credit Quality of Financing Receivables and the Allowance for CreditLosses*, which improves the disclosures that an entity provides aboutthe credit quality of its financing receivables and the related allowance forcredit losses. As a result of these amendments, an entity is required todisaggregate by portfolio segment or class certain existing disclosures andprovide certain new disclosures about its financing receivables and relatedallowance for credit losses. ASU 2010-20 is effective for financial statementsissued for interim and annual periods ending on or after December 15, 2010except for disclosures about activity that occurs during a reporting period,which are effective for interim and annual reporting periods beginning on orafter 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, early adoption is permitted. The Company does notexpect the adoption of ASU 2010-18 to have a material impact on itsconsolidated financial statements.

 

In April 2010, FASBissued ASU 2010-17, *Revenue Recognition —Milestone Method (Topic 605) Milestone Method of Revenue Recognition,*providesguidance on defining a milestone and determining when it may be appropriate toapply the milestone method of revenue recognition for research or developmenttransactions. ASU 2010-17 is effective prospectively beginning on or afterJune 15, 2010, early adoption is permitted. The respective ASU can also beapplied retrospectively for all prior periods. Effective July 3, 2010, theCompany adopted ASU 2010-17, which did not have an impact on its consolidatedfinancial statements.

 

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.

 

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InJanuary 2010, FASB issued ASU 2010-06, *Improving Disclosures about Fair Measurements*, whichprovides amendments to subtopic 820-10 that require separate disclosure ofsignificant transfers in and out of Level 1 and Level 2 fair valuemeasurements and the presentation of separate information regarding purchases,sales, issuances and settlements for Level 3 fair value measurements. Additionally,ASU 2010-06 provides amendments to subtopic 820-10 that clarify existingdisclosures about the level of disaggregation and inputs and valuationtechniques. ASU 2010-06 is effective for financial statements issued forinterim and annual periods ending after December 15, 2009, except for thedisclosures about purchases, sales, issuances and settlements in therollforward of activity in Level 3 fair value measurements, which areeffective for interim and annual periods ending after December 15, 2010.The Company does not expect the adoption of ASU 2010-06 to have a materialimpact on its consolidated financial statements.

 

**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:

 

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

 

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

 

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

 

As of July 3, 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$24.7 million, $30.0 million and $30.6 million as of July 3, 2010,January 2, 2010 and June 27, 2009, respectively. For the fiscalperiods ended July 3, 2010, January 2, 2010 and June 27, 2009,the aggregate amount of marketable securities (maturing greater than 90 daysand less than one year) totaled approximately $24.7 million, $30.0 million and$30.5 million, respectively. The Company noted small variances between the bookvalue and 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.

 

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

 
| ** **               | ** ** | **July 3,** | ** ** | **January 2,** | ** ** | **June 27,** | ** ** |
|--------------------------|------------|------------------|------------|---------------------|------------|-------------------|------------|
| ** **               | ** ** | **2010**         | ** ** | **2010**            | ** ** | **2009**          | ** ** |
| Construction allowances  |       | $                | 338,000    |                | $          | 507,000           |       | $ | 384,000 |   |
| Third party credit cards |       | 1,447,000        |       | 2,142,000           |       | 1,386,000         |       |
| Accounts receivable, net |       | —           |       | 62,000              |       | 115,000           |       |
| Other                    |       | 829,000          |       | 700,000             |       | 768,000           |       |
|                     |       | $                | 2,614,000  |                | $          | 3,411,000         |       | $ | 2,653,000 |   |

 

AtJuly 3, 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 26-week period ended July 3,2010, the Company received payments of $3.3 million against the $3.4 millionreceivable, which was recorded in fiscal 2009. During fiscal 2009, the Companyrecorded income tax receivables of $3.4 million, which resulted fromestimated tax payments of approximately $200,000 made during fiscal 2009 and2008 combined with a refund of $3.2 million, generated as a result of thecarry back on the net loss incurred for fiscal 2009.

