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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 2003



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 29, 2003

       
  o   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 or Organization)   (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)

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 o

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

     
  COMMON STOCK, par value $0.01 per share, number of shares outstanding as of April 17, 2003: 21,236,695 shares.  



 


TABLE OF CONTENTS

CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT 10.28
EXHIBIT 99.1
EXHIBIT 99.2


Table of Contents

CHARLOTTE RUSSE HOLDING, INC.

TABLE OF CONTENTS




PART I.  FINANCIAL INFORMATION

                 
            Page
           
ITEM 1
  CONSOLIDATED FINANCIAL STATEMENTS        
 
  Consolidated Balance Sheets as of March 29, 2003        
 
  (unaudited) and September 28, 2002     2  
 
  Consolidated Statements of Operations (unaudited) for        
 
  the three and six months ended March 29, 2003 and        
 
  March 30, 2002     3  
 
  Consolidated Statements of Cash Flows (unaudited) for        
 
  the three and six months ended March 29, 2003 and        
 
  March 30, 2002     4  
 
  Notes to Consolidated Financial Statements (unaudited)     5  
ITEM 2
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL        
 
  CONDITION AND RESULTS OF OPERATIONS     8  
ITEM 3
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     13  
ITEM 4
  CONTROLS AND PROCEDURES     14  
 
  PART II. OTHER INFORMATION        
ITEM 1
  LEGAL PROCEEDINGS     15  
ITEM 2
  CHANGES IN SECURITIES AND USE OF PROCEEDS     15  
ITEM 3
  DEFAULTS UPON SENIOR SECURITIES     15  
ITEM 4
  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     15  
ITEM 5
  OTHER INFORMATION     15  
ITEM 6
  EXHIBITS AND REPORTS ON FORM 8-K     15  

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Table of Contents

CHARLOTTE RUSSE HOLDING, INC.
CONSOLIDATED BALANCE SHEETS

                         
            March 29,   September 28,
            2003   2002
           
 
            (unaudited)   (audited)
                 
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 17,693,575     $ 13,553,480  
 
Inventories
    34,683,377       33,319,014  
 
Other current assets
    8,043,762       2,502,201  
 
Deferred tax assets
    4,600,000       4,300,000  
 
 
   
     
 
   
Total current assets
    65,020,714       53,674,695  
Fixed assets, net
    95,279,658       95,632,346  
Goodwill, net
    28,790,000       28,790,000  
Other assets
    1,371,281       1,405,928  
 
 
   
     
 
   
Total assets
  $ 190,461,653     $ 179,502,969  
 
 
   
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Accounts payable trade
  $ 26,583,438     $ 24,928,743  
 
Accounts payable other
    4,049,522       5,444,806  
 
Accrued payroll and related expense
    2,319,539       2,372,134  
 
Income and sales taxes payable
    1,579,560       1,259,525  
 
Other current liabilities
    10,243,571       6,752,135  
 
 
   
     
 
   
Total current liabilities
    44,775,630       40,757,343  
Deferred rent
    9,066,299       8,376,994  
Other liabilities
    282,777       208,883  
Deferred tax liabilities
    5,000,000       1,600,000  
 
 
   
     
 
   
Total liabilities
    59,124,706       50,943,220  
 
Commitments
               
 
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 – 21,236,695 at March 29, 2003 and 21,210,707 at September 28, 2002
    212,367       212,107  
 
Additional paid-in capital
    43,978,905       43,793,497  
 
Deferred compensation
    (117,000 )     (171,000 )
 
Retained earnings
    87,262,675       84,725,145  
 
 
   
     
 
   
Total stockholders’ equity
    131,336,947       128,559,749  
 
 
   
     
 
   
Total liabilities and stockholders’ equity
  $ 190,461,653     $ 179,502,969  
 
 
   
     
 

See accompanying notes.

