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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 2000
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or
[ ] 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 13-3045573
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
456 NORTH FIFTH STREET, PHILADELPHIA, PA 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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Securities registered pursuant to
Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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NONE N/A
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Securities registered pursuant to
Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. ____
On December 12, 2000, the aggregate market value of the Registrant's
common stock, $.01 par value, held by nonaffiliates of the Registrant was
approximately $23,078,439.
On December 12, 2000, 3,453,750 shares of the Registrant's common
stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed with the Commission in
connection with the Annual Meeting of Stockholders scheduled to be held on
January 18, 2001 are incorporated by reference into Part III of this Form 10-K.
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<PAGE>
PART I.
ITEM 1. BUSINESS
GENERAL
Mothers Work, Inc. ("Mothers Work" or the "Company")1 is the largest
designer, manufacturer and retailer of maternity clothing in the United States.
The Company is incorporated under the laws of the State of Delaware and entered
into the maternity apparel business in 1982. Its principal executive offices and
production facility are located at 456 North Fifth Street, Philadelphia,
Pennsylvania 19123 and its telephone number is (215) 873-2200.
As of September 30, 2000, the Company operated a total of 703 stores,
including 592 stores through the Mimi Maternity(R) ("Mimi Maternity"), A Pea in
the Pod(R) ("A Pea in the Pod"), Motherhood Maternity(R) ("Motherhood"), and
Motherhood Maternity Outlet(R) ("Motherhood Maternity Outlet") store concepts
and 111 leased maternity departments, offering a full range of career, casual,
and special occasion maternity apparel.
The Company locates its stores primarily in regional shopping malls,
factory-direct outlet centers and, to a lesser extent, in central business
districts within major metropolitan areas. The Company is vertically integrated,
performing design, manufacturing, distribution, and retail sales functions
primarily in-house. The Company also markets its brands and takes sales orders
over the phone, by mail order catalogs and brochures and on its Internet sites.
The Company's maternity wear retail stores have distinctly positioned
brands with different merchandising and marketing strategies targeted to women
seeking to purchase moderate to upscale maternity fashions. All of the Company's
maternity store concepts sell clothing that is designed to meet an expectant
mother's entire lifestyle fashion needs, including her career requirements, as
well as her casual and special occasion needs. Mimi Maternity is designed to
meet the needs of fashion-forward women who are willing to spend more to make a
fashion statement. A Pea in the Pod markets the most upscale of the Company's
maternity fashions in boutique store locations, offering a premium merchandise
selection manufactured by the Company, including the Mimi Maternity line of
clothing as well as certain designer labels produced exclusively for A Pea in
the Pod. Mimi Maternity and A Pea in the Pod collectively constitute the
Company's "high-end" product line. Motherhood, the broadest market-based
specialty retailer of maternity clothing in the United States, is positioned to
offer everyday low pricing and an extraordinary assortment of career, casual,
exercise, lingerie, nursing apparel and accessories and plus sizes at moderate
price points. Motherhood Maternity Outlet stores(2) offer the Motherhood concept
in a line of moderate market factory-direct outlet stores, serving the woman who
seeks maternity clothing but cannot or will not purchase at full retail prices.
In April 2000, the Company launched Mimi Essentials for Maternity(TM) ("Mimi
Essentials"), a line of fashionably modern maternity clothes in the middle
market with price points between the Mimi Maternity and Motherhood concepts. The
Mimi Essentials line is sold in Mimi Maternity stores as well as in new Mimi
Essentials departments situated within certain Motherhood stores nationwide.
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(1) The terms Mothers Work and the Company as used in this Report
include Mothers Work, Inc. and Cave Springs, Inc., its wholly-owned subsidiary.
All references in this Report to stores or Company-owned stores include leased
departments.
(2) The Company continues to operate stores under the name Mothers Work
where bound by lease arrangements or where it would otherwise not be economical
to change the name of the store.
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The Company's strategy is to:
o Respond quickly to customer fashion demand utilizing its Real Time
Retailing(R) business model.
o Secure and maintain desirable retail locations within regional
shopping malls, exclusive street address locations, and
factory-direct outlet centers.
o Use a combination of domestic and international production to
ensure responsiveness to market demands as well as cost
efficiencies.
o Maintain positions at all price points, "giving the customer what
she wants when she wants it" at the price point she selects.
o Expand its presence in the moderate price market by identifying
key items and offering them at everyday low prices.
o Maintain a strategic presence in high visibility online portals
and sites and have the full line of brands available for shopping
and purchasing online.
o Deliver marketing and branding communications in venues that
influence and reach first time pregnant women early in their
pregnancy.
THE MATERNITY APPAREL MARKET
The Company is unaware of any reliable data on the revenue size of the
maternity apparel market. The Company believes that the number of maternity
clothing wholesale vendors has decreased over the last few years as full service
retailers are attempting to be more competitive in this commitment. Vertical
integration reduces the Company's reliance on the availability of merchandise
from outside vendors and provides it with a competitive advantage over other
maternity retailers. Management believes that the fact that women may choose to
shop the regular market or decide to purchase loose-fitting or larger-sized
clothing as a substitute for maternity wear impacts the maternity apparel
market.
STRATEGY
The key components of the Company's strategic objectives are described
below.
REAL TIME RETAILING - Real Time Retailing(R) is the Company's
proprietary and comprehensive capability to monitor better and respond more
quickly to consumer fashion demand, thereby reducing the fashion risk inherent
in the apparel business. Through the use of computerized point of sale and
merchandising systems, daily replenishment of inventory to the stores,
"quick-response" design, "quick-turn" domestic manufacturing and cost efficient
international production, the Company is able to provide its customers with the
merchandise that they want when they want it. The objective is to maximize the
sales potential of each store by matching the profile of the store's customers
with the proper merchandise. Real Time Retailing(R) also assists the Company in
maximizing its in-store inventory turns and sales per square foot, reducing its
cost of goods sold and improving gross profit margins.
PRIME LOCATIONS AND BROAD DISTRIBUTION - The Company's ability to
generate high sales per square foot, in addition to the high quality image and
design of the Company's stores and its multiple concept approach, have enabled
the Company to secure and maintain desirable retail locations within regional
shopping malls throughout the United States, factory-direct outlet centers and
select real estate street locations. These factors have enabled the Company not
only to locate stores at many of the most desirable shopping malls and
factory-direct outlet centers in the country, but also to obtain desirable
locations within such malls and centers.
By operating four different store concepts, the Company is positioned
to satisfy demand for maternity clothing throughout the moderate and high-end
segments of the market by offering a full range
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of career, casual, exercise, and special occasion maternity wear and lingerie.
Mall operators require an appropriate mix of stores for the mall's consumer and
market position. For regional malls that require one maternity store, the
Company provides several different concepts within the moderate and high-end
segments of the market from which the mall can choose to meet its consumer
needs. In the case of multi-mall operators, the Company has the flexibility to
supply packages of stores in multiple malls utilizing all of its concepts.
KEY ITEMS - The Company's strategy is to continue to expand in the
moderate item market by offering seasonal items at everyday low prices. Typical
seasonal offerings are denim blue jeans, turtlenecks, t-shirts, leggings,
lingerie and additional items identified in the market that fit the key-item
profile.
PRODUCTION - The Company uses a combination of domestic and
international production. International sources are used for items such as those
in the moderate apparel market where lower costs are necessary for competitive
reasons, and the fashion marketability of the item is not adversely affected by
the longer lead times that are inherent when a product is acquired from an
international vendor. Domestic production helps to ensure (1) in-season
manufacturing capability for fast selling moderate priced product to reduce
stock-outs; (2) preseason production of time-sensitive fashion apparel; and (3)
in-season production of fashion items identified during the season. Domestic
manufacturing capability allows the Company to react in real-time to changing
market trends, thereby providing the Company with a competitive advantage over
other apparel retailers who source the majority of their product overseas.
EXPANSION STRATEGY
Since the time of its initial public offering in March 1993, the
Company has grown its maternity store base from 67 to 703 stores as of September
30, 2000. Reflected in this increase are stores that were obtained as a result
of the Company's January 1994 acquisition of 22 Page Boy stores, its April 1995
acquisition of 66 A Pea in the Pod stores and its August 1995 acquisition of 217
Motherhood stores.
The Company opened 78 new locations (net of closures) in fiscal 2000,
consisting of 62 Motherhood and Motherhood Maternity Outlet stores, 14 leased
departments and two high-end stores compared with 94 new locations in fiscal
1999, consisting of 73 Motherhood and Motherhood Maternity outlet stores, 19
leased departments and two high-end stores. In fiscal 2001, the Company plans to
add approximately 78 maternity stores, principally Motherhood stores, as well as
the more exclusive Mimi Maternity stores.
In September 2000, the Company entered into a multi-year agreement with
Babies "R" Us, Inc. ("Babies "R" Us"). Under the terms of this business
arrangement, the Company will expand its maternity departments to 53 Babies "R"
Us locations nationwide. Additionally, in October 2000, the Company announced an
agreement with America Online Inc. ("AOL") for placement in the Shop@AOL online
shopping destinations. The agreement broadens the Company's ability to reach new
customers using AOL, currently the world's largest Internet provider.
A significant portion of the Company's growth has been attributable to
the addition of new stores, the acquisition of existing maternity stores and the
increased sales volume from such stores. The Company's ability to open new
stores on a timely basis will depend upon its success in identifying suitable
store sites, obtaining leases for those sites on acceptable terms, constructing
or refurbishing the sites where necessary, hiring and training skilled store
managers and personnel, and cash availability. There can be no assurance that
suitable sites will be available for new stores or that new stores will generate
sales volumes comparable to those of the Company's existing stores. In addition,
the costs
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associated with opening such stores may adversely affect the Company's
profitability. Further, the Company periodically monitors and analyzes the need
for store closures.
The Company continually identifies and evaluates real estate
opportunities. In addition to its current stores, the Company has identified
additional malls and other locations in the United States that would be well
suited for maternity stores. The Company considers markets nationwide but favors
metropolitan areas with populations greater than 500,000. Additional malls and
outlet centers that do not meet the Company's primary site selection criteria
may nevertheless be attractive store locations if favorable lease terms can be
negotiated. The addition of non-mall store locations is likely to continue
during fiscal 2001.