 

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

 
| ** **      | ** ** | **July 3,** | ** ** | **January 2,** | ** ** | **June 27,** | ** ** |
|-----------------|------------|------------------|------------|---------------------|------------|-------------------|------------|
| ** **      | ** ** | **2010**         | ** ** | **2010**            | ** ** | **2009**          | ** ** |
| Raw materials   |       | $                | 2,188,000  |                | $          | 1,253,000         |       | $ | 2,075,000 |   |
| Work in process |       | 1,000,000        |       | 1,160,000           |       | 1,241,000         |       |
| Finished goods  |       | 17,220,000       |       | 14,186,000          |       | 19,104,000        |       |
|            |       | $                | 20,408,000 |                | $          | 16,599,000        |       | $ | 22,420,000 |   |

 

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

 
| ** **                                      | ** ** | **July 3,** | ** ** | **January 2,** | ** ** | **June 27,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|---------------------|------------|-------------------|------------|
| ** **                                      | ** ** | **2010**         | ** ** | **2010**            | ** ** | **2009**          | ** ** |
|                                            |       |             |       |                |       |              |       |
| Leasehold improvements                          |       | $                | 51,631,000 |                | $          | 51,861,000        |       | $ | 53,475,000 |   |
| Furniture, fixtures and equipment               |       | 34,371,000       |       | 33,913,000          |       | 51,704,000        |       |
|                                            |       | 86,002,000       |       | 85,774,000          |       | 105,179,000       |       |
| Less: accumulated depreciation and amortization |       | (57,798,000      | )          | (54,061,000         | )          | (66,764,000       | )          |
|                                            |       | $                | 28,204,000 |                | $          | 31,713,000        |       | $ | 38,415,000 |   |

 

**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 July 3, 2010, January 2, 2010and June 27, 2009 was $9.1 million.

 

The carrying amounts of netintangible assets as of July 3, 2010, January 2, 2010 and June 27,2009 are as follows:

 
| ** **                          | ** ** | **July 3,** | ** ** | **January 2,** | ** ** | **June 27,** | ** ** |
|-------------------------------------|------------|------------------|------------|---------------------|------------|-------------------|------------|
| ** **                          | ** ** | **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           |       |
| Non-compete agreements              |       | —           |       | —              |       | 300,000           |       |
| Favorable market lease              |       | —           |       | —              |       | 160,000           |       |
|                                |       | —           |       | —              |       | 760,000           |       |
| Less: accumulated amortization      |       | —           |       | —              |       | (237,000          | )          |
|                                |       | —           |       | —              |       | 523,000           |       |
|                                |       |             |       |                |       |              |       |
| Total intangible assets, net        |       | $                | 102,000    |                | $          | 102,000           |       | $ | 1,245,000 |   |

 

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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 executiveofficers.

 

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

 
| ** **                                                                    | ** ** | **July 3,** | ** ** | **January 2,** | ** ** | **June 27,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------|------------|---------------------|------------|-------------------|------------|
| ** **                                                                    | ** ** | **2010**         | ** ** | **2010**            | ** ** | **2009**          | ** ** |
| Gift cards, merchandise credit cards and other customer  deposits and credits |       | $                | 3,548,000  |                | $          | 3,817,000         |       | $ | 3,387,000 |   |
| Taxes, including income taxes                                                 |       | 2,249,000        |       | 2,807,000           |       | 1,998,000         |       |
| Operating expenses                                                            |       | 1,405,000        |       | 2,007,000           |       | 1,592,000         |       |
| Employee separation settlement                                                |       | —           |       | 1,375,000           |       | —            |       |
| Deferred income — co-branded credit card program                         |       | 675,000          |       | 568,000             |       | 449,000           |       |
| Sales return reserve                                                          |       | 339,000          |       | 470,000             |       | 340,000           |       |
| Group insurance                                                               |       | 518,000          |       | 481,000             |       | 556,000           |       |
| Leasehold additions                                                           |       | 114,000          |       | 234,000             |       | 24,000            |       |
| Exit costs                                                                    |       | —           |       | 24,000              |       | 301,000           |       |
|                                                                          |       | $                | 8,848,000  |                | $          | 11,783,000        |       | $ | 8,647,000 |   |

 