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Table of Contents

CHARLOTTE RUSSE HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

                                       
          Three Months Ended   Six Months Ended
         
 
          March 29,   March 30,   March 29,   March 30,
          2003   2002   2003   2002
         
 
 
 
Net sales
  $ 93,098,703     $ 86,069,774     $ 226,427,339     $ 198,007,892  
Cost of goods sold, including buying, distribution and occupancy costs
    74,841,538       63,240,942       171,578,511       142,886,501  
 
   
     
     
     
 
Gross profit
    18,257,165       22,828,832       54,848,828       55,121,391  
Selling, general and administrative expenses
    20,762,893       17,198,466       45,095,200       37,216,115  
Store closing costs
    5,500,000             5,500,000        
 
   
     
     
     
 
Operating income(loss)
    (8,005,728 )     5,630,366       4,253,628       17,905,276  
Other income(expense):
                               
   
Interest income, net
    22,598       82,207       31,405       83,715  
   
Other charges, net
    (62,649 )     (70,260 )     (125,148 )     (148,556 )
 
   
     
     
     
 
     
Total other income(expense)
    (40,051 )     11,947       (93,743 )     (64,841 )
 
   
     
     
     
 
Income(loss) before income taxes
    (8,045,779 )     5,642,313       4,159,885       17,840,435  
Income taxes(benefit)
    (3,137,854 )     2,139,511       1,622,355       6,957,769  
 
   
     
     
     
 
Net income(loss)
  $ (4,907,925 )   $ 3,502,802     $ 2,537,530     $ 10,882,666  
 
   
     
     
     
 
Earnings(loss) per share:
                               
 
Basic
  $ (0.23 )   $ 0.17     $ 0.12     $ 0.52  
 
   
     
     
     
 
 
Diluted
  $ (0.23 )   $ 0.15     $ 0.11     $ 0.46  
 
   
     
     
     
 
Weighted average shares outstanding:
                               
 
Basic
    21,236,375       20,948,770       21,225,797       20,887,675  
 
   
     
     
     
 
 
Diluted
    21,236,375       23,699,708       23,494,120       23,607,835  
 
   
     
     
     
 

See accompanying notes.

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CHARLOTTE RUSSE HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

                                     
        Three Months Ended   Six Months Ended
       
 
        March 29,   March 30,   March 29,   March 30,
        2003   2002   2003   2002
       
 
 
 
Operating Activities
                               
Net income(loss)
  $ (4,907,925 )   $ 3,502,802     $ 2,537,530     $ 10,882,666  
Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities:
                               
 
Depreciation and amortization
    3,909,443       3,205,925       7,810,163       6,384,758  
 
Deferred rent
    179,560       723,542       689,305       1,388,468  
 
Amortization of deferred compensation
    27,000       27,000       54,000       54,000  
 
Loss on impairment and disposal of assets
    3,072,136             3,235,796       23,745  
 
Deferred income taxes
    3,100,000       (300,000 )     3,100,000       (400,000 )
 
Changes in operating assets and liabilities:
                               
   
Inventories
    (9,505,060 )     (9,064,914 )     (1,364,363 )     (1,650,715 )
   
Other current assets
    (3,683,531 )     1,021       (5,541,561 )     (361,656 )
   
Accounts payable trade
    6,702,297       9,317,888       1,654,695       3,572,528  
   
Accounts payable other
    189,766       1,599,141       (1,395,284 )     (1,477,541 )
   
Accrued payroll and related expense
    (2,040,109 )     (1,152,840 )     (52,595 )     737,427  
   
Income and sales taxes payable
    (5,874,529 )     (4,211,567 )     341,633       (1,411,051 )
   
Other current liabilities
    (324,832 )     (1,544,774 )     3,491,436       2,100,900  
   
Other liabilities
    58,894       (105,586 )     73,894       (90,587 )
 
   
     
     
     
 
Net cash provided by (used in) operating activities
    (9,096,890 )     1,997,638       14,634,649       19,752,942  
Investing Activities
                               
Purchases of fixed assets
    (6,203,399 )     (11,793,473 )     (10,672,081 )     (19,061,523 )
Other assets
    (45,781 )     10,026       13,457       (18,564 )
 
   
     
     
     
