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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly report ended December 31, 1997
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Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
456 North 5th Street, Philadelphia, Pennsylvania 19123
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 873-2200
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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 - 3,570,616 shares outstanding as of February 1,
1998
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<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARIES
-----------------------------------
INDEX
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Page
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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 14
Exhibit Index 17
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,665,760 $ 1,589,881
Receivables
Trade 2,781,803 3,239,081
Other 164,334 69,598
Inventories 63,812,590 62,570,055
Deferred income taxes 4,050,980 3,442,921
Prepaid expenses and other 2,695,218 2,512,549
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Total current assets 75,170,685 73,424,085
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PROPERTY, PLANT AND EQUIPMENT, net 45,373,439 46,456,070
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OTHER ASSETS:
Deferred income taxes 7,235,600 6,957,288
Goodwill, net 38,752,184 38,192,580
Other intangible assets, net 1,351,221 1,309,292
Deferred financing costs, net 3,339,759 3,233,495
Other assets 494,632 696,359
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Total other assets 51,173,396 50,389,014
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$ 171,717,520 $ 170,269,169
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 11,088,000 $ 7,209,957
Current portion of long-term debt 648,231 720,797
Accounts payable 17,264,704 15,564,000
Accrued expenses 14,087,057 16,660,074
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Total current liabilities 43,087,992 40,154,828
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LONG-TERM DEBT 96,375,620 96,653,697
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ACCRUED DIVIDENDS ON PREFERRED STOCK 2,228,700 2,520,754
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DEFERRED RENT 3,645,651 3,923,408
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COMMITMENTS AND CONTINGENCIES (NOTE 4)
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, none outstanding -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
3,564,644 and 3,570,616 shares issued and outstanding 35,646 35,706
Additional paid-in capital 27,740,840 27,765,802
Accumulated deficit (12,896,929) (12,285,026)
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Total stockholders' equity 26,379,557 27,016,482
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$ 171,717,520 $ 170,269,169
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
MOTHERS WORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------------
1996 1997
---- ----
<S> <C> <C>
NET SALES $61,233,328 $77,396,876
COST OF GOODS SOLD 27,500,762 37,015,489
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Gross Profit 33,732,566 40,381,387
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 29,188,899 35,049,872
----------- -----------
Operating income 4,543,667 5,331,515
INTEREST EXPENSE, NET 3,332,138 3,541,187
----------- -----------
Income before income taxes 1,211,529 1,790,328
INCOME TAXES 743,468 886,371
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NET INCOME 468,061 903,957
PREFERRED DIVIDENDS 244,375 292,054
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NET INCOME AVAILABLE TO
COMMON STOCKHOLDERS $ 223,686 $ 611,903
=========== ===========
NET INCOME PER COMMON SHARE:
BASIC $ 0.06 $ 0.17
=========== ===========
DILUTED EPS $ 0.06 $ 0.16
=========== ===========
WEIGHTED AVERAGE COMMON SHARES:
OUTSTANDING:
BASIC EPS 3,559,315 3,564,709
=========== ===========
DILUTED EPS 3,725,824 3,723,352
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
MOTHERS WORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------
1996 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 468,061 $ 903,957
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 2,866,735 2,972,040
Imputed interest on debt 27,763 31,490
Asset impairments 247,900 --
Deferred tax expense 743,468 886,371
Amortization of deferred financing costs 105,991 106,264
Provision for deferred rent 250,085 277,757
Changes in assets and liabilities, net of effects
from purchase of businesses-
Decrease (increase) in --
Receivables (214,156) (362,542)
Inventories 4,785,480 1,242,535
Prepaid expenses and other (277,979) (19,058)
(Decrease) increase in --
Accounts payable and accrued expenses 880,410 1,005,709
Other liabilities 272,071 292,054
------------ ------------
Net cash provided by operating activities 10,155,829 7,336,577
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,190,924) (2,919,907)
Increase in intangibles and other assets (69,970) (55,554)
------------ ------------
Net cash used in investing activities (2,260,894) (2,975,461)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in line of credit and cash overdrafts, net (7,792,951) (4,303,493)
Repayments of long-term debt (102,038) (158,524)
Other (51) 25,022
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Net cash used in financing activities (7,895,040) (4,436,995)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (105) (75,879)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,262,435 1,665,760
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,262,330 $ 1,589,881
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 400,577 $ 569,110
============ ============
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
DECEMBER 31, 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, 1997 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.
