**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K**

**FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

| **(MARK ONE)** | ** **                                                                          |
|----------------|-------------------------------------------------------------------------------------|
| **x**          | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES**     |
| ** **     | **EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED  DECEMBER 31, 2005**               |
| **OR**         |
| **o**          | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES** |
| ** **     | **EXCHANGE ACT OF 1934 (No fee required)**                                          |

**Commission file number 0-10345**

**CACHE, INC.**(Exactname of registrant as specified in its charter)

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

 

**Registrant’s telephone number,including area code:**  (212) 575-3200

**Securitiesregistered pursuant to Section 12(b) of the Act: none**

**Securitiesregistered pursuant to Section 12(g) of the Act:**

Common Stock $.01 par value

(Title of Class)

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 theSecurities Act.   Yes o   No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.Yes o   No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to filingrequirements for the past 90 days. Yes x     No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer (as defined in Rule 12b-2of the Exchange Act).

| Large Accelerated Filer o | Accelerated Filer x | Non-Accelerated Filer o |
|---------------------------|---------------------|-------------------------|

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

The aggregate market valueof voting stock held by non-affiliates of the registrant was approximately $218million as of July 1, 2005, the last business day of the registrant’s mostrecently completed second fiscal quarter, based upon the closing sale price of$17.02 of the registrant’s Common Stock as reported on the Nasdaq NationalMarket on such date. Shares of Common Stock held by each executive officer anddirector and by each person who owns 10% or more of the outstanding CommonStock have been excluded in that such persons may be deemed to be affiliates.This determination of affiliate status is not necessarily conclusive for otherpurposes.

As of February 28,2006, 15,770,553 common shares were outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Certaininformation included in the Registrant’s Proxy Statement to be filed inconnection with its 2006 Annual Meeting of Stockholders has been incorporatedby reference into Part III (Items 10, 11, 12, 13, 14 and 15) of thisreport on Form 10-K.

 

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**CACHE, INC.FORM 10-K ANNUAL REPORTFISCAL YEAR ENDEDDECEMBER 31, 2005**

**TABLE OF CONTENTS**

|                   | ** **                                                                                  | **PAGE** |
|-------------------|---------------------------------------------------------------------------------------------|----------|
| **PART I**   |                                                                                        |     |   |   |
| Item 1.           | Business                                                                                    |     | 1 |   |
| Item 1A.          | Risk Factors                                                                                |     | 7 |   |
| Item 1B.          | Unresolved Staff Comments                                                                   |     | 10 |   |
| Item 2.           | Properties                                                                                  |     | 12 |   |
| Item 3.           | Legal Proceedings                                                                           |     | 13 |   |
| Item 4.           | Submission of Matters to a Vote of Security Holders                                         |     | 13 |   |
| **PART II**  |                                                                                        |     |   |   |
| Item 5.           | Market for the Registrant’s Common Stock and Related  Stockholder Matters              |     | 14 |   |
| Item  6.          | Selected  Financial Data                                                                    |     | 15 |   |
| Item 7.           | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |     | 16 |   |
| Item 7A           | Quantitative and Qualitative Disclosures About Market  Risk                                 |     | 24 |   |
| Item 8.           | Financial Statements and Supplementary Data                                                 |     | 24 |   |
| Item 9.           | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure  |     | 25 |   |
| Item 9A           | Controls and Procedures                                                                     |     | 25 |   |
| Item  9B          | Other  Information                                                                          |     | 29 |   |
| **PART III** |                                                                                        |     |   |   |
| Item 10.          | Directors and Executive Officers of the Registrant                                          |     | 29 |   |
| Item 11.          | Executive Compensation                                                                      |     | 29 |   |
| Item 12.          | Security Ownership of Certain Beneficial Owners and  Management                             |     | 29 |   |
| Item 13.          | Certain Relationships and Related Transactions                                              |     | 29 |   |
| Item 14           | Principal Accountant Fees and Services                                                      |     | 29 |   |
| **PART IV**  |                                                                                        |     |   |   |
| Item 15.          | Exhibits and Financial Statement Schedules                                                  |     | 30 |   |

 

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**STATEMENT REGARDING FORWARD LOOKING STATEMENTS**

Except for the historicalinformation and current statements contained in this Annual Report, certainmatters discussed herein, including, without limitation, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” areforward-looking statements that involve risks and uncertainties. Actual resultsand timing of certain events could differ materially from those projected in orcontemplated by forward-looking statements due to a number of factorsincluding, without limitation, industry trends, merchandise and fashion trends,competition, changes in general economic conditions and consumer spendingpatterns, vendor procurement issues and the ability to obtain financing, any ofwhich could cause actual results to differ materially.

**PART I**

**ITEM 1.**                BUSINESS

**GENERAL**

We are a specialty retailer of social occasionsportswear and dresses targeting style-conscious women. We own and operate twoseparate store concepts, Cache and Lillie Rubin, each of which carries its owndistinctive branded merchandise. Cache targets women between the ages of 25 and45 while Lillie Rubin stores offer a more sophisticated line of social occasionapparel targeting women between the ages of 35 and 55.

Both store concepts focuson social occasion dressing designed for contemporary women. Our Cache andLillie Rubin lines extend from elegant eveningwear to our distinctiveday-into-evening sportswear, which encompasses a variety of tops, bottoms anddresses versatile enough to be worn during the day or evening. We operate 267Cache and 39 Lillie Rubin stores (as of December 31, 2005) primarilysituated in central locations in high traffic, upscale malls throughout theUnited States.

**Merchandising**

Our merchandising focuseson providing a selection of sportswear and dresses extending from eleganteveningwear to day-into-evening sportswear. As a result of our short lead timeof four weeks to 12 weeks, we are able to employ a constant process oftest-and-ordering that allows us to restock popular items during the sameseason. We also maintain a key item strategy, providing some popular and coreitems for longer periods to meet ongoing customer demand. New merchandisetypically arrives on a weekly basis at each of our stores, giving our customersa reason to visit our stores frequently. We introduce new floor sets into eachof our stores approximately every six weeks. These new floor sets allowexciting changes in visual merchandising within both our stores and our windowpresentations.

**Merchandise**

We design andmarket three general categories of merchandise:

*Sportswear.**  *Sportswearconsists of related tops and bottoms, versatile enough to be worn during theday or out for evening affairs.

*Dresses.**  *Dressesrange from special occasion long dresses to shorter lengths for cocktail andday-into-evening wear.

*Accessories.**  *Accessoriesconsist primarily of jewelry, belts and handbags intended to complement oursportswear and dress selections.

These categories of merchandise differ in styledepending on whether they are offered in our Cache or Lillie Rubin stores.

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***Cache.******  ***Cache’s average price pointsfor sportswear range from $60 to $300, dresses range from $125 to $450 andaccessories range from $30 to $150. The following table indicates thepercentage of Cache’s net sales by merchandise category for each of the lastthree fiscal years:

| ** **  | ** ** | **52 Weeks**     | ** ** | **53 Weeks**   | ** ** | **52 Weeks**     | ** ** |
|-------------|------------|-----------------------|------------|---------------------|------------|-----------------------|------------|
| ** **  | ** ** | **Ended**             | ** ** | **Ended**           | ** ** | **Ended**             | ** ** |
| ** **  | ** ** | **December 27,** | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
| ** **  | ** ** | **2003**              | ** ** | **2005**            | ** ** | **2005**              | ** ** |
| Sportswear  |       |                  | 67.3       | %                   |       |                  | 69.1       | % |   |   | 68.7 | % |   |
| Dresses     |       |                  | 24.3       | %                   |       |                  | 22.3       | % |   |   | 21.7 | % |   |
| Accessories |       |                  | 8.4        | %                   |       |                  | 8.6        | % |   |   | 9.6 | % |   |
| Total       |       |                  | 100.0      | %                   |       |                  | 100.0      | % |   |   | 100.0 | % |   |

 

***Lillie Rubin.******  ***Price points at Lillie Rubinare approximately 25% to 30% higher than at Cache. The following tableindicates the percentage of Lillie Rubin’s net sales by merchandise categoryfor each of the last three fiscal years:

| ** **  | ** ** | **52 Weeks**     | ** ** | **53 Weeks**   | ** ** | **52 Weeks**     | ** ** |
|-------------|------------|-----------------------|------------|---------------------|------------|-----------------------|------------|
| ** **  | ** ** | **Ended**             | ** ** | **Ended**           | ** ** | **Ended**             | ** ** |
| ** **  | ** ** | **December 27,** | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
| ** **  | ** ** | **2003**              | ** ** | **2005**            | ** ** | **2005**              | ** ** |
| Sportswear  |       |                  | 49.7       | %                   |       |                  | 58.1       | % |   |   | 65.1 | % |   |
| Dresses     |       |                  | 44.9       | %                   |       |                  | 36.6       | % |   |   | 29.6 | % |   |
| Accessories |       |                  | 5.4        | %                   |       |                  | 5.3        | % |   |   | 5.3 | % |   |
| Total       |       |                  | 100.0      | %                   |       |                  | 100.0      | % |   |   | 100.0 | % |   |

 

The percentage of salesrepresented by dresses is typically higher in the first half of the year forboth Cache and Lillie Rubin due to buying for the Easter, wedding and promseasons. The percentage of Lillie Rubin sales represented by sportswear isexpected to increase again in fiscal 2006, as a result of the increasedpresentation of our day-into-evening sportswear collection in all of our LillieRubin stores.

***Design***

Our apparel design and merchandising are organizedaround the spring and fall seasons. Our internal design and merchandising teamis comprised of a designer, buyers who specialize in particular fashionclassifications and executive management personnel. Following the end of aseason, our design team reviews data from that season’s results as well asmarket research, retail trends, trade shows and other resources. Based on thisinformation, our team develops seasonal themes, which will influence ourexclusive designs for the following year.

Approximately nine to twelve weeks prior to a season,we begin to coordinate with external designers at our vendors to selectspecific styles that reflect seasonal themes. In collaboration with ourvendors, Cache’s merchants adjust test garments for color and style to ensureofferings reflect the appropriate balance between fashion content andmarketability. The team then works with its technical department, in-house fitmodel and manufacturers to guarantee its missy fit and high-comfort standardsare met. The Company’s strong relationship with its vendor facilitates a seamlessdesign cycle that enables us to create innovative, exclusive styles and testmerchandise in select stores before full-store roll-outs.

Accessories are designedand manufactured for Cache, by third party vendors, a process which allows ourdesign and merchandising team to focus on its core apparel offerings. TheCompany maintains close relationships with these vendors, and accessoriesofferings are designed to complement seasonal themes and palettes.

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***Planning***

We conduct our planning process based on ourhistorical point-of-sale data, economic trends, seasonality and anticipateddemand based on market tests. We determine at a corporate level the totalnumber of stock keeping units and the composition by product, print, color,style and size. Our vendors are then able to negotiate bulk material purchasewith their suppliers, which we believe enables us to obtain better pricing.

Our merchandising and planning teams determine theappropriate level and type of merchandise per store and communicate thatinformation to our vendors who drop ship the merchandise to each store.Following receipt at our stores the merchandising staff obtains daily salesinformation and store-level inventory generated by our point-of-sale computersystem. Based upon this data management teams make decisions with respect tore-orders, store transfers and markdowns.

In addition to introducing new merchandise, we employa key item strategy whereby we maintain an inventory of core items in everystore. This provides customers with a level of certainty that these items willbe in stock when they visit, rather than rotating out of the store withmerchandise changes. In certain situations, a store that is experiencingparticularly strong sell-throughs relays the information to our management teamand buyers, who in turn may add or adjust new merchandise in response to thisfeedback.

***Sourcing and Distribution***

We employ a sourcing and distribution strategy thatenhances our speed to market, allows us to respond quickly to fashionpreferences and demand, and reduces inventory risk. We purchase the vastmajority of our merchandise from domestic vendors. Sourcing from domesticvendors provides us with short lead times ranging from 4 to 12 weeks from orderto shipment, compared with typically much longer periods for sourcing fromforeign vendors. Our five largest vendors accounted for approximately 37% ofour purchases in fiscal 2005, and our largest vendor accounted for 21% of ourpurchases during this period.

Nearly all of ourmerchandise is drop shipped directly by our vendors to our individual storesrather than sent to a warehouse or distribution center. Drop shippingsignificantly decreases our distribution expenses and reduces the time requiredto deliver merchandise to our stores. If a customer requests an item out ofstock at a specific store, we can ship the merchandise from another store tothe customer by overnight or common carrier, the cost of which typically isborne by the customer.

**Store Operations**

***Store Design and Environment***

Most of our stores range in size from approximately1,500 to 2,500 square feet, with our typical store averaging approximately2,000 square feet. We believe that our relatively smaller store size enables usto create a boutique-like atmosphere by providing a more intimate shoppingenvironment and a higher level of customer service than department stores. Mostof our stores are open during the same hours as the malls in which they arelocated, typically seven days and six nights a week.

We continue to implement our new store designs andlayouts for both our Cache and Lillie Rubin stores to enhance their appeal tothe customer, increase access to merchandise, facilitate movement throughoutthe store and improve our displays. Our new store design emphasizes a modern,sophisticated and well-lit atmosphere with streamlined exteriors and sleekinteriors. In addition, at Cache we have moved the dressing rooms from themiddle of the store to the rear, and check-out locations from the front of thestore to the side. This eliminates barriers to movement throughout the storeand permits greater flexibility in merchandise displays, allowing us to moreeffectively market our clothing.

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We began to remodelexisting stores using this new design during late fiscal 2001. We remodeled 20Cache and two Lillie Rubin stores in fiscal 2005 and expect to remodelapproximately 25 stores in fiscal 2006 and 30 stores in fiscal 2007, as leasescome up for renewal. Most store remodels take from four to six weeks. Duringthis period, we typically utilize temporary locations in the mall near theexisting location so that customers can continue to shop for our merchandise.

***Store Management and Training***

We organize our stores into regions and districts,which are overseen by four regional vice presidents and 34 district managers,with each of our district managers typically responsible for eight to 12stores. We typically staff our stores with two opening employees, three mid-dayemployees and two closing employees.

We seek to provide ourcustomers with superior customer service. To promote this part of our strategy,store managers and co-managers receive both salaries and performance-basedbonuses. We pay sales associates and assistant managers on an hourly basis aswell as performance incentives. From time to time, we offer additionalincentives, such as sales contests, to both management and sales associates.Additionally, we place special emphasis on the recruitment of fashion-consciousand career-oriented sales personnel. We train most new store managers indesignated training stores and train most other new store sales personnel onthe job.

**Existing Store Locations**

As of December 31,2005 we operated 306 stores located in 43 states, as well as in Puerto Rico andthe U.S. Virgin Islands. Of these 267 were Cache stores and 39 were LillieRubin stores. The following tables indicate our stores by location:

***Cachestores:***

| Alabama     |   | 5  |   | Louisiana      |   | 5  |   | Oklahoma       |   | 2  |
|-------------|--------|----|--------|----------------|--------|----|--------|----------------|--------|----|
| Arizona     |   | 4  |   | Maryland       |   | 7  |   | Oregon         |   | 2  |
| Arkansas    |   | 1  |   | Massachusetts  |   | 8  |   | Pennsylvania   |   | 7  |
| California  |   | 29 |   | Michigan       |   | 6  |   | Rhode Island   |   | 2  |
| Colorado    |   | 4  |   | Minnesota      |   | 2  |   | South Carolina |   | 5  |
| Connecticut |   | 4  |   | Mississippi    |   | 1  |   | Tennessee      |   | 6  |
| Delaware    |   | 1  |   | Missouri       |   | 3  |   | Texas          |   | 22 |
| Florida     |   | 35 |   | Nebraska       |   | 2  |   | Utah           |   | 1  |
| Georgia     |   | 9  |   | Nevada         |   | 6  |   | Vermont        |   | 1  |
| Hawaii      |   | 2  |   | New Hampshire  |   | 3  |   | Virginia       |   | 7  |
| Illinois    |   | 9  |   | New Jersey     |   | 12 |   | Washington     |   | 5  |
| Indiana     |   | 2  |   | New Mexico     |   | 2  |   | West Virginia  |   | 1  |
| Iowa        |   | 2  |   | New York       |   | 14 |   | Wisconsin      |   | 3  |
| Kansas      |   | 2  |   | North Carolina |   | 8  |   | Puerto Rico    |   | 1  |
| Kentucky    |   | 3  |   | Ohio           |   | 10 |   | Virgin Islands |   | 1  |

 

***LillieRubin stores:***

| Alabama  |   | 1  |   | Louisiana  |   | 1 |   | North Carolina |   | 1 |
|----------|--------|----|--------|------------|--------|---|--------|----------------|--------|---|
| Arizona  |   | 1  |   | Maryland   |   | 1 |   | Ohio           |   | 1 |
| Colorado |   | 1  |   | Michigan   |   | 2 |   | Pennsylvania   |   | 2 |
| Florida  |   | 11 |   | Minnesota  |   | 1 |   | Tennessee      |   | 1 |
| Georgia  |   | 2  |   | Nevada     |   | 1 |   | Texas          |   | 4 |
| Illinois |   | 2  |   | New Jersey |   | 1 |   | Virginia       |   | 2 |
| Indiana  |   | 1  |   | New York   |   | 1 |   | Washington     |   | 1 |

 

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Thefollowing table indicates the number of stores opened and closed over the pastfive fiscal years:

| ** **           | ** ** | **Stores  Open  Beginning  of** | ** ** | **Stores  Opened  During  Fiscal Year** | ** ** | **Stores  Closed  During  Fiscal Year** | ** ** | **Stores  Open at End of Fiscal Year** | ** ** | ** ** | ** ** | **Total  Square** | ** ** |
|----------------------|------------|---------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|------------|------------|-------------------|------------|
| **Fiscal Year** | ** ** | ** **                      | ** ** | **Fiscal Year**                         | ** ** | **Cache**                                    | ** ** | **L.R.**                                    | ** ** | **Cache**  | ** ** | **L.R.**          | ** ** | **Cache** | ** ** | **L.R.** | ** ** | **Totals** | ** ** | **Footage** | ** ** |
| 2001                 |       |                            | 215        |                                         |       |                                         | 9          |                                        |       |       | 1          |              |       |   | 2 |   |   |   | 1 |   |   |   | 197 |   |   |   | 25 |   |   |   | 222 |   |   | 460,000 |   |
| 2002                 |       |                            | 222        |                                         |       |                                         | 10         |                                        |       |       | 3          |              |       |   | 0 |   |   |   | 1 |   |   |   | 207 |   |   |   | 27 |   |   |   | 234 |   |   | 478,000 |   |
| 2003                 |       |                            | 234        |                                         |       |                                         | 22         |                                        |       |       | 2          |              |       |   | 2 |   |   |   | 1 |   |   |   | 227 |   |   |   | 28 |   |   |   | 255 |   |   | 514,000 |   |
| 2004                 |       |                            | 255        |                                         |       |                                         | 31         |                                        |       |       | 9          |              |       |   | 4 |   |   |   | 0 |   |   |   | 254 |   |   |   | 37 |   |   |   | 291 |   |   | 596,000 |   |
| 2005                 |       |                            | 291        |                                         |       |                                         | 17         |                                        |       |       | 2          |              |       |   | 4 |   |   |   | 0 |   |   |   | 267 |   |   |   | 39 |   |   |   | 306 |   |   | 614,000 |   |
|                      |            |                                 |            |                                              |            |                                              |            |                                             |            |            |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***New Store Development***

We continually review potential new locations forCache and Lillie Rubin stores. We locate our new stores primarily in upscaleshopping malls. When selecting a new site, we target high traffic locationswith suitable demographics and favorable lease economics. When evaluating a newsite, we also look at the principal and anchor stores in the mall, location ofour store within the mall and other specialty stores located in the mall.