 
Net cash used in investing activities
    (6,249,180 )     (11,783,447 )     (10,658,624 )     (19,080,087 )
Financing Activities
                               
Payments on capital leases
          (24,951 )           (45,017 )
Proceeds from notes payable to bank
                      11,000,000  
Payments on notes payable to bank
                      (11,000,000 )
Proceeds from issuance of common stock
    131,570       782,695       164,070       872,996  
 
   
     
     
     
 
Net cash provided by financing activities
    131,570       757,744       164,070       827,979  
 
   
     
     
     
 
Net increase (decrease) in cash and cash equivalents
    (15,214,500 )     (9,028,065 )     4,140,095       1,500,834  
Cash and cash equivalents at beginning of the period
    32,908,075       20,560,297       13,553,480       10,031,398  
 
   
     
     
     
 
Cash and cash equivalents at end of the period
  $ 17,693,575     $ 11,532,232     $ 17,693,575     $ 11,532,232  
 
   
     
     
     
 

See accompanying notes.

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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 as of September 28, 2002.

     Due to the seasonal nature of the Company’s business, the results of operations for the six month period ended March 29, 2003 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 28, 2002 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 13, 2002.

2.  Net Income(Loss) Per Common Share

     In accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share,” the following table reconciles income(loss) and share amounts utilized to calculate basic and diluted net income(loss) per common share.

                                   
      Three Months Ended   Six Months Ended
     
 
      March 29,   March 30,   March 29,   March 30,
      2003   2002   2003   2002
     
 
 
 
Net income(loss)
  $ (4,907,925 )   $ 3,502,802     $ 2,537,530     $ 10,882,666  
 
   
     
     
     
 
Earnings(loss) per share:
                               
 
Basic
  $ (0.23 )   $ 0.17     $ 0.12     $ 0.52  
 
Effect of dilutive stock options
          (0.01 )     0.00       (0.02 )
 
Effect of dilutive warrants
          (0.01 )     (0.01 )     (0.04 )
 
   
     
     
     
 
 
Diluted
  $ (0.23 )   $ 0.15     $ 0.11     $ 0.46  
 
   
     
     
     
 
Weighted average number of shares:
                               
 
Basic
    21,236,375       20,948,770       21,225,797       20,887,675  
 
Effect of dilutive stock options
          878,220       487,439       860,590  
 
Effect of dilutive warrants
          1,872,718       1,780,884       1,859,570  
 
   
     
     
     
 
 
Diluted
    21,236,375       23,699,708       23,494,120       23,607,835  
 
   
     
     
     
 

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3.  Recent Accounting Pronouncements

     In October 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and amends Accounting Principles Board Statement No. 30, “Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. SFAS 144 retains the fundamental provisions of SFAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. The Company adopted the new standard on September 29, 2002, the beginning of fiscal 2003.

     In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”. This statement supercedes Emerging Issues Task Force (“EITF”) Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability is recognized at the date an entity commits to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of SFAS 146 are effective for any exit and disposal activities initiated after December 31, 2002.

     In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation- Transition and Disclosure- an amendment of FASB Statement No. 123”. This statement amends SFAS No. 123 “Accounting for Stock Based Compensation” to provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 to require disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The disclosure provisions were effective for the Company beginning with the Company’s second quarter of fiscal year 2003.

4.  Store Closing Costs

     During the second quarter of fiscal 2003, the Company decided to exit the Charlotte’s Room concept and initiated the closing process for the 10 Charlotte’s Room stores, which it expects to complete by the end of the current fiscal year. In accordance with SFAS 146, the company recorded a liability of $2.6 million which is shown in the store closing costs line item of the accompanying statement of operations. The following chart provides a detail of each major cost associated with the closing activity:

                           
      Expected to   Incurred   Incurred
Description   be incurred   current period   to date

 
 
 
Contract termination costs
  $ 1,787,100     $ 96,500     $ 96,500  
Employee termination
    100,000              
Other associated costs
    712,900              
 
   
     
     
 