Capital lease obligations of $477,677 were incurred on equipment leases entered
into in the first quarter of fiscal 1998.
2. STOCK OPTIONS AND WARRANTS
During the three months ended December 31, 1997, 161,300 options were granted to
certain officers 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 grant.
3. EARNINGS PER SHARE (EPS)
In the first quarter of fiscal 1998 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share", which simplifies the
EPS calculation by replacing primary EPS with basic EPS. The calculation of EPS
is as follows:
<TABLE>
<CAPTION>
For the Quarter Ended December 31, 1997
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 611,903 3,564,709 $ 0.17
========
EFFECT OF DILUTIVE SECURITIES
Warrants 139,965
Stock Options 18,678
---------
DILUTED EPS
Income available to common stockholders
Plus assumed conversions $ 611,903 3,723,352 $ 0.16
========= ========= ========
</TABLE>
-4-
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
(Unaudited)
-- (continued) --
<TABLE>
<CAPTION>
For the Quarter Ended December 31, 1996
-------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 223,686 3,559,315 $ .06
=======
EFFECT OF DILUTIVE SECURITIES
Warrants 145,603
Stock Options 20,906
--------------------------
DILUTED EPS
Income available to common stockholders
Plus assumed conversions $ 223,686 3,725,824 $ .06
========= ========= =======
</TABLE>
Options to purchase 595,679 shares of common stock at prices ranging from $9.00
to $18.75 per share were outstanding during the first quarter of fiscal 1998,
but were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of common shares for
the period. The options which expire between 2003 and 2007 were still
outstanding at December 31, 1997. In addition, the 41,000 shares of Series A
Cumulative Convertible Preferred Stock could potentially dilute basic EPS in the
future, but were not considered in the computation of diluted EPS because they
are antidilutive.
4. 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
December 31, 1997
(Unaudited)
-- (continued) --
5. 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., and Mothers Work
(R.E.), Inc.(d/b/a A Pea in the Pod, Inc.)(collectively, the "Guarantors") have,
jointly and severally, unconditionally guaranteed the obligations of Mothers
Work, Inc. with respect to these Notes. 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.
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, 1997 December 31, 1997
------------------ -----------------
Current assets $ 4,127,213 $ 3,908,090
Noncurrent assets 80,125,458 81,090,013
Current liabilities 3,064,719 2,201,133
Noncurrent liabilities 52,539,740 50,415,742
Three Months Ended Three Months Ended
December 31, 1996 December 31, 1997
------------------ ------------------
Net sales $12,077,349 $15,420,959
Costs and expenses 8,624,992 9,764,874
Net income 1,332,811 3,733,016
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 Guarantors receive all inventory
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.