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:

 
| ** **                                            | ** ** | **July3,  2010** | ** ** | **January 2,  2010** | ** ** | **June 27,  2009** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|---------------------------|------------|-------------------------|------------|
| Deferred rent                                         |       | $                | 12,822,000 |                      | $          | 13,913,000              |       | $ | 14,709,000 |   |
| Deferred income — co-branded credit card program |       | 1,914,000        |       | 1,893,000                 |       | 1,721,000               |       |
|                                                  |       | $                | 14,736,000 |                      | $          | 15,806,000              |       | $ | 16,430,000 |   |

 

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

 

On May 27, 2009, theCompany entered into a one year credit facility with Bank of America (the “Bank”).Under this facility, the Company may direct the Bank to issue letters of creditup to a total of $1,425,000. Any outstanding letters of credit under thisfacility are collateralized by granting to the Bank a security interest invarious certificates of deposit held by the Company and its subsidiaries withthe Bank, amounting to a total of $1,500,000. This one year credit facility expiredon May 1, 2010.

 

Priorto the expiration of the preceding credit facility, the Company entered into anew one year credit facility with the Bank on April 22, 2010. Under thisfacility, the Company may direct the Bank to issue letters of credit up to a totalof $2,500,000. Any outstanding letters of credit under this facility arecollateralized 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 $1.1 million under this facility at July 3,2010.

 

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**13.****      ****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 26-weekperiod ended July 3, 2010, the Company recorded an income tax benefit of$2.0 million, primarily related to the net loss incurred. The Current portionof deferred tax assets and liabilities of $1.7 million is included in prepaidexpenses and other current assets, while the Non-current portion of deferredtax assets and liabilities of $4.8 million is included in other assets on theCompany’s accompanying condensed consolidated balance sheets.

 

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

 

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 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.

 

OnSeptember 23, 2009, the Company entered into a separation agreement withits then executives (former executives of Adrienne Victoria Designs, Inc.).Pursuant to one of these separation agreements, the former executive mayreceive payments of up to $500,000 in the aggregate, based on the achievementby the Company over the next 4 years of certain net income targets set forth inthe agreement.  As of July 3, 2010,no accrual was recorded for this earn-out provision.

 

TheCompany is exposed to a number of asserted and unasserted potentialclaims.  Management does not believe thatthe resolution of any of these matters will result in a material loss.  The Company had no guarantees, subleases orassigned lease obligations as of July 3, 2010, January 2, 2010 or June 27,2009.

 

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

 

Exceptfor the historical information contained in this Form 10-Q, the mattersaddressed herein are forward-looking statements within the meaning 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,without limitation, macroeconomic factors that have affected the retail sector,including changes in national, regional and local economic conditions,employment levels and consumer spending patterns, and the other risks detailedfrom time to time in the Company’s most recent Form 10-K, Forms 10-Q andother reports filed with the Securities and Exchange Commission. Continuedweakness in or a further worsening of the economy generally or in a number ofour markets could adversely affect our financial position and results ofoperations, cause us to reduce the number and frequency of new store openings,slow our re-modeling of existing locations or cause us to increase storeclosings. Other unknown or unpredictable factors also could harm the Company’sbusiness, financial condition and results. Consequently, there can be no assurance that actual results ordevelopments anticipated by the Company will be realized or, even ifsubstantially realized, that they will have the expected consequences to, or effectson, the Company.  The Company undertakesno obligation to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise, except to the extentrequired by applicable securities laws.

 

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**RESULTS OF OPERATIONS**

 

Thefollowing table sets forth our results of operations for the 26-week and13-week periods ended July 3, 2010 and June 27, 2009, respectively,expressed as a percentage of net sales.

