- -------------------------------------------------------------------------------
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
|X| Quarterly Report Pursuant to Section 13 of 15(d) of the Securities Exchange
Act of 1934
For the quarterly report ended March 31, 1999
--------------
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
--------------------------------------------------------
Mothers Work, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 133045573
- --------------------------------- ----------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Common Stock, $.01 par value - 3,509,885 shares outstanding as of May 1, 1999
- -------------------------------------------------------------------------------
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
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 7
Item 3. Qualitative and Quantitative Disclosures about Market Risk 13
PART II - OTHER INFORMATION
Item 4 Submission of matters to a vote of security holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Exhibit Index 15
<PAGE>
MOTHERS WORK, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
ASSETS 1998 1999
------------- -------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,623,003 $ 3,787,961
Receivables
Trade 3,422,848 2,707,282
Other 131,940 578,942
Inventories 61,678,014 62,774,726
Deferred income taxes 8,846,921 8,846,921
Prepaid expenses and other 5,992,273 1,982,439
------------- -------------
Total current assets 83,694,999 80,678,271
PROPERTY, PLANT AND EQUIPMENT, net 37,334,250 36,259,160
OTHER ASSETS:
Goodwill, net 36,524,960 35,417,033
Deferred income taxes 9,918,455 8,887,318
Deferred financing costs, net 3,118,042 2,869,063
Other intangible assets, net 1,154,801 1,111,795
Other assets 723,558 752,056
------------- -------------
Total other assets 51,439,816 49,037,265
------------- -------------
$ 172,469,065 $ 165,974,696
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of Credit $ 23,095,934 $ 25,089,784
Current portion of long-term debt 464,408 464,408
Accounts payable 14,108,610 11,639,771
Accrued expenses 22,411,762 16,338,037
------------- -------------
Total current liabilities 60,080,714 53,532,000
LONG TERM DEBT 96,421,707 96,320,464
ACCRUED DIVIDENDS ON PREFERRED STOCK 3,396,916 4,022,520
DEFERRED RENT 3,819,998 4,005,992
COMMITMENTS AND CONTINGENCIES (NOTE 3)
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,
3,597,997 and 3,509,885 shares issued and outstanding 35,980 35,099
Additional paid-in capital 27,995,694 26,899,813
Accumulated deficit (30,781,944) (30,341,192)
------------- -------------
Total stockholders' equity 8,749,730 8,093,720
------------- -------------
$ 172,469,065 $ 165,974,696
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
MOTHERS WORK, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------------- -----------------------------------
1998 1999 1998 1999
<S> <C> <C> <C> <C>
NET SALES $ 67,760,866 $ 66,469,493 $ 145,157,742 $ 143,211,449
COST OF GOODS SOLD 34,013,978 33,848,170 71,029,467 71,988,108
------------- ------------- ------------- -------------
Gross profit 33,746,888 32,621,323 74,128,275 71,223,341
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 34,517,982 30,215,746 69,567,854 61,597,961
------------- ------------- ------------- -------------
Operating income (loss) (771,094) 2,405,577 4,560,421 9,625,380
INTEREST EXPENSE, NET 3,560,518 3,504,965 7,101,705 7,527,887
------------- ------------- ------------- -------------
Income (loss) before income taxes (4,331,612) (1,099,388) (2,541,284) 2,097,493
INCOME TAX EXPENSE (BENEFIT) (2,156,855) (518,505) (1,270,484) 1,031,137
------------- ------------- ------------- -------------
NET INCOME (LOSS) (2,174,757) (580,883) (1,270,800) 1,066,356
PREFERRED DIVIDENDS 292,054 312,802 584,108 625,604
------------- ------------- ------------- -------------
NET INCOME (LOSS) AVAILABLE
TO COMMON STOCKHOLDERS $ (2,466,811) $ (893,685) $ (1,854,908) $ 440,752
============= ============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ (0.69) $ (0.25) $ (0.52) $ 0.12
============= ============= ============= =============
DILUTED (0.69) (0.25) (0.52) $ 0.12
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC 3,570,662 3,594,860 3,567,653 3,599,462
============= ============= ============= =============
DILUTED 3,570,662 3,594,860 3,567,653 3,797,438
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
MOTHERS WORK, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-------------------------------
1998 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,270,800) $ 1,066,356
Adjustments to reconcile net income to