-6-
<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 (Decrease)
-------------------
Three Months
Ended
Percentage of Net Sales December 31,
------------------------ 1997
Three Compared to
Months Ended Three Months
December 31, Ended
------------------------ December 31,
1996 1997 1996
----- ----- -------------------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 26.4%
Cost of goods sold 44.9 47.8 34.6
----- -----
Gross profit 55.1 52.2 19.7
Selling, general and
administrative expenses 47.7 45.3 20.1
----- -----
Operating income 7.4 6.9 17.3
Interest expense, net 5.4 4.6 6.3
----- -----
Income before income taxes 2.0 2.3 47.8
Income taxes 1.2 1.1 19.2
----- -----
Net income 0.8% 1.2% 93.1%
===== =====
</TABLE>
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
Months Months
Ended Ended
Dec. 31, Dec. 31,
1996 1997
-------- --------
Beginning of period
Stores 442 473
Leased maternity departments 26 114
----- ---
Total 468 587
Opened:
Stores 14 23
Leased maternity departments 15 12
Closed:
Stores (1) -
Leased maternity departments - (1)
----- ---
End of period
Stores 455 496
Leased maternity departments 41 125
===== ===
Total 496 621
===== ===
-7-
<PAGE>
Three Months Ended December 31, 1997 and 1996
Net Sales
Net sales in the first quarter of fiscal 1998 increased by $16.2 million or
26.4%, as compared to the first quarter of fiscal 1997. This increase was
primarily due to an increase in Episode America, acquired on June 1, 1996, sales
of $6.5 million, $5.4 million generated by a quarterly comparable store sales
increase of 11.6% in its core maternity clothing business (based on 386 stores),
and a $4.3 million net increase due to other store and leased department opening
and closing activity. A portion of the comparable store sales increase in the
maternity business is due to the consolidation announced in April 1997, and we
do not expect that benefit to continue past the one year anniversary. The
Company had 621 locations, including 571 maternity clothing locations and 50
Episode(R) upscale "bridge" women's apparel stores at December 31, 1997 compared
to 496 locations, including 463 maternity clothing locations and 33 Episode(R)
upscale "bridge" women's apparel stores at December 31, 1996.
Gross Profit
Gross profit in the first quarter of fiscal 1998 increased $6.6 million or
19.7%, as compared to the first quarter of fiscal 1997. This increase was
primarily generated by the increase in sales noted above. Gross profit as a
percentage of net sales decreased to 52.2% in the first quarter of fiscal 1998
as compared to 55.1% in the comparable period of the prior year. The Company's
gross profit as a percent of sales decreased due to the increase of Motherhood
and Episode sales as a percentage of overall sales. The continued growth of
Motherhood sales as a percentage of overall sales has contributed to the
decrease in gross profit percentage because Motherhood operates with a lower
gross profit percentage as compared to the high end maternity divisions. In
addition, Episode sales have generated lower overall margins than the maternity
sales due to the high degree of competition in high end bridge women's apparel.
The Company anticipates that its gross profit as a percentage of sales may
decrease further as Motherhood and Episode become a more significant part of
overall operations.
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased $5.9 million or 20.1% in
the first quarter of fiscal 1998 as compared to the first quarter of fiscal 1997
and, as a percentage of net sales, decreased from 47.7% to 45.3%. The decrease
as a percentage of sales was primarily due to the increase in net sales. The
dollar increase in the first quarter of fiscal 1998, as compared to the first
quarter of fiscal 1997, was primarily due to increases in store wages and
benefits, rents and operating expenses at the store level, which accounted for
$2.9 million, $1.6 million and $0.5 million of the increase, respectively. The
increase in wages and benefits and rents at the store level resulted from the
increased number of stores opened and the related staffing costs. In addition,
higher shipping and corporate wages contributed $1.3 million to the increase in
selling, general and administrative expenses. These expenses increased due to
the continued expansion of operations as a result of new store rollouts.
Operating Income
The operating income in the first quarter of fiscal 1998 was $5.3 million, or
6.9% of sales, as compared to $4.5 million, or 7.4% of sales, in the first
quarter of fiscal 1997. Operating income dollars for the core maternity business
increased in the first quarter of fiscal 1998 when compared to the first quarter
of fiscal 1997. The Episode stores had negative operating income in the first
quarter of fiscal 1998 comparable with the first quarter of fiscal 1997. The
-8-
<PAGE>
Company has taken certain initiatives that it believes will help to support the
higher selling, general, and administrative expenses of the Episode division.
