CACHE INC - FORM 10-Q - November 12, 2013

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EXCEL - IDEA: XBRL DOCUMENT - CACHE INC	Financial_Report.xls
EX-32.1 - EX-32.1 - CACHE INC	a13-19415_1ex32d1.htm
EX-31.1 - EX-31.1 - CACHE INC	a13-19415_1ex31d1.htm
EX-31.2 - EX-31.2 - CACHE INC	a13-19415_1ex31d2.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 28, 2013

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-10345

CACHE, INC.

(Exact name of registrant as specified in its Charter)

Delaware		59-1588181
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

1440 Broadway, New York, New York		10018
(Address of principal executive offices)		(zip code)

212-575-3200

(Registrant’s telephone number, including area code)

(Former name, address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

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

As of November 12, 2013, 21,551,171 shares of common stock were outstanding.

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CACHE, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION		3

Item 1.	Condensed Consolidated Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of September 28, 2013, December 29, 2012 and September 29, 2012	3
	Condensed Consolidated Statements of Operations for the thirty-nine and thirteen week periods ended September 28, 2013 and September 29, 2012	4
	Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended September 28, 2013 and September 29, 2012	6
	Notes to the Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19

PART II. OTHER INFORMATION		20

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	20

Item 4.	Mine Safety Disclosures	20

Item 5.	Other Information	20

Item 6.	Exhibits	20

SIGNATURES		21

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CACHE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 28, 2013			December 29, 2012			September 29, 2012
	(Unaudited)			(Audited)			(Unaudited)
ASSETS
Current assets:
Cash and equivalents	$	4,363,000		$	12,360,000		$	10,374,000
Marketable securities	—			3,013,000			3,009,000
Certificates of deposit — restricted	1,750,000			3,000,000			3,000,000
Receivables, net	2,610,000			2,200,000			2,294,000
Income tax receivable	49,000			184,000			245,000
Inventories, net	21,588,000			21,246,000			23,806,000
Prepaid expenses and other current assets	1,354,000			2,224,000			2,068,000
Total current assets	31,714,000			44,227,000			44,796,000

Equipment and leasehold improvements, net	19,814,000			20,177,000			20,522,000
Intangible assets, net	102,000			102,000			102,000
Other assets	1,449,000			10,119,000			10,708,000

Total assets	$	53,079,000		$	74,625,000		$	76,128,000

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	8,981,000		$	12,397,000		$	10,974,000
Accrued compensation	3,223,000			2,615,000			1,420,000
Accrued liabilities	10,374,000			11,795,000			9,609,000
Total current liabilities	22,578,000			26,807,000			22,003,000

Other liabilities	9,285,000			8,777,000			9,628,000

Commitments and contingencies

STOCKHOLDERS’ EQUITY

Common stock, par value $.01; authorized, 40,000,000 shares; issued 25,213,370, 17,093,788 and 17,093,788	252,000			171,000			171,000
Additional paid-in capital	60,489,000			48,735,000			48,666,000
Retained earnings	270,000			29,930,000			35,455,000
Treasury stock 3,682,199 shares, at cost	(39,795,000		)	(39,795,000		)	(39,795,000		)
Total stockholders’ equity	21,216,000			39,041,000			44,497,000

Total liabilities and stockholders’ equity	$	53,079,000		$	74,625,000		$	76,128,000

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

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CACHE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THIRTY-NINE WEEKS ENDED

(Unaudited)

	September 28 , 2013			September 29 , 2012

Net sales	$	160,853,000		$	163,417,000

Cost of sales, including buying and occupancy	107,770,000			100,176,000

Gross profit	53,083,000			63,241,000

Expenses:
Store operating expenses	54,729,000			57,727,000
General and administrative expenses	14,652,000			13,466,000
Employee separation charges	3,092,000			503,000
Total expenses	72,473,000			71,696,000

Operating loss	(19,390,000		)	(8,455,000		)

Other expense (income):
Amortization of deferred financing cost	37,000			—
Interest income	(22,000		)	(62,000		)
Total other expense (income), net	15,000			(62,000		)

Loss before income taxes	(19,405,000		)	(8,393,000		)

Income tax provision (benefit)	10,255,000			(1,840,000		)

Net loss	$	(29,660,000	)	$	(6,553,000	)

Basic loss per share	$	(1.70	)	$	(0.51	)

Diluted loss per share	$	(1.70	)	$	(0.51	)

Basic weighted average shares outstanding	17,450,000			12,882,000

Diluted weighted average shares outstanding	17,450,000			12,882,000

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

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CACHE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THIRTEEN WEEKS ENDED

(Unaudited)

	September 28, 2013			September 29, 2012

Net sales	$	47,221,000		$	45,789,000

Cost of sales, including buying and occupancy	31,409,000			31,128,000

Gross profit	15,812,000			14,661,000

Expenses:
Store operating expenses	17,894,000			18,268,000
General and administrative expenses	5,237,000			4,275,000
Employee separation charges	638,000			227,000
Total expenses	23,769,000			22,770,000

Operating loss	(7,957,000		)	(8,109,000		)

Other expense (income):
Amortization of deferred financing cost	37,000			—
Interest income	(5,000		)	(20,000		)
Total other expense (income), net	32,000			(20,000		)

Loss before income taxes	(7,989,000		)	(8,089,000		)

Income tax provision (benefit)	8,000			(1,713,000		)

Net loss	$	(7,997,000	)	$	(6,376,000	)

Basic loss per share	$	(0.38	)	$	(0.49	)

Diluted loss per share	$	(0.38	)	$	(0.49	)

Basic weighted average shares outstanding	21,090,000			12,892,000

Diluted weighted average shares outstanding	21,090,000			12,892,000

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

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CACHE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THIRTY-NINE WEEKS ENDED

(Unaudited)

	September 28, 2013			September 29, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss	$	(29,660,000	)	$	(6,553,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	5,148,000			5,285,000
Stock-based compensation	502,000			230,000
Deferred income taxes	10,201,000			(1,905,000		)
Gift card breakage	(170,000		)	(212,000		)
Amortization of deferred income for co-branded credit card	(330,000		)	(858,000		)
Amortization of deferred rent	(1,019,000		)	(1,656,000		)
Amortization of deferred financing costs	37,000			—
Change in assets and liabilities:
Decrease (increase) in receivables and income tax receivable	(275,000		)	836,000
Increase in inventories	(342,000		)	(1,731,000		)
Decrease (increase) in prepaid expenses and other current assets	385,000			(399,000		)
Increase (decrease) in accounts payable	(3,416,000		)	1,409,000
Increase (decrease) in accrued liabilities, accrued compensation and other liabilities	1,371,000			(760,000		)

