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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 2, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from.......to.......
COMMISSION FILE NUMBER: 0-10345
CACHE, INC.
(Exact name of registrant as specified in its Charter)
FLORIDA 59-1588181
---------------------------------- ----------------------------------
(State or other jurisdiction o (IRS Employer Identification No.)
incorporation or organization)
1440 BROADWAY, NEW YORK, NEW YORK 10018
--------------------------------- -----
(Address of principal executive offices) (zip code)
212-575-3200
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each issuer's classes of common
stock, as of the latest practicable date.
COMMON STOCK, $.01 15,706,428
- ----------------------------------- -----------------------------------
CLASS OF STOCK OUTSTANDING OUTSTANDING AT MAY 10, 2005
CACHE, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 2
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits 15
SIGNATURES 16
2
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 27,
ASSETS 2004
----
April 2, January 1, As restated, see
2005 2005 NOTE 10
---- ---- -------
Current assets:
Cash and equivalents $ 18,646,000 $ 16,848,000 $ 18,200,000
Marketable securities 24,000,000 25,874,000 22,538,000
Receivables, net 5,992,000 6,545,000 3,865,000
Inventories 34,393,000 32,296,000 29,824,000
Deferred income taxes 616,000 567,000 930,000
Prepaid expenses and other current assets 1,600,000 1,948,000 1,000,000
-------------------- -------------------- -------------------
Total current assets 85,247,000 84,078,000 76,357,000
Equipment and leasehold improvements, net 48,287,000 47,118,000 35,307,000
Other assets 850,000 832,000 832,000
-------------------- -------------------- -------------------
Total assets $ 134,384,000 $ 132,028,000 $ 112,496,000
==================== ==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,957,000 $ 17,055,000 $ 16,259,000
Income taxes payable 502,000 --- 224,000
Accrued compensation 2,563,000 1,927,000 1,719,000
Accrued liabilities 10,164,000 11,627,000 9,822,000
-------------------- -------------------- -------------------
Total current liabilities 30,186,000 30,609,000 28,024,000
Other liabilities 14,496,000 13,556,000 9,452,000
Deferred income taxes, net 2,978,000 3,023,000 701,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01; authorized, 20,000,000 shares;
15,702,053, 15,655,053 and 10,416,150 shares issued
and outstanding 157,000 157,000 104,000
Additional paid-in capital 34,832,000 34,705,000 34,285,000
Retained earnings 51,735,000 49,978,000 39,930,000
-------------------- -------------------- -------------------
Total stockholders' equity 86,724,000 84,840,000 74,319,000
-------------------- -------------------- -------------------
Total liabilities and stockholders'
equity $ 134,384,000 $ 132,028,000 $ 112,496,000
==================== ==================== ===================
See accompanying Notes to Condensed Consolidated Financial Statements.
3
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS ENDED
(UNAUDITED)
April 2, March 27,
2005 2004
-------------------- -------------------
Net sales $ 62,793,000 $ 57,194,000
Cost of sales, including occupancy and buying costs 35,660,000 31,506,000
-------------------- -------------------
Gross profit 27,133,000 25,688,000
-------------------- -------------------
Expenses
Store operating expenses 20,593,000 16,889,000
General and administrative expenses 3,789,000 3,648,000
-------------------- -------------------
Total expenses
24,382,000 20,537,000
-------------------- -------------------
Operating income 2,751,000 5,151,000
Interest income 157,000 95,000
-------------------- -------------------
Income before income taxes 2,908,000 5,246,000
Income tax provision 1,151,000 1,997,000
-------------------- -------------------
Net income $ 1,757,000 $ 3,249,000
==================== ===================
Basic earnings per share $0.11 $0.21
================= =================
Diluted earnings per share $0.11 $0.20
================= =================
Basic weighted average shares outstanding 15,686,000 15,438,000
================= =================
Diluted weighted average shares outstanding 16,002,000 15,957,000
================= =================
See accompanying Notes to Condensed Consolidated Financial Statements.
