Edgar Filing: CHARLOTTE RUSSE HOLDING INC

Amendment No. 1 to Form 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 25, 2004

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

COMMISSION FILE NUMBER 0-27677

CHARLOTTE RUSSE HOLDING, INC.

(Exact Name of Registrant as Specified in Its Charter)


DELAWARE		33-0724325
(State or Other Jurisdiction of Incorporation)		(I.R.S. Employer Identification No.)

4645 MORENA BOULEVARD

SAN DIEGO, CA 92117

(Address, including Zip Code, of Registrant’s Principal Executive Offices)

(858) 587-1500

(Registrant’s Telephone Number, Including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

COMMON STOCK, PAR VALUE $0.01 PER SHARE

(Title of Each 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 such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

The number of shares of common stock outstanding as of January 20, 2005 was approximately 21,980,000.

EXPLANATORY NOTE

This Quarterly Report on Form 10-Q/A (“Form 10-Q/A”) is being filed in order to correct the previously issued consolidated financial statements of Charlotte Russe Holding, Inc., (the “Company”) for the quarterly period ended December 25, 2004, initially filed with the Securities and Exchange Commission (the “SEC”) on January 21, 2005 (the “Original Filing”). The corrections are to reflect changes to our lease accounting for landlord construction allowances and straight-line rent during construction periods in accordance with accounting principles generally accepted in the United States of America as clarified by the Office of the Chief Accountant of the SEC on February 7, 2005 in a letter to the American Institute of Certified Public Accountants. In addition, the Company concluded that is was appropriate to correct a previously identified immaterial inter-quarterly error by shifting these charges between appropriate quarterly periods. See Note 2: “Restatement of Financial Statements” under Notes to Consolidated Financial Statements included in Item 1, “Consolidated Financial Statements” of this Form 10-Q/A for additional discussion.

This Form 10-Q/A amends and restates only Items 1, 2, and 4 of Part I and Item 6 of Part II of the Original Filing to reflect the effects of this restatement of our financial statements for the period presented or as deemed necessary in connection with the completion of restated financial statements. The remaining Items contained within this Form 10-Q/A consist of all other Items originally contained on Form 10-Q for the quarterly period ended December 25, 2004. These remaining Items are not amended hereby, but are included for the convenience of the reader. Except for the forgoing amended information, this Form 10-Q/A continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date.

CHARLOTTE RUSSE HOLDING, INC.

TABLE OF CONTENTS


	PART I. FINANCIAL INFORMATION
		Page

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS

	Consolidated Balance Sheets as of December 25, 2004 (unaudited) and September 25, 2004 (audited)	2

	Consolidated Statements of Income for the three months ended December 25, 2004 (unaudited) and December 27, 2003 (unaudited)	3

	Consolidated Statements of Cash Flows for the three months ended December 25, 2004 (unaudited) and December 27, 2003 (unaudited)	4

	Notes to Consolidated Financial Statements (unaudited)	5

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	11

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	15

ITEM 4.	CONTROLS AND PROCEDURES	16

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	17

ITEM 2.	CHANGES IN SECURITIES	17

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	17

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	17

ITEM 5.	OTHER INFORMATION	17

ITEM 6.	EXHIBITS	17

CHARLOTTE RUSSE HOLDING, INC.

CONSOLIDATED BALANCE SHEETS


	December 25, 2004		September 25, 2004
	(Restated)		(Restated)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	41,817,643	$	30,713,343
Inventories		38,497,548		49,154,877
Other current assets		8,115,767		8,019,487
Deferred tax assets		6,300,000		6,300,000

Total current assets		94,730,958		94,187,707

Fixed assets, net		176,907,909		177,518,053
Goodwill		28,790,000		28,790,000
Other assets		1,174,524		1,184,227

Total assets	$	301,603,391	$	301,679,987

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade	$	19,963,288	$	25,703,097
Accounts payable, other		5,122,148		8,749,782
Accrued payroll and related expense		5,614,464		4,124,136
Income and sales taxes payable		3,621,777		1,970,903
Other current liabilities		14,700,407		10,548,758