Specifically, the Company continues to introduce new merchandise for the
division and provides incentives to sales associates in order to increase
Episode revenues. 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 $0.2 million in the first quarter of fiscal
1998 compared with the first quarter of fiscal 1997, and as a percentage of
sales, decreased from 5.4% to 4.6%. The dollar increase was primarily due to
short-term borrowings under the line of credit agreement.
Income Taxes
The effective income tax rate was 49.5% in the first quarter of fiscal 1998 as
compared to 61.4% in the first quarter of fiscal 1997. The change in the
effective income tax rate was primarily due to the relationship of
non-deductible goodwill amortization to income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs during the quarter ended December 31, 1997 have been
primarily for furniture and fixtures and leasehold improvements required to
increase the number of retail locations. In addition, the Company used excess
cash flow to reduce its outstanding borrowings on its line of credit. The
Company's cash source for the first quarter of fiscal 1997 has primarily been
from operations. At December 31, 1997 the Company had available cash and cash
equivalents of $1.6 million, compared to $1.3 million at September 30, 1997.
Net cash provided by operating activities was $10.2 million in the first quarter
of fiscal 1997 compared with $7.3 million in the first quarter of fiscal 1998.
The net cash provided by operating activities in the first quarter of fiscal
1998 includes cash provided by net income, including adjustments for non-cash
items of $5.2 million, plus cash provided by working capital of $2.1 million.
The cash provided by working capital in the first quarter of fiscal 1998
consisted of $2.5 million from a decrease in inventories and an increase in
accounts payable, accrued expenses and other liabilities, partially offset by an
increase in receivables, prepaid expenses and other assets. The net cash
provided by working capital in the first quarter of fiscal 1997 derives from
cash provided by net income, after adjustments of non-cash items of $4.7
million, plus cash provided by working capital of $5.4 million. The cash
provided by working capital in the first quarter of fiscal 1997 consisted of
$5.9 million from a decrease in inventories and an increase in accounts payable,
accrued expenses and other liabilities, partially offset by an increase in
receivables, prepaid expenses and other assets.
Net cash used in investing activities increased from $2.3 million in the quarter
ended December 31, 1996 to $3.0 million in the quarter ended December 31, 1997.
The cash used in investing activities for the first quarter of fiscal 1998
included $2.7 million used for capital expenditures for new store facilities,
primarily Motherhood and Episode, and improvements to existing stores, $0.2 for
other corporate capital expenditures and $0.1 million for intangible and other
assets. This compares with investing activities for the first quarter of fiscal
1997, which included $1.8 million used for capital expenditures for new store
facilities and improvements to existing stores and $0.4 million for other
corporate capital expenditures and $0.1 million for intangible and other assets.
Net cash used in financing activities decreased $3.9 million, from $7.9 million
used in financing activities in the quarter ended December 31, 1996 to $4.4
million used in financing activities for the quarter ended December 31, 1997.
The $4.4 million used in financing activities resulted primarily from $4.3
-9-
<PAGE>
million in repayment of borrowings on the line of credit and cash overdraft
activity and $0.2 million in repayment of long-term debt, offset by proceeds
from the exercise of stock options. This compares with $7.8 million in repayment
of borrowings on the line of credit and cash overdraft activity and $0.1 million
in repayment of long-term debt.
In January 1998, the Company's borrowing capacity under its working capital
revolving line of credit facility ("Working Capital Facility") was increased to
provide additional seasonal borrowing capacity. The Working Capital Facility was
increased from $27.0 million to $30.0 million, through April 30, 1998, subject
to limitations based upon eligible accounts receivable and inventory ("Borrowing
Base"). Effective May 1, 1998, the Company's Working Capital Facility will
revert back to $27.0 million and, at that time, the Company's borrowing capacity
will be the lesser of $27.0 million or the Borrowing Base reduced by $3.0
million. Effective July 1, 1998, the Borrowing Base will be reduced by $5.0
million. However, at such time as the monthly rolling twelve-month operating
cash flow reaches $30.0 million and remains at least $28.0 million, the
Company's borrowing capacity will revert to $27.0 million without limitations on
the Borrowing Base. In addition, in connection with the above arrangement, the
Company granted additional collateral under the Working Capital Facility in the
form of raw materials inventory. On February 2, 1998, after the $5.8 million
semi-annual interest payment on the Notes, the Company had $14.2 million in
borrowings and $6.8 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 moderate priced Motherhood and leased department business, subject to
capital and marketplace availability. The Company began expanding into the
leased department business approximately one year ago, and to date, revenue from
the leased departments has been below management's estimates. As a result,
selling, general and administrative expenses as a percentage of sales have been
higher than the maternity business as a whole. In addition, the gross margin
from Motherhood and the leased departments is typically lower than the remainder
of the maternity business, consequently as the Motherhood and leased department
business increases as a percentage of the maternity business it will produce
overall lower margins in the maternity business.