net cash provided by (used in) operating activities--
Depreciation and amortization 6,045,921 5,093,373
Deferred tax benefit (1,270,484) 1,031,137
Provision for deferred rent 537,726 185,994
Amortization of deferred financing costs 212,573 248,978
Imputed interest on debt 64,344 73,708
Changes in assets and liabilities:
(Increase) decrease in--
Receivables (1,561,325) 268,564
Inventories (2,910,517) (1,096,712)
Prepaid expenses and other 92,731 3,981,336
Increase (decrease) in--
Accounts payable and accrued expense 1,726,911 (9,168,168)
Other liabilities 584,108 625,604
----------- -----------
Net cash provided by operating activities 2,251,188 2,310,170
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,182,983) (2,802,669)
Increase in intangibles and other assets (77,252) (64,680)
----------- -----------
Net cash used in investing activities (5,260,235) (2,867,349)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in line of credit and cash overdrafts, net 2,193,921 1,993,850
Purchase of common stock -- (1,207,500)
Repayments of long-term debt (246,118) (174,951)
Debt issuance costs (17,959) --
Proceeds from exercise of options 27,524 110,738
----------- -----------
Net cash provided by financing activities 1,957,368 722,137
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,051,679) 164,958
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,665,760 3,623,003
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 614,081 $ 3,787,961
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 6,871,280 $ 6,939,541
=========== ===========
Cash paid for income taxes $ -- $ --
=========== ===========
Capital lease obligations incurred $ 477,677 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(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, 1998 for Mothers Work, Inc. and Subsidiary (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 adjustments, necessary to present
fairly the consolidated financial position of the Company for the periods
presented. Since the Company's operations are seasonal, the interim operating
results of the Company may not be indicative of operating results for the full
year.
2. STOCK OPTIONS AND WARRANTS
During the quarter ended March 31, 1999, 11,500 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. 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.
4
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
4. EARNINGS PER SHARE (EPS)
Earnings per share is computed in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share". The calculation of
EPS is as follows:
<TABLE>
<CAPTION>
For the Quarter Ended March 31, 1999
-------------------------------------------------------
Loss Shares Per share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic EPS
<S> <C> <C> <C>
Income available to common stockholders $ (893,685) 3,594,860 $(0.25)
For the Quarter Ended March 31, 1998
-------------------------------------------------------
Loss Shares Per share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic EPS
Income available to common stockholders $(2,466,811) 3,570,662 $(0.69)
For the Six Months Ended March 31, 1999
-------------------------------------------------------
Income Shares Per share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic EPS
Income available to common stockholders $ 440,752 3,599,462 $ 0.12
Effect of dilutive securities
Warrants 140,000
Stock options -- 57,976
------------ ---------
Diluted EPS
Income available to common stockholders $ 440,752 3,797,438 $0.12
------------ ---------
For the Six Months Ended March 31, 1998
-------------------------------------------------------
Income Shares Per share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic EPS
Income available to common stockholders $(1,854,908) 3,567,653 $(0.52)
</TABLE>
Options to purchase 863,319 shares of common stock at prices ranging from $1.67
to $18.75 per share were outstanding during the first six months of fiscal 1999,
and were included in the computation of diluted EPS to the extent that they were
dilutive. The outstanding options expire between 2003 and 2008. In addition, the
41,000 shares of Series A Cumulative Convertible Preferred Stock could
potentially dilute basic EPS in the future, although they were not dilutive for
the six month period ended March 31, 1999.
5
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
5. RESTRUCTURING CHARGES
During fiscal 1998, the Company closed its Episode(R) division, incurring
charges totaling $20,925,000. At March 31, 1999, approximately $1.3 million of
the restructuring costs remain in accrued expenses. The majority of the $1.3
million relates to legal and other fees associated with the transfer of leases.