4
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED
(Unaudited)
March 27,
2004
April 2, As restated, see
2005 Note 10
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
Net income $ 1,757,000 $ 3,249,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,238,000 1,740,000
(Decrease) increase in deferred income taxes (94,000) 20,000
Reversal of future rent escalations (362,000) (243,000)
Change in assets and liabilities:
---------------------------------
Decrease in receivables 553,000 749,000
Increase in inventories (2,097,000) (3,100,000)
Decrease in prepaid expenses and other current assets 348,000 239,000
(Decrease) increase in accounts payable (98,000) 1,897,000
Increase in income taxes payable 502,000 1,494,000
Increase (decrease) in accrued liabilities
and accrued compensation 554,000 (3,467,000)
-------------------- -------------------
Net cash provided by operating activities 3,301,000 2,578,000
-------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
-------------------------------------
Maturities of marketable securities 5,117,000 ---
Purchases of marketable securities (3,243,000) (2,792,000)
Purchases of equipment and leasehold improvements (3,486,000) (3,172,000)
-------------------- -------------------
Net cash used in investing activities (1,612,000) (5,964,000)
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
-------------------------------------
Proceeds from the issuance of common stock 127,000 4,658,000
Other, net (18,000) 41,000
-------------------- -------------------
Net cash provided by financing activities 109,000 4,699,000
-------------------- -------------------
Net increase in cash and equivalents 1,798,000 1,313,000
Cash and equivalents, at beginning of period 16,848,000 16,887,000
-------------------- -------------------
Cash and equivalents, at end of period $ 18,646,000 $ 18,200,000
==================== ===================
Supplemental disclosure of cash flow information:
Income taxes paid $ 56,000 $ 197,000
Income tax benefit from stock option exercises --- 1,270,000
See accompanying Notes to Condensed Consolidated Financial Statements.
5
CACHE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
References to the "Company," "we," "us," or "our" means Cache, Inc., together
with its wholly-owned subsidiaries, except as expressly indicated or unless the
context otherwise requires. We operate two chains of women's apparel specialty
stores of which 257 stores are operated under the trade name "Cache" and 37
stores are operated under the trade name "Lillie Rubin", as of April 2, 2005.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X and do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States. However, in the opinion of our management, all
known adjustments necessary for a fair presentation of the results of the
interim periods have been made. These adjustments consist primarily of normal
recurring accruals and estimates that impact the carrying value of assets and
liabilities. Actual results may materially differ from these estimates.
These condensed consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the year ended
January 1, 2005, which are included in the Company's Annual Report on Form 10-K
with respect to such period filed with the Securities and Exchange Commission.
All significant intercompany accounts and transactions have been eliminated. The
January 1, 2005 condensed consolidated balance sheet amounts are derived from
the Company's audited consolidated financial statements.
The Company's Fiscal Year ("Fiscal Year" or "Fiscal") refers to the 52 or 53
weeks, as applicable, ending the Saturday nearest to December 31. The year ended
December 31, 2005 ("Fiscal 2005") is a 52 week year as compared to the years
ended January 1, 2005 ("Fiscal 2004") and December 27, 2003 ("Fiscal 2003"),
that are 53 and 52 week years, respectively.
The Company's significant accounting policies are described in Note 1 to the
consolidated financial statements included in the 2004 10-K.
2. COMMON STOCK SPLIT
On June 18, 2004, we completed a three-for-two stock split for holders of record
on May 21, 2004. All share amounts have been retroactively restated to reflect
the stock split.
3. STOCK BASED COMPENSATION
We periodically grant stock options to our employees, and we account for these
stock options in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). We
have also adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation
- -- Transition and Disclosure" ("SFAS No. 148"). In accordance with the
provisions of SFAS No. 148 and APB No. 25, we have not recognized compensation
expense related to stock options. If the options are granted to employees below
fair market value, compensation expense is recognized. If we would have elected
to recognize compensation expense based on the fair value of options at grant
date, as prescribed by SFAS No. 148, our net income and income per share would
have been reduced to the pro forma amounts indicated in the following table:
6
13 Weeks Ended
----------------------------------------
April 2, March 27,
2005 2004
------------- -------------
Net income:
As reported $1,757,000 $3,249,000
Deduct: Total stock based employee
compensation expense determined under fair
value based method, net of taxes (143,000) (272,000)
Pro forma net income $1,614,000 $2,977,000
Basic earnings per share:
As reported $0.11 $0.21
Pro forma 0.10 0.19
Diluted earnings per share:
As reported $0.11 $0.21
Pro forma 0.10 0.19
There were no option grants in the thirteen week period ended April 2, 2005. For
the thirteen week period ended March 27, 2004, stock options totaling 105,000
were granted.
4. BASIC AND DILUTED EARNINGS
In accordance with SFAS No. 128, "Earnings Per Share", basic earnings per share
has been computed based upon the weighted average of common shares outstanding.