 
| ** **                          | ** ** | **26-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **July 3,  2010**  | ** ** | **June 27,  2009** | ** ** | **July 3,  2010** | ** ** | **June 27,  2009** | ** ** |
| Sales                               |       | 100.0                   | %          | 100.0                   | %          | 100.0 | % | 100.0 | % |
| Cost of sales                       |       | 60.4                    |       | 57.2                    |       | 55.9 |   | 55.6 |   |
| Gross profit                        |       | 39.6                    |       | 42.8                    |       | 44.1 |   | 44.4 |   |
| Store operating expenses            |       | 36.0                    |       | 35.7                    |       | 33.8 |   | 34.6 |   |
| General and administrative expenses |       | 8.6                     |       | 8.2                     |       | 7.7 |   | 7.5 |   |
| Operating income (loss)             |       | (5.0                    | )          | (1.1                    | )          | 2.6 |   | 2.3 |   |
| Interest expense                    |       | (0.1                    | )          | (0.1                    | )          | (0.1 | ) | (0.1 | ) |
| Interest income                     |       | 0.1                     |       | 0.1                     |       | 0.1 |   | 0.1 |   |
| Income (loss) before income taxes   |       | (5.0                    | )          | (1.1                    | )          | 2.6 |   | 2.3 |   |
| Income tax provision (benefit)      |       | (1.9                    | )          | (0.4                    | )          | 1.0 |   | 0.8 |   |
| Net income (loss)                   |       | (3.1                    | )%         | (0.7                    | )%         | 1.6 | % | 1.5 | % |

 

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:

 
| ** **                                             | ** ** | **26-Weeks Ended** | ** ** | **13-Weeks Ended** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **July 3,**             | ** ** | **June 27,**       | ** ** | **July 3,** | ** ** | **June 27,** | ** ** |
| ** **                                             | ** ** | **2010**                | ** ** | **2009**                | ** ** | **2010** | ** ** | **2009** | ** ** |
| Total store count, at end of period                    |       | 284                     |       | 291                     |       | 284 |   | 291 |   |
| Net sales decrease                                     |       | (4.3                    | )%         | (22.5                   | )%         | (0.5 | )% | (23.1 | )% |
| Comparable store sales increase (decrease)             |       | (0.8                    | )%         | (21.9                   | )%         | 5.1 | % | (23.0 | )% |
| Average sales per transaction decrease                 |       | (9.9                    | )%         | (11.2                   | )%         | (3.7 | )% | (9.0 | )% |
| Average number of transactions increase (decrease)     |       | 10.1                    | %          | (12.0                   | )%         | 9.1 | % | (15.5 | )% |
| Net sales per average square foot                      |       | $                       |  174  |                    | $          |  177 |   | $ |  93 |   | $ |  91 |   |
| Total square footage, at end of period (in  thousands) |       | 572                     |       | 586                     |       | 572 |   | 586 |   |
|                                                        |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

Netsales

 

Duringthe 26-week period ended July 3, 2010, net sales decreased to $105.1 millionfrom $109.9 million, a decrease of $4.8 million, or 4.3%, as compared to thesame 26-week period last year.  Thisreflects a decrease of $3.3 million from our non-comparable store sales, adecrease of $852,000 of net sales from our Mary L. division, which the Companydiscontinued during the first quarter of fiscal 2010, as well as, $796,000 or0.8% decrease in comparable store sales, which was offset by a small increasein income recognized from our co-branded credit card. The decrease in net salesduring the 26-week period of fiscal 2010 was primarily due to macroeconomicevents, which resulted in a reduction in mall traffic where our stores arelocated, coupled with a shift in consumer spending pattern that favored lowerpriced or discounted merchandise. The decrease in net sales at our stores forthe 26-week period ended July 3, 2010, reflected a 9.9% decrease in averagedollars per transaction partially offset by a 10.1% increase in salestransactions.

 

Duringthe 13-week period ended July 3, 2010, net sales decreased slightly to $56.6million from $56.9 million, a decrease of $291,000 or 0.5%, as compared to thesame 13-week period last year.  Thisreflects a decrease of $2.7 million from our non-comparable store sales, adecrease of $330,000 of net sales from our Mary L. division, which the Companydiscontinued during the first quarter of fiscal 2010, which was partiallyoffset by $2.7 million or 5.1% increase in comparable store sales and a smallincrease in income recognized from our co-branded credit card.  The decrease in net sales during the secondquarter of fiscal 2010 was primarily due to the same reasons discussed above,however our comparable stores sales improved as a result of improved productofferings during the second quarter, which received a favorable response fromour customers. The decrease in net sales in the second quarter at our storesreflected a 3.7% decrease in average dollars per transaction partially offsetby a 9.1 % increase in sales transactions.

