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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly report ended June 30, 1997
----------------------------------
or
| | Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
-------------------- ---------------------
Commission file number 0-21196
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Mothers Work, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 133045573
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
456 North 5th Street, Philadelphia, Pennsylvania 19123
- -------------------------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 873-2200
--------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
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Common Stock, $.01 par value - 3,564,644 shares outstanding
as of August 1, 1997
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<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARIES
-----------------------------------
INDEX
-----
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Cash Flows 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Exhibit Index 17
<PAGE>
MOTHERS WORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1996 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,262,435 $ 1,483,573
Receivables
Trade 2,141,102 2,132,665
Other 146,924
173,369
Inventories 57,209,499 55,467,127
Deferred income taxes 3,815,002 4,880,555
Prepaid expenses and other 1,791,070 2,573,571
------------- -------------
Total current assets 66,366,032 66,710,860
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, net 45,451,114 43,628,237
------------- -------------
OTHER ASSETS:
Deferred income taxes 4,741,869 5,931,261
Goodwill, net 40,989,708 39,310,797
Other intangible assets, net 1,310,900 1,395,092
Deferred financing costs, net 3,736,937 3,425,313
Other assets 2,016,178
488,324
------------- -------------
Total other assets 52,795,592 50,550,787
------------- -------------
$ 164,612,738 $ 160,889,884
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of Credit $ 6,558,193 $ 904,000
Current portion of long-term debt 758,911
715,004
Accounts payable 9,102,185 12,737,221
Accrued expenses 12,511,600 16,814,820
------------- -------------
Total current liabilities 28,930,889 31,171,045
------------- -------------
LONG TERM DEBT 96,680,722 96,501,754
------------- -------------
ACCRUED DIVIDENDS ON PREFERRED STOCK 1,140,416 1,956,629
------------- -------------
DEFERRED RENT 2,754,197 3,457,995
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY:
Series A Cumulative convertible preferred stock,
$.01 par value, $280.4878 stated value,
2,000,000 shares authorized, 41,000 shares
issued and outstanding (liquidation value
of $11,500,000) 11,500,000 11,500,000
Series B Junior participating preferred stock,
$.01 par value 10,000 shares authorized
in 1996, none outstanding -- --
Common stock, $.01 par value, 10,000,000 shares
authorized, 3,559,277 and 3,564,644 shares
issued and outstanding 35,593 35,646
Additional paid-in capital 27,740,483 27,740,840
Accumulated deficit (4,169,562) (11,474,025)
------------- -------------
Total stockholders' equity 35,106,514 27,802,461
------------- -------------
$ 164,612,738 $ 160,889,884
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
- 1 -
<PAGE>
MOTHERS WORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------------- -----------------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 51,552,000 $ 64,232,626 $ 146,616,883 $ 181,221,730
COST OF GOODS SOLD 22,830,973 28,317,716 62,898,164 81,852,040
------------- ------------- ------------- -------------
Gross profit 28,721,027 35,914,910 83,718,719 99,369,690
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 23,178,633 31,629,614 69,168,116 92,676,279
RESTRUCTURING COSTS -- -- -- 5,617,094
------------- ------------- ------------- -------------
Operating income 5,542,394 4,285,296 14,550,603 1,076,317
INTEREST EXPENSE, NET 3,194,813 3,247,281 9,337,137 9,819,512
------------- ------------- ------------- -------------
Income (loss) before income taxes 2,347,581 1,038,015 5,213,466 (8,743,195)
INCOME TAX PROVISION (BENEFIT) 1,108,862 105,000 2,473,023 (2,254,945)
------------- ------------- ------------- -------------
NET INCOME (LOSS) 1,238,719 933,015 2,740,443 (6,488,250)
PREFERRED DIVIDENDS 244,374 272,071 733,125 816,213
------------- ------------- ------------- -------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ 994,345 $ 660,944 $ 2,007,318 $ (7,304,463)
============= ============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE $ 0.28 $ 0.18 $ 0.58 $ (2.05)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,578,953 3,704,572 3,441,233 3,562,419
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
- 2 -
<PAGE>
MOTHERS WORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------------------------------
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,740,443 $ (6,488,250)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities-
Depreciation and amortization 7,392,699 9,311,896
Non-cash portion of restructuring charges -- 3,822,515
Imputed interest on debt 76,085 56,730
Deferred tax expense (benefit) 2,189,438 (2,254,945)
Amortization of deferred financing costs 313,703 313,475
Provision for deferred rent 477,952 703,798
Changes in assets and liabilities, net of effects
from purchase of businesses-
Decrease (increase) in-
Receivables 2,601,215 (18,008)
Inventories (16,365,148) 1,742,372
Prepaid expenses and other 320,721 (745,280)
Increase (decrease) in-
Accounts payable and accrued expense (682,772) 5,555,062
Other liabilities 733,125 816,213
------------ ------------
Net cash provided by (used in) operating activities (202,539) 12,815,578
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (6,251,513) --
Purchases of property, plant and equipment (9,190,851) (7,886,256)
Increase in intangibles and other assets (286,762) (339,926)
------------ ------------
Net cash used in investing activities (15,729,126) (8,226,182)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (increase) in line of credit and cash overdrafts, net 1,500,000 (4,087,212)
Proceeds from issuance of long-term debt 2,340,000 --
Repayments of long-term debt (191,068) (279,605)
Debt issuance costs (288,191)
(1,851)
Net proceeds from sale of common stock 4,392,002 --
Proceeds from exercise of options 71,685 410
------------ ------------
Net cash provided by (used in) financing activities 7,824,428 (4,368,258)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,107,237) 221,138
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,130,480 1,262,435
============ ============
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,023,243 $ 1,483,573
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 6,174,218 $ 6,583,591
============ ============
Income taxes $ -- $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements are presented in
accordance with the requirements for Form 10-Q and do not include all the
disclosures required by generally accepted accounting principles for complete
financial statements. Reference should be made to the Form 10-K as of and for
the year ended September 30, 1996 for Mothers Work, Inc. and subsidiaries (the
"Company") for additional disclosures including a summary of the Company's
accounting policies.
In the opinion of management, the consolidated financial statements contain all
adjustments, consisting of normal recurring accruals, necessary to present
fairly the consolidated financial position of the Company for the periods
presented. The interim operating results of the Company may not be indicative of
operating results for the full year. Certain reclassifications were made to the
prior years' financial statements to conform to the current year presentation.
2. PROPERTY, PLANT AND EQUIPMENT
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that full
recoverability is questionable. Management evaluates the recoverability of
goodwill and other long-lived assets and several factors are used in the
valuation including, but not limited to, management's future operating plans,
recent operating results and projected cash flows. The Company adopted SFAS No.
121 in the first quarter of fiscal 1997 and recorded a charge of approximately
$248,000, related to leasehold improvements and furniture and equipment at two
store locations. In the second quarter, as part of the restructuring discussed
in Note 6, the Company took an additional $704,000 charge for 14 additional
stores. These charges are included in selling, general and administrative
expenses. An impairment is recognized when future net cash flows for each store
are expected to be less than the carrying amount of the assets. The fair value
of each store asset was determined based on a forecast of expected cash flows.
4
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
-- (continued) --
3. STOCK OPTIONS AND WARRANTS
During the nine months ended June 30, 1997, 151,500 options were granted to
certain officers (not the Chairman or the President) and employees for the
purchase of the Company's common stock at prices at least equal to the fair
market value on the date of the grant. In addition, pursuant to a cashless
exercise right, warrants were exercised to purchase 7,465 shares of common stock
at $2.72 per share through the surrender of 2,138 shares of common stock.