Total current liabilities		49,022,084		51,096,676

Deferred rent		90,694,989		91,226,297
Other liabilities		43,894		43,894
Deferred tax liabilities		4,000,000		3,700,000

Total liabilities		143,760,967		146,066,867

Commitments and contingencies

Stockholders’ equity:
Preferred Stock $0.01 par value, 3,000,000 shares authorized, none issued and outstanding		—		—
Common Stock $0.01 par value, 100,000,000 shares authorized, issued and outstanding shares – 21,968,627 and 21,950,927 at December 25, 2004 and September 25, 2004, respectively.		219,686		219,509
Additional paid-in capital		50,096,865		50,029,794
Retained earnings		107,525,873		105,363,817

Total stockholders’ equity		157,842,424		155,613,120

Total liabilities and stockholders’ equity	$	301,603,391	$	301,679,987

See accompanying notes.

CHARLOTTE RUSSE HOLDING, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended
	December 25, 2004			December 27, 2003
	(Restated)			(Restated)
Net sales	$	149,982,125		$	149,290,638
Cost of goods sold, including buying, distribution and occupancy costs		115,181,777			110,263,323

Gross profit		34,800,348			39,027,315
Selling, general and administrative expenses		31,315,458			28,365,840

Operating income		3,484,890			10,661,475
Other income (expense):
Interest income, net		122,662			37,457
Other charges, net		(63,199	)		(75,636	)

Total other income (expense)		59,463			(38,179	)

Income before income taxes		3,544,353			10,623,296
Income taxes		1,382,297			4,143,087

Net income	$	2,162,056		$	6,480,209

Earnings per share:
Basic	$	0.10		$	0.30

Diluted	$	0.09		$	0.27

Weighted average shares outstanding:
Basic		21,956,593			21,364,041

Diluted		24,012,728			23,752,905

See accompanying notes.

CHARLOTTE RUSSE HOLDING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended
	December 25, 2004			December 27, 2003
	(Restated)			(Restated)
Operating Activities
Net income	$	2,162,056		$	6,480,209
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,783,433			6,494,745
Amortization of construction allowances		(2,251,471	)		(1,816,490	)
Landlord construction allowances		1,399,598			4,044,363
Deferred rent		320,565			538,496
Amortization of deferred compensation		—			27,000
Loss on disposal of assets		45,220			78,533
Deferred income taxes		300,000			—
Changes in operating assets and liabilities:
Inventories		10,657,329			296,664
Other current assets		(96,280	)		706,944
Accounts payable, trade		(5,739,809	)		(951,267	)
Accounts payable, other		(3,627,634	)		(1,073,815	)
Accrued payroll and related expense		1,490,328			3,396,191
Income and sales taxes payable		1,664,723			5,082,479
Other current liabilities		4,151,649			4,329,512
Other liabilities		—			5,000

Net cash provided by operating activities		18,259,707			27,638,564

Investing Activities
Purchases of fixed assets		(7,196,379	)		(11,710,593	)
Other assets		(12,427	)		33,932

Net cash used in investing activities		(7,208,806	)		(11,676,661	)

Financing Activities
Proceeds from issuance of common stock		53,399			977,167

Net cash provided by financing activities		53,399			977,167


Net increase in cash and cash equivalents		11,104,300			16,939,070
Cash and cash equivalents at beginning of the period		30,713,343			22,967,317

Cash and cash equivalents at end of the period	$	41,817,643		$	39,906,387

See accompanying notes.

CHARLOTTE RUSSE HOLDING, INC.

Notes to Consolidated Financial Statements (Unaudited)

1. Interim Financial Statements

The accompanying unaudited consolidated financial statements of Charlotte Russe Holding, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited financial statements contain all material adjustments, consisting of normal recurring accruals, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods indicated, and have been prepared in a manner consistent with the audited financial statements for the fiscal year ended September 25, 2004.

Due to the seasonal nature of the Company’s business, the results of operations for the three month period ended December 25, 2004 are not necessarily indicative of the results of a full fiscal year.