Diluted earnings per share gives effect to outstanding stock options.
Earnings per common share has been computed as follows:
13 Weeks Ended
-----------------------------------------
April 2, March 27,
2005 2004
---------------- ----------------
Net income $1,757,000 $3,249,000
Basic weighted number of average
shares outstanding 15,686,000 15,438,000
Incremental shares from assumed issuances
of stock options 316,000 519,000
Diluted weighted average number of shares outstanding 16,002,000 15,957,000
Net income per share - Basic $0.11 $0.21
- Diluted $0.11 $0.20
Options to purchase 1,596,000 common shares with exercise prices ranging from
$1.73 to $15.17 per share were outstanding at April 2, 2005, and options to
purchase 1,775,000 common shares with exercise prices ranging from $1.73 to
$15.17 per share were outstanding at March 27, 2004 and, in each case, were
included in the computation of diluted earnings per share for the fiscal quarter
ended April 2, 2005 and March 27, 2004, respectively.
7
5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB published SFAS No. 123R, pursuant to which all forms
of share-based payments to employees, including employee stock options, would be
treated as compensation and recognized in the income statement. SFAS No. 123R is
effective beginning the first quarter of Fiscal 2006. The Company currently
accounts for stock options under APB No. 25. The Company is continuing to
evaluate the full impact of SFAS No. 123R for its adoptions in the first quarter
of Fiscal 2006.
In December 2004, the FASB published Statement of Financial Accounting Standards
No. 151, "Inventory Costs" ("SFAS No. 151"), an amendment of Accounting Research
Bulletin (ARB) No. 43, Chapter 4, which clarifies that abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges. In addition, SFAS No. 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
Company has determined that SFAS No. 151 will not have a material impact on its
condensed consolidated results of operations, financial position or cash flows.
FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations ("FIN 47"), was issued in March 2005. This interpretation will be
effective for the Company in the fourth quarter of 2005 and clarifies that an
entity is required to recognize a liability for the fair value of a conditional
asset retirement obligation when incurred if the liability's fair value can be
reasonably estimated. The Company is currently in the process of determining the
impact.
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
April 2, January 1, March 27,
2005 2005 2004
------------------ ------------------ ------------------
Leasehold improvements $ 46,317,000 $ 45,349,000 $ 36,734,000
Furniture, fixtures and equipment 46,875,000 45,049,000 37,917,000
------------------ ------------------ ------------------
93,192,000 90,398,000 74,651,000
Less: accumulated depreciation
and amortization 44,905,000 43,280,000 39,344,000
------------------ ------------------ ------------------
$ 48,287,000 $ 47,118,000 $ 35,307,000
================== ================== ==================
7. ACCRUED LIABILITIES
April 2, January 1, March 27,
2005 2005 2004
------------------ ------------------ ------------------
Operating expenses $ 2,530,000 $ 3,315,000 $ 2,647,000
Taxes, other than income taxes 1,547,000 2,185,000 1,668,000
Group insurance 530,000 509,000 457,000
Sales return reserve 969,000 832,000 812,000
Leasehold additions 849,000 928,000 1,205,000
Other customer deposits 3,739,000 3,858,000 3,033,000
------------------ ------------------ ------------------
$ 10,164,000 $ 11,627,000 $ 9,822,000
================== ================== ==================
8
8. BANK DEBT
During November 2002, the Company reached an agreement with its bank to extend
the maturity of the Amended Revolving Credit Facility until November 30, 2005.
Pursuant to the newly Amended Revolving Credit Facility, $17,500,000 is
available until expiration at November 30, 2005. The amounts outstanding
thereunder bear interest at a maximum per annum rate equal to the bank's prime
rate. The agreement contains selected financial and other covenants. Effective
upon the occurrence of an Event of Default under the Amended Revolving Credit
Facility, the Company grants to the bank a security interest in the Company's
inventory and certain receivables. The Company has, at all times, been in
compliance with all loan covenants.
There have been no borrowings against the line of credit during fiscal 2005 and
fiscal 2004. There were outstanding letters of credit of $1.6 million, $3.1
million and $1.3 million, pursuant to the Amended Revolving Credit Facility, at
April 2, 2005, January 1, 2005 and March 27, 2004, respectively.
9. CONTINGENCIES
The Company is exposed to a number of asserted and unasserted potential claims.