The Company has increased its share of brand building through its
advertising program and fashion and maternity-targeted publicity, as well as
leveraged strategic alliances with other key partners who assist in
cost-effectively reaching the target pregnant customer through a variety of
marketing initiatives. The Company runs full-page ads for all its brands in
pregnancy-targeted publications as well as prenatal issues of leading baby
magazines. Publicity initiatives begun in fiscal 2000 to drive editorial
coverage of the Company in magazines, TV and newsprint were focused primarily on
A Pea in the Pod.
The Company has expanded its product offering during fiscal 2000 to
include Plus size maternity apparel and a broader line of clothing and
accessories suitable for nursing mothers. Nursing products were offered through
seasonal mail order catalogs mailed to store customers and a select collection
of nursing apparel was made available in Motherhood stores.
STORE CONCEPTS
The Company operates its maternity stores under four concepts offering
a full range of career, casual, exercise and special occasion maternity wear: A
Pea in the Pod, Mimi Maternity (including Mimi Essentials), Motherhood and
Motherhood Maternity outlets. The following table sets forth certain information
regarding the Company's store composition as of September 30, 2000, including
each store concept's target location, product description and general price
points:
SUMMARY OF STORE CONCEPTS
<TABLE>
<CAPTION>
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AVERAGE STORE
STORE DESCRIPTION OF PRODUCT GENERAL SIZE
CONCEPT TARGET LOCATION DESCRIPTION PRICE RANGE (SQUARE FEET) COMPARABLE RETAILERS
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<S> <C> <C> <C> <C> <C>
A Pea in the Pod High-end regional Bridge, high $70 - $450 2,400 Bergdorf Goodman, Neiman
malls and affluent fashion Marcus, Saks Fifth Avenue,
residential areas and Barney's
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Mimi Maternity High-end regional Fashion-forward, $58 - $208 1,600 Boomingdales, Gap, Old
malls contemporary Navy, Nordstrom's, Ann
Taylor, and Banana Republic
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Motherhood Moderate regional Value-oriented, $ 9 - $ 59 1,300 Macy's, Sears, J.C. Penney,
malls and mostly casual Mervyn's, Lerners,
department stores basics; key imaternity, Mothertime, Dan
items Howard, Target, K Mart,
Kohl's and Wal-Mart
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Motherhood Factory-direct Fashion at $ 7 - $ 59 2,000 Neiman Marcus' Last Call,
Maternity outlet malls and marked-down Nordstrom Off the Rack,
Outlets centers prices Saks Fifth Avenue
Clearinghouse, and outlets
for Ann Taylor, Polo, Donna
Karan, Liz Claiborne, J.
Crew and Brooks Brothers
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</TABLE>
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<PAGE>
Most malls require only one moderate to high-end maternity store;
however, major regional malls with several department stores may be able to
accommodate two. The Company has the potential to fill both positions at a given
mall with Mimi Maternity and A Pea in the Pod as the Company's prestige
offerings and Motherhood as the value-oriented, mostly casual basics. As of
September 30, 2000, the Company had two or more maternity stores in 31 major
regional malls.
STORE OPERATIONS
The Company employs skilled, motivated sales associates who are trained
to provide the detailed assistance and the reassurance needed by the customer.
The Company's centralized operations allow the store associates to focus on
selling and the physical maintenance of the merchandise and store appearance.
Visual merchants coordinate with the merchandising department to develop space
allocation plans, design store display windows, and to define and enhance the
product presentation.
MERCHANDISING, DESIGN AND STORE INVENTORY PLANNING
MERCHANDISING. Guided by Real Time Retailing(R), the Company's
merchandising department combines input from Company designers, current trends
seen generally in women's clothing, outside vendor resources and store
management input, with TrendTrack(TM) computer analysis of customer preferences
to provide a constant flow of merchandise to the Company's stores. The Company
strives to maintain an appropriate balance between new merchandise and proven
successful styles and utilizes TrendTrack's(TM) open-to-buy system to plan its
domestic and international production to control inventory quantity and mix.
These fashions are generally marketed under the Company's A Pea in the Pod(R),
Mimi Maternity(R), Mimi Essentials for Maternity(TM), Steena(R), and
Motherhood(R) labels.
DESIGN. The Design department creates and produces samples and patterns
for the Company's manufactured products under the guidance of the Merchandising
department. The design of a product begins with a review of European and New
York trends and current retail trends through fashion reporting service slides
and fabric samples. The designers review the Company's best selling items from
prior seasons and integrate current fashion ideas from the non-maternity retail
market.
STORE INVENTORY PLANNING. The Company establishes target inventories
for each store using its inventory planning system to enhance store merchandise
coordination and stock balance, maintain adequate depth of merchandise by style,
and manage close-out merchandise and end-of-season consolidation of merchandise.
Integral to the Company's inventory management program are its proprietary
methods guided by Real Time Retailing(R) and managed by its TrendTrack(TM)
information system.
PRODUCTION AND DISTRIBUTION
The Company designs and manages production for a substantial portion of
its merchandise. The Company subcontracts its sewing to factories throughout the
world, including factories located in the Philadelphia metropolitan and
surrounding area, and works with more than 40 subcontractors. No individual
subcontractor represents a material portion of the Company's sewing. Merchandise
produced abroad utilizes Company designs. The Company continues to seek
additional subcontractors throughout the world for its sourcing needs including
independent foreign subcontractors, principally in Mexico, India and the Far
East, and for its "807 operations" in the Dominican Republic, Costa Rica,
Guatemala and Honduras. A growing percentage of the Company's merchandise is
purchased from the vendor as a final assembled product. These products typically
utilize Company designs as well. Fabric, trim and other supplies are obtained
from a variety of sources.
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The Company believes that as it continues to increase its number of
store locations, there will continue to be adequate sources of fabrics and other
supplies to produce a sufficient supply of quality goods in a timely manner and
on satisfactory economic terms.
The Company's production and quality assurance team monitors production
at each subcontractor's facility in the United States and abroad to ensure
quality control, compliance with its design specifications and timely delivery
of finished goods. Finished garments from subcontractors and other manufacturers
are received at the Company's central warehouse in Philadelphia, Pennsylvania,
inspected, and stored for picking. Shipments to stores are primarily made by
common carrier, typically UPS, Airborne, Federal Express or a similar service
providing one-or two-day delivery throughout the United States.
Merchandise imported into the United States is subject to duty. Duties
on Mexican imports are controlled in accordance with the North American Free
Trade Agreement. The Company cannot predict whether any of the other foreign
countries in which its products are manufactured, currently or at any future
date, will be subject to new or increased import restrictions by the United
States government, including the likelihood, type or effect of any trade
restrictions. Such trade restrictions, including increased tariffs or decreased
quotas, imposed on items sold by the Company could affect the importation of
such merchandise generally and, in that event, could increase the cost or reduce
the supply of merchandise available to the Company and adversely affect the
Company's business, financial condition, results of operations and liquidity.
The Company's merchandise flow may also be adversely affected by political or
economic instability in any of the countries in which its goods are
manufactured, if it affects the production or export of merchandise from such
countries; significant fluctuation in the value of the U.S. dollar against
foreign currencies; and restrictions on the transfer of funds.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
All of the Company's stores have point-of-sale terminals that provide
information used in the Company's customized TrendTrack(TM) item and
classification tracking system. This system provides daily financial and
merchandising information that is integral to the Company's Real Time
Retailing(R) strategy. The TrendTrack(TM) system has numerous features designed
to integrate the Company's retail operations with its design, manufacturing and
financial functions. These features include custom merchandise profiles for each
store, daily inventory replenishment, item-tracking providing daily updated
selling information for every style, classification open-to-buy and inventory
control, as well as the daily collection of credit card sales data.
The Company employs a comprehensive materials requirements planning
system to manage its production inventories, documentation, work orders and
scheduling. This system provides a perpetual inventory of raw materials, actual
job costing, scheduling and bill of materials capabilities.
ADVERTISING, MARKETING AND STRATEGIC ALLIANCES
The Company's advertising and promotion efforts leverage in-store
marketing utilizing store windows, prenatal consumer-targeted advertising for
the Motherhood, Mimi Maternity, A Pea in the Pod, Mimi Essentials, Motherhood
Nursing and MaternityMall.com brands. Key prenatal magazines in which the
Company advertises include SHAPE FIT PREGNANCY, PREGNANCY and AMERICAN BABY
magazines. A Pea in the Pod and Mimi Maternity are also advertised in fashion
magazines such as VOGUE and IN STYLE. In addition, the Company produces and
distributes maternity brochures quarterly to obstetric and gynecological offices
as well as upon direct requests to customers, doctors' offices and hospitals.
Nursing products are offered through a mail order catalog as well as marketed in
Motherhood ads. Strategic alliance partners offer additional brand visibility
through well-negotiated barter and business
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agreements to increase mutual brand visibility. During fiscal 2001, the Company
plans to continue to increase its investment in advertising and marketing;
however, there can be no assurances that these increased investments will result
in increased sales or profitability.
The customer mailing list, which by its nature is constantly changing,
is regularly updated through the Company's point-of-sale collection system. The
database is an important asset in striking strategic relationships and providing
access to the major brands and partners desiring to target our pregnant
customer.
The Company also advertises on the Internet through its websites. The
MaternityMall.com website was launched on the Internet in January 1999 with five
tenants. In less than a year, it has expanded to over 30 tenants. The Company
intends to continue to grow its MaternityMall.com website by further increasing
its e-commerce tenants and by expanding the services offered and information
provided. Cross-selling of brands occurs through the website where customers can
search to find the ideal maternity brand in addition to store locations. In
fiscal 2001, Mothers Work intends to close its infant apparel and product
e-commerce site, Babystuff.com, in conjunction with the recently expanded
business alliance with Babies "R" Us.