Net cash used in operating activities	(17,568,000		)	(6,314,000		)

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of marketable securities	(2,000,000		)	(8,285,000		)
Maturities of marketable securities	5,013,000			9,284,000
Proceeds from insurance recovery	—			190,000
Certificates of deposit — restricted	1,250,000			—
Purchase of equipment and leasehold improvements	(5,124,000		)	(7,010,000		)

Net cash used in investing activities	(861,000		)	(5,821,000		)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from the issuance of common stock	13,419,000			—
Payment of issuance costs	(2,046,000		)	—
Payments of deferred financing costs	(941,000		)	—

Net cash provided by financing activities	10,432,000			—

Net decrease in cash and equivalents	(7,997,000		)	(12,135,000		)
Cash and equivalents, at beginning of period	12,360,000			22,509,000
Cash and equivalents, at end of period	$	4,363,000		$	10,374,000

Supplemental disclosure of cash flow information:
Income taxes paid	$	115,000		$	209,000

Supplemental disclosure of non-cash investing and financing activities:
Accrued fixed asset additions	$	425,000		$	59,000
Accrued issuance costs	$	46,000		$	—
Accrued deferred financing costs	$	136,000		$	—
Prepaid stock-based compensation	$	6,000		$	24,000

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

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CACHE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

References to the “Company,” “we,” “us,” or “our” mean Cache, Inc., together with its wholly-owned subsidiaries, except as expressly indicated or unless the context otherwise requires. Under the trade name “Cache”, we operated 250 women’s apparel specialty stores, as of September 28, 2013.

The following unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The accompanying condensed consolidated financial statements include all known adjustments necessary for a fair presentation of the results of the interim periods as required by accounting principles generally accepted in the United States. These adjustments consist primarily of normal recurring accruals and estimates that impact the carrying value of assets and liabilities. Actual results may materially differ from these estimates.

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 29, 2012, which are included in the Company’s Annual Report on Form 10-K with respect to such period filed with the Securities and Exchange Commission. All significant intercompany accounts and transactions have been eliminated. The December 29, 2012 condensed consolidated balance sheet amounts are derived from the Company’s audited consolidated financial statements.

The Company’s fiscal year (“fiscal year” or “fiscal”) refers to the applicable 52-or 53-week period. The years ended December 29, 2012 (“fiscal 2012”) and December 28, 2013 (“fiscal 2013”) are each 52-week years.

Reclassifications related to Employee Separation Charges have been made to fiscal 2012 Financial Statements to conform to fiscal 2013 presentation.

2. STOCK BASED COMPENSATION

Stock-based compensation expense for all stock-based awards programs, including grants of stock options, is recorded in accordance with “Compensation-Stock Compensation”, Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”). During the 39- and 13-week periods ended September 28, 2013, the Company recognized approximately $502,000 and $288,000, respectively, in stock-based compensation expense, and for the same periods ended September 29, 2012, the Company recognized approximately $230,000 and $68,000, respectively. The grant date fair value for stock options is calculated using the Black-Scholes option valuation model.

On February 5, 2013, the Company granted Jay Margolis (its Chief Executive Officer and Chairman of the Board) time-based stock options to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $3.34 which had a weighted average grant date fair value of $1.15. These options vest in equal installments on the first, second and third anniversary of the grant date. The Company granted no stock options during the 39- and 13-week periods ended September 29, 2012. No excess tax benefits were recognized from the exercise of stock options during the 39- week periods ended September 28, 2013 and September 29, 2012.

The following assumptions were used during the 39-week period ended September 28, 2013:

Expected dividend rate	$	0.00
Expected volatility	50.72		%
Risk free interest rate	0.41		%
Expected lives (years)	3.00

During the first quarter of fiscal 2013, 40,000 shares of the Company’s common stock were issued for services to its board members. The total fair value of the issued common stock was approximately $94,000, of which approximately $89,000 and $18,000 were included in stock-based compensation expense for the 39- and 13-week periods ended September 28, 2013, respectively. The remaining cost is expected to be recognized over the remainder of fiscal 2013. Comparatively, during the first quarter of fiscal 2012, 14,000 shares of the Company’s common stock were issued for services to its board members. The total fair value of the issued common stock was approximately $95,000, of which approximately $71,000 and $23,000 were included in stock-based compensation expense for the 39- and 13-week periods ended September 29, 2012, respectively.

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During the 39- and 13-week periods ended September 28, 2013, the Company granted restricted stock awards representing 370,000 and 115,000 shares of the Company’s common stock, which had a weighted-average grant date fair value of $4.28 and $5.33 per share, respectively. A portion of these restricted stock awards will contingently vest over a three-year period, based on the Company meeting performance goals, and a portion will vest over the requisite service period. Comparatively, during the 39- week period ended September 29, 2012, the Company granted 12,000 shares of restricted stock awards of the Company’s common stock, which had a weighted average grant date fair value of $6.70. These restricted shares will contingently vest over a three-year period, based on the Company meeting performance goals. During the 13- week period ended September 29, 2012, the Company granted no restricted stock awards of the Company’s common stock.

3. BASIC AND DILUTED EARNINGS PER SHARE

Basic loss per share has been computed based upon the weighted average of common shares outstanding. Diluted loss per share also includes the dilutive effect of potential common shares (dilutive stock options and unvested restricted stock awards) outstanding during the period. Loss per common share has been computed as follows:

	39-Weeks Ended						13-Weeks Ended
	September 28,			September 29,			September 28,			September 29,
	2013			2012			2013			2012
Net loss	$	(29,660,000	)	$	(6,553,000	)	$	(7,997,000	)	$	(6,376,000	)
Basic weighted number of average shares outstanding	17,450,000			12,882,000			21,090,000			12,892,000
Incremental shares from assumed issuances of stock options and restricted stock awards	—			—			—			—
Diluted weighted average number of shares outstanding	17,450,000			12,882,000			21,090,000			12,892,000

Net loss per share - Basic	$	(1.70	)	$	(0.51	)	$	(0.38	)	$	(0.49	)
- Diluted	$	(1.70	)	$	(0.51	)	$	(0.38	)	$	(0.49	)

The accompanying financial statements reflect for fiscal 2012 the issuance of all restricted stock awards as if issued on the original grant date. The Company previously had been issuing restricted stock awards only when the awards vested. This change in reporting had no effect on the Company’s financial statements except for the number of shares outstanding at September 29, 2012.