 
Store closing costs
  $ 2,600,000     $ 96,500     $ 96,500  
 
   
     
     
 

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A reconciliation of the liability balance for the quarter is as follows:

                                           
      Beginning   Current   Costs                
      reserve   period   paid or   Other   Ending
Description   balance   expense   settled   adjustments   reserve

 
 
 
 
 
Contract termination costs
        $ 1,787,100     $ 96,500           $ 1,690,600  
Employee termination
          100,000                   100,000  
Other associated costs
          712,900                   712,900  
 
   
     
     
     
     
 
 
Store closing costs
        $ 2,600,000     $ 96,500           $ 2,503,500  
 
   
     
     
     
     
 

     In accordance with SFAS 144, an impairment charge of $2.9 million was also recorded during the second quarter of fiscal 2003. The impairment charge reflects the difference between the carrying value and fair value of Charlotte’s Room assets. Fair value was based on estimated market valuations for those assets since their carrying value is not currently anticipated to be recoverable through future cash flows. The provision for the asset impairment is shown in the accompanying statement of operations in the store closing costs line item.

5.  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. The company did not grant any significant stock options during the first half of fiscal 2003. In accordance with SFAS 148 the following pro-forma information has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. For options granted through October 18, 1999, the fair value of options granted were estimated at the date of the grant using the minimum value option pricing model. For options granted from October 19, 1999 to September 28, 2002, the fair value of the options was estimated at the date of grant using the Black-Scholes method for option pricing. The following weighted average assumptions were used for those periods:

                 
    Years Ended
   
    Sept. 28,   Sept. 29,
    2002   2001
   
 
Risk free interest rate
    4 %     6 %
Dividend yield
    0 %     0 %
Expected volatility
    60 %     70 %
Weighted average expected life
  4 years   5 years

     The minimum value option pricing model is similar to the Black-Scholes option valuation model that was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, 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 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.

     For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the related options. The Company’s pro forma information follows:

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    Three Months Ended   Six Months Ended
   
 
    March 29,   March 30,   March 29,   March 30,
    2003   2002   2003   2002
   
 
 
 
Net income(loss) as reported
  $ (4,907,925 )   $ 3,502,802     $ 2,537,530     $ 10,882,666  
SFAS 123 expense
    343,118       342,965       686,235       685,930  
 
   
     
     
     
 
Pro forma net income(loss)
  $ (5,251,043 )   $ 3,159,837     $ 1,851,295     $ 10,196,736  
Net Income(loss) per share basic as reported
  $ (0.23 )   $ 0.17     $ 0.12     $ 0.52  
Pro forma
  $ (0.25 )   $ 0.15     $ 0.09     $ 0.49  
Net income(loss) per share diluted as reported
  $ (0.23 )   $ 0.15     $ 0.11     $ 0.46  
Pro forma
  $ (0.25 )   $ 0.13     $ 0.08     $ 0.43  
     
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. In some cases you can identify these statements by forward-looking words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “intends,” “predicts,” “future,” “potential,” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties, and assumptions about us, may include, among other things, projections of our future financial performance, our anticipated growth strategies, anticipated trends in our business and consumer preferences especially with respect to the impact of economic weakness on consumer spending, as well as projections relating to our anticipated rate of new store openings, anticipated store opening costs, capital expenditures, inventory turnover rates and vendor delivery times. These statements are only predictions based on our current expectations and projections about future events. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on December 13, 2002.

     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 might not occur.

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 Form 10-Q. The following table sets forth our operating results, expressed as a percentage of net sales,

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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   Six Months Ended
   
 
    March 29,   March 30,   March 29,   March 30,
    2003   2002   2003   2002
   
 
 
 
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of goods sold
    80.4       73.5       75.8       72.2  
 
   
     
     
     
 
Gross profit
    19.6       26.5       24.2       27.8  
Selling, general and administrative expenses
    22.3       19.9       19.9       18.8  
Store closing costs
    5.9       0.0       2.4       0.0  
 
   
     
     
     