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 as a percentage of sales for the
first quarter of fiscal 1998 is primarily attributable to Episode operations.
Sales levels continue to improve validating management's initial efforts to turn
this business around, however further improvements are required. Episode
revenues remain below management's initial estimates and are currently at levels
which would not support profitable operations of the Episode division. In
addition, successful fashion forecasting must continue to achieve needed sales
results into the future. 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 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 December 31, 1997, the Episode assets consist
primarily of inventory and furniture, equipment and leasehold improvements of
approximately $13.7 million and $8.7 million, respectively. The Company also has
lease commitments on Episode stores approximating $34.1 million payable through
2011.
-10-
<PAGE>
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 required principal and interest
payments for fiscal 1998. Based on the Company's fiscal 1998 expansion plan, the
Company expects capital expenditures to be approximately $8.0 million, of which
$3.0 million has been expended through December 31, 1997. These expenditures
consist primarily of new Motherhood and Episode stores. 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.
The Company has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the Year 2000("Y2K") issue and
is developing an implementation plan to resolve the issue. Throughout fiscal
1998, the Company will assess its own internal computer systems and will contact
third parties with whom it interacts electronically in order to get an
assessment of their Y2K issues. Based on preliminary results, the Company does
not believe the Y2K issue on its internal computer systems will have a material
adverse impact on operations. Notwithstanding the Company's efforts in this
regard, there does exist the risk that the Y2K issue will manifest itself in
unanticipated ways, thereby adversely affecting the Company's performance in the
future. In addition, the Company cannot give assurance that the third parties
with whom it does business will address any Y2K issues in their own systems on a
timely basis; their failure to do so could have a material adverse impact on the
Company.
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 merchandise and ability to hire and train associates, changes
in fertility and birth rates, political stability, currency and exchange risks
and changes in existing or potential duties, tariffs or quotas, postal rate
increases and charges, paper and printing costs, and other factors affecting the
Company's business beyond the Company's control.
-11-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) 10.1 Ninth Amendment to Credit Agreement dated January 30, 1998
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.
None.
-12-
<PAGE>
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: February 13, 1998 By: /s/ Dan W. Matthias
--------------------------------------
Dan W. Matthias
Chief Executive Officer
And
Chairman of the Board
Date: February 13, 1998 By: /s/ Thomas Frank
--------------------------------------
Thomas Frank
Chief Financial Officer
And
Vice President - Finance
-13-
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page No.