Options and unvested restricted common shares totaling 1,483,444 and 1,176,675 were excluded from the computation of diluted loss per share for the 39- and 13- week periods ended September 28, 2013 and September 29, 2012 due to the net loss incurred by the Company.

4. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similiar Tax Loss, or a Tax Credit Carryforward Exists to clarify the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The ASU is effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2013. The Company early adopted this ASU and it did not have a material impact on its consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments in ASU 2013-02 were effective prospectively for interim and annual reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial statements.

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In July 2012, the FASB issued ASU 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments were effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of ASU 2012-02 did not have a material impact on the Company’s consolidated financial statements.

5. FAIR VALUE MEASUREMENT

“Fair Value Measurement”, Topic 820 of the FASB ASC, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Topic 820 of the FASB ASC establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

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

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

· Level 3 — Unobservable inputs that reflect assumptions about what market participants would use in pricing assets or liabilities based on the best information available.

The Company classifies its short-term investments 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 purchase 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 and such carrying values approximate fair value.

A decline in the market value of any held-to-maturity security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established.

“Financial Instruments”, Topic 825 of the FASB ASC, provides entities the option to measure many financial instruments and certain other items at fair value. Entities that choose the fair value option will recognize unrealized gains and losses on items for which the fair value option was elected in earnings at each subsequent reporting date. The Company has chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with Topic 825 of the FASB ASC.

The fair value of our marketable securities, which consist of certificates of deposits (maturing greater than 90 days and less than one year) were determined based upon Level 1 inputs, totaled $3.0 million as of December 29, 2012 and September 29, 2012. The Company had no marketable securities as of September 28, 2013. The Company noted small variances between the book value and fair value due to the remaining unamortized premiums. As a result, no impairment has occurred for the fiscal periods presented herein. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity investments. Interest income is recognized when earned.

Fair Value of Financial Instruments

The carrying amounts of certificates of deposit, accounts receivable, accounts payable and accrued liabilities approximate their estimated fair values due to their short-term nature.

6. RECEIVABLES

	September 28,		December 29,		September 29,
	2013		2012		2012
Construction allowances	$	496,000	$	137,000	$	34,000
Third party credit cards	1,589,000		1,622,000		1,531,000
Other	525,000		441,000		729,000
	$	2,610,000	$	2,200,000	$	2,294,000

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At September 28, 2013, December 29, 2012, and September 29, 2012, the Company’s income tax receivable was $49,000, $184,000 and $245,000, respectively, which resulted from quarterly federal and state tax estimated payments.

7. INVENTORIES

	September 28,		December 29,		September 29,
	2013		2012		2012
Raw materials	$	1,569,000	$	1,014,000	$	1,166,000
Work-in-process	1,528,000		2,237,000		2,784,000
Finished goods	18,491,000		17,995,000		19,856,000
	$	21,588,000	$	21,246,000	$	23,806,000

8. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

	September 28,			December 29,			September 29,
	2013			2012			2012

Leasehold improvements	$	47,303,000		$	47,734,000		$	49,344,000
Furniture, fixtures and equipment	40,974,000			39,571,000			38,694,000
	88,277,000			87,305,000			88,038,000
Less: accumulated depreciation and amortization	(68,463,000		)	(67,128,000		)	(67,516,000		)
	$	19,814,000		$	20,177,000		$	20,522,000

9. ACCRUED LIABILITIES

	September 28,		December 29,		September 29,
	2013		2012		2012
Gift cards, merchandise credit cards and other customer deposits and credits	$	3,971,000	$	4,118,000	$	4,097,000
Operating expenses	2,894,000		2,502,000		1,821,000
Taxes, including income taxes	1,733,000		2,130,000		1,491,000
Group insurance	569,000		581,000		619,000
Sales return reserve	558,000		485,000		338,000
Fixed asset additions	425,000		764,000		59,000
Deferred income — co-branded credit card program	224,000		1,215,000		1,184,000
	$	10,374,000	$	11,795,000	$	9,609,000

10. OTHER LIABILITIES

The Company’s other liabilities are comprised of the following:

	September 28, 2013		December 29, 2012		September 29, 2012
Deferred rent	$	7,833,000	$	8,372,000	$	8,937,000
Deferred income — co-branded credit card program	1,215,000		405,000		691,000
Severance	237,000		—		—
	$	9,285,000	$	8,777,000	$	9,628,000

11. CREDIT FACILITY

The Company had a $3.0 million credit facility with the Bank of America, which expired May 31, 2013. The agreement allowed the Company to issue letters of credit up to $3.0 million and was collateralized by a security interest in various certificates of deposit held by the Company. As of September 28, 2013, the Company had $1,750,000 of certificates of deposit collateralized for the remaining outstanding letters of credit with Bank of America. These certificates of deposit are reported as restricted funds. As letters of credit are drawn upon or replaced through our new credit facility described below, the restricted funds will be released. There were outstanding letters of credit of $ 1.1 million at September 28, 2013 under this facility which were collateralized by restricted funds.

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The Company entered into a new credit agreement on July 25, 2013 (the “Credit Agreement”) with Wells Fargo Bank, National Association. The credit facility (“Credit facility”) pursuant to the Credit Agreement provides the Company with a line of credit of $25 million for short term borrowings and letters of credit with a sublimit of $5 million. Any borrowings that the Company may incur in the future under the Credit Facility are due and payable on July 25, 2018, at which time the facility thereunder terminates.

Borrowings under the Credit Facility bear interest, at the Company’s option, either at the London interbank offering rate (“LIBOR”) Margin or at the Base Rate Margin. LIBOR Margin is equal to LIBOR plus a margin of 1.50% per annum when the average daily availability is equal to or greater than 50% of the borrowing base. When the average daily availability is less than 50% of the borrowing base, the LIBOR Margin is equal to LIBOR, plus a margin of 1.75% per annum. Base Rate Margin is equal to the base rate as defined below, plus a margin of 0.50% per annum when the average daily availability is equal to or greater than 50% of the borrowing base. When the average daily availability is less than 50% the Base Rate Margin is equal to the base rate as defined below, plus a margin of 0.75% per annum. The base rate, as defined in the Credit Agreement, is a fluctuating rate per annum equal to the highest of (a) the U. S. federal funds rate, plus a margin of 0.50% per annum, (b) the adjusted LIBOR rate plus a margin of 1.00% or (c) the Wells Fargo prime rate in effect at that time.