6. SUBSIDIARY GUARANTOR
Pursuant to the terms of an indenture relating to the 12 5/8% Senior Unsecured
Exchange Notes due 2005 (the "Notes"), the Company's direct subsidiary, Cave
Springs, Inc., has unconditionally guaranteed the obligations of Mothers Work,
Inc. with respect to these Notes. There are no restrictions on the ability of
the Guarantor 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 Guarantor:
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1999
------------------ --------------
<S> <C> <C>
Current assets $ 2,865 $ 2,865
Non-current assets $39,729,143 $48,975,303
Current liabilities $ -- $ --
Non-current liabilities $ 2,520,464 $ 5,683,958
Net sales $15,420,959 $ 9,246,160
Costs and expenses $ 9,764,874 $ 30,000
Net income $ 3,733,016 $ 6,082,665
</TABLE>
This summarized financial information for the Guarantor has been prepared from
the books and records maintained by the Guarantor and the Company. The
summarized financial information may not necessarily be indicative of the
results of operations or financial position had the Guarantor operated as an
independent entity. Certain intercompany sales included in the Subsidiary's
records are eliminated in consolidation. Mothers Work, Inc., in turn, pays all
expenditures on behalf of the Guarantor. 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 consistently 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)
Percentage of Net Sales --------------------------
-------------------------------------------------------- Three Months Six Months
Three Six Ended Ended
Months Ended Months Ended March 31, March 31
March 31, March 31 1999 1999
---------------------------- -------------------------- Compared to Compared to
1998 1999 1998 1999 1998 1998
----- ----- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% (1.9)% (1.3)%
Cost of goods sold 50.2 50.9 48.9 50.3 (0.5) 1.3
----- ----- ----- -----
Gross profit 49.8 49.1 51.1 49.7 (3.3) (3.9)
Selling, general
and administrative
expenses 50.9 45.5 48.0 43.0 (12.5) (11.5)
----- ----- ----- -----
Operating income (1.1) 3.6 3.1 6.7 NM NM
Interest expense, net 5.3 5.3 4.9 5.2 (1.6) 6.0
----- ----- ----- -----
Income (loss) before
income taxes (6.4) (1.7) (1.8) 1.5 NM NM
Income tax provision
(benefit) (3.2) (0.8) (0.9) 0.8 NM NM
----- ----- ----- -----
Net income (loss) (3.2)% (0.9)% (0.9)% 0.7% NM NM
===== ===== ===== =====
</TABLE>
NM - Not Meaningful.
7
<PAGE>
The following table sets forth certain information representing growth in the
number of leased departments and Company-owned stores for the periods indicated:
<TABLE>
<CAPTION>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Beginning of period
Maternity Stores 446 473 431 460
Non-maternity Stores 50 -- 42 --
Leased maternity departments 125 106 114 123
---- ---- ---- ----
Total 621 579 587 583
Opened:
Maternity stores 9 15 24 28
Non-maternity stores 1 -- 9 --
Leased maternity departments 19 -- 31 5
Closed:
Maternity stores (7) (2) (7) (2)
Non-maternity stores -- -- -- --
Leased maternity departments (14) (12) (15) (34)
---- ---- ---- ----
End of period
Maternity stores 448 486 448 486
Non-maternity stores 51 -- 51 --
Leased maternity departments 130 94 130 94
==== ==== ==== ====
Total 629 580 629 580
==== ==== ==== ====
</TABLE>
In 1998, the Company terminated its Episode (R) operations. The Company's
results of operations for the second quarter and the first six months of fiscal
1998 included the following amounts for the Episode division:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, 1998 March 31,1998
------------------ ----------------
<S> <C> <C>
Revenues $ 11,133,000 $ 24,489,000
Cost of goods sold 7,626,000 15,085,000
Gross profit 3,507,000 9,404,000
Contribution loss* $ (4,701,000) $ (6,894,000)
</TABLE>
* Contribution margin is comprised of gross margin less cost of store
operations, royalties and certain related expenses.