COMPETITION
The Company's business is highly competitive. Depth of selection in
sizes, colors and styles of merchandise, product procurement and pricing,
ability to anticipate fashion trends and customer preferences, inventory
control, reputation, quality of merchandise, store design and location,
advertising and customer service are all important factors in competing
successfully in the retail industry. The Company faces competition in its
maternity and nursing apparel lines from various full-price maternity clothing
chains, a number of off-price specialty retailers, Internet businesses and
catalog retailers as well as from local, regional and national department stores
and women's and, to some extent, men's clothing stores. The Company faces
competition in the moderate maternity market from retailers such as Target,
Kohl's, J.C. Penney, K Mart, Wal-Mart, Mervyn's, Sears, Gap and others. Many of
these competitors are larger and have significantly greater financial resources
than the Company.
EMPLOYEES
At September 30, 2000, the Company had approximately 2,253 full-time
and 1,375 part-time employees nationwide. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its employee
relations to be good.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Dan W. Matthias.....................57 Chairman of the Board and Chief Executive Officer
Rebecca C. Matthias.................47 President, Chief Operating Officer and Director
Michael F. Devine, III..............42 Chief Financial Officer and Vice President - Finance
Donald W. Ochs......................59 Senior Vice President - Operations
Vana Longwell.......................54 Senior Vice President - Merchandising
Frank C. Mullay.....................49 Senior Vice President - Stores
</TABLE>
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DAN W. MATTHIAS joined the Company on a full-time basis in 1982 and has
served as Chairman of the Board since its inception. From 1983 to 1993, he
served as the Company's Executive Vice President, and since January 1993, Mr.
Matthias has been the Company's Chief Executive Officer. Prior to Mothers Work,
Mr. Matthias had been involved in the computer and electronics industry, serving
as a director of Zilog, Inc. and as the President of a division of a subsidiary
of Exxon Corporation.
REBECCA C. MATTHIAS founded the Company in 1982 and has served as a
director of the Company and its President since its inception. Since January
1993, Ms. Matthias has served as the Company's Chief Operating Officer. In 1992,
she was chosen as "Regional Entrepreneur of the Year" by INC. magazine and
Merrill Lynch. Prior to 1982, she was a construction engineer for the Gilbane
Building Company. Ms. Matthias also serves as a member of the Board of Trustees
of Drexel University.
MICHAEL F. DEVINE, III joined the Company in February 2000 as Chief
Financial Officer and Vice President-Finance. From 1997 to 2000, Mr. Devine was
Chief Financial Officer of Strategic Distribution, Inc., a NASDAQ-listed
industrial store operator. Previously, Mr. Devine was Chief Financial Officer at
Industrial System Assoc., Inc. from 1995 to 1997 and for the prior six years was
the Director of Finance and Distribution for McMaster-Carr Supply Co.
DONALD W. OCHS joined the Company in June 1995 as Senior Vice President
- Operations with over 30 years of experience in apparel manufacturing
management, operations and worldwide sourcing of women's specialty clothing. Mr.
Ochs was Senior Vice President - Corporate Worldwide Sourcing and Manufacturing
at Leslie Fay Companies from October 1993 until joining the Company. From 1989
to 1993, Mr. Ochs was employed by Liz Claiborne, Inc. as Senior Vice President -
Manufacturing.
VANA LONGWELL joined the Company in 1994 as Vice President -
Merchandising and since April 1999 has served as Senior Vice President -
Merchandising. Prior to 1994, she served as President of Wainscott Sportswear
from 1989 to 1993 and from 1980 to 1989, she was the Executive Vice President
and general manager of Apparel Affiliates.
FRANK C. MULLAY joined the Company in September 1999 as Senior Vice
President - Stores. Mr. Mullay was previously employed by Limited, Inc. from
1983 to 1999, most recently at the Limited Too division as Interim Director of
Stores and East Coast Senior Regional Manager.
The Company's executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board. Other than the husband and
wife relationship between Dan and Rebecca Matthias, there are no family
relationships among any of the other executive officers of the Company.
TRADEMARKS
The Company owns such rights to the trademarks and service marks as it
believes are necessary to conduct its business as currently operated. The
Company, through its wholly-owned subsidiary, Cave Springs, Inc., is the owner
of trademarks including Mothers Work(R), A Pea in The Pod(R), Mimi Maternity(R),
Mimi Essentials for Maternity(TM), Motherhood(R), Motherhood Maternity
Outlet(R), Steena(R), MaternityMall.com(TM), and Maternite(R). Additionally, the
Company owns the service marks Real Time Retailing(R), What's Showing is Your
Style(R), Motherhood is Everything Good...(TM), and Maternity Redefined(R). The
Company is not aware of any pending claims of infringement or other challenges
to the Company's rights to use its marks in the United States as currently used
by the Company.
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ITEM 2. PROPERTIES
The Company's principal executive offices, manufacturing and
distribution facilities are located at 456 North Fifth Street, Philadelphia,
Pennsylvania 19123. This facility consists of approximately 318,000 square feet
of which approximately 44,000 square feet is dedicated to office space and the
remaining square footage to manufacturing, warehousing and distribution.
During October 1999, the Company entered into a multi-year lease for
fabric warehouse space located at 10430 Drummond Road, Philadelphia,
Pennsylvania 19152. Of the 50,000 square feet leased, 5,000 square feet is
dedicated to office space and the remaining square footage to the warehouse.
The Company leases virtually all of its store premises. All of the
Company's retail stores are leased pursuant to terms averaging from seven to ten
years. Certain leases allow the Company to terminate its obligations in the
event the specified store does not achieve a specified sales volume. Certain
clauses provide for contingent payments based on sales volume and others contain
clauses for escalations of the base rent as well as increases in operating
costs, marketing costs and real estate taxes. The following number of store
leases, excluding leased departments, are set to expire by fiscal year (most of
the real estate leases will be renewed):
<TABLE>
<CAPTION>
Fiscal Year
LEASE EXPIRATIONS NUMBER OF STORES
----------------- ----------------
<S> <C>
2001 36
2002 67
2003 58
2004 99
2005 and later 332
</TABLE>
Generally, start-up and operating costs for a leased department are
substantially less than a stand-alone store. The departments are leased from
stores such as Macy's, Rich's, Babies "R" Us and Lazarus. The Company terminated
its lease departments in Famous Barr and Macy's West stores during fiscal 1999.
The inventory of the leased departments is merchandised and owned by the Company
and includes fashions from Motherhood, Mimi Maternity, and A Pea in The Pod. In
addition, select department stores carry the Mimi Essentials line. The leased
departments also carry a line of maternity clothing designed exclusively for
them under the Steena(R) label. The leased departments utilize point-of-sale
registers to capture sales data and to communicate product information.
ITEM 3. LEGAL PROCEEDINGS
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 of this
nature cannot be accurately predicted, in the opinion of management, no
liability for any pending action will have a material adverse effect on the
financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market
under the symbol "MWRK."
The following table sets forth, for the fiscal quarters indicated, the
high and low closing bid prices per share for the Company's common stock, as
reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
Fiscal 1999 HIGH LOW
----------- ---- ---
<S> <C> <C>
First Quarter $ 14 $ 8 1/4
Second Quarter 15 7/8 10 3/8
Third Quarter 13 10 3/8
Fourth Quarter 14 1/8 7 5/16
</TABLE>
<TABLE>
<CAPTION>
FISCAL 2000
-----------
<S> <C> <C>
FIRST QUARTER $ 13 1/4 $ 8
SECOND QUARTER 15 3/8 9 13/16
THIRD QUARTER 12 1/4 10
FOURTH QUARTER 10 7/8 6
</TABLE>
As of December 12, 2000, there were 61 holders of record and 700
estimated beneficial holders of the Company's common stock.
The Company currently intends to retain any future earnings to fund
operations and the continued development of its business and, therefore, does
not anticipate paying cash dividends on its common stock in the immediate
future. In addition, no dividends may be paid on the Company's common stock
until all cumulative and current dividends on the Company's preferred stock have
been declared and paid in full. Any payment of future dividends will be at the
discretion of the Company's Board of Directors and will be based upon certain
restrictive financial covenants, earnings, capital requirements and the
operating and financial condition of the Company, among other factors, at the
time any such dividends are considered. See Note 7 of "Notes to Consolidated
Financial Statements" for further discussion of preferred stock dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of September 30,
2000, 1999, 1998, 1997 and 1996 and for the fiscal years then ended have been
derived from the financial statements of the Company which have been audited by
Arthur Andersen LLP, independent public accountants. The information set forth
below should be read in conjunction with the financial statements and notes
thereto as well as "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
11
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- --------- --------- ---------
(in thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................................... $ 366,283 $ 299,735 $ 298,991 $ 246,934 $ 199,180
Cost of goods sold................................ 183,300 150,402 158,047 113,886 88,417
---------- --------- --------- --------- ---------
Gross profit................................... 182,983 149,333 140,944 133,048 110,763
Selling, general and administrative expenses...... 157,809 127,390 139,322 124,495 95,395
Restructuring and non-recurring charges........... -- -- 10,635 5,617 --
---------- --------- --------- --------- ---------
Operating income (loss)........................ 25,174 21,943 (9,013) 2,936 15,368
Interest expense, net............................. 15,877 15,132 15,181 13,252 12,636
---------- --------- --------- --------- ---------
Income (loss) before income taxes.............. 9,297 6,811 (24,194) (10,316) 2,732
Income tax provision (benefit).................... 4,249 3,424 (7,477) (2,677) 1,828
---------- --------- --------- --------- ---------
Net income (loss)................................. 5,048 3,387 (16,717) (7,639) 904
Preferred dividends............................... 1,389 1,251 1,168 1,088 978
---------- --------- --------- --------- ---------
Net income (loss) available to common stockholders $ 3,659 $ 2,136 $ (17,885) $ (8,727) $ (74)
========== ========= ========= ========= =========
Income (loss) per share-basic (1):
Income (loss) per share ....................... $ 1.06 $ 0.60 $ (5.00) $ (2.45) $ (0.02)
Weighted average common shares outstanding..... 3,443 3,538 3,577 3,563 3,269
Income (loss) per share-assuming dilution (1):
Income (loss) per share ....................... $ 1.01 $ 0.57 $ (5.00) $ (2.45) $ (0.02)
Weighted average common shares outstanding .... 3,641 3,754 3,577 3,563 3,269
OPERATING DATA:
Same-store sales increase (2)..................... 8.3% 12.9% 13.4% 4.3% 8.0%
Average net sales per gross square foot (3)....... $ 390 $ 382 $ 354 $ 338 $ 333
Average net sales per store (3)................... $ 545,000 $ 521,000 $ 464,000 $ 508,000 $ 452,000
At end of period:
Number of stores (4).............................. 703 625 583 587 468
Gross square footage.............................. 1,012,000 852,000 738,000 820,000 720,000
<CAPTION>
SEPTEMBER 30
----------------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ 29,684 $ 24,021 $ 23,614 $ 32,083 $ 37,435
Total assets...................................... 179,586 177,608 172,469 171,718 164,613
Total debt........................................ 127,179 128,661 119,982 108,112 103,998
Stockholders' equity.............................. 12,750 9,068 8,750 26,380 35,107
</TABLE>
-----
(1) See Note 1 of "Notes to Consolidated Financial Statements."