We recently expanded to anumber of street and lifestyle locations. We believe these stores can enhanceour potential store base. These stores have generated faster sales growth andhigher profitability. We plan to expand this program in fiscal 2006.

During fiscal 2005, weopened 17 Cache stores and 2 Lillie Rubin stores and closed 4 Cache stores. Infiscal 2006, we intend to open approximately 25 stores consisting of 20 Cacheand 5 Lillie Rubin stores. In January 2006, we closed 5 Cache stores and 1Lillie Rubin store, as part of our ongoing efforts to enhance storeproductivity. In fiscal 2007, we intend to open approximately 30 stores,consisting of 20 Cache and 10 Lillie Rubin stores. Currently 36 of our LillieRubin stores are located in malls that also contain Cache stores, and we intendto locate the substantial majority of our new Lillie Rubin stores in mallscontaining Cache stores.

**Marketing andPromotion**

Historically, we conductedlimited marketing and advertising, relying on our individual store displays,mall locations and word-of-mouth to attract customers. During fiscal 2004 and2005, we used a variety of media to promote our Cache brand and increase sales,consisting primarily of advertisements in magazines such as Harper’s Bazaar,Latina, Lucky, People and Vogue. We also selectively advertise in targetedmarkets, employing various media, such as outdoor billboards and buses,including a large campaign in Grand Central Station in New York. We expect tocontinue to increase our Cache advertising and marketing expenditures. Infiscal 2003, we launched a first-time advertising and marketing campaign forthe Lillie Rubin brand. These increased marketing efforts for both Cache andLillie Rubin continued in fiscal 2005 and are intended to attract new customersand increase sales to existing customers.

We use direct mailcampaigns to both potential and existing Cache customers. Over the past severalyears, we have built a database of over 3.1 million preferred Cache customersfrom our point-of-sale information system and mail 10 to 12 promotions per yearto our targeted customers. We have continued to rapidly expand the Lillie RubinPreferred Customer database over the past year. Our preferred customer trackingsystem enables us to identify and target specific merchandise promotionstargeted at individual customers. We also send e-mail notices to customers andintend to increase our use of e-mail promotions in the future.

Our Cache and Lillie Rubinbrands are supported by visual merchandising, which consists of windowdisplays, front table layouts and various promotions. This type of marketing isan important component of 

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ourmarketing and promotion strategies since our mall locations provide significantfoot traffic. We make decisions regarding store displays and advertising at thecorporate level, ensuring a consistent appearance and message throughout allour stores. In addition, we encourage store management to become involved incommunity affairs, such as participating in local charity fashion shows, toenhance brand recognition and meet potential customers.

We expect to launch ourenhanced customer loyalty program during the second half of fiscal 2006, withthe assistance of our new marketing agency and will gradually roll out theprogram to all our locations. The completion of our store POS system upgradewill allow us the ability to introduce this program to all our stores. Theprogram will be marketed in-store, as well as online and in targetedadvertising media.

We have operated a Cachewebsite, www.cache.com, since August 1999. We continue to enhance featureson this website, which allows customers to purchase merchandise online, viewcurrently available styles and schedule private fittings of merchandise at anyCache store. We have seen an increase in sales at the website over the pastthree years, as website sales have increased from $1.3 million in fiscal 2003to $1.9 million in fiscal 2004 and $2.4 million in fiscal 2005.

**Competition**

Themarket for women’s social occasion sportswear, dresses and accessories ishighly competitive. We compete primarily with specialty retailers of women’sapparel and department stores. Our stores typically compete directly with otherwomen’s apparel stores located in the same mall or a nearby location. Webelieve our target customers choose to purchase apparel based on the followingfactors:

·       Styleand fashion,

·       Fitand comfort,

·       Customerservice,

·       Shoppingconvenience and environment and

·       Value.

We believe that our Cacheand Lillie Rubin stores and merchandise have advantages over our competitors inmeeting these needs.

**Information Systems**

Cache has made aninvestment in technology to improve sales, gain efficiencies and reduceoperating costs. Our information systems integrate all major aspects of ourbusiness, including sales, finance, distribution, purchasing, inventory controland merchandise planning. Our stores utilize a point-of-sale (“POS”) systemwith price look-up capabilities for both inventory and sales transactions. Inaddition, the rollout of a new POS system to all of our stores, with manyenhanced features, was begun in the first quarter of fiscal 2006. We are alsoinstalling a wide area network as part of this upgrade. This new system willallow us to add functionality to our POS system with the ability to capturedebit card transactions, centralize credit authorizations, centralize ourcustomer database, improve promotion transactions handling, and speed upcustomer transaction time. In addition, we will begin to sell gift cards anduse merchandise credit cards in early fiscal 2006.

**Trademarksand Service Marks**

We are the owner in theUnited States of the Cache and Lillie Rubin trademarks and service marks. Thesemarks are registered with the United States Patent and Trademark Office. Eachfederal registration is renewable indefinitely if the mark is still in use atthe time of renewal. Our rights to the “Cache” mark and “Lillie Rubin” mark area significant part of our business. Accordingly, we intend to maintain thesemarks and the related registrations. We are unaware of any material claims ofinfringement or other 

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challengesto our right to use our marks in the United States, although we have successfullybrought infringement claims against third parties in the past.

**Employees**

As of December 31,2005, we had approximately 2,700 employees, of whom approximately 1,225 werefull-time employees and 1,475 were part time employees. None of these employeesis represented by a labor union. We consider our employee relations to besatisfactory.

**AvailableInformation**

We make available on ourwebsite, www.cache.com, under “Investor Relations,” free of charge, ourannual reports on Form 10-K, quarterly reports on Form 10-Q,currents reports on Form 8-K and amendments to those reports as soonas reasonably practicable after we electronically file or furnish suchmaterials to the U.S. Securities and Exchange Commission (“SEC”).

Our Code of BusinessConduct and Ethics, and Board of Directors’ Committee Charters are alsoavailable on our website, under “Corporate Governance”.

**ITEM 1A.**   RISK FACTORS

**Our success dependson our ability to respond rapidly to ever-changing fashion trends and customerdemands.**

Customer tastes and fashion trends change rapidly. Oursuccess depends in large part on our ability to anticipate the fashion tastes ofour customers, to respond to changing fashion tastes and consumer demands, andto translate market trends into fashionable merchandise on a timely basis. Ifwe are unable to anticipate, identify or react to changing styles or trends,our sales may decline and we may be faced with excess inventories. If thisoccurs, we may be forced to rely on additional markdowns or promotional salesto dispose of excess or slow moving inventory. This could also cause us to missopportunities. Both of the foregoing could have a material adverse effect onour business, financial condition and results of operations. In addition, if wemiscalculate fashion tastes and our customers come to believe that we are nolonger able to offer fashions that appeal to them, our brand image may suffer.

**Our growth willdepend on our ability to successfully open and operate new stores. This maystrain our ability to manage our business.**

Our growth strategydepends on our ability to open and operate new stores on a profitable basis.Opening new stores is dependant on a variety of factors including our abilityto:

·       Identifysuitable markets and sites for store locations,

·       Negotiateacceptable lease terms,

·       Hire,train and retain competent store personnel,

·       Maintaina proportion of new stores to mature stores that does not harm existing sales,

·       Fostercurrent relationships and develop new relationships with vendors that arecapable of supplying an increasing volume of merchandise,

·       Manageinventory effectively to meet the needs of new and existing stores in a timelybasis and

·       Expandour infrastructure to accommodate growth.

 

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We opened 24 new stores in fiscal 2003, 40 new storesin fiscal 2004 and 19 new stores during fiscal 2005. Additionally, we plan toopen approximately 25 new stores during fiscal 2006 and approximately 30 newstores in fiscal 2007. We intend to continue to open a significant number ofnew stores in future years and to remodel many of our existing stores as theirleases come up for renewal. Our proposed expansion will place demands on ouroperational, managerial and administrative resources. These increased demandscould have a material adverse effect on our ability to manage our business. Aswe open more stores, our resources may come under greater strain and may proveto be inadequate. If we are unable to open new stores or remodel our existingstores as planned, or if our new stores are unsuccessful, it could have anegative impact on our financial performance. In addition, even if we are ableto open new stores as planned, some of our newly opened stores may not becommercially successful, possibly resulting in their closure at a significantcost to us or a material adverse effect on our financial condition or resultsof operations.

In addition, some of our new stores will be opened inareas of the United States in which we currently have few or no stores. Theexpansion into new markets may present competitive, merchandising andadministrative challenges that are different from those currently encounteredin our existing markets. Any of these challenges could adversely affect ourbusiness, financial condition and results in operations. To the extent our newstore openings are in existing markets, we may experience reduced net salesvolumes in existing stores in those markets.

**We recently made changes to our business strategythat, if not successful, could hurt our profitability.**

We have embarked on a number of strategic initiativesintended to improve our business and profitability. These initiatives includehiring new members of senior management, significantly increasing ouradvertising and promotional activities, transitioning to exclusively Cache andLillie Rubin branded lines of apparel, increasing the number of store openings,remodeling existing stores and reducing the number of items carried in ourstores and vendors from which we source. These initiatives have costsassociated with them, and we cannot assure you that they ultimately will provesuccessful or result in an increase to our sales or profitability.

**Fluctuations incomparable store sales and quarterly results of operations could cause the priceof our common stock to decline substantially.**

Our quarterlyresults of operations for our individual stores have fluctuated in the past andwill continue to fluctuate in the future. Since the beginning of fiscal 2000,our quarterly comparable store sales have ranged from an increase of 13% to adecrease of 5%. We cannot assure you that we will be able to increasecomparable store sales in the future over any given period. Our comparablestore sales and quarterly results of operations are affected by a variety offactors, including:

·       Fashiontrends,

·       Calendarshifts of holiday or seasonal periods,

·       Theeffectiveness of our inventory management,

·       Changesin our merchandise mix,

·       Thetiming of promotional events,

·       Weatherconditions,

·       Changesin general economic conditions and consumer spending patterns and

·       Actionsof competitors or mall anchor tenants.

If our future comparable store sales fail to meet theexpectations of research analysts, then the market price of our common stockcould decline substantially.

8

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**Our success dependsin part on the efforts of our management team, several of whom are relativelynew to our company.**

Our success in implementing our business and growthstrategies depends on the abilities and experience of our management team. Ifwe were to lose the services of one or more members of this team, and inparticular the services of Brian Woolf, our Chief Executive Officer, we may beunable to find a suitable replacement on a timely basis. This in turn couldadversely affect our business, financial condition and results of operations.

Additionally, some members of our management teamrecently joined us and have been working together for a relatively short amountof time. It is possible that we will be unable to integrate the new members ofour management to effectively and efficiently run our business. If we areunable to do so, it could frustrate the execution of our business strategy andhurt our profitability.

**We may be adverselyimpacted at any time by a significant number of competitors.**

The women’s apparel market is highly competitive,fragmented and characterized by low barriers to entry. We compete against adiverse group of retailers, including traditional department stores, nationaland local specialty retail stores, internet-based retailers and mail orderretailers. Many of our competitors, particularly traditional department storesand national specialty retail stores, are larger and have greater resources toexpend on marketing and advertising campaigns. In addition, may of thesecompetitors are already established in markets that we have not yet penetratedand have greater name recognition in general. We cannot assure you that we willcontinue to be successful in competing against existing or future competitors. Ourexpansion into markets served our competitors or entry of new competitors orexpansion of existing competitors into our markets could have a materialadverse effect on our business, financial condition and results of operations.

**Our sales fluctuateon a seasonal basis and are sensitive to economic conditions and consumerspending patterns, leaving our operating results particularly susceptible tochanges in shopping patterns.**

Our net sales and net income are generally highesteach year during our fourth fiscal quarter (October, November, and December)and lowest in our third fiscal quarter (July, August, and September). Salesduring any period cannot be used as an accurate indicator of our annual results.Any significant decrease in sales during the fourth quarter in a given yearwould hurt our profitability.

Our business is also sensitive to changes in overalleconomic conditions and consumer spending patterns. Our growth, sales andprofitability may be adversely affected by unfavorable local, regional,national or international economic conditions, including the effects of war,terrorism or the threat of these events.

**We rely on arelatively small number of vendors, and our success depends on maintaining goodrelationships with these vendors to source our products.**

For fiscal 2005, we purchased approximately 37% of ourmerchandise from our top five vendors, with approximately 21% being purchasedfrom one vendor. The terms of our relationships with our vendors generally arenot contractual and do not assure adequate supply or pricing on a long-termbasis. If one or more of these vendors ceased to sell to us or significantlyaltered the terms of our relationship, we may be unable to obtain merchandisein a timely manner, in the desired styles, fabrics or colors, or at the pricesand volumes we need. This could hurt our sales and our ability to respond tochanging fashion trends. In addition, we have been reducing the number ofvendors with which we do business and anticipate continuing this process. As wecontinue to do so, the risks associated with a vendor ceasing to sell to us mayincrease.

9

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**Some of our merchandise purchased from domesticvendors is produced in foreign facilities. This subjects us to the risks ofinternational trade.**

Many of ourdomestic vendors utilize overseas production facilities. To the extent that ourdomestic vendors rely on overseas sources for a significant portion of theirmaterials or products, any event causing a disruption of imports, includingfinancial or political instability or trade restrictions in the form of tariffsor quotas or both, could negatively affect our business. These adverse impactsmay include an increased cost to us, reductions in the supply of merchandise ordelays in our manufacturing lead time.

**We rely on thirdparties to distribute our merchandise. If these third parties do not adequatelyperform this function, our business would be disrupted.**

The efficient operation of our business depends on theability of our vendors to ship merchandise through third party carriers, suchas United Parcel Service, directly to our individual stores. These carrierstypically employ personnel represented by labor unions and have experiencedlabor difficulties in the past. Due to our reliance on these parties for ourshipments, interruptions in the ability of our vendors to ship our merchandiseor the ability of carriers to fulfill the distribution of merchandise to ourstores could adversely affect our business, financial condition and results ofoperations.

**Our ability to attract new customers to our storesdepends heavily on the success of the shopping malls in which we are located.**

All but a few of our existing stores are located inshopping malls. We cannot control the development of new shopping malls, theavailability or cost of appropriate locations within existing or new shoppingmalls, or the success of individual shopping malls. A significant decrease inshopping mall traffic would have a material adverse effect on our results ofoperations.

**We may be unable to protect our trademarks and otherintellectual property rights.**

We believe that ourtrademarks and service marks are important to our success and our competitiveposition due to their name recognition with our customers. There can be noassurance that the actions we have taken to establish and protect ourtrademarks and service marks will be adequate to prevent imitation of ourproducts by others or to prevent others from seeking to block sales of ourproducts as a violation of the trademarks, service marks and proprietary rightsof others. Also, others may assert rights in, or ownership of, our trademarksand other proprietary rights, and we may be unable to successfully resolvethose types of conflicts to our satisfaction.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

None.

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**ExecutiveOfficers, Directors and Key Employees**

Thefollowing table sets forth information concerning our executive officers,directors and key employees:

| **Name**                                | ** ** | ** ** | ** ** | **Age**  | ** ** | **Position**                                       |
|-----------------------------------------|------------|------------|------------|----------|------------|----------------------------------------------------|
| ***Executive  Officers and Directors*** | * *   |       | * *   | * * |       | * *                                           |
| Brian Woolf                             |       |       | 57         | * * |       | Chief Executive  Officer and Chairman of the Board |
| Thomas E. Reinckens                     |       |       | 52         | * * |       | President, Chief  Operating Officer                |
| Margaret Feeney                         |       |       | 48         | * * |       | Executive Vice President, Chief Financial Officer  |
| Arthur S. Mintz                         |       |       | 60         | * * |       | Director                                           |
| Andrew M. Saul                          |       |       | 59         | * * |       | Director                                           |
| Morton J. Schrader                      |       |       | 74         | * * |       | Director                                           |
| Gene G. Gage                            |       |       | 58         | * * |       | Director                                           |
| ***Other  Key Employees***              | * *   |       | * *   | * * |       | * *                                           |
| Victor Coster                           |       |       | 48         | * * |       | Treasurer and  Secretary                           |
| Lisa Decker                             |       |       | 44         | * * |       | Vice President,  Marketing                         |
| Clifford Gray                           |       |       | 50         | * * |       | Vice President,  Construction                      |
| Joanne Marselle                         |       |       | 45         | * * |       | Vice President,  Planning and Distribution         |
| Caryl Paez                              |       |       | 45         | * * |       | Director,  Information Technologies                |

 

***Executive Officersand Directors***

*Brian Woolf* has served as Chief Executive Officer and Chairmanof the Board since October 2000. From March 1999 to October 2000,Mr. Woolf served as Vice President and General Merchandise Manager for TheLimited. From 1995 to March 1999, Mr. Woolf served as Senior VicePresident and General Merchandise Manager for Caldor. Mr. Woolf has heldvarious management positions within the retail industry over the last 30 years.

*Thomas E. Reinckens* has served as President and Chief Operating Officersince October 2000. Mr. Reinckens joined our company in February 1987and has held various positions throughout his tenure, most recently serving asChief Financial Officer from November 1989 to October 2000 andExecutive Vice President from September 1995 to October 2000. Mr. Reinckenshas over 20 years of retail experience.

*Margaret Feeney*has served as ExecutiveVice President of Finance and Chief Financial Officer since May 2005.Ms. Feeney was promoted to Vice President of Finance in July 2001.Ms. Feeney has served in a variety of financial and operational capacitieswith us since 1992. Prior to joining us, Ms. Feeney served as Manager ofFinancial Analysis and Budgeting for Toys “R” Us and in various financialpositions at Brooks Fashion Stores, a junior specialty chain. Ms. Feeneyhas 20 years of retail experience.

*Arthur S. Mintz* has served as one of our directors since September 2002.Mr. Mintz has served as the President of Bees & Jam, Inc.,an apparel manufacturer, since 1971.

*Andrew M. Saul*has served as one of ourdirectors since 1986. Mr. Saul also served as our Chairman of the Boardfrom February 1993 to October 2000. Mr. Saul is a partner inSaul Partners, an investment partnership, a position he has held since 1986.

*Morton J. Schrader*has served as one of ourdirectors since 1989. Mr. Schrader was the President of Abe SchraderCorp., a manufacturer of women’s apparel, from 1968 through March 1989.Since 1989, he has been active as a real estate broker and is a principal ofPBS Realty Advisors.

*Gene G. Gage*has served as one of ourdirectors since September 2004. Mr. Gage is currently the Presidentand Chief Executive Officer of Gage Associates, a firm which provides financialplanning and 

11

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*servicesto individuals and businesses. He is a certified public accountant, as well asa certified financial planner. He has over 30 years of financial experience.*

***Other Key Employees***

*Victor Coster*has served as Secretarysince July 1991 and as our Treasurer since July 2001. Mr. Costeris responsible for all treasury and tax matters. Mr. Coster joined us in February 1991,and has held various positions, most recently as Controller from February 1997to July 2001. Mr. Coster has over 25 years of experience in financeand accounting and has been a Certified Public Accountant since 1981.