The obligations of the Company under the Credit Facility are secured by liens on all assets of the Company. The Credit Agreement contains various customary covenants, including, but not limited to, limitations on indebtedness, liens, investments, dividends or other capital distributions, purchases or redemptions of stock, sales of assets or subsidiary stock, transactions with affiliates, line of business and accelerated payments of certain obligations.

The Credit Agreement contains events of default customary for similar financings. Upon the occurrence of an event of default, the outstanding obligations under the Credit Facility may be accelerated and become due and payable immediately. In addition, if certain change of control events occur with respect to any loan party, the Lenders have the right to require the Company to repay any outstanding loans under the Credit Facility.

The Company had outstanding letters of credit of $1.2 million under the Credit Facility and no borrowings as of September 28, 2013.

During the 39-week period September 28, 2013, the Company recorded $1.1 million of deferred financing costs in connection with the Credit Agreement, which are included in other assets at September 28, 2013 and will be amortized on a straight line basis through July 2018.

12. INCOME TAXES

The Company accounts for income taxes in accordance with “Income Taxes”, Topic 740 of the FASB ASC. This guidance 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. At December 29, 2012, the Company maintained $10.2 million of net deferred tax assets. During the 39-week period ended September 28, 2013, the Company recorded income tax expense of $10.2 million as a result of a full valuation allowance recorded against its net deferred tax assets. Federal valuation allowances totaled $22.3 million, $8.3 million and $5.8 million at September 28, 2013, December 29, 2012 and September 29, 2012, respectively. State valuation allowances totaled $4.2 million, $675,000 and $638,000 at September 28, 2013, December 29, 2012 and September 29, 2012, respectively. The valuation allowances are primarily to reserve for the possible non-utilization of net operating loss carry-forwards which may not be realized in future periods before they expire. At September 28, 2013, the Company had an estimated federal net operating loss carry-forward of approximately $53.5 million available for carry-forward expiring from 2030 through 2033.

At December 29, 2012 and September 29, 2012, the current portion of net deferred tax assets and liabilities of $352,000 and $388,000, respectively, were included in prepaid expenses and other current assets, while the non-current portion of net deferred tax assets and liabilities of $9.9 million and $10.4 million were included in other assets on the Company’s accompanying condensed consolidated balance sheets. These amounts are net of the valuation allowances discussed above.

When tax contingencies become probable, a liability for the contingent amount is estimated based upon the Company’s best estimation of the potential exposures associated with the timing and amount of deductions, as well as various tax filing positions. As of September 28, 2013, December 29, 2012 and September 29, 2012, the Company had no reserve recorded for potential tax contingencies.

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13. RIGHTS OFFERING AND RELATED TRANSACTIONS

On February 5, 2013, the Company entered into an Investment Agreement to provide additional capital (as amended, the “Backstop and Investment Agreement”). The Backstop and Investment Agreement required the Company to commence a rights offering, which was completed on May 1, 2013. Pursuant to the rights offering and the other issuances contemplated by the Backstop and Investment Agreement, the Company issued approximately 8.1 million shares of the Company’s common stock and raised approximately $13.4 million of gross proceeds. These proceeds were offset by $2.1 million of costs in connection with the issuance of the rights and the other issuances. The proceeds from these issuances are intended to provide the Company with the financial resources to return to profitability and growth under the leadership of Jay Margolis, who became the Chief Executive Officer and Chairman of the Board of Directors of the Company on February 5, 2013.

In connection with the Backstop and Investment Agreement, on February 5, 2013, Jay Margolis and the Company entered into an Employment Agreement (the “Employment Agreement”), which has a term of three years. Under the Employment Agreement, Mr. Margolis serves as Chief Executive Officer and Chairman of the Board of Directors, and is entitled to receive an annual base salary of $900,000 and an annual bonus with a target of fifty percent (50%) of his annual base salary, subject to financial performance targets set by the Company; provided, however, that for 2013, he is entitled to a guaranteed bonus of $225,000.

In addition, the Company and Mr. Margolis entered into a Nonqualified Stock Option Agreement, dated as of February 5, 2013, which granted to Mr. Margolis, a time-based stock option (the “Option”) to purchase 1,000,000 shares of the Company’s common stock, with an exercise price equal to $3.34 (see Note 2).The Option vests in equal installments on the first, second and third anniversary of the grant date. The Option grant made to Mr. Margolis was awarded as stock options that qualify as an inducement grant pursuant to NASDAQ Listing Rules.

Furthermore, on February 5, 2013, Thomas E. Reinckens resigned as Chairman of the Board and Chief Executive Officer of the Company. In connection with his resignation, Mr. Reinckens and the Company entered into a Separation and General Release Agreement, dated as of February 5, 2013 (the “Separation Agreement”). The Separation Agreement provides for severance in the form of continuing payments for the remaining balance of his employment term, in the amount of approximately $1.2 million over a period of approximately two years, subject to reduction for any compensation he receives from any employment or consultant position during the remainder of the term. The $1.2 million was accrued with related payroll taxes in the first quarter of fiscal 2013. In connection with his resignation, Mr. Reinckens forfeited all of his remaining stock options and unvested restricted shares.

14. COMMITMENTS AND CONTINGENCIES

The Company is exposed to a number of asserted and unasserted potential claims. Management does not believe it is reasonably possible that resolution of these matters will result in a material loss. The Company had no guarantees, subleases or assigned lease obligations as of September 28, 2013, December 29, 2012 or September 29, 2012.

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

Except for the historical information contained in this Form 10-Q, the matters addressed herein are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements represent the Company’s expectation or belief concerning future events. Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,” “estimates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. The Company cautions that forward-looking statements are subject to risks, uncertainties, assumptions and other important factors that could cause actual results to differ materially, or otherwise, from those expressed or implied in the forward-looking statements, including, without limitation, macroeconomic factors that have affected the retail sector, including changes in national, regional and local economic conditions, employment levels and consumer spending patterns, and the other risks detailed from time to time in the Company’s most recent Form 10-K, Forms 10-Q and other reports filed with the Securities and Exchange Commission. Any weakening of the economy generally or in a number of our markets could adversely affect our financial position and results of operations, cause us to reduce the number and frequency of new store openings, slow our re-modeling of existing locations or cause us to increase store closings. Other unknown or unpredictable factors also could harm the Company’s business, financial condition and results. Consequently, there can be no assurance that actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable securities laws.