(2) Based on stores opened at least 24 months in their current store format.
(3) Based on locations in operation during the entire fiscal year.
(4) September 30, 1998 excludes 30 Episode stores which, while owned by the
Company, were operated by a liquidator.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following tables set forth the percentages that the items in the
Company's Consolidated Statements of Operations bear to net sales:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Net sales ................................. 100.0% 100.0% 100.0%
Cost of goods sold ........................ 50.0 50.2 52.9
----- ----- -----
Gross profit .......................... 50.0 49.8 47.1
Selling, general and
Administrative expenses ............... 43.1 42.5 46.6
Restructuring charges ..................... -- -- 3.5
----- ----- -----
Operating income (loss) ............... 6.9 7.3 (3.0)
Interest expense, net ..................... 4.3 5.0 5.1
----- ----- -----
Income (loss) before income taxes (benefit) 2.6 2.3 (8.1)
Income tax provision (benefit) ............ 1.2 1.2 (2.5)
----- ----- -----
Net income (loss) ......................... 1.4% 1.1% (5.6)%
===== ===== =====
</TABLE>
The following table sets forth certain information representing growth
in the number of stores and leased maternity departments for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
STORES:
Beginning of period ....................... 625 613 587
Opened ................................ 82 94 80
Closed ................................ (4) (82) (54)
---- ---- ----
End of period ............................. 703 625 613
==== ==== ====
</TABLE>
The table above includes 30 Episode stores in the number at the end
period for fiscal 1998 and the beginning of period fiscal 1999. The Company
completed the closure of its remaining Episode stores during the second quarter
of fiscal 1999.
Included in the accompanying Consolidated Statements of Operations for
fiscal 1998 were the following amounts related to the Episode stores (in
thousands):
Revenues................................... $45,684
Cost of goods sold*........................ 39,275
Gross margin .............................. 6,409
Contribution margin (loss)*................ (22,451)
Restructuring charges ..................... 10,635
* Cost of goods sold for 1998 included $10,290,000 of write-downs of inventory
related to the Episode closing. Contribution margin is comprised of gross margin
less cost of store operations, royalties and certain related expenses.
13
<PAGE>
YEAR ENDED SEPTEMBER 30, 2000 AND 1999
NET SALES. The Company's 22.2% sales growth in fiscal 2000 compared to
fiscal 1999 was attributable to the Company's continued store expansion program
and the 8.3% increase in comparable store sales. For fiscal 2000, comparable
store sales increased by $23.3 million based on 532 locations versus a
comparable store sales increase of $29.6 million, or 12.9%, during fiscal 1999
based on 473 locations. The Company opened 78 new stores (net of closures)
during fiscal 2000. As of September 30, 2000, the Company operated a total of
703 maternity stores and leased departments: 405 operating under the
moderately-priced Motherhood store concept, 112 under the high-end A Pea in the
Pod/Mimi Maternity concept, 75 under the Motherhood Maternity Outlet concept,
and 111 leased maternity departments. In comparison, at September 30, 1999, the
Company had 625 store locations: 351 Motherhood stores, 112 Pea/Mimi Maternity
stores, 65 Motherhood Maternity Outlets and 97 leased maternity departments.
Fiscal 1999 also included 30 Episode stores that were sold or closed by the end
of the second quarter of fiscal 1999.
GROSS PROFIT. Gross profit increased by $33.6 million, or 22.5%, to
$183.0 million in fiscal 2000 primarily reflective of the higher sales volume.
As a percentage of net sales, margins improved to 50.0% in fiscal 2000 compared
to 49.8% in fiscal 1999. Improvements made to reduce vendor costs, tighter
controls over managing inventory levels and lower shipping costs served to
strengthen margins in fiscal 2000.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $30.4 million or 23.9% in fiscal 2000
compared to fiscal 1999 and, as a percentage of net sales, increased from 42.5%
to 43.1%. The increase was primarily due to higher store wages and related
benefit costs in addition to increased store rents, which were in-line with the
new store expansions.
OPERATING INCOME. Operating income for fiscal 2000 improved to $25.2
million (6.9% of net sales) compared to $21.9 million (7.3% of net sales) in
fiscal 1999. The increase of $3.3 million is primarily reflective of higher
sales volume.
INTEREST EXPENSE, NET. Net interest expense increased by $0.7 million
in fiscal 2000 from to fiscal 1999, reflecting higher average borrowings under
the Company's working capital facility at a higher effective interest rate.
Average borrowings and the corresponding effective interest rates were $33.7
million at 8.6% and $27.0 million at 7.7% in fiscal 2000 and 1999, respectively.
INCOME TAXES. The Company's effective tax rate decreased to 45.7% in
fiscal 2000 from 50.3% in fiscal 1999. The reduction in the effective tax rate
in fiscal 2000 was primarily due to the relationship of non-deductible goodwill
amortization to the higher pre-tax income. See Note 10 of "Notes to Consolidated
Financial Statements" for the reconciliation of the statutory federal income tax
rate to the Company's effective tax rate.
YEAR ENDED SEPTEMBER 30, 1999 AND 1998
NET SALES. Net sales in fiscal 1999 increased by $0.1 million, or 0.2%,
compared to fiscal year 1998. Net sales from the Company's core maternity
business increased $46.4 million, or 18.3%, from $253.3 million in fiscal 1998
to $299.7 million in fiscal 1999. This increase was primarily due to a $29.6
million or 12.9% net increase in comparable sales in its core maternity
business. The remainder of the increase in sales was due to store openings in
fiscal 1999. At September 30, 1999, the Company operated 625 maternity stores
and leased departments: 351 operating under the Motherhood store concept, 112
under the Pea/Mimi Maternity concept, 65 under the Motherhood Maternity Outlet
concept and 97 leased maternity departments. At September 30, 1998, the Company
operated 583 maternity stores and leased
14
<PAGE>
departments: 285 operating under the Motherhood store concept, 115 under the
Pea/Mimi Maternity concept, 60 under the Motherhood Maternity Outlet concept,
and 123 leased maternity departments. Additionally, the Company had 30 Episode
stores being operated on its behalf by a liquidator. The Company agreed to sell
its leasehold rights and interests in most of the remaining Episode stores to
The Wet Seal, Inc. All remaining stores were sold or closed by the end of the
second quarter of fiscal 1999.
GROSS PROFIT. Gross profit as a percentage of net sales increased to
49.8% in fiscal 1999 compared to 47.1% in fiscal 1998. This improvement was
primarily due to the lack of non-recurring charges in fiscal 1999 compared to
fiscal 1998.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $11.9 million, or 8.6% in fiscal 1999
compared to fiscal 1998 and, as a percentage of net sales, decreased from 46.6%
to 42.5%. The decrease was primarily due to elimination of Episode related
selling, general and administrative costs which more than offset increases in
maternity business related store wages, rents and operating expenses. The
decrease in selling, general and administrative expenses as a percentage of
sales was a function of large increases in comparable store sales combined with
an effort to better control costs.
CLOSING AND RESTRUCTURING COSTS. In May 1998, the Company reported that
the Board of Directors had instructed management to restructure the Episode
non-maternity bridge women's apparel business to eliminate losses from that
business. The initial step of the restructuring resulted in closure or
conversion of 21 stores, principally Episode outlets. Additionally, the Company
retained an advisor to assist in establishing the extent of restructuring
necessary. Subsequently, in September 1998, the Company's management announced
that the remaining Episode stores would be sold or closed. Costs associated with
the closing of Episode included payoffs of royalties, severance, store closings,
legal fees, inventory, and other costs incident to the closing. The aggregate
charge for closing the Episode stores, all of which was recorded in fiscal 1998,
was $20.9 million of which $10.3 million was included in cost of goods sold.
OPERATING INCOME. Operating income for fiscal 1999 was $22.0 million,
or 7.3%, of net sales, compared to an operating loss in fiscal 1998 of $9.0
million. Fiscal 1998 operations were negatively impacted due to losses from
Episode and the non-recurring charges of $20.9 million. Exclusive of the
non-recurring charges, operating income in fiscal 1998 would have been $11.9
million, or 4.0% of net sales. The dollar increase of $10.1 million, excluding
non-recurring charges, was the result of the increased sales volume and
elimination of selling, general, and administrative costs relating to Episode.
Operating income was positive in the core maternity business for fiscal 1999 and
1998.
INTEREST EXPENSE, NET. Net interest expense increased by $0.1 million
in fiscal 1999 compared to fiscal 1998. The dollar increase was due to increased
short-term borrowings under the line of credit.