Three Months Ended March 31, 1998 and 1999
Net Sales
Net sales of $66.5 million in the second quarter of fiscal 1999 decreased by
$1.3 million or 1.9%, as compared to the second quarter of fiscal 1998 of $67.8
million, which included $11.1 million of sales from the now closed Episode (R)
America stores. Net sales for its maternity business increased 17.5% to $66.5
million in the second quarter of fiscal 1999 from $56.6 million in the same
quarter of the preceding year. The increase was primarily due to a comparable
store sales increase in its maternity business of 14.2% during the second
quarter of fiscal 1999 (based on 503 stores) versus a comparable sales increase
of 10.8% during the second quarter of fiscal 1998 (based on 394 stores). At
March 31, 1999 the Company had 580 maternity clothing locations, as compared to
578 maternity clothing locations and 51 Episode(R) non-maternity locations at
March 31, 1998. All of the Episode (R) stores were closed as of December 31,
1998.
8
<PAGE>
Gross Profit
Gross profit in the maternity business in the second quarter of fiscal 1999
increased $2.4 million or 7.9%, as compared to the second quarter of fiscal 1998
gross profit for the maternity division which was $30.2 million. Gross profit as
a percentage of net sales decreased to 49.1% in the second quarter of fiscal
1999 as compared to maternity gross profit of 53.3% in the comparable period of
the prior year. The decrease in gross profit as a percentage of sales results
from sales in the Motherhood division, which operates at a lower gross profit
percentage, growing at a faster rate than sales in the high end maternity
division. Gross profit was also reduced as the company reduced selling prices in
its moderate division in an effort to counter aggressive competition.
Selling, General & Administrative Expenses
Selling, general and administrative expenses decreased $4.3 million, or 12.5%,
in the second quarter of fiscal 1999 as compared to the second quarter of fiscal
1998 and, as a percentage of net sales, decreased from 50.9% to 45.5%. The
decrease was primarily due to the elimination of Episode (R) related selling,
general and administrative costs which more than offset the increase in the
maternity business store wages, rents and operating expenses. The increase in
the number of maternity stores is the principal cause of the increase in
maternity business expenses.
Operating Income
The operating income in the second quarter of fiscal 1999 was $2.4 million, or
3.6% of sales, as compared to an operating loss of $0.8 million, or 1.1% of
sales, in the second quarter of fiscal 1998. The increase in operating income is
due to the elimination of losses from Episode (R) which was offset by a $1.5
million decrease in the maternity business operating income in the second
quarter of fiscal 1999 when compared to the second quarter of fiscal 1998.
Interest Expense, Net
Net interest expense decreased slightly in the second quarter of fiscal 1999
compared with the second quarter of fiscal 1998, and as a percentage of sales,
was 5.3% in the second quarter of fiscal 1999 and fiscal 1998. The decrease is
attributable to lower interest rates, which were largely offset by higher
average outstanding balance on the line of credit.
Income Taxes
The effective income tax rate was 47.2% in the second quarter of fiscal 1999 as
compared to 49.8% in the second quarter of fiscal 1998. The change in the
effective income tax rate was primarily due to the relationship of
non-deductible goodwill amortization to income before income taxes.
Six Months Ended March 31, 1998 and 1999
Net Sales
Net sales of $143.2 million in the first six months of fiscal 1999 decreased by
$1.9 million, or 1.3%, as compared to $145.2 million in the first six months of
fiscal 1998, which included $24.5 million of sales from the now closed Episode
(R) stores. Net sales for the maternity business increased 18.7% to $143.2
million in the first six months of fiscal 1999 from $120.7 million in the same
six months of the preceding year. The increase was primarily due to a comparable
store sales increase in its maternity business of 14.6% during the first six
months of fiscal 1999 (based on 480 stores) as compared to an 11.3% comparable
store sales increase in the first six months of fiscal 1998 (based on 376
maternity stores). The increase is also attributable to sales generated by new
stores, which was partially offset by decreases resulting from the closure of
34 leased maternity departments.