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CHANGE IN LEADERSHIP; COMPLETION OF CAPITAL INCREASE

Jay Margolis became our Chief Executive Officer and the Chairman of our Board of Directors on February 5, 2013. Since joining the Company, Mr. Margolis has been focused on re-invigorating our brand and enhancing our operations, with a view to returning the Company to profitability. Some of the actions taken by Mr. Margolis in his first ten months with the Company include:

· Hiring a new Chief Merchandise Officer and Chief Marketing Officer, each of whom has more than thirty years of retail experience with leading brands.

· Hiring a new Chief Financial Officer, with over sixteen years of experience in finance with leading companies.

· Revamping the Company’s merchandise strategy; the Company’s merchandise assortment in the second half of fiscal 2012 and in the first half of fiscal 2013, which was ordered before Mr. Margolis joined the Company has not been as well-received as in previous periods and resulted in an increased promotional activity to reduce inventory levels.

· Implementing new inventory management strategies that we expect will improve our inventory turnover rate.

· Refocusing the Company’s promotional strategies, which we anticipate will reduce reliance on mark-downs.

· Entering into a new, larger credit facility, as described below, which provides the Company with additional financial flexibility to implement its business strategy.

In addition, on April 4, 2013, Michael F. Price and Charles J. Hinkaty were appointed to our Board of Directors, filling the vacancies created by the resignations of Morton J. Schrader and Arthur S. Mintz. Mr. Price and Mr. Hinkaty bring substantial financial, managerial, leadership and board experience to our Company.

On May 1, 2013, the Company completed a rights offering and other private issuances that raised approximately $13.4 million of gross proceeds. These issuances coupled with our new, larger credit facility are intended to provide the Company with the financial resources to return to profitability and growth under Mr. Margolis’ leadership.

On August 14, 2013, Robert C. Grayson and J. David Scheiner were elected to our Board of Directors who also bring substantial financial, managerial, leadership and board experience to our Company.

New Credit Facility

The Company entered into a new credit agreement on July 25, 2013 (the “Credit Agreement”) with Wells Fargo Bank, National Association. The Credit Agreement provides the Company with a line of credit of $25 million for short term borrowings and letters of credit with a sublimit of $5 million. Any borrowings that the Company may incur in the future under the Credit Facility are due and payable on July 25, 2018, at which time the facility thereunder terminates, see Notes To Condensed Consolidated Financial Statements — Note 11, Credit Facility.

RESULTS OF OPERATIONS

The following table sets forth our results of operations for the 39-week and 13-week periods ended September 28, 2013 and September 29, 2012, respectively, expressed as a percentage of net sales.

	39-Weeks Ended				13-Weeks Ended
	September 28,		September 29,		September 28,		September 29,
	2013		2012		2013		2012
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	67.0		61.3		66.5		68.0
Gross profit	33.0		38.7		33.5		32.0
Store operating expenses	34.0		35.3		37.9		39.9
General and administrative expenses	9.1		8.2		11.1		9.3
Employee separation charges	1.9		0.3		1.4		0.5
Operating loss	(12.0	)	(5.1	)	(16.9	)	(17.7	)
Interest expense (income)	0.0		0.0		(0.0	)	0.0
Loss before income taxes	(12.0	)	(5.1	)	(16.9	)	(17.7	)
Income tax provision (benefit)	6.4		(1.1	)	0.0		(3.7	)
Net loss	(18.4	)%	(4.0	)%	(16.9	)%	(14.0	)%

We use a number of key indicators of financial condition and operating performance to evaluate the performance of our business, some of which are set forth in the following table:

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	39-Weeks Ended						13-Weeks Ended
	September 28,			September 29,			September 28,			September 29,
	2013			2012			2013			2012
Total store count, at end of period	250			262			250			262
Net sales increase (decrease)	(1.6		)%	1.5		%	3.1		%	(5.9		)%
Comparable store sales increase (decrease)	1.4		%	4.0		%	6.0		%	(2.9		)%
Average sales per transaction increase (decrease)	(5.7		)%	(6.6		)%	4.5		%	(12.8		)%
Average number of transactions increase	7.5		%	11.3		%	1.5		%	11.3		%
Net sales per average square foot	$	282		$	265		$	84		$	74
Total square footage, at end of period (in thousands)	506			528			506			528

Net sales

During the 39-week period ended September 28, 2013, net sales decreased to $160.8 million from $163.4 million, a decrease of $2.6 million, or 1.6%, as compared to the same 39-week period last year. This reflects a decrease in non-comparable store sales of approximately $3.8 million partially offset by an increase in comparable stores sales of $2.2 million or 1.4%. Included in comparable store sales are e-commerce sales of $16.4 million during the recent 39-week period, as compared to $18.5 million in the prior year period. The decrease in e-commerce sales was a result of less promotional activity this year as compared to last year. The net sales during the 39- week period reflected a 7.5% increase in number of sales transactions, partially offset by a decrease of 5.7% in average dollars per transaction, as a result of increased promotional activity to maintain appropriate inventory levels, as further discussed below.

During the 13-week period ended September 28, 2013, net sales increased to $47.2 million from $45.8 million, an increase of $1.4 million, or 3.1%, as compared to the same 13-week period last year. This reflects an increase in comparable store sales of $2.6 million or 6.0% and a decrease in non-comparable store sales of approximately $897,000. Included in comparable store sales are e-commerce sales of $4.3 million during the 13-week period, as compared to $5.9 million in the prior year period. The decrease in e-commerce sales was a result of less promotional activity this year as compared to last year. The net sales for the quarter reflected a 4.5% increase in average dollars per transaction and a 1.5% increase in number of sales transactions due to the improvement in the merchandise assortment.

Gross profit

During the 39-week period ended September 28, 2013, gross profit decreased to $53.1 million from $63.2 million, a decrease of $10.1 million, or 16.1%, as compared to the same 39-week period last year. This decrease was primarily due to an increase in markdowns of 13% over the comparable period in fiscal 2012, as well as a decrease in net sales as described above. As a percentage of net sales, gross profit decreased to 33.0% from 38.7% for the current 39-week period, as compared to the prior year period, primarily due to an increase in markdowns. Our merchandise assortment was not as well received by our customers as in the prior period, which resulted in the reduction in net sales, and caused us to markdown inventory in order to maintain an appropriate level and valuation. There was no geographic concentration of markdowns in the fiscal 2013 or fiscal 2012 39-week periods.