INCOME TAXES. The effective income tax rate was an expense of 50.3% in
fiscal 1999 compared to a benefit of 30.9% in fiscal 1998. The increased
effective tax rate in fiscal 1999 was primarily due to the impact of
non-deductible goodwill amortization on the current year pre-tax income compared
to the prior year net loss. See Note 10 of "Notes to Consolidated Financial
Statements" for the reconciliation of the statutory federal income tax rate to
the Company's effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 2000, the Company's primary sources of working capital were
the $18.6 million of income from operations (an increase of $18.2 million over
fiscal 1999) and borrowings under its $56.0 million working capital facility
(the "Working Capital Facility"). The Working Capital Facility was
15
<PAGE>
amended and restated in April 2000 to increase borrowings to the current level
from $44.0 million, to raise the annual capital expenditure limitation and to
extend the maturity until September 15, 2004. The interest rate is based on the
lender's prime plus 25 basis points. At any time, the Company at its option may
elect an alternative rate for all or part of the direct borrowings outstanding
at a rate of LIBOR plus 225 basis points. The blended rate for all borrowings
under the facility at September 30, 2000 was approximately 9.0%. Amounts
available for direct borrowings, net of letters of credit outstanding, are
limited to the lesser of (a) the unused portion of the Working Capital Facility
or (b) the Aggregate Adjusted Availability ("AAA"), as defined in the agreement
as a percentage of eligible inventory and receivables. The Working Capital
Facility is secured by a security interest in the Company's inventory,
equipment, fixtures and cash. In addition to the direct borrowings, a $4.0
million standby letter of credit has been utilized in fiscal years 2000 and 1999
to collateralize the Company's Industrial Revenue Bond. There are no financial
covenant requirements in the agreement unless the AAA falls below $10.0 million.
In the event that the AAA were to fall below $10.0 million, the Company would
have to achieve Minimum Cash Flow, as defined in the agreement, of not less than
zero. During fiscal 2000 and 1999, the Company exceeded the AAA minimum. As of
September 30, 2000, the outstanding borrowings under the Working Credit Facility
consisted of $30.5 million in direct borrowings and $3.0 million in letters of
credit with available borrowings of $19.1 million compared to $42.9 million of
direct borrowings and $0.4 million in letters of credit as of September 30,
1999. Additionally, in both fiscal years, the $4.0 million standby letter of
credit was outstanding.
The Company's cash needs have been primarily for debt service,
furniture, fixtures and leasehold improvements relative to the increase in the
number of retail locations, increased inventories to support the additional
locations and building improvements and equipment at its existing stores and
corporate headquarters. During fiscal 2000, the Company spent $13.6 million in
capital expenditures, including $12.1 million in furniture, fixtures, and
leasehold improvements for new store facilities, primarily Motherhood stores,
and improvements to existing stores and another $1.5 million for corporate
additions and other assets. This compares to $10.1 million in capital
expenditures for fiscal 1999, of which $7.8 million was for new and existing
store facilities and $2.3 million was for corporate additions and other assets.
During the first and second quarters of fiscal 1999, the Company
repurchased and retired $2.0 million worth of its common stock as authorized by
the Company's Board of Directors. In comparison, repurchases of stock during the
first quarter of fiscal 2000 were limited to $0.2 million due to restrictions
imposed by the terms of the Company's $92.0 million of 12 5/8% Senior Unsecured
Exchange Notes (the "Notes").
Management of the Company believes that its current cash and working
capital positions, expected operating cash flows as well as available borrowing
capacity under the Working Capital Facility will be sufficient to fund the
Company's working capital and debt repayment requirements for fiscal 2001.
SEASONALITY
The Company's business, like that of most retailers, is subject to
seasonal influences. A significant portion of the Company's net sales and
profits are realized during the Company's first and third fiscal quarters, which
include the holiday selling season and Spring sales, respectively. Results for
any quarter are not necessarily indicative of the results that may be achieved
for a full fiscal year. Quarterly results may fluctuate materially depending
upon, among other things, the timing of new store openings, net sales and
profitability contributed by new stores, increases or decreases in comparable
store sales, adverse weather conditions, shifts in the timing of certain
holidays and promotions, and changes in the Company's merchandise mix.
16
<PAGE>
INFLATION
The Company does not believe the relatively moderate levels of
inflation, which have been experienced in the United States in recent years,
have had a significant effect on its net sales or profitability. However, there
can be no assurance that the Company's business will not be affected by
inflation in the future.
SAFE HARBOR STATEMENT 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 1, Business and Item 7, 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 2001 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 and consequent changes in store
opening plans, 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The analysis below presents the sensitivity of the market value of the
Company's financial instruments to selected changes in market rates. The range
of changes chosen reflects the Company's view of changes that are reasonably
possible over a one-year period. The Company's financial instruments consist
principally of its debt portfolio. The market value of the debt portfolio is
referred to below as the "Debt Value". The Company believes that market risk
exposure on other financial instruments is immaterial.
At September 30, 2000, the principal components of the Company's debt
portfolio are the Notes and the Working Capital Facility, both of which are
denominated in US dollars. The Notes bear interest at a fixed rate of 12 5/8%
and the Working Capital Facility bears interest at a variable rate, which at
September 30, 2000 was approximately 9.0%. While a change in interest rates
would not affect the interest incurred or cash flows 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 September 30, 2000 with all other variables
held constant. A 100 basis point increase in market interest rates would result
in a decrease in the Debt Value by $0.9 million at September 30, 2000. A 100
basis point decrease in market interest rates would result in a $0.9 million
increase in the Debt Value at September 30, 2000.
17
<PAGE>
Based on the variable rate debt included in the Company's debt
portfolio at September 30, 2000, a 100 basis point increase in interest rates
would result in an additional $0.3 million of interest incurred per year. A 100
basis point decrease would lower interest incurred by $0.3 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements appear at pages F-1
through F-20, as set forth in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors, appearing under the caption "Election
of Directors" in the Company's Proxy Statement (the "Proxy Statement") to be
filed with the Securities and Exchange Commission in connection with the Annual
Meeting of Stockholders scheduled to be held on January 18, 2001, and
information concerning executive officers, appearing under the caption "Item 1.
Business - Executive Officers of the Company" in Part I of this Form 10-K, are
incorporated herein by reference in response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section titled "Executive
Compensation" in the Proxy Statement, with respect to executive compensation,
and the information contained in the section entitled "Compensation of
Directors" with respect to director compensation, are incorporated herein by
reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section titled "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement, with respect
to security ownership of certain beneficial owners and management, is
incorporated herein by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section titled "Certain Transactions"
of the Proxy Statement, with respect to certain relationships and related
transactions, is incorporated herein by reference in response to this Item 13.
19
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The financial statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this
Form 10-K, commencing on page F-1.
(2) Schedules
None.
(3) Exhibits
Exhibit No. Description
--------------------- --------------------------------------------------------
*3.1 Amended and Restated Certificate of Incorporation of the
Company (effective March 10, 1993) (Exhibit 3.3 to the
Company's Registration Statement on Form S-1,
Registration No. 33-57912, dated February 4, 1993 (the
"1993 Registration Statement")).
*3.2 By-Laws of the Company (Exhibit 3.5 to the Company's
Annual Report on Form 10-K for the year ended September
30, 1993 (the "1993 Form 10-K")).
*4.1 Certificate of Designation for the Series A Cumulative
Convertible Preferred Stock of the Company (Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the
Quarter ended June 30, 1995 (the "June 1995 10-Q")).
*4.2 Indenture dated as of August 1, 1995 from the Company to
Society National Bank, as Trustee (Exhibit 4.1 to the
June 1995 10-Q).
*4.3 Specimen certificate representing shares of the
Company's common stock with legend regarding Preferred
Stock Purchase Rights. (Exhibit 4.2 to the October 1995
8-K).
*4.4 Amended and Restated Rights Agreement, dated as of March
17, 1997, between the Company and StockTrans, Inc.
(incorporated by reference to Exhibit 4.2 to the
Company's current report on Form 8-K dated March 17,
1997).
*4.5 Amendment No. 1, dated as of June 4, 1997, to the
Amended and Restated Rights Agreement, dated as of March
17, 1997, between the Company and StockTrans, Inc.
(Exhibit 4.3 to the Company's Quarterly Report on Form
10-Q for the Quarter ended June 30, 1997).
*4.6 Registration Rights Agreement, dated as of June 9, 1998,
by and among the Company and certain of the Selling
Stockholders (Exhibit 4.1 of the Company's Registration
Statement on Form S-3, Registration No. 333-59309, dated
July 17, 1998).
*4.7 1987 Stock Option Plan (as amended and restated)
(Exhibit 4.1 of the Company's Registration Statement on
Form S-8, Registration No. 333-59529, dated July 21,
1998).
20
<PAGE>
*10.1 Registration Rights and Right of Co-Sale Agreement dated
as of May 4, 1992 among the Company, Dan W. Matthias,
Rebecca C. Matthias, Meridian Venture Partners, Penn
Janney Fund, Inc., Apex Investment Fund, L.P., Meridian
Capital Corp., Butcher & Singer/Keystone Venture II,
L.P., G-2 Family Partnership, PIISC - Penn Venture Fund,
John L. Plummer, Gail G. Davis, Milton S. Stearns Jr.,
Trustee U/D/T dated 12/20/88, Stevan Simich, Growth
Investors, George P. Keeley, Robert E. Brown Jr., Bruce
II. Hooper, John J. Serrell, Charles G. Schiess, Terence
Kavanagh and Michael B. Staebler (Exhibit 10.8 to the
1993 Registration Statement).
*10.2 1994 Director Stock Option Plan (Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 1994 (the "1994 Form 10-K")).
*10.3 Employment Agreement dated as of July 14, 1994 between
the Company and Dan W. Matthias (Exhibit 10.25 to the
Company's Current Report on Form 8-K dated January 31,
1994 (the "1994 Form 8-K")).
*10.4 Employment Agreement dated as of July 14, 1994 between
the Company and Rebecca C. Matthias (Exhibit 10.26 to
the 1994 Form 10-K).
*10.5 Registration Rights Agreement dated as of August 1, 1995
among the Company and Morgan Stanley & Co. Incorporated,
Wheat, First Securities, Inc. and Janney Montgomery
Scott Inc. (Exhibit 10.2 to the June 1995 10-Q).
*10.6 Loan Agreement dated September 1, 1995 between
Philadelphia Authority For Industrial Development
("PAID") and the Company (Exhibit 10.26 to the Company's
Registration Statement on Form S-1, Registration No.
33-97318, dated October 26, 1995 (the "1995 Registration
Statement")).
*10.7 Indenture of Trust dated September 1, 1995 between PAID
and Society National Bank (Exhibit 10.29 to the 1995
Registration Statement).