4. EARNINGS PER SHARE (EPS)
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", which the Company is required to adopt for both interim and annual
periods ending after December 15, 1997. SFAS No. 128 simplifies the EPS
calculation by replacing primary EPS with basic EPS. Basic EPS is computed by
dividing reported earnings available to common stockholders by weighted average
shares outstanding. Fully diluted EPS, now called diluted EPS, is still
required. Early application is prohibited, although footnote disclosure of
proforma EPS amounts computed is required. Under SFAS No. 128, proforma basic
EPS for the three months ended June 30, 1997 and 1996 would have been $0.19 and
$0.31, respectively, as compared to the $0.18 and $0.28 reported. Proforma basic
EPS for the nine months ended June 30, 1996 would have been $0.63 as compared to
the $0.58 reported. All other EPS amounts for the periods presented remain the
same.
5. CONTINGENCIES
From time to time, the Company is named as a defendant in legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to currently pending actions cannot be accurately
predicted, in the opinion of the Company, any such liability will not have a
material adverse effect on the financial position or operating results of the
Company.
5
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
-- (continued) --
6. RESTRUCTURING COSTS AND OTHER UNUSUAL CHARGES
In April 1997 the Company announced a plan to restructure its core maternity
business by combining the Mimi Maternity and Maternite over-lapping product
styles and closing approximately 30 retail locations serviced by other Company
stores. Restructuring costs of $5.6 million were recorded in the second quarter
of fiscal 1997 and includes approximately $2.6 for the write-off of furniture,
fixtures and leasehold improvements, $1.7 million for lease termination and
other costs and $1.3 million for the write-off of patterns related to
over-lapping product styles that will no longer be manufactured by the Company
as a result of the Mimi Maternity and Maternite product line consolidation, and
thus have no future value. As of June 30, 1997 16 stores had been closed and the
remaining stores will primarily be closed through the end of fiscal 1997.
In addition to the charge discussed above, the Company also recorded a $0.8
million inventory reserve in cost of goods sold for the overlapping product
lines, a $0.7 million asset impairment in selling, general and administrative
expense as discussed in Note 2 for 14 additional facilities and approximately
$0.5 million in selling, general and administrative expense for other occupancy
related items.
7. SUBSIDIARY GUARANTORS
Pursuant to the terms of an indenture relating to the 12 5/8% Senior Unsecured
Exchange Notes due 2005, the direct subsidiaries of Mothers Work, Inc.,
consisting of Cave Springs, Inc., The Page Boy Company, Inc., Mothers Work
(R.E.), Inc.(d/b/a A Pea in the Pod, Inc.), and Motherhood Maternity Shops, Inc.
(collectively, the "Guarantors") have, jointly and severally, unconditionally
guaranteed the obligations of Mothers Work, Inc. with respect to the Notes. The
operations of Motherhood Maternity Shops, Inc. were merged into the operations
of Mothers Work, Inc. as of September 30, 1996. The only subsidiary of the
Company that is not a Guarantor is Motherhood International, Inc.
("International"). International, an indirect wholly-owned subsidiary of the
Company and inconsequential to the assets and operations of the Company and to
the Guarantors in that it has no assets or operations, was dissolved as of
November 28, 1996. There are no restrictions on the ability of any of the
Guarantors to transfer funds to Mothers Work, Inc. in the form of loans,
advances, or dividends, except as provided by applicable law.
6
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
-- (continued) --
Accordingly, set forth below is certain summarized financial information (within
the meaning of Section 1-02(bb) of Regulation S-X) for the Guarantors:
September 30, 1996 June 30, 1997
------------------ -------------
Current assets $ 5,601,825 $ 3,353,380
Noncurrent assets 20,963,279 20,806,704
Current liabilities 3,059,322 2,810,555
Noncurrent liabilities 3,835,768 3,215,508
Nine Months Ended Nine Months Ended
June 30, 1996 June 30, 1997
------------- -------------
Net sales $89,787,000 $35,756,289
Costs and expenses 79,262,000 27,237,568
Net income 5,533,000 5,622,356
This summarized financial information for the Guarantors has been prepared from
the books and records maintained by the Guarantors and the Company. The
summarized financial information may not necessarily be indicative of the
results of operations or financial position had the Guarantors operated as
independent entities. Certain intercompany sales included in the subsidiary
records are eliminated in consolidation. The subsidiary guarantors receive all
inventory and administrative support from and transfer all cash to Mothers Work,
Inc., who, in turn, pays all expenditures on behalf of the Guarantors. An amount
due to/due from parent will exist at any time as a result of this activity. The
summarized financial information includes the allocation of material amounts of
expenses such as corporate services, administration, and taxes on income. The
allocations are generally based on proportional amounts of sales or assets, and
taxes on income are allocated consistent with the asset and liability approach
used for consolidated financial statement purposes. Management believes these
allocation methods are reasonable.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
The following tables set forth certain operating data as a percentage of sales
and as a percentage change for the periods indicated:
<TABLE>
<CAPTION>
% Period to Period
Increase
Percentage of Net Sales -----------------------------------------
-------------------------------------------------- Three Months Nine Months
Three Nine Ended Ended
Months Ended Months Ended June 30, June 30,
June 30, June 30, 1997 1997
------------------------ ------------------------ Compared to Compared to
1996 1997 1996 1997 1996 1996
----------- ----------- ------------ ----------- ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 24.6% 23.6%
Cost of goods sold 44.3 44.1 42.9 45.2 24.0 30.1
----------- ----------- ------------ -----------
Gross profit 55.7 55.9 57.1 54.8 25.0 18.7
Selling, general
and administrative
expenses 44.9 49.2 47.2 51.1 36.5 34.0
Restructuring costs -- -- -- 3.1
----------- ----------- ------------ -----------
Operating income 10.8 6.7 9.9 0.6 NM NM
Interest expense, net 6.2 5.1 6.3 5.4 1.6 5.2
----------- ----------- ------------ -----------
Income (loss) before
income taxes 4.6 1.6 3.6 (4.8) NM NM
Income tax provision
(benefit) 2.2 0.1 1.7 (1.2) NM NM
----------- ----------- ------------ -----------
Net income (loss) 2.4% 1.5% 1.9% (3.6)% NM NM
=========== =========== ============ ===========
</TABLE>
NM - Not Meaningful.
8
<PAGE>
The following table sets forth certain information representing growth in the
number of leased departments and Company-owned stores for the periods indicated:
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
-------- -------- -------- ---------
Beginning of period
Stores 406 465 427 442
Leased maternity departments 25 95 24 26
---- ---- ---- ----
Total 431 560 451 468
Acquired stores 21 -- 21 --
Opened:
Stores 8 14 27 41
Leased maternity departments -- -- 1 70
Closed:
Stores (5) (18) (45) (22)
Leased maternity departments -- (1) -- (2)
---- ---- ---- ----
End of period
Stores 431 461 431 461
Leased maternity departments 25 94 25 94
==== ==== ==== ====
Total 455 555 455 555
==== ==== ==== ====
Three Months Ended June 30, 1997 and 1996
Net Sales
Net sales in the third quarter of fiscal 1997 increased by $12.7 million or
24.6%, as compared to the third quarter of fiscal 1996. This increase was
primarily due to increased sales of $7.6 million generated by Episode America
stores, acquired on June 1, 1996, $0.4 million generated by a quarterly
comparable store sales increase of 0.9% in its core maternity clothing business
(based on 387 stores), and a $4.7 million net increase due to other store and
leased department opening and closing activity. The Company had 555 stores and
leased departments (226 Motherhood Maternity(R) stores, 62 Maternite(R) stores,
49 Mimi Maternity(R) stores, 47 Maternity Works(R) outlet stores, 39 A Pea in
the Pod(R) stores, 94 leased maternity departments and 38 Episode upscale
"bridge" (i.e. style of clothing similar to designer fashion with a price point
below designer fashion) women's apparel stores) at June 30, 1997 compared to 455
(202 Motherhood Maternity stores, 77 Maternite stores, 50 Mimi Maternity stores,
40 Maternity Works outlet stores, 40 A Pea in the Pod stores and 25 leased
maternity departments and 21 Episode upscale "bridge" women's apparel stores) at
June 30, 1996.