During the 13-week period ended September 28, 2013, gross profit increased to $15.8 million from $14.7 million, an increase of $1.1 million, or 7.9%, as compared to the same 13-week period last year. This increase was primarily due to an improvement in our gross profit percentage and an increase in sales. As a percentage of net sales, gross profit increased to 33.5% from 32.0% for the current 13-week period, as compared to the prior year period, primarily due to lower costs in our design, production and sourcing departments as well as a decrease in markdowns of 19%. There was no geographic concentration of markdowns in the fiscal 2013 or fiscal 2012 13-week periods.

Store operating expenses

During the 39-week period ended September 28, 2013, store operating expenses decreased to $54.7 million from $57.7 million, a decrease of $3.0 million, or 5.2%, as compared to the same 39-week period last year. Store operating expenses decreased primarily due to a decrease in marketing expense of $2.0 million and a decrease in payroll and payroll-related costs of $1.3 million, partially offset by an increase e-commerce expenses of $176,000. The decrease in marketing expense was largely due to a decrease in print advertising. The decrease in payroll and payroll-related costs was primarily attributable to fewer stores in operation. The increase in

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e-commerce expenses were primarily due to the outsourcing of our call center services. As a percentage of net sales, for the fiscal 2013 39-week period, store operating expenses decreased to 34.0% from 35.3% as compared to the prior year period, primarily due to the dollar decrease in store operating expenses in 2013.

During the 13-week period ended September 28, 2013, store operating expenses decreased to $17.9 million from $18.3 million, a decrease of $374,000, or 2.0%, as compared to the same 13-week period last year. Store operating expenses decreased primarily due to a decrease in marketing expense of $763,000, partially offset by an increase in depreciation of $181,000 and an increase in non-capitalizable expenses of $135,000 to improve store appearance. The decrease in marketing expense was largely due to a decrease in print advertising. The increase in depreciation expense was due to acceleration of depreciation of certain assets. As a percentage of net sales, store operating expenses decreased to 37.9% from 39.9% for the current 13-week period, as compared to the prior year period, primarily due to the decrease in store operating expenses in 2013.

General and administrative expenses

During the 39-week period ended September 28, 2013, general and administrative expenses increased to $14.7 million from $13.5 million, an increase of $1.2 million, or 8.9%, as compared to the same 39-week period last year, primarily due to an increase in payroll and payroll-related costs of $454,000, an increase in information technology and real estate consulting fees of $246,000, an increase in recruiting fees of $161,000, and an increase in professional fees of $129,000 primarily related to legal fees. The increase in payroll and payroll related costs as well as recruiting fees was predominately due to the replacement of the Company’s corporate management team. As a percentage of net sales, general and administrative expenses increased to 9.1% from 8.2% in fiscal 2012, primarily due to the decrease in sales as well as the increase in general and administrative expenses in fiscal 2013.

During the 13-week period ended September 28, 2013, general and administrative expenses increased to $5.2 million from $4.3 million, an increase of $962,000, or 22.5%, as compared to the to the same 13-week period last year, primarily due to an increase in payroll and payroll-related costs of $403,000, an increase in information technology and real estate consulting fees of $170,000, an increase in professional fees of $96,000, an increase in recruiting fees of $87,000 and other various increases of $205,000. The increases in payroll and payroll related costs, recruiting and professional fees are as discussed above. As a percentage of net sales, general and administrative expenses increased to 11.1% from 9.3% in fiscal 2012, primarily due to the increase in general and administrative expenses in fiscal 2013.

Employee Separation Charges

During the 39-week period ended September 28, 2013, employee separation charges increased to $3.1 million from $503,000 as compared to the same 39-week period last year primarily due to the severance accrual of $1.8 million in connection with the separation agreement with the Company’s former Chief Executive Officer and Chief Financial Officer, as well as severance for other corporate employees.

During the 13-week period ended September 28, 2013, employee separation charges increased to $638,000 from $227,000 as compared to the same 13-week period last year, due to the increase in severance for the Company’s former Chief Financial Officer, as well as severance for other corporate employees.

Other expense (income), net

During the 39-week period ended September 28, 2013, other expense, net increased to $15,000 from other income, net of $62,000, an increase of $77,000, as compared to the same 39-week period last year. This increase was primarily due to the amortization of deferred financing cost of $37,000 and reduction of interest income as a result of less cash on hand as compared to last year.

During the 13-week period ended September 28, 2013, other expense, net increased to $32,000 from $20,000, an increase of $52,000, as compared to the same 13-week period last year. This increase was primarily due to the amortization of deferred financing cost of $37,000 and reduction of interest income as a result of less cash on hand as compared to last year.

Income taxes

During the 39-week period ended September 28, 2013 and September 29, 2012, the Company recorded an income tax provision of $10.3 million in fiscal 2013, as compared to an income tax benefit of $1.8 million in fiscal 2012.

During the 13-week period ended September 28, 2013, the Company recorded an income tax provision of $8,000, as compared to an income tax benefit of $1.7 million in fiscal 2012.

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Our new senior management is reviewing our business and policies, including inventory management, and, due to the cumulative losses incurred over the past few years and the uncertainty of executing a turnaround in the current year, we have recorded a full valuation allowance against the remaining net deferred tax assets during the 39-week period ended September 28, 2013. The income tax benefit recorded in fiscal year 2012 was attributable to the operating losses incurred by the Company, as discussed above.

Net income/(loss)

As a result of the factors discussed above, a net loss of $29.7 million and $8.0 million were recorded during the 39- and 13-week periods ended September 28, 2013, respectively. Comparatively, the Company recorded a net loss of $6.6 million and $6.4 million during the 39- and 13-week periods ended September 29, 2012, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Our cash requirements are primarily for funding operations and remodeling of existing stores. We have historically satisfied our cash requirements principally through cash flows from operations. On May 1, 2013, the Company completed a rights offering and other capital raises which raised $13.4 million in gross proceeds or $11.3 million in net proceeds. In addition, on July 25, 2013, the Company entered into a five year credit agreement with Wells Fargo Bank, National Association (the “Credit Agreement”) which provides the Company the ability to borrow up to $25 million dollars and the ability to issue letters of credit in amounts of $5 million under the $25 million cap, see Notes To Condensed Consolidated Financial Statements — Note 11, Credit Facility.

At September 28, 2013, we had working capital of $9.1 million, which included cash of approximately $4.4 million and certificates of deposit of $1.8 million. The certificates of deposit of $1.8 million had been placed by the Company as collateral against letters of credit outstanding under our previous credit facility.