*Lisa Decker*has served as Vice Presidentof Marketing and Advertising since 1998 and was our Director of Marketing from1991 until 1998. She has over 20 years of experience in marketing, advertising,sales promotion and visual merchandising within the retail industry.

*Clifford Gray*has served as VicePresident of Construction since 1999 and was our Operations Manager from 1991to 1999. Prior to joining us, Mr. Gray served as Operations Manager withKids “R” Us.

*Joanne Marselle*has served as VicePresident of Planning and Distribution since 2000 and was our Director ofPlanning from 1990 to 2000. Prior to joining us, Ms. Marselle served atvarious times as a Planning and Distribution Analyst and a MerchandiseCoordinator for both Country Road Australia and Ann Taylor. Ms. Marsellehas over 20 years experience in the areas of planning and distribution.

*Caryl Paez*has served as Directorof Information Technologies since he rejoined our company in 1999. From 1996 to1999, he was Director of Information Technologies for Louis Vuitton Americas. From1992 to 1996, he served as our Director of Management Systems and from 1989 to1992, as our Manager of Point of Sales Systems.

**ITEM 2.**                PROPERTIES

All but a few of our 306 stores are located inshopping malls. The substantial majority of our stores contain between 1,500and 2,500 square feet of space, with the typical store averaging 2,000 squarefeet. All of our stores are in leased facilities, and we typically negotiateour rental agreements based on our portfolio of store locations with aparticular landlord rather than on an individual basis. Rental terms usuallyinclude a fixed minimum rent plus a percentage rent based on sales in excess ofa specified amount. In addition, we generally are required to pay a charge forcommon area maintenance, utility consumption, promotional activities and/oradvertising, insurance and real estate taxes. Many leases contain fixedescalation clauses. Most leases contain leasehold improvement reimbursementsfrom landlords and/or rent holidays. In recognizing landlord incentives andminimum rent expenses, the Company amortizes the charges on a straight linebasis over the lease term.

Our leases expire at various dates through 2019. Thefollowing table indicates the periods during which our leases expire.

| **Fiscal Years** | ** ** | ** ** | ** ** | **Cache** | ** ** | **Lillie Rubin** | ** ** | **Totals** | ** ** |
|-----------------------|------------|------------|------------|-----------|------------|-----------------------|------------|------------|------------|
| Present-2008          |       |       | 55         |      |       |                  | 5          |       |       |   | 60 |   |   |
| 2009-2011             |       |       | 43         |      |       |                  | 7          |       |       |   | 50 |   |   |
| 2012-2014             |       |       | 91         |      |       |                  | 14         |       |       |   | 105 |   |   |
| 2015-2017             |       |       | 77         |      |       |                  | 12         |       |       |   | 89 |   |   |
| 2018-2019             |       |       | 1          |      |       |                  | 1          |       |       |   | 2 |   |   |
| Totals                |       |       | 267        |      |       |                  | 39         |       |       |   | 306 |   |   |

* *

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Our corporate office is a 20,000 square foot facilitylocated at 1440 Broadway in New York City. We lease this space under a 10-yearlease through 2013 at a rate of approximately $543,000 per year.

We contract for space in awarehouse in New York on an as-needed basis to serve as a staging area for newstore inventories and fixtures.

**ITEM 3.**                LEGALPROCEEDINGS

We are party to variouslawsuits arising in the ordinary course of our business. Management does notbelieve it is reasonably possible that resolution of these matters will resultin a material loss.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

Cache, Inc. held its annual meeting ofshareholders at its headquarters in New York, New York on November 10,2005. Of the 15,752,553 shares outstanding as of the record date, 15,250,454shares were represented by proxy at the meeting. Proxies were solicited byCache pursuant to Regulation 14A under the Securities Exchange Act of 1934, asamended. At the meeting, Cache’s shareholders voted on the following matters:

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

| ** **          | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------|------------|------------|------------|--------------|------------|
| Andrew M. Saul      |       | 14,696,096 |       | 554,358      |       |
| Brian Woolf         |       | 14,991,455 |       | 258,999      |       |
| Gene G. Gage        |       | 15,087,655 |       | 162,799      |       |
| Arthur S. Mintz     |       | 15,197,590 |       | 52,864       |       |
| Morton J.  Schrader |       | 15,062,563 |       | 187,891      |       |

** **

(2)         Proposalto ratify the appointment of Deloitte and Touche LLP as the Company’sindependent auditors for the fiscal year ended December 31, 2005.

| **For**    | ** ** | **Against** | ** ** | **Abstain** |
|------------|------------|-------------|------------|-------------|
| 15,243,448 |       | 5,184       |       | 1,822       |

 

 

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**PART II**

**ITEM 5.**                MARKETFOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

a.                  Theprincipal market on which the Company’s Common Stock is traded is the NASDAQNational Market System. The stock symbol is “CACH”. The price range of the highand low bid information for the Company’s Common Stock during 2004 and 2005, byfiscal quarters, are as follows:

| **Fiscal Period** | ** ** | ** ** | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2005** | ** ** |
|------------------------|------------|------------|------------|----------------------|------------|----------------------|------------|
| ** **             | ** ** | **High**   | ** ** | **Low**              | ** ** | **High**             | ** ** | **Low** | ** ** |
| First Fiscal Quarter   |       | $          | 21.59      |                 | $          | 12.50                |       | $ | 18.05 |   | $ | 13.33 |   |
| Second Fiscal  Quarter |       | $          | 23.63      |                 | $          | 13.39                |       | $ | 17.69 |   | $ | 10.90 |   |
| Third Fiscal  Quarter  |       | $          | 15.85      |                 | $          | 11.31                |       | $ | 18.52 |   | $ | 13.71 |   |
| Fourth Fiscal Quarter  |       | $          | 18.53      |                 | $          | 13.69                |       | $ | 19.09 |   | $ | 14.47 |   |

 

Such over-the-counter market quotations reflectinter-dealer prices, without retail mark-up, markdown or commission and may notnecessarily represent actual transactions.

b.                 As of February 28,2006, there were approximately 315 registered holders of record of the Company’sCommon Stock.

c.                  The Company hasnever paid cash dividends on its common stock. Payment of dividends is withinthe discretion of the Company’s Board of Directors.

d.                 Thefollowing table summarizes our equity compensation plans as of December 31,2005:

| **Plan Category**                                      | ** ** | ** ** | ** **      | **Number of  securities to be  issued upon  exercise of  outstanding  options** | ** ** | **Weighted average  exercise  price of  outstanding  options** | ** **   | **Number of  securities remaining  available for  the future issuance  under equity  compensation plans  (excluding securities  reflected in  column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------|-----------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**    | ** **      | **(b)**                                                                                                  | ** ** | **(c)**                                                                  | ** **   |
| Equity  compensation plans approved by security holders     |       |       | 1,481,500       |                                                                                                     |       |                                                                     | $            | 10.85                                                                                                                                                                                                         |       |   |   | 210,532 |   |   |
| Equity  compensation plans not approved by security holders |       |       | 0               |                                                                                                     |       |                                                                     | 0            |                                                                                                                                                                                                          |       |   | 0 |   |   |
| Total                                                       |       |       |  1,481,500 |                                                                                                     |       |                                                                     |  $10.85 |                                                                                                                                                                                                          |       |   | 210,532 |   |   |

 

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**ITEM6.**                SELECTED FINANCIALDATA

Thefollowing Selected Consolidated Financial Data should be read in conjunctionwith the Company’s Consolidated Financial Statements and Notes thereto.

| ** **                                     | ** ** | **52 WEEKS ENDED**                                                               | ** ** | **53 WEEKS  ENDED** | ** ** | **52 WEEKS  ENDED** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                     | ** ** | **DEC. 29,**                                                                          | ** ** | **DEC. 28,**        | ** ** | **DEC. 27,**        | ** ** | **JAN. 1,** | ** ** | **DEC. 31,** | ** ** |
| ** **                                     | ** ** | **2001**                                                                                   | ** ** | **2002**                 | ** ** | **2003**                 | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share and operating data)** | ** ** |
| STATEMENT OF  INCOME DATA:                     |       |                                                                                       |       |                     |       |                     |       |   |   |   |   |   |   |   |   |
| NET SALES                                      |       | $                                                                                          | 180,750    |                     | $          | 200,315                  |       | $ | 216,256 |   |   | $ | 247,300 |   |   |   | $ | 266,345 |   |   |
| COST OF SALES                                  |       | 117,201                                                                                    |       | 116,490                  |       | 120,731                  |       |   | 135,745 |   |   |   | 144,984 |   |   |
| GROSS PROFIT                                   |       | 63,549                                                                                     |       | 83,825                   |       | 95,525                   |       |   | 111,555 |   |   |   | 121,361 |   |   |
| STORE OPERATING EXPENSES                       |       | 51,285                                                                                     |       | 57,322                   |       | 63,546                   |       |   | 76,466 |   |   |   | 85,529 |   |   |
| GENERAL AND ADMINISTRATIVE EXPENSES            |       | 8,929                                                                                      |       | 12,190                   |       | 14,074                   |       |   | 14,221 |   |   |   | 15,824 |   |   |
| OPERATING INCOME                               |       | 3,335                                                                                      |       | 14,313                   |       | 17,905                   |       |   | 20,868 |   |   |   | 20,008 |   |   |
| OTHER INCOME, (net)(1)                         |       | 1,858                                                                                      |       | 260                      |       | 273                      |       |   | 459 |   |   |   | 1,072 |   |   |
| INCOME BEFORE INCOME TAXES                     |       | 5,193                                                                                      |       | 14,573                   |       | 18,178                   |       |   | 21,327 |   |   |   | 21,080 |   |   |
| INCOME TAX PROVISION                           |       | 1,895                                                                                      |       | 5,632                    |       | 7,089                    |       |   | 8,030 |   |   |   | 7,675 |   |   |
| NET INCOME                                     |       | $                                                                                          | 3,298      |                     | $          | 8,941                    |       | $ | 11,089 |   |   | $ | 13,297 |   |   |   | $ | 13,405 |   |   |
| EARNINGS PER  SHARE:                           |       |                                                                                       |       |                     |       |                     |       |   |   |   |   |   |   |   |   |
| BASIC EARNINGS PER SHARE                       |       | $                                                                                          | 0.24       |                     | $          | 0.66                     |       | $ | 0.78 |   |   | $ | 0.85 |   |   |   | $ | 0.85 |   |   |
| DILUTED EARNINGS PER SHARE                     |       | $                                                                                          | 0.24       |                     | $          | 0.62                     |       | $ | 0.75 |   |   | $ | 0.83 |   |   |   | $ | 0.83 |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING:          |       |                                                                                       |       |                     |       |                     |       |   |   |   |   |   |   |   |   |
| BASIC                                          |       | 13,637                                                                                     |       | 13,650                   |       | 14,256                   |       |   | 15,589 |   |   |   | 15,726 |   |   |
| DILUTED(2)                                     |       | 13,844                                                                                     |       | 14,448                   |       | 14,721                   |       |   | 16,004 |   |   |   | 16,150 |   |   |
| STORE  DATA:                                   |       |                                                                                       |       |                     |       |                     |       |   |   |   |   |   |   |   |   |
| NUMBER OF STORES OPEN AT END OF PERIOD         |       | 222                                                                                        |       | 234                      |       | 255                      |       |   | 291 |   |   |   | 306 |   |   |
| AVERAGE SALES PER SQUARE FOOT(3)               |       | $                                                                                          | 408        |                     | $          | 438                      |       | $ | 450 |   |   | $ | 461 |   |   |   | $ | 450 |   |   |
| COMPARABLE STORE SALES INCREASE(4)             |       | 0                                                                                          | %          | 7                        | %          | 3                        | %          |   | 5 | % |   |   | 4 | % |   |
| TOTAL SQUARE FOOTAGE                           |       | 460                                                                                        |       | 478                      |       | 514                      |       |   | 596 |   |   |   | 614 |   |   |
| STATEMENT OF  BALANCE SHEET AND OTHER DATA:    |       |                                                                                       |       |                     |       |                     |       |   |   |   |   |   |   |   |   |
| WORKING CAPITAL                                |       | $                                                                                          | 20,197     |                     | $          | 26,654                   |       | $ | 41,034 |   |   | $ | 53,469 |   |   |   | $ | 63,786 |   |   |
| TOTAL ASSETS                                   |       | $                                                                                          | 61,182     |                     | $          | 76,480                   |       | $ | 104,067 |   |   | $ | 132,028 |   |   |   | $ | 150,884 |   |   |
| TOTAL LONG-TERM DEBT                           |       | —                                                                                     |       | —                   |       | —                   |       |   | — |   |   |   | — |   |   |
| STOCKHOLDERS' EQUITY                           |       | $                                                                                          | 36,306     |                     | $          | 45,292                   |       | $ | 65,142 |   |   | $ | 84,840 |   |   |   | $ | 98,996 |   |   |
| RATIO OF CURRENT ASSETS TO CURRENT LIABILITIES |       | 2.03:1                                                                                     |       | 2.07:1                   |       | 2.41:1                   |       |   | 2.75:1 |   |   |   | 2.91:1 |   |   |
| INVENTORY TURNOVER RATIO                       |       | 5.07:1                                                                                     |       | 5.28:1                   |       | 4.94:1                   |       |   | 4.60:1 |   |   |   | 4.46:1 |   |   |
| CAPITAL EXPENDITURES                           |       | $                                                                                          | 6,220      |                     | $          | 9,033                    |       | $ | 15,628 |   |   | $ | 21,753 |   |   |   | $ | 15,490 |   |   |
| DEPRECIATION AND AMORTIZATION                  |       | $                                                                                          | 5,247      |                     | $          | 5,519                    |       | $ | 6,395 |   |   | $ | 8,232 |   |   |   | $ | 9,779 |   |   |
| BOOK VALUE PER  SHARE                          |       | $                                                                                          | 2.66       |                     | $          | 3.32                     |       | $ | 4.35 |   |   | $ | 5.42 |   |   |   | $ | 6.28 |   |   |

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(1)     Other income in fiscal 2001 included $1,518,000 fromthe settlement of a trademark litigation claim undertaken against a thirdparty, net of professional fees related to the lawsuit. Other income generallyconsists of interest income.

(2)     Diluted weighted average shares for the fiscal yearsended December 29, 2001, December 28, 2002, December 27, 2003, January 1,2005 and December 31, 2005 include 207,000, 798,000, 465,000, 415,000 and424,000, shares respectively, due to the potential exercise of stock optionsthat were outstanding and exercisable during those years.

(3)     Average sales per square foot are calculated bydividing net sales by the weighted average store square footage available.

(4)     Comparable store sales data is calculated based on thenet sales of stores open at least 12 full months at the beginning of the periodfor which the data are presented.

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**ITEM7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**General**

We are a specialty retailer of social occasionsportswear and dresses targeting style-conscious women. We own and operate twoseparate store concepts, Cache and Lillie Rubin, each of which carries its owndistinctive branded merchandise. Cache targets women between the ages of 25 and45 while Lillie Rubin stores offer a more sophisticated line of social occasionapparel targeting women between the ages of 35 and 55.

Both store concepts focus on social occasion dressingdesigned for contemporary women. Our Cache and Lillie Rubin lines extend fromelegant eveningwear to our distinctive day-into-evening sportswear, whichencompasses a variety of tops, bottoms and dresses versatile enough to be wornduring the day or evening. We operate 267 Cache and 39 Lillie Rubin stores (asof December 31, 2005), primarily situated in central locations in hightraffic, upscale malls throughout the United States.

**Management Overview**

Fiscal 2005 represents the company’s fifteenthconsecutive profitable year.

The overall success of fiscal 2005 was not withoutchallenges. The first half of fiscal 2005 was a pivotal period for the Company.We expanded our casual fashion assortments, while reducing our key item anddress business. These repositioning efforts created lower gross margins for thefirst half, gross profits as a percentage of net sales in the first halfdecreased to 44.3% from 46.0% in fiscal 2004. During the second half of fiscal2005, our consumer responded well to the increased penetration of casualfashions versus basics. Also, we reduced the quantity per style being offered, whichwe believe created a greater sense of urgency for the customer. The second halfgross profit margin increased to 46.8% in fiscal 2005 from 44.3% in fiscal2004.

In fiscal 2006, the Company will focus on its sourcingstrategy and has already hired an Executive Vice President of Production andSourcing to lead this initiative. The merchandising team had in the past alsobeen responsible for sourcing. We believe that having a separate arearesponsible for this integral process will enhance consistent flow and qualityof product.

The company opened 19 stores in fiscal 2005, 17 Cacheand 2 Lillie Rubin stores and closed 4 Cache stores. Operating cash flow fundedall store openings. In fiscal 2006, we intend to open approximately 25 storesconsisting of 20 Cache and 5 Lillie Rubin stores, also intended to be funded byoperating cash flow. In fiscal 2005, the company remodeled 18 Cache stores and2 Lillie Rubin, approximately 60% of the chain is now in the new format.

In Spring 2006, the Company intends to roll-out a newPOS system to all locations. The new systems will allow the Company to then goforward with a customer loyalty program in late 2006, which will link to theCompany’s direct marketing.

The Company is optimistic about its opportunity forsuccess in fiscal 2006. Management will continue to offer the consumer the mostcurrent fashion trends in a boutique setting with high levels of customerservice.

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We usea number of key indicators of financial condition and operating performance toevaluate the performance of our business, some of which are set forth in thefollowing table:

| ** **                           | ** ** | **52 Weeks Ended** | ** ** | **53 Weeks Ended** | ** ** | **52 Weeks Ended** | ** ** |
|--------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **December 27,**        | ** ** | **January 1,**          | ** ** | **December 31,**        | ** ** |
| ** **                           | ** ** | **2003**                     | ** ** | **2005**                     | ** ** | **2005**                     | ** ** |
| **Operating Results**                |       |                         |       |                         |       |                         |       |   |   |   |   |   |   |
| Total store  count, at end of period |       |                         | 255        |                         |       |                         | 291        |   |   |   | 306 |   |   |
| Net sales growth                     |       |                         | 8.0        | %                            |       |                         | 14.3       | % |   |   | 7.7 | % |   |
| Comparable store  sales growth       |       |                         | 3.0        | %                            |       |                         | 5.0        | % |   |   | 4.0 | % |   |
| Net sales per  square foot           |       |                         | $          | 450                          |       |                         |       | $ | 461 |   |   |   | $ | 450 |   |   |
| Total square footage (in  thousands) |       |                         | 514        |                         |       |                         | 596        |   |   |   | 614 |   |   |
|                                      |            |                              |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |

 

*Netsales.*   Net sales consist of sales fromcomparable stores and non-comparable stores. A store is not included incomparable store sales until the first day of the fiscal month following thetwelfth full month of sales. Non-comparable store sales include sales generatedat new stores prior to the period when they are considered comparable storesand sales generated from stores that we have since closed.

*Shippingand handling.*   Amounts billed to customers forshipping and handling fees are included in net sales at the time of shipment. Costsincurred for shipping and handling are included in cost of sales.

*Costof sales.*   Cost of sales includes the cost ofmerchandise, cost of freight from vendors, costs incurred for shipping andhandling, payroll for our design, buying and merchandising personnel and storeoccupancy costs. Store occupancy costs include rent, contingent rents, commonarea maintenance and real estate taxes.