Management does not believe it is reasonably possible that resolution of these
matters will result in a material loss. We have not provided any third party
financial guarantees as of and for the thirteen weeks April 2, 2005.
10. RESTATEMENT OF BALANCE SHEET AND STATEMENT OF CASH FLOWS
Subsequent to the issuance of the condensed consolidated financial statements
for the period ended March 27, 2004, we determined that our lease incentives
should have been classified within other liabilities rather than equipment and
leaseholds on the condensed consolidated balance sheet and as an investing
activity, rather than an operating activity on the condensed consolidated
statement of cash flows. In addition, we determined that several marketable
securities were misclassified as cash and equivalents at March 27, 2004. As a
result, the condensed consolidated balance sheet and the condensed consolidated
statement of cash flows as of and for the thirteen weeks ended March 27, 2004
have been restated to reflect the lease incentives within other liabilities,
rather than within equipment and leaseholds on the condensed consolidated
balance sheet and as an investing activity, rather than an operating activity on
the condensed consolidated statement of cash flows, as well as restating
marketable securities to reflect a reduction in investing activity. A summary of
the effect of the restatement on the condensed consolidated balance sheet and
condensed consolidated cash flow provided by (used in) operating and investing
activities is as follows:
As Previously
Reported As Restated
-------- -----------
For the thirteen weeks ended March 27, 2004:
Cash flow provided by operating activities $2,037,000 $2,578,000
Cash flow provided by (used in) investing activities $2,962,000 ($5,964,000)
As of March 27, 2004:
Cash and Cash equivalents $26,585,000 $18,200,000
Marketable securities $14,153,000 $22,538,000
Equipment and leasehold improvements $26,984,000 $35,307,000
Other liabilities $1,129,000 $9,452,000
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information and current statements contained in this
Form 10-Q, certain matters discussed herein, including, without limitation,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are forward looking statements that involve risks and uncertainties,
including, without limitation, the effect of economic and market conditions and
competition, the ability to open new stores and expand into new markets, and
risks relating to foreign importing operations, which would cause actual results
to differ materially.
RESULTS OF OPERATIONS
The following table sets forth our results of operations for the thirteen week
periods ended April 2, 2005 and March 27, 2004, expressed as a percentage of net
sales.
Thirteen Weeks Ended
------------------------------------------
April 2, March 27,
2005 2004
---------------- ---------------
Sales 100.0% 100.0%
Cost of sales 56.8 55.1
Gross profit 43.2 44.9
Store operating expenses 32.8 29.5
General and administrative expenses 6.0 6.4
Operating income 4.4 9.0
Other income 0.3 0.2
Income before income taxes 4.6 9.2
Income tax provision 1.8 3.5
Net income 2.8 5.7
NET SALES
Net sales increased to $62.8 million from $57.2 million, an increase of $5.6
million or 9.8%, over the prior year period. Comparable store sales (sales for
stores open at least one year or more) increased $0.7 million or 1%, during the
quarter. Net sales from new stores and non-comparable stores were $4.9 million
during the current quarter.
GROSS PROFIT
Gross profit increased to $27.1 million from $25.7 million, an increase of $1.4
million or 5.4%, over the prior year period. This increase was the combined
result of higher net sales and increased gross profit margins. As a percentage
of net sales, gross profit decreased to 43.2% from 44.9%. This decrease as a
percentage of net sales was primarily due to higher markdowns taken.
STORE OPERATING EXPENSES
Store operating expenses increased to $20.6 million from $16.9 million, an
increase of $3.7 million or 21.9%, over the prior year period. This increase is
primarily attributable to the increase in the number of stores open. As a
percentage of net sales, store operating expenses increased to 32.8% from 29.5%
for the thirteen week period, primarily due to higher payroll, depreciation and
advertising expenses.
10
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $3.8 million from $3.6 million,
an increase of $141,000 or 3.9%, over the prior year period. As a percentage of
net sales, general and administrative expenses decreased to 6.0% from 6.4%,
primarily due to lower incentive bonus accruals, as compared to last year.
INCOME TAXES
Income taxes decreased to $1.2 million from $2.0 million, for the prior year
period. The decrease was primarily attributable to lower taxable income in
fiscal 2005. The estimated effective tax rate for fiscal 2005 and fiscal 2004
were 39.5% and 39.0% respectively, including state and local income taxes.
INTEREST INCOME
Interest income increased to $157,000 from $95,000, an increase of $62,000 over
the prior year period, primarily due to higher average cash balances, as well as
higher interest rates.