The following table sets forth our cash flows for the periods indicated:

	39-Weeks Ended
	September 28, 2013			September 29, 2012
Net cash used in operating activities	$	(17,568,000	)	$	(6,314,000	)
Net cash used in investing activities	(861,000		)	(5,821,000		)
Net cash provided by financing activities	10,432,000			—
Net decrease in cash and equivalents	$	(7,997,000	)	$	(12,135,000	)

During the 39-week period ended September 28, 2013, the $17.6 million of cash used in operating activities was primarily due to the net loss of $29.7 million and a decrease in accounts payable of $3.4 million. These decreases in cash were partly offset by deferred income taxes of $10.2 million, depreciation and amortization of $5.1 million and an increase in accrued liabilities of $1.4 million. The net loss was primarily due to decrease in gross profit of $10.1 million, an income tax provision of $10.3 million and a $3.1 million severance accrual in connection with the separation agreement with the Company’s former Chief Executive Officer and severance for other corporate employees. The income tax provision reflects a $10.2 million full valuation allowance against deferred tax assets recorded by the Company during the 39-week period ended September 28, 2013. The decrease in gross profit was primarily due to the increase in markdowns of 13% in the 39-week period ended September 28, 2013 over the comparable period in fiscal 2012.

The Company’s inventory turnover rate increased approximately 15.2% during the 39-week period ended September 28, 2013 as compared to the comparable period in fiscal 2012. The Company’s days sell through was approximately 54 days during the 39-week period ended September 28, 2013 as compared to 63 days in the comparable period in fiscal 2012. The Company’s inventory as of September 28, 2013 decreased by approximately $2.2 million as compared to September 29, 2012. The decrease in inventory was primarily due to a higher markdown rate during the 39-week period ended September 28, 2013 as compared to the comparable period in fiscal 2012. The increase in our inventory turnover rate and the decrease in our days sell through was primarily due to increased promotional activity, which accelerated our cost of goods sold. Although markdowns have exceeded historical levels year to date, our markdown rate has declined in the current 13-week period as compared to the comparable period last year. We anticipate that our markdown rate will continue to decline as the merchandise and inventory strategy being implemented continues to take effect. Nevertheless, we expect markdowns to continue to put pressure on our working capital.

During the 39-week period ended September 28, 2013, cash used by investing activities was $861,000, as compared to cash used by investing activities of $5.8 million during the 39-week period ended September 29, 2012. The net maturities in marketable securities of $3.0 million and the release of $1.3 million in restricted certificates of deposit were mostly offset by the purchases of equipment and leasehold improvements of $5.1 million. The purchase of equipment and leasehold improvements was primarily used for remodeling stores. Projected capital expenditures for fiscal 2013, to remodel existing stores and open one new outlet store are approximately $6.0 to $7.0 million.

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During the 39-week period ended September 28, 2013, cash flows from financing activities were primarily due to the net proceeds of $11.4 million from the issuance of common stock in connection with the Company’s rights offering and related issuances which were completed on May 1, 2013. These were offset by payments of $941,000 in deferred financing costs in connection with the Company’s new Credit Agreement for fiscal 2013. There were no cash flows from financing activities for the 39-week period ending September 29, 2012.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements or transactions with unconsolidated, limited purpose entities. In the normal course of our business, we enter into operating leases for store locations and utilize letters of credit principally for the importation of merchandise. Other than operating lease commitments and letters of credit, we are not a party to any material off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

The Company’s accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements in our fiscal 2012 Form 10-K. As disclosed in Note 1 of the Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from those estimates. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these under different assumptions or conditions.

The Company’s management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the Consolidated Financial Statements.

Inventories. Our finished goods inventories at our retail stores are valued at the lower of cost or market using the retail inventory method. Under the retail inventory method (“RIM”), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method that is used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. We take markdowns due to changes in fashion and style, based on the following factors: (i) supply on hand, (ii) historical experience and (iii) our expectations as to future sales. We do not anticipate any significant change in our markdown strategy that would cause a significant change in our earnings. We believe that our RIM provides an inventory valuation, which results in a carrying value at the lower of cost or market. Inventories other than finished goods at retail stores, called production inventory, primarily consist of piece goods, trim and work-in-process. The Company values production inventory at lower of cost or market value using first-in-first-out valuation method. The Company reviews the inventory for factors such as age, obsolescence, potential use or other factors that may indicate a decline in its value. The Company records a reserve against the cost of the production inventory to account for any decline in its value.

Finite long-lived assets. The Company’s judgment regarding the existence of impairment indicators is based on market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable and exceeds the fair market value. Factors we consider important which could trigger an impairment review include the following:

· significant changes in the manner of our use of assets or the strategy for our overall business;

· significant negative industry or economic trends;

· store closings; or

· underperforming business trends.

The Company evaluates finite long-lived assets in accordance with “Impairment or Disposal of Long-Lived Assets” under Topic 360 “Property, Plant and Equipment” of the FASB ASC. Finite-lived assets are evaluated for recoverability in accordance with Topic 360 of the FASB ASC whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset

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for recoverability, the Company estimates the future cash flows expected to result from the use and eventual disposition of the asset. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair market value of the asset is recognized. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates. No impairment charges were recorded during the 39-week periods ended September 28, 2013 and September 29, 2012. The Company recorded an impairment charge of $1.1 million for 26 underperforming stores during the fourth quarter of fiscal 2012.

Self Insurance. The Company is self-insured for losses and liabilities related primarily to employee health and welfare claims up to certain thresholds. Losses are accrued based upon our estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience. Adjustments to earnings resulting from changes in historical loss trends were insignificant for the 39- and 13-week periods ended September 28, 2013 and September 29, 2012. Further, we do not anticipate any significant change in loss trends, settlements or other costs that would cause a significant change in our earnings. We maintain stop-loss insurance coverage, which covers us for benefits paid in excess of limits as defined in the plan.