*Storeoperating expenses.**  *Storeoperating expenses include payroll, payroll taxes, health benefits, insurance,credit card processing fees, depreciation, licenses and taxes as well asmarketing and advertising expenses.

*General and administrativeexpenses.**  *Generaland administrative expenses include district and regional manager payroll,other corporate personnel payroll and employee benefits, employment taxes,insurance, legal and other professional fees and other corporate levelexpenses. Corporate level expenses are primarily attributable to our corporateheadquarters in New York.

**CriticalAccounting Policies and Estimates**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires the appropriate application of certain accounting policies, many ofwhich requires us to make estimates and assumptions about future events andtheir impact on amounts reported in our financial statements and related notes.Since future events and their impact cannot be determined with certainty, theactual results will inevitably differ from our estimates. Such differencescould be material to the financial statements.

Our accounting policies are more fully described inNote 1 to the financial statements, located elsewhere in this document. We haveidentified certain critical accounting policies which are described below.

*Inventories.*   Ourinventories are valued at lower of cost or market using the retail inventorymethod. Under the retail method (“RIM”), the valuation of inventories at costand the resulting gross margins are calculated by applying a calculated cost toretail ratio to the retail value of inventories. RIM is an averaging methodthat had been widely used in the retail industry due to its practicality. Additionally,it is recognized that the use of RIM will result in valuing inventories at thelower of cost or market if markdowns are currently taken as a reduction of theretail value of inventories. Inherent in the RIM calculation are certain 

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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) historicalexperience and (iii) our expectations as to future sales. We do notanticipate any significant change in our markdown strategy that would cause asignificant change in our earnings. We believe that our RIM provides aninventory valuation, which results in a carrying value at the lower of cost ormarket.

*Finite-long lived assets.*   TheCompany’s judgment regarding the existence of impairment indicators is based onmarket and operational performance. We assess the impairment of long-livedassets, primarily fixed assets, whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Factors we considerimportant which could trigger an impairment review include the following:

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

·       significantnegative industry or economic trends;

·       storeclosings; or

·       underperformingbusiness trends.

In the evaluation of the fair value and futurebenefits of finite long-lived assets, we perform an analysis by store of theanticipated undiscounted future net cash flows of the related finite long-livedassets. If the carrying value of the related asset exceeds the undiscountedcash flows, the carrying value is reduced to its fair value. Various factorsincluding future sales growth and profit margins are included in this analysis.To the extent these future projections or strategies change, the conclusionregarding impairment may differ from the current estimates. No impairmentcharges were incurred in fiscal 2003, 2004 and 2005, respectively.

*SelfInsurance.**  *We are self-insuredfor losses and liabilities related primarily to employee health and welfareclaims. Losses are accrued based upon our estimates of the aggregate liabilityfor claims incurred using certain actuarial assumptions followed in theinsurance industry and based on Company experience. Adjustments to earningsresulting from changes in historical loss trends have been insignificant for fiscal2003, 2004 and 2005. Further, we do not anticipate any significant change inloss trends, settlements or other costs that would cause a significant changein our earnings.

*RevenueRecognition.*   Sales are recognized at the “pointof 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 or credits toearnings resulting from revisions to estimates on our sales return provisionwere approximately $66,000, $20,000 and $(29,000) for fiscal 2003, 2004 and2005, respectively. Amounts billed to customers for shipping and handling feesare included in net sales at the time of shipment. Costs incurred for shippingand handling are included in cost of sales.

*IncomeTaxes.**  *The Company accounts for income taxes inaccordance with SFAS No. 109, “*Accountingfor Income Taxes*.”  Thisstatement requires the Company to recognize deferred tax liabilities and assetsfor the expected future tax consequences of events that have been recognized inthe Company’s financial statements or tax returns. Under this method, deferredtax liabilities 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. The Company reserves for tax contingencies when it is probable thata liability has been incurred and the 

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contingent amount isreasonably estimable. These reserves are based upon the Company’s bestestimation of the potential exposures associated with the timing and amount ofdeductions as well as various tax filing positions. Due to the complexity ofthese examination issues, $325,000 has been accrued to date.

*Seasonality.**  *We experience seasonal andquarterly fluctuations in net sales and operating income. Quarterly results ofoperations may fluctuate significantly as a result of a variety of factors,including the timing of new store openings, fashion trends and shifts in timingof certain holidays. Our business is subject to seasonal influences,characterized by highest sales during the fourth quarter (October, November andDecember) and lowest sales during the third quarter (July, August andSeptember).

**Results of Operations**

The following table sets forth our operating results,expressed as a percentage of net sales.

| ** **                           | ** ** | **52 Weeks**     | ** ** | **53 Weeks**   | ** ** | **52 Weeks**     | ** ** |
|--------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **Ended**             | ** ** | **Ended**           | ** ** | **Ended**             | ** ** |
| ** **                           | ** ** | **December 27,** | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
| ** **                           | ** ** | **2003**              | ** ** | **2005**            | ** ** | **2005**              | ** ** |
| **Operating Results**                |       |                  |       |                |       |                  |       |   |   |   |   |   |   |
| Net sales                            |       |                  | 100.0      | %                   |       |                  | 100.0      | % |   |   | 100.0 | % |   |
| Cost of sales                        |       |                  | 55.8       |                |       |                  | 54.9       |   |   |   | 54.4 |   |   |
| Gross profit                         |       |                  | 44.2       |                |       |                  | 45.1       |   |   |   | 45.6 |   |   |
| Store operating  expenses            |       |                  | 29.4       |                |       |                  | 30.9       |   |   |   | 32.1 |   |   |
| General and  administrative expenses |       |                  | 6.5        |                |       |                  | 5.8        |   |   |   | 5.9 |   |   |
| Operating income                     |       |                  | 8.3        |                |       |                  | 8.4        |   |   |   | 7.5 |   |   |
| Other income  (net)                  |       |                  | 0.1        |                |       |                  | 0.2        |   |   |   | 0.4 |   |   |
| Income before  income taxes          |       |                  | 8.4        |                |       |                  | 8.6        |   |   |   | 7.9 |   |   |
| Income taxes                         |       |                  | 3.3        |                |       |                  | 3.2        |   |   |   | 2.9 |   |   |
| Net income                           |       |                  | 5.1        | %                   |       |                  | 5.4        | % |   |   | 5.0 | % |   |

 

**52Weeks Ended December 31, 2005 (Fiscal 2005) Compared to 53 Weeks EndedJanuary 1, 2005 (Fiscal 2004)**

*Netsales.**  *Netsales increased to $266.3 million from $247.3 million, an increase of $19.0million, or 7.7%, over the prior fiscal year. Fiscal 2004 net sales included afifty-third week; on a comparable basis, assuming a fifty-two week year in bothperiods, total sales would have risen by approximately 10.0% in fiscal 2005.The actual increase in fiscal 2005 net sales as compared to fiscal 2004reflects $10.1 million of additional net sales primarily due to a 4% increasein comparable store sales. Comparable store sales were higher in the secondhalf of fiscal 2005, rising 5.4%, as compared to a 3.1% increase during thefirst half of fiscal 2005. This improvement resulted from a change in themerchandise assortment in the second half of fiscal 2005, to reflect a greaterproportion of fashion-forward merchandise. The increase in full year fiscal2005 sales was also partially attributable to the increase in accessory sales,which increased to 9.6% of total sales for Cache stores in fiscal 2005, from8.6% of sales in fiscal 2004. The remainder of the increase in sales was theresult of additional net sales from non-comparable stores and new stores. Webelieve our new store expansion, planned at approximately 25 new stores infiscal 2006, will help to increase sales during the next fiscal year.

*Grossprofit.**  *Grossprofit increased to $121.4 million from $111.6 million, an increase of $9.8million, or 8.8%, over the prior fiscal year. As a percentage of net sales,gross profit increased to 45.6% from 45.1%. This increase in gross profit wasthe combined result of higher net sales and an increase in gross profitmargins, due to improved inventory management, which led to an increase ininitial markup as compared to fiscal 2004. Partially offsetting the increase ingross margins was an increase in occupancy costs, which rose an additional 0.6%of sales in fiscal 2005 as compared to fiscal 2004, primarily due to the 

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increase in new storesopened in late 2004 and during 2005. We believe it generally takes three yearsfor new stores to reach maturity levels, which provide positive leverage foroccupancy costs. We estimate that excluding the fifty-third week from fiscal2004 results, gross profit would have risen by an additional approximately 0.8%in fiscal 2005.

We will seek to increase gross margin rates in fiscal2006 and beyond by establishing our own in-house production department. To thatend, in March 2006 we hired a Vice President of Production and Sourcing,to assist in this effort.

*Storeoperating expenses.**  *Storeoperating expenses increased to $85.5 million from $76.5 million, an increaseof $9.0 million, or 11.8%, over the prior fiscal year. This was due primarilyto an increase in the total number of new stores open. As a percentage of netsales, store operating expenses increased to 32.1% from 30.9%, primarily due toan increase in payroll expense of $3.3 million, an increase in licenses andtaxes of $1.0 million (rising to 1.7% of net sales in fiscal 2005, ascompared to 1.4% in fiscal 2004)  and anincrease in depreciation expense of $2.8 million (rising to 3.5% of net salesin fiscal 2005, as compared to 2.6% in fiscal 2004). The increases indepreciation and taxes were partially attributable to the increase in newstores, as well as an increase in store remodels. Excluding the fifty-thirdweek from fiscal 2004 results, we estimate that store operating expenses wouldhave risen by approximately 1.5% in fiscal 2005. We anticipate that storeoperating expenses will decrease, as a percent of net sales in future years, ascomparable store sales rise in our newer locations.

*Generaland administrative expenses.**  *Generaland administrative expenses increased to $15.8 million from $14.2 million, anincrease of $1.6 million or 11.3% from the prior fiscal year. As a percentageof net sales, general and administrative expenses increased to 5.9% from 5.8%.This increase was primarily attributable to increase in corporate level payrollof $520,000, as well as an increase in incentive compensation expense of$680,000 (rising to 0.5% of net sales in fiscal 2005 as compared to 0.2% infiscal 2004) and was partially offset by a reduction in travel expense of$297,000 (decreasing to 0.7% of net sales in fiscal 2005 as compared to 0.8% infiscal 2004). Excluding the fifty-third week from fiscal 2004 results, weestimate that general and administrative expenses would have been 5.7% of netsales.

*Otherincome.*   Other income increased to $1.1 millionfrom $459,000, primarily attributable to higher average cash balances andhigher interest rates in fiscal 2005, as compared to fiscal 2004. Other incomegenerally consists of interest income. We expect interest income to grow in thefuture due to stronger cash flows from operations.

*Incometaxes.*   Income taxesdecreased to $7.7 million from $8.0 million, a decrease of $355,000, below thesame period last year. The overall effective tax rate decreased to 36.4% infiscal 2005 from 37.7% in fiscal 2004. The decrease in the overall effectiveincome tax rate is primarily attributable to a reversal of overaccrued stateincome taxes. An increase in tax-free interest from municipal bond investmentsin the first half of fiscal 2005 also contributed to the reduction in effectiverate during fiscal 2005. Refer to Note 9 to the Consolidated FinancialStatements for additional details of the income tax provision.

***Net income.***   Asa result of the foregoing, net increased to $13.4 million from $13.3 million,as compared to the same period last year.

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**53 Weeks Ended January 1,2005 (Fiscal 2004) Compared to 52 Weeks Ended December 27, 2003 (Fiscal 2003)**

*Netsales.**  *The results of the Company for fiscal 2004were favorably impacted by the extra reporting week. Net sales increasedto $247.3 million from $216.3 million, an increase of $31.0 million, or 14.3%,over the prior fiscal year, for the 53 week period ended January 1, 2005as compared to the 52 week period in Fiscal 2003. The one week of additionalsales in Fiscal 2004 was approximately 2.7% of the total sales increase. Thesales increase reflects $10.1 million of additional net sales as a result of a5% increase in comparable store sales. The remainder of the increase was theresult of additional net sales from non-comparable stores.

*Grossprofit.**  *Grossprofit increased to $111.6 million from $95.5 million, an increase of $16.1million, or 16.9%, over the prior fiscal year. This increase was the combinedresult of higher net sales, partially due to the additional one week of salesin the Fiscal 2004 period and increased gross profit margins. As a percentageof net sales, gross profit increased to 45.1% from 44.2%. This increase as apercentage of net sales was primarily due to higher initial margins resultingfrom sourcing improvements.

*Storeoperating expenses.**  *Storeoperating expenses increased to $76.5 million from $63.5 million, an increaseof $13.0 million, or 20.5%, over the prior fiscal year. As a percentage of netsales, store operating expenses increased to 30.9% from 29.4%, primarily due tothe increase in stores opened over the past two years and an increase inmarketing and advertising expenses of $1.8 million. Store operating expenses inFiscal 2004 were also higher than Fiscal 2003, due to the additional one weekperiod included in Fiscal 2004 results.

*Generaland administrative expenses.**  *Generaland administrative expenses increased to $14.2 million from $14.1 million, anincrease of $147,000 or 1.0%, above the prior fiscal year. As a percentage ofnet sales, general and administrative expenses decreased to 5.8% from 6.5%,primarily due to lower incentive compensation expense in Fiscal 2004 costs. Generaland administrative expenses in Fiscal 2004 were also slightly higher thanFiscal 2003, due the additional one week period included in Fiscal 2004results.

*Otherincome.*   Other income increased to $459,000 from$273,000, in the prior fiscal year, primarily attributable to higher averagecash balances and higher interest rates during fiscal 2004, as compared tofiscal 2003.

*Incometaxes.*   Income taxes increased to $8.0 millionfrom $7.1 million, an increase of $941,000, over the prior fiscal year. Thisincrease was attributable to higher taxable income, and was partially offset bya decrease in the effective tax rate from 39.0% in fiscal 2003 to 37.7% infiscal 2004. The decrease in the overall effective income tax rate is primarilyattributable to a reversal of state income tax over accrued in prior fiscalyears.

*Net income.**  *As a result of the foregoing, net income increased to$13.3 million from $11.1 million, an increase of $2.2 million or 19.8%, overthe same period last year.

**Quarterly Resultsand Seasonality**

We experience seasonal and quarterly fluctuations inour net sales and operating income. Our quarterly results of operations mayfluctuate significantly as a result of a variety of factors, including thetiming of new store openings, fashion trends and shifts in timing of certainholidays. Our business is subject to seasonal influences, characterized byhighest sales during our fourth fiscal quarter (October, November andDecember) and lowest sales during our third fiscal quarter (July, August andSeptember).

Thefollowing table includes our unaudited quarterly results of operations data foreach of the eight quarters during the two-year period ended December 31,2005. We derived this data from our unaudited quarterly consolidated financialstatements. We believe that we have prepared this information on the 

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same basis as our audited consolidated financialstatements and that we have included all necessary adjustments, consisting onlyof normal recurring adjustments, to present fairly the selected quarterlyinformation when read in conjunction with our audited annual consolidatedfinancial statements and the notes to those statements included elsewhere inthis document. The operating results for any particular quarter are notnecessarily indicative of the operating results for any future period.

| ** **                                  | ** ** | **13 Weeks  Ended**             | ** ** | **14 Weeks  Ended** | ** ** | **13 Weeks  Ended** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **Mar. 27,**                    | ** ** | **June 26,**        | ** ** | **Sept. 25,**       | ** ** | **Jan. 1,** | ** ** | **Apr. 1,** | ** ** | **July 2,** | ** ** | **Oct. 1,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                  | ** ** | **2004**                             | ** ** | **2004**                 | ** ** | **2004**                 | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(Unaudited)**                      | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)** | ** ** |
| **Operating  Results**                      |       |                                 |       |                     |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                   |       |                                 | $          | 57,194                   |       |                     |       | $ | 62,087 |   |   |   | $ | 49,430 |   |   |   | $ | 78,589 |   |   | $ | 62,793 |   | $ | 66,970 |   | $ | 57,262 |   |   | $ | 79,320 |   |   |   |
| Gross profit                                |       |                                 | 25,688     |                     |       |                     | 29,149     |   |   |   | 19,596 |   |   |   | 37,122 |   |   | 27,133 |   | 30,366 |   | 26,113 |   |   | 37,749 |   |   |   |
| Operating income (loss)                     |       |                                 | 5,151      |                     |       |                     | 7,102      |   |   |   | (961 | ) |   |   | 9,576 |   |   | 2,751 |   | 4,717 |   | 1,541 |   |   | 10,999 |   |   |   |
| Net income (loss)                      |       |                                 | $          | 3,249                    |       |                     |       | $ | 4,361 |   |   |   | ($521 | ) |   |   | $ | 6,208 |   |   | $ | 1,757 |   | $ | 3,000 |   | $ | 1,107 |   |   | $ | 7,541 |   |   |   |
| **As a Percentage of Net Sales**            |       |                                 |       |                     |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                   |       |                                 | 100.0      | %                        |       |                     | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   | 100.0 | % | 100.0 | % | 100.0 | % |   | 100.0 | % |   |   |
| Gross profit                                |       |                                 | 44.9       | %                        |       |                     | 46.9       | % |   |   | 39.6 | % |   |   | 47.2 | % |   | 43.2 | % | 45.3 | % | 45.6 | % |   | 47.6 | % |   |   |
| Operating income (loss)                     |       |                                 | 9.0        | %                        |       |                     | 11.4       | % |   |   | (1.9 | %) |   |   | 12.2 | % |   | 4.4 | % | 7.0 | % | 2.7 | % |   | 13.9 | % |   |   |
| Net income (loss)                      |       |                                 | 5.7        | %                        |       |                     | 7.0        | % |   |   | (1.1 | %) |   |   | 7.9 | % |   | 2.8 | % | 4.5 | % | 1.9 | % |   | 9.5 | % |   |   |
| **Selected Operating Data**                 |       |                                 |       |                     |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of stores open at end of period      |       |                                 | 258        |                     |       |                     | 269        |   |   |   | 276 |   |   |   | 291 |   |   | 294 |   | 297 |   | 301 |   |   | 306 |   |   |   |
| Comparable store  sales increase (decrease) |       |                                 | 13         | %                        |       |                     | 3          | % |   |   | (1 | %) |   |   | 4 | % |   | 1 | % | 5 | % | 8 | % |   | 4 | % |   |   |
|                                             |            |                                      |            |                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Liquidity andCapital Resources**

Our cash requirements are primarily for theconstruction of new stores and inventory for new stores as well as theremodeling of existing stores. We have historically satisfied our cashrequirements principally through cash flow from operations. Cash flows haveincreased significantly in recent years, due to the dramatic increase in grossmargin contribution.

As of December 31, 2005, we had working capitalof $63.8 million, which included cash and marketable securities of $53.3million.

Thefollowing table sets forth our cash flows for the period indicated (inthousands):

| ** **                                                   | ** ** | **52 Weeks Ended  December 27, 2003** | ** **   | **53 Weeks Ended  January 1, 2005** | ** ** | **52 Weeks Ended  December 31, 2005** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------|--------------|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Net cash from  operating activities                          |       |                                                      | $            | 21,810,000                                              |       |                                                      | $          | 22,983,000 |   |   | $ | 25,482,000 |   |   |
| Net cash used by  investing activities                       |       |                                                      | ($20,982,000 | )                                                       |       | ($27,881,000                                              | )          |   | ($26,136,000 | ) |   |
| Net cash from  financing activities                          |       |                                                      | $            | 5,772,000                                               |       |                                                      | $          | 4,859,000 |   |   | $ | 559,000 |   |   |
| Net increase (decrease),  in cash and cash equivalents  |       |                                                      | $            | 6,600,000                                               |       |                                                      | ($39,000   | ) |   | ($95,000 | ) |   |

 

During fiscal 2005, wegenerated $25.5 million in cash from operating activities due primarily to netincome, depreciation of $9.8 million, an increase in accrued liabilities andcompensation of $5.3 million, an 

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increasein accounts payable of $1.3 million, partially offset by a decrease of $1.0million in deferred taxes and an increase in prepaid expenses of$2.8 million.