Gross Profit
Gross profit in the third quarter of fiscal 1997 increased $7.2 million or
25.0%, as compared to the third quarter of fiscal 1996. This increase was
primarily generated by the increase in sales noted above. Gross profit as a
percentage of net sales increased nominally to 55.9% in the third quarter of
fiscal 1997 as compared to 55.7% in the comparable period of the prior year.
This increase was primarily due to improved gross margin percentage in the
upscale and moderate priced maternity divisions, partially offset by a decrease
in gross margin percentage at the maternity outlet division.
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased by $8.5 million or 36.5%
in the third quarter of fiscal 1997 as compared to the third quarter of fiscal
1996 and, as a percentage of net sales, increased from 44.9% to 49.2%. The
increase as a percentage of sales was primarily due to higher rents and wages
necessary to operate
9
<PAGE>
the Episode stores, when compared to maternity stores and $0.4 million of
royalty expense to license the Episode trademark. Since the acquisition of
Episode in June 1996, the Company has been paying a royalty of 5% of Episode
sales under its Episode trademark license which royalty will end when the
cumulative royalty payment reaches $4.5 million. As of June 30, 1997 $1.5
million in cumulative royalty charges have been recorded. The dollar increase
during the third quarter of fiscal 1997 as compared to the third quarter of
fiscal 1996 was primarily due to increases in store rents, wages and benefits
and operating expenses at the store level, which accounted for $2.9 million,
$2.1 million and $0.9 million of the increase, respectively. The increases in
rents, wages and benefits and operating expenses at the store level were due to
the increase in the number of stores opened and acquired and additional
employees required to operate these stores. In addition, royalty expense, higher
advertising, marketing, depreciation and amortization, and shipping costs
contributed to the dollar increase in selling, general and administrative
expenses.
Operating Income
The operating income in the third quarter of fiscal 1997 was $4.3 million
compared to $5.5 million in the third quarter of fiscal 1996 and, as a
percentage of net sales, decreased from 10.8% to 6.7%. Operating income for the
third quarter of fiscal 1997 for the core maternity business was comparable to
the same period in the prior year, however as a percentage of sales it has
declined primarily as a result of the growth of the Motherhood revenues, as
Motherhood operates with a lower gross margin percentage than the upscale
maternity divisions. The Episode stores had negative operating income in the
third quarter of fiscal 1997 which added to the overall decline in the Company's
operating income. In general, the Episode stores have higher selling, general
and administrative expenses, than the maternity stores. The Company continues to
introduce new merchandise for the division, and train and provide incentive to
sales associates, in order to increase Episode revenues to support the higher
selling, general and administrative expenses of this division. However, there
can be no assurances that the Episode divisions actual performance will improve
as a result of these steps.
Interest Expense, Net
Net interest expense increased by $0.1 million in the third quarter of fiscal
1997 compared with the third quarter of fiscal 1996, and as a percentage of
sales, decreased from 6.2% to 5.1%. The dollar increase was primarily due to
short-term borrowings under the line of credit agreement.
Income Taxes
The effective income tax rate was 10.1% in the third quarter of fiscal 1997 as
compared to 47.2% in the third quarter of fiscal 1996. The change in the
effective income tax rate was primarily due to the impact of non-deductible
amortization of goodwill relative to income before income taxes.
Nine Months Ended June 30, 1997 and 1996
Net Sales
Net sales in the first nine months of fiscal 1997 increased by $34.6 million or
23.6%, as compared to the first nine months of fiscal 1996. This increase was
primarily due to increased sales of $21.8 million generated by Episode America
stores, acquired on June 1, 1996, $3.4 million generated by a year-to-date
comparable store sales increase of 2.7% in its core maternity clothing business
(based on 364 stores), and a $9.4 million net increase due to other store and
leased department opening and closing activity.
10
<PAGE>
Gross Profit
Gross profit in the first nine months of fiscal 1997 increased $15.7 million or
18.7%, as compared to the first nine months of fiscal 1996. This increase was
primarily generated by the increase in sales noted above. Gross profit as a
percentage of net sales decreased to 54.8% in the first nine months of fiscal
1997 as compared to 57.1% in the comparable period of the prior year. The
continued growth of the Motherhood Maternity sales as a percentage of overall
maternity sales has contributed to the decrease in gross profit as a percentage
of sales because Motherhood operates with a lower gross margin percentage than
the upscale maternity divisions. In addition, the decrease in gross profit was
partially due to an $0.8 million charge to write-down inventory related to the
Company's restructuring and consolidation of its upscale maternity business (see
Restructuring Costs below) and an increase in factory overhead. Further, the
Episode sales have generated overall lower margins than the maternity sales, due
to the high degree of competition in upscale bridge women's apparel. The Company
anticipates that its gross margins could decrease further as Episode and
Motherhood become more significant to the Company's operations.
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased by $23.5 million or 34.0%
in the first nine months of fiscal 1997 as compared to the first nine months of
fiscal 1996 and, as a percentage of net sales, increased from 47.2% to 51.1%.
The increase as a percentage of sales was primarily due to higher rents and
wages necessary to operate the Episode stores, when compared to the maternity
stores and $1.1 million of royalty expense to license the Episode trademark. The
dollar increase during the first nine months of fiscal 1997 as compared to the
first nine months of fiscal 1996 was primarily due to increases in store rents,
wages and benefits and operating expenses at the store level, which accounted
for $7.6 million, $5.8 million and $2.9 million of the increase, respectively.
The increases in rents, wages and benefits and operating expenses at the store
level were due to the increase in the number of stores opened and acquired and
additional employees required to operate these stores. In addition, royalty
expense, higher advertising, marketing, depreciation and amortization, and
shipping costs contributed to the increase in selling, general and
administrative expenses.
Further, during the first nine months of fiscal 1997 the Company recorded a
charge of approximately $952,000, under Statement of Financial Accounting
Standards No. 121, related to leasehold improvements and furniture and equipment
at 16 store locations.
Restructuring Costs
In April 1997 the Company reported that it will combine the Mimi Maternity and
Maternite over-lapping product styles and close approximately 30 retail
locations serviced by other Company stores. Restructuring costs of $5.6 million,
related to the restructuring of the Company's core maternity business, were
charged in the second quarter of fiscal 1997. The restructuring costs consist
primarily of $2.6 for the write-off of furniture, fixtures and leasehold
improvements, $1.7 million for lease termination and other costs and $1.3
million for the write-off of patterns related to over-lapping product styles
that will no longer be manufactured by the Company as a result of the Mimi
Maternity and Maternite product line consolidation, and thus have no future
value.
Operating Income
The operating income in the first nine months of fiscal 1997 was $1.1 million
compared to operating income of $14.6 million for the comparable period in
fiscal 1996 and, as a percentage of net sales, decreased to 0.6% from 9.9%. The
first nine months of fiscal 1997 was impacted by a pre-tax charge of $7.6
million related to restructuring costs and other unusual charges for
restructuring the Company's core maternity business and the operating losses
incurred at the Episode division.
11
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Operating income for the first nine months of fiscal 1997 for the core
maternity business and exclusive of restructuring and other unusual charges
decreased to $13.2 from $14.6 million for the comparable period in the prior
year; and also decreased as a percentage of sales. Due to factors affecting
gross profit discussed above, the gross margin percentage declined at a faster
rate than the decline in the selling, general and administrative expense
percentage related to the core maternity business, thus causing the decline in
operating income. In addition, Episode stores had negative operating income in
the first nine months of fiscal 1997 which added to the overall decline in the
Company's operating income. The Company believes it has taken certain
initiatives discussed above to support the higher selling general and
administrative expenses of the Episode division. However, there can be no
assurances that the Company's actual performance will improve as a result of
these steps.