9
<PAGE>
Gross Profit
Gross profit in the maternity business in the first six months of fiscal 1999
increased $6.5 million to $71.2 million or 10.0%, as compared to $64.7 million
gross profit in the maternity business in the first six months of fiscal 1998.
Gross profit as a percentage of net sales decreased to 49.7% in the first six
months of fiscal 1999 as compared to maternity gross profit of 53.6% in the
comparable period of the prior year. The decrease in gross profit as a
percentage of sales results from sales in the Motherhood division, which are
growing at a faster rate than high end, but which operates at a lower gross
profit percentage than the high end maternity division. Gross profit was also
reduced as the company reduced selling prices in its moderate division, in an
effort to counter aggressive competition.
Selling, General & Administrative Expenses
Selling, general and administrative expenses decreased $8.0 million, or 11.5%,
in the first six months of fiscal 1999 as compared to the second quarter of
fiscal 1998 and, as a percentage of net sales, decreased from 47.9% to 43.0%.
The decrease was primarily due to elimination of Episode (R) related selling,
general and administrative costs which more than offset increases in maternity
business related store wages, rents and operating expenses. The increase in the
number of maternity stores is the principal cause of the increase in maternity
business expenses.
Operating Income
The operating income in the first six months of fiscal 1999 was $9.6 million, or
6.7% of sales, as compared to the first six months of fiscal 1998 which was of
$4.6 million, or 3.1% of sales. Operating income for the maternity business
decreased $1.7 million in the first six months of fiscal 1999 when compared to
the first six months of fiscal 1998.
Interest Expense, Net
Net interest expense increased by $0.4 million in the first six months of fiscal
1999 compared with first six months of fiscal 1998, and as a percentage of
sales, increased from 4.9% to 5.3%. The dollar increase was primarily due to
increased short-term borrowings under the line of credit but was partially
offset by lower interest rates.
Income Taxes
The effective income tax rate was 49.2% in the first six months of fiscal 1999
as compared to 50.0% in the first six months of fiscal 1998. 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 first six months ended March 31, 1999 have
been primarily for the following: debt service, furniture and fixtures and
leasehold improvements required to increase the number of retail locations,
obligations related to the shut down of the Episode (R) division, and a purchase
of 115,000 shares of its common stock. The Company's cash source for the first
six months of fiscal 1999 was principally from operations, but also from
additional draws on the line of credit. At March 31, 1999 the Company had
available cash and cash equivalents of $3.8 million, compared to $3.6 million at
September 30, 1998.
Net cash provided by operating activities was $2.3 million in the first six
months of both fiscal 1999 and 1998. The net cash provided by operating
activities in the first six months of fiscal 1999 includes cash provided by net
income, including adjustments for non-cash items of $7.7 million, partially
offset by cash used by working capital of $5.4 million. The principal component
of cash used for working capital in the first six months of fiscal 1999 was a
$9.2 million decrease in accounts payable and accrued expenses, which was
partially offset by a $4 million decrease in prepaid expenses. The reduction in
accrued expenses and prepaid expenses largely related to Episode (R) expenses
and cash receipts. The net cash provided by working capital in the first six
months of fiscal 1998 derived from cash provided by net income, after
adjustments for non-cash items of $4.3 million, partially offset by cash used by
working capital of $2.0 million. The cash used by working capital in the first
six months of fiscal 1998 consisted of a $2.9 million increase in inventories
and an increase in accounts payable and accrued expenses, all of which were
partially offset by increases in receivables, and a decrease in prepaid expenses
and other assets.
10
<PAGE>
Net cash used in investing activities decreased from $5.3 million in the six
months ended March 31, 1998 to $2.9 million in the six months ended March 31,
1999. The cash used in investing activities for the first six months of fiscal
1998 included $4.0 million used for capital expenditures for new store
facilities, primarily Motherhood and Episode (R), and improvements to existing
stores, $1.2 million for other corporate capital expenditures and $0.1 million
for intangible and other assets. This compares with investing activities
amounting to $2.9 million for the first six months of fiscal 1999, which derives
principally from capital expenditures for new stores.