During fiscal 2004, wegenerated $23.0 million in cash from operating activities due primarily to netincome, depreciation of $8.2 million, an increase in deferred taxes of $2.7million, an increase in accounts payable of $2.7 million, an increase in accruedliabilities of $3.9 million and a tax benefit of $1.6 million from stock optionexercises, which were partially offset by an increase in inventories of $5.6million (primarily due to the net increase of 36 stores), reversal of deferredrent of $1.2 million, and an increase in receivables of $1.9 million.

During fiscal 2003, wegenerated $21.8 million in cash from operating activities due primarily to netincome, depreciation of $6.4 million, an increase in accrued liabilities andcompensation of $5.4 million, and an increase in accounts payable of $2.4million and a tax benefit of $2.9 million from stock option exercises,partially offset by an increase in accounts receivable of $1.9 million and anincrease in inventories of $4.7 million, primarily due to the net increase of21 stores.

Cash used in investingactivities was approximately $26.1 million in fiscal 2005, $27.9 million infiscal 2004, $21.0 million in fiscal 2003. These amounts were used for thepurchase of marketable securities, as well as the payment for equipment andleasehold improvements in new and remodeled stores. Our capital requirementsdepend primarily on the number of new stores we open, the number of existingstores we remodel and the timing of these expenditures. Projected capital expendituresfor fiscal 2006 to fund new store openings and remodelings are approximately$16.0 to $18.0 million.

Based on our experiencewith new store openings, we estimate that the average net investment to opennew stores is approximately $225,000 to $375,000, which includes new storeopening expenses and initial inventory, net of landlord contributions. Weestimate that the average net investment to remodel an existing store isapproximately $200,000 to $300,000, net of landlord contributions.

Cash provided by financingactivities was approximately $559,000 in fiscal 2005, primarily due to cashprovided from the proceeds of common stock issuances. Cash provided byfinancing activities was approximately $4.9 million in fiscal 2004, primarilydue to stock option exercises and stock issuances. During fiscal 2003, wereceived net proceeds of $5.8 million from stock issuances and stock optionexercises.

We have a line of creditwith Fleet Bank, N.A., permitting us to borrow up to $17.5 million on a revolvingbasis. At December 31, 2005, there was no outstanding balance under thiscredit facility. Amounts outstanding under the credit facility bear interest ata maximum annual rate equal to the bank’s prime rate, currently 7.50% atFebruary 28, 2006, less 0.25%. The agreement relating to this facilitycontains selected financial and other covenants. In addition, the creditfacility contains restrictions on our ability to make capital expenditures,incur indebtedness or create or incur liens on our assets. While this facilityis unsecured, if a default occurs under the facility, we are required to grantthe lender a security interest in our inventory and accounts receivable. Wehave at all times been in compliance with all loan covenants. This facilitycurrently expires in November 2008.

We believe that cash flowfrom operations, our current available cash and funds available under ourrevolving credit facility will be sufficient to meet our working capital needsand contemplated new store opening expenses for at least the next 12 months. Ifour cash flow from operations should decline significantly or if we shouldaccelerate our store expansion or remodeling program, it may be necessary forus to seek additional sources of capital.

23

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**ContractualObligations and Commercial Commitments**

Thefollowing tables summarize our minimum contractual obligations and commercialcommitments as of December 31, 2005:

| ** **              | ** ** | **Payments Due in Period** | ** ** |
|-------------------------|------------|-------------------------------------------|------------|
| ** **              | ** ** | **Total**                                 | ** ** | **Within   1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
| ** **              | ** ** | **(In thousands)**                   | ** ** |
| Contractual Obligations | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Employment contracts    |       | $                                         | 4,110      |   | $ | 1,255 |   | $ | 2,855 |   | $ | — |   | $ | — |   |
| Purchase Obligations    |       | 38,222                                    |       | 38,222 |   | — |   | — |   | — |   |
| Operating leases        |       | 188,625                                   |       | 25,859 |   | 48,547 |   | 44,622 |   | 69,597 |   |
| Total                   |       | $                                         | 230,957    |   | $65,336 |   | $51,402 |   | $44,622 |   | $69,597 |   |
|                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                | ** ** | **Payments Due in Period** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **Total**                                 | ** ** | **Within   1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
| ** **                | ** ** | **(In thousands)**                   | ** ** |
| Commercial Commitments    |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit facility           |       | $                                         | —     |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Standby Letters of credit |       | 969                                       |       |   | 969 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total                     |       | $                                         | 969        |   |   | $ | 969 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |

 

We issue standby lettersof credit primarily for the importation of merchandise inventories. The Companydoes not have any off balance sheet financing arrangements.

The operating leasesincluded in the above table do not include contingent rent based upon salesvolume, which represented approximately 0.8% of minimum lease obligations infiscal 2005, or variable costs such as maintenance, insurance and taxes, whichrepresented approximately 43.5% of minimum lease obligations in fiscal 2005.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk relates primarily to changes in interestrates. We bear the risk in two specific ways. First, the revolving creditfacility carries a variable interest rate that is tied to market indices and,therefore, the statement of income and cash flows will be exposed to changes ininterest rates. As of December 31, 2005, we had no borrowing under ourcredit facility. However, we may borrow funds under the revolving creditfacility, as needed.

The second component ofinterest rate risk involves the short-term investment of excess cash inshort-term, investment-grade interest-bearing securities. These investments areincluded in cash and equivalents as well as marketable securities on ourbalance sheet. If there are changes in interest rates, those changes wouldaffect the investment income we earn on these investments and, therefore,impact our cash flows and results of operations.

**Recent AccountingDevelopments**

See the section “RecentAccounting Developments” included in Note 1 in the Notes to the ConsolidatedFinancial Statements for a discussion of recent accounting developments andtheir impact on our consolidated financial statements.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

The Company’s unauditedselected quarterly financial data is incorporated herein by reference to Note12 to the Company’s consolidated financial statements on page F-21.The Company’s consolidated 

24

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financialstatements and the report of independent public accountants are listed at Item16 of this Report and are included in this Form 10-K on pages F-1through F-22.

**ITEM9.**                CHANGES IN AND/ORDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

During the two fiscalyears prior to the fiscal year ended December 31,2005, (i) there wereno disagreements with KPMG on any matter of accounting principles or practices,financial statement disclosure or auditing scope or procedure, whichdisagreements, if not resolved to the satisfaction of KPMG, would have causedit to make reference to the subject matter of the disagreements in connectionwith its report, and (ii) there were no “reportable events” (as defined inItem 304(a)(1)(v) of Regulation S-K). Please see our Report on Form 8-Kfiled February 15, 2005 for additional disclosure regarding our change inaccountants.

**ITEM 9A.**        CONTROLSAND PROCEDURES

(1)   *Disclosure Controls and Procedures*—TheCompany maintains a system of disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the Company’sreports under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), 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 management, including the Company’s Chief ExecutiveOfficer (“CEO”) and the Chief Financial Officer (“CFO”), as appropriate, toallow timely decisions regarding required disclosure. In designing andevaluating the disclosure controls and procedures, management recognized thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,as the Company’s are designed to do, and management necessarily was required toapply its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.

In connection withthe preparation of this Annual Report on Form 10-K, as of December 31,2005, an evaluation was performed under the supervision and with theparticipation of the Company’s management, including the CEO and CFO, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rule 13a-15(e) under the ExchangeAct). Management identified a material weakness, due to an insufficient numberof resources in the accounting and finance department, resulting in anineffective review, monitoring and analysis of schedules, reconciliations and financialstatement disclosures and several audit adjustments to the financial statementsfor the quarter and year ended December 31, 2005. Due to the pervasiveeffect of the lack of resources and the potential impact on the financialstatements and disclosures and the importance of the annual and interimfinancial closing and reporting process, in the aggregate, there is more than aremote likelihood that a material misstatement of the annual financialstatements would not have been prevented or detected. Based on that evaluation,the Company’s CEO and CFO concluded that the Company’s disclosure controls andprocedures were not effective as of December 31, 2005.

(2)   *Management’s Annual Report on Internal Control overFinancial Reporting*—Management is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).A system of  internal control  over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financial reporting and the preparation andfair presentation of  financialstatements for external purposes in accordance with generally acceptedaccounting principles. All internal control systems, no matter how welldesigned, have inherent limitations. Therefore, even those systems determinedto be effective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

Management has assessed the effectiveness of theCompany’s internal control over financial reporting as of December 31,2005. In making its assessment of internal control over financial reporting, 

25

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management used thecriteria set forth by the Committee of Sponsoring Organizations (“COSO”) of theTreadway Commission in *Internal Control—IntegratedFramework*.

In performing this assessment, management reviewed thelack of resources in the accounting and finance department. As a result of thisreview, management concluded that the lack of resources resulted in anineffective review, monitoring and analysis of schedules, reconciliations and financialstatement disclosures, resulting in several adjustments to the currentfinancial statements.

Management evaluated the impact of these adjustmentson the Company’s assessment of its system of internal control and has concludedthat the control deficiencies that resulted from the lack of resources in theaccounting and finance department, resulting in an ineffective review,monitoring and analysis of schedules, reconciliations and financial statementdisclosures, represented a material weakness as of December 31, 2005. As aresult of the material weakness in the Company’s internal control overfinancial reporting, management has concluded that as of December 31,2005, the Company’s internal control over financial reporting was not effectivebased on the criteria set forth by the COSO of the Treadway Commission in *Internal Control—Integrated Framework*. Amaterial weakness in internal control over financial reporting is a controldeficiency (within the meaning of the Public Company Accounting Oversight Board’s(“PCAOB”) Auditing Standard No. 2), or combination of controldeficiencies, that results in there being more than a remote likelihood that amaterial misstatement of the annual or interim financial statements will not beprevented or detected. PCAOB Auditing Standard No. 2 identifies a numberof circumstances that, because of their likely significant negative effect oninternal control over financial reporting, are to be regarded as at leastsignificant deficiencies as well as strong indicators that a material weaknessexists, including the restatement of previously issued financial statements toreflect the correction of a misstatement.

TheCompany’s independent registered public accounting firm, Deloitte &Touche LLP, has issued an attestation report on management’s assessment of theCompany’s internal control over financial reporting. This report appears below.

(3)   *Remediation Steps to Address the Material Weakness*

We are currentlyreviewing our remediation process for the material weakness described above. Wemay conclude to take one or more of the following actions:

i.                   Clearly defineroles and responsibilities throughout the accounting/finance organization;

ii.               Hiring additionalresources;

iii.           Institute a formaltraining of finance personnel;

iv.             Conducting a reviewof accounting processes to incorporate technology enhancements and strengthenthe design and operation of controls;

v.                 Implement processimprovements to support timely reconciliation of all major balance sheetaccounts on a monthly basis.

vi.             Implement policies toensure the accuracy of accounting calculations supporting the amounts reflectedin our financial statements and to ensure all significant accounts are properlyreconciled on a frequent and timely basis.

These remediation plans will be implemented during thesecond and third quarters of fiscal 2006. The material weakness will not beconsidered remediated until the applicable remedial procedures operate for aperiod of time, such procedures are tested and management has concluded thatthe procedures are operating effectively.

26

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(4)   *Change inInternal Control Over Financial Reporting*—No changes in the Company’sinternal control over financial reporting has occurred during the Company’slast fiscal quarter that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

| /s/ BRIAN WOOLF                                         |   | March 17, 2006 |
|---------------------------------------------------------|--------|---------------------|
| Brian Woolf                                             |   |                |
| *Chairman  and Chief Executive Officer*                 |   |                |
| /s/ MARGARET FEENEY                                     |   | March 17, 2006 |
| Margaret Feeney                                         |   |                |
| *Executive  Vice President and Chief Financial Officer* |   |                |

 

27

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**Report of Independent Registered Public AccountingFirm**

To the Board of Directors and Stockholders ofCache, Inc.New York, New York

We have audited management’s assessment, included inthe accompanying Management’s Annual Report on Internal Control over FinancialReporting, that Cache, Inc. and subsidiaries (the “Company”) did notmaintain effective internal control over financial reporting as of December 31,2005, because of the effect of the material weakness identified by management’sassessment based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission. The Company’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management andother personnel to provide reasonable assurance regarding the reliability ofthe financial reporting and the preparation of the financial statements forexternal purposes in accordance with generally accepted accounting principles.A company’s internal control over financial reporting includes those policiesand procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of effectiveness of the internal control over financialreporting to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

A material weakness is a significant deficiency, orcombination of significant deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The Company identified andincluded in management’s assessment a material weakness, due to an insufficientnumber of resources in the accounting and finance department, resulting in anineffective review, monitoring and analysis of schedules, reconciliations andfinancial statement disclosures and several audit adjustments to the financialstatements for the quarter and year ended December 31, 2005. Due to the pervasiveeffect of the lack of resources and the potential impact on the consolidated financialstatements and disclosures and the importance of the annual and 

28

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interim financial closingand reporting process, in the aggregate, there is more than a remote likelihoodthat a material misstatement of the annual or interim consolidated financialstatements would not have been prevented or detected. The material weakness wasconsidered in determining the nature, timing, and extent of audit tests appliedin our audit of the consolidated financial statements and financial statementschedule as of and for the fiscal year ended December 31, 2005, of theCompany and this report does not affect our report on such consolidatedfinancial statements and financial statement schedule.

In our opinion, management’s assessment that theCompany did not maintain effective internal control over financial reporting asof December 31, 2005, is fairly stated, in all material respects, based onthe criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Also in ouropinion, because of the effect of the material weakness described above on theachievement of the objectives of the control criteria, the Company has notmaintained effective internal control over financial reporting as of December 31,2005, based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated financial statements as of and for the fiscal year ended December 31,2005 of the Company and the related financial statement schedule listed in theIndex at Item 15, and our report dated March 17, 2006 expressed anunqualified opinion on those consolidated financial statements and financialstatement schedule.
| /s/ DELOITTE & TOUCHE LLP |
|------------------------------------|
| New York, New  York                |
| March 17,  2006               |

**ITEM 9B.   OTHER INFORMATION**

None.

**PART III**

The information called for by Items 10, 11, 12, 13,and 14 is incorporated herein by reference from the definitive proxy statementto be filed by the Company in connection with its 2006 Annual Meeting ofShareholders.

29

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**PART IV**

**ITEM 15.**   EXHIBITS andFINANCIAL STATEMENT SCHEDULES
| (a)    |   | 1. |   | The financial statements listed in the “Index To The  Consolidated Financial Statements” on page F-2 are filed as a part  of this report.                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 2. |   | Financial statement  schedules are included on page F-22 or are omitted because they  are not applicable or the required information is shown in the financial  statements or notes thereto. A Stockholder may obtain a copy of any of the  exhibits included in the Annual Report on Form 10-K upon payment  of a fee to cover the reasonable expenses of furnishing such exhibits, by  written request to CACHE, Inc., at 1440 Broadway, 5th Floor, New York,  New York 10018 Attention: Chief Financial Officer. |

 
| 3.    |   | Exhibits (10)                                                                                                                                                                                                                          |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1   |   | Articles of Incorporation of the Company and all  amendments thereto(2)                                                                                                                                                                     |
| 3.2   |   | Bylaws of the Company(1)                                                                                                                                                                                                                    |
| 10.1  |   | Lease, dated  July 28, 2003, between the Company, as Tenant, and  New 1440 Broadway Partners, LLC, as Landlord, for the Company’s offices  at 1440 Broadway, New York, New York(10)                                |
| 10.2  |   | 1994 Stock Option Plan  of the Company(3)(11)                                                                                                                                                                                               |
| 10.3  |   | Form of Option  Agreement relating to Options issued under the 1994 Stock Option Plan(4)(11)                                                                                                                                           |
| 10.4  |   | 2000 Stock Option Plan  of the Company(7)(11)                                                                                                                                                                                               |
| 10.5  |   | Form of Option  Agreement relating to Options issued under the 2000 Stock Option Plan(8)(11)                                                                                                                                           |
| 10.6  |   | 2003 Stock Option Plan  of the Company(9)(11)                                                                                                                                                                                               |
| 10.7  |   | Form of Option  Agreement relating to Options issued under the 2003 Stock Option Plan(10)(11)                                                                                                                                          |
| 10.8  |   | Second Amended and  Restated Revolving Credit Agreement (the “Credit Agreement”) dated as of  August 26, 1996, between Fleet Bank, N.A. (Successor in interest to  National Westminster Bank, New Jersey) and the Company(4) |
| 10.9  |   | Security Agreement,  dated as of August 26, 1996 (the “Security Agreement”), between the  Company and Fleet Bank, N.A.(4)                                                                                                    |
| 10.10 |   | Amended and Restated  Asset Purchase Agreement dated August 10, 1998 between Lillie Rubin  Fashions, Inc. and the Company(5)                                                                                                      |
| 10.11 |   | Master Amendment, dated  July 19, 1999, to Revolving Credit Agreement and Security Agreement(6)                                                                                                                                        |
| 10.12 |   | Second Master Amendment,  dated November 21, 2002, to Revolving Credit Agreement(10)                                                                                                                                                   |
| 10.13 |   | Third Master Amendment,  dated May 20, 2004, to Revolving Credit Agreement(10)                                                                                                                                                         |
| 10.14 |   | Fourth Master Amendment,  dated November 30, 2005 to Revolving Credit Agreement.                                                                                                                                                       |
| 10.15 |   | Employment Agreement,  dated February 8, 2006, between the Company and Brian P. Woolf(11)                                                                                                                                         |
| 10.16 |   | Employment Agreement  dated February 8, 2006, between the Company and Thomas E.  Reinckens(11)                                                                                                                                    |
| 11.1  |   | Calculation of Basic and  Fully Diluted Earnings per Common Share                                                                                                                                                                           |
| 12.1  |   | Statements re: Computation  of Ratios                                                                                                                                                                                                       |

30

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| 23.1 |   | Consent of  Deloitte & Touche LLP                                                                                                 |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
| 23.2 |   | Consent of KPMG LLP                                                                                                                        |
| 31.1 |   | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                             |
| 31.2 |   | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                              |
| 32.1 |   | Certification of the Chief Executive Officer and  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |

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(1)          Incorporated byreference to the Company’s Registration Statement on Form S-18,dated December 29, 1980.

(2)          Incorporated byreference to the Company’s Current Report on Form 8-K, dated September 15,1993.

(3)          Incorporated byreference to the Company’s Annual Report on Form 10-K for the fiscalyear ended December 31, 1994.

(4)          Incorporated byreference to the Company’s Annual Report on Form 10-K for the fiscalyear ended December 28, 1996.

(5)          Incorporated byreference to the Company’s Annual Report on Form 10-K for the fiscalyear ended January 2, 1999.

(6)          Incorporated byreference to the Company’s Annual Report on Form 10-K for the fiscalyear ended January 1, 2000.