 
Operating income(loss)
    (8.6 )     6.6       1.9       9.0  
Interest income, net
    0.0       0.1       0.0       0.1  
Other charges, net
    0.0       (0.1 )     (0.1 )     (0.1 )
 
   
     
     
     
 
Income(loss) before income taxes
    (8.6 )     6.6       1.8       9.0  
Income taxes(benefit)
    (3.3 )     2.5       0.7       3.5  
 
   
     
     
     
 
Net income(loss)
    (5.3 )%     4.1 %     1.1 %     5.5 %
 
   
     
     
     
 
Number of stores open at end of period
    280       224       280       224  
 
   
     
     
     
 

Three Months Ended March 29, 2003 Compared to the Three Months Ended March 30, 002

     Net Sales. Our net sales increased to $93.1 million from $86.1 million, an increase of $7 million, or 8.2%, over the prior fiscal year. This increase reflects $16.7 million of additional net sales from the 12 new stores opened during the three months ended March 29, 2003, as well as other stores opened in prior fiscal periods that did not qualify as comparable stores. This increase was partially offset by a 11.6% decrease in our comparable store sales, which resulted in decreased sales of $9.7 million compared to the same period last year. We believe net sales during the three months ended March 29, 2002 were negatively affected by Easter occurring three weeks later than in the prior fiscal year, although sales trends for the first two weeks of April have not shown the level of sales shift previously anticipated.

     Gross Profit. Gross profit represents net sales less cost of goods sold, which includes buying, distribution and occupancy costs. Our gross profit decreased to $18.3 million from $22.8 million, a decrease of $4.5 million, or 20%, from the same period last year. This decrease was the result of decreased gross profit margins despite higher net sales. As a percentage of net sales, gross profit decreased to 19.6% from 26.5%. The decrease as a percentage of net sales was principally due to higher markdown expenses, higher occupancy expenses and incremental fixed expenses associated with operations of the Ontario, California distribution center that opened in April 2002.

     Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased to $20.8 million from $17.2 million, an increase of $3.6 million, or 20.7%, over the same period last year. This increase was attributable to new store expansion. As a percentage of net sales, selling, general and administrative expenses increased to 22.3% from 20.0%, primarily due to increased store payroll expense.

     Store Closing Costs. Store closing costs of $5.5 million are attributable to the closing of the Charlotte’s Room test concept for which there was no similar charge in the prior year.

     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 2002.

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     Net Income(Loss). Net loss was $4.9 million as compared to income of $3.5 million for the same period last year. This decrease of $8.4 million, or 240.1%, was primarily due to store closing costs, the decrease in gross profit and the increase in selling, general and administrative expenses.

Six Months Ended March 29, 2003 Compared to the Six Months Ended March 30, 2002

     Net Sales. Our net sales increased to $226.4 million from $198.0 million, an increase of $28.4 million, or 14.4%, over the same period last year. This increase reflects $41.6 million of additional net sales from the 29 new stores opened during the six months ended March 29, 2003, as well as other stores opened in prior fiscal years that did not qualify as comparable stores. This increase was partially offset by a 7.2% decrease in our comparable store sales, which resulted in decreased sales of $13.2 million compared to the prior fiscal year. We believe net sales during the six months ended March 29, 2003 were negatively affected by Easter occurring three weeks later than 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 $54.8 million from $55.1 million, a decrease of $0.3 million, or 0.5%, from the same period last year. This decrease was the result of decreased gross profit margins despite higher net sales. As a percentage of net sales, gross profit decreased to 24.2% from 27.8%. The decrease as a percentage of net sales was principally due to higher markdown expenses and higher occupancy expenses

     Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased to $45.1 million from $37.2 million, an increase of $7.9 million, or 21.1%, over the same period last year. This increase was attributable to new store expansion. As a percentage of net sales, selling, general and administrative expenses increased to 19.9% from 18.8%, primarily due to increased store payroll expense.

     Store Closing Costs. Store closing costs of $5.5 million are attributable to the closing of the Charlotte’s Room test concept for which there was no similar charge in the prior year.