Interest Expense, Net
Net interest expense increased by $0.5 million in the first nine months of
fiscal 1997 compared with the comparable period in fiscal 1996, and as a
percentage of sales, decreased from 6.3% to 5.4%. The dollar increase was
primarily due to short-term borrowings under the line of credit agreement and a
reduction of interest income.
Income Taxes
The effective income tax rate was 25.8% in the first nine months of fiscal 1997
as compared to 47.4% in the first nine months of fiscal 1996. The change in the
effective income tax rate was primarily due to the impact of non-deductible
amortization of goodwill relative to income before income taxes. Income before
income taxes was impacted by the restructuring costs discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash sources for the first nine months of fiscal 1997 have
primarily been from operations. The Company's primary cash needs during the nine
months ended June 30, 1997 have been for capital expenditures at the store
level. In addition, the Company used excess cash flow to reduce its line of
credit balance and net cash overdrafts by approximately $4.1 million. At June
30, 1997 the Company had available cash and cash equivalents of $1.5 million,
compared with $1.3 million at September 30, 1996.
Net cash provided by operating activities increased from $0.2 million used in
operating activities for the nine months ended June 30, 1996 to $12.8 million
provided by operating activities in the same period for fiscal 1997. The cash
provided by operating activities in the nine months ended June 30, 1997 included
cash provided by a net loss, after adjustments for non-cash items, of $5.5
million, and cash provided by working capital of $7.3 million. The cash provided
by working capital consists of $6.4 million resulting from an increase in
accounts payable, accrued expenses and other liabilities and $1.7 million due to
a decrease in inventories, partially offset by an increase in receivables,
prepaid expenses and other assets of $0.8 million. The cash provided by
inventories during fiscal 1997 is a result of company-wide efforts to increase
inventory turn-over ratio for fiscal 1997. This compares with cash provided by
net income, after adjustments for non-cash items, of $13.2 million, and cash
used for working capital of $13.4 million during the first nine months of fiscal
1996. The cash used for working capital consists of $16.4 million to increase
inventories, partially offset by a decrease in accounts receivable, prepaid
expenses and other assets of $3.0 million. In the prior year period, inventories
increased as the Company continued to supply product to the newly acquired
Motherhood division.
Net cash used in investing activities decreased from $15.7 million in the nine
months ended June 30, 1996 to $8.2 million in the nine months ended June 30,
1997. The cash used in investing activities for the first nine months of fiscal
1997 included $6.5 million used for capital expenditures for new store
facilities and improvements to existing stores, $1.4 million for other corporate
capital
12
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expenditures and $0.3 million for intangible and other assets. This compares
with $2.3 million used in connection with the Episode acquisition, $3.9
million in additional acquisition costs for Pea and Motherhood, $3.9 million
used for building improvements to the new Company headquarters, manufacturing
and distribution facility, $4.4 million used for capital expenditures for new
store facilities and $1.2 million for other corporate capital expenditures and
intangible assets.
Net cash used in financing activities increased $12.2 million, from $7.8 million
provided by financing activities in the nine months ended June 30, 1996 to $4.4
million used in financing activities for the nine months ended June 30, 1997.
The $4.4 million used in financing activities resulted primarily from $4.1
million in repayment of the line of credit and cash overdraft activity and $0.3
million in repayment of long-term debt. This compares with $7.8 million provided
by financing activities primarily from $4.4 million of net proceeds from the
sale of common stock, $1.5 million in short-term borrowings under the line of
credit agreement, $2.3 million of proceeds from the issuance of long-term debt,
and $0.1 million of proceeds from the exercise of options, partially offset by
$0.2 million in repayments of long-term debt and $0.3 million in debt issuance
costs.
In April 1997 the Company reported that it will restructure its core maternity
business and consequently, combine the Mimi Maternity and Maternite over-lapping
product lines and close approximately 30 retail locations serviced by other
Company stores, the cash portion of which is approximately $1.3 million. As of
June 30, 1997 approximately $0.3 million in cash has been paid and the remaining
amount will be paid out through the second quarter of fiscal 1998.
In July 1997, and in order to provide the Company with additional borrowing
capacity under its working capital revolving line of credit facility ("Working
Capital Facility"), the Working Capital Facility was increased from $20.0
million to $27.0 million. In April 1997, in connection with the restructuring,
the Company obtained a one year extension and a revision to certain financial
covenants pertaining to the Working Capital Facility. The Working Capital
Facility has been extended through July 31, 1999 and provides for a revolving
credit and letter of credit facility and for an additional $4.0 million letter
of credit to collateralize an Industrial Revenue Bond. Financial covenant
requirements were changed and a monthly rolling twelve-month operating cash flow
covenant was added. In addition, the interest coverage ratio was replaced with a
fixed charge coverage ratio. On August 1, 1997, after the $5.8 million
semi-annual interest payment on the Notes, the Company had $9.6 million in
borrowings and $12.2 million in additional letters of credit issued under the
Working Capital Facility.
In its maternity operations, the Company intends to focus primarily on growing
the leased department business. Departments are leased from stores such as
Lazarus, Rich's, Famous Barr and Macy's and are generally staffed with Mothers
Work employees. The inventory of the leased departments are maintained by the
Company, and Company point-of-sale registers are used in the majority of the
departments. Payment terms for the leased space are based on a percentage of net
sales and generally range between 15% and 21%. In addition, expenses such as
credit card fees, miscellaneous supplies and telephone usage are individually
charged. Secondarily, the Company intends to grow the Motherhood business,
subject to capital availability. These businesses represent the Company's
biggest opportunity for growth, subject to capital and marketplace availability.
In comparison to the maternity business as a whole, the Company does not
anticipate the leased departments to have materially different gross profit and
selling, general and administrative expenses as a percentage of sales. However,
gross margin from Motherhood is typically lower than the remainder of the
maternity business and growth in the Motherhood business could result in lower
gross margin.
The near-term strategy for the Episode division is to broaden the product line
through the growth of the Daniel & Rebecca(R) product and to add several stores
in major metropolitan areas, subject to capital and marketplace availability.
The Episode division has operated at a loss since the acquisition on June 1,
1996, and the decrease in operating income for fiscal 1997, exclusive of
restructuring and
13
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other unusual charges, is primarily attributable to Episode operations.
Although sales levels improved in the fiscal 1997 third quarter, Episode
revenues remain below management's initial estimates and are currently at levels
which would not support profitable operations of the Episode division. Based on
the existing operations at Episode the Company needs to increase revenues
substantially in order to be profitable at that division. The Company's
management has limited experience in the bridge women's apparel business and the
integration of Episode into the rest of the Company's operations has required
substantial management time and other resources. In addition, the operations of
a bridge women's fashion business are subject to numerous risks, unanticipated
operating problems, and greater competition and fashion risk than the Company's
core maternity business. Based on the foregoing factors, there can be no
assurance that the Company's Episode operations will become profitable. Further,
the Episode acquisition could result in the incurrence of additional
indebtedness, which in turn could result in an increase in the degree of
financial leverage of the Company and a decrease in the Company's financial
flexibility. At June 30, 1997 the Episode assets consist primarily of inventory
and furniture, equipment and leasehold improvements of approximately $8.6
million and $7.7 million, respectively. The Company also has lease commitments
on Episode stores approximating $34.2 million payable through 2011.