These financial statements should be read in conjunction with the audited financial statements and the footnotes for the fiscal year ended September 25, 2004 included in the Company’s Annual Report on Form 10-K/A, filed with the Securities Exchange Commission on May 5, 2005.

2. Restatement of Financial Statements

We reviewed our lease accounting practices in response to the letter issued on February 7, 2005 by the Office of the Chief Accountant of the SEC to the American Institute of Certified Public Accountants (the “SEC Letter”) expressing its views regarding certain operating lease accounting issues and their application under generally accepted accounting principles (“GAAP”). Our lease accounting practices had not changed materially over the years. Our external independent auditors had been aware of our lease accounting practices, similar to those used by many other companies in the retail and restaurant industries, and had not suggested that they were not in accordance with GAAP. When reviewed against GAAP as set forth in the SEC Letter, we determined that our historical method of accounting for construction period straight-line rent and landlord construction allowances was not in accordance with GAAP.

Specifically, we previously reflected the unamortized portion of construction allowances as a reduction of capital expenditures rather than recording those transactions as a deferred rent credit. In addition, we previously recognized straight-line rent expense for leases beginning on the rent commencement date (i.e., store opening date), which had the effect of excluding the build-out period from the calculation of the period over which rent is expensed.

As a result, we restated our previously issued audited financial statements, as follows:

•

We no longer offset construction allowances against capital expenditures. The unamortized portion of construction allowances is recorded as a deferred rent credit rather than as a reduction to the cost of leasehold improvements. Depreciation expense has been increased to reflect the adjustment to capital expenditures with an equal and offsetting credit against rent expense during the contractual lease term.

•

We no longer recognize rent in accordance with the contractual lease commencement dates. Straight-line rent is imputed starting when we receive possession of the leased property for construction purposes. Preopening expense is recognized during the construction period with an equal and offsetting credit against rent expense during the contractual lease term.

CHARLOTTE RUSSE HOLDING, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

2. Restatement of Financial Statements (continued)

As a result, excluding tax impacts, the correction of this accounting required us to record additional deferred rent, increase fixed assets and adjust retained earnings on the consolidated balance sheets. In connection with the restatement of all prior periods for these changes in lease accounting practices, we also corrected for previously identified immaterial inter-quarterly errors by shifting these charges between appropriate quarters.

Following is a summary of the significant effects of these corrections on the Company’s consolidated balance sheets as of December 25, 2004 and September 25, 2004, as well as on the Company’s consolidated statements of income and cash flows for the three-month periods ended December 25, 2004 and December 27, 2003:

Consolidated Statements of Income


	As Previously Reported		Adjustments			As Restated
Three Months Ended December 25, 2004
Cost of goods sold	$	116,074,337	$	(892,560	)	$	115,181,777
Gross profit		33,907,788		892,560			34,800,348
Operating income		2,592,330		892,560			3,484,890
Income before income taxes		2,651,793		892,560			3,544,353
Income taxes		1,034,199		348,098			1,382,297
Net income		1,617,594		544,462			2,162,056
Earnings per share—basic	$	0.07	$	0.03		$	0.10
Earnings per share—diluted	$	0.07	$	0.02		$	0.09

Three Months Ended December 27, 2003
Cost of goods sold	$	110,116,571	$	146,752		$	110,263,323
Gross profit		39,174,067		(146,752	)		39,027,315
Operating income		10,808,227		(146,752	)		10,661,475
Income before income taxes		10,770,048		(146,752	)		10,623,296
Income taxes		4,200,319		(57,232	)		4,143,087
Net income		6,569,729		(89,520	)		6,480,209
Earnings per share—basic	$	0.31	$	(0.01	)	$	0.30
Earnings per share—diluted	$	0.28	$	(0.01	)	$	0.27