 

Grossprofit

 

Duringthe 26-week period ended July 3, 2010, gross profit decreased to $41.6 millionfrom $47.0 million, a decrease of $5.4 million, or 11.4%, as compared to thesame 26-week period last year.  Thisdecrease was primarily due to lower net sales, an increase in

 

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markdowns,coupled with an increase in operational costs related to our design, productionand sourcing departments.  As apercentage of net sales, gross profit decreased to 39.6% from 42.8% for thefiscal 2010 26-week period, as compared to the prior year period.

 

Duringthe 13-week period ended July 3, 2010, gross profit decreased slightly to$24.9 million from $25.2 million, a decrease of $297,000 or 1.2%, as comparedto the same 13-week period last year. This decrease was primarily due to lower net sales, as described above,for the 13-week period for net sales. As a percentage of net sales, grossprofit decreased to 44.1% from 44.4% for the current 13-week period, ascompared to the prior year period.

 

Storeoperating expenses

 

Duringthe 26-week period ended July 3, 2010, store operating expenses decreased to$37.8 million from $39.3 million, a decrease of $1.4 million, or 3.7%, ascompared to the same 26-week period last year. Store operating expensesdecreased primarily due to a reduction in payroll and payroll related taxexpenses of $989,000, as a result of a decrease in the total number ofemployees, as compared to the same 26-week period last year. A decrease indepreciation expense of $667,000 also attributed to the decrease in storeoperating expense. Reduction in depreciation expense was due to certain assetsbeing fully depreciated as of fiscal 2009, coupled with the impairment of 23underperforming stores during the fourth quarter of fiscal 2009. As apercentage of net sales, store operating expenses increased to 36.0% from 35.7%for the fiscal 2010 26-week period, as compared to the prior year period, dueto a reduction in net sales.

 

Duringthe 13-week period ended July 3, 2010, store operating expenses decreased to$19.2 million from $19.7 million, a decrease of $515,000, or 2.6%, as comparedto the same 13-week period last year. Store operating expenses decreasedprimarily due to a reduction in payroll and payroll related expenses of$261,000, as a result of a decrease in the total number of employees, ascompared to the same 13-week period last year. A decrease in depreciationexpense of $340,000, due to the same reasons described above, also attributedto the decrease in store operating expense. As a percentage of net sales, storeoperating expenses decreased to 33.8% from 34.6% for the fiscal 2010 13-weekperiod, as compared to the prior year period due to lower store operatingexpenses.

 

Generaland administrative expenses

 

During the 26-week periodended July 3, 2010 general and administrative expenses did not changematerially as compared to the same 26-week period last year.  As a percentage of net sales, general andadministrative expenses increased to 8.6% from 8.2% in fiscal 2010, primarilydue to the reduction in net sales in fiscal 2010.

 

During the 13-week periodended July 3, 2010, general and administrative expenses increased to $4.3million from $4.2 million, an increase of $92,000 or 2.2%, as compared to thesame 13-week period last year. As a percentage of net sales, general andadministrative expenses increased slightly to 7.7% from 7.5% in fiscal 2010,due to the reduction in net sales in fiscal 2010 and a small increase ingeneral and administrative expenses.

 

Otherincome/(expense)

 

Duringthe 26-week period ended July 3, 2010, other income (expense) decreased to$18,000 from $29,000, a decrease of $11,000 or 37.9% as compared to the same26-week period last year. This decrease was due to a reduction in interestincome of $42,000, partially offset by a reduction in interest expense of$31,000.

 

Duringthe 13-week period ended July 3, 2010, other income (expense) decreased to$9,000 from $13,000, a decrease of $4,000 or 30.8%, as compared to the same13-week period last year. This decrease was due to a reduction in interestincome of $19,000, partially offset by a reduction in interest expense of $15,000.