(7)          Incorporated byreference to the Company’s Definitive Proxy Statement filed on September 18,2001.

(8)          Incorporated byreference to the Company’s Annual Report on Form 10-K for the fiscalyear ended December 29, 2001.

(9)          Incorporated byreference to the Company’s Definitive Proxy Statement filed on October 6,2003.

(10)   Incorporated by references tothe Company’s Annual Report on Form 10-K for the fiscal year ended December 27,2003.

(11)   Exhibits 10.2 through 10.7,10.15 and 10.16 are management contracts or compensatory plans or arrangements,which are required to be filed as an exhibit pursuant to Item 16(c) ofthis Annual Report on Form 10-K.

(b)          Reports on Form 8-K

None.

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**Signatures**

Pursuantto the requirement of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

| Date: March 17, 2006 | CACHE, INC.                                       |
|---------------------------|---------------------------------------------------|
|                      | (Registrant)                                      |
|                      | By:                                               | /s/ BRIAN WOOLF |
|                      | Brian Woolf                                       |
|                      | Chairman of the Board and Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

|                               | **Signature** | ** **                 | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-------------------------------|---------------|----------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/ BRIAN WOOLF          |          | Chairman of the Board      |       | March 17,  2006 |
| Brian  Woolf                  |          |                       |       |                 |
| /s/ THOMAS  E. REINCKENS |          | President                  |       | March 17, 2006  |
| Thomas  E. Reinckens          |          | (Chief Operating  Officer) |       |                 |
| /s/ MARGARET  FEENEY     |          | Executive Vice  President  |       | March 17, 2006  |
| Margaret  Feeney              |          | (Chief Financial  Officer) |       |                 |
| /s/ GENE  GAGE           |          | Director                   |       | March 17, 2006  |
| Gene  Gage                    |          |                       |       |                 |
| /s/ ARTHUR  S. MINTZ     |          | Director                   |       | March 17, 2006  |
| Arthur  S. Mintz              |          |                       |       |                 |
| /s/ ANDREW  M. SAUL      |          | Director                   |       | March 17, 2006  |
| Andrew  M. Saul               |          |                       |       |                 |
| /s/ MORTON  J. SCHRADER  |          | Director                   |       | March 17, 2006  |
| Morton J.  Schrader           |          |                       |       |                 |

 

 

32

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**CACHE, INC. AND SUBSIDIARIES**

**CONSOLIDATED FINANCIAL STATEMENTS**

**FISCAL YEARS ENDED DECEMBER 31, 2005,**

**JANUARY 1, 2005,**

**AND**

**DECEMBER 27, 2003**

F-1

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**CACHE,INC. AND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTS**
| INDEX                                                | ** ** | **PAGE**                     | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|
| Independent Auditors’ Report                    |       | F-3                |       |
| Consolidated  Balance Sheets                         |       | F-5                |       |
| Consolidated Statements of Income                    |       | F-6                |       |
| Consolidated Statements of Stockholders’ Equity |       | F-7                |       |
| Consolidated Statements of Cash Flows                |       | F-8                |       |
| Notes to Consolidated Financial Statements           |       | F-9                |       |
| Valuation and Qualifying Accounts                    |       |   F-22   |       |

 

F-2

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofCache, Inc.New York, New York

We have audited the accompanying consolidated balancesheet of Cache, Inc. and subsidiaries (the “Company”) as of December 31,2005, and the related consolidated statements of income, stockholders’ equity,and cash flows for the fiscal year then ended. Our audit also included financialstatement schedule listed in the Index at Item 15. These consolidated financialstatements and financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyas of December 31, 2005, and the results of their operations and theircash flows for the year then ended, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, such financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2005, based on the criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 17,2006 expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anadverse opinion on the effectiveness of the Company’s internal control overfinancial reporting because of a material weakness.

/s/ DELOITTE &TOUCHE LLP

New York, New YorkMarch 17, 2006

F-3

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

The Board of Directors and StockholdersCache, Inc.:

We have audited the accompanying consolidated balancesheets of Cache, Inc. and subsidiaries as of January 1, 2005 and December 27,2003, and the related consolidated statements of income, stockholders’ equityand cash flows for each of the years in the three-year period ended January 1,2005. In connection with our audits of the consolidated**financialstatements, we also have audited the financial statement schedule. Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements and financial statement schedulebased on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Cache, Inc. and subsidiaries as of January 1, 2005 and December 27,2003, and the results of their operations and their cash flows for each of theyears in the three-year period ended January 1, 2005, in conformity withU.S. generally accepted accounting principles. Also in our opinion, the relatedfinancial statement schedule, when considered in relation to the basic consolidated financial statementstaken as a whole, presents fairly, in all material respects, the informationset forth therein.

/s/ KPMG LLP

New York, New YorkMarch 15, 2005

F-4

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**CACHE, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**
|                                                                                                                                 | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2005**            | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                      |       |                |       |                  |       |
| **CURRENT  ASSETS**                                                                                                             |       |                |       |                  |       |
| Cash and equivalents (Note 1)                                                                                                   |       | $ 16,848,000   |       | $ 16,753,000     |       |
| Marketable securities                                                                                                           |       | 25,874,000          |       | 36,520,000            |       |
| Receivables, net (Note 2)                                                                                                       |       | 6,545,000           |       | 5,734,000             |       |
| Inventories                                                                                                                     |       | 32,296,000          |       | 32,785,000            |       |
| Deferred income taxes, net (Note 9)                                                                                             |       | 567,000             |       | 691,000               |       |
| Prepaid expenses and other current assets                                                                                       |       | 1,948,000           |       | 4,777,000             |       |
| Total Current Assets                                                                                                            |       | 84,078,000          |       | 97,260,000            |       |
| **EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net**(Note  3)                                                                          |       | 47,118,000          |       | 52,760,000            |       |
| **OTHER ASSETS**                                                                                                                |       | 832,000             |       | 864,000               |       |
| **Total Assets**                                                                                                                |       | $ 132,028,000  |       | $ 150,884,000    |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                  |       |                |       |                  |       |
| **CURRENT  LIABILITIES**                                                                                                        |       |                |       |                  |       |
| Accounts payable                                                                                                                |       | $ 17,055,000   |       | $ 18,404,000     |       |
| Accrued compensation                                                                                                            |       | 1,927,000           |       | 2,624,000             |       |
| Accrued liabilities (Note 4)                                                                                                    |       | 11,627,000          |       | 12,446,000            |       |
| Total Current Liabilities                                                                                                       |       | 30,609,000          |       | 33,474,000            |       |
| **OTHER LIABILITIES**(Note 7)                                                                                                   |       | 13,556,000          |       | 16,309,000            |       |
| **DEFERRED INCOME TAXES, net**(Note  9)                                                                                         |       | 3,023,000           |       | 2,105,000             |       |
| **COMMITMENTS AND CONTINGENCIES**(Note  8)                                                                                      |       |                |       |                  |       |
| **STOCKHOLDERS’  EQUITY**                                                                                                  |       |                |       |                  |       |
| Common stock, par value $.01; authorized, 20,000,000  shares; issued and outstanding 15,665,053 and 15,770,553 shares (Note 10) |       | 157,000             |       | 158,000               |       |
| Additional paid-in capital                                                                                                      |       | 34,705,000          |       | 35,455,000            |       |
| Retained earnings                                                                                                               |       | 49,978,000          |       | 63,383,000            |       |
| Total Stockholders’ Equity                                                                                                 |       | 84,840,000          |       | 98,996,000            |       |
| **Total  Liabilities and Stockholders’ Equity**                                                                            |       | $ 132,028,000  |       | $ 150,884,000    |       |

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-5

----

**CACHE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFINCOME**
|                                                                      | ** ** | **52 Weeks Ended** | ** **  | **53 Weeks Ended** | ** ** | **52 Weeks Ended** | ** **  |
|----------------------------------------------------------------------|------------|------------------------------|-------------|------------------------------|------------|------------------------------|-------------|
| ** **                                                           | ** ** | **December 27,**        | ** **  | **January 1,**          | ** ** | **December 31,**        | ** **  |
| ** **                                                           | ** ** | **2003**                     | ** **  | **2005**                     | ** ** | **2005**                     | ** **  |
| **NET  SALES**                                                       |       |                         | $           | 216,256,000                  |       |                         |        | $ | 247,300,000 |   |   |   | $ | 266,345,000 |   |   |
| **COST OF SALES, including buying and occupancy**(Note 8)  |       |                         | 120,731,000 |                         |       |                         | 135,745,000 |   |   |   | 144,984,000 |   |   |
| **GROSS PROFIT**                                                     |       |                         | 95,525,000  |                         |       |                         | 111,555,000 |   |   |   | 121,361,000 |   |   |
| **EXPENSES**                                                         |       |                         |        |                         |       |                         |        |   |   |   |   |   |   |
| Store operating expenses                                             |       |                         | 63,546,000  |                         |       |                         | 76,466,000  |   |   |   | 85,529,000 |   |   |
| General and administrative expenses                                  |       |                         | 14,074,000  |                         |       |                         | 14,221,000  |   |   |   | 15,824,000 |   |   |
| TOTAL EXPENSES                                                       |       |                         | 77,620,000  |                         |       |                         | 90,687,000  |   |   |   | 101,353,000 |   |   |
| **OPERATING INCOME**                                                 |       |                         | 17,905,000  |                         |       |                         | 20,868,000  |   |   |   | 20,008,000 |   |   |
| **OTHER  INCOME (EXPENSE)**                                          |       |                         |        |                         |       |                         |        |   |   |   |   |   |   |
| Interest income                                                      |       |                         | 259,000     |                         |       |                         | 439,000     |   |   |   | 1,071,000 |   |   |
| Miscellaneous income (net)                                           |       |                         | 14,000      |                         |       |                         | 20,000      |   |   |   | 1,000 |   |   |
| TOTAL OTHER INCOME                                                   |       |                         | 273,000     |                         |       |                         | 459,000     |   |   |   | 1,072,000 |   |   |
| **INCOME BEFORE INCOME TAXES**                                       |       |                         | 18,178,000  |                         |       |                         | 21,327,000  |   |   |   | 21,080,000 |   |   |
| **INCOME TAX PROVISION (Note 9)**                                    |       |                         | 7,089,000   |                         |       |                         | 8,030,000   |   |   |   | 7,675,000 |   |   |
| **NET INCOME**                                                       |       |                         | $           | 11,089,000                   |       |                         |        | $ | 13,297,000 |   |   |   | $ | 13,405,000 |   |   |
| **BASIC EARNINGS PER SHARE**                                         |       |                         | $           | 0.78                         |       |                         |        | $ | 0.85 |   |   |   | $ | 0.85 |   |   |
| **DILUTED EARNINGS PER SHARE**                                       |       |                         | $           | 0.75                         |       |                         |        | $ | 0.83 |   |   |   | $ | 0.83 |   |   |
| **BASIC WEIGHTED AVERAGE SHARES OUTSTANDING**                   |       |                         | 14,256,000  |                         |       |                         | 15,589,000  |   |   |   | 15,726,000 |   |   |
| **DILUTED  WEIGHTED AVERAGE SHARES OUTSTANDING**                     |       |                         | 14,721,000  |                         |       |                         | 16,004,000  |   |   |   | 16,150,000 |   |   |
|                                                                      |            |                              |             |                              |            |                              |             |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-6

----

**CACHE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY**
|                                                            | ** ** | ** **                  | ** ** | ** **     | ** ** | **Additional**    | ** ** | ** **        | ** ** | ** **        | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|----------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                 | ** ** | **Common  Stock** | ** ** | **Paid-In**    | ** ** | **Retained**      | ** ** | ** **        | ** ** |
| ** **                                                 | ** ** | **Shares**                  | ** ** | **Amount**     | ** ** | **Capital**       | ** ** | **Earnings**      | ** ** | **Total**         | ** ** |
| **Balance  at December 28, 2002**                     |       | 9,100,150                   |       | $ 91,000  |       | $ 19,609,000 |       | $ 25,592,000 |       | $ 45,292,000 |       |
| Net income                                                 |       | —                      |       | —         |       | —            |       | 11,089,000        |       | 11,089,000        |       |
| Tax benefit from  stock option exercises    |       | —                      |       | —         |       | 2,933,000         |       | —            |       | 2,933,000         |       |
| Issuance of  common stock                                  |       | 881,000                     |       | 9,000          |       | 5,819,000         |       | —            |       | 5,828,000         |       |
| **Balance at December 27, 2003**                      |       | 9,981,150                   |       | 100,000        |       | 28,361,000        |       | 36,681,000        |       | 65,142,000        |       |
| Net income                                                 |       | —                      |       | —         |       | —            |       | 13,297,000        |       | 13,297,000        |       |
| Tax benefit from  stock option exercises    |       | —                      |       | —         |       | 1,583,000         |       | —            |       | 1,583,000         |       |
| Issuance of  common stock                                  |       | 472,125                     |       | 5,000          |       | 4,813,000         |       | —            |       | 4,818,000         |       |
| Stock split                                                |       | 5,211,778                   |       | 52,000         |       | (52,000           | )          | —            |       | —            |       |
| **Balance at January 1, 2005**                        |       | 15,665,053                  |       | 157,000        |       | 34,705,000        |       | 49,978,000        |       | 84,840,000        |       |
| Net income                                                 |       | —                      |       | —         |       | —            |       | 13,405,000        |       | 13,405,000        |       |
| Tax benefit from  stock option exercises    |       | —                      |       | —         |       | 160,000           |       | —            |       | 160,000           |       |
| Issuance of  common stock                                  |       | 105,500                     |       | 1,000          |       | 590,000           |       | —            |       | 591,000           |       |
| **Balance  at December 31, 2005**                     |       | 15,770,553                  |       | $ 158,000 |       | $ 35,455,000 |       | $ 63,383,000 |       | $ 98,996,000 |       |

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-7

----

**CACHE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF CASH FLOWS**

| ** **                                                                         | ** ** | **52 Weeks Ended** | ** **        | **53 Weeks Ended** | ** ** | **52 Weeks Ended** | ** **        |
|------------------------------------------------------------------------------------|------------|------------------------------|-------------------|------------------------------|------------|------------------------------|-------------------|
| ** **                                                                         | ** ** | **December 27,  2003**  | ** **        | **January 1,  2005**    | ** ** | **December 31,  2005**  | ** **        |
| **Cash flows From Operating  Activities:**                                         |       |                         |              |                         |       |                         |              |   |   |   |   |   |   |
| Net income                                                                         |       |                         | $ 11,089,000 |                         |       |                         | $ 13,297,000 |   |   |   | $ 13,405,000 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                         |              |                         |       |                         |              |   |   |   |   |   |   |
| Depreciation and  amortization                                                     |       |                         | 6,395,000         |                         |       |                         | 8,232,000         |   |   |   | 9,779,000 |   |   |
| Decrease  (increase) in deferred tax assets                                        |       |                         | 916,000           |                         |       |                         | 2,705,000         |   |   |   | (1,042,000 | ) |   |
| Income tax  benefit from stock option exercises                                    |       |                         | 2,933,000         |                         |       |                         | 1,583,000         |   |   |   | 160,000 |   |   |
| Amortization of  deferred rent                                                     |       |                         | (835,000          | )                            |       |                         | (1,221,000        | ) |   |   | (940,000 | ) |   |
| Change in assets  and liabilities:                                                 |       |                         |              |                         |       |                         |              |   |   |   |   |   |   |
| Increase (decrease) in receivables                                                 |       |                         | (1,937,000        | )                            |       |                         | (1,931,000        | ) |   |   | 811,000 |   |   |
| Decrease in notes receivable from related parties                                  |       |                         | 321,000           |                         |       |                         | —            |   |   |   | — |   |   |
| Increase in inventories                                                            |       |                         | (4,659,000        | )                            |       |                         | (5,572,000        | ) |   |   | (489,000 | ) |   |
| Increase in prepaid expenses                                                       |       |                         | (219,000          | )                            |       |                         | (709,000          | ) |   |   | (2,829,000 | ) |   |
| Increase in accounts payable                                                       |       |                         | 2,374,000         |                         |       |                         | 2,693,000         |   |   |   | 1,349,000 |   |   |
| Increase in accrued liabilities and accrued  compensation                          |       |                         | 5,432,000         |                         |       |                         | 3,906,000         |   |   |   | 5,278,000 |   |   |
| Net cash provided by operating activities                                          |       |                         | 21,810,000        |                         |       |                         | 22,983,000        |   |   |   | 25,482,000 |   |   |
| **Cash  Flows From Investing Activities:**                                         |       |                         |              |                         |       |                         |              |   |   |   |   |   |   |
| Purchase of marketable securities                                                  |       |                         | (19,746,000       | )                            |       |                         | (25,874,000       | ) |   |   | (54,828,000 | ) |   |
| Maturities of marketable securities                                                |       |                         | 14,392,000        |                         |       |                         | 19,746,000        |   |   |   | 44,182,000 |   |   |
| Payments for equipment and leasehold improvements                                  |       |                         | (15,628,000       | )                            |       |                         | (21,753,000       | ) |   |   | (15,490,000 | ) |   |
| Net cash used in investing activities                                              |       |                         | (20,982,000       | )                            |       |                         | (27,881,000       | ) |   |   | (26,136,000 | ) |   |
| **Cash  Flows From Financing Activities:**                                         |       |                         |              |                         |       |                         |              |   |   |   |   |   |   |
| Proceeds from issuance of common stock                                             |       |                         | 5,828,000         |                         |       |                         | 4,818,000         |   |   |   | 591,000 |   |   |
| Other, net                                                                         |       |                         | (56,000           | )                            |       |                         | 41,000            |   |   |   | (32,000 | ) |   |
| Net cash provided by financing activities                                          |       |                         | 5,772,000         |                         |       |                         | 4,859,000         |   |   |   | 559,000 |   |   |
| Net increase  (decrease) in cash and equivalents                                   |       |                         | 6,600,000         |                         |       |                         | (39,000           | ) |   |   | (95,000 | ) |   |
| Cash and  equivalents, at beginning of period                                      |       |                         | 10,287,000        |                         |       |                         | 16,887,000        |   |   |   | 16,848,000 |   |   |
| Cash and equivalents, at  end of period                                            |       |                         | $ 16,887,000 |                         |       |                         | $ 16,848,000 |   |   |   | $ 16,753,000 |   |   |

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-8

----

**CACHE,INC. AND SUBSIDIARIESNOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**NOTE 1.   SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

**Business**

Cache, Inc. (togetherwith its subsidiaries, the “Company”) owns and operates two chains of women’sapparel specialty stores, of which 267 stores (as of December 31, 2005)are operated under the trade name “Cache” and 39 stores are operated under thetrade name “Lillie Rubin”. The Company specializes in the sale of high fashionwomen’s apparel and accessories in the better to expensive price range.

**Basis of Consolidation**

The consolidated financialstatements include the accounts of the Company and its subsidiaries, all ofwhich are wholly owned. All significant intercompany balances and transactionshave been eliminated.

**Useof Estimates in the Preparation of Financial Statements**

The  preparationof financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand use assumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

The most significantestimates made by management include those made in the areas of inventory;deferred taxes; contingencies; self insurance reserves; and sales returns andallowances. Management periodically evaluates estimates used in the preparationof the consolidated financial statements for continued reasonableness.Appropriate adjustments, if any, to the estimates used are made prospectivelybased on such periodic evaluations.