NET INCOME
As a result of the factors discussed above, net income decreased to $1.8 million
from $3.2 million for the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements are primarily for working capital, the construction of new
stores, the remodeling of existing stores, and to improve and enhance our
information technology systems. Due to the seasonality of our business, we have
historically realized a significant portion of our cash flows from operating
activities during the second half of the fiscal year. Most recently, our cash
requirements have been met primarily through cash and cash equivalents on hand
during the first half of the year, and through cash flows from operating
activities during the second half of the year. We expect to continue to meet our
cash requirements primarily through cash flows from operating activities,
existing cash and cash equivalents, and short-term investments. In addition, we
have available a $17.5 million revolving credit facility (the "credit facility")
with Bank of America Retail Finance, and we have not had outstanding borrowings
under the credit facility for several years. At April 2, 2005, we had working
capital of $55.1 million, cash and cash equivalents of $18.6 million, short-term
investments of $24.0 million, and no third party debt outstanding.
The following table sets forth our cash flows for the period indicated:
------------------------------
Thirteen weeks ended
------------------------------
April 2, March 27,
2005 2004
------------- -------------
Net cash from operating activities.............................................. $3,301,000 $2,578,000
Net cash from investing activities.............................................. (1,612,000) (5,964,000)
Net cash from financing activities.............................................. 109,000 4,699,000
------------- -------------
Net increase in cash and cash equivalents....................................... $1,798,000 $1,313,000
============= =============
During the thirteen weeks ended April 2, 2005, we increased our cash and cash
equivalents by $1.8 million, primarily due to net matured investments of $1.9
million, net income of $1.8 million and depreciation of $2.2
11
million, partially offset by inventory purchases of $2.1 million, and
expenditures for our new store expansion and remodeling program totaled $3.5
million.
We plan to open approximately 20 to 30 new stores during fiscal 2005. Five new
stores were opened in March 2005 and two new stores opened in April. We
anticipate opening the remaining new stores during the balance of 2005. We
renovated three existing stores in the first quarter. We spent $3.5 million
through April 2, 2005 and expect to spend an additional $15 million to $17
million in 2005, for both new store and existing store construction and
remodeling.
INFLATION
We do not believe that our sales revenue or operating results have been
materially impacted by inflation during the past three fiscal years. There can
be no assurance, however, that our sales revenue or operating results will not
be impacted by inflation in the future.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements or transactions with
unconsolidated, limited purpose entities. In the normal course of our business,
we enter into operating leases for store locations and utilize letters of credit
principally for the importation of merchandise. We do not have any undisclosed
material transactions or commitments involving related persons or entities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are more fully described in Note 1 of Notes to
Consolidated Financial Statements in our fiscal 2004 10-K. As disclosed in Note
1 of Notes to Consolidated Financial Statements, the preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America ("GAAP") requires management to make estimates and
assumptions about future events that affect the amounts reported in the
consolidated financial statements and accompanying notes. Since future events
and their effects cannot be determined with absolute certainty, actual results
will differ from those estimates. We evaluate our estimates and judgments on an
ongoing basis and predicate those estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances. Actual results will differ from these under different
assumptions or conditions.
Our management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in preparation
of the Consolidated Financial Statements.
Inventories. Our inventories are valued at lower of cost or market using the
retail inventory method. Under the retail inventory method ("RIM"), the
valuation of inventories at cost and the resulting gross margins are calculated
by applying a calculated cost to retail ratio to the retail value of
inventories. RIM is an averaging method that has 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 the lower of cost or market if
markdowns are currently taken as a reduction of the retail value of inventories.
Inherent in the RIM calculation are certain significant management judgments
including, among others, merchandise markon, markups, and markdowns, which
significantly impact the ending inventory valuation at cost as well as the
resulting gross margins. Management believes that our RIM provides an inventory
valuation which results in a carrying value at the lower of cost or market.
Marketable Securities - Marketable securities at April 2, 2005, January 1, 2005
and March 27, 2004 primarily consist of short-term United States Treasury bills.
We classify its short-term investments as held-to-maturity. Held-to-maturity
securities are those securities in which we have the ability and intent to hold
the securities until maturity. Because our held-to-maturity securities mature
within one year of the purchase date, the securities are classified as
short-term marketable securities. Held-to-maturity debt securities are recorded
at amortized cost,
12
adjusted for the amortization or accretion of premiums or discounts and such
carrying values approximate fair value. A decline in the market value of any
held-to-maturity security below cost that is deemed to be other than temporary
results in a reduction in carrying amount to fair value. The impairment is
charged to earnings and a new cost basis for the security is established.