CHARLOTTE RUSSE HOLDING, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

2. Restatement of Financial Statements (continued)

Consolidated Balance Sheets


	As Previously Reported		Adjustments			As Restated
December 25, 2004
Inventories	$	37,948,548	$	549,000		$	38,497,548
Total current assets		94,181,958		549,000			94,730,958
Fixed assets, net		107,733,651		69,174,258			176,907,909
Total assets		231,880,133		69,723,258			301,603,391
Income and sales taxes payable		3,582,676		39,101			3,621,777
Total current liabilities		48,982,983		39,101			49,022,084
Deferred rent		12,610,452		78,084,537			90,694,989
Deferred tax liabilities		7,300,000		(3,300,000	)		4,000,000
Total liabilities		68,937,329		74,823,638			143,760,967
Retained earnings		112,626,253		(5,100,380	)		107,525,873
Total stockholders’ equity		162,942,804		(5,100,380	)		157,842,424
Total liabilities and stockholders’ equity		231,880,133		69,723,258			301,603,391


September 25, 2004
Fixed assets, net	$	107,491,922	$	70,026,131		$	177,518,053
Total assets		231,653,856		70,026,131			301,679,987
Income and sales taxes payable		1,979,900		(8,997	)		1,970,903
Other current liabilities		10,620,758		(72,000	)		10,548,758
Total current liabilities		51,177,673		(80,997	)		51,096,676
Deferred rent		11,874,327		79,351,970			91,226,297
Deferred tax liabilities		7,300,000		(3,600,000	)		3,700,000
Total liabilities		70,395,894		75,670,973			146,066,867
Retained earnings		111,008,659		(5,644,842	)		105,363,817
Total stockholders’ equity		161,257,962		(5,644,842	)		155,613,120
Total liabilities and stockholders’ equity		231,653,856		70,026,131			301,679,987

Consolidated Statements of Cash Flows


	As Previously Reported			Adjustments			As Restated
Three Months Ended December 25, 2004
Net cash provided by operating activities	$	16,860,109		$	1,399,598		$	18,259,707
Net cash used in investing activities		(5,809,208	)		(1,399,598	)		(7,208,806	)

Three Months Ended December 27, 2003
Net cash provided by operating activities		23,594,201			4,044,363			27,638,564
Net cash used in investing activities		(7,632,298	)		(4,044,363	)		(11,676,661	)

CHARLOTTE RUSSE HOLDING, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

3. Stock Based Compensation

The Company accounts for the issuance of stock option grants in accordance with Accounting Principles Board Opinion (“APB”) No. 25 and related interpretations in accounting for stock options. Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require the Company to record compensation cost for stock-based employee compensation plans at fair value. The Company has adopted the disclosure-only provision of SFAS No. 123. Accordingly, compensation expense has only been recognized for stock options granted to employees when the exercise price was below fair market value on the date of grant. Had compensation expense been recorded for options granted in the three months ended December 25, 2004 and December 27, 2003 using the fair value method under SFAS No. 123, the Company’s net income and basic and diluted earnings per share would have been decreased to the following proforma amounts:


	Three Months Ended
	December 25, 2004			December 27, 2003
Net income (as restated)	$	2,162,056		$	6,480,209
Less: stock-based compensation expense for all awards, net of related tax effects		(123,173	)		(268,400	)

Pro forma net income	$	2,038,883		$	6,211,809

Basic earnings per share	$	0.10		$	0.30
Pro forma	$	0.09		$	0.29
Diluted earnings per share	$	0.09		$	0.27
Pro forma	$	0.08		$	0.26

Pro forma information regarding net income is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. For options granted through October 18, 1999, the fair value of options granted were estimated at the date of grant using the minimum value option pricing model. Following the Company’s initial public offering, the fair value of the options granted was estimated at the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for those periods:


	Three Months Ended
	December 25, 2004		December 27, 2003
Risk free interest rate	3.30	%	3.20	%
Dividend yield	—		—
Expected volatility	55	%	66	%
Weighted average expected life	4 years		4 years

The minimum value option-pricing model is similar to the Black-Scholes option-pricing model except that it excludes the factor of volatility. In addition, option valuation models require the input of highly subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

CHARLOTTE RUSSE HOLDING, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

4. Net Income Per Common Share

Basic earnings per share is calculated based on the weighted average outstanding common shares. Diluted earnings per share is calculated based on the weighted average outstanding shares and potentially dilutive stock options and warrants. In accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share,” the following table reconciles income and share amounts utilized to calculate basic and diluted net income per common share.