Net cash provided by financing activities decreased from $2.0 million for the
six months ended March 31, 1998 to $0.7 million for the six months ended March
31, 1999. The cash provided by financing activities in the first six months of
fiscal 1999 resulted primarily from $2.0 million in net cash borrowings on the
line of credit and cash overdraft and $0.1 million from the exercise of options
offset by the purchase of 115,000 Company shares at a total cost of $1.2 million
and repayments of long-term debt of $0.2 million. This compares with $2.2
million in net cash borrowings on the line of credit and cash overdraft activity
offset by $0.2 million in repayment of long-term debt in the first six months of
fiscal 1998.
On March 31, 1999, the Board of Directors authorized the repurchase of up to
150,000 additional shares of the Company's common stock, which represents
approximately 4.1% of the total common shares outstanding, from time to time
during the period from April 1, 1999 through September 30, 2002. Purchases will
be dependent upon market conditions and will be made through open market
purchases, negotiated transactions or other types of repurchases. During the
month of April 1999, the Company purchased 37,000 additional shares at a total
cost of $0.4 million.
In April 1998 the Company entered into a $44 million Working Capital Facility
Agreement (the "Agreement") which expires in April 2001. In addition to the
Working Capital Facility, which can be used for borrowings and letters of
credit, the Company also has an additional $4 million letter of credit to
collateralize an Industrial Revenue Bond. Further, there are no financial
requirements under the Agreement unless the Aggregate Adjusted Availability
("AAA"), as defined in the Agreement, falls below $10 million. If the AAA falls
below $10 million, then the Company must achieve a Minimum Cash Flow, also
defined in the Agreement, of not less than zero. During the first six months of
fiscal 1999 the Company achieved a positive cash flow, and the AAA did not fall
below $10 million. As of April 30, 1999 the Company had $25.8 million in
borrowings and $5.6 million in additional letters of credit under the Working
Capital Facility, which includes approximately $4 million collateralizing the
Industrial Revenue Bond.
The Company's expansion efforts will be focused on the moderate Motherhood
business. Gross margin from Motherhood is typically lower than the remainder of
the maternity business, and consequently as revenues from the Motherhood
business increase as a percentage of total Company revenues gross margin
percentages for the Company may decline.
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 1999. Based on the Company's fiscal 1999 expansion plan, the
Company expects capital expenditures to be approximately $6.8 million, of which
approximately $2.9 million was expended by March 31, 1999. Most of the planned
capital expenditures related to new store openings and computer equipment.
The Year 2000 ("Y2K") issue arises from computer programs, commercial systems
and embedded chips that will be unable to properly interpret dates beyond the
year 1999. The Company uses numerous proprietary and third party computer
technologies - both hardware and software - directly in its business.The
Company also relies on the ability of numerous third parties and their systems
to address the Y2K issue. The Company's critical management information systems
include: point-of-sale equipment; procurement, manufacturing and distribution
equipment; credit card and banking services; and business and accounting
management systems. In order to assess its readiness for the Y2K issue, the
Company conducted a comprehensive review of its internal computer systems to
identify any applications that potentially could be compromised by the Y2K
issue. The Company also reviewed the Y2K readiness of its key vendors and
suppliers. Based on the results of the reviews, the Company believes that the
reasonably likely worst scenario would be short-term disruption of systems
affecting its supply and distribution channels. The Company has developed
contingency plans and is identifying the necessary actions it would need to take
11
<PAGE>
if critical systems or service providers were not Y2K compliant. The Company
expects to finalize these contingency plans by mid-1999.
At the present time, the Company is not aware of any Y2K issues that are
expected to materially affect its products, services, competitive positions or
financial performance. 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 can not give assurance that the third parties
with whom it does business will address any Y2K issues in their own systems on a
timely basis. Total incremental expenses incurred to date, and those yet to be
incurred, related to review and remediation of the Y2K issue have not had and
are not expected to have a material impact on the Company's financial position.