**Fiscal Reporting Period**

The Company reports itsannual results of operations based on fiscal periods comprised of 52 or 53weeks, which is in accordance with industry practice. Results for fiscal 2004includes 53 weeks. Results for fiscal 2005 and 2003 include 52 weeks.

**Fair Value of Financial Instruments**

The carrying amounts ofaccounts receivable, accounts payable and accrued liabilities approximate fairvalue due to the short-term nature of such items.

**Cash Equivalents**

The Company considers allhighly liquid investments that mature within three months of the date ofpurchase to be cash equivalents.

**Marketable Securities:**

Marketable securities at January 1,2005 and December 31, 2005 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 

F-9

----

discountsand such carrying values approximate fair value. A decline in the market valueof any held-to-maturity security below cost that is deemed to be other thantemporary results in a reduction in carrying amount to fair value. Theimpairment is charged to earnings and a new cost basis for the security isestablished. Premiums and discounts are amortized or accreted over the life ofthe related held-to-maturity as an adjustment to yield using the effectiveinterest method. Interest income is recognized when earned.

**Inventories**

Our inventories are valuedat lower of cost or market using the retail inventory method. Under the retailmethod (“RIM”), the valuation of inventories at cost and the resulting grossmargins are calculated by applying a calculated cost to retail ratio to theretail value of inventories. RIM is an averaging method that had been widelyused in the retail industry due to its practicality. Additionally, it isrecognized that the use of RIM will result in valuing inventories at the lowerof cost or market if markdowns are currently taken as a reduction of the retailvalue of inventories. Inherent in the RIM calculation are certain significantmanagement judgments including, among others, merchandise markon, markups, andmarkdowns, which significantly impact the ending inventory valuation at cost aswell as the resulting gross margins. We take markdowns due to changes infashion and style, based on the following factors: (i) supply on hand, (ii) historicalexperience and (iii) our expectations as to future sales. We do notanticipate any significant change in our markdown strategy that would cause asignificant change in our earnings. We believe that our RIM provides aninventory valuation, which results in a carrying value at the lower of cost ormarket.

**Equipmentand Leasehold Improvements**

Equipment and leasehold improvements are stated at cost.Depreciation and amortization are computed using the straight-line method overthe estimated useful lives of the related assets, which generally range fromthree to 10 years. For income tax purposes, accelerated methods are generallyused. Leasehold improvements are amortized over the shorter of their usefullife or lease term.

The Company evaluatesfinite-lived assets in accordance with SFAS No.144, *“Accountingfor the Impairment or Disposal of Long-lived Assets” (“SFAS No. 144”)*.This statement supersedes SFAS No. 121, *“Accountingfor Impairment of Long-lived Assets and for Long-lived Assets to Be Disposedof.”* Finite-lived assets are evaluated for recoverability inaccordance with SFAS No. 144 whenever events or changes incircumstances indicate that an asset may have been impaired. In evaluating anasset for recoverability, the Company estimates the future cash flows expectedto result from the use of the asset and eventual disposition. If the sum of theexpected future cash flows (undiscounted and without interest charges) is lessthan the carrying amount of the asset, an impairment loss, equal to the excessof the carrying amount over the fair market value of the asset is recognized.The Company evaluated its finite-lived assets during fiscal 2003, 2004 and 2005.Based on current and projected performance there was no fixed asset impairmentsin fiscal 2003, 2004 and 2005, Management believes the carrying value anduseful lives are appropriate.

**Self Insurance**

We are self-insured forlosses and liabilities related primarily to employee health and welfare claims.Losses are accrued based upon our estimates of the aggregate liability forclaims incurred using certain actuarial assumptions followed in the insuranceindustry and based on Company experience. Adjustments to earnings resultingfrom changes in historical loss trends have been insignificant for fiscal 2003,2004 and 2005. Further, we do not anticipate any significant change in losstrends, settlements or other costs that would cause a significant change in ourearnings.

F-10

----

**Revenue Recognition**

Sales are recognized atthe “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 or credits toearnings resulting from revisions to estimates on our sales return provisionwere approximately $66,000, $20,000 and $(29,000) for fiscal 2003, 2004 and2005, respectively. Amounts billed to customers for shipping and handling feesare included in net sales at the time of shipment. Costs incurred for shippingand handling are included in cost of sales.

**Operating Leases**

The Company leases retail stores and office spaceunder operating leases. Most leases contain construction allowancereimbursements by landlords, rent holidays, rent escalation clauses and/orcontingent rent provisions. The Company recognizes the related rental expenseon a straight-line basis over the lease term and records the difference betweenthe amounts charged to expense and the rent paid as a deferred rent liability.

To account forconstruction allowance reimbursements from landlords and rent holidays, theCompany records a deferred rent liability included in accrued liabilities andother long-term liabilities on the consolidated balance sheets and amortizesthe deferred rent over the lease term, as a reduction to rent expense on theconsolidated income statements. For leases containing rent escalation clauses,the Company records minimum rent expense on a straight-line basis over thelease term on the consolidated income statement. The lease term used for leaseevaluation includes option periods only in instances in which the exercise ofthe option period can be reasonably assured and failure to exercise suchoptions would result in an economic penalty.

**Advertising costs**

Costs associated withadvertising are charged to store operating expense when the advertising firsttakes place. We spent $5,610,000, $7,373,000 and $7,695,000 on advertising infiscal 2003, 2004 and 2005, respectively.

**Pre-Opening Store Expenses**

Expenses associated withthe opening of new stores are expensed as incurred.

**Employee Benefit Plan**

Employees are eligible toparticipate in the Company’s 401(k) plan if they have been employed by theCompany for one year, have reached age 21, and work at least 1,000 hoursannually. Generally, employees can defer up to 18% of their gross wages up tothe maximum limit allowable under the Internal Revenue Code. We can make adiscretionary matching contribution for the employee. Employer contributions tothe plan for fiscal 2003, 2004 and 2005 were $195,000, $205,000, and $227,000,respectively.

**Income Taxes**

The Company accounts forincome taxes in accordance with SFAS No. 109, “*Accounting for Income Taxes*.”  This statement requires the Company torecognize deferred tax liabilities and assets for the expected future taxconsequences of events that have been recognized in the Company’s financialstatements or tax returns. Under this method, deferred tax liabilities andassets are determined based on 

F-11

----

thedifference between the financial statement carrying amounts and tax bases ofassets and liabilities, using applicable tax rates for the years in which thedifferences are expected to reverse. The Company reserves for tax contingencieswhen it is probable that a liability has been incurred and the contingentamount is reasonably estimable. These reserves are based upon the Company’sbest estimation of the potential exposures associated with the timing andamount of deductions as well as various tax filing positions. Due to thecomplexity of these examination issues, $325,000 has been accrued to date.

**Stock-Based Compensation**

TheCompany periodically grants stock options to employees. Pursuant to AccountingPrinciples Board Opinion No. 25, *“Accounting for StockIssued to Employees”*, the Company accounts for stock-based employeecompensation arrangements using the intrinsic value method. If the options aregranted to employees below fair market value, compensation expense isrecognized. The Company has adopted the disclosure only provisionsSFAS No. 123 as amended by SFAS No. 148, *“Accounting for Stock Based Compensation—Transition and Disclosure, anAmendment of SFAS No. 123”*. If compensation cost for theCompany’s stock option plans had been determined in accordance with the fairvalue method prescribed by SFAS No. 123, the Company’s net incomewould have been (in thousands, except per share data):

| ** **                                                                                                                          | ** ** | **52 Weeks Ended  December 27, 2003** | ** ** | **53 weeks Ended  January 1, 2005** | ** ** | **52 Weeks Ended  December 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Net income as  reported                                                                                                             |       |                                                      | $          | 11,089,000                                              |       |                                                      |       | $ | 13,297,000 |   |   |   | $ | 13,405,000 |   |   |
| Add: Stock-based  employee compensation expense determined under APB 25, net of tax                                            |       |                                                      | —     |                                                    |       |                                                      | —     |   |   |   | — |   |   |
| Deduct: Total  stock based employee compensation determined under fair value based method of  SFAS No. 123, net of tax(1) |       |                                                      | 712,000    |                                                    |       |                                                      | 1,086,000  |   |   |   | 930,000 |   |   |
| Pro-forma net  income                                                                                                               |       |                                                      | $          | 10,377,000                                              |       |                                                      |       | $ | 12,211,000 |   |   |   | $ | 12,475,000 |   |   |
| Basic earnings per  share:                                                                                                          |       |                                                      |       |                                                    |       |                                                      |       |   |   |   |   |   |   |
| As reported                                                                                                                         |       |                                                      | $          | 0.78                                                    |       |                                                      |       | $ | 0.85 |   |   |   | $ | 0.85 |   |   |
| Pro-forma                                                                                                                           |       |                                                      | $          | 0.73                                                    |       |                                                      |       | $ | 0.78 |   |   |   | $ | 0.80 |   |   |
| Diluted earnings per  share:                                                                                                        |       |                                                      |       |                                                    |       |                                                      |       |   |   |   |   |   |   |
| As reported                                                                                                                         |       |                                                      | $          | 0.75                                                    |       |                                                      |       | $ | 0.83 |   |   |   | $ | 0.83 |   |   |
| Pro-forma                                                                                                                           |       |                                                      | $          | 0.71                                                    |       |                                                      |       | $ | 0.76 |   |   |   | $ | 0.78 |   |   |

----

In accordance with SFAS No. 123, the fairvalue of each option grant is estimated on the date of grant  using the Black-Scholes option-pricing modelusing the above assumptions for grants in the respective periods.

Inaccordance with SFAS No. 123, “*Accountingfor Stock-Based Compensation*” (“SFAS No. 123”), the fairvalue of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model using the following assumptions for grantsin the respective periods:

| ** **               | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|--------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **               | ** ** | **Grants** | ** ** | **Grants** | ** ** | **Grants** | ** ** |
| Expected dividend  rate  |       |       | $          | 0.00       |       |       |       | $ | 0.00 |   |   |   | $ | 0.00 |   |   |
| Expected  volatility     |       |       | 98.9       | %          |       |       | 97.8       | % |   |   | 53.2 | % |   |
| Risk free  interest rate |       |       | 3.0        | %          |       |       | 3.8        | % |   |   | 4.25 | % |   |
| Expected lives (years)   |       |       | 5.0        |       |       |       | 5.0        |   |   |   | 5.0 |   |   |

 

The weighted average fair value of options grantedduring fiscal years ended December 27, 2003, January 1, 2005 and December 31,2005 were $12.44, $15.17 and $12.83, respectively.

F-12

----

**Earnings Per Share**

Basic earnings per shareis computed by dividing net income by the weighted-average number of commonshares outstanding for the period. Diluted earnings per common share alsoincludes the dilutive effect of potential common shares (dilutive stockoptions) outstanding during the period.

**Segment Reporting**

SFAS No. 131, *“Disclosures about Segments of an Enterprise andRelated Information,”* establishesstandards for reporting information about a company’s operating segments. Italso establishes standards for related disclosures about products and services,geographic areas and major customers. We operate in a single operating segment—theoperation of mall-based specialty retail stores. Revenues from externalcustomers are derived from merchandise sales and we do not rely on any majorcustomers as a source of revenue.

Cache net sales mix bymerchandise category at December 31, 2005 was as follows; Sportswear, 68.7percent; Dresses, 21.7 percent and Accessories, 9.6 percent. Lillie Rubin netsales by merchandise category at December 31, 2005 were: Sportswear, 65.1percent; Dresses, 29.6 percent and Accessories, 5.3 percent.

**Concentration**

The Company has five majorsuppliers, who in total represented over 37% of purchases in fiscal 2005, ofwhich the largest vendor accounted for 21% of the purchases during the year. Theloss of any of these suppliers could adversely affect the Company’s operations.

**RecentAccounting Developments**

In December 2004, theFASB issued SFAS No. 123R, “*Share-BasedPayment*,” which revises SFAS No. 123, “*Accounting for Stock-Based Compensation*,”and supersedes APB Opinion No. 25, “*Accountingfor Stock Issued to Employees*.” This Statement focuses primarily on accounting for transactions in whichan entity obtains employee services in share-based payment transactions. ThisStatement requires an entity to recognize the cost of employee servicesreceived in share-based payment transactions and measure the cost on a grant-datefair value of the award. That cost will be recognized over the period duringwhich an employee is required to provide service in exchange for the award. Theprovisions of SFAS No. 123R will be effective for the Company’s financialstatements issued for periods beginning after December 15, 2005. Weestimate that the effect on fiscal 2006 earnings per share will beapproximately $0.06 per share.

In May 2005, the FASBissued SFAS No. 154, *“Accounting Changes andError Corrections”* (“SFAS No. 154”), which replaces APB OpinionNo. 120, *“Accounting Changes,”* and SFAS No. 3,*“Reporting Accounting Changes in Interim FinancialStatements.”* SFAS No. 154 changes the requirements foraccounting and reporting a change in accounting principle, and applies to allvoluntary changes in accounting principles, as well as changes required by anaccounting pronouncement in the unusual instance it does not include specifictransition provisions. Specifically, SFAS No. 154 requires retrospectiveapplication to prior periods’ financial statements, unless it is impracticableto determine the period-specific effects or the cumulative effect of thechange. When it is impracticable to determine the effects of the change, thenew accounting principle must be applied to the balances of assets andliabilities as of the beginning of the earliest period for which retrospectiveapplication is practicable and a corresponding adjustment must be made to theopening balance of retained earnings for that period rather than being reportedin an income statement. When it is impracticable to determine the cumulativeeffect of the change, the new principle must be applied as if it were adoptedprospectively from the earliest date practicable. SFAS No. 154 iseffective for accounting changes and corrections of errors made in fiscal years

F-13

----

beginningafter December 15, 2005. SFAS No. 154 does not change the transitionprovisions of any existing pronouncements. The Company has evaluated the impactof SFAS No. 154 and does not expect the adoption of this statement to havea significant impact on its consolidated statement of income or financialcondition. The Company will apply SFAS No. 154 in future periods, whenapplicable.

In March 2005, the FASBissued Interpretation No. 47, “*Accounting for ConditionalAsset Retirement Obligations — an interpretation of FASB Statement No. 143*”(“FIN 47”). FIN 47 requires an entity to recognize a liability forthe fair value of a conditional asset retirement obligation if the fair valuecan be reasonably estimated. A conditional asset retirement obligation is alegal obligation to perform an asset retirement activity in which the timing ormethod of settlement are conditional upon a future event that may or may not bewithin control of the entity. The Company adopted FIN 47 for the fiscalyear ended December 31, 2005 and the adoption had an immaterial impact onthe financial position or results of operations.

**SupplementalStatements of Cash Flow Information**

The Company paid nointerest charges in fiscal 2003, 2004 and 2005. During fiscal 2003, 2004 and2005 the Company paid $4,071,000, $4,143,000 and $8,248,000 in income taxes,respectively.

**NOTE 2.**   RECEIVABLES

| ** **              | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2005**            | ** ** | **2005**              | ** ** |
| Construction allowances |       | $                   | 3,270,000  |                  |       | $ | 1,523,000 |   |   |
| Third party credit card |       | 2,885,000           |       |                  | 3,500,000  |   |   |
| Other                   |       | 390,000             |       |                  | 711,000    |   |   |
|                    |       | $                   | 6,545,000  |                  |       | $ | 5,734,000 |   |   |

 

**NOTE3.**   EQUIPMENT AND LEASEHOLD IMPROVEMENTS 

| ** **                                      | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2005**            | ** ** | **2005**              | ** ** |
| Leasehold improvements                          |       | $                   | 45,349,000 |                  | $          | 51,827,000 |   |
| Furniture, fixtures, and equipment              |       | 45,049,000          |       | 51,715,000            |       |
|                                            |       | 90,398,000          |       | 103,542,000           |       |
| Less: accumulated depreciation and amortization |       | (43,280,000         | )          | (50,782,000           | )          |
|                                            |       | $                   | 47,118,000 |                  | $          | 52,760,000 |   |

 

Store operating andgeneral and administrative expenses include depreciation and amortization of$6,395,000, $8,232,000 and $9,779,000 in fiscal 2003, 2004 and 2005,respectively.

F-14

----

**NOTE 4.**   ACCRUEDLIABILITIES

| ** **                          | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2005**            | ** ** | **2005**              | ** ** |
| Operating expenses                  |       | $                   | 3,315,000  |                  | $          | 2,894,000 |   |
| Other taxes                         |       | 2,185,000           |       | 2,540,000             |       |
| Group insurance                     |       | 509,000             |       | 598,000               |       |
| Sales return reserve                |       | 832,000             |       | 803,000               |       |
| Leasehold additions                 |       | 928,000             |       | 859,000               |       |
| Other customer deposits and credits |       | 3,858,000           |       | 4,752,000             |       |
|                                |       | $                   | 11,627,000 |                  | $          | 12,446,000 |   |

 

Leasehold additionsgenerally represent a liability to general contractors for a final 10% payable onconstruction contracts for store construction or renovations.

**NOTE 5.**   BANKDEBT

During November 2005,the Company reached an agreement with its bank to amend the amount availableunder the Amended Revolving Credit Facility. Pursuant to the newly AmendedRevolving Credit Facility, $17,500,000 is available until expiration at November 30,2008. The amounts outstanding under the credit facility bear interest at amaximum per annum rate equal to the bank’s prime rate, currently 7.50% atFebruary 25, 2006, less 0.25%. The agreement contains selected financialand other covenants. Effective upon the occurrence of an Event of Default underthe Revolving Credit Facility, the Company grants to the bank a securityinterest in the Company’s inventory and certain receivables. The Company has atall times been in compliance with all loan covenants.

There have been noborrowings against the line of credit during fiscal 2004 and 2005. There wereoutstanding letters of credit of $3.1 million and $1.0 million pursuant to theRevolving Credit Facility at January 1, 2005 and December 31, 2005,respectively.

**NOTE 7.**   OTHERLIABILITIES

Other liabilitiesprimarily consist of accruals of future rent escalations and unamortizedlandlord construction allowances.

**NOTE8.**   COMMITMENTS AND CONTINGENCIES

**Leases**

At December 31, 2005,the Company was obligated under operating leases for various store locationsexpiring at various times through 2019. The terms of the leases generallyprovide for the payment of minimum annual rentals, contingent rentals based ona percentage of sales in excess of a stipulated amount, and a portion of realestate taxes, insurance and common area maintenance. Most leases containleasehold improvement reimbursements from landlords and/or rent holidays. Inrecognizing landlord incentives and minimum rent expenses, the Companyamortizes the charges on a straight line basis over the lease term.