 

Incometaxes

 

Duringthe 26-week period ended July 3, 2010, an income tax benefit of $2.0million was recorded, as compared to an income tax benefit of $432,000 in thesame 26-week period last year. During the 13-week period ended July 3, 2010,the income tax provision increased to $556,000 from $486,000, an increase of$70,000 or 14.4%, as compared to the same 13-week period last year. Theestimated effective tax rate for fiscal 2010 is projected to be 38.3%, ascompared to the fiscal 2009 estimate of 36.5%.

 

Netloss

 

Asa result of the factors discussed above, net loss of $3.2 million and netincome of $897,000 were recorded during the 26 and 13-week periods ended July3, 2010, respectively. In fiscal 2009, net loss of $751,000 and net income of$845,000 were recorded during

 

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the26 and 13-week periods ended June 27, 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 requirements principally through cash flow from operations. During the26-week period ended July 3, 2010, we used $4.0 million of cash flow fromoperations, as compared to $7.0 million generated during the same period infiscal 2009. We expect to continue to meet our operating cash requirementsprimarily through cash flows from operating activities, existing cash andequivalents, and short-term investments. At July 3, 2010, we had workingcapital of $40.1 million, cash and marketable securities of $30.9 million and$2.2 million in third party debt outstanding related to the purchase ofAdrienne Victoria Designs, Inc. (“AVD”). The cash and marketable securities atJuly 3, 2010 included certificates of deposit of $2.5 million that havebeen placed by the Company as collateral against a one year credit facility.

 

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

 
| ** **                                           | ** ** | **26-Weeks Ended**           | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **July 3,********2010** | ** ** | **June 27,********2009** | ** ** |
| Net cash provided by (used in) operating  activities |       | $                            | (4,028,000 | ) | $ | 6,994,000 |   |
| Net cash provided by (used in) investing  activities |       | 2,888,000                    |       | (7,779,000 | ) |
| Net cash used in financing activities                |       | (634,000                     | )          | (1,235,000 | ) |
| Net decrease in cash and equivalents                 |       | $                            | (1,774,000 | ) | $ | (2,020,000 | ) |

 

During the 26-week period ended July 3, 2010,cash and equivalents decreased by $2.0 million, primarily as a result of theoperating loss incurred during fiscal 2010. Decrease in accrued liabilities,accrued compensation and other liabilities ($2.4 million) is principally due topayment on the remaining $1.4 million owed to one of the Company’s formerexecutives, as part of an employee separation agreement entered into in fiscal2009. Seasonal increase in inventories ($3.9 million) coupled with the purchaseof equipment and leasehold improvements ($1.6 million), also contributed to thedecrease in cash and equivalents. These decreases in cash were offset by netmaturities of marketable securities ($5.3 million), combined with a decrease inreceivables and income tax receivables ($4.2 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 $1.1 million, $660,000 and $1.1million at July 3, 2010, January 2, 2010 and June 27, 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 could adverselyaffect our net sales or gross margins, which could adversely affect ourbusiness, financial condition and results of operations.

 

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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.

 

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 15.6% 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 26-week periods ended July 3,2010 and June 27,

 

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2009.The Company recorded an impairment charge of $1.9 million for 23underperforming stores during the fourth quarter of fiscal 2009**.**

 