	Three Months Ended
	December 25, 2004			December 27, 2003
Net income (as restated)	$	2,162,056		$	6,480,209

Earnings per share:
Basic	$	0.10		$	0.30
Effect of dilutive stock options		—			(0.01	)
Effect of dilutive warrants		(0.01	)		(0.02	)

Diluted	$	0.09		$	0.27

Weighted average number of shares:
Basic		21,956,593			21,364,041
Effect of dilutive stock options		253,676			570,980
Effect of dilutive warrants		1,802,459			1,817,884

Diluted		24,012,728			23,752,905

The calculation of dilutive shares excludes the effect of the following options that are considered anti-dilutive:


	Three Months Ended
	December 25, 2004	December 27, 2003
Anti-dilutive options	558,273	268,346

5. Recent Accounting Pronouncements

In December 2004, the FASB issued Statement 123R, “Share-Based Payment,” to be effective for interim or annual periods beginning after June 15, 2005; thereby, becoming effective beginning in the fourth quarter of fiscal 2005 for the company. Statement 123R requires all share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized as an operating expense in the income statement. The cost is recognized over the requisite service period based on fair values measured on grant dates, and the new standard may be adopted using either the modified prospective transition method or the modified retrospective transition method. We are currently evaluating our share-based employee compensation programs, potential impact of this statement on our consolidated financial position and results of operations, and alternative adoption methods.

CHARLOTTE RUSSE HOLDING, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

6. Commitments and Contingencies

On December 14, 2004 plaintiff David Phillips, on behalf of himself and purportedly on behalf of a class of others similarly situated, filed a complaint in the United States District Court for the Southern District of California against the Company and two of its officers, alleging violations of federal securities laws related to declines in the Company’s stock price in connection with various statements and alleged omissions to the public and to the securities markets, and seeking damages therefore. To date, one follow-on action has been filed in the same court alleging substantially similar claims. The Company believes the allegations in these actions are without merit and intends to defend vigorously against these claims.

Other than the foregoing, from time to time, the Company may be involved in litigation relating to claims arising out of its operations. As of the date of this filing, the Company is not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company’s business, financial condition or results of operations.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

We have made statements in this Quarterly Report that are forward-looking statements. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate” and “continue” or similar words. These forward-looking statements may also use different phrases. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements, which are subject to risks, uncertainties, and assumptions about us, may include, among other things, projections of our future results of operations or of our financial condition, our anticipated growth strategies, successful repositioning of our Rampage brand, integration of our recently hired senior executives, and general and regional economic conditions, industry trends, consumer demands and preferences, competition from other retailers and uncertainties generally associated with women’s apparel and accessory retailing, including those factors discussed in the Company’s Annual Report on Form 10-K/A, filed with the Securities and Exchange Commission on May 5, 2005.

There may be events in the future that we are not able to accurately predict or which we do not fully control that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including shopping mall traffic and shopping patterns, timing of openings for new shopping malls or our stores, fashion trends, national or regional economic influences, and weather.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q/A might not occur.

RESTATEMENT OF FINANCIAL STATEMENTS

As a result, we restated our previously issued audited financial statements, as follows:

•

See Note 2: “Restatement of Financial Statements” to the financial statements for a summary of the effects of the restatement on the Company’s balance sheets as of December 25, 2004 and September 25, 2004, and the Company’s statements of income and cash flows for the fiscal quarters ended December 25, 2004 and December 27, 2003. The accompanying Management’s Discussion and Analysis gives effect to these changes.

RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Financial Statements and Notes thereto of the company included elsewhere in this Quarterly Report on Form 10-Q/A. The following table sets forth our operating results, expressed as a percentage of net sales and store information for the periods indicated. These operating results are not necessarily indicative of the results that may be expected for any future period.