Premiums and discounts are amortized or accreted over the life of the related
held-to-maturity as an adjustment to yield using the effective interest method.
Interest income is recognized when earned.
Finite-lived assets. We evaluate the fair value and future benefits of
finite-lived assets whenever events and changes in circumstances suggest. We
perform an analysis of the anticipated undiscounted future net cash flows of the
related finite-lived assets. If the carrying value of the related asset exceeds
the undiscounted cash flows, the carrying value is reduced to its fair value.
Various factors including future sales growth and profit margins are included in
this analysis. To the extent these future projections or our strategies change,
the conclusion regarding impairment may differ from the current estimates.
Revenue recognition - Sales are recognized at the "point of sale," which occurs
when merchandise is sold in an "over-the-counter" transaction or upon receipt by
a customer. Sales of merchandise via our website are recognized at the time of
delivery to the customer. Our customers can return merchandise. Sales are
reported net of actual and estimated returns. We maintain a reserve for
potential product returns and record, as a reduction to sales, a provision for
estimated product returns, which is determined based on historical experience.
Amounts billed to customers for shipping and handling fees are included in net
sales at the time of shipment. Costs incurred for shipping and handling are
included in cost of sales.
Income Taxes. Temporary differences arising from differing treatment of income
and expense items for tax and financial reporting purposes result in deferred
tax assets and liabilities that are recorded on the balance sheet. These
balances, as well as income tax expense, are determined through management's
estimations, interpretation of tax law for multiple jurisdictions and tax
planning. If our actual results differ from estimated results due to changes in
tax laws, new store locations or tax planning, the our effective tax rate and
tax balances could be affected. As such these estimates may require adjustment
in the future as additional facts become known or as circumstances change.
Seasonality. We experience seasonal and quarterly fluctuations in net sales and
operating income. Quarterly results of operations may fluctuate significantly as
a result of a variety of factors, including the timing of new store openings,
fashion trends and shifts in timing of certain holidays. Our business is subject
to seasonal influences, characterized by highest sales during the fourth quarter
(October, November and December) and lowest sales during the third quarter
(July, August and September).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the following types of market risk-fluctuations in the
purchase price of merchandise, as well as other goods and services: the value of
foreign currencies in relation to the U.S. dollar; and changes in interest
rates. Due to our inventory turn rate and its historical ability to pass through
the impact of any generalized changes in its cost of goods sold to its customers
through pricing adjustments, commodity and other product risks are not expected
to be material. We purchase substantially all merchandise in U.S. dollars.
Our exposure to market risk for changes in interest rates relates to cash, cash
equivalents and marketable securities. As of April 2, 2005, our cash, cash
equivalents and marketable securities consisted primarily of funds invested in
money market accounts, which bear interest at a variable rate, U.S. treasury
instruments and tax exempt municipal bonds rated AA or better, which bear
interest at a fixed rate. Due to the average maturity and the conservative
nature of our investment portfolio, we believe a sudden change in interest rates
would not have a material effect on the value of our investment portfolio. As
the interest rates on a material portion of our cash, cash equivalents and
marketable securities are variable, a change in interest rates earned on our
investment
13
portfolio would impact interest income along with cash flows, but would not
materially impact the fair market value of the related underlying instruments.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed by us in our Exchange Act reports is
recorded, processed, summarized and reported on a timely basis and that such
information is accumulated and communicated to our management, including the
Chief Executive Officer "CEO" and the Chief Financial Officer "CFO", as
appropriate, to allow timely decisions regarding the required disclosure. As of
the end of the period covered by this Form 10-Q, an evaluation was performed
under the supervision and with the participation of our management, including
the CEO and the CFO, of the effectiveness of the design and operation of these
disclosure controls and procedures. Based on that evaluation, the CEO and the
CFO concluded that our disclosure controls and procedures were effective.
In connection with the preparation of the Annual Report on Form 10-K, as of
January 1, 2005, an evaluation was performed under the supervision and with the
participation of the Company's management, including the CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act). In performing
this evaluation, we reviewed the our lease accounting and leasehold depreciation
practices in light of the February 7, 2005 letter issued by the Office of the
Chief Accountant of the SEC to the American Institute of Certified Public
Accountants. As a result of this review, we concluded that our previously
established lease accounting and leasehold improvement depreciation practices
were not appropriate and determined that the our cash flows from operations and
cash used in investing activities over the last several years had been
understated. There was no impact on net income, as a result of the changes.