*10.8 Variable/Fixed Rate Federally Taxable Economic
Development Bond (Mothers Work, Inc.), Series of 1995,
in the aggregate principal amount of $4,000,000 (Exhibit
10.30 to the 1995 Registration Statement).
*10.9 Trademark License Agreement dated May 31, 1996 between
the Company and Episode USA, Inc. (Exhibit 10.1 to the
June 1996 8-K).
*10.10 Distribution Agreement dated April 25, 1996 among Toppy
International Limited, T3 Acquisition, Inc. and the
Company (Exhibit 10.2 to the June 1996 8-K).
*10.11 Residential Lease dated June 28, 1996 between the
Company and Daniel & Rebecca Matthias (Exhibit 10.27 to
the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996).
*10.12 Note dated February 14, 1996 from the Company to PIDC
Local Development Corporation (Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996).
*10.13 Installment Sale Agreement dated April 4, 1996 by and
between PIDC Financing Corporation and the Company
(Exhibit 10.30 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1996).
21
<PAGE>
*10.14 Open-ended Mortgage dated April 4, 1996 between
PIDC Financing Corporation and the Pennsylvania
Industrial Development Authority ("PIDA")
(Exhibit 10.31 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30,
1996).
*10.15 Loan Agreement dated April 4, 1996 by and between
PIDC Financing Corporation and PIDA (Exhibit
10.32 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996).
*10.16 Loan & Security Agreement dated as of April 24, 1998 by
and among, Mothers Work, Inc., Cave Springs, Inc. and
Fleet Capital Corporation (Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1998).
*10.17 Asset Transfer Agreement dated as of August 31, 1998 by
and between the Company, T3 Acquisition, Inc. and The
Wet Seal, Inc. (Exhibit 10.32 to the Company's Annual
Report on Form 10-K for the Fiscal Year ended September
30, 1998).
*10.18 Amendment to Loan and Security Agreement dated as of
April 11, 2000 by and among, Mothers Work Inc., Cave
Springs, Inc. and Fleet Capital Corporation (Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for
the Quarter ended March 31, 2000).
21 Subsidiary of the Company.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule for the fiscal year ended
September 30, 2000.
-------------
*Incorporated by reference.
(b) Reports filed on Form 8-K during the last quarter of fiscal 2000:
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Philadelphia, Commonwealth of Pennsylvania, on the 13th day of December,
2000.
By: /s/ DAN W. MATTHIAS
--------------------------------------------------
Dan W. Matthias
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
By: /s/ MICHAEL F. DEVINE, III
--------------------------------------------------
Michael F. Devine, III
CHIEF FINANCIAL OFFICER, VICE PRESIDENT-FINANCE
AND THE PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
23
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on December 13, 2000, in
the capacities indicated:
/s/ Dan W. Matthias CHAIRMAN OF THE BOARD, CHIEF
-------------------------------------- EXECUTIVE OFFICER AND DIRECTOR,
DAN W. MATTHIAS THE PRINCIPAL EXECUTIVE OFFICER
/s/ Rebecca C. Matthias PRESIDENT, CHIEF OPERATING OFFICER
-------------------------------------- AND DIRECTOR
REBECCA C. MATTHIAS
/s/ Michael F. Devine, III CHIEF FINANCIAL OFFICER,
-------------------------------------- VICE PRESIDENT - FINANCE AND CHIEF
MICHAEL F. DEVINE, III ACCOUNTING OFFICER, THE PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER
/s/ Verna K. Gibson DIRECTOR
--------------------------------------
VERNA K. GIBSON
/s/ Joseph A. Goldblum DIRECTOR
--------------------------------------
JOSEPH A. GOLDBLUM
/s/ Elam M. Hitchner, III DIRECTOR
--------------------------------------
ELAM M. HITCHNER, III
/s/ William A. Schwartz, Jr. DIRECTOR
--------------------------------------
WILLIAM A. SCHWARTZ, JR.
/s/ Stanley C. Tuttleman DIRECTOR
--------------------------------------
STANLEY C. TUTTLEMAN
24
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7 to F-20
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mothers Work, Inc.:
We have audited the accompanying consolidated balance sheets of Mothers Work,
Inc. (a Delaware corporation) and subsidiary as of September 30, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended September 30, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mothers Work, Inc. and
subsidiary as of September 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Philadelphia, PA
November 3, 2000
F-2
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.................................................. $ 3,076 $ 1,140
Trade receivables.......................................................... 4,280 3,016
Inventories................................................................ 75,747 74,955
Deferred income taxes...................................................... 3,851 6,121
Prepaid expenses and other current assets.................................. 2,593 2,227
--------- ---------
TOTAL CURRENT ASSETS.............................................. 89,547 87,459
Property, Plant and Equipment, net.............................................. 44,260 39,611
Other Assets
Goodwill, net of accumulated amortization of $12,300 and $10,084........... 32,093 34,309
Deferred financing costs, net of accumulated amortization of $2,289
and $1,808............................................................. 2,139 2,620
Other intangible assets, net of accumulated amortization of $2,144
and $1,865............................................................. 1,045 1,115
Deferred income taxes...................................................... 9,821 11,687
Other non-current assets................................................... 681 807
--------- ---------
Total other assets................................................ 45,779 50,538
--------- ---------
$ 179,586 $ 177,608
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Line of credit............................................................. $ 30,548 $ 32,003
Current portion of long-term debt.......................................... 543 496
Accounts payable........................................................... 15,445 17,461
Accrued expenses and other current liabilities............................. 13,327 13,478
--------- ---------
TOTAL CURRENT LIABILITIES......................................... 59,863 63,438
Long-Term Debt.................................................................. 96,088 96,162
Accrued Dividends on Preferred Stock............................................ 6,037 4,648
Deferred Rent 4,848 4,292
Commitments and Contingencies (Note 11)
Stockholders' Equity
Series A Cumulative 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 11,500
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, 3,451,770
and 3,446,353 shares issued and outstanding............................ 34 34
Additional paid-in-capital................................................. 26,203 26,180
Accumulated deficit........................................................ (24,987) (28,646)
--------- ---------
Total stockholders' equity........................................ 12,750 9,068
--------- ---------
$ 179,586 $ 177,608
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
---------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales................................................ $ 366,283 $ 299,735 $ 298,991
Cost of goods sold....................................... 183,300 150,402 158,047
--------- --------- ---------
Gross profit........................................ 182,983 149,333 140,944
Selling, general and administrative expenses............. 157,809 127,390 139,322
Restructuring charges.................................... -- -- 10,635
--------- --------- ---------
Operating income (loss)............................. 25,174 21,943 (9,013)
Interest expense, net.................................... 15,877 15,132 15,181
--------- --------- ---------
Income (loss) before income taxes................... 9,297 6,811 (24,194)
Income tax provision (benefit)........................... 4,249 3,424 (7,477)
--------- --------- ---------
Net income (loss)........................................ 5,048 3,387 (16,717)
Dividends on preferred stock............................. 1,389 1,251 1,168
--------- --------- ---------
Net income (loss) available to common stockholders....... $ 3,659 $ 2,136 $ (17,885)
========= ========= =========
Income (loss) per share - Basic.......................... $ 1.06 $ 0.60 $ (5.00)
========= ========= =========
Average shares outstanding - Basic....................... 3,443 3,538 3,577
========= ========= =========
Income (loss) per share - Diluted........................ $ 1.01 $ 0.57 $ (5.00)
========= ========= =========
Average shares outstanding - Diluted..................... 3,641 3,754 3,577
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
SERIES A ------------------- ADDITIONAL
PREFERRED NUMBER PAID-IN ACCUMULATED
STOCK OF SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- --------- ------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance September 30, 1997................ $ 11,500 3,565 $ 36 $ 27,741 $ (12,897) $ 26,380
Exercise of stock options............ -- 6 -- 28 -- 28
Stock issued to senior noteholders... -- 27 -- 227 -- 227
Preferred stock dividends............ -- -- -- -- (1,168) (1,168)
Net loss ............................ -- -- -- -- (16,717) (16,717)
--------- ------- ------ --------- --------- ---------
Balance September 30, 1998................ 11,500 3,598 36 27,996 (30,782) 8,750
Exercise of stock options............ -- 35 -- 209 -- 209
Purchase and retirement of
common stock..................... -- (187) (2) (2,025) -- (2,027)
Preferred stock dividends............ -- -- -- -- (1,251) (1,251)
Net income........................... -- -- -- -- 3,387 3,387
--------- ------- ------ --------- --------- --------
Balance September 30, 1999................ 11,500 3,446 34 26,180 (28,646) 9,068
EXERCISE OF STOCK OPTIONS............ -- 24 -- 202 -- 202
PURCHASE AND RETIREMENT OF
COMMON STOCK..................... -- (18) -- (179) -- (179)
PREFERRED STOCK DIVIDENDS............ -- -- -- -- (1,389) (1,389)
NET INCOME........................... -- -- -- -- 5,048 5,048
--------- ------- ------ --------- --------- --------
BALANCE SEPTEMBER 30, 2000................ $ 11,500 3,452 $ 34 $ 26,203 $ (24,987) $ 12,750
========= ======= ====== ========= ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------
2000 1999 1998
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................................ $ 5,048 $ 3,387 $ (16,717)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization................................... 11,951 10,516 11,992
Non-cash portion of restructuring charge........................ -- -- 18,167
Stock issuance charged to interest expense...................... -- -- 228
Imputed interest on debt........................................ 173 150 131
Deferred taxes.................................................. 4,136 957 (7,479)
Amortization of deferred financing costs........................ 481 498 395
Provision for deferred rent..................................... 556 473 867
Changes in assets and liabilities:
Decrease (increase) in -
Receivables................................................. (1,263) 406 (641)
Inventories................................................. (793) (13,277) (8,155)
Prepaid expenses and other assets........................... 28 3,814 (3,494)
Increase (decrease) in -
Accounts payable and accrued expenses....................... (1,694) (6,496) 5,169
--------- --------- ---------
Net cash provided by operating activities................................ 18,623 428 463
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures..................................................... (13,619) (10,087) (9,350)
Purchase of intangible assets............................................ (209) (219) (242)
--------- --------- ---------
Net cash used in investing activities.................................... (13,828) (10,306) (9,592)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in line of credit and cash overdrafts, net........... (2,173) 9,591 12,008
Repurchase of common stock............................................... (179) (2,026) --
Repayments of long-term debt............................................. (709) (379) (777)
Debt issuance costs...................................................... -- -- (173)
Proceeds from exercise of options........................................ 202 209 28
--------- --------- ---------
Net cash (used in) provided by financing activities...................... (2,859) 7,395 11,086
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 1,936 (2,483) 1,957
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................................ 1,140 3,623 1,666
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR...................................... $ 3,076 $ 1,140 $ 3,623
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Mothers Work, Inc., incorporated in Delaware in 1980, is a specialty
retailer and manufacturer of maternity clothing. The Company operates
in 703 retail store locations, including 111 leased departments,
throughout the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Mothers
Work, Inc. and its wholly-owned subsidiary, Cave Springs, Inc.