The Company believes that its current cash and working capital positions,
available borrowing capacity through the Working Capital Facility and net cash
expected to be generated from operations will be sufficient to fund the
Company's working capital requirements and the remaining anticipated fiscal 1997
capital expenditures of $1.1 million. The remaining fiscal 1997 capital
expenditures are primarily for the addition of new stores. On August 1, 1997 the
required $5.8 million semi-annual interest payment on the Notes was paid. There
are currently no restrictions on the ability of the Guarantors to transfer funds
to the Company in the form of cash dividends, loans or advances other than
restrictions imposed by applicable law.
SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
Item 2, Management's Discussion and Analysis of Financial Condition and Results
of Operations, of this Report or made from time to time by management of the
Company involve risks and uncertainties, and are subject to change based on
various important factors. The following factors, among others, in some cases
have affected and in the future could affect the Company's financial performance
and actual results and could cause actual results for fiscal 1997 and beyond to
differ materially from those expressed or implied in any such forward-looking
statements: changes in consumer spending patterns, raw material price increases,
consumer preferences and overall economic conditions, the impact of competition
and pricing, changes in weather patterns, availability of suitable store
locations at appropriate terms, continued availability of capital and financing,
ability to develop and source merchandise, consumer acceptance of merchandise
and ability to hire, train and provide incentive to associates, particularly at
the Episode division, ability of Company to capture sales from store closings at
proximate locations, ability to negotiate satisfactory lease buy-outs at store
closing locations, changes in fertility and birth rates, global stability,
currency and exchange risks and changes in existing or potential duties, tariffs
or quotas, and other factors affecting the Company's business beyond the
Company's control.
14
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) 4.1 Rights Agreement, dated as of October 9, 1995, between
Mothers Work, Inc. and StockTrans, Inc., including Form of Series
B Rights Certificate (Exhibit A), Form of Certificate of
Designation (Exhibit B), and Form of Summary of Rights (Exhibit
C)(incorporated by reference to Exhibit 4.1 to the Mothers Work,
Inc. Current Report on Form 8-K dated October 12, 1995).
4.2 Amended and Restated Rights Agreement, dated as of March 17,
1997, between Mothers Work, Inc. and StockTrans, Inc., including
Form of Series B Rights Certificate (as amended) (Exhibit A),
Form of Certificate of Designation (Exhibit B), and Form of
Summary of Rights (as amended) (Exhibit C) (incorporated by
reference to Exhibit 4.2 to the Mothers Work, Inc. Current Report
on From 8-K dated March 17, 1997).
4.3 Amendment No. 1, dated as of June 4, 1997 to the Amended and
Restated Rights Agreement, dated as of March 17, 1997, between
Mothers Work, Inc. and StockTrans, Inc., including Form of
Summary of Rights (as amended) as Exhibit C.
10.1 Seventh Amendment to Credit Agreement dated July 31, 1997
between the Company, its subsidiaries and CoreStates Bank.
11 Statement re: Computation of per share earnings.
27 Financial Data Schedule (schedule submitted in electronic
format only)
(b) Reports on Form 8-K.
During the quarter ended June 30, 1997, the Company filed a
Current Report on Form 8-K dated April 25, 1997 ("Form 8-K"), relating
to the Company's announcement of its results of operations for the
second fiscal quarter of 1997, a restructuring of its maternity
product line and an extension of its credit agreement.
15
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTHERS WORK, INC.
Date: August 11, 1997 By: /s/ Dan W. Matthias
----------------------------
Dan W. Matthias
Chief Executive Officer
And
Chairman of the Board
Date: August 11, 1997 By: /s/ Thomas Frank
----------------------------
Thomas Frank
Chief Financial Officer
and
Vice President - Finance
16
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page No.
- ------------ ---------------- --------
4.1 Rights Agreement, dated as of October 9. 1995, between
Mothers Work, Inc. and StockTrans, Inc., including
Form of Series B Rights Certificate (Exhibit A), Form of
Certificate of Designation (Exhibit B), and Form of
Summary of Rights (Exhibit C) (incorporated by reference
To Exhibit 4.1 to the Mothers Work, Inc. Current Report
On Form 8-K dated October 12, 1995).
4.2 Amended and Restated Rights Agreement, dated as of
March 17, 1997, between Mothers Work, Inc. and
StockTrans., including Form of Series B Rights
Certificate (as amended)(Exhibit A), Form of Certificate
of Designation (Exhibit B), and Form of Summary of
Rights (as amended) (Exhibit C) (incorporated by
reference to Exhibit 4.2 to the Mothers Work, Inc.
Current Report on From 8-K dated March 17, 1997).
4.3 Amendment No. 1, dated as of June 4, 1997 to the Amended
And Restated Rights Agreement, dated as of March 17,
1997, between Mothers Work, Inc. and StockTrans, Inc.,
Including Form of Summary of Rights (as amended) as
Exhibit C.
10.1 Seventh Amendment to Credit Agreement dated July 31,
1997 between the Company, its subsidiaries and
CoreStates Bank
11 Statement re: Computation of per share earnings
27 Financial Data Schedule (schedule submitted in
Electronic format only)
17
AMENDMENT NO. 1
to the
AMENDED AND RESTATED RIGHTS AGREEMENT
THIS AMENDMENT NO. 1, dated as of June 4, 1997 (the "Amendment") to the
Amended and Restated Rights Agreement dated as of March 17, 1997 (the "Amended
and Restated Rights Agreement"), between MOTHERS WORK, INC., a Delaware
corporation (the "Company") and STOCKTRANS, INC. (the "Rights Agent").
WHEREAS, effective October 5, 1995 (the "Rights Dividend Declaration
Date"), the Board of Directors of the Company authorized and declared a
distribution of one right for each share of common stock, par value $.01 per
share, of the Company (the "Company Common Stock") outstanding at the Close of
Business on October 16, 1995 (the "Record Date"), and authorized the issuance of
one right (subject to adjustment) for each share of Company Common Stock issued
between the Record Date (whether originally issued or delivered from the
Company's treasury) and, except as otherwise provided in Section 22 of the
Rights Agreement, the Distribution Date, each right issued in respect of a share
of Company Common Stock ("Right") initially representing the right to purchase,
upon the terms and subject to the conditions hereinafter set forth, one Unit of
Series B Junior Participating Preferred Stock;
WHEREAS, on March 17, 1997, the Company entered into the Amended and
Restated Rights Agreement to amend the Rights Agreement dated as of October 9,
1995 (the "Rights Agreement") to, among other things, insert provisions relating
to an inadvertent triggering of the impact of the Rights, and to restate the
Rights Agreement, as thereby amended, in its entirety;
WHEREAS, the Company desires to amend the Amended and Restated Rights
Agreement to designate Robert Fleming Inc. ("Fleming") as an Exempt Person
provided that Fleming shall immediately and thereafter cease to be an Exempt
Person if it, individually or together with its affiliates or associates,
acquires additional shares resulting in an increase in its aggregate beneficial
ownership of Company Common Stock from time to time outstanding by more than
46,833 shares of Company Common Stock;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
SECTION 1. Section 1, paragraph (j) of the Amended and Restated Rights
Agreement is amended to read in its entirety as follows:
(j) "Exempt Person" means:
(i) the Company, any Subsidiary of the Company, any employee benefit
plan or employee stock plan of the Company or of any Subsidiary of the
Company, or any person or entity organized, appointed, established or
holding Company Common Stock for or pursuant to the terms of any such plan;
(ii) any member of the Matthias Group, any member of the Meridian
Group, any member of the Mass Financial Group, or any member of the Crown
Group; provided, however, that all the members of the Meridian Group, the
Mass Financial Group or the Crown Group, as applicable, shall immediately
and thereafter cease to be an Exempt Person if the members of such group
shall acquire, at any time after Rights Dividend Declaration Date,
additional shares resulting in an increase in such group's aggregate
beneficial ownership of Company Common Stock from time to time outstanding
by more than 46,833 shares of Company Common Stock; and provided, further,
that all members of the Matthias Group shall immediately and thereafter
cease to be an Exempt Person if such group at any time shall acquire
additional shares resulting in an increase in its aggregate beneficial
ownership of Company Common Stock from time to time outstanding, except for
increases resulting from the future issuance to such members of options
hereafter issued by the Company, or by inheritance or laws of descent;
(iii) Robert Fleming Inc. ("Fleming"); provided, however, that Fleming
shall immediately and thereafter cease to be an Exempt Person if it,
individually or together with its affiliates or associates, shall acquire,
at any time after May 22, 1997, additional shares resulting in an increase
in its aggregate beneficial ownership of Company Common Stock from time to
time outstanding by more than 46,833; and
(iv) any Person who would otherwise become an Acquiring Person solely
by virtue of a reduction in the number of outstanding shares of Company
Common Stock; provided, however, that such Person shall not be an Exempt
Person if, subsequent to such reduction, such Person shall become the
Beneficial Owner of any additional shares of Company Common Stock.