*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, associated with its AVD reporting unit, is necessary. Thisis reevaluated annually during the fourth quarter, or more frequently ifnecessary. The Company considers many factors in evaluating whether thecarrying value of the recorded goodwill will be recoverable. Factors used todetermine this primarily include declines in stock price and the marketcapitalization in relation to the book value of the Company, discountedprojected cash flows of the reporting unit and valuation of companiescomparable to the reporting unit. No impairment charges were recorded duringthe 26-week periods ended July 3, 2010 and June 27, 2009. An impairmentcharge of $891,000 was recorded against the carrying value of intangible assetsassociated with its wholesale division—Mary L., during the fourth quarter offiscal 2009, related to the discontinuance of Mary L. Pursuant to theemployee separation agreements entered into with two of the Company’s thenofficers, the Company recorded a pre-tax charge of $204,000 during the thirdfiscal quarter of 2009 for the remaining net book value of the non-competeagreements 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 Credit”), which do not expire. TheCompany recognizes sales from Gift Cards when they are redeemed by the customerand income when the likelihood of the Gift Card and Merchandise Credit beingredeemed by the customer is remote (“Gift Card breakage”), since the Companyhas determined that it does not have a legal obligation to remit the unredeemedvalue to the relevant jurisdiction as abandoned property. The Companydetermines Gift Card breakage income based upon historical redemption patternsand the remaining unredeemed percentage at the end of our historical data 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 Credit. The Company recorded $100,000 and $123,000 ofbreakage income during the 26-week periods ended July 3, 2010 and June 27,2009, 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$(131,000) and $(210,000) for the 26-week periods ended July 3, 2010 andJune 27, 2009, respectively. Amounts billed to customers for shipping andhandling fees are included in net sales at the time of shipment. Costs incurredat our stores for shipping and handling are included in cost of sales. TheCompany 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 26-week periods ended July 3, 2010 andJune 27, 2009, the Company received $440,000 and $593,000, respectively, inconnection with activated credit cards. The amount of fee income recorded inconnection with activated credit cards was $313,000 and $197,000 for the26-week periods ended July 3, 2010 and June 27, 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

 

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bank and Visa U.S.A Inc. Theamount of sales royalty income recorded was $174,000 and $145,000 for the26-week periods ended July 3, 2010 and June 27, 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 at non-Cachebusinesses.  A cardholder whose creditcard account is not delinquent, in default or closed will be automaticallyeligible to receive a $25 Cache gift card upon accrual of 2,500 reward points.The issuing bank bears the cost of the reward program and is responsible forthe administration and management of the program.

 

*Income Taxes.*****The Company accounts for income taxes in accordancewith “*Income Taxes*”, Topic 740 ofthe FASB ASC. This guidance requires the Company to recognize deferred taxliabilities and assets for the expected future tax consequences of events thathave been recognized in the Company’s financial statements or tax returns.Under this method, deferred tax liabilities and assets are determined based onthe difference between the financial statement carrying amounts and tax basesof assets and liabilities, using applicable tax rates for the years in whichthe differences are expected to reverse. 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 26-week period ended July 3, 2010, the Company recorded an incometax benefit of $2.0 million, primarily related to the net loss incurred. Whentax contingencies 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 deductions, as well as various taxfiling positions. As of July 3, 2010, the Company has recorded a $301,000reserve, net of federal benefit for potential tax contingencies. As of June 27,2009, the Company reported a reserve balance of $288,000.

 

*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 and competition.  Our business is subject to seasonalinfluences, 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 relatesprimarily to changes in interest rates. The interest rate risk involves theshort-term investment of excess cash in short-term, investment-gradeinterest-bearing securities. These investments are included in cash andequivalents, marketable securities, and certificatesof deposit — restricted on our balance sheet. If there are changes ininterest rates, those changes would affect the investment income we earn onthese investments and, therefore, impact our cash flows and results ofoperations.

 

**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 the effectivenessof any system of disclosure controls and procedures, including the possibilityof human error and the circumvention or overriding of the controls andprocedures.  Accordingly, even effectivedisclosure controls and procedures can only provide reasonable assurance ofachieving their control objectives. Based on this evaluation, our principal executive officer and ourprincipal financial officer concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this Report.

 

Duringthe 13-weeks ended July 3, 2010 there has been no change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) of the Exchange Act) that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II - OTHER INFORMATION**

 

**ITEM 1.  LEGALPROCEEDINGS**

 

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, amongother things, that two former employees of Chico’s that are currently employedby Cache supplied the Company with confidential information and trade secrets.The Company believes that Chico’s filed the lawsuit in an effort to undermineCache in the marketplace. Their allegations were reported in a key tradepublication and in an analyst report. The Company believes the allegations made by Chico’s are without meritand intends to vigorously 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 orassigned lease obligations as of July 3, 2010, January 2, 2010 or June 27,2009.

 

**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. |

 

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* Filed herewith

 

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**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: August 12, 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) |

 

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