(collectively "Mothers Work" or the "Company"), as of September 30,
2000. All significant intercompany transactions and accounts have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
CASH EQUIVALENTS
The Company considers investments with an original maturity of three
months or less when purchased to be cash equivalents. At September 30,
2000, cash and cash equivalents include cash on hand and cash in the
bank. Cash overdrafts of $3,682,000 and $4,400,000 are included in
accounts payable at September 30, 2000 and 1999, respectively.
INVENTORIES
Inventories are stated at the lower of FIFO (first-in, first-out) cost
or market. Inventories manufactured by the Company include the cost of
materials, freight, direct labor, manufacturing and distribution
overhead.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred or the first time
the advertising takes place. Catalog production costs are deferred and
amortized over the period in which the related catalogs are
distributed. Advertising and catalog expenses were $6,953,000,
$6,479,000 and $4,653,000 in fiscal 2000, 1999 and 1998, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation and
amortization are computed for financial reporting purposes on a
straight-line basis, using service lives ranging principally from five
to ten years for furniture and equipment and forty years for the
building. Leasehold improvements are amortized over the shorter of the
estimated useful life or the lease term. The
F-7
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
cost of assets sold or retired and the related accumulated depreciation
or amortization are removed from the accounts with any resulting gain
or loss included in net income. Maintenance and repairs are expensed as
incurred except for the capitalization of major renewals and
betterments that extend the life of the asset. Long-lived assets are
reviewed for impairment whenever adverse events or changes in
circumstances or business climate indicate that the carrying value may
not be recoverable. Factors used in the valuation include, but are not
limited to, management's plans for future operations, brand
initiatives, recent operating results and projected cash flows. If the
associated undiscounted cash flows are insufficient to support the
recorded asset, an impairment is recognized to reduce the carrying
value of the asset. The amount of the impairment loss is determined by
comparing the discounted expected future cash flows with the carrying
value.
INTANGIBLE ASSETS
Goodwill, leasehold interests and other intangible assets are amortized
over twenty years, the lease term and five to ten years, respectively.
Amortization of goodwill, leasehold interests and other intangible
assets was $2,494,000, $2,451,000 and $2,581,000 in fiscal 2000, 1999
and 1998, respectively.
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs are amortized over the term of the related
debt using the effective interest method. Amortization of deferred debt
issuance costs was $481,000, $498,000 and $479,000 in fiscal 2000, 1999
and 1998, respectively, and is included in interest expense in the
accompanying Consolidated Statements of Operations.
DEFERRED RENT
Rent expense on leases is recorded on a straight-line basis over the
lease period. The excess of rent expense over the actual cash paid has
been recorded as deferred rent in the accompanying Consolidated Balance
Sheets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, trade receivables, accounts payable and
accrued expenses are reflected at fair value in the accompanying
financial statements due to the short-term nature of those instruments.
The carrying amounts of long-term debt and capitalized lease
obligations approximates fair value at the balance sheet dates.
REVENUE RECOGNITION
Revenue is recognized at the point of sale for retail store sales or
when merchandise is shipped to customers for Internet and mail order
and other direct response sales.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets
and liabilities.
F-8
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under the provisions
of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees." The Company has adopted the disclosure
requirements of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation."
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available
to common stockholders by the weighted average number of outstanding
common shares. Diluted earnings per share is computed based upon the
weighted average number of outstanding common shares reduced by the
potential dilutive effect of stock options and warrants.
The following summarizes those effects for the diluted earnings per
share calculation (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Weighted average number of shares - Basic................................... 3,443 3,538 3,577
Incremental shares from the assumed exercise of outstanding
stock options and warrants.............................................. 198 216 --
----- ----- -----
Weighted average number of shares - Diluted.................................. 3,641 3,754 3,577
===== ===== =====
</TABLE>
Options to purchase 587,321 and 150,340 shares were outstanding at
September 30, 2000, and 1999, respectively, but were not included in
the computation of diluted earnings per share as their effect would
have been antidilutive. Since the Company had incurred a loss in fiscal
1998, all of the outstanding options and warrants for that year were
determined to be antidilutive, and therefore excluded from the
computation. Additionally, the assumed conversion of the Company's
Series A Cumulative Convertible Preferred Stock was determined to be
antidilutive for all the periods presented.
STATEMENTS OF CASH FLOWS
In fiscal 2000, 1999 and 1998, the Company paid interest of
$15,127,000, $14,919,000 and $14,481,000, respectively, and made tax
payments of $494,000, $28,000 and $57,000, respectively. Capital lease
obligations totaling $511,000 and $508,000 were incurred with respect
to new equipment leases in fiscal 2000 and 1998, respectively (none for
fiscal 1999).
RECLASSIFICATIONS
Certain prior year balances in the financial statements have been
reclassified to conform with the current year presentation.
F-9
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. INVENTORIES
Inventories at September 30 were as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Finished goods.......................... $ 60,871 $ 58,879
Work-in-progress........................ 5,570 6,477
Raw materials .......................... 9,306 9,599
--------- ---------
$ 75,747 $ 74,955
========= =========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment at September 30 was comprised of the
following (in thousands):
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Land .................................... $ 1,400 $ 1,400
Building and improvements................ 10,443 10,061
Furniture and equipment.................. 24,067 21,667
Leasehold improvements................... 51,399 40,375
--------- ---------
87,309 73,503
Less: accumulated depreciation and
amortization........................ (43,049) (33,892)
--------- ---------
$ 44,260 $ 39,611
========= =========
</TABLE>
4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
At September 30, accrued expenses were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Salaries, wages and employee benefits... $ 5,078 $ 3,248
Interest................................ 2,293 2,197
Sales taxes............................. 1,738 1,263
Restructuring costs (see Note 13)....... 250 957
Rent.................................... 1,527 2,142
Other................................... 2,441 3,671
--------- ---------
$ 13,327 $ 13,478
========= =========
</TABLE>
5. LINE OF CREDIT
The Company's primary sources of working capital consist of income from
operations and borrowings under its $56.0 million working capital
facility (the "Working Capital Facility"). The Working Capital Facility
was amended and restated in April 2000 to increase borrowings to the
current level, to raise the annual capital expenditure limitation, and
to extend the maturity until September 15, 2004. The interest rate on
direct borrowings outstanding is based on the prime rate of the
Company's lender plus 25 basis points. At any time, the Company at its
option may elect an alternative rate for all or part of the direct
borrowings outstanding at LIBOR plus 225 basis points. The blended rate
at September 30, 2000 was 9.0%. Amounts available for direct borrowings
(net of letters of credit outstanding) are limited to the lesser of (a)
the unused portion of the Working Capital Facility or (b) the Aggregate
Adjusted Availability ("AAA"), as defined in the agreement as a
percentage of eligible inventory and trade receivables. The Working
F-10
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Capital Facility is secured by a security interest in the Company's
inventory, equipment, fixtures and cash. In addition to borrowings and
letters of credit available under the Working Capital Facility, the
Company has a $4.0 million letter of credit that collateralizes an
Industrial Revenue Bond (see Note 6). The facility has no financial
covenants provided that the AAA does not fall below $10.0 million. In
the event that the AAA would be less than $10.0 million, the Company
must achieve a Minimum Cash Flow, as defined, of not less than zero. At
September 30, 2000, there were $30.5 million of direct borrowings, $3.0
million of outstanding letters of credit and the AAA was $18,491,000
($14,431,000 at September 30, 1999). The Company was in compliance with
all non-financial covenants per the agreement. In fiscal 2000, 1999 and
1998, the weighted average interest rates on the Working Capital
Facility were 8.6%, 8.1% and 8.8%, respectively.
6. LONG-TERM DEBT
The following table summarizes the Company's long-term debt at
September 30 (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
12 5/8% Senior Unsecured Exchange Notes due 2005 (net of
unamortized discount)............................................. $ 90,790 $ 90,617
Industrial Revenue Bonds, interest is variable (5.0% at
September 30, 2000 and 1999), principal due annually through
2020 (collateralized by a $4.0 million letter of credit)......... 3,535 3,730
MORTGAGE NOTES:
Interest at 3%, principal due monthly until 2011 (collateralized
by a $1.0 million letter of credit and a second mortgage on
certain property and equipment at the Company's headquarters)..... 1,511 1,630
Interest at 2.0%, principal due monthly until 2011
(collateralized by certain equipment at the Company's
headquarters)..................................................... 219 237
Interest at 4.25%, principal monthly until 2001 (collateralized
by certain equipment at the Company's headquarters)............... 32 94
Capital lease obligations.............................................. 544 350
-------- --------
96,631 96,658
Less: current maturities.............................................. (543) (496)
-------- --------
$ 96,088 $ 96,162
======== ========
</TABLE>
F-11
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-term debt maturities as of September 30 are as follows (in thousands):
<TABLE>
<S> <C>
2001............................................... $ 543
2002............................................... 434
2003............................................... 369
2004............................................... 279
2005............................................... 288
2006 and thereafter................................ 95,928
--------
97,841
Less: unamortized discount........................ (1,210)
--------
$ 96,631
========
</TABLE>
In connection with the acquisition of Motherhood on August 1, 1995, the
Company sold 12 5/8% Senior Unsecured Notes due 2005 (the "Notes") with
a face amount of $92.0 million. The Notes were issued at 97.934% of
their face amount, resulting in an annual effective interest rate of
13.0%. Interest on the Notes is payable semiannually in cash on
February 1 and August 1. The Notes were issued by Mothers Work and are
unconditionally guaranteed on a senior basis by its subsidiary (see
Note 12). The Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after August 1, 2000, at 106.25% of
their face amount, plus accrued interest, declining ratably to 100% of
their face amount on and after August 1, 2002, plus accrued interest.