     Income Taxes. Our effective tax rate of 39.0% approximates our statutory income tax rates.

     Net Income. Our net income decreased to $2.5 million from $10.9 million, a decrease of $8.4 million, or 76.7%, from the same period last year. This decrease was primarily due to store closing costs and the increase in selling, general and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

     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 we have also used borrowings under our unsecured credit facility. Due to rapid turnover of inventory, we generate trade payables and other accrued liabilities sufficient to offset most, if not all, of our working capital requirements, and this allows us to generally operate with limited working capital. As of March 29, 2003, we had net working capital of approximately $20.2 million which included cash and cash equivalents of $17.7 million.

     Net cash provided by operations was $14.6 million for the six months ended March 29, 2003 compared with $19.8 million during the six months ended March 30, 2002. Cash flows from operating activities for the period were primarily generated by income from operations and changes in working capital account balances. Net cash used in investing activities was $10.7 million for the six months ended March 29, 2003 compared

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with $19.1 million during the six months ended March 30, 2002. Cash used in investing activities for the period primarily represents capital expenditures for store openings, store remodelings and fixtures.

     In the six months ended March 29, 2003 and March 30, 2002, we opened 29 and 36 new stores, respectively. During fiscal 2003, we plan to open at least 75 new Charlotte Russe and Rampage stores. We anticipate that total capital expenditures during fiscal 2003 will approximate $33.0 million. We plan to fund these expenditures with cash flows from operations, available cash balances and funds available under our revolving credit facility.

     Net cash provided by financing activities was $0.2 million for the six months ended March 29, 2003 compared with $0.8 million during the six months ended March 30, 2002. Financing activities primarily represent the proceeds of stock option exercises.

     Effective February 28, 2003, we obtained a $25.0 million unsecured revolving line of credit with Bank of America, N.A. to replace a previous $15.0 million facility. The new facility expires on March 1, 2006 and is subject to certain restrictions and covenants.

     We believe that cash generated from operations, our current cash balances and funds available under our revolving credit facility will be sufficient to fund our store expansion program and working capital requirements for at least the next 12 months.

LETTERS OF CREDIT

     Pursuant to the terms of the new unsecured revolving credit facility, the Company can issue up to $15.0 million of documentary or standby letters of credit. The outstanding commitments under this agreement at March 29, 2003 totaled approximately $3.7 million, including $3.3 million in standby letters of credit.

CONTRACTUAL OBLIGATIONS

     The Company’s commitment to make future payments under long-term contractual obligations at March 29, 2003 was as follows:

                                         
    Payments Due by Period
   
            Less than   1 to 3   3 to 5   More than
Contractual Obligations   Total   One year   years   years   5 years

 
 
 
 
 
    (dollars in thousands)
Operating Leases
  $ 388,653     $ 49,969     $ 98,221     $ 91,637     $ 148,826  
Purchase Obligations
    12,475       12,475                    
Other Long-term Obligations
    7,313       750       1,500       1,500       3,563  
 
   
     
     
     
     
 
Total Contractual Obligations
  $ 408,441     $ 63,194     $ 99,721     $ 93,137     $ 152,389  
 
   
     
     
     
     
 

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INFLATION

     We do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented. There can be no assurance, however, that our business will not be affected by inflation in the future.

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. Management estimates the markdown reserve based on several factors, including but not limited to, merchandise quantities, historical markdown percentages, and seasonal merchandise and future merchandise plans. If future demand or merchandise markdowns are less favorable than those projected by management, additional inventory adjustments may be required.

     The Company also provides for estimated inventory losses for damaged, lost or stolen inventory for the period from the 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 whenever events or changes in circumstances indicate the carrying amounts might not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. During the current quarter we recorded

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an impairment charge of $2.9 million related to the closure of our ten Charlotte’s Room test stores, and no other stores are contemplated for closure at this time. Should the business prospects for our company or stores deteriorate, write downs of other assets might be required.