Gift Cards, Gift Certificates and Credits. The Company sells gift cards and gift certificates (“Gift Cards”) and issues credits to its customers when merchandise is returned (“Merchandise Credits”), which do not expire. The Company recognizes sales from Gift Cards when they are redeemed by the customer and income when the likelihood of the Gift Card and Merchandise Credit being redeemed by the customer is remote (“Gift Card breakage”), since the Company has determined that it does not have a legal obligation to remit the unredeemed value to the relevant jurisdiction as abandoned property. The Company determines Gift Card breakage income based upon historical redemption patterns of its Merchandise Credits and Gift Cards. The Company has determined based on these historical redemption rates that approximately 5% of its Merchandise Credits issued and approximately 3% of its Gift Cards issued will remain unredeemed. The Company is recognizing the estimated unredeemed Merchandise Credits and Gift Cards over a fourteen-quarter period with 64% recognized in the first quarter to 0.03% in the fourteenth quarter subsequent to the issue date. The Company has determined that redemption would be remote based on the fact that, by the fourteenth quarter since issue date, the redemption rate approximated 0%, indicating that the probability of such merchandise credits and gift cards being redeemed is remote. As such, we have recorded breakage income based upon the above criteria which is reviewed on a quarterly basis for propriety. Breakage income represents the balance of Gift Cards and Merchandise Credits for which the Company believes the likelihood of redemption by the customer is remote.

The Company recorded breakage income of $170,000 and $212,000 during the 39-week periods ended September 28, 2013 and September 29, 2012, respectively.

Revenue Recognition. Sales are recognized at the “point of sale,” which occurs when merchandise is sold in an “over-the-counter” transaction or upon receipt by a customer. Sales of merchandise via our website are recognized at the expected time of delivery to the customer. Our customers have the right to return merchandise. Sales are reported net of actual and estimated returns. We maintain a reserve for potential product returns and record, as a reduction to sales, a provision for estimated product returns, which is determined based on historical experience. The Company recorded a net increase in sales return reserve of approximately $73,000 and a net decrease of approximately $113,000 for the 39-week periods ended September 28, 2013 and September 29, 2012, respectively. Amounts billed to customers for shipping and handling fees are included in net sales at the time of shipment. Costs incurred at our stores for shipping and handling are included in cost of sales. The Company records revenues net of applicable sales tax.

The Company’s co-branded customer credit card program, which was introduced during fiscal 2007, entitles the Company to receive from the issuing bank a non-refundable credit card activation fee for each new account that is opened and activated. These fees are initially deferred and recognized in consolidated net sales as revenue over the life of the contract, which was amended on March 1, 2013 for a period of 7 years. During the 39-week periods ended September 28, 2013 and September 29, 2012, the Company recorded $150,000 and $316,000, respectively, in connection with activated credit cards. The amount of fee income recorded in connection with activated credit cards was $330,000 and $858,000 for the 39-week periods ended September 28, 2013 and September 29, 2012, respectively.

The Company also receives from the issuing bank and Visa U.S.A Inc. a sales royalty, which is based on a percentage of net purchases made by cardholders at Cache or other businesses. Cache has determined that since it has not incurred any significant or recurring costs in relation to the co-branded credit card program, the sales royalties earned in connection to the agreement will be recorded under net sales. The fees that are incurred by the Company are cardholder incentives, which are funded from the fees paid by the issuing bank and Visa U.S.A Inc. The amount of sales royalty income recorded was $337,000 and $332,000 for the 39-week periods ended September 28, 2013 and September 29, 2012, respectively.

The Company also offers its card holders a program whereby points can be earned on net purchases made with the co-branded credit card. Five reward points are awarded for each dollar spent at Cache and one reward point is awarded for each dollar spent at other

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businesses. A cardholder whose credit card account is not delinquent, in default or closed will be automatically eligible to receive a $25 Company gift card upon accrual of 2,500 reward points. Effective March 1, 2013, the issuing bank pays the Company 70% of the Company gift cards issued to the bank. All other costs associated with the gift card reward program are the responsibility of the bank.

Income Taxes. The Company accounts for income taxes in accordance with “Income Taxes”, Topic 740 of the FASB ASC. This guidance 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. At December 29 2012, the Company maintained $10.2 million of net deferred tax assets. During the 39-week period ended September 28, 2013, the Company recorded income tax expense of $10.2 million as a result of a full valuation allowance recorded against its net deferred tax assets. Federal valuation allowances totaled $22.3 million, $8.3 million and $5.8 million at September 28, 2013, December 29, 2012 and September 29, 2012, respectively. State valuation allowances totaled $4.2 million, $675,000 and $638,000 at September 28, 2013, December 29, 2012 and September 29, 2012, respectively. The valuation allowances are primarily to reserve for the possible non-utilization of net operating loss carry-forwards which may not be realized in future periods before they expire. At September 28, 2013, the Company had an estimated federal net operating loss carry-forward of approximately $53.5 million available for carry-forward expiring from 2030 through 2033.

At December 29, 2012 and September 29, 2012, the current portion of net deferred tax assets and liabilities of $352,000 and $388,000, respectively, were included in prepaid expenses and other current assets, while the non-current portion of net deferred tax assets and liabilities of $9.9 million and $10.4 million, respectively, were included in other assets on the Company’s accompanying condensed consolidated balance sheets. These amounts are net of the valuation allowance discussed above.

Seasonality. The Company experiences seasonal and quarterly fluctuations in net sales and operating income. Quarterly results of operations may fluctuate significantly as a result of a variety of factors, including the timing of new store openings, fashion trends, shifts in timing of certain holidays, economic conditions and competition. Our business is subject to seasonal influences, characterized by highest sales generally during the fourth quarter (October, November and December) and lowest sales generally during the third quarter (July, August and September).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk relates primarily to changes in interest rates. The 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, marketable securities, and certificates of deposit — restricted 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.

ITEM 4. CONTROLS AND PROCEDURES

The Company is committed to maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework to evaluate the effectiveness of the Company’s internal controls. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

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During the 13-week period ended September 28, 2013, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is exposed to a number of asserted and unasserted potential claims. Management does not believe that the resolution of any of these matters will result in a material loss.

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

31.1*		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following materials from Cache Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2013 are furnished herewith, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of September 28, 2013, December 29, 2012 and September 29, 2012, (ii) the Condensed Consolidated Statements of Operations for the Thirty-Nine Weeks Ended September 28, 2013 and September 29, 2012, (iii) the Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended September 28, 2013 and September 29, 2012, (iv) the Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended September 28, 2013 and September 29, 2012, and (v) the Notes to Condensed Consolidated Financial Statements.

* Filed herewith

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Signatures

Pursuant to the requirements 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.

	Dated: November 12, 2013
	CACHE, INC.


	BY:	/s/ Jay Margolis
		Jay Margolis
		Chairman and Chief Executive Officer
		(Principal Executive Officer)


	BY:	/s/ Anthony DiPippa
		Anthony DiPippa
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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