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 1, 2006
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 of (IRS Employer Identification No.)
incorporation or organization)
1440 BROADWAY, NEW YORK, NEW YORK 10018
-------------------------------------- ----------
(Address of principal executive offices) (zip code)
212-575-3200
(Registrant's telephone number, 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 preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer
[ ] [X] [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of April 30, 2006, 15,785,553 common shares were outstanding.
CACHE, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of April 1, 2006,
December 31, 2005 and April 2, 2005 3
Condensed Consolidated Statements of Income for the
thirteen weeks ended April 1, 2006 and April 2, 2005 4
Condensed Consolidated Statements of Cash Flows for the thirteen
weeks ended April 1, 2006 and April 2, 2005 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 14
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
April 1, December 31, April 2,
ASSETS 2006 2005 2005
---- ---- ----
Current assets:
Cash and cash equivalents $ 22,185,000 $ 16,753,000 $ 18,646,000
Marketable securities 34,552,000 36,520,000 24,000,000
Receivables, net 3,697,000 5,734,000 5,992,000
Inventories 34,427,000 32,785,000 34,393,000
Deferred income taxes, net 705,000 691,000 616,000
Prepaid expenses and other current assets 1,032,000 4,777,000 1,600,000
--------------------- --------------------- --------------------
Total current assets 96,598,000 97,260,000 85,247,000
Equipment and leasehold improvements, net 54,059,000 52,760,000 48,287,000
Other assets 886,000 864,000 850,000
--------------------- --------------------- --------------------
Total assets $ 151,543,000 $ 150,884,000 $ 134,384,000
===================== ===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,027,000 $ 18,404,000 $ 16,957,000
Income taxes payable 872,000 --- 502,000
Accrued compensation 2,560,000 2,624,000 2,563,000
Accrued liabilities 12,624,000 12,446,000 10,164,000
--------------------- --------------------- --------------------
Total current liabilities 32,083,000 33,474,000 30,186,000
Other liabilities 16,171,000 16,309,000 14,496,000
Deferred income taxes, net 2,042,000 2,105,000 2,978,000
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01; authorized, 20,000,000 shares;
15,785,553, 15,770,553 and 15,702,053 shares issued
and outstanding 158,000 158,000 157,000
Additional paid-in capital 35,978,000 35,455,000 34,832,000
Retained earnings 65,111,000 63,383,000 51,735,000
--------------------- --------------------- --------------------
Total stockholders' equity
101,247,000 98,996,000 86,724,000
--------------------- --------------------- --------------------
Total liabilities and stockholders'
equity $ 151,543,000 $ 150,884,000 $ 134,384,000
===================== ===================== ====================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS ENDED
(UNAUDITED)
April 1, April 2
2006 2005
--------------------- --------------------
Net sales $ 63,821,000 $ 62,793,000
Cost of sales, including occupancy and buying costs 34,639,000 35,660,000
--------------------- --------------------
Gross profit 29,182,000 27,133,000
--------------------- --------------------
Expenses
Store operating expenses 22,054,000 20,593,000
General and administrative expenses 4,824,000 3,789,000
--------------------- --------------------
Total expenses
26,878,000 24,382,000
--------------------- --------------------
Operating income 2,304,000 2,751,000
Interest income 529,000 157,000
--------------------- --------------------
Income before income taxes 2,833,000 2,908,000
Income tax provision 1,105,000 1,151,000
--------------------- --------------------
Net income $ 1,728,000 $ 1,757,000
===================== ==================
Basic earnings per share $0.11 $0.11
===================== ==================
Diluted earnings per share $0.11 $0.11
===================== ==================
Basic weighted average shares outstanding 15,776,000 15,686,000
===================== ==================
Diluted weighted average shares outstanding 16,236,000 16,002,000
===================== ==================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
CACHE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED
(UNAUDITED)
April 1, April 2,
2006 2005
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,728,000 $ 1,757,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,749,000 2,238,000
Decrease in deferred income taxes (77,000) (94,000)
Amortization of deferred rent (389,000) (362,000)
Non-cash compensation expense 330,000 ----
Change in assets and liabilities:
Decrease in receivables 2,037,000 553,000
Increase in inventories (1,642,000) (2,097,000)
Decrease in prepaid expenses and other current assets 3,745,000 348,000
Decrease in accounts payable (2,377,000) (98,000)
Increase in income taxes payable 872,000 502,000
Increase (decrease) in accrued liabilities
and accrued compensation (651,000) 554,000
----------------- -----------------
Net cash provided by operating activities 6,325,000 3,301,000
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities 25,634,000 5,117,000
Purchases of marketable securities (23,666,000) (3,243,000)
Payments for equipment and leasehold improvements (3,032,000) (3,486,000)
----------------- -----------------
Net cash used in investing activities (1,064,000) (1,612,000)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 193,000 127,000
Other, net (22,000) (18,000)
----------------- -----------------
Net cash provided by financing activities 171,000 109,000
----------------- -----------------
Net increase in cash and equivalents 5,432,000 1,798,000
Cash and equivalents, at beginning of period 16,753,000 16,848,000
----------------- --------------------
Cash and equivalents, at end of period $ 22,185,000 $ 18,646,000
================= ====================
Supplemental disclosure of cash flow information:
Income taxes paid $ 60,000 $ 56,000
Change in accrued equipment and leasehold improvements $ 1,016,000 $ (79,000)
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these 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 263 stores are operated under the trade name "Cache" and 39
stores are operated under the trade name "Lillie Rubin", as of April 1, 2006.
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
December 31, 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 December 31, 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 30, 2006 ("Fiscal 2006") is a 52 week year as compared to the years
ended December 31, 2005 ("Fiscal 2005") and January 1, 2005 ("Fiscal 2004"),
that are a 52 and 53 week years, respectively.
2. STOCK BASED COMPENSATION
Effective January 1, 2006, the Company began recording compensation expense
associated with stock options in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 123R, Share-Based Payment, as interpreted by
SEC Staff Accounting Bulletin No. 107. Prior to January 1, 2006, we had
accounted for stock options according to the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations, and therefore no related compensation expense was
recorded for awards granted with no intrinsic value. We adopted the modified
prospective transition method provided for under SFAS No. 123R, and,
consequently, have not retroactively adjusted results from prior periods. Under
this transition method, compensation cost associated with stock options
recognized in the first quarter of Fiscal 2006 includes: 1) quarterly
amortization related to the remaining unvested portion of all stock option
awards granted prior to January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123; and 2)
quarterly amortization related to all stock option awards granted subsequent to
January 1, 2006, when granted, based on the grant-date fair value estimated in
accordance with the provisions of SFAS No. 123R.
The Company's 2000 Stock Option Plan provides for the granting of either ISO's
or non-qualified options to purchase up to 825,000 shares of common stock. As of
April 1, 2006, there were 67,032 shares under the 2000 plan available for future
grant. The Company's 2003 Stock Option Plan provides for the granting of either
ISO's or non-qualified options to purchase up to 1,350,000 shares of common
stock. As of April 1, 2006, there were 152,500 shares under the 2003 plan
available for future grant. All of the Company's prior stock option plans have
expired as to the ability to grant new options.
6
Stock awards outstanding under the Company's current plans have generally been
granted at prices which are equal to the market value of our stock on the date
of grant, generally vest over four years and expire no later than ten years
after the grant date. Effective January 1, 2006, we recognize compensation
expense ratably over the vesting period, net of estimated forfeitures. As of
April 1, 2006, there was $2.1 million of total unrecognized compensation cost
related to non-vested options, which is expected to be recognized over a
remaining weighted-average vesting period of 7.7 years. The total intrinsic
value of options exercised during the thirteen weeks ended April 1, 2006 was
approximately $81,000.
A summary of the changes in stock options outstanding during the thirteen weeks
ended April 1, 2006:
Total Outstanding Currently Exercisable
---------------------------------- -------------------------------
Number Number
of Average Average of Average Average
Options Price * Life ** Options Price * Life **
---------------------------------- -------------------------------
December 31, 2005 1,481,500 $10.85 7.45 742,250 $10.85 8.80
Granted --- --- --- --- --- ---
Canceled/forfeited (9,000) 12.65 7.64 --- --- ---
Exercised (15,000) 12.65 7.64 (15,000) 12.65 7.64
----------- ------- ------- ------- ------- ------
April 1, 2006 1,457,500 $10.82 7.20 727,250 $10.82 8.72
=========== ======= ======= ======= ======= ======
* Weighted-average exercise price.
** Weighted-average contractual life remaining in years.
FAIR
VALUE
COMMON AT
STOCK GRANT
OPTIONS DATE
----------- ---------
Nonvested--December 31, 2005 739,250 $10.92
Granted --- ---
Vested --- ---
Cancelled/forfeited (9,000) $12.65
--------- --------
Nonvested--April 1, 2006 730,250 $10.92
========= ========
Prior to the adoption of SFAS No. 123R, we presented all tax benefits resulting
from the exercise of stock options as operating cash flows in the Condensed
Consolidated Statement of Cash Flows. SFAS No. 123R requires that cash flows
resulting from tax deductions in excess of the cumulative compensation cost
recognized for options exercised ("excess tax benefits") be classified as
financing cash flows. For the quarter ended April 1, 2006, there were no excess
tax benefits realized from the exercise of stock options.
During the quarter ended April 1, 2006, the Company recognized approximately
$330,000 in share-based compensation expense. No compensation cost was
recognized prior to January 1, 2006. Had compensation cost for our share-based
compensation plans been determined consistent with SFAS No. 123R, the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts (in thousands, except per share data):
7
Thirteen Weeks
Ended
April 2, 2005
--------------
Net earnings as reported: $1,757,000
Add share-based employee compensation expense included
in reported net income, net of taxes ---
Deduct employee compensation expense determined under a
fair value based method, net of related tax effects (252,000)
Pro forma net earnings $1,505,000
Basic earnings per share:
As reported $0.11
Pro forma $0.10
Diluted earnings per share:
As reported $0.11
Pro forma $0.09
There were no options granted during the thirteen week periods ended April 1,
2006 and April 2, 2005.
3. 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:
April 1, April 2,
2006 2005
----------- ----------
Net income $1,728,000 $1,757,000
Basic weighted average number of
shares outstanding 15,776,000 15,686,000
Incremental shares from assumed issuances
of stock options 460,000 316,000
Diluted weighted average number of shares outstanding 16,236,000 16,002,000
Net income per share - Basic $0.11 $0.11
- Diluted $0.11 $0.11
Options to purchase 1,458,000 common shares with exercise prices ranging from
$1.73 to $18.30 per share were outstanding at April 1, 2006, and 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 in each case, were
included in the computation of diluted earnings per share for the fiscal quarter
ended April 1, 2006 and April 2, 2005, respectively.
8
4. RECENT ACCOUNTING PRONOUNCEMENTS
On October 6, 2005, the FASB issued FASB Staff Position ("FSP") No. FAS 13-1
"Accounting for Rental Costs Incurred during a Construction Period." The FASB
has concluded that rental costs incurred during and after a construction period
are for the right to control the use of a leased asset and must be recognized as
rental expense. Such costs were previously capitalized as construction costs, if
the company had a policy to do so. The FSP is effective for reporting periods
beginning after December 15, 2005. The Company expects that the implementation
of FSP No. FAS 13-1 will decrease Net Income by approximately $500,000 for the
fiscal year ended December 30, 2006.
On November 3, 2005, FASB issued FSP Nos. FAS 115-1 and FAS 124-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments."
This FSP addresses the determination as to when an investment is considered
impaired, whether that impairment is other than temporary, and the timing and
measurement of an impairment loss. The FSP is required to be applied to
reporting periods beginning after December 15, 2005 and was adopted by the
Company in the first quarter of fiscal 2006. The impact of the adoption of this
FSP did not have a material impact on its consolidated financial statements.
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
April 1, December 31, April 2,
2006 2005 2005
------------------ ------------------ ------------------
Leasehold improvements $ 52,860,000 $ 51,827,000 $ 46,317,000
Furniture, fixtures and equipment 53,136,000 51,715,000 46,875,000
------------------ ------------------ ------------------
105,996,000 103,542,000 93,192,000
Less: accumulated depreciation
and amortization (51,937,000) (50,782,000) (44,905,000)
------------------ ------------------ ------------------
$ 54,059,000 $ 52,760,000 $ 48,287,000
================== ================== ==================
6. ACCRUED LIABILITIES
April 1, December 31, April 2,
2006 2006 2005
------------------ ------------------ ------------------
Operating expenses $ 2,507,000 $ 2,894,000 $ 2,530,000
Other taxes 1,933,000 2,540,000 1,547,000
Group insurance 624,000 598,000 530,000
Sales return reserve 902,000 803,000 969,000
Leasehold additions 2,191,000 859,000 849,000
Other customer deposits and credits 4,467,000 4,752,000 3,739,000
------------------ ------------------ ------------------
$ 12,624,000 $ 12,446,000 $ 10,164,000
================== ================== ==================
9
7. BANK DEBT
During November 2005, the Company reached an agreement with its bank to extend
the maturity of the Amended Revolving Credit Facility until November 30, 2008.
Pursuant to the newly Amended Revolving Credit Facility, $17,500,000 is
available until expiration at November 30, 2008. The amounts outstanding under
the credit facility bear interest at a maximum per annum rate equal to the
bank's prime rate, currently 7.75% at April 30, 2006, less 0.25%. 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 2006 and
fiscal 2005. There were outstanding letters of credit of $0.7 million, $1.0
million and $1.6 million, pursuant to the Revolving Credit Facility, at April 1,
2006, December 31, 2005 and April 2, 2005, respectively.
8. 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 ending April 1, 2006.
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 could 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 1, 2006 and April 2, 2005, expressed as a percentage of net
sales.
Thirteen Weeks Ended
----------------------------------------
April 1, April 2,
2006 2005
---------------- ---------------
Sales 100.0% 100.0%
Cost of sales 54.3 56.8
Gross profit 45.7 43.2
Store operating expenses 34.6 32.8
General and administrative expenses 7.6 6.0
Operating income 3.6 4.4
Other income 0.8 0.3
Income before income taxes 4.4 4.6
Income tax provision 1.7 1.8
Net income 2.7 2.8
10
We use a number of key indicators of financial condition and operating
performance to evaluate the performance of our business, some of which are set
forth in the following table:
13 Weeks Ended
--------------------------------
April 1, April 2,
2006 2005
------------ ---------------
Total store count at end of period 302 294
Net sales growth 1.6% 9.8%
Comparable store sales growth 1.0% 1.0%
Net sales per average square foot $107 $108
Total square footage (in thousands) 616 595
NET SALES
Net sales increased to $63.8 million from $62.8 million, an increase of $1.0
million or 1.6%, over the prior year 13 week 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
$0.3 million during the current quarter. The increase in net sales in FY 2006
reflected a 5% increase in average dollars per transaction, which was partially
offset by a 4% decrease in sales transactions. Dress sales in March 2006 helped
to increase sales above FY 2005 levels. This trend continued into April, as
Easter shifted into the Company's second quarter in FY 2006 from the first
quarter in FY 2005.
GROSS PROFIT
Gross profit increased to $29.2 million from $27.1 million, an increase of $2.1
million or 7.7%, 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 increased to 45.7% from 43.2%. This increase as a
percentage of net sales was primarily due to higher initial markup, as well was
lower markdowns during FY 2006 as compared to FY 2005. The Company expects gross
margins to improve during the remainder of Fiscal 2006 and beyond, due to the
establishment of an internal production and sourcing department.
STORE OPERATING EXPENSES
Store operating expenses increased to $22.1 million from $20.6 million, an
increase of $1.5 million or 7.3%, 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 34.6% from 32.8%,
for the thirteen week period. This increase reflects the impact of newer stores,
which have not achieved a mature sales volume level as compared to the existing
store base. The increase in store operating expenses was principally due to the
higher payroll ($258,000), higher depreciation expense ($510,000) and higher
property taxes ($274,000) in FY 2006 as compared to FY 2005, primarily due to
the increase in stores open.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $4.8 million from $3.8 million,
an increase of $1.0 million, or 26.3%, over the prior year period. As a
percentage of net sales, general and administrative expenses increased to 7.6%
from 6.0%, primarily due to higher travel ($189,000) and professional fees
($214,000), as compared to last year, as well as due to compensation expense
from stock options of $330,000 related to the adoption of FAS No. 123R.
INCOME TAXES
Income taxes decreased to $1.1 million from $1.2 million in the prior year. The
estimated effective tax rate for fiscal 2006 and fiscal 2005 was 40.1% and 39.5%
respectively. The FY 2006 effective income tax rate is higher than FY 2005, due
to a permanent difference associated with the nondeductible benefit of incentive
stock option expenses.
11
INTEREST INCOME
Interest income increased to $529,000 from $157,000, an increase of $372,000
over the prior period, primarily due to higher average cash balances, as well as
higher interest rates in FY 2006.
NET INCOME
As a result of the factors discussed above, net income decreased slightly to
$1.7 million from $1.8 million for the prior fiscal 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. During the first quarter
of FY 2006, we generated $6.3 million of cash flow from operations as compared
to $3.3 million in FY 2005. 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 1, 2006, we had working capital of $64.5
million, cash and marketable securities of $56.7 million and no third party debt
outstanding.
The following table sets forth our cash flows for the period indicated:
------------------------------
Thirteen weeks ended
------------------------------
April 1, April 2,
2006 2005
------------- -------------
Net cash from operating activities.................................................. $6,325,000 $3,301,000
Net cash from investing activities.................................................. (1,064,000) (1,612,000)
Net cash from financing activities.................................................. 171,000 109,000
------------- -------------
Net increase in cash and cash equivalents........................................... $5,432,000 $1,798,000
============= =============
During the thirteen weeks ended April 1, 2006, we increased our cash and cash
equivalents by $5.4 million, primarily due to net matured investments of $2.0
million, net income of $1.7 million (which includes depreciation expense of $2.7
million), a reduction in prepaid expenses of $3.7 million and receivables of
$2.0 million, partially offset by inventory purchases of $1.6 million, a
reduction in accounts payable of $2.4 million and expenditures for our new store
expansion and remodeling program totaling $3.0 million.
We plan to open approximately 15 to 20 new stores during fiscal 2006. Two new
stores opened in March 2006 and two new stores opened in April. We anticipate
opening an additional 9 new stores during the balance of the second quarter. We
renovated six existing stores in the first quarter. We spent $3.0 million
through April 1, 2006 and expect to spend an additional $12 million to $13
million in 2006, 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.
12
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 its 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 2005 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 predicates 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. We take markdowns due to changes in fashion and style,
based on the following factors: (i) supply on hand, and (ii) our expectations as
to future sales. We do not anticipate any significant change in our markdown
strategy that would cause a change in our earnings. We believe that our RIM
provides an inventory valuation which results in a carrying value at the lower
of cost or market.
Finite-long lived assets. The Company's judgment regarding the existence of
impairment indicators is based on market and operational performance. We assess
the impairment of long-lived assets, primarily fixed assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include the following:
o significant changes in the manner of our use of assets or the strategy
for our overall business;
o significant negative industry or economic trends;
o store closings;
o underperforming stores; or
o underperforming business trends.
In the evaluation of the fair value and future benefits of finite
long-lived assets, we perform an analysis by store of the anticipated
undiscounted future net cash flows of the related finite long-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 strategies change, the conclusion regarding
13
impairment may differ from the current estimates. No impairment charges were
incurred in fiscal 2003, 2004 and 2005, respectively.
Self Insurance. We are self-insured for losses and liabilities related primarily
to employee health and welfare claims. Losses are accrued based upon our
estimates of the aggregate liability for claims incurred using certain actuarial
assumptions followed in the insurance industry and based on Company experience.
Adjustments to earnings resulting from changes in historical loss trends have
been insignificant for fiscal 2003, 2004 and 2005. Further, we do not anticipate
any significant change in loss trends, settlements or other costs that would
cause a significant change in our earnings.
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 expected
time of delivery to the customer. Our customers have the right to 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. Charges or credits to earnings resulting from revisions to estimates
on our sales return provision were approximately $66,000, $20,000 and $(29,000)
for fiscal 2003, 2004 and 2005, respectively. 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. The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes." This statement requires the Company to
recognize deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities, using applicable tax
rates for the years in which the differences are expected to reverse. The
Company reserves for tax contingencies when it is probable that a liability has
been incurred and the contingent amount is reasonably estimable. These reserves
are based upon the Company's best estimation of the potential exposures
associated with the timing and amount of deductions as well as various tax
filing positions. Due to the complexity of these examination issues, $325,000
has been accrued to date.
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 1, 2006, our cash, cash
equivalents and marketable securities consisted primarily of funds invested in
money market accounts, which bear interest at a variable rate and U.S. treasury
instruments, 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 portfolio would impact interest income along with
cash flows, but would not materially impact the fair market value of the related
underlying instruments.
14
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
December 31, 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 assessment, management reviewed the lack of resources in the accounting and
finance department. As a result of this review, management concluded that the
lack of resources resulted in an ineffective review, monitoring and analysis of
schedules, reconciliations and financial statement disclosures, resulting in
several adjustments to the current financial statements, which caused a material
weakness as of December 31, 2005.
We have subsequently implemented a more thorough review process to ensure the
accuracy of accounting calculations supporting the amounts reflected in our
financial statements and also to ensure that all significant accounts are
properly reconciled on a frequent and timely basis. The remaining remediation
steps will be completed during the second and third quarters.
There have not been any changes, except for those noted above, in the Company's
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act), during the fiscal quarter to
which this report relates that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Form 8-K, filed February 8, 2006 - reporting pursuant to Item 2.02 of such
Form, the operating results for the fifty-two and thirteen week periods
ended December 31, 2005.
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, 2006
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 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-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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; and
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, 2006 By: /s/ Brian Woolf
---------------------------
Brian Woolf
Chairman and Chief
Executive Officer
(Principal Executive
Officer)
17
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-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) 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;
c) 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;
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; and
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, 2006 By: /s/ Margaret Feeney
---------------------------
Margaret Feeney
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
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 1, 2006 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, 2006 By: /s/ Brian Woolf
---------------------------
Brian Woolf
Chairman and Chief
Executive Officer
(Principal Executive
Officer)
May 10, 2006 By: /s/ Margaret Feeney
---------------------------
Margaret Feeney
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19