- -------------- ---------------- ----------
10.1 Ninth Amendment to Credit Agreement dated January 30,
1998 between the Company, its subsidiaries and
CoreStates Bank 15
11 Statement re: Computation of per share earnings 21
27 Financial Data Schedule (schedule submitted in
Electronic format only) 22
-14-
<PAGE>
EXHIBIT 10.1
NINTH AMENDMENT TO CREDIT AGREEMENT dated as of January 30, 1998 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, as sixth amended April 16, 1997, as seventh
amended July 31, 1997, and as eighth amended September 30, 1997 (the "Credit
Agreement") pursuant to which the Bank established, in favor of the Borrowers, a
credit facility in an aggregate principal amount of $31,094,684.93, subject to
the terms and conditions set forth therein. Borrowers have requested the Bank to
increase the amount of the Revolving Credit Commitment to $30,000,000, to modify
certain terms of the Credit Agreement, including certain of the financial
covenants set forth in the Credit Agreement, 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:
1. Section 1.01 of the Credit Agreement shall be modified by
adding the following definitions:
"'Borrowing Base' shall mean an amount, determined monthly
as of the last Business Day of each calendar month, equal
to (a) fifty-five percent (55%) of the value (determined
at cost) of Borrowers' Inventory of finished goods plus
(b) thirty percent (30%) of the value (determined at cost)
of Borrowers' Inventory of raw materials, plus (c) thirty
percent (30%) of the value (determined in accordance with
GAAP, consistently applied by Borrowers) of the Borrowers'
<PAGE>
work-in-process Inventory plus (d) eighty-five percent
(85%) of Borrowers' Eligible Accounts minus (e)
$3,000,000, if such calculation relates to May, 1998 or
June, 1998, and $5,000,000, if such calculation relates to
any month thereafter."
"'Eligible Accounts' shall mean all accounts receivable of
the Borrowers except accounts receivable (i) which have
been due more than 120 days from the invoice or payment
due date therefor, as applicable, (ii) inter-company
accounts or accounts from other affiliated corporations,
organizations or individuals, and (iii) accounts
receivable from the United States Government or any of it
agencies which have not been assigned to the Bank under
the Assignment of Claims Act."
"'Inventory' shall mean all of the Borrowers'
work-in-process, finished goods and all other inventory
(as such term is defined in the Uniform Commercial Code of
Pennsylvania, as amended), to the extent owned and
possessed, as of any relevant determination date, by the
Borrowers, or any of them."
In addition, Section 1.01 of the Credit Agreement shall be modified by deleting
the definition of the following term, and by substituting therefor the language
set forth below:
"'Revolving Credit Commitment' shall mean the lesser of
(a) $30,000,000 from and after the date hereof through
April 30, 1998, and $27,000,000 thereafter, or (b) the
Borrowing Base, in either case as the same may be reduced
from time to time pursuant to Section 2.07 hereof;
provided, however, that at such time as the Operating Cash
Flow of MWI and its Subsidiaries on a Consolidated basis,
as of the end of then immediately preceding twelve (12)
month period, shall exceed thirty million dollars
($30,000,000) then, effective as of the date that the
Borrowers shall have obtained such Operating Cash Flow,
and as long thereafter as the Operating Cash Flow of MWI
and its Subsidiaries, on a Consolidated Basis, for and as
of the end of the then immediately preceding twelve (12)
month period shall be at least $28,000,000, the "Revolving
Credit Commitment" shall mean $27,000,000, as the same may
-2-
<PAGE>
be reduced from time to time pursuant to Section 2.07
hereof, and the limitation tied to the Borrowing Base
shall not be applicable, during such period."
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
Borrower shall be evidenced by a single Revolving Credit
Note, duly executed on behalf of each of the Borrowers,
dated the date of this Ninth Amendment, in substantially
the form of Exhibit "A" annexed hereto, and delivered and
payable to the Bank in the principal amount equal to
$30,000,000."
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 thereof, and not as payment of, the previous Revolving Credit Note.
3. Section 7.08 of the Credit Agreement shall be amended by
modifying the ratio required during the Fiscal Quarter ending March 31, 1998
from 0.95:1.00 to 0.85 to 1.00. All other ratios set forth therein shall remain
unchanged.
4. Section 7.09 of the Credit Agreement shall be amended by
modifying the ratio required during the Fiscal Quarter ending March 31, 1998
from 1.90:1.00 to 1.75 to 1.00. All other ratios set forth therein shall remain
unchanged.
5. Borrowers shall deliver to the Bank, monthly on or before
the tenth (10th) day of each month, a "Borrowing Base Certificate", duly
executed by a Responsible Officer of the Borrowers, on which such Responsible
Officer shall certify the amount of the Borrowing Base as of the last Business
Day of the immediately preceding calendar month.