Accordingly, we determined to restate certain of its previously issued financial
statements to reflect the correction in the Company's lease accounting and
leasehold improvement depreciation practices. Based on that evaluation, the
Company's CEO and CFO concluded that the Company's disclosure controls and
procedures were not effective as of January 1, 2005. However, this was corrected
in the first quarter of 2005 and currently our disclosure controls and
procedures are effective.
14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 6. EXHIBITS
(a) Exhibits.
11.1 Calculation of Basic and Diluted Earnings per Common Share.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15
Signatures
Pursuant to the requirement of section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: May 10, 2005
CACHE, INC.
BY: /S/ BRIAN WOOLF
--------------------
Brian Woolf
Chairman and Chief
Executive Officer
(Principal Executive
Officer)
BY: /S/ MARGARET FEENEY
--------------------
Margaret Feeney
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
EXHIBIT 11.1
CALCULATION OF BASIC AND DILUTED EARNINGS PER COMMON SHARE
(In thousands except per share data)
THIRTEEN WEEKS ENDED
----------------------------------------
April 2, March 27,
2005 2004
-------------- -------------
EARNINGS PER SHARE
Net Income Applicable to Commo
Stockholders $ 1,757,000 $ 3,249,000
============== =============
BASIC EARNINGS PER SHARE
Weighted Average Number of Common
Shares Outstanding 15,686,000 15,438,000
============== =============
Basic Earnings Per Share $0.11 $0.21
============== =============
DILUTED EARNINGS PER SHARE
Weighted Average Number of
Common Shares Outstanding 15,686,000 15,438,000
Assuming Conversion of
Outstanding Stock Options 1,596,000 1,775,000
Less Assumed Repurchase
of Common Stock Pursuant
to the Treasury Stock Method (1,280,000) (1,256,000)
============== =============
Weighted Average Number of
Common Shares Outstanding 16,002,000 15,957,000
============== =============
Diluted Earnings Per Share $0.11 $0.20
============== =============
17
EXHIBIT 31.1
CERTIFICATION
I, Brian Woolf, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cache, Inc.
(Cache),
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Cache as of, and for, the periods presented in this
quarterly report;
4. Cache's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to Cache, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period which this quarterly report
is being prepared;
b) designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of Cache's disclosure controls
and procedures and presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered
by this quarterly report based on such evaluation; and
d) disclosed in this report any changes in Cache's internal
control over financial reporting that occurred during
Cache's first quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting;
5. Cache's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to Cache's auditors and the audit committee of Cache's Board of
Directors;
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect
Cache's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in Cache's
internal controls over financial reporting.
May 10, 2005 By: /S/ BRIAN WOOLF
------------------
Brian Woolf
Chairman and Chief
Executive Officer
(Principal Executive
Officer)
18
EXHIBIT 31.2
CERTIFICATION
I, Margaret Feeney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cache, Inc.
(Cache),
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Cache as of, and for, the periods presented in this
quarterly report;
4. Cache's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to Cache, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period which this quarterly report
is being prepared;
b) designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of Cache's disclosure controls
and procedures and presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered
by this quarterly report based on such evaluation; and
d) disclosed in this report any changes in Cache's internal
control over financial reporting that occurred during
Cache's first quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting;
5. Cache's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to Cache's auditors and the audit committee of Cache's Board of
Directors;
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect
Cache's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in Cache's
internal controls over financial reporting.
May 10, 2005 By: /S/ MARGARET FEENEY
-------------------
Margaret Feeney
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to and solely for the purposes of, 18 U.S.C. Section 1350 (Section 906
of the Sarbanes-Oxley Act of 2002, each of the undersigned hereby certifies in
the capacity and on the date indicated below that:
1. The Quarterly Report of Cache, Inc. on Form 10-Q for the period ending
April 2, 2005 as filed with the Securities and Exchange Commission on
the date hereof (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of Cache, Inc.
May 10, 2005 BY: /S/ BRIAN WOOLF
---------------
Brian Woolf
Chairman and Chief
Executive Officer
(Principal Executive
Officer)
May 10, 2005 By: /S/ MARGARET FEENEY
-------------------
Margaret Feeney
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20