	Three Months Ended
	December 25, 2004		December 27, 2003
Net sales	100.0	%	100.0	%
Cost of goods sold	76.8		73.9

Gross profit	23.2		26.1
Selling, general and administrative expenses	20.9		19.0

Operating income	2.3		7.1
Interest income, net	0.1		0.0
Other charges, net	(0.0	)	(0.0	)

Income before income taxes	2.4		7.1
Income taxes	1.0		2.8

Net income	1.4	%	4.3	%

Number of stores open at end of period	368		329

Three Months Ended December 25, 2004 Compared to the Three Months Ended December 27, 2003

Net Sales. Our net sales increased to $150.0 million from $149.3 million, an increase of $0.7 million, or 0.5%, over the same quarter last year. This increase reflects $14.4 million of additional net sales from the 8 new stores opened during the three months ended December 25, 2004, as well as other stores opened in prior fiscal periods that did not qualify as comparable stores. This increase was largely offset by a 9.9% decrease in comparable store sales, which resulted in decreased sales of $13.7 million compared to the same quarter in the prior fiscal year.

Gross Profit. Gross profit represents net sales less cost of goods sold, which includes buying, distribution and occupancy costs. Our gross profit decreased to $34.8 million from $39.0 million, a decrease of $4.2 million, or 10.8%, from the same quarter last year. This decrease was the result of decreased gross profit margins. As a percentage of net sales, gross profit decreased to 23.2% from 26.1%. The decrease in gross profit as a percentage

of net sales was principally due to higher occupancy expenses, as these relatively fixed charges were spread over a smaller average store sales base, and higher markdowns.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased to $31.3 million from $28.4 million, an increase of $2.9 million, or 10.4%, over the same quarter last year. This increase was attributable to new store expansion and increased corporate expenses, specifically higher store payroll and operating expenses. As a percentage of net sales, selling, general and administrative expenses increased to 20.9% from 19.0%, primarily due to increased store-level expenses, specifically payroll and other operating expenses.

Income Taxes. Our effective tax rate of 39.0% approximates our statutory income tax rate and is consistent with the tax rate utilized for fiscal year 2004.

Net Income. Our net income decreased to $2.2 million from $6.5 million, an decrease of $4.3 million, or 66.6%, from the same quarter last year. This decrease was primarily due to a decrease in gross profit and an increase in selling, general and administrative expenses, partially offset by reduced income tax expense.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital requirements vary consistent with the seasonality of our business. Our capital requirements result primarily from capital expenditures related to new store openings. We have historically satisfied our cash requirements principally through cash flow from operations, although in some prior years we have also used borrowings under prior credit facilities in the past for acquisitions, including our acquisition and the acquisition of the Rampage stores. Due to the rapid turnover of our inventory, we generate trade payables and other accrued liabilities sufficient to offset most of our working capital requirements, and this allows us to generally operate with limited working capital. As of December 25, 2004, we had working capital of approximately $45.7 million which included cash and cash equivalents of $41.8 million.

Our net cash provided by operations was $18.3 million and $27.6 million for the three months ended December 25, 2004 and December 27, 2003, respectively. The decrease was primarily due to lower net income, lower landlord construction allowances and increased investment in working capital accounts, partially offset by a higher non-cash adjustment for depreciation expense. Our net cash used in investing activities was $7.2 million and $11.7 million for the three months ended December 25, 2004 and December 27, 2003, respectively. The primary component related to purchases of fixed assets, which consists of new store openings, the upgrade of our information systems and other corporate expenditures.

The decrease in capital expenditures was primarily due to opening fewer new stores in fiscal 2005 to date. In the three months ended December 25, 2004 and December 27, 2003, we opened 8 and 18 new stores, respectively. During fiscal 2005, we plan to open up to 49 new Charlotte Russe stores and one Rampage store. After taking into account new store construction, existing store remodeling, distribution center expenditures, and other corporate capital projects, total capital expenditures for fiscal year 2005 are projected to range from approximately $35.0 to $40.0 million, of which $7.2 million was spent during the three months ended December 25, 2004.