F-15

----

Storerental expense related to these leases, included in cost of sales, consisted ofthe following:

| ** **          | ** ** | **52 Weeks**     | ** ** | **53 Weeks**   | ** ** | **52 Weeks**     | ** ** |
|---------------------|------------|-----------------------|------------|---------------------|------------|-----------------------|------------|
| ** **          | ** ** | **Ended**             | ** ** | **Ended**           | ** ** | **Ended**             | ** ** |
| ** **          | ** ** | **December 27,** | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
| ** **          | ** ** | **2003**              | ** ** | **2005**            | ** ** | **2005**              | ** ** |
| Minimum rentals     |       | $                     | 19,058,000 |                | $          | 21,410,000            |       | $ | 23,980,000 |   |
| Contingent  rentals |       | 8,258,000             |       | 9,176,000           |       | 10,625,000            |       |
|                |       | $                     | 27,316,000 |                | $          | 30,586,000            |       | $ | 34,605,000 |   |

 

Futureminimum payments under non-cancelable operating leases consisted of thefollowing at December 31, 2005:

| Fiscal Year                          |   |       |        |
|--------------------------------------|--------|------------|-------------|
| 2006                                 |   | $          | 25,859,000  |   |
| 2007                                 |   | 24,679,000 |        |
| 2008                                 |   | 23,868,000 |        |
| 2009                                 |   | 23,234,000 |        |
| 2010                                 |   | 21,388,000 |        |
| Thereafter                           |   | 69,597,000 |        |
| Total future minimum  lease payments |   | $          | 188,625,000 |   |

 

The operating leasesincluded in the above table do not include contingent rent based upon salesvolume, which represented approximately 0.8% of minimum lease obligations infiscal 2005, or variable costs such as maintenance, insurance and taxes, whichrepresented approximately 43.5% of minimum lease obligations in fiscal 2005.

**ContractualObligations and Commercial Commitments**

Thefollowing tables summarize our contractual obligations and commercialcommitments as of December 31, 2005:

| ** **              | ** ** | **Payments Due in Period** | ** ** |
|-------------------------|------------|-------------------------------------------|------------|
| ** **              | ** ** | **Total**                                 | ** ** | **Within   1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
| ** **              | ** ** | **(In thousands)**                   | ** ** |
| Contractual Obligations | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Employment contracts    |       | $                                         | 4,110      |   | $ | 1,255 |   | $ | 2,855 |   | $ | — |   | $ | — |   |
| Purchase Obligations    |       | 38,222                                    |       | 38,222 |   | — |   | — |   | — |   |
| Total                   |       | $                                         | 42,332     |   | $39,477 |   | $2,855 |   | $— |   | $— |   |
|                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                | ** ** | **Payments Due in Period** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **Total**                                 | ** ** | **Within   1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
| ** **                | ** ** | **(In thousands)**                   | ** ** |
| Commercial Commitments    |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit facility           |       | $                                         | —     |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Standby Letters of credit |       | 969                                       |       |   | 969 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total                     |       | $                                         | 969        |   |   | $ | 969 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |

 

We issue standby letters of credit primarily for theimportation of merchandise inventories. The Company does not have any offbalance sheet financing arrangements.

F-16

----

**Contingencies**

The Company is exposed to a number of asserted andunasserted potential claims. Management does not believe it is probable thatresolution of these matters will result in a material loss.

The Company has noguarantees, subleases or assigned lease obligations as of January 1, 2005and December 31, 2005.

**NOTE 9.**   INCOME TAXES

Theprovision for income taxes includes:

| ** **                  | ** ** | **52 Weeks**     | ** ** | **53 Weeks**   | ** ** | **52 Weeks**     | ** ** |
|-----------------------------|------------|-----------------------|------------|---------------------|------------|-----------------------|------------|
| **Ended**                   | ** ** | **Ended**             | ** ** | **Ended**           | ** ** | **Ended**             | ** ** |
| ** **                  | ** ** | **December 27,** | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
| ** **                  | ** ** | **2003**              | ** ** | **2005**            | ** ** | **2005**              | ** ** |
| Current:                    |       |                  |       |                |       |                  |       |   |   |
| Federal                     |       |                  | $          | 5,105,000           |       |                  | $          | 4,328,000 |   | $ | 7,792,000 |   |
| State                       |       |                  | 1,067,000  |                |       | 996,000               |       | 925,000 |   |
|                        |       |                  | 6,172,000  |                |       | 5,324,000             |       | 8,717,000 |   |
| Deferred:                   |       |                  |       |                |       |                  |       |   |   |
| Federal                     |       |                  | 1,110,000  |                |       | 2,489,000             |       | (959,000 | ) |
| State                       |       |                  | (193,000   | )                   |       | 217,000               |       | (83,000 | ) |
|                        |       |                  | 917,000    |                |       | 2,706,000             |       | (1,042,000 | ) |
| Provision for income  taxes |       |                  | $          | 7,089,000           |       |                  | $          | 8,030,000 |   | $ | 7,675,000 |   |

 

TheCompany’s effective tax rate, as a percent of income before income taxesdiffers from the statutory federal tax rates as follows:

| ** **                                               | ** ** | **52 Weeks**     | ** ** | **53 Weeks**   | ** ** | **52 Weeks**     | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **Ended**             | ** ** | **Ended**           | ** ** | **Ended**             | ** ** |
| ** **                                               | ** ** | **December 27,** | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
| ** **                                               | ** ** | **2003**              | ** ** | **2005**            | ** ** | **2005**              | ** ** |
| Effective federal  tax rate                              |       |                  | 34.5       | %                   |       |                  | 34.5       | % |   |   | 35.0 | % |   |
| State and local income taxes, net of federal tax benefit |       |                  | 4.7        | %                   |       |                  | 3.3        | % |   |   | 3.5 | % |   |
| Other net,  primarily permanent items                    |       |                  | (0.2       | )%                  |       |                  | (0.1       | )% |   |   | (2.1 | )% |   |
| Provision for income  taxes                              |       |                  | 39.0       | %                   |       |                  | 37.7       | % |   |   | 36.4 | % |   |

 

Themajor components of the Company’s net deferred tax assets (liabilities) at January 1,2005 and December 31, 2005 are as follows:

| ** **           | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
|----------------------|------------|---------------------|------------|-----------------------|------------|
| **Current**          | ** ** | ** **          | ** ** | **2005**              | ** ** | **2005** | ** ** |
| Group insurance      |       | $                   | 199,000    |                  |       | $ | 237,000 |   |   |
| Sales return reserve |       | 325,000             |       |                  | 319,000    |   |   |
| Inventory            |       | 407,000             |       |                  | 481,000    |   |   |
| Prepaid expenses     |       | (364,000            | )          |                  | (346,000   | ) |   |
| Total Current        |       | $                   | 567,000    |                  |       | $ | 691,000 |   |   |
|                      |            |                     |            |                       |            |  |  |  |  |  |  |

 

F-17

----

 

| ** **                                  | ** ** | **January 1,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| **Non-current**                             | ** ** | ** **          | ** ** | **2005**              | ** ** | **2005** | ** ** |
| State tax net  operating loss carryforwards |       | $                   | 76,000     |                  | $          | 76,000 |   |
| Deferred rent                               |       | 590,000             |       | 875,000               |       |
| Deferred  construction allowances           |       | —              |       | (650,000              | )          |
| Other  (principally depreciation expense)   |       | (3,689,000          | )          | (2,406,000            | )          |
| Total Non-current                           |       | $                   | (3,023,000 | )                     | $          | (2,105,000 | ) |
|                                             |            |                     |            |                       |            |  |  |  |  |

 

The Company’s income taxreturns are periodically audited by various state and local jurisdictions.Additionally, the Internal Revenue Service audits the Company’s federal incometax return. The Company reserves for tax contingencies, when it is probablethat a liability has been incurred and the contingent amount is reasonablyestimable. These reserves are based upon the Company’s best estimation of thepotential exposures associated with the timing and amount of deductions as wellas various tax filing positions. Due to the complexity of these examinationissues, $325,000 has been accrued to date.

**NOTE10.   INCENTIVE STOCK OPTION PLAN**

On October 4, 2000, the Company adopted the 2000Stock Option Plan. The plan is administered by the Compensation and PlanAdministration Committee of the Company’s Board of Directors. Under the optionplan the Company reserved 550,000 shares of the Company’s authorized commonstock for issuance to officers and key employees of the Company.

On July 22, 2003, the Company adopted the 2003Stock Option Plan. The plan is administered by the Compensation and PlanAdministration Committee of the Company’s Board of Directors. Under the optionplan the Company reserved 900,000 shares of the Company’s authorized commonstock for issuance to officers and key employees of the Company.

On June 18, 2004, the Company paid a 3 for 2stock dividend to holders of record.

Options granted under the plans have a ten-year termand may be either incentive stock options or non-qualified stock options. Theoptions are granted at an exercise price equal to the fair market value on thedate of grant and generally vest over a four year period. The granted optionsgenerally become exercisable at the maximum rate of 25% per annum. The price ispayable in cash at the time of the exercise or, at the discretion of theAdministrators, through the delivery of shares of Common Stock or the Company’swithholding of shares otherwise deliverable to the employee, or a combinationthereof.

F-18

----

Thefollowing table summarizes all stock option transactions for the three fiscalyears ended December 31, 2005:

| ** **                                         | ** ** | **Options  Outstanding** | ** ** | **Exercise  Prices ** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| Shares under  option as of December 28, 2002  |       |                     | 1,710,375  |                       |       |   | $ | 2.40 |   |   |
| Options granted in 2003                            |       |                     | 1,222,500  |                       |       |   | 12.44 |   |   |
| Options exercised in 2003                          |       |                     | (871,500   | )                          |       |   | 2.09 |   |   |
| Options canceled in 2003                           |       |                     | (39,375    | )                          |       |   | 3.30 |   |   |
| Shares under option as of December 27, 2003   |       |                     | 2,022,000  |                       |       |   | 8.46 |   |   |
| Options granted in 2004                            |       |                     | 105,000    |                       |       |   | 15.17 |   |   |
| Options exercised in 2004                          |       |                     | (392,750   | )                          |       |   | 2.36 |   |   |
| Options canceled in 2004                           |       |                     | (82,500    | )                          |       |   | 9.67 |   |   |
| Shares under option as of January 1, 2005     |       |                     | 1,651,750  |                       |       |   | 10.43 |   |   |
| Options granted in 2005                            |       |                     | 140,000    |                       |       |   | 12.83 |   |   |
| Options exercised in 2005                          |       |                     | (105,500   | )                          |       |   | 5.63 |   |   |
| Options canceled in 2005                           |       |                     | (204,750   | )                          |       |   | 11.48 |   |   |
| Shares under  options as of December 31, 2005 |       |                     | 1,481,500  |                       |       |   | $ | 10.85 |   |   |

 

| **Options Exercisable at:** | ** ** | ** ** | ** ** | **Number of Shares** | ** ** | **Weighted average  exercise price** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------------|------------|------------------------------------------------|------------|
| December 27,  2003               |       |       | 531,750    |                           |       |                                           | $          | 2.71 |   |   |
| January 1,  2005                 |       |       | 712,375    |                           |       |                                           | $          | 7.47 |   |   |
| December 31, 2005                |       |       | 742,250    |                           |       |                                           | $          | 8.80 |   |   |

 

Significantoption groups outstanding at December 31, 2005 and related weightedaverage price and life information follows:

| **Grant Date** | ** ** | ** ** | ** ** | **Options  Outstanding** | ** ** | **Options  Exercisable** | ** ** | **Exercise  Price** | ** ** | **Remaining  Life (Years)** | ** ** |
|---------------------|------------|------------|------------|--------------------------|------------|--------------------------|------------|---------------------|------------|----------------------------------|------------|
| 8/30/05             |       |       | 25,000     |                     |       |                     | —     |                |       |                             | $          | 16.40 |   |   |   | 10 |   |   |
| 7/25/05             |       |       | 10,000     |                     |       |                     | —     |                |       |                             | 18.30      |   |   |   | 10 |   |   |
| 5/3/05              |       |       | 80,000     |                     |       |                     | 16,000     |                |       |                             | 11.53      |   |   |   | 9 |   |   |
| 5/2/05              |       |       | 10,000     |                     |       |                     | 2,000      |                |       |                             | 11.61      |   |   |   | 9 |   |   |
| 4/25/05             |       |       | 15,000     |                     |       |                     | 3,000      |                |       |                             | 11.00      |   |   |   | 9 |   |   |
| 1/22/04             |       |       | 105,000    |                     |       |                     | 47,250     |                |       |                             | 15.17      |   |   |   | 8 |   |   |
| 7/22/03             |       |       | 932,250    |                     |       |                     | 369,750    |                |       |                             | 12.65      |   |   |   | 7 |   |   |
| 4/16/02             |       |       | 114,500    |                     |       |                     | 114,500    |                |       |                             | 4.69       |   |   |   | 6 |   |   |
| 10/2/01             |       |       | 77,250     |                     |       |                     | 77,250     |                |       |                             | 2.13       |   |   |   | 6 |   |   |
| 10/4/00             |       |       | 112,500    |                     |       |                     | 112,500    |                |       |                             | 1.73       |   |   |   | 5 |   |   |

 

 

F-19

----

**NOTE 11.   EarningsPer Share**

Thefollowing table sets forth the computations of basic and diluted earnings pershare (in thousands, except per share amounts):

| ** **                                                      | ** ** | **52 Weeks Ended  December 27, 2003** | ** ** | **53 weeks Ended  January 1, 2005** | ** ** | **52 Weeks Ended  December 31, 2005** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Net income                                                      |       |                                                      | $          | 11,089,000                                              |       |                                                      |       | $ | 13,297,000 |   |   |   | $ | 13,405,000 |   |   |
| Net income per  share—basic                                |       |                                                      | $          | 0.78                                                    |       |                                                      |       | $ | 0.85 |   |   |   | $ | 0.85 |   |   |
| Net income per  share—diluted                              |       |                                                      | $          | 0.75                                                    |       |                                                      |       | $ | 0.83 |   |   |   | $ | 0.83 |   |   |
| Weighted average  common shares outstanding                     |       |                                                      | 14,256,000 |                                                    |       |                                                      | 15,589,000 |   |   |   | 15,726,000 |   |   |
| Dilutive effect  of stock options                               |       |                                                      | 465,000    |                                                    |       |                                                      | 415,000    |   |   |   | 424,000 |   |   |
| Weighted average common  and potentially dilutive common shares |       |                                                      | 14,721,000 |                                                    |       |                                                      | 16,004,000 |   |   |   | 16,150,000 |   |   |

 

Optionsto purchase common shares $16.40 and $18.30 per share during Fiscal 2005 wereoutstanding, but were not included in the computation of dilutive earnings pershare because to do so would have been anti-dilutive for the period presented.

| ** **        | ** ** | **52 Weeks Ended  December 27, 2003** | ** ** | **53 Weeks Ended  January 1,2005** | ** ** | **52 Weeks Ended  December 31,2005** | ** ** |
|-------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| Net Income        |       |                                                      |       |                                              |       |                                                |       |   |   |   |   |   |   |
| —as reported |       |                                                      | $          | 11,089,000                                        |       |                                                |       | $ | 13,297,000 |   |   |   | $ | 13,405,000 |   |   |
| —pro-forma   |       |                                                      | $          | 10,377,000                                        |       |                                                |       | $ | 12,211,000 |   |   |   | $ | 12,475,000 |   |   |
| Basic EPS         |       |                                                      |       |                                              |       |                                                |       |   |   |   |   |   |   |
| —as reported |       |                                                      | $          | 0.78                                              |       |                                                |       | $ | 0.85 |   |   |   | $ | 0.85 |   |   |
| —pro-forma   |       |                                                      | $          | 0.73                                              |       |                                                |       | $ | 0.78 |   |   |   | $ | 0.80 |   |   |
| Diluted EPS       |       |                                                      |       |                                              |       |                                                |       |   |   |   |   |   |   |
| —as reported |       |                                                      | $          | 0.75                                              |       |                                                |       | $ | 0.83 |   |   |   | $ | 0.83 |   |   |
| —pro-forma   |       |                                                      | $          | 0.71                                              |       |                                                |       | $ | 0.76 |   |   |   | $ | 0.78 |   |   |

 

 

F-20

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**NOTE12.**   QUARTERLY RESULTS OF OPERATIONS(UNAUDITED)

| ** **                                    | ** ** | **First  Quarter**                        | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                    | ** ** | **(In thousands, except per share data)** | ** ** |
| **53 weeks ended January 1,  2005**      |       |                                      |       |                |       |               |       |                |       |
| Net sales                                     |       | $57,194                                   |       | $62,087             |       | $49,430            |       | $78,589             |       |
| Gross profit                                  |       | 25,688                                    |       | 29,149              |       | 19,596             |       | 37,122              |       |
| Income (loss)  before income tax provision    |       | 5,246                                     |       | 7,229               |       | (854               | )          | 9,706               |       |
| Income tax  provision (benefit)               |       | 1,997                                     |       | 2,868               |       | (333               | )          | 3,498               |       |
| Net income (loss)                             |       | $3,249                                    |       | $4,361              |       | ($521              | )          | $6,208              |       |
| Basic and diluted  earnings (loss) per share: |       |                                      |       |                |       |               |       |                |       |
| Basic earnings (loss)  per share:             |       | $0.21                                     |       | $0.28               |       | ($0.03             | )          | $0.40               |       |
| Diluted earnings (loss)  per share:           |       | $0.20                                     |       | $0.27               |       | ($0.03             | )          | $0.39               |       |
| **52  weeks ended December 31, 2005**    |       |                                      |       |                |       |               |       |                |       |
| Net sales                                     |       | $62,793                                   |       | $66,970             |       | $57,262            |       | $79,320             |       |
| Gross profit                                  |       | 27,133                                    |       | 30,366              |       | 26,113             |       | 37,749              |       |
| Income before  income tax provision           |       | 2,908                                     |       | 4,960               |       | 1,820              |       | 11,392              |       |
| Income tax  provision                         |       | 1,151                                     |       | 1,960               |       | 713                |       | 3,851               |       |
| Net income                                    |       | $1,757                                    |       | $3,000              |       | $1,107             |       | $7,541              |       |
| Basic and diluted  earnings per share:        |       |                                      |       |                |       |               |       |                |       |
| Basic earnings per  share:                    |       | $0.11                                     |       | $0.19               |       | $0.07              |       | $0.48               |       |
| Diluted earnings per share:                   |       | $0.11                                     |       | $0.19               |       | $0.07              |       | $0.47               |       |

 

Per share amounts are calculated independently foreach quarter. The sum of the quarters may not equal the full year per shareamounts.

F-21

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**Schedule II**

**Cache,Inc and SubsidiariesValuation and Qualifying Accounts**

| ** **                         | ** ** | ** ** | ** ** | **Additions**                             | ** ** | ** **                                   | ** ** | ** **          | ** ** |
|------------------------------------|------------|------------|------------|-------------------------------------------|------------|----------------------------------------------|------------|---------------------|------------|
| **Sales Return Reserve** | ** ** | ** ** | ** ** | **Balance at  Beg. Of  Period** | ** ** | **Charge to  Costs and  Expenses** | ** ** | **Other  Accounts** | ** ** | **Deductions  $** | ** ** | **Balance at  End of  Period** | ** ** |
| 52 Weeks Ended                     |       |       |       |                                      |       |                                         |       |                |       |   |   |   |   |   |   |
| December 27, 2003             |       | $          | 746,000    |                                      |       | $                                            | 66,000     |                |       |   | — |   |   | — |   | $ | 812,000 |   |
| 53 Weeks Ended                     |       |       |       |                                      |       |                                         |       |                |       |   |   |   |   |   |   |
| January 1, 2005               |       | $          | 812,000    |                                      |       | $                                            | 20,000     |                |       |   | — |   |   | — |   | $ | 832,000 |   |
| 52 Weeks Ended                     |       |       |       |                                      |       |                                         |       |                |       |   |   |   |   |   |   |
| December 31,  2005            |       | $          | 832,000    |                                      |       | $                                            | —     |                |       |   | — |   |   | ($29,000) |   | $ | 803,000 |   |
|                                    |            |            |            |                                           |            |                                              |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

F-22

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