In November 1995, the Company completed an exchange offer whereby the
Notes were exchanged for 12 5/8% Senior Unsecured Exchange Notes due
2005 which have been registered under the Securities Act of 1933.
The Notes impose certain limitations on the ability of the Company to,
among other things, incur additional indebtedness, pay dividends and
enter into certain types of transactions. The most restrictive of these
covenants limits the Company's ability to repurchase outstanding common
stock (see Note 16).
7. PREFERRED STOCK
In connection with an acquisition, the Company issued 41,000 shares of
Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock") with a stated value of $11.5 million. The Series A
Preferred Stock has a preference in liquidation equal to the stated
value, plus accrued but unpaid dividends. The Company may redeem (but
is under no obligation to do so) the Series A Preferred Stock at any
time at a price equal to liquidation preference, subject to certain
limitations imposed by the Working Capital Facility and the holders of
the Notes.
The holders of the Series A Preferred Stock are entitled to receive
annual cash dividends, which are cumulative to the extent not paid, and
compound annually at 8.5% of the stated value. No dividends may be paid
on common stock, or any other shares of capital stock of the Company
ranking junior to the Series A Preferred Stock (other than dividends
payable in shares of common stock), until all cumulative and current
dividends on the Series A Preferred Stock have been declared and paid
in full. As of September 30, 2000 and 1999, accrued dividends on the
Series A Preferred Stock were $6,037,000 and $4,648,000, respectively,
and are classified as long-term liabilities in the accompanying
Consolidated Balance Sheets.
The Series A Preferred Stock is convertible into shares of common stock
(i) between August 1, 2000 and November 1, 2006, at an initial
conversion rate (subject to adjustments for stock splits, stock
dividends, recapitalizations and similar events) equal to ten shares of
common stock for each share of Series A Preferred Stock, or (ii) after
November 1, 2006, at a conversion rate
F-12
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
determined by dividing the aggregate stated value of all shares of
Series A Preferred Stock to be converted by 90% of the then-market
price of the common stock, as defined. After a holder's exercise of the
conversion right under (i) above, the Company may only redeem the
Series A Preferred Stock from the proceeds of an equity offering. The
limitation on this redemption right may only be modified with the
consent of the holders of a majority of the outstanding principal
amount of the Notes. Upon any conversion, the holder of the Series A
Preferred Stock to be converted is entitled to receive payment of all
accrued and unpaid dividends in cash unless the Company is prohibited
by limitations contained in the Notes agreement. In the case of a
conversion under (i) above, if dividends are not paid in cash, the
Company will issue a note with interest at the prime rate, payable
beginning one year after the date of conversion. The note will be
subordinated to the Notes and will be payable only to the extent
permitted under the restrictions contained in the Notes. If the note is
not paid by August 1, 2003, then all principal and accrued interest may
be converted into that number of shares of common stock determined by
dividing the amount due by the then-market price, as defined. In the
case of a conversion under (ii) above, if accrued dividends are not
paid in cash, then such dividends are convertible into common stock on
the same basis as the shares of Series A Preferred Stock.
In connection with the Rights Agreement (see Note 8), the Company
authorized 10,000 shares of Series B Junior Participating Preferred
Stock (the "Series B Preferred Stock"). The Series B Preferred Stock
can be purchased in units equal to one one-thousandth of a share (the
"Series B Units") under the terms of the Rights Agreement. The holders
of the Series B Units are entitled to receive dividends when and if
declared on common stock. Series B Units are junior to the common stock
and Series A Preferred Stock for both dividends and liquidations. Each
Series B Unit votes as one share of common stock.
8. RIGHTS AGREEMENT
In accordance with the Rights Agreement, the Company has one Right
outstanding for each share of Mothers Work common stock now or
hereafter outstanding. Under certain limited conditions as defined in
the Rights Agreement, each Right entitles the registered holder to
purchase from the Company one Series B Unit at $85 per share, subject
to adjustment. The rights expire on October 9, 2005 (the "Final
Expiration Date").
On March 17, 1997, the Company amended its Rights Agreement to provide
the independent directors of the Company with some discretion in
determining when the Distribution Date (as defined in the Rights
Agreement) 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 10.0% 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 be an Acquiring Person.
The Rights are not exercisable until the Distribution Date which will
occur upon the earlier of (i) ten business days following a public
announcement that an Acquiring Person has acquired beneficial ownership
of 10.0% or more of the Company's outstanding common stock, and ten
business days following the commencement of a tender offer or exchange
offer that would result in a person or group owning 10.0% or more of
the Company's outstanding common stock, or (ii) such later date as may
be determined by action of a majority of the independent directors.
F-13
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Company without conditioning the offer on the redemption of the Rights.
The rights can be mandatorily redeemed by action of a majority of the
independent directors at any time prior to the earlier of the Final
Expiration Date and the Distribution Date for $.01 per right.
Upon exercise and the occurrence of certain events as defined in the
Rights Agreement, each holder of a Right, except the Acquiring Person,
will have the right to receive Mothers Work common stock or common
stock of the acquiring company having a value equal to two times the
exercise price of the Right.
9. STOCK OPTION PLANS
The Company has two stock option plans: the DIRECTOR STOCK OPTION PLAN
and the AMENDED AND RESTATED 1987 STOCK OPTION PLAN. Under the Director
Stock Option Plan, each outside director is granted 2,000 fully vested
options on an annual basis at an exercise price equal to the fair
market value on the grant date. Under the 1987 Stock Option Plan, as
amended and restated, officers and certain employees may be granted
options to purchase the Company's common stock at exercise prices equal
to the fair market value of the stock at the date of grant or at other
prices as determined by the Compensation Committee of the Board of
Directors. Up to a total of 1,425,000 options may be issued under the
Plans. Options outstanding generally vest ratably over 5 years.
Stock option activity for all plans was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OUTSTANDING EXERCISE
OPTIONS PRICE
-------------- --------
(in thousands)
<S> <C> <C>
Balance - September 30, 1997............................. 670 $ 11.38
Granted.................................................. 183 8.45
Exercised................................................ (6) 4.81
Canceled................................................. (117) 10.06
----
Balance - September 30, 1998............................. 730 10.85
Granted.................................................. 185 9.98
Exercised................................................ (32) 5.54
Canceled................................................. (74) 10.09
----
Balance - September 30, 1999............................. 809 10.93
GRANTED.................................................. 179 10.61
EXERCISED................................................ (23) 9.37
CANCELED................................................. (63) 10.02
----
BALANCE - SEPTEMBER 30, 2000............................. 902 $ 10.98
====
</TABLE>
Options for 544,512, 485,889 and 452,613 shares were exercisable as of
September 30, 2000, 1999 and 1998, respectively, and had a
weighted-average exercise price of $11.49, $11.62, and $11.72 for those
respective periods.
The Company has adopted the disclosure requirements of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, but has elected to continue to
measure compensation expense in accordance with APB Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly,
F-14
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
no compensation expense for stock options has been recognized for stock
option awards granted at fair market value. Had the compensation cost
for the Company's stock-based compensation plans been determined based
on the fair value at the grant dates for awards under those plans in
accordance with the provisions of SFAS No. 123, the Company's net
earnings and earnings per share would have been reduced to the pro
forma amounts indicated below. The effect of applying SFAS No. 123 in
this pro forma disclosure is not indicative of future amounts. SFAS No.
123 does not apply to options awarded prior to fiscal year ended
September 30, 1996. Additional option awards are anticipated in future
years.
<TABLE>
<CAPTION>
2000 1999 1998
------------- ---------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net income (loss) applicable to common stockholders:
As reported............................................... $ 3,659 $ 2,136 $ (17,885)
Pro forma................................................. 2,190 735 (18,817)
Diluted net income (loss) per common share:
As reported............................................... $ 1.01 $ 0.57 $ (5.00)
Pro forma................................................. 0.60 0.20 (5.26)
</TABLE>
The weighted average fair value of the stock options granted during
2000, 1999 and 1998 was $8.98, $9.28 and $6.15, respectively. The fair
value of each option granted is estimated on the date of grant using
the Black Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
----------- --------- -----------
<S> <C> <C> <C>
Dividend yield......................................... NONE none none
Expected price volatility.............................. 83.7% 75.8% 71.2%
Risk-free interest rates............................... 6.08% 6.05% 6.11%
Expected lives......................................... 8.4 YEARS 9.1 years 7.1 years
</TABLE>
The following table summarizes information about stock options
outstanding at September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES (IN THOUSANDS) REMAINING LIFE EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE
------------------ -------------- -------------- ---------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 4.55 to $6.83 1 6.6 $ 6.25 1 $ 6.63
6.83 to 9.10 241 8.0 8.68 52 8.42
9.10 to 11.38 370 6.1 10.34 280 10.28
11.38 to 13.65 253 6.2 13.13 177 13.33
13.66 to 15.92 13 5.3 14.50 12 14.50
15.92 to 18.20 7 5.3 16.50 5 16.50
18.20 to 20.48 17 3.5 18.28 17 18.27
---- ----
$4.55 to $20.48 902 6.5 $ 10.98 544 $ 11.49
==== ====
</TABLE>
At September 30, 2000, warrants were outstanding to purchase 140,123
shares of common stock at an exercise price of $0.01 per share. These
warrants expire on April 5, 2002.
F-15
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES
For the years ended September 30, income tax provisions (benefits) were
comprised of the following (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Current provision........................................ $ 113 $ 2,467 $ --
Deferred provision (benefit)............................. 4,136 957 (7,477)
-------- -------- --------
$ 4,249 $ 3,424 $ (7,477)
======== ======== ========
</TABLE>
The reconciliation of the statutory federal rate to the Company's
effective income tax rate on the income (loss) was as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Statutