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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X Annual Report pursuant to Section 13 or 15 (d) of the Securities
- ----- Exchange Act of 1934
For the fiscal year ended December 28, 2002
or
Transition Report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 (No fee required)
Commission file number 0-10345
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Cache, Inc.
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(Exact name of registrant as specified in its charter)
Florida 59-1588181
- --------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
1460 Broadway, New York, New York 10036
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 575-3200
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
- -----------------------------------------------------------------------------
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of June 28, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant (based on the closing price in the NASDAQ
National Market) was approximately $40.3 million.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes No X
----- -----
As of February 28, 2003, 9,126,900 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information included in the Registrant's Proxy Statement to be filed
in connection with its 2003 Annual Meeting of Stockholders has been
incorporated by reference into Part III (Items 10, 11, 12, 13 and 15) of this
report on Form 10-K.
CACHE, INC.
FORM 10-K ANNUAL REPORT
DECEMBER 28, 2002
TABLE OF CONTENTS
Page
PART I
------
Item 1. Business.............................................. 1
Item 2. Properties............................................ 13
Item 3. Legal Proceedings..................................... 13
Item 4. Submission of Matters to a Vote of Security
Holders............................................... 14
PART II
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Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters........................... 14
Item 6. Selected Financial Data............................... 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 17
Item 8. Financial Statements and Supplementary Data........... 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................ 25
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.... 25
Item 11. Executive Compensation................................ 25
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................ 25
Item 13. Certain Relationships and Related Transactions........ 25
PART IV
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Item 14. Controls and Procedures............................... 25
Item 15. Principal Accounting Fees and Services................ 25
Item 16. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................... 25
PART I
------
ITEM 1. BUSINESS
STATEMENT REGARDING FORWARD LOOKING STATEMENTS
- ----------------------------------------------
Except for the historical information and current statements contained
in this Annual Report, 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.
BUSINESS
- --------
We are a nationwide, mall-based specialty retailer of sophisticated,
social occasion sportswear and dresses targeting style-conscious women. We own
and operate two separate store concepts, Cache and Lillie Rubin, each of which
carries its own distinctive branded merchandise. Cache targets women between
the ages of 25 and 45 who have a youthful attitude, are self-confident and
fashion-conscious, and require a missy fit. Lillie Rubin stores offer a more
sophisticated line of social occasion apparel targeting women between the ages
of 35 and 55.
Both store concepts focus on social occasion dressing designed for
contemporary women who take pride in their appearance, whether they are out for
a casual lunch or at a black tie affair. Our Cache and Lillie Rubin lines extend
from elegant eveningwear to our distinctive day-into-evening sportswear, which
encompasses a variety of chic tops, bottoms and dresses versatile enough to be
worn during the day or evening. We believe the appeal of our merchandise is
enhanced through the intimate boutique-like environment we offer to our
customers. This environment is achieved through a high level of customer service
combined with our smaller store format, which averages approximately 2,000
square feet. We operate 207 Cache and 27 Lillie Rubin stores (as of December 28,
2002) primarily situated in central locations in high traffic, upscale malls
throughout the United States.
History
- -------
The first Cache store was opened in 1975 in Florida as a couture boutique.
From 1986 until 2000, Cache grew under the ownership of the Saul family,
expanding from 29 stores to 183 stores at the end of 1999. In addition, in 1998
we acquired the 12-store Lillie Rubin chain and grew it to 18 stores by the end
of 1999. By mid-2000, we recognized the need to bring in a more seasoned
executive to lead us through our next phase of growth. In October 2000, we hired
Brian Woolf as our Chief Executive Officer. Mr. Woolf recognized the
significant opportunity to build upon a distinctive brand and market niche. He
immediately embarked on a series of strategic initiatives to accelerate growth
and enhance profitability. These initiatives included:
1
* hiring three new members of management, all of whom have extensive
retail experience,
* re-launching the Cache brand through a national advertising
campaign,
* transitioning the merchandise mix to an exclusively Cache and
Lillie Rubin branded line of apparel,
* introducing our day-into-evening sportswear line in Lillie Rubin,
* developing a more modern and efficient store format and
* significantly reducing the number of stock keeping units and
vendors.
As a result of these initiatives, comparable store sales have increased
from 0% for fiscal 2001 to 7% in fiscal 2002 and gross margins increased from
35.3% to 42.0% during the same time period.
Business Strategy
- -----------------
We differentiate ourselves from other mall-based specialty retailers of
women's apparel and department stores by serving a specific market niche:
social occasion apparel with a missy fit. Our target customers desire to feel
attractive and be admired by others, irrespective of the actual event for which
they are dressing. For them, social occasion dressing relates more to an
attitude than a specific type of event. For example, a woman may wear our
sportswear to a picnic or out shopping when she wants to feel and look her
best. Regardless of the reason for a purchase, the Cache and Lillie Rubin woman
seeks apparel that is both eye-catching and alluring yet tasteful and
age-appropriate. Our ability to merchandise apparel that appeals to these
customers and at the same time provides a proper missy fit is our greatest
competitive advantage. We capitalize on this advantage through our ability to:
* Target a Highly Desirable Market. Our target market comprises of
women between the ages of 25 and 55 with higher income levels. As
compared to other demographics, the shopping options for these
customers tend to be limited to either large department stores or
highly specialized boutiques, particularly for social occasion
dressing. We believe that this creates a significant opportunity
for us to attract those customers seeking a more intimate shopping
experience and higher levels of customer service.
* Preserve Distinct but Complementary Brand Images. Cache and Lillie
Rubin are two distinct brands with their own individual styles.
Each has its own feel with Cache appealing to a more fashion-
conscious, youthful woman and Lillie Rubin appealing to a more
sophisticated, mature customer. To support these brand images, the
average price point at Lillie Rubin is typically 25% to 30% higher
than that at Cache. In addition to merchandise assortment and price
point, the two brand identities remain separate through our
marketing and advertising campaigns as well as in-store visual
displays. Lastly, all apparel in our stores is branded under the
respective Cache and Lillie Rubin names. While their assortments
and images differ, these concepts are complementary. We have found
that in malls containing both Cache and Lillie Rubin stores, many
of our customers shop in both stores during the same mall visit. As
a result, we strategically place our Lillie Rubin stores in the
same malls where Cache stores are located.
2
* Provide a Boutique Environment. We believe that our discerning
target customer enjoys an intimate boutique atmosphere, and we
provide this environment through a variety of means. First, our
smaller store format ensures a more intimate feel. Second, we offer
highly personalized customer service. Our level of staffing and
smaller store format enable our staff to be highly visible and
accessible. In addition, we have built a detailed customer database
from our point-of-sale system over the past 10 years, enabling us
to hold special events, offer rewards and send targeted mailings to
our preferred customers. Our salespeople can quickly access all her
preferences. Third, we offer our customers a variety of additional
conveniences to enhance their overall shopping experience. For
example, our special order system allows a customer to receive an
item overnight from another store. Similarly, a customer may make
an appointment on our website for a personalized style consultation
or fitting at a store near her.
* Maintain Balance between Sportswear and Dress Business. We seek to
preserve a balance between our sportswear and dresses. Our dress
and eveningwear business has a highly loyal customer base of women
who make Cache and Lillie Rubin destination stores for their
special occasion purchases. In addition, the dress business
provides strong, reliable sales during the spring and holiday
seasons and enables us to leverage our deep expertise in
eveningwear to design our popular day-into-evening sportswear line,
which represents a large percentage of our sales. Our sportswear
provides a more consistent stream of sales throughout the year and
attracts a broader customer base. Both businesses help to
differentiate us from other mall-based women's specialty retailers
and are important parts of our overall strategy.
* Enhance Merchandising Speed and Flexibility. The vast majority of
our merchandise is purchased from domestic vendors. This provides
us with a number of competitive advantages. We have focused on
relationships with a select number of key suppliers and work
closely with them to design and manufacture apparel to be sold
under our Cache and Lillie Rubin brands. By collaborating with our
domestic vendors, we enjoy short lead times of four to 12 weeks,
enabling us to respond rapidly to changes in sell-through trends
and to conduct frequent test-and-order cycles prior to broad
merchandise introductions. In addition, our suppliers drop ship all
merchandise directly to our stores, further increasing delivery
speed and reducing inventory risk. This drop ship system is
supplemented by an automated special order system that allows us to
efficiently ship merchandise between stores if necessary.
* Execute with Proven Management Team. Our senior management has
extensive industry expertise in all areas of specialty retailing.
Brian Woolf, our Chief Executive Officer, has over 30 years of
industry experience, most recently in senior management at The
Limited. Tom Reinckens, our President and Chief Operating Officer,
has been with us since 1987 and has served in all areas of
operations and finance during his tenure. In addition, we have
recently added three senior managers in operations and
merchandising, with an average of over 12 years of experience with
such leading specialty retailers as Giorgio Armani, The Limited and
Talbots. These management additions include Maria Comfort as Vice
President and General Merchandise Manager for Lillie Rubin, David
Desjardins as Executive Vice President and Director of Stores and
Operations and Bonnie Fox as Vice President of Merchandise Design.
These additions complement our strong existing management team, six
members of whom have been with us for 10 or more years.
3
Growth Strategy
- ---------------
With the new strategic initiatives that Mr. Woolf implemented after his
arrival in October 2000, we have refined our overall operating strategy. With
much of that groundwork complete, our main objective is to capitalize on our
distinct brand identities and differentiated merchandise offerings to accelerate
our growth. We intend to do so through the following means:
* New Unit Expansion and Remodeling. We plan to open new stores and
remodel existing stores. Our remodeled store format optimizes
space, enhances merchandise displays and facilitates customer flow.
The format not only increases the overall store appeal but also
supports our new merchandising strategy put in place in 2001.
During fiscal 2002, our 15 remodeled Cache stores have shown an
average 10% increase in comparable store sales. We expect to
remodel 20 stores in 2003 and 25 stores in fiscal 2004, as we renew
our store leases. In conjunction with our remodeling plans, we also
intend to expand our store base. In fiscal 2002, we opened 10 new
Cache and three new Lillie Rubin stores. We plan to accelerate new
store openings in fiscal 2003 with the opening of approximately 20
new Cache and five new Lillie Rubin stores. Additionally, we expect
to open approximately 35 new stores in fiscal 2004, comprised of 20
new Cache and 15 new Lillie Rubin stores.
* Enhance Brand Recognition. During fiscal 2002, we embarked upon an
advertising campaign that renewed Cache's image and reinforced its
distinct brand identity. This creative campaign encompassed print
media, targeted direct mailings and outdoor advertising. Given the
success of this recent campaign, we will continue to undertake
several strategic marketing initiatives. These initiatives, which
include direct mail pieces, new in-store window and table displays,
and the recent relaunch of the Cache website, are aimed to promote
the Cache brand and reward loyal customers. We have also built an
extensive customer database, based on capturing our point-of-sale
data since 1992, which supports our direct mail programs. In
addition, in fiscal 2003 we expect to launch a marketing campaign
for the Lillie Rubin brand.
* Further Improve Profitability. As we grow our business, we will
seek to further increase our margins through a number of
initiatives. We have significantly reduced the number of our
suppliers and our stock keeping units. This enables us to commit to
bulk fabric purchases and increases our ability to receive
favorable terms and pricing from our vendors. In fiscal 2001 and
2002, we reduced the number of our vendors by approximately 24%
from fiscal 2000 and reduced the number of stock keeping units by
approximately 42%. In addition to increasing our gross margins,
these initiatives also reduce our operating costs and improve our
collaboration with manufacturers. We anticipate further reduction
of our vendor base as well as the number of stock keeping units in
fiscal 2003.
Merchandising
- -------------
Our merchandising focuses on providing a selection of sportswear and
dresses extending from elegant eveningwear to day-into-evening sportswear. As
a result of our short lead time of four weeks to 12 weeks, we are able to
employ a constant process of test-and-ordering that allows us to restock popular
items during the same season. We also maintained a key item strategy, providing
some popular and core items for longer periods to meet ongoing customer demand.
New merchandise typically arrives on a weekly basis at each of our stores,
giving our customers a reason to visit our stores frequently. We introduce new
floor sets into each of our stores approximately every six weeks. These new
floor sets allow exciting changes in visual merchandising within both our stores
and our window presentations.
4
Merchandise
We design and market three general categories of merchandise:
Sportswear. Sportswear consists of related chic tops and bottoms,
versatile enough to be worn during the day or out for evening
affairs.
Dresses. Dresses range from special occasion long dresses to
shorter lengths for cocktail and day-into-evening wear.
Accessories. Accessories consist primarily of jewelry, belts and
handbags intended to complement our sportswear and dress
selections.
These categories of merchandise differ in style depending on whether
they are offered in our Cache or Lillie Rubin stores.
Cache. Cache merchandise targets fashion-conscious women who require a
missy fit and are typically between the ages of 25 and 45. To appeal to these
women, much of our Cache apparel offers tasteful and trendy detailing including
fringe, lace, leather trim and beads. Cache's average price points for
sportswear range from $60 to $300, dresses range from $125 to $450 and
accessories range from $30 to $150. The following table indicates the percentage
of Cache's net sales by merchandise category for each of the last three fiscal
years:
52 Weeks Ended
-----------------------------------------------
December 30, December 29, December 28,
2000 2001 2002
------------- ------------ -------------
Sportswear 65.8% 67.0% 65.7%
Dresses 25.9 24.7 26.1
Accessories 8.3 8.3 8.2
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Total 100.0% 100.0% 100.0%
------------- ------------ -------------
Lillie Rubin. Lillie Rubin targets women who are between the ages of 35
and 55 and desire classic, smart styles. Price points at Lillie Rubin are
approximately 25% to 30% higher than at Cache. The following table indicates
the percentage of Lillie Rubin's net sales by merchandise category for each of
the last three fiscal years:
52 Weeks Ended
-----------------------------------------------
December 30, December 29, December 28,
2000 2001 2002
------------- ------------- -------------
Sportswear 39.8% 39.9% 44.9%
Dresses 50.9 51.6 47.1
Accessories 9.3 8.5 8.0
------------- ------------- -------------
Total 100.0% 100.0% 100.0%
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The percentage of sales represented by dresses is typically higher in the
first half of the year for both Cache and Lillie Rubin due to buying for the
Easter, wedding and prom seasons. The percentage of Lillie Rubin sales
represented by sportswear is expected to increase in fiscal 2003 as a result of
the introduction in spring 2002 of a new day-into-evening sportswear collection
in all of our Lillie Rubin stores.
5
Design
Our apparel design and merchandising are organized around the spring and
fall seasons. Our internal design and merchandising team is comprised of a
designer, buyers who specialize in particular fashion classifications and
executive management personnel. Following the end of a season, our design team
reviews data from that season's results as well as market research, retail
trends, trade shows and other resources. Based on this information, our team
develops seasonal themes which will influence our exclusive designs for the
following year.
Approximately nine to 12 weeks prior to a season, we begin to coordinate
with external designers at our vendors to select specific styles that reflect
our themes for the upcoming season. We have established close relationships
with many of our vendors, enabling us to frequently create and test new
merchandise in our stores prior to the upcoming season and stay abreast of
changing fashion trends and market demands. On an ongoing basis, we revise
our styles or buying levels accordingly.
We believe that our ability to offer an attractive but comfortable missy
fit is crucial for our customers. Once we have identified specific designs and
materials, our technical department works closely with our in-house fit model
and our manufacturers through a collaborative process that tests specific
measurements to ensure that the merchandise meets our high standards for fit
and comfort.
Our accessories are designed and manufactured for us by third-party
vendors.
Planning
We conduct our planning process based on our historical point-of-sale
data, economic trends, seasonality and anticipated demand based on market
tests. We determine at a corporate level the total number of stock keeping
units and the composition by product, print, color, style and size. Our vendors
are then able to negotiate bulk material purchase with their suppliers, which
we believe enables us to obtain better pricing.
Our merchandising and planning teams determine the appropriate level and
type of merchandise per store and communicate that information to our vendors
who drop ship the merchandise to each store. Following receipt at our stores
the merchandising staff obtains daily sales information and store-level
inventory generated by our point-of-sale computer system. Based upon this data
management teams make decisions with respect to re-orders, store transfers and
markdowns.
In addition to introducing new merchandise, we employ a key item strategy
whereby we maintain an inventory of core items in every store. This provides
customers with a level of certainty that these items will be in stock when they
visit, rather than rotating out of the store with merchandise changes. In
certain situations, a store that is experiencing particularly strong
sell-throughs relays the information to our management team and buyers, who
in turn may add or adjust new merchandise in response to this feedback.
Sourcing and Distribution
We employ a sourcing and distribution strategy that enhances our speed to
market, allows us to respond quickly to fashion preferences and demand, and
reduces inventory risk. We purchase the vast majority of our merchandise from
domestic vendors. Sourcing from domestic vendors provides us with short lead
times ranging from four to 12 weeks from order to shipment, compared with
typically much longer periods for sourcing from foreign vendors. Our five
largest vendors accounted for approximately 36% of our purchases in fiscal 2002,
and our largest vendor accounted for 18% of our purchases during this period.
6
Nearly all of our merchandise is drop shipped directly by our vendors to
our individual stores rather than sent to a warehouse or distribution center.
Drop shipping significantly decreases our distribution expenses and reduces the
time required to deliver merchandise to our stores. If a customer requests an
item out of stock at a specific store, we can ship the merchandise from another
store to the customer by overnight or common carrier, the cost of which
typically is borne by the customer.
Store Operations
- ----------------
Store Design and Environment
Most of our stores range in size from approximately 1,500 to 2,500 square
feet, with our typical store averaging approximately 2,000 square feet. We
believe that our relatively smaller store size enables us to create a boutique-
like atmosphere by providing a more intimate shopping environment and a higher
level of customer service than department stores. Most of our stores are open
during the same hours as the malls in which they are located, typically seven
days and six nights a week.
We have recently changed both our Cache and Lillie Rubin store designs and
layouts to enhance their appeal to the customer, increase access to merchandise,
facilitate movement throughout the store and improve our displays. Our new store
design emphasizes a modern, sophisticated and well-lit atmosphere with
streamlined exteriors and sleek interiors. In addition, at Cache we have moved
the dressing rooms from the middle of the store to the rear, and check-out
locations from the front of the store to the side. This eliminates barriers to
movement throughout the store and permits greater flexibility in merchandise
displays, allowing us to more effectively market our clothing.
We began to remodel existing stores using this new design during fiscal
2001. We remodeled 15 Cache and three Lillie Rubin stores in fiscal 2002 and
expect to remodel approximately 20 stores in fiscal 2003 and 25 stores in fiscal
2004, as leases come up for renewal. Most store remodels take from four to six
weeks. During this period, we typically utilize temporary locations in the mall
near the existing location so that customers can continue to shop for our
merchandise.
Store Management and Training
We organize our stores into regions and districts, which are overseen by
three regional vice presidents and 24 district managers, with each of our
district managers responsible for eight to 12 stores. We typically staff our
stores with two opening employees, three mid-day employees and two closing
employees.
We seek to provide our customers with superior customer service. To
promote this part of our strategy, store managers and co-managers receive both
salaries and performance-based bonuses. We pay sales associates and assistant
managers on an hourly basis as well as performance incentives. From time to
time, we offer additional incentives, such as sales contests, to both management
and sales associates. Additionally, we place special emphasis on the recruitment
of fashion-conscious and career-oriented sales personnel. We train most new
store managers in designated training stores and train most other new store
sales personnel on the job.
7
Existing Store Locations
- ------------------------
As of December 28, 2002 we operated 234 stores located in 41 states and
Puerto Rico. Of these 207 were Cache stores and 27 were Lillie Rubin stores.
The following tables indicate our stores by location:
Cache stores:
Alabama 5 Louisiana 4 Ohio 9
Arizona 3 Maryland 5 Oklahoma 2
Arkansas 1 Massachusetts 6 Oregon 2
California 19 Michigan 5 Pennsylvania 7
Colorado 2 Minnesota 1 Rhode Island 2
Connecticut 4 Mississippi 1 South Carolina 3
Delaware 1 Missouri 2 Tennessee 5
Florida 30 Nebraska 1 Texas 16
Georgia 6 Nevada 6 Vermont 1
Hawaii 2 New Hampshire 3 Virginia 5
Illinois 6 New Jersey 11 Washington 3
Indiana 2 New Mexico 1 West Virginia 1
Kansas 2 New York 11 Wisconsin 1
Kentucky 2 North Carolina 7 Puerto Rico 1
Lillie Rubin stores:
Alabama 1 Louisiana 1 Ohio 1
Arizona 1 Michigan 1 Pennsylvania 1
Colorado 1 Nevada 1 Tennessee 1
Florida 9 New Jersey 1 Texas 4
Georgia 2 North Carolina 1 Washington 1
The following table indicates the number of stores opened and closed
over the past five fiscal years:
Stores Opened Stores Closed Stores Open at End
Stores Open at During Fiscal Year During Fiscal Year of Fiscal Year
Beginning of ------------------ ------------------ ------------------
Fiscal Year Fiscal Year Cache L.R. Cache L.R. Cache L.R. Totals
- ----------------- -------------- ----- ----- ----- ----- ------ ----- ------
1998............. 169 4 12(1) 1 0 172 12 184
1999............. 184 13 6 2 0 183 18 201
2000............. 201 8 8 1 1 190 25 215
2001............. 215 9 1 2 1 197 25 222
2002............. 222 10 3 0 1 207 27 234
(1) In 1998, we acquired the Lillie Rubin chain which consisted of
12 stores at that time.
New Store Development
We continually review potential new locations for Cache and Lillie Rubin
stores. We locate our new stores primarily in upscale shopping malls. When
selecting a new site, we target high traffic locations with suitable
demographics and favorable lease economics. When evaluating a new site, we also
look at the principal and anchor stores in the mall, location of our store
within the mall and other specialty stores located in the mall.
8
During fiscal 2002, we opened 10 Cache stores and three Lillie Rubin
stores and closed one Lillie Rubin store. In fiscal 2003, we intend to open
approximately 25 stores consisting of 20 Cache and five Lillie Rubin stores.
In fiscal 2004, we intend to open approximately 35 stores, consisting of 20
Cache and 15 Lillie Rubin stores. Currently 24 of our Lillie Rubin stores are
located in malls that also contain Cache stores, and we intend to locate the
substantial majority of our new Lillie Rubin stores in malls containing Cache
stores.
Marketing and Promotion
- -----------------------
Historically, we conducted limited marketing and advertising, relying on
our individual store displays, mall locations and word-of-mouth to attract
customers. In early fiscal 2002, we began to use a variety of media to promote
our Cache brand and increase sales, consisting primarily of advertisements in
magazines such as Harper's Bazaar, Marie Claire and Vogue. We also introduced
outdoor advertising in selected markets on billboards and buses, including a
large campaign in Grand Central Station in New York. We expect to continue to
increase our Cache advertising and marketing expenditures. In fiscal 2003, we
intend to launch an advertising and marketing campaign for the Lillie Rubin
brand. These increased marketing efforts for both Cache and Lillie Rubin are
intended to attract new customers and increase sales to existing customers.
We use direct mail campaigns to both potential and existing Cache
customers. Over the past several years, we have built a database of over
1,000,000 preferred Cache customers from our point-of-sale information system
and mail eight to 10 promotions per year to our targeted customers. Our
preferred customer tracking system enables us to identify and target specific
merchandise promotions targeted at individual customers. We also send e-mail
notices to customers and intend to increase our use of e-mail promotions in
the future.
Our Cache and Lillie Rubin brands are supported by visual merchandising,
which consists of window displays, front table layouts and various promotions.
This type of marketing is an important component of our marketing and promotion
strategies since our mall locations provide significant foot traffic. We make
decisions regarding store displays and advertising at the corporate level,
ensuring a consistent appearance and message throughout all our stores. In
addition, we encourage store management to become involved in community affairs,
such as participating in local charity fashion shows, to enhance brand
recognition and meet potential customers. Some stores host trunk shows several
times each year to present selected merchandise to customers.
We operate a Cache website, www.cache.com. In March 2002, we relaunched
this website which allows customers to purchase merchandise online, view
currently available styles and schedule private fittings of merchandise at any
Cache store. We have seen a strong increase in sales since the website was
relaunched, as website sales increased 75% to $537,000 in fiscal 2002.
9
Competition
- -----------
The market for women's social occasion sportswear, dresses and accessories
is highly competitive. We compete primarily with specialty retailers of women's
apparel and department stores. Our stores typically compete directly with other
women's apparel stores located in the same mall or a nearby location. We
believe our target customers choose to purchase apparel based on the following
factors:
* style and fashion,
* fit and comfort,
* customer service,
* shopping convenience and environment and
* value.
We believe that our Cache and Lillie Rubin stores and merchandise have
advantages over our competitors in meeting these needs.
Information Systems
- -------------------
We utilize a combination of off-the-shelf and custom software applications
in our point-of-sale computer system to track our sales and inventory levels
on a daily basis. Each store communicates this data directly to the host system
at our corporate headquarters in New York. Our systems enable us to quickly
identify issues and make decisions such as redirecting merchandise shipments,
adjusting prices, re-ordering based on results of test marketing and monitoring
the success of promotional campaigns. In addition, our systems facilitate
various administrative functions such as payroll, inventory control, merchandise
transfers, special orders and price checking.
Trademarks and Service Marks
- ----------------------------
We are the owner in the United States of the Cache and Lillie Rubin
trademarks and service marks. These marks are registered with the United States
Patent and Trademark Office. Each federal registration is renewable indefinitely
if the mark is still in use at the time of renewal. Our rights to the "Cache"
mark and "Lillie Rubin" mark are a significant part of our business.
Accordingly, we intend to maintain these marks and the related registrations.
We are unaware of any material claims of infringement or other challenges to
our right to use our marks in the United States, although we have successfully
brought infringement claims against third parties in the past.
Employees
- ---------
As of December 28, 2002, we had approximately 1,950 employees, of whom
approximately 1,000 were full-time employees and 950 were part time employees.
None of these employees is represented by a labor union. We consider our
employee relations to be satisfactory.
10
Executive Officers, Directors and Key Employees
- -----------------------------------------------
The following table sets forth information concerning our executive officers,
directors and key employees:
Name Age Position
- ---------------------- ----- -----------------------------------
Executive Officers and Directors
Brian Woolf 54 Chief Executive Officer and
Chairman of the Board
Thomas E. Reinckens 49 President, Chief Operating Officer
and Director
Arthur S. Mintz 57 Director
Andrew M. Saul 56 Director
Joseph E. Saul 83 Director
Morton J. Schrader 71 Director
Other Key Employees
Maria Comfort 46 Vice President, General Merchandise
Manager Lillie Rubin
Victor Coster 45 Treasurer and Secretary
Lisa Decker 41 Vice President, Marketing
David Desjardins 41 Executive Vice President, Director
of Stores & Operations
Margaret Feeney 45 Vice President, Finance
Bonnie Fox 45 Vice President, Merchandise Design
Clifford Gray 47 Vice President, Construction
Joanne Marselle 42 Vice President, Planning and
Distribution
Caryl Paez 42 Director, Information Technologies
Executive Officers and Directors
Brian Woolf has served as our Chief Executive Officer and Chairman of the
Board since October 2000. From March 1999 to October 2000, Mr. Woolf served as
Vice President and General Merchandise Manager for The Limited. From 1995 to
March 1999, Mr. Woolf served as Senior Vice President and General Merchandise
Manager for Caldor. Mr. Woolf has held various management positions within the
retail industry over the last 30 years.
Thomas E. Reinckens has served as our President and Chief Operating
Officer since October 2000 and as a director since February 1993. Mr. Reinckens
also is our current principal financial and accounting officer. Mr. Reinckens
joined our company in February 1987 and has held various positions throughout
his tenure, most recently serving as Chief Financial Officer from November 1989
to October 2000 and Executive Vice President from September 1995 to October
2000.
Arthur S. Mintz has served as one of our directors since September 2002.
Mr. Mintz has served as the President of Bees & Jam, Inc., an apparel
manufacturer, since 1971.
Andrew M. Saul has served as one of our directors since 1986. Mr. Saul
also served as our Chairman of the Board from February 1993 to October 2000.
Mr. Saul is a partner in Saul Partners, an investment partnership, a position
he has held since 1986. He is the son of Joseph E. Saul.
11
Joseph E. Saul has served as one of our directors since 1986. Mr. Saul
is a partner in Saul Partners, a position he has held since 1986. He is the
father of Andrew M. Saul.
Morton J. Schrader has served as one of our directors since 1989. Mr.
Schrader was the President of Abe Schrader Corp., a manufacturer of women's
apparel, from 1968 through March 1989. Since 1989, he has been active as a
real estate broker.
Other Key Employees
Maria Comfort has served as our Vice President and General Merchandise
Manager for our Lillie Rubin stores since May 2002. From 1999 until she joined
us, Ms. Comfort served as Executive Vice President for Giorgio Armani. From
June 1997 to 1999, Ms. Comfort served as President of 9 & Co., a division of
Nine West Group, Inc., a women's apparel company. Ms. Comfort's background
encompasses a variety of merchandising functions, including design,
manufacturing and buying. Ms. Comfort has 26 years of retail experience.
Victor Coster has served as our Secretary since July 1991 and as our
Treasurer since July 2001. Mr. Coster is responsible for all treasury and tax
matters. Mr. Coster joined us in February 1991, and has held various positions,
most recently as Controller from February 1997 to July 2001. Mr. Coster has
over 23 years of experience in finance and accounting and has been a Certified
Public Accountant since 1981.
Lisa Decker has served as our Vice President of Marketing and Advertising
since 1998 and was our Director of Marketing from 1991 until 1998. She has over
19 years of experience in marketing, advertising, sales promotion and visual
merchandising within the retail industry.
David Desjardins has served as our Executive Vice President and Director
of Stores and Operations since April 2002. From 1999 until joining us, Mr.
Desjardins served in various managerial capacities at the Limited, most recently
as Vice President of Express and Director of Sales and Operations at Limited
Stores. From 1990 to 1999, Mr. Desjardins held various managerial positions
with The Gap. Mr. Desjardins has 17 years of retail experience.
Margaret Feeney has served as our Vice President of Finance since 2001.
Ms. Feeney has served in a variety of financial and operational capacities with
us since 1992. Prior to joining us, Ms. Feeney served as Manager of Financial
Analysis and Budgeting for Toys "R" Us and in various financial positions at
Brooks Fashion Stores, a junior specialty chain. Ms. Feeney has 19 years of
retail experience.
Bonnie Fox has served as our Vice President, Merchandise Design for our
Cache stores since March 2002. From 1997 to 2001, Ms. Fox served as Vice
President, Merchandising for Maggy London, a blouse and dress manufacturer.
From 1994 to 1997, Ms. Fox served as Vice President, General Merchandise
Manager for Barami specialty stores. Ms. Fox has over 20 years of retail
and manufacturing experience.
Clifford Gray has served as our Vice President of Construction since 1999
and was our Operations Manager from 1991 to 1999. Prior to joining us, Mr.
Gray served as Operations Manager with Kids "R" Us.
12
Joanne Marselle has served as our Vice President of Planning and
Distribution since 2000 and was our Director of Planning from 1990 to 2000.
Prior to joining us, Ms. Marselle served at various times as a Planning and
Distribution Analyst and a Merchandise Coordinator for both Country Road
Australia and Ann Taylor. Ms. Marselle has over 20 years experience in the
areas of planning and distribution.
Caryl Paez has served as our Director of Information Technologies since
he rejoined our company in 1999. From 1996 to 1999, he was Director of
Information Technologies for Louis Vuitton Americas. From 1992 to 1996, he
served as our Director of Management Systems and from 1989 to 1992, as our
Manager of Point of Sales Systems.
ITEM 2. PROPERTIES
All but a few of our 234 stores are located in shopping malls. The
substantial majority of our stores contain between 1,500 and 2,500 square feet
of space, with the typical store averaging 2,000 square feet. All of our stores
are in leased facilities, and we typically negotiate our rental agreements
based on our portfolio of store locations with a particular landlord rather
than on an individual basis. Rental terms usually include a fixed minimum rent
plus a percentage rent based on sales in excess of a specified amount. In
addition, we generally are required to pay a charge for common area maintenance,
utility consumption, promotional activities and/or advertising, insurance and
real estate taxes. Several leases contain fixed escalation clauses.
Our leases expire at various dates through 2015. The following table
indicates the periods during which our leases expire.
Fiscal Years Cache Lillie Rubin Totals
- ------------ ----- ------------ ------
Present-2005 62 4 66
2006-2008 60 3 63
2009-2011 35 9 44
2012-2015 50 11 61
----- ------------ -----
Totals 207 27 234
Our corporate office is an 11,900 square foot facility located at 1460
Broadway in New York City. We lease this space under a 10-year lease through
2003 at a rate of approximately $357,000 per year. We are presently searching
for new office space for our corporate offices in the same general vicinity
in New York City.
We contract for space in a warehouse in New Jersey on an as-needed basis
to serve as a staging area for new store inventories and fixtures.
ITEM 3. LEGAL PROCEEDINGS
We are party to various lawsuits arising in the ordinary course of our
business. In management's opinion, the ultimate disposition of these matters
will not have a material adverse effect on our liquidity or operating results.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on November 13, 2002.
(b) All members of the current Board of Directors were re-elected as
such for the ensuing year. The names of each elected Director are:
Andrew M. Saul , Joseph E. Saul, Arthur S. Mintz, Thomas E.
Reinckens, Morton J. Schrader and Brian Woolf.
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
(a) The principal market in which the Company's Common Stock is being
traded is the NASDAQ National Market System. The stock symbol is CACH. The
price range of the high and low bid information for the Company's Common Stock
during 2001 and 2002, by fiscal quarters, are as follows:
Fiscal 2001 Fiscal 2002
----------- -----------
Fiscal Period High Low High Low
- --------------------- ------ ------ ------ ------
First Fiscal Quarter $ 5.00 $ 2.59 $ 7.94 $ 3.40
Second Fiscal Quarter $ 4.54 $ 3.00 $18.45 $ 6.26
Third Fiscal Quarter $ 4.50 $ 3.06 $18.15 $ 9.25
Fourth Fiscal Quarter $ 3.80 $ 3.15 $15.05 $10.29
Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily
represent actual transactions.
(b) As of February 28, 2003, there were approximately 400 holders of
record of the Company's Common Stock.
(c) The Company has never paid cash dividends on its common stock.
Payment of dividends is within the discretion of the Company's
Board of Directors.
(d) The following table summarizes our equity compensation plans as of
December 28, 2002:
Number of securities
remaining available
for the future issuance
under equity
Number of securities Weighted average compensation plans
to be issued upon exercise price of (excluding
exercise of of outstanding securities reflected
Plan Category outstanding options options in column (a))
- ----------------------------- -------------------- ----------------- ------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 1,140,250 $3.60 938
Equity compensation plans not
approved by security holders 0 0 0
-------------------- ----------------- ------------------------
Total 1,140,250 $3.60 938
==================== ================= ========================
14
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Consolidated Financial Data should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto.
CACHE, INC. AND SUBSIDIARIES
STORE DATA AND OPERATING RESULTS
52 WEEKS ENDED (1)
-------------------------------------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1999 (1) 2000 2000 2001 2002
-------------------------------------------------------------------------
(in thousands, except per share and operating data)
OPERATING RESULTS:
- -----------------------------------------
NET SALES $146,831 $161,373 $176,470 $179,899 $199,423
COST OF SALES 95,259 105,145 117,448 116,346 115,700
-------------------------------------------------------------------------
GROSS INCOME 51,572 56,228 59,022 63,553 83,723
STORE OPERATING EXPENSES 37,917 42,366 47,828 51,289 57,220
GENERAL AND ADMINISTRATIVE EXPENSES 7,058 7,655 9,481 8,929 12,190
-------------------------------------------------------------------------
OPERATING INCOME 6,597 6,207 1,713 3,335 14,313
OTHER INCOME, (net) 227 286 64 1,858 (2) 260
INTEREST EXPENSE (154) (134) (40) -- --
-------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 6,670 6,359 1,737 5,193 14,573
INCOME TAX PROVISION 2,735 2,350 634 1,895 5,632
-------------------------------------------------------------------------
NET INCOME $3,935 $4,009 $1,103 $3,298 $8,941
=========================================================================
EARNINGS PER SHARE:
- -----------------------------------------
BASIC EARNINGS PER SHARE $0.43 $0.44 $0.12 $0.36 $0.98
DILUTED EARNINGS PER SHARE $0.43 $0.43 $0.12 $0.36 $0.93
WEIGHTED AVERAGE SHARES OUTSTANDING:
- -----------------------------------------
BASIC 9,091 9,091 9,091 9,091 9,100
DILUTED (3) 9,170 9,305 9,224 9,229 9,632
STORE DATA:
- -----------------------------------------
NUMBER OF STORES OPEN AT END OF PERIOD 184 201 215 222 234
AVERAGE SALES PER SQUARE FOOT (4) $403 $400 $409 $408 $438
COMPARABLE STORE SALES INCREASE (5) 2% 5% 3% 0% 7%
15
CACHE, INC. AND SUBSIDIARIES
BALANCE SHEET DATA
--------------------------------------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1999 (1) 2000 2000 2001 2002
--------------------------------------------------------------------------
(in thousands, except ratios and per share data)
WORKING CAPITAL $15,374 $14,877 $16,165 $20,197 $26,654
TOTAL ASSETS 51,558 56,962 55,051 57,135 70,752
TOTAL LONG-TERM DEBT 2,000 --- --- --- ---
STOCKHOLDERS' EQUITY 27,896 31,905 33,008 36,306 45,292
RATIO OF CURRENT ASSETS TO
CURRENT LIABILITIES 1.77:1 1.63:1 1.78:1 2.03:1 2.09:1
INVENTORY TURNOVER RATIO 5.13:1 4.86:1 4.84:1 5.07:1 5.28:1
CAPITAL EXPENDITURES 3,266 6,354 4,852 4,330 7,342
DEPRECIATION AND AMORTIZATION 4,136 4,602 4,891 4,870 4,963
BOOK VALUE PER SHARE $3.07 $3.51 $3.63 $3.99 $4.98
FOOTNOTES
- ---------
(1) - Results for the fiscal year ended January 2, 1999 include 53 weeks.
Results for all other periods presented include 52 weeks.
(2) - Other income in fiscal 2001 included $1,518,000 from the settlement of
a trademark litigation claim undertaken against a third party, net of
professional fees related to the lawsuit.
Other income generally consists of interest income.
(3) - Diluted weighted average shares for the fiscal years ended January 2,
1999, January 1, 2000, December 30, 2000, December 29, 2001 and December
28, 2002, include 79,000; 214,000; 133,000; 138,000; and 532,000,
respectively, due to the potential exercise of stock options that were
outstanding and exercisable during those years.
(4) - Average sales per square foot are calculated by dividing net sales by
the weighted average store square footage available.
(5) - Comparable store sales data are calculated based on the net sales of
stores open at least 12 full months at the beginning of the period for
which the data are presented.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are a nationwide, mall-based specialty retailer of sophisticated,
social occasion sportswear and dresses targeting style-conscious women between
the ages of 25 and 55. We own and operate two separate store concepts, Cache
and Lillie Rubin, each of which carries its own distinctive branded merchandise.
We operate 234 stores primarily situated in central locations in high traffic,
upscale malls.
The first Cache store was opened in 1975 in Florida as a couture boutique.
From 1986 until 2000, Cache grew under the ownership of the Saul family,
expanding from 29 stores to 183 stores at the end of 1999. In addition, in
1998 we acquired the 12-store Lillie Rubin chain and grew it to 18 stores by
the end of 1999. In October 2000, we hired Brian Woolf as our Chief Executive
Officer. Mr. Woolf embarked on a series of strategic initiatives to accelerate
growth and enhance profitability. These initiatives included:
* hiring three new members of management, all of whom have extensive
retail experience,
* re-launching the Cache brand through a national advertising
campaign,
* transitioning the merchandise mix to an exclusively Cache and
Lillie Rubin branded line of apparel,
* introducing our day-into-evening sportswear line in Lillie Rubin,
* developing a more modern and efficient store format and
* significantly reducing the number of stock keeping units and
vendors
As a result of these initiatives, comparable stores sales have increased
from 0% in fiscal 2001 to 7% in fiscal 2002 and gross margins have
increased from 35.3% to 42.0% during that same time period. Improvements
to our gross margins were primarily the result of our significant
reduction in the number of stock keeping units we carry and vendors from
which we purchase.
General
Net sales. Net sales consist of sales from comparable stores and
non-comparable stores. A store is not included in comparable store sales
until the first day of the fiscal month following the twelfth full month
of sales. Non-comparable store sales include sales generated at new
stores prior to the period when they are considered comparable stores
and sales generated from stores that we have since closed.
Cost of sales. Cost of sales includes the cost of merchandise, cost
of freight from vendors, payroll for our design, buying and merchandising
personnel and store occupancy costs. Store occupancy costs include rent,
contingent rents, common area maintenance and real estate taxes.
17
Store operating expenses. Store operating expenses include payroll,
payroll taxes, health benefits, insurance, credit card processing fees,
depreciation, licenses and taxes as well as marketing and advertising
expenses.
General and administrative expenses. General and administrative
expenses include district and regional manager payroll, other corporate
personnel payroll and employee benefits, employment taxes, insurance,
legal and other professional fees and other corporate level expenses.
Corporate level expenses are primarily attributable to our corporate
headquarters in New York.
Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
appropriate application of certain accounting policies, many of which
requires us to make estimates and assumptions about future events and their
impact on amounts reported in our financial statements and related notes.
Since future events and their impact cannot be determined with certainty,
the actual results will inevitably differ from our estimates. Such
differences could be material to the financial statements.
We believe our application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are constantly reevaluated, and adjustments are made when facts
and circumstances dictate a change. Historically, we have found our
application of accounting policies to be appropriate, and actual results
have not differed materially from those determined using necessary
estimates.
Our accounting policies are more fully described in Note 1 to the
financial statements, located elsewhere in this document. We have
identified certain critical accounting policies which are described
below.
Inventories. Merchandise inventory is carried at the lower of cost
or market using the retail method of accounting. We make assumptions to
adjust the value of inventory based on historical experience and current
information. This procedure inherently reduces the carrying value of
inventories as markdowns are initiated. These assumptions can have a
significant impact on current and future operating results and financial
position.
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.
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. 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.
18
Results of Operations
The following table sets forth our operating results, expressed as
a percentage of net sales.
52 Weeks Ended
-----------------------------------------
December 30, December 29, December 28,
2000 2001 2002
------------ ------------ ------------
Operating Results
Net sales........................... 100.0% 100.0% 100.0%
Cost of sales....................... 66.6 64.7 58.0
------------ ------------ ------------
Gross profit........................ 33.4 35.3 42.0
Store operating expenses............ 27.1 28.5 28.7
General and administrative expenses. 5.4 5.0 6.1
------------ ------------ ------------
Operating income.................... 1.0 1.9 7.2
Other income (net).................. 0.0 1.0 0.1
------------ ------------ ------------
Income before income taxes.......... 1.0 2.9 7.3
Income taxes........................ 0.4 1.1 2.8
------------ ------------ ------------
Net income.......................... 0.6% 1.8% 4.5%
============ ============ ============
52 Weeks Ended December 28, 2002 (Fiscal 2002) Compared to 52 Weeks Ended
December 29, 2001 (Fiscal 2001)
Net sales. Our net sales increased to $199.4 million from $179.9 million,
an increase of $19.5 million, or 10.9%, over the prior fiscal year. This
increase reflects $11.9 million of additional net sales as a result of a 7%
increase in our comparable store sales. The remainder of this increase was
the result of additional net sales from non-comparable stores.
Gross profit. Our gross profit increased to $83.7 million from $63.6
million, an increase of $20.2 million, or 31.7%, over the prior fiscal year.
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 42.0%
from 35.3%. This increase as a percentage of net sales was primarily due to
higher initial margins resulting from a reduction in the number of our vendors
and the number of stock keeping units. These reductions enabled us to commit
to bulk fabric purchases and increased our ability to receive favorable
pricing from vendors. We expect the improvement created by higher initial
mark ups to continue to benefit results in fiscal 2003.
Store operating expenses. Our store operating expenses increased to
$57.2 million from $51.3 million, an increase of $5.9 million, or 11.6%, over
the prior fiscal year. As a percentage of net sales, store operating expenses
increased to 28.7% from 28.5%, primarily due to an increase in marketing and
advertising expenses of $2.4 million which were partially offset by a reduction
in store operating expenses as a percentage of sales, due to the fixed nature
of most store operating expenses.
General and administrative expenses. Our general and administrative
expenses increased to $12.2 million from $8.9 million, an increase of $3.3
million or 36.5%, over the prior fiscal year. As a percentage of net sales,
general and administrative expenses increased to 6.1% from 5.0%, primarily due
to a higher corporate-level payroll and employee-related costs.
19
Other income. Other income decreased to $260,000 from $1.9 million in the
prior fiscal year, primarily attributable to the $1.5 million of other income
in last year's period from the settlement of a trademark litigation claim
undertaken against a third party, net of professional fees related to the
lawsuit. Other income generally consists of interest income.
Income taxes. Our taxes increased to $5.6 million from $1.9 million, an
increase of $3.7 million over the prior fiscal year. This increase was
attributable to higher taxable income, as well as an increase in our effective
tax rate from 36.5% in fiscal 2001 to 38.6% in fiscal 2002. The increase in
our overall effective income tax rate is attributable to increased levels of
federal taxable income subject to tax in a higher tax bracket, as well as a
change in the mix of income subject to tax in the various states in which we
conduct business.
Net income. As a result of the foregoing, our net income increased to
$8.9 million from $3.3 million, an increase of $5.6 million from the same
period last year.
52 Weeks Ended December 29, 2001 (Fiscal 2001) Compared to 52 Weeks Ended
December 30, 2000 (Fiscal 2000)
Net sales. Our net sales increased to $179.9 million from $176.5 million
an increase of $3.4 million, or 1.9%, over the prior fiscal year. This increase
was the result of net sales from non-comparable stores. Comparable store sales
increased by 3% in the first 26 weeks of fiscal 2001. Comparable store sales
decreased by 3% in the second 26 weeks of fiscal 2001 as a result of the
after-effects of the events of September 11 and the slowdown in the United
States economy.
Gross profit. Our gross profit increased to $63.6 million from $59.0
million, an increase of $4.5 million, or 7.7%, over the prior fiscal year. As
a percentage of net sales, gross profit increased to 35.3% from 33.4%. This
increase as a percentage of net sales was primarily the result of the change
in our merchandising strategy. We reduced the number of vendors from which we
purchased during fiscal 2001 by 28% from fiscal 2000 and reduced the number of
stock keeping units we carried by 39%. The effects of these changes on our
financial performance were realized in the third and fourth quarters of fiscal
2001. The increase in our gross margin was offset in part by an increase in
occupancy expenses for new stores and merchandise markdowns due to the
difficult retail environment in the third and fourth quarters of fiscal 2001.
Store operating expenses. Our store operating expenses increased to
$51.3 million from $47.8 million, an increase of $3.5 million, or 7.2%, over
the prior fiscal year. This was due primarily to an increase in the total
number of stores. As a percentage of net sales, store operating expenses
increased to 28.5% from 27.1%, primarily due to an increase in payroll expense
of $2.0 million and an increase in advertising expense of $1.0 million.
General and administrative expenses. Our general and administrative
expenses declined to $8.9 million from $9.5 million, a decrease of $552,000 or
5.8% from the prior fiscal year. As a percentage of net sales, general and
administrative expenses decreased to 5.0% from 5.4%. This decrease was
primarily attributable to professional fees relating to the trademark
litigation settled during May 2001. In fiscal 2000, these fees were included
in general and administrative expenses. In fiscal 2001, these fees were offset
against the recovery which is included in other income.
20
Other income. Other income increased to $1.9 million from $64,000, an
increase of $1.8 million, over the same period last year, primarily attributable
to the $1.5 million we received from the settlement of a trademark litigation
claim undertaken against a third party, net of professional fees related to the
lawsuit.
Income taxes. Our taxes increased to $1.9 million from $634,000, an
increase of $1.3 million, over the same period last year. This increase was
attributable to higher taxable income.
Net income. As a result of the foregoing, our net income increased to
$3.3 million from $1.1 million, an increase of $2.2 million, over the prior
fiscal year.
Quarterly Results and Seasonality
We experience seasonal and quarterly fluctuations in our net sales and
operating income. Our 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 our fourth fiscal quarter (October, November and December) and lowest
sales during our third fiscal quarter (July, August and September).
The following table includes our unaudited quarterly results of operations
data for each of the eight quarters during the two-year period ended December
28, 2002. We derived this data from our unaudited quarterly consolidated
financial statements. We believe that we have prepared this information on the
same basis as our audited consolidated financial statements and that we have
included all necessary adjustments, consisting only of normal recurring
adjustments, to present fairly the selected quarterly information when read
in conjunction with our audited annual consolidated financial statements and
the notes to those statements included elsewhere in this document. The
operating results for any particular quarter are not necessarily indicative of
the operating results for any future period.
13 Weeks Ended
-----------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 29, Dec. 29, Mar. 30, June 29, Sept. 28, Dec. 28,
2001 2001 2001 2001 2002 2002 2002 2002
-------- -------- --------- -------- -------- -------- --------- --------
(Unaudited)
Dollars in thousands)
Operating Results
Net sales................. $44,191 $45,613 $37,859 $52,236 $47,643 $51,294 $41,989 $58,497
Gross profit.............. 15,235 16,084 12,859 19,375 19,577 21,902 16,787 25,457
Operating income.......... 308 835 (1,638) 3,830 2,872 4,586 94 6,761
Net income................ 1,198 629 (1,009) 2,480 1,856 2,960 103 4,022
As a Percentage of Net Sales
Net sales................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.............. 34.5 35.3 34.0 37.1 41.1 42.7 40.0 43.5
Operating income.......... 0.7 1.8 (4.3) 7.3 6.0 8.9 0.2 11.6
Net income................ 2.7 1.4 (2.7) 4.7 3.9 5.8 0.2 6.9
Selected Operating Data
Number of stores open at
end of period............. 215 215 217 222 224 224 227 234
Comparable store sales
increase.................. 4% 2% (1)% (5)% 5% 8% 7% 8%
21
Liquidity and Capital Resources
Our cash requirements are primarily for the construction of new stores and
inventory for new stores as well as the remodeling of existing stores. We have
historically satisfied our cash requirements principally through cash flow from
operations. As of December 28, 2002, we had working capital of approximately
$26.7 million, which included cash and marketable securities of $24.7 million.
During fiscal 2002, we generated $19.9 million in cash from operating
activities due primarily to net income, depreciation of $5.0 million, a
decrease in receivables of $1.6 million, an increase in accounts payable of
$899,000 and an increase in accrued liabilities and compensation of $3.6
million. During fiscal 2001, we generated $9.6 million in cash from operating
activities due primarily to net income, depreciation of $4.9 million, a
decrease in inventory of $2.4 million and a decrease in accounts receivable
of $1.0 million, offset in part by a decrease in accounts payable of $1.2
million. During fiscal 2000, we generated $1.7 million in cash from operating
activities due primarily to net income, depreciation of $4.9 million and an
increase in accrued liabilities and compensation of $1.5 million, offset in
part by a decrease in accounts payable of $4.0 million.
Cash used in investing activities was approximately $4.8 million for fiscal
2000, $4.2 million for fiscal 2001 and $21.7 million for fiscal 2002. These
amounts were used for the purchase of marketable securities as well as the
payment for equipment and leasehold improvements in new and remodeled stores.
Our capital requirements depend primarily on the number of new stores we open,
the number of existing stores we remodel and the timing of these expenditures.
Projected capital expenditures for fiscal 2003 to fund new store openings and
remodelings are approximately $10.0 million.
Based on our experience with new store openings, we estimate that the
average net investment to open new stores is approximately $150,000 to
$200,000, which includes new store opening expenses and initial inventory,
net of landlord contributions. We estimate that the average net investment to
remodel an existing store is approximately $200,000 to $300,000, net of
landlord contributions.
Cash provided by (used in) used in financing activities was negligible
in fiscal 2000, fiscal 2001 and fiscal 2002.
We have a line of credit with Fleet Bank, N.A., permitting us to borrow
up to $15.0 million on a revolving basis. At December 28, 2002, there was no
outstanding balance under this credit facility. Amounts outstanding under the
credit facility bear interest at a maximum annual rate equal to the bank's
prime rate, currently 4.25%. The agreement relating to this facility contains
selected financial and other covenants. In addition, the credit facility
contains restrictions on our ability to make capital expenditures, incur
indebtedness or create or incur liens on our assets. While this facility is
unsecured, if a default occurs under the facility, we are required to grant
the lender a security interest in our inventory and accounts receivable. We are
in compliance with all loan covenants. This facility currently expires in
November 2005.
We believe that cash flows from operations, our current available cash
and funds available under our revolving credit facility will be sufficient to
meet our working capital needs and contemplated new store opening expenses for
at least the next 12 months. If our cash flow from operations should decline
significantly or if we should accelerate our store expansion or remodeling
program, it may be necessary for us to seek additional sources of capital.
22
Contractual Obligations and Commercial Commitments
The following tables summarize our minimum contractual commitments and
commercial obligations as of December 28, 2002:
Payments Due in Period
--------------------------------------------------
Within After
Total 1 Year 2-3 Years 4-5 Years 5 Years
-------- -------- --------- --------- -------
(In thousands)
Contractual Obligations
Employment contracts.... $ 38 $ 38 $ - $ - $ -
Operating leases........ 133,078 19,713 35,555 27,242 50,568
-------- -------- --------- --------- -------
Total................... $133,116 $ 19,751 $ 35,555 $ 27,242 $50,568
======== ======== ========= ========= =======
Payments Due in Period
--------------------------------------------------
Within After
Total 1 Year 2-3 Years 4-5 Years 5 Years
-------- ------- --------- --------- -------
(In thousands)
Commercial Commitments
Credit facility......... $ - $ - $ - $ - $ -
Letters of credit....... 487 487
-------- ------- --------- --------- -------
Total................... $ 487 $ 487 $ - $ - $ -
======== ======= ========= ========= =======
Quantitative and Qualitative Disclosures About Market Risk
Our market risk relate primarily to changes in interest rates. We bear
the risk in two specific ways. First, our revolving credit facility carries a
variable interest rate that is tied to market indices and, therefore, our
statement of income and our cash flows will be exposed to changes in interest
rates. As of December 28, 2002, we had no borrowing under our credit facility.
However, we may borrow funds under our revolving credit facility as needed.
The second component of interest rate risk involves the short-term
investment of excess cash in short-term, investment-grade interest-bearing
securities. These investments are included in cash and equivalents as well as
marketable securities on our balance sheet. If there are changes in interest
rates, those changes would affect the investment income we earn on these
investments and, therefore, impact our cash flows and results of operations.
New Accounting Pronouncements
In July 2001, Statements of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") were released. The related statements address financial
accounting and reporting for business combinations and acquired goodwill and
other intangible assets. SFAS 141 is effective for all business combinations
initiated after June 30, 2001. SFAS 142 is effective for all Fiscal years
beginning after December 15, 2001. The Company adopted SFAS 142 in January 2002.
We have determined that the adoption of SFAS 141 and SFAS 142 had no material
impact on our financial position and results of operations.
23
In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses the accounting and financial reporting
for legal obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The provisions of SFAS No. 143
will be effective for our financial statements for the 2003 fiscal year.
We do not expect the adoption of this standard to have a significant impact on
our financial position, earnings or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses the accounting
for impairment or disposal of long-lived assets and discontinued operations.
On December 30, 2001, we adopted this standard and its application had no
significant impact on our financial position, earnings or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS No. 146 supercedes previous accounting
guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS No. 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost was recognized at the date of the company's
commitment to an exit plan. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. Accordingly, SFAS
No. 146 may affect the timing of recognizing any future restructuring costs
as well as the amounts recognized. This statement establishes accounting
standards for recognition and measurement of a liability for an asset retirement
obligation and the associated asset retirement cost. The Company is required
to adopt the provisions of SFAS No. 146 effective for exit or disposal
activities initiated after December 31, 2002. We will adopt the provisions of
SFAS No. 146 for any restructuring activities initiated after December 31,
2002.
On December 31, 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation. Statement 148 amends the
disclosure requirements in Statement 123 for stock-based compensation for
annual periods ending after December 15, 2002 and for interim periods beginning
after December 15, 2002. Therefore, calendar year-end companies should provide
the amended disclosures in their December 31, 2002 annual financial statements
and their March 31, 2003 interim financial statements. These disclosure
requirements apply to all companies, including those that continue to recognize
stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued
to Employees."
Effective for financial statements for fiscal years ending after December
15, 2002, Statement 148 also provides three alternative transition methods for
companies that choose to adopt the fair value measurement provisions of
Statement 123. Earlier application of those transition methods is permitted
for entities with a fiscal year ending prior to December 15, 2002, provided
that financial statements for the 2002 fiscal year have not been issued as of
December 31, 2002.
We will continue to recognize stock-based compensation under APB Opinion
No. 25, and in accordance with FASB Statement No. 148, we will include required
disclosures for interim reporting purposes.
24
In November 2002, the FASB issued FASB Interpretation 45("FIN 45") which
requires new disclosures and liability-recognition for certain guarantees. This
Interpretation addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees. It clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This Interpretation does not prescribe a
specific approach for subsequently measuring the guarantor's recognized
liability over the term of the related guarantee. This Interpretation also
incorporates, without change, the guidance in FASB Interpretation No. 34,
Disclosure of Indirect Guarantees of Indebtedness of Others, which is being
superceded. The initial recognition and measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements in this Interpretation are effective
for financial statements of interim or annual periods ending after December
15, 2002. The interpretive guidance incorporated without change from
Interpretation 34 continues to be required for financial statements for
fiscal years ending after June 15, 1981 - the effective date of Interpretation
34. We have determined that the adoption of FIN 45 will have no material
impact on our financial position and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's unaudited selected quarterly financial data is incorporated
herein by reference to Note 11 to the Company's consolidated financial
statements on page F-21. The Company's consolidated financial statements and
the report of independent public accountants are listed at Item 16 of this
Report and are included in this Form 10-K on pages F-1 through F-22.
ITEM 9. CHANGES IN AND/OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
--------
The information called for by Items 10, 11, 12, 13 and 15 is incorporated
herein by reference from the definitive proxy statement to be filed by the
Company in connection with its 2003 Annual Meeting of Shareholders.
ITEM 14. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and
other disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. We evaluated the effectiveness of the design
and operation of our disclosure controls and procedures under the supervision
and with the participation of management, including our Chief Executive Officer
and Principal Financial and Accounting Officer, within 90 days prior to the
filing date of this report. Based upon the evaluation, our Chief Executive
Officer and Principal Financial and Accounting Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic Securities and
Exchange Commission filings. No significant changes were made to our internal
controls or other factors that could significantly affect these controls
subsequent to the date of their evaluation.
25
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements listed in the "Index To The Consolidated
Financial Statements" on page F-2 are filed as a part of this
report.
2. Financial statement schedules are included on page F-22 or are
omitted because they are not applicable or the required information
is shown in the financial statements or notes thereto.
2. Exhibits (9)
3.1 Articles Incorporation of the Company and amendments thereto
(2)
3.2 Bylaws of the Company (1)
10.1 Lease, dated May 13, 1993, between the Company, as Tenant, and
Robert H. Arnow, as Landlord, for the Company's offices at
1460 Broadway, New York, New York (3)
10.2 1994 Stock Option Plan of the Company (4) (12)
10.3 Form of Option Agreement relating to Options issued under the
1994 Stock Option Plan (4) (12)
10.4 2000 Stock Option Plan of the Company (9) (12)
10.5 Form of Option Agreement relating to Options issued under the
2000 Stock Option Plan (10) (12)
10.6 Second Amended and Restated Revolving Credit Agreement (the
"Credit Agreement") dated as of August 26, 1996, between Fleet
Bank, N.A. (Successor in interest to National Westminster
Bank, New Jersey) and the Company (5)
10.7 Security Agreement, dated as of August 26, 1996 (the "Security
Agreement"), between the Company and Fleet Bank, N.A. (5)
10.8 Form of Promissory Note made by each of Roy Smith and Thomas
Reinckens to the order of the Company, in an amount equal to
$170,000 and $80,000, respectively, (4) (12)
10.9 Amended and Restated Asset Purchase Agreement dated August 10,
1998 between Lillie Rubin Fashions, Inc. and the Company (6)
10.10 Master Amendment, dated July 19, 1999, to Revolving Credit
Agreement and Security Agreement (7)
10.11 Employment Agreement, dated September 28, 2000, between the
Company and Brian Woolf (8) (12)
10.12 Second Master Amendment, dated November 21, 2002, to Revolving
Credit Agreement
11.1 Calculation of Basic and Fully Diluted Earnings per Common
Share
12.1 Statements re: Computation of Ratios
16.1 Letter of Arthur Andersen LLP dated June 12, 2002, regarding
change in certifying accountant (11)
26
23.1 Consent of KPMG LLP
23.2 Notice Regarding Lack of Consent of Arthur Andersen LLP
99.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Principal Financial and Accounting
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
99.3 Certification of the Chief Executive and Principal Financial
and Accounting Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(1) Incorporated by Reference to the Company's Registration Statement
on Form S-18, dated December 29, 1980.
(2) Incorporated by Reference to the Company's Current Report on Form
8-K, dated September 15, 1993.
(3) Incorporated by Reference to the Company's Annual Report on Form
10-K for the fiscal year ended January 1, 1994.
(4) Incorporated by Reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
(5) Incorporated by Reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 1996.
(6) Incorporated by Reference to the Company's Annual Report on Form
10-K for the fiscal year ended January 2, 1999.
(7) Incorporated by Reference to the Company's Annual Report on Form
10-K for the fiscal year ended January 1, 2000.
(8) Incorporated by Reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 30, 2000.
(9) Incorporated by Reference to the Company's Definitive Proxy
Statement filed on September 18, 2001.
(10) Incorporated by Reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 29, 2001.
(11) Incorporated by Reference to the Company's Current Report on Form
8-K, dated June 12, 2002.
(12) Exhibits 10.2 through 10.5, 10.8 and 10.11 are management contracts
or compensatory plans or arrangements required to be filed as an
exhibit pursuant to Item 16(c) of this Annual Report on Form 10-K.
(13) A Stockholder may obtain a copy of any of the exhibits included in
the Annual Report on Form 10-K upon payment of a fee to cover the
reasonable expenses of furnishing such exhibits, by written request
to CACHE, Inc., at 1460 Broadway, 15th Floor, New York, New York
10036 Attention: Chief Operating Officer.
(b) Reports on Form 8-K
None
27
Signatures
----------
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Date: March 26, 2003 CACHE, INC.
(Registrant)
By: /s/ Brian Woolf
-------------------------
Brian Woolf
Chairman of the Board
and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- -----
/s/ Brian Woolf Chairman of the Board; March 26, 2003
- -----------------------
BRIAN WOOLF
/s/ Thomas E. Reinckens President/Director March 26, 2003
- ----------------------- (Principal Financial
THOMAS E. REINCKENS and Accounting Officer
/s/ Arthru S. Mintz Director March 26, 2003
- -----------------------
ARTHUR S. MINTZ
/s/ Andrew M. Saul Director March 26, 2003
- -----------------------
ANDREW M. SAUL
/s/ Joseph E. Saul Director March 26, 2003
- -----------------------
JOSEPH E. SAUL
/s/ Morton J. Schrader Director March 26, 2003
- -----------------------
MORTON J. SCHRADER
28
CACHE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 28, 2002,
DECEMBER 29, 2001,
AND
DECEMBER 30, 2000
F-1
INDEX TO
--------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
PAGE
CACHE, INC. AND SUBSIDIARIES
Independent Auditors' Report............................. F-3
Consolidated Balance Sheets.............................. F-5
Consolidated Statements of Income........................ F-6
Consolidated Statements of Stockholders' Equity.......... F-7
Consolidated Statements of Cash Flows.................... F-8
Notes to Consolidated Financial Statements............... F-9
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Cache, Inc.:
We have audited the accompanying consolidated balance sheet of Cache, Inc. and
subsidiaries as of December 28, 2002 and the related statements of income,
stockholders' equity, and cash flows for the year ended December 28, 2002
as listed in the accompanying index. In connection with our audit of the
consolidated financial statements, we also have audited the financial schedule
as listed in the accompanying index. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audit. The
2000 and 2001 financial statements and financial statements schedule of Cache,
Inc. and subsidiaries as listed in the accompanying index were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those financial statements and financial statement schedules in
their report dated February 1, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cache, Inc. and
subsidiaries as of December 28, 2002 and the results of their operations and
their cash flows for the period ended December 28, 2002, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
New York, New York
February 5, 2003 /s/ KPMG LLP
F-3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders' of
Cache, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Cache, Inc.
(a Florida corporation) and subsidiaries as of December 29, 2001 and December
30, 2000, and the related statements of income, stockholders' equity and cash
flows for each of the three fiscal years ended December 29, 2001. These
consolidated financial statements and schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cache, Inc. and subsidiaries
as of December 29, 2001 and December 30, 2000, and the results of its operations
and its cash flows for each of the three fiscal years ended December 29, 2001
in conformity with accounting principles generally accepted in the United
States.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for the purpose of complying
with the Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
New York, New York
February 1, 2002 /s/ Arthur Andersen LLP
THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THIS
REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
F-4
CACHE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 2001 AND DECEMBER 28, 2002
A S S E T S
December 29, December 28,
2001 2002
--------------- ---------------
CURRENT ASSETS
Cash and equivalents (Note 1) $ 12,101,000 $ 10,287,000
Marketable securities --- 14,392,000
Receivables, net (Note 2 ) 4,318,000 2,677,000
Notes receivable from related parties (Note 6) 371,000 321,000
Inventories 21,761,000 22,065,000
Deferred income taxes and other tax assets (Note 9) 599,000 271,000
Prepaid expenses 712,000 1,020,000
--------------- ---------------
Total Current Assets 39,862,000 51,033,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net (Note 3) 15,906,000 18,553,000
OTHER ASSETS 825,000 817,000
DEFERRED INCOME TAXES, net (Note 9) 542,000 349,000
--------------- ---------------
Total Assets $ 57,135,000 $ 70,752,000
=============== ===============
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
CURRENT LIABILITIES
Accounts payable $ 11,089,000 $ 11,988,000
Accrued compensation 2,135,000 3,629,000
Accrued liabilities (Note 4 ) 6,441,000 8,762,000
--------------- ---------------
Total Current Liabilities 19,665,000 24,379,000
--------------- ---------------
OTHER LIABILITIES (Note 7 ) 1,164,000 1,081,000
COMMITMENTS AND CONTINGENCIES (Note 8 )
STOCKHOLDERS' EQUITY
Common stock, par value $.01; authorized, 20,000,000
shares; issued and outstanding 9,100,150 shares (Note 10) 91,000 91,000
Additional paid-in capital 19,564,000 19,609,000
Retained earnings 16,651,000 25,592,000
--------------- ---------------
Total Stockholders' Equity 36,306,000 45,292,000
--------------- ---------------
Total Liabilities and Stockholders $ 57,135,000 $ 70,752,000
=============== ===============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-5
CACHE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 29, 2001 AND DECEMBER 28, 2002
52 Weeks Ended
-----------------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
--------------- --------------- ---------------
NET SALES $ 176,470,000 $ 179,899,000 $ 199,423,000
COST OF SALES, including buying and occupancy (Note 8) 117,448,000 116,346,000 115,700,000
--------------- --------------- ---------------
GROSS PROFIT 59,022,000 63,553,000 83,723,000
--------------- --------------- ---------------
EXPENSES
Store operating expenses 47,828,000 51,289,000 57,220,000
General and administrative expenses 9,481,000 8,929,000 12,190,000
--------------- --------------- ---------------
TOTAL EXPENSES 57,309,000 60,218,000 69,410,000
--------------- --------------- ---------------
OPERATING INCOME 1,713,000 3,335,000 14,313,000
--------------- --------------- ---------------
OTHER INCOME (EXPENSE)
Litigation settlement (net) --- 1,518,000 ---
Interest income 150,000 300,000 260,000
Miscellaneous income (net) (86,000) 40,000 ---
Interest expense (40,000) --- ---
--------------- --------------- ---------------
TOTAL OTHER INCOME 24,000 1,858,000 260,000
--------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 1,737,000 5,193,000 14,573,000
INCOME TAX PROVISION (NOTE 9) 634,000 1,895,000 5,632,000
--------------- --------------- ---------------
NET INCOME $ 1,103,000 $ 3,298,000 $ 8,941,000
=============== =============== ===============
BASIC EARNINGS PER SHARE $0.12 $0.36 $0.98
=============== =============== ===============
DILUTED EARNINGS PER SHARE $0.12 $0.36 $0.93
=============== =============== ===============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 9,091,000 9,091,000 9,100,000
=============== =============== ===============
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 9,224,000 9,229,000 9,632,000
=============== =============== ===============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-6
CACHE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 29, 2001 AND DECEMBER 28, 2002
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
----------- --------------- --------------- ---------------
BALANCE JANUARY 1, 2000 $ 91,000 $ 19,564,000 $ 12,250,000 $ 31,905,000
-------------------------
Net Income --- --- 1,103,000 1,103,000
----------- --------------- --------------- ---------------
BALANCE DECEMBER 30, 2000 91,000 19,564,000 13,353,000 33,008,000
------------------------- ----------- --------------- --------------- ----------------
Net Income --- --- 3,298,000 3,298,000
----------- --------------- --------------- ---------------
BALANCE DECEMBER 29, 2001 91,000 19,564,000 16,651,000 36,306,000
------------------------- ----------- --------------- --------------- ---------------
Net Income --- --- 8,941,000 8,941,000
Issuance of common stock --- 45,000 --- 45,000
----------- --------------- --------------- ---------------
BALANCE DECEMBER 28, 2002 $ 91,000 $ 19,609,000 $ 25,592,000 $ 45,292,000
------------------------- =========== =============== =============== ===============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-7
CACHE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 29, 2001 AND DECEMBER 28, 2002
52 Weeks Ended
-----------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
Net income $ 1,103,000 $ 3,298,000 $ 8,941,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,891,000 4,870,000 4,963,000
Gain on litigation settlement --- (1,518,000) ---
Decrease (increase) in deferred taxes (709,000) 688,000 521,000
Reversal of future rent escalations (165,000) (289,000) (116,000)
Change in assets and liabilities:
Decrease (increase) in receivables (517,000) 1,040,000 1,641,000
Decrease (increase) in notes receivable from related parties (465,000) 350,000 50,000
Decrease (increase) in inventories 276,000 2,362,000 (304,000)
Decrease (increase) in prepaid expenses (182,000) 194,000 (308,000)
Increase (decrease) in accounts payable (3,995,000) (1,227,000) 899,000
Increase (decrease) in accrued liabilities and accrued compensation 1,462,000 (180,000) 3,580,000
------------- ------------- -------------
Net cash provided by operating activities 1,699,000 9,588,000 19,867,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
-------------------------------------
Purchase of marketable securities --- --- (21,184,000)
Maturities of marketable securities --- --- 6,792,000
Payments for equipment and leasehold improvements (4,852,000) (4,330,000) (7,342,000)
Disposal of property and equipment 36,000 103,000 ---
------------- ------------- -------------
Net cash used in investing activities (4,816,000) (4,227,000) (21,734,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
-------------------------------------
Proceeds from long-term bank debt 10,400,000 --- ---
Repayment of long-term bank debt (10,400,000) --- ---
Proceeds from issuance of common stock --- --- 45,000
Other, net 17,000 (8,000) 8,000
------------- ------------- -------------
Net cash (used in) provided by financing activities 17,000 (8,000) 53,000
------------- ------------- -------------
Net increase (decrease) in cash and equivalents (3,100,000) 5,353,000 (1,814,000)
Cash and equivalents, at beginning of period 9,848,000 6,748,000 12,101,000
------------- ------------- -------------
Cash and equivalents, at end of period $ 6,748,000 $ 12,101,000 $ 10,287,000
============= ============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-8
CACHE, INC. AND SUBSIDIARIES
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
- --------
Cache, Inc. (together with its subsidiaries, the "Company") owns and
operates two chains of women's apparel specialty stores, of which 207 (as of
December 28, 2002) stores are operated under the trade name "Cache". In
addition, 27 stores are operated under the trade name "Lillie Rubin". The
Company specializes in the sale of high fashion women's apparel and accessories
in the better to expensive price range.
Basis of Consolidation
- ----------------------
The consolidated financial statements include the accounts of the Company,
including subsidiaries, all of which are wholly owned. All significant
intercompany balances and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
appropriate application of certain accounting policies, many of which requires
us to make estimates and assumptions about future events and their impact on
amounts reported in our financial statements and related notes. Since future
events and their impact cannot be determined with certainty, the actual results
will inevitably differ from our estimates. Such differences could be material
to the financial statements.
We believe our application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are constantly reevaluated, and adjustments are made when facts and
circumstances dictate a change. Historically, we have found our application of
accounting policies to be appropriate, and actual results have not differed
materially from those determined using necessary estimates.
Fiscal Reporting Period
- -----------------------
The Company reports its annual results of operations based on fiscal
periods comprised of 52 or 53 weeks, which is in accordance with industry
practice. Results for fiscal 2000, 2001 and 2002 include 52 weeks.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of accounts receivable, accounts payable and accrued
liabilities approximate fair value due to the short-term nature of such items.
F-9
Cash Equivalents
- ----------------
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Marketable Securities:
- ----------------------
Marketable securities at December 28, 2002 primarily consist of short-term
municipal bonds. The Company classifies its municipal bond holdings as
held-to-maturity. Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold the securities until maturity.
Because the Company's held-to-maturity securities mature within one year of the
balance sheet date, the securities are classified as short-term marketable
securities. Held-to-maturity debt securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts. 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.
Inventories
- -----------
Merchandise inventory is carried at the lower of cost or market using the
retail method of accounting. We make assumptions to adjust the value of
inventory based on historical experience and current information. This procedure
inherently reduces the carrying value of inventories as markdowns are initiated.
These assumptions can have a significant impact on current and future operating
results and financial position.
Equipment and Leasehold Improvements
- ------------------------------------
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the related assets which generally range from three to 10 years.
For income tax purposes, accelerated methods are generally used. Leasehold
improvements are amortized over the shorter of their useful life or lease
term. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", provides a single accounting model for long-lived assets to be
disposed of. SFAS No. 144 also changes the criteria for classifying an
asset as held for sale; and broadens the scope of businesses to be disposed
of that qualify for reporting as discontinued operations and changes the
timing of recognizing losses on such operations. The Company adopted SFAS
No. 144 on December 30, 2001. The adoption of SFAS No. 144 did not affect
the Company's financial statements.
In accordance with SFAS No. 144, long-lived assets, such as property, and
equipment, and purchased intangibles subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of an asset.
F-10
Assets to be disposed of would be separately presented in the balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the appropriate
asset and liability sections of the balance sheet.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.
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.
Goodwill
- --------
The Company recorded goodwill totaling $440,000 related to the purchase
of Lillie Rubin assets in fiscal 1999. Accumulated amortization at December 29,
2001 and December 28, 2002 was $100,000 and $100,000, respectively. In
accordance with SFAS No. 142 (see "New Accounting Pronouncements" below), the
Company no longer amortizes goodwill, instead the Company evaluates annually
the reasonableness of the carrying value of the goodwill and adjusts the
balance accordingly.
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. 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.
Deferred Rent
- -------------
Many of our operating leases contain predetermined fixed increases of the
minimum rental rate during the initial lease term. For these leases, the
Company recognizes the related rental expense on a straight-line basis and
records the difference between the amount charged to expense and the rent paid
as deferred rent.
Advertising costs
- -----------------
Costs associated with advertising are charged to store operating expense
when the advertising first takes place. We spent $799,000, $1,742,000, and
$4,375,000 on advertising in fiscal 2000, 2001 and 2002, respectively.
F-11
Pre-Opening Store Expenses
- --------------------------
Expenses associated with the opening of new stores are expensed as
incurred.
Employee Benefit Plan
- ---------------------
The Company's 401(k) plan is for employees eligible to participate in the
plan if they have been employed by the Company for one year, have reached age
21, and work at least 1,000 hours annually. Generally, employees can defer up
to 18% of their gross wages up to the maximum limit allowable under the
Internal Revenue Code. The employer can make a discretionary matching
contribution for the employee. Employer contributions to the plan for fiscal
2000, fiscal 2001 and fiscal 2002 were $154,447, $184,000 and $190,000,
respectively.
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.
Earnings per Share
- ------------------
Basic earnings per share (EPS) is computed as net earnings divided by the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur from common shares issued
through the exercise of outstanding dilutive stock options.
The stock options issued on October 13, 1995, December 10, 1997, February
2, 1999, October 4, 2000, October 2, 2001, March 11, 2002, April 16, 2002 and
May 13, 2002 were included in the computation of Diluted EPS and resulted in
133,000, 138,000 and 532,000 shares for fiscal 2000, 2001 and 2002,
respectively, included in weighted average shares outstanding. Options totaling
8,812 were exercised in fiscal 2002.
New Accounting Pronouncements
- -----------------------------
In July 2001, Statements of Financial Accounting Standards No. 141
"Business Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") were released. The related statements address financial
accounting and reporting for business combinations and acquired goodwill and
other intangible assets. SFAS 141 is effective for all business combinations
initiated after June 30, 2001. SFAS 142 is effective for all fiscal years
beginning after December 15, 2001. The Company adopted SFAS 142 in January 2002.
We have determined that the adoption of SFAS 141 and SFAS 142 had no material
impact on our financial position and results of operations.
F-12
In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses the accounting and financial reporting
for legal obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The provisions of SFAS No. 143
will be effective for our financial statements for the 2003 fiscal year.
We do not expect the adoption of this standard to have a significant impact
on our financial position, earnings or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses the accounting
for impairment or disposal of long-lived assets and discontinued operations.
On December 30, 2001, we adopted this standard and its application had no
significant impact on our financial position, earnings or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS No. 146 supercedes previous accounting
guidance, principally Emerging Issue Task Force Issue No. 94-3. SFAS No. 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost was recognized at the date of the company's
commitment to an exit plan. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. Accordingly, SFAS No.
146 may affect the timing of recognizing any future restructuring costs as well
as the amounts recognized. This Statement establishes accounting standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. The Company is required to adopt
the provisions of SFAS No. 146 effective for exit or disposal activities
initiated after December 31, 2002. We will adopt the provisions of SFAS No.
146 for only restructuring activities initiated after December 31, 2002.
On December 31, 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation. Statement 148 amends the
disclosure requirements in Statement 123 for stock-based compensation for
annual periods ending after December 15, 2002 and for interim periods beginning
after December 15, 2002. Therefore, calendar year-end companies should provide
the amended disclosures in their December 31, 2002 annual financial statements
and their March 31, 2003 interim financial statements. These disclosure
requirements apply to all companies, including those that continue to recognize
stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued
to Employees."
Effective for financial statements for fiscal years ending after December
15, 2002, Statement 148 also provides three alternative transition methods for
companies that choose to adopt the fair value measurement provisions of
Statement 123. Earlier application of those transition methods is permitted for
entities with a fiscal year ending prior to December 15, 2002, provided that
financial statements for the 2002 fiscal year have not been issued as of
December 31, 2002.
We will continue to recognize stock-based compensation under APB Opinion
No. 25, and in accordance with FASB Statement No. 148, we will include required
disclosures for interim reporting purposes.
F-13
In November 2002, the FASB issued FASB Interpretation 45 ("FIN 45"), which
requires new disclosures and liability-recognition for certain guarantees.
This Interpretation addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees. It clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This Interpretation does not prescribe a
specific approach for subsequently measuring the guarantor's recognized
liability over the term of the related guarantee. This Interpretation also
incorporates, without change, the guidance in FASB Interpretation No. 34,
Disclosure of Indirect Guarantees of Indebtedness of Others, which is being
superceded. The initial recognition and measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements in this Interpretation are effective
for financial statements of Interim or annual periods ending after December 15,
2002. The interpretive guidance incorporated without change from Interpretation
34 continues to be required for financial statements for Fiscal years ending
after June 15, 1981 - the effective date of Interpretation 34. We have
determined that the adoption of FIN 45 will have no material impact on our
financial position and results of operations.
Supplemental Statements of Cash Flow Information
- ------------------------------------------------
The Company paid interest of $40,000, $0 and $0 in fiscal 2000, 2001 and
2002, respectively. During fiscal 2000, 2001 and 2002 the Company paid
$1,234,000, $1,228,000 and $5,160,000 in income taxes, respectively.
Prior Years' Reclassification
- -----------------------------
Certain items previously reported in specific captions in the accompanying
financial statements and notes have been reclassified to conform with the
current year's classification.
NOTE 2. RECEIVABLES
December 29, December 28,
2001 2002
----------- -----------
Construction allowances $ 1,501,000 $ 468,000
Legal settlement 800,000 ---
Third party credit card 1,704,000 1,837,000
Other 313,000 372,000
----------- -----------
$ 4,318,000 $ 2,677,000
=========== ===========
F-14
NOTE 3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
December 29, December 28,
2001 2002
----------- -----------
Leasehold improvements $19,954,000 $21,803,000
Furniture, fixtures and
equipment 25,521,000 29,463,000
----------- -----------
45,475,000 51,266,000
Less: accumulated depreciation
and amortization 29,569,000 32,713,000
----------- -----------
$15,906,000 $18,553,000
=========== ===========
Store operating and general and administrative expenses include
depreciation and amortization of $4,891,000, $4,870,000 and $4,963,000 in
fiscal years 2000, 2001 and 2002, respectively.
NOTE 4. ACCRUED LIABILITIES
December 29, December 28,
2001 2002
----------- -----------
Operating expenses $ 1,910,000 $ 2,092,000
Taxes, other than income taxes 1,719,000 2,074,000
Group insurance --- 841,000
Sales return reserve 555,000 746,000
Leasehold additions 31,000 299,000
Other customer deposits 2,226,000 2,710,000
----------- -----------
$ 6,441,000 $ 8,762,000
=========== ===========
Leasehold additions generally represent a liability to general contractors
for a final 10% payable on construction contracts for store construction or
renovations.
NOTE 5. 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, $15,000,000 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 Revolving Credit Facility,
the Company grants to the bank a security interest in the Company's inventory
and certain receivables. The Company is in compliance with all loan covenants.
There have been no borrowing against the line of credit during fiscal 2001
and 2002. There were outstanding letters of credit of $446,000 and $487,000
pursuant to the Revolving Credit Facility at December 29, 2001 and December 28,
2002, respectively.
F-15
NOTE 6. INDEBTEDNESS TO/FROM RELATED PARTIES
As of December 28, 2002 the Company had notes receivable totaling $321,000
from one current executive officer and one former executive officer of the
Company. The receivables, which are due on demand, are evidenced by secured
promissory notes, which bear interest at rates of 6% and 9% per annum. One
executive repaid $50,000 during fiscal 2002 of the loan amount originally made
to him. One executive repaid a $350,000 loan from the Company during fiscal
2001, which was outstanding at December 30, 2000. In April 2002, one executive
borrowed $260,000 and fully repaid this loan in June 2002.
NOTE 7. OTHER LIABILITIES
Other liabilities primarily consist of accruals of future rent
escalations.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Leases
- ------
At December 28, 2002, the Company was obligated under operating leases
for various store locations expiring at various times through 2015. The terms
of the leases generally provide for the payment of minimum annual rentals,
contingent rentals based on a percentage of sales in excess of a stipulated
amount, and a portion of real estate taxes, insurance and common area
maintenance.
Store rental expense related to these leases, included in cost of sales,
consisted of the following:
52 Weeks Ended
-------------------------------------------
December 30, December 29, December 28,
2000 2001 2002
----------- ----------- -----------
Minimum rentals $16,393,000 $17,141,000 $18,167,000
Contingent rentals 6,576,000 7,106,000 7,555,000
----------- ----------- -----------
$22,969,000 $24,247,000 $25,722,000
=========== =========== ===========
Future minimum payments under non-cancelable operating leases consisted
of the following at December 28, 2002:
Fiscal
------
2003 $ 19,713,000
2004 18,872,000
2005 16,683,000
2006 14,179,000
2007 13,063,000
Thereafter 50,568,000
------------
Total future minimum lease payments $133,078,000
============
F-16
Contingencies
- -------------
The Company is exposed to a number of asserted and unasserted potential
claims. In the opinion of management, the resolution of these matters is not
presently expected to have a material adverse effect upon the Company's
financial position and results of operations.
NOTE 9. INCOME TAXES
The provision for income taxes includes:
52 Weeks Ended
----------------------------------------
December 30, December 29, December 28,
2000 2001 2002
----------- ----------- -----------
Current:
Federal $ 533,000 $1,726,000 $4,841,000
State ( 74,000) 54,000 1,023,000
----------- ----------- -----------
459,000 1,780,000 5,864,000
----------- ----------- -----------
Deferred:
Federal 181,000 107,000 (205,000)
State ( 6,000) 8,000 ( 27,000)
----------- ----------- -----------
175,000 115,000 (232,000)
----------- ----------- -----------
Provision for income taxes $ 634,000 $1,895,000 $5,632,000
=========== =========== ===========
The Company's effective tax rate, as a percent of income before income
taxes differs from the statutory federal tax rates as follows:
52 Weeks Ended
-------------------------------------
December 30, December 29, December 28,
2000 2001 2002
----------- ----------- -----------
Effective federal tax rate 34.0% 34.0% 34.3%
State and local income taxes,
net of federal tax benefit 2.5% 2.5% 4.5%
Other net, primarily tax free
interest - - (0.2%)
----------- ----------- -----------
36.5% 36.5% 38.6%
=========== =========== ===========
F-17
The major components of the Company's net deferred tax assets (liabilities)
at December 29, 2001 and December 28, 2002 are as follows:
December 29, December 28,
2001 2002
----------- -----------
Net operating loss carryforwards ("NOL'S")... $ 183,000 $ 91,000
Deferred rent................................ 547,000 526,000
Group insurance.............................. - 319,000
Sales return reserve......................... - 283,000
Other (principally depreciation expense)..... 204,000 (53,000)
----------- -----------
$ 934,000 $1,166,000
=========== ===========
NOTE 10. INCENTIVE STOCK OPTION PLAN
On October 4, 2000, the Company adopted the 2000 Stock Option Plan. The
plan is administered by the Compensation and Plan Administration Committee of
the Company's Board of Directors. Under the option plan the Company reserved
550,000 shares of the Company's authorized common stock for issuance to officers
and key employees of the Company.
On December 16, 1994, the Company adopted the 1994 Stock Option Plan. Under
the option plan the Company reserved 600,000 shares of the Company's authorized
common stock for issuance to officers and key employees of the Company.
Options granted under the plan have a ten-year term and may be either
incentive stock options or non-qualified stock options. The options are granted
at an exercise price equal to the fair market value on the date of grant and
generally vest over a four year period. The granted options become generally
exercisable earlier at the maximum rate of 25% per annum, to the extent the
Company's earning plan, as approved by the Compensation and Plan Administration
Committee, is achieved. The price is payable in cash at the time of the
exercise or at the discretion of the Administrators, through the delivery of
shares of Common Stock or the Company's withholding of shares otherwise
deliverable to the employee, or a combination thereof.
F-18
The following table summarizes all stock option transactions for the
three 52 week periods ended December 28, 2002:
Weighted Average
Shares Exercise Prices
--------- ----------------
Shares under option as of January 1, 2000 600,000 $ 3.54
Options granted in 2000 473,750 2.59
Options canceled in 2000 (173,750) 4.55
---------
Shares under option as of December 30, 2000 900,000 2.84
---------
Options granted in 2001 228,000 3.20
Options canceled in 2001 ( 88,906) 2.59
---------
Shares under option as of
December 29, 2001 1,039,094 2.94
---------
Options granted in 2002 186,000 6.81
Options exercised in 2002 ( 8,812) 2.59
Options canceled in 2002 ( 76,032) 2.59
--------- ---------------
Shares under option as of
December 28, 2002 1,140,250 $ 3.60
========= ===============
In October 2000, the Company canceled and reissued 123,750 options at a
reduced exercise price. As such, in accordance with FASB Interpretation Number
44 ("FIN 44") "Accounting for Certain Transactions Involving Stock
Compensation", this transaction resulted in variable accounting for reporting
periods during fiscal 2000 and 2001. Employees surrendered 88,906 of these
options in March 2001, ending variable accounting treatment for these options
and the employees were subsequently issued new options in October 2001.
Significant option groups outstanding at December 28, 2002 and related
weighted average price and life information follows:
Options Options Exercise Remaining
Grant Date Outstanding Exercisable Price Life (Years)
- ---------- ----------- ----------- -------- ------------
5/13/02 25,000 6,250 $11.21 9
4/16/02 91,000 45,500 7.04 9
3/11/02 70,000 17,500 4.95 9
10/2/01 228,000 114,000 3.20 9
10/4/00 300,000 150,000 2.59 8
12/10/97 276,250 276,250 3.06 5
10/13/95 150,000 150,000 3.25 3
F-19
The Company accounts for the Plan in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" under which no compensation cost
has been recognized for stock option awards granted at fair market value. Had
compensation expense for the Plan been determined based on the fair value at
the grant dates for awards under the Plan, consistent with the method of
SFAS No. 123, "Accounting for Stock Based Compensation" the Company's net
earnings, basic EPS and diluted EPS would have been reduced to the pro forma
amounts listed below:
52 Weeks Ended
-----------------------------------------
December 30, December 29, December 28,
2000 2001 2002
------------ ------------ ------------
Net income - as reported $ 1,103,000 $ 3,298,000 $ 8,941,000
- pro-forma $ 1,099,000 $ 3,275,000 $ 7,863,000
Basic EPS - as reported $ 0.12 $ 0.36 $ 0.98
- pro-forma $ 0.12 $ 0.36 $ 0.86
Diluted EPS - as reported $ 0.12 $ 0.36 $ 0.93
- pro-forma $ 0.12 $ 0.35 $ 0.82
The weighted average fair value of options granted during the 52 week
periods ended December 30, 2000, December 29, 2001, December 28, 2002 were
$2.59, $3.20 and $6.81, respectively. The fair value of each option grant was
estimated on the date of the grant using the Black-Scholes option pricing
method with the following weighted average assumptions:
2000 2001 2002
Grants Grants Grants
------ ------ ------
Expected dividend rate $ 0.00 $ 0.00 $ 0.00
Expected volatility 81.6% 140.9% 70.3%
Risk free interest rate 4.9% 1.7% 1.1%
Expected lives (years) 5.0 5.0 5.0
F-20
NOTE 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------
52 weeks ended December 29, 2001
- --------------------------------
Net sales $44,191 $45,613 $37,859 $52,236
Gross profit 15,235 16,084 12,859 19,375
Income (loss) before income tax provision (benefit) 1,887 989 (1,590) 3,907
Income tax provision (benefit) 689 360 (581) 1,427
----------------------------------------
Net income (loss) $1,198 $629 ($1,009) $2,480
========================================
Basic and diluted earnings per share:
Basic earnings (loss) per share: $0.13 $0.07 ($0.11) $0.27
========================================
Diluted earnings (loss) per share: $0.13 $0.07 ($0.11) $0.27
========================================
52 weeks ended December 28, 2002
- --------------------------------
Net sales $47,643 $51,294 $41,989 $58,497
Gross profit 19,577 21,902 16,787 25,457
Income before income tax provision 2,923 4,662 162 6,826
Income tax provision 1,067 1,702 59 2,804
----------------------------------------
Net income $1,856 $2,960 $103 $4,022
========================================
Basic and diluted earnings per share:
Basic earnings per share: $0.20 $0.33 $0.01 $0.44
========================================
Diluted earnings per share: $0.20 $0.31 $0.01 $0.42
========================================
F-21
CACHE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
-------------------------
CHARGED TO CHARGED TO
BALANCE AT COSTS AND OTHER BALANCE AT
DESCRIPTION BEG. OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- -------------------------------- --------------------------------------------------------------------------------------
SALES RETURN RESERVE
- --------------------------------
52 WEEKS ENDED DECEMBER 30, 2000 $480,000 $75,000 --- --- $555,000
52 WEEKS ENDED DECEMBER 29, 2001 $555,000 --- --- --- $555,000
52 WEEKS ENDED DECEMBER 28, 2002 $555,000 $191,000 --- --- $746,000
F-22
Exhibit 11.1
EXHIBIT 11.1
CALCULATION OF BASIC AND DILUTED EARNINGS PER COMMON SHARE
52 Weeks Ended
------------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
Earnings Per Share 2000 2001 2002
------------------ -------------- -------------- --------------
Net income applicable
to common stockholders $ 1,103,000 $ 3,298,000 $ 8,941,000
-------------- -------------- --------------
Basic Earnings Per Share
------------------------
Weighted average number of
common shares outstanding 9,091,000 9,091,000 9,100,000
============== ============== ==============
Basic earnings per share $0.12 $0.36 $0.98
============== ============== ==============
Diluted Earnings Per Share
--------------------------
Weighted average number of
common shares outstanding 9,091,000 9,091,000 9,100,000
Assuming conversion of
outstanding stock options 900,000 1,039,000 1,140,000
Less: assumed repurchase
of common stock pursuant
to the treasury stock method (767,000) (901,000) (608,000)
-------------- -------------- --------------
Weighted average number of
common shares outstanding
as adjusted 9,224,000 9,229,000 9,632,000
============== ============== ==============
Diluted earnings per share $0.12 $0.36 $0.93
============== ============== ==============
Exhibit 12.1
EXHIBIT 12.1
COMPUTATION OF RATIOS
Ratio of current assets to current liabilities = current assets (at balance
- ----------------------------------------------
sheet date) divided by current liabilities (at balance sheet date).
Inventory turnover ratio = total cost of sales divided by average inventory
- ------------------------
(beginning and ending inventory, divided by two, at the balance sheet dates).
Book value per share = stockholders' equity divided by common shares
- --------------------
outstanding (at balance sheet date).
Exhibit 16.1
June 12, 2002
Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sir/Madam:
The representations made in this letter are based solely on discussions with
and representations from the engagement partner on the audits of the financial
statements of this registrant for the two most recent fiscal years. This
individual is longer with Arthur Andersen LLP. We have read the first six
paragraphs of Item 4 included in the Form 8-K dated June 12, 2002 of Cache,
Inc. to be filed with the Securities and Exchange Commission and have found
no basis for disagreement with the statements contained therein.
Very truly yours,
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
Copy to:
Mr. Brian Woolf
Chairman and Chairman Chief Executive Officer
Cache, Inc.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Cache, Inc.:
We consent to the incorporation by reference in the Registration Statements
Numbers 33-40354, 33-40358, 33-65113 and 333-84848 on Form S-8 and 333-96717
on Form S-2 of Cache, Inc. and subsidiaries of our report dated February 5, 2003
relating to the consolidated balance sheet of Cache, Inc. and subsidiaries as
of December 28, 2002 and the related consolidated statement of income,
shareholders' equity and cash flows for the year ended December 28, 2002,
which report appears in the December 28, 2002 Annual Report on Form 10-K of
Cache, Inc. and subsidiaries.
New York, New York
March 26, 2003 /s/ KPMG LLP
Exhibit 23.2
NOTICE REGARDING LACK OF CONSENT OF ARTHUR ANDERSEN LLP
On June 12, 2002, Cache, Inc. (the "Company") dismissed Arthur Andersen LLP
("Arthur Andersen") as its independent auditors and retained KPMG LLP as its
new auditors. KPMG LLP audited the financial statements of the Company as of
and for the fiscal year ended December 28, 2002 (and the related financial
statement schedule for such year) issued their reports with respect thereto.
However, after reasonable efforts, the Company has been unable to obtain from
Arthur Andersen reissued audit reports with respect to the financial statements
of the Company as of and for the fiscal years ended December 30, 2000 and
December 29, 2001 (and the related financial statement schedules for such
years). In accordance with regulations of the Securities and Exchange
Commission, the Company has filed with this Annual Report on Form 10-K a copy
of the previously-issued audit report dated February 1, 2002 of Arthur Andersen
with respect to the fiscal 2000 and 2001 financials. Because this Annual
Report on Form 10-K is incorporated by reference into the Company's registration
statements on Form S-8 and S-2 (Nos. 33-40354, 33-40358, 33-65113, 333-84848,
and 333-96717), it is deemed to be a new registration statement relating to the
securities offered therein. After reasonable efforts, the Company has been
unable to obtain Arthur Andersen's written consent to the incorporation by
reference of its previously-issued audit reports into this Annual Report.
As a result, Arthur Andersen may not have any liability under Section 11(a)
of the Securities Act of 1933 (the "Securities Act") (1) for any untrue
statement of a material fact contained in the fiscal 2000 and 2001 financials
or any omissions of a material fact required to be stated therein. Accordingly,
persons acquiring securities under those registration statements may be
unable to assert a claim against Arthur Andersen under Section 11(a) of
the Securities Act.
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(1) Section 11(a) of the Securities Act provides that if party of a registration
statement at the time it becomes effective contains an untrue statement of a
material fact, or omits a material fact required to be stated therein or
necessary to make the statements therein not misleading, any person acquiring
a security pursuant to such registration statement (unless it is proved that
at the time of such acquisition such person knew of such untruth or omission)
may assert a claim against, among others, an accountant who has consented to
be named as having certified any part of the registration statement or as
having prepared any report for use in connection with the registration
statement.
Exhibit 99.1
EXHIBIT 99.1
CERTIFICATION
-------------
I, Brian Woolf, certify that:
1. I have reviewed this annual report on Form 10-K of Cache Inc.
(Cache),
2. Based on my knowledge, this annual 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 are made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 in which this annual report is being prepared;
b) evaluated the effectiveness of Cache's disclosure controls and procedures
as of a date within 90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. Cache's other certifying officer and I have disclosed, based on our most
recent evaluation, to Cache's auditors and the audit committee of Cache's
Board of Directors;
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect Cache's ability to record, process, summarize and
report financial data and have identified for Cache's auditors any material
weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Cache's internal controls; and
6. Cache's other certifying officer and I have indicated in this annual report
whether there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including corrective actions with regard to significant
deficiencies and material weaknesses.
March 26, 2003 By: /s/ Brian Woolf
------------------------
Brian Woolf
Chairman and Chief
Executive Officer
Exhibit 99.2
EXHIBIT 99.2
CERTIFICATION
-------------
I, Thomas E. Reinckens, certify that:
1. I have reviewed this annual report on Form 10-K of Cache Inc.
(Cache),
2. Based on my knowledge, this annual 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 are made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 in which this annual report is being prepared;
b) evaluated the effectiveness of Cache's disclosure controls and procedures
as of a date within 90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. Cache's other certifying officer and I have disclosed, based on our most
recent evaluation, to Cache's auditors and the audit committee of Cache's
Board of Directors;
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect Cache's ability to record, process, summarize and
report financial data and have identified for Cache's auditors any material
weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Cache's internal controls; and
6. Cache's other certifying officer and I have indicated in this annual report
whether there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of
our most recent evaluation, including corrective actions with regard to
significant deficiencies and material weaknesses.
March 26, 2003 By: /s/ Thomas E. Reinckens
----------------------------
Thomas E. Reinckens
President and Chief
Operating Officer
(Principal Financial
and Accounting Officer)
Exhibit 99.3
EXHIBIT 99.3
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to and solely for 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 Annual Report of Cache, Inc. on Form 10-K for the period ending
December 28, 2002 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 and 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.
/s/ Brian Woolf March 26, 2003
-------------------------
Brian Woolf
Chairman and Chief Executive Officer
/s/ Thomas E. Reinckens
------------------------- March 26, 2003
Thomas E. Reinckens
President and Chief Operating Officer
(Principal Financial and
Accounting Officer)