SECTION 2. The form of Summary of Rights set forth in Exhibit C attached to
the Amended and Restated Rights Agreement is hereby amended to read in its
entirety as set forth in Exhibit C attached hereto.
SECTION 3. The terms "Agreement" and "Rights Agreement" as used in the
Amended and Restated Rights Agreement shall be deemed to refer to the Amended
and Restated Rights Agreement as amended hereby. This Amendment shall be
effective as of the date hereof and, except as set forth herein, the Amended and
Restated Rights Agreement shall remain in full force and effect and be otherwise
unaffected hereby.
SECTION 4. This Amendment may be executed (including by facsimile) in one
or more counterparts and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original, but
all of which taken together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed, all as of the date first above written.
ATTEST: MOTHERS WORK, INC.
By: /s/ Dan W. Matthias By: /s/ Rebecca C. Matthias
---------------------------- ------------------------------
Dan W. Matthias Rebecca C. Matthias
Secretary President
ATTEST: STOCKTRANS, INC.
By: /s/ Barbara Phillips By: /s/ Jonathan Miller
---------------------------- ------------------------------
Barbara Phillips Jonathan Miller
Vice-President and President
Secretary
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EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK
On October 5, 1995, the Board of Directors of Mothers Work, Inc., a
Delaware corporation (the "Company"), declared a distribution of one Right (as
defined below) for each outstanding share of Common Stock, par value $.01 per
share (the "Company Common Stock"), to stockholders of record at the close of
business on October 16, 1995 (the "Record Date") and for each share of Company
Common Stock issued (including shares distributed from Treasury) by the Company
thereafter and prior to the Distribution Date. Each Right entitles the
registered holder, subject to the terms of the Rights Agreement, to purchase
from the Company one one-thousandth of a share (a "Unit") of Series B Preferred
Stock, par value $.01 per share (the "Preferred Stock"), at a Purchase Price of
$85.00 per Unit, subject to adjustment (the "Right"). The Purchase Price is
payable in cash or by certified or bank check or money order payable to the
order of the Company. On March 17, 1997, the Company entered into an amendment
(the "Amended and Restated Rights Agreement") to its Rights Agreement, dated as
of October 9, 1995, with StockTrans, Inc., as Rights Agent (the "Rights
Agreement"). The Amended and Restated Rights Agreement restates the Rights
Agreement, makes certain minor changes, corrects certain scrivener's errors, and
provides the independent directors of the Company with some discretion in
determining when the Distribution Date (as defined below) shall occur and the
date until which the Rights may be redeemed. In addition, the Amended and
Restated Rights Agreement exempts from its operation any person that acquires,
obtains the right to acquire, or otherwise obtains beneficial ownership of 10%
or more of the then outstanding shares of Company Common Stock without any
intention of changing or influencing control of the Company provided that such
person, as promptly as practicable, divests himself or itself of a sufficient
number of shares of Common Stock so that such person would no longer an
Acquiring Person (as defined below). On June 4, 1997, the Company entered into
an amendment ("Amendment No. 1") to its Amended and Restated Rights Agreement
that designates Robert Fleming Inc. ("Fleming") as an Exempt Person until such
time as Fleming, individually or together with its affiliates or associates,
increases its beneficial ownership of Company Common Stock by more than 46,833
shares of Company Common Stock. The description and terms of the Rights are set
forth more fully in the Amended and Restated Rights Agreement.
Copies of the Amended and Restated Rights Agreement and the Certificate of
Designation for the Preferred Stock have been filed with the Securities and
Exchange Commission as exhibits to a Current Report on Form 8-K dated March 18,
1997 (the "Form 8-K"). Copies of Amendment No. 1 to the Amended and Restated
Rights Agreement has been filed with the Securities and Exchange Commission as
an exhibit to the Quarterly Report on Form 10-Q dated August ___, 1997 (the
"Form 10-Q"). Copies of the Amended and Restated Rights Agreement, Amendment No.
1, and the Certificate of Designation are available free of charge from the
Company. This summary description of the Rights and the Preferred Stock does not
purport to be complete and is qualified in its entirety by reference to all the
provisions of the Amended and Restated Rights Agreement and the Certificate of
Designation, including the definitions therein of certain terms, which Amended
and Restated Rights Agreement and Certificate of Designation are incorporated
herein by reference.
<PAGE>
Initially, the Rights will attach to all certificates representing shares
of outstanding Company Common Stock, and no separate Rights Certificates will be
distributed. The Rights will separate from the Company Common Stock and the
"Distribution Date" will occur (i) upon the earlier of (x) 10 business days
following a public announcement (the date of such announcement being the "Stock
Acquisition Date") that a person or group of affiliated or associated persons
(other than the Company, any subsidiary of the Company or any employee benefit
plan of the Company or such subsidiary) (an "Acquiring Person") has acquired,
obtained the right to acquire, or otherwise obtained beneficial ownership of 10%
or more of the then outstanding shares of Company Common Stock, and (y) 10
business days following the commencement of a tender offer or exchange offer
that would result in an Acquiring Person owning 10% or more of the then
outstanding shares of Company Common Stock, or (ii) such later date as may be
determined by action of a majority of the independent members of the Board of
Directors (such determination to be made prior to such time as any person
becomes an Acquiring Person pursuant to (x) or (y) above). Until the
Distribution Date, (i) the Rights will be evidenced by Company Common Stock
certificates and will be transferred with and only with such Company Common
Stock certificates, (ii) new Company Common Stock certificates issued after the
Record Date (also including shares distributed from Treasury) will contain a
notation incorporating the Amended and Restated Rights Agreement by reference
and (iii) the surrender for transfer of any certificates representing
outstanding Company Common Stock will also constitute the transfer of the Rights
associated with the Company Common Stock represented by such certificates.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on the tenth anniversary of the Rights Agreement unless
earlier redeemed by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of Company Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights.
In the event that (i) the Company is the surviving corporation in a merger
with an Acquiring Person and shares of Company Common Stock shall remain
outstanding, (ii) a Person becomes the beneficial owner of 10% or more of the
then outstanding shares of Company Common Stock, (iii) an Acquiring Person
engages in one or more "self-dealing" transactions as set forth in the Amended
and Restated Rights Agreement, or (iv) during such time as there is an Acquiring
Person, an event occurs which results in such Acquiring Person's ownership
interest being increased by more than 1% (e.g., by means of a reverse stock
split or recapitalization), then, in each such case, each holder of a Right will
thereafter have the right to receive, upon exercise, Units of Preferred Stock
(or, in certain circumstances, Company Common Stock, cash, property or other
securities of the Company) having a value equal to two times the exercise price
of the Right. The exercise price is the Purchase Price multiplied by the number
of Units of Preferred Stock issuable upon exercise of a Right prior to the
events described in this paragraph. Notwithstanding any of the foregoing,
following the occurrence of any of the events set forth in this paragraph, all
Rights that are, or (under certain circumstances specified in the Amended
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<PAGE>
and Restated Rights Agreement) were, beneficially owned by any Acquiring
Person will be null and void.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction
and the Company is not the surviving corporation (other than a merger described
in the preceding paragraph), (ii) any Person consolidates or merges with the
Company and all or part of the Company Common Stock is converted or exchanged
for securities, cash or property of any other Person or (iii) 50% or more of the
Company's assets or earning power is sold or transferred, each holder of a Right
(except Rights which previously have been voided as described above) shall
thereafter have the right to receive, upon exercise, common stock of the
Acquiring Person having a value equal to two times the exercise price of the
Right.