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 1999 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, ability to hire and train associates,
changes in fertility and birth rates, political stability, currency and exchange
risks, 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 which are beyond the Company's control.
12
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The analysis below presents the sensitivity of the market value of the Company's
debt instruments to selected changes in market rates. The range of changes
chosen reflects the Company's view of changes which are reasonably possible over
a one-year period. The Company's financial instruments are primarily comprised
of its debt portfolio. The Company believes that the market risk exposure on
other financial instruments is immaterial.
At March 31, 1999, the major components of the Company's debt portfolio are
Senior Unsecured Exchange Notes (the " Notes") and a Line of Credit (the
"Line"); both are denominated in US dollars. The Notes bear interest at a fixed
rated of 125/8%, and the Line bears interest at a variable rate which, at March
31, 1999 was approximately 8%. While a change in interest rates would not affect
the interest incurred or cash flow related to the fixed portion of the debt
portfolio, the Debt Value would be affected. A change in interest rates on the
variable portion of the debt portfolio impacts the interest incurred and cash
flows, but does not impact the net financial instrument position.
The sensitivity analysis as it relates to the fixed portion of the Company's
debt portfolio assumes an instantaneous 100 basis point move in interest rates
from their levels at March 31, 1999 with all other variables held constant. A
100 basis point increase in market interest rates would result in a decrease in
Debt Value of $0.9 million at March 31, 1999. A 100 basis point decrease in
market interest rates would result in a $0.9 million increase in Debt Value at
March 31, 1999.
Based on the variable rate debt included in the Company's debt portfolio at
March 31, 1999, a 100 basis point increase in interest rates would result in an
additional $0.2 million of interest incurred per year. A 100 basis point
decrease would lower interest expense by $0.2 million.
13
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Ms. Rebecca C. Matthias, Ms. Verna K. Gibson and Mr. Joseph A.
Goldblum were elected to serve as directors at the Company's
Annual Meeting held on January 22, 1999. The voting results were
2,307,260 shares in favor and 3,530 shares withheld for Ms.
Matthias, 2,310,260 shares in favor and 530 shares withheld for
Ms. Gibson, and 2,310,445 shares in favor and 345 shares
withheld for Mr. Goldblum. At this Annual Meeting the vote
ratifying appointment of Arthur Andersen LLP as independent
auditors for the year ending September 30, 1999 was 2,310,295
shares for, 450 shares against, and 45 shares withheld.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (schedule submitted in
electronic format only)
(b) Reports on Form 8-K.
None.
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: May 17, 1999 By: /s/ Dan W. Matthias
-----------------------------------
Dan W. Matthias
Chief Executive Officer
And
Chairman of the Board
Date: May 17, 1999 By: /s/ Thomas Frank
-----------------------------------
Thomas Frank
Chief Financial Officer
And
Vice President - Finance
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page No.
------- ----------- --------
<S> <C> <C>
27 Financial Data Schedule (schedule submitted in 16
Electronic format only)
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S SECOND QUARTER 10-Q FOR THE PERIOD ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 3,787,961
<SECURITIES> 0
<RECEIVABLES> 3,286,224
<ALLOWANCES> 0
<INVENTORY> 62,774,726
<CURRENT-ASSETS> 80,678,271
<PP&E> 66,701,726
<DEPRECIATION> 30,442,566
<TOTAL-ASSETS> 165,974,696
<CURRENT-LIABILITIES> 53,532,000
<BONDS> 96,320,464
0
11,500,000
<COMMON> 35,099
<OTHER-SE> (3,441,379)
<TOTAL-LIABILITY-AND-EQUITY> 165,974,696
<SALES> 143,211,449
<TOTAL-REVENUES> 143,211,449
<CGS> 71,988,108
<TOTAL-COSTS> 61,597,961
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,527,887
<INCOME-PRETAX> 2,097,493
<INCOME-TAX> 1,031,137
<INCOME-CONTINUING> 1,066,356
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,066,356
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