Our net cash provided by financing activities was $53,000 and $977,000 for the three months ended December 25, 2004 and December 27, 2003, respectively. Financing activities primarily consists of the proceeds of stock option exercises.

Effective February 28, 2003, we obtained a $25.0 million unsecured revolving credit facility with Bank of America, N.A. to replace a previous $15.0 million unsecured revolving credit facility with another lender. The new facility, as amended, is subject to certain restrictions and covenants and expires on March 1, 2006. Interest on the revolving credit facility is payable quarterly, at the Company’s option, at either (i) the Bank’s Base Rate,

as defined, or (ii) the Bank’s Eurodollar Rate plus 1.00%, subject to certain adjustments. At December 25, 2004, there was no outstanding debt, and $5.6 million of outstanding letters of credit, under the revolving credit facility. The agreement requires that the Company maintain certain financial ratios on a quarterly basis, sets limits on stock repurchases and capital spending and restricts future liens and indebtedness, sales of assets and dividend payments. We have consistently achieved compliance with the covenant requirements in the past, although modifications to the original agreement have been necessary and the bank has been cooperative. In light of our recent financial performance, achieving covenant requirements may become more challenging in the future and further modifications by the bank can not be assured.

We believe that cash flows from operations, our current cash balance and funds available under our revolving credit facility will be sufficient to meet our working capital needs and contemplated capital expenditure requirements for fiscal 2005. If our cash flow from operations should decline significantly, it may be necessary for us to adjust the structure of our credit facility and seek additional sources of capital.

LETTERS OF CREDIT

Pursuant to the terms of the $25.0 million unsecured revolving credit facility, we can issue up to $15.0 million of documentary or standby letters of credit. The outstanding commitments under this agreement at December 25, 2004 totaled approximately $5.6 million, including $2.6 million in standby letters of credit.

CONTRACTUAL OBLIGATIONS

Our commitment to make future payments under long-term contractual obligations was as follows, as of December 25, 2004:


	Total		Less Than 1 Year		1-3 Years		3-5 Years		After 5 Years
	(dollars in thousands)
Contractual Obligations:
Operating leases	$	471,672	$	65,318	$	129,816	$	121,573	$	154,965
Other long-term obligations		6,000		750		1,500		1,500		2,250

	$	477,672	$	66,068	$	131,316	$	123,073	$	157,215

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reported periods.

On an on-going basis, management evaluates its estimates and judgments regarding inventories, receivables, fixed assets, intangible assets, accrued liabilities, income taxes and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results from this evaluation form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Under different assumptions or conditions, alternative estimates and judgments could be derived which would differ from the estimates being used by management. Actual results could differ from any or all of these estimates.

As a retailer of women’s apparel and accessories, our financial statements are affected by several critical accounting policies, many of which affect management’s use of estimates and judgments, as described in the Notes to the Consolidated Financial Statements. We sell merchandise directly to retail customers and recognize revenue at the point of sale. Customers have the right to return merchandise to us, and we maintain a reserve for the financial impact of returns which occur subsequent to the current reporting period.

Our merchandise is initially offered for sale at a regular price, but is often marked down prior to the ultimate sale of all such units. We utilize the retail method of accounting for our inventory valuation that inherently reduces the inventories’ carrying value as markdowns are initiated. In addition, we maintain a reserve for the financial impact of markdowns that we believe are likely to be encountered in the future. If actual demand or market conditions are more or less favorable than those projected by management, the level of the reserve for future markdowns would be subject to change in subsequent reporting periods.

We also provide for estimated inventory losses for damaged, lost or stolen inventory for the period from the last physical inventory to the financial statement date. These estimates are based on historical experience and other factors.

We have recorded a goodwill asset that arose from the acquisition of our business in September 1996. This asset is tested for possible impairment on at least an annual basis in accordance with SFAS No. 142, “Goodwill and Other Intangibles.” The carrying value of investments in our stores, principally leasehold improvements and equipment, and other operations is reviewed for impairment on at least an annual basis in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In prior years, we established reserves for stores which have been closed, and no other stores are contemplated for closure at this time.