RECENT ACCOUNTING PRONOUNCEMENTS

     In October 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and amends Accounting Principles Board Statement No. 30, “Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. SFAS 144 retains the fundamental provisions of SFAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. The Company adopted the new standard on September 29, 2002, the beginning of fiscal 2003. A charge of $2.9 million was recorded for the quarter and six months ended March 29, 2003 for the impairment of assets related to the Charlotte’s Room concept.

     In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”. This statement supercedes Emerging Issues Task Force (“EITF”) Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability is recognized at the date an entity commits to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of SFAS 146 are effective for any exit and disposal activities initiated after December 31, 2002. A charge of $2.6 million was recorded for the quarter and six months ended March 29, 2003 related to the closure of the Charlotte’s Room concept.

     In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation- Transition and Disclosure- an amendment of FASB Statement No. 123”. This statement amends SFAS No. 123 “Accounting for Stock Based Compensation” to provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 to require disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The interim disclosure requirements were implemented for the quarter ended March 29, 2003.

                                     
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our market risks relate primarily to changes in interest rates. We borrow money, when necessary, on a revolving basis under our $25.0 million revolving credit facility to fund capital expenditures and other working capital needs. Our revolving credit facility carries a variable interest rate pegged to market indices and, therefore, our statements of operations and our cash flows may be impacted by changes in interest rates. As of March 29, 2003, there was no amount outstanding under the revolving credit facility.

     Another component of interest rate risk involves the short-term investment of excess cash in short-term, investment-grade interest-bearing securities. These are considered to be cash equivalents and are shown that way on our balance sheets. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations.

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ITEM 4.   CONTROLS AND PROCEDURES

     Within the 90 days prior to the date of filing this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Disclosure Committee and the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 Rules 13a-14 and 15d-14. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. Subsequent to the date of that evaluation, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls, nor were any corrective actions required with regard to significant deficiencies and material weaknesses.

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PART II — OTHER INFORMATION

     
ITEM 1.   LEGAL PROCEEDINGS

     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.   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, dividends and distributions are restricted to $5.0 million or less in any fiscal year, of which up to $2.5 million may be cash dividends paid on a non-cumulative basis, and capital stock redemptions are limited to $12.0 million in any fiscal year.

     
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

     Not applicable.

     
ITEM 4.   SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

     An annual meeting of stockholders was held on February 11, 2003. The following directors were re-elected, each having received no less than 17,389,345 votes in favor, or 81.8% of the votes cast: Messrs. Del Rossi, Gould, Karp, Mogil, Oddi and Zeichner.

     The proposal to increase by 1,000,000 shares the aggregate number of shares available for issuance under the Company’s 1999 Equity Incentive Plan was approved, receiving 16,370,938 votes in favor, or 82.4% of the votes cast.

     
ITEM 5.   OTHER INFORMATION

     Not applicable.

     
ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

  (a)   Exhibits:
 
  10.28   Business Loan Agreement, dated as of February 28, 2003, between Bank of America, N.A and Charlotte Russe, Inc.

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  99.1   Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
  99.2   Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
  (b)   Reports on Form 8-K
 
      Current Report on Form 8-K dated April 17, 2003, containing a copy of the Company’s press release dated April 17, 2003 titled “Charlotte Russe Announces Second Quarter Results”.

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 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 21st day of April, 2003.

         
  CHARLOTTE RUSSE HOLDING, INC.  
 
    By: /s/ DANIEL T. CARTER  
     
 
      Daniel T. Carter  
      Executive Vice President and  
      Chief Financial Officer  

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CERTIFICATIONS

I, Bernard Zeichner, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Charlotte Russe Holding, Inc.;
 
2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

  a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
  b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
  c)   presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

  a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.   The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 21, 2003


     
/s/ BERNARD ZEICHNER    

Bernard Zeichner
   
Chief Executive Officer    

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CERTIFICATIONS

I, Daniel T. Carter, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Charlotte Russe Holding, Inc.;
 
2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

  a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
  b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
  c)   presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

  a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.   The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 21, 2003


     
/s/ DANIEL T. CARTER    

   
Daniel T. Carter    
Chief Financial Officer    

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