In light of the fact that certain stockholders of the Company currently
exceed the 10% threshold for distribution of the Rights, the Amended and
Restated Rights Agreement exempts those stockholders from triggering the
distribution of the Rights unless they, individually or together with their
affiliates or associates, increase their beneficial ownership of Company Common
Stock by more than 46,833 shares of Company Common Stock. These stockholders
consist of Meridian Venture Partners, Massachusetts Financial Services Company,
and Crown-Glynn Associates, and their respective affiliates and associates.
Additionally, Dan and Rebecca Matthias, the current Chairman and Chief Executive
Officer, and President and Chief Operating Officer, respectively, also
collectively exceed the 10% threshold. Under the Amended and Restated Rights
Agreement, their current level of ownership does not result in the distribution
of the Rights. However, if they (or any of their affiliates or associates)
acquire any additional shares which results in an increase in their aggregate
percentage ownership of outstanding Company Common Stock, other than increases
resulting from the future issuance of employee stock options or from inheritance
or by the laws of descent, then the Rights are distributed.
The Purchase Price payable, and the number of Units of Preferred Stock
issuable, upon exercise of the Rights are subject to adjustment from time to
time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Preferred Stock, (ii) if
holders of the Preferred Stock are granted certain rights or warrants to
subscribe for Preferred Stock or convertible securities at less than the current
market price of the Preferred Stock, or (iii) upon the distribution to the
holders of the Preferred Stock of evidences of indebtedness, cash or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. The Company is not required to issue fractional Units. In lieu thereof,
an adjustment in cash may be made based on the market price of the Preferred
Stock prior to the date of exercise.
At any time until (i) ten business days following the Stock Acquisition
Date or (ii) such later date as a majority of the independent members of the
Board of Directors shall determine (such determination to be made prior to the
date specified in (i) above), a majority of the Independent Directors may redeem
the Rights in whole, but not in part, at a price of $.01 per
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Right (subject to adjustment in certain events) (the "Redemption Price"),
payable, at the election of such majority of the Independent Directors, in cash
or shares of Company Common Stock. Immediately upon the action of a majority of
the Independent Directors ordering the redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Units of Preferred Stock (or other consideration).
Any of the provisions of the Rights Agreement may be amended without the
approval of the holders of Company Common Stock at any time prior to the
Distribution Date. After the Distribution Date, the provisions of the Rights
Agreement may be amended in order to cure any ambiguity, defect or
inconsistency, to make changes which do not adversely affect the interests of
holders of Rights (excluding the interests of any Acquiring Person), or to
shorten or lengthen any time period under the Rights Agreement; provided,
however, that no amendment to adjust the time period governing redemption shall
be made at such time as the Rights are not redeemable.
The Units of Preferred Stock that may be acquired upon exercise of the
Rights will be nonredeemable and subordinate to any other shares of preferred
stock that may be issued by the Company.
Each Unit of Preferred Stock will be entitled to dividends at the same rate
per share as dividends declared on the Company Common Stock and shall be
entitled to payment of dividends to the extent dividends are declared on the
Company Common Stock. In the event of liquidation, the holder of a Unit of
Preferred Stock will receive the per share amount paid in respect of a share of
Company Common Stock.
In the event of any merger, consolidation or other transaction in which
shares of Company Common Stock are exchanged, each Unit of Preferred Stock will
be entitled to receive the per share amount paid in respect of each share of
Company Common Stock. Each Unit of Preferred Stock will have one vote, voting
together with the Company Common Stock. The rights of holders of the Preferred
Stock to dividends, liquidation and voting, and in the event of mergers and
consolidations, are protected by customary antidilution provisions.
Because of the nature of the Preferred Stock's dividend, liquidation and
voting rights, the economic value of one Unit of Preferred Stock that may be
acquired upon the exercise of each Right should approximate the economic value
of one share of the Company Common Stock.
C-4
SEVENTH AMENDMENT TO CREDIT AGREEMENT dated as of July 31, 1997 by and
among Mothers Work, Inc., a Delaware corporation, on its own behalf and as
successor, by merger, to Motherhood Maternity Shops, Inc., a Delaware
corporation ("MWI"), Cave Springs, Inc., a Delaware corporation ("Cave"), The
Page Boy Company, Inc., a Delaware corporation ("Page Boy"), Mothers Work
(R.E.), Inc., a Pennsylvania corporation ("MW-RE"), (each, a "Borrower", and
collectively, jointly and severally, the "Borrowers"), and CoreStates Bank,
N.A., successor to Meridian Bank ("Bank").
BACKGROUND
The Borrowers and the Bank are parties to a Credit Agreement dated as of
August 1, 1995, as first amended September 1, 1995, as second amended January
25, 1996, as third amended May 31, 1996, as fourth amended September 30, 1996,
as fifth amended January 31, 1997 and as sixth amended April 16, 1997 (the
"Credit Agreement") pursuant to which the Bank established, in favor of the
Borrowers, a credit facility in an aggregate principal amount of $24,094,684.93,
subject to the terms and conditions set forth therein. Borrowers have requested
the Bank to increase the amount of the Revolving Credit Commitment to
$27,000,000, to eliminate the sublimit with respect to the issuance of Letters
of Credit, and to effect certain other changes to the Credit Agreement, which
Bank is willing to do, all on the terms and conditions set forth herein.
Capitalized terms used herein, and not otherwise defined, shall have the
meanings ascribed to them in the Credit Agreement.
AGREEMENTS
The parties hereto, intending to be legally bound, hereby agree:
I. Section 1.01 of the Credit Agreement shall be modified by deleting the
definition of each of the following terms, and by substituting therefor the
language set forth below:
"Final Maturity Date" shall mean July 31, 1999.
"Revolving Credit Commitment" shall mean $27,000,000, as the same
may be reduced from time to time Revolving Credit Commitment"
shall mean $27,000,000, as the same may be reduced from time to
time pursuant to Section 2.07 hereof."
2. Section 2.04(a) of the Credit Agreement shall be amended by deleting the
first sentence thereof in its entirety, and by substituting therefor the
following:
"All Revolving Credit Loans made by the Bank to the
<PAGE>
Borrower shall be evidenced by a single Revolving Credit Note,
duly executed on behalf of each of the Borrowers, dated the date
of this Seventh Amendment, in substantially the form of Exhibit
"A" annexed hereto, delivered and payable to the Bank in a
principal amount equal to $27,000,000."
From and after the date hereof, all references to the Revolving Credit Note in
the Credit Agreement and all other Loan Documents shall be deemed to be
references to such new Revolving Credit Note. Exhibit "A" to the Credit
Agreement is hereby replaced with Exhibit "A" attached hereto. The indebtedness
evidenced by the previous Revolving Credit Note remains outstanding as of the
date hereof and continues to be secured by the Collateral. The parties hereby
expressly acknowledge and agree that the new Revolving Credit Note merely
re-evidences the indebtedness evidenced by the previous Revolving Credit Note
while increasing the principal amount thereof, shall not extinguish the
Obligations evidenced thereby or constitute a novation thereof, and is given in
substitution of, and not as payment of, the previous Revolving Credit Note.