We record rent expense on noncancellable leases containing known future scheduled rent increases on a straight-line basis over the respective leases beginning when we receive possession of the leased property for construction purposes. The difference between rent expense and rent paid is accounted for as deferred rent. Landlord construction allowances and other such lease incentives are recorded as deferred lease credits, and are amortized on a straight-line basis as a reduction to rent expense.

RECENT ACCOUNTING PRONOUNCEMENTS

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks relate primarily to changes in interest rates. We bear this 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 25, 2004, we had no borrowings against our credit facility. However, we may borrow additional 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 considered to be cash equivalents and are shown that way 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.

We believe our market risk exposure is immaterial.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management of Charlotte Russe Holding, Inc. (the “Management”), including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

An evaluation was performed under the supervision and with the participation of the Company’s Management, including the CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). In performing this evaluation, Management reviewed the Company’s lease accounting practices in response to the letter issued on February 7, 2005 by the Office of the Chief Accountant of the SEC to the American Institute of Certified Public Accountants (the “SEC Letter”) expressing its views regarding certain operating lease accounting issues and their application under generally accepted accounting principles (“GAAP”). The Company’s lease accounting practices had not changed materially over the years. The Company’s external independent auditors had been aware of our lease accounting practices, similar to those used by many other companies in the retail and restaurant industries, and had not suggested that they were not in accordance with GAAP. When reviewed against GAAP as set forth in the SEC Letter, the Company determined that its historical method of accounting for construction period straight-line rent and landlord construction allowances was not in accordance with GAAP. As a result of changing its historical lease accounting practices to conform to GAAP as set forth in the SEC Letter, Management concluded that the Company’s previously reported fixed assets and deferred lease credits had been understated and that previously issued financial statements should be restated. Because of this change in its lease accounting practices, the Company concluded that it had a material weakness in the effectiveness of controls over the selection and monitoring of appropriate practices used in accounting for leases and tenant allowances during the fiscal year. As a result, the Chief Executive Officer and the Chief Financial Officer each concluded that, based solely on this change in lease accounting practices, that the Company’s disclosure controls and procedures were not effective as of December 25, 2004.

In the second quarter of fiscal 2005, the Company remediated the material weakness in internal control and the ineffectiveness of its disclosure controls and procedures by conducting a review of its lease accounting practices, establishing new lease-related accounting policies, and correcting its method of accounting for landlord construction allowances and construction period straight-line rent.

Changes in Internal Control Over Financial Reporting

During the quarter ended December 25, 2004, there have been no significant changes in the Company’s internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, internal controls over financial reporting, nor were there any corrective actions required with regard to significant deficiencies and material weaknesses.

PART II—OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

On December 14, 2004 plaintiff David Phillips, on behalf of himself and purportedly on behalf of a class of others similarly situated, filed a complaint in the United States District Court for the Southern District of California against us and two of our officers, alleging violations of federal securities laws related to declines in our stock price in connection with various statements and alleged omissions to the public and to the securities markets, and seeking damages therefore. To date, one follow-on action has been filed in the same court alleging substantially similar claims. We believe that the allegations in these actions are without merit and intend to defend vigorously against these claims.

Other than the foregoing, from time to time, we may be involved in litigation relating to claims arising out of its operations. As of the date of this filing, we are not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition or results of operations.

ITEM 2.

CHANGES IN SECURITIES

Unregistered Sales of Securities

None.

Dividends

We have never declared nor paid dividends on our common stock and we do not intend to pay any dividends on our common stock in the foreseeable future. We currently intend to retain earnings to finance future operations and expansion. Moreover, under the terms of the revolving credit facility and amendment, stock dividends and distributions are prohibited. Cash dividends and capital stock redemptions are not permitted.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM 6.

EXHIBITS

(a) The following exhibits are included herein:



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

32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q/A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 5^th day of May, 2005.


CHARLOTTE RUSSE HOLDING, INC.

By:		/s/ DANIEL T. CARTER
		Daniel T. Carter Executive Vice President and Chief Financial Officer

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