6. As a condition to the execution and delivery of this Ninth
Amendment to Credit Agreement, the Borrowers shall deliver to the Bank, in form
-3-
<PAGE>
and content satisfactory to the Bank and its counsel, the following documents,
instruments or payments:
(a) 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;
(b) An Amendment to Security Agreement, in form and
substance satisfactory to the Bank, pursuant to which the Borrowers will grant
to the Bank a security interest in all Borrowers' raw material Inventory;
(c) A certified copy of resolutions adopted by the Board
of Directors of each of the Borrowers authorizing the execution, delivery and
performance of this Ninth Amendment, and all of the documents and instruments
required by the Bank for the implementation of this Ninth Amendment;
(d) 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 Ninth Amendment, addressed to the Bank and
satisfactory to it;
(e) The sum of $50,000, which is comprised of an amendment
fee in the amount of $16,250, and the sum owing to the Bank in accordance with
the provision of Section 4 of the Eighth Amendment to Credit Agreement, dated
September 30, 1997, or $33,750;
(f) the inventory location report, as described in Section
6.05(k) of the Credit Agreement;
(g) a report setting forth the location of all Borrowers'
Inventory of raw materials; and
(h) all such UCC-1 or UCC-3 financing statements as Bank
shall, in its discretion, deem necessary in order to perfect the security
interest in raw materials Inventory granted to Bank this date.
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 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 Ninth Amendment; provided, however,
that with respect to the dates set forth in certain representations, such dates
shall be updated as follows:
-4-
<PAGE>
(i) in Section 4.05, the referenced date shall be
September 30, 1997;
(ii) in Section 4.07(a), the referenced date for
consolidated balance sheet shall be September 30, 1997;
(iii) in Section 4.07(b), the referenced date shall be
1998; and
(iv) in Section 4.07(c), the referenced 1995 Fiscal
Year and 1996 Fiscal Year shall be changed to 1998 Fiscal Year and 1999 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 Ninth 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 Ninth
Amendment to Credit Agreement to be executed by their
-5-
<PAGE>
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
-6-
EXHIBIT 11
MOTHERS WORK, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the Quarter Ended December 31, 1997
-------------------------------------------------------
Income Share Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 611,903 3,564,709 $0.17
=========
EFFECT OF DILUTIVE SECURITIES
Warrants 139,965
Stock Options 18,678
-----------------------------------
DILUTED EPS
Income available to common stockholders
Plus assumed conversions $ 611,903 3,723,352 $0.16
=================================== =========
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended December 31, 1996
-------------------------------------------------------
Income Share Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 223,686 3,559,315 $.06
=========
EFFECT OF DILUTIVE SECURITIES
Warrants 145,603
Stock Options 20,906
-----------------------------------
DILUTED EPS
Income available to common stockholders
Plus assumed conversions $ 223,686 3,725,824 $.06
=================================== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 1,589,881
<SECURITIES> 0
<RECEIVABLES> 3,308,679
<ALLOWANCES> 0
<INVENTORY> 62,570,055
<CURRENT-ASSETS> 73,424,085
<PP&E> 71,134,407
<DEPRECIATION> 24,678,337
<TOTAL-ASSETS> 170,269,169
<CURRENT-LIABILITIES> 40,154,828
<BONDS> 96,653,697
0
11,500,000
<COMMON> 35,706
<OTHER-SE> 15,480,776
<TOTAL-LIABILITY-AND-EQUITY> 170,269,169
<SALES> 77,396,876
<TOTAL-REVENUES> 77,396,876
<CGS> 37,015,489
<TOTAL-COSTS> 37,015,489
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,541,187
<INCOME-PRETAX> 1,790,328
<INCOME-TAX> 886,371
<INCOME-CONTINUING> 903,957
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 903,957
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
</TABLE>