3. Section 2.15 of the Credit Agreement shall be amended by deleting the
first sentence thereof, and by substituting therefor the following:
"Upon the request of the Borrowers, and subject to the conditions
set forth in Article V hereof and such other conditions to the
opening of letters of credit as the Bank requires of its
customers generally, the Bank shall from time to time open
commercial or standby letters of credit (each a "Letter of
Credit") for the account of the Borrowers; provided, however,
that no Letter of Credit may be opened if the face amount thereof
exceeds the Availability outstanding at such time; and provided,
further that no Letter of Credit may be opened if the amount
thereof would cause the amount of all Letters of Credit then
outstanding (including the Letter of Credit then requested) to
exceed the Revolving Credit Commitment; and provided, further
that no standby Letter of Credit may be opened if the amount
thereof would cause the amount of all standby Letters of Credit
then outstanding (including the standby Letter of Credit then
requested) to exceed $5,000,000."
4. Section 6 of the Sixth Amendment to the Credit Agreement, which deals
with the Operating Cash Flow of MWI and its Subsidiaries on a Consolidated
basis, shall be amended by deleting, from the third sentence thereof (which
sentence begins with the words "If the Borrower shall fail to comply with the
-2-
<PAGE>
terms of this Section 6") the following:
"(i) obtain an appraisal, from a reputable appraiser mutually
acceptable to the Bank and the Borrowers, of the value of all its
inventory, which appraisal shall be delivered to the Bank within
thirty (30) days after the Bank shall have provided written
notice with respect thereto to the Borrowers, or any of them, and
(ii)".
5. In connection with the execution of this Seventh Amendment, the
Borrowers shall obtain an appraisal, from a reputable appraiser mutually
acceptable to the Bank and the Borrowers, of the value of all the Borrowers'
inventory, which appraisal shall be in form and substance satisfactory to the
Bank and shall be delivered to the Bank on or before September 2, 1997.
6. As a condition to the execution and delivery of this Seventh Amendment
to Credit Agreement, the Borrowers shall deliver to the Bank, in form and
content satisfactory to the Bank and its counsel, the following documents,
instruments or payments:
(a) A certified copy of resolutions adopted by the Board of Directors of
each of the Borrowers authorizing the execution, delivery and performance of
this Seventh Amendment, and all of the documents and instruments required by the
Bank for the implementation of this Seventh Amendment, including, but not
limited to, the replacement Revolving Credit Note;
(b) The favorable written opinion of Pepper Hamilton & Scheetz, counsel
for the Borrowers, substantially in the form of Exhibit "B" hereto, dated the
date of this Seventh Amendment, addressed to the Bank and satisfactory to it;
(c) The replacement Revolving Credit Note, duly executed by the
Borrowers, payable to its order and otherwise complying with the provisions of
Section 2.04 of the Credit Agreement;
(d) An Amendment fee in the amount of $17,500; and
(e) the inventory location report, as described in Section 6.05(k) of
the Credit Agreement.
7. The Borrowers hereby:
(a) acknowledge and agree that all of their representations,
warranties and covenants contained in the Credit Agreement and/or in the Loan
Documents, as amended hereby, are
-3-
<PAGE>
true, accurate and correct on and as of the date hereof as if made on and as of
the date hereof, except as set forth on Schedule 7(a) attached to this Seventh
Amendment; provided, however, that with respect to the dates set forth in
certain representations, such dates shall be updated as follows:
(i) in Section 4.05, the referenced date shall be September 30,
1996;
(ii) in Section 4.07(a), the referenced date for consolidated
balance sheet shall be September 30, 1996;
(iii) in Section 4.07(b), the referenced date shall be 1997; and
(iv) in Section 4.07(c), the referenced 1995 Fiscal Year and 1996
Fiscal Year shall be changed to 1996 Fiscal Year and 1997 Fiscal Year,
respectively.
(b) acknowledge and agree that they have no defense, set-off,
counterclaim or challenge against the payment of any sums owing under the Credit
Agreement or the Loan Documents or the Obligations, or the enforcement of any of
the terms of the Credit Agreement or the Loan Documents, as amended hereby; and
(c) represent and warrant that no Event of Default, as defined in the
Credit Agreement, exists or will exist upon the delivery of notice, passage of
time or both.
8. The Borrowers will pay all of Bank's out-of-pocket costs and
expenses incurred in connection with the review, preparation, negotiation,
documentation and closing of this Seventh Amendment and the consummation of the
transactions contemplated herein, including, without limitation, fees, expenses
and disbursements of counsel retained by Bank and all fees related to filings,
recording of documents and searches, appraisal costs, whether or not the
transactions contemplated hereunder are consummated.
9. All other terms and conditions of the Credit Agreement and of the
Loan Documents, not inconsistent with the terms hereof, shall remain in full
force and effect and are hereby ratified and confirmed by the Borrowers.
IN WITNESS WHEREOF, the Borrowers and the Bank have caused this
Seventh Amendment to Credit Agreement to be executed by
-4-
<PAGE>
their respective authorized officers as of the day and year first above written.
MOTHERS WORK, INC.
By: /s/ Thomas Frank
----------------------------
Name: Thomas Frank
Title: Vice President
CAVE SPRINGS, INC.
By: /s/ Thomas Frank
----------------------------
Name: Thomas Frank
Title: Vice President
THE PAGE BOY COMPANY, INC.
By: /s/ Thomas Frank
----------------------------
Name: Thomas Frank
Title: Vice President
MOTHERS WORK (R.E.), INC.
By: /s/ Thomas Frank
----------------------------
Name: Thomas Frank
Title: Vice President
CORESTATES BANK, N.A.
By: /s/ Randal D. Southern
----------------------------
Name: Randal D. Southern
Title: Vice President
-5-
<PAGE>
QUALIFICATIONS, EXCEPTIONS
TO REPRESENTATIONS
NONE
SCHEDULE 7(a)
-6-
MOTHERS WORK, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE:
Weighted average common shares outstanding 3,257,978 3,564,644 3,167,615 3,562,419
Net effect of dilutive stock options and warrants 320,976 139,928 273,617 --
---------- ---------- ---------- -----------
Shares used in computing primary earnings per share 3,578,954 3,704,572 3,441,232 3,562,419
========== ========== ========== ===========
Net income (loss) $1,238,719 $ 933,015 $2,740,443 $(6,488,250)
Preferred stock dividends (244,374) (272,071) (733,125) (816,213)
---------- ---------- ---------- -----------
Net income (loss) applicable to common stockholders $ 994,345 $ 660,944 $2,007,318 $(7,304,463)
========== ========== ========== ===========
Per common share amount $ 0.28 $ 0.18 $ 0.58 $ (2.05)
========== ========== ========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,483,573
<SECURITIES> 0
<RECEIVABLES> 2,306,034
<ALLOWANCES> 0
<INVENTORY> 55,467,127
<CURRENT-ASSETS> 66,710,860
<PP&E> 65,691,614
<DEPRECIATION> 22,063,377
<TOTAL-ASSETS> 160,889,884
<CURRENT-LIABILITIES> 31,171,045
<BONDS> 96,501,754
0
11,500,000
<COMMON> 35,646
<OTHER-SE> 16,266,815
<TOTAL-LIABILITY-AND-EQUITY> 160,889,884
<SALES> 181,221,730
<TOTAL-REVENUES> 181,221,730
<CGS> 81,852,040
<TOTAL-COSTS> 81,852,040
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,819,512
<INCOME-PRETAX> (8,743,195)
<INCOME-TAX> (2,254,945)
<INCOME-CONTINUING> (6,488,250)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,488,250)
<EPS-PRIMARY> (2.05)
<EPS-DILUTED> (2.05)
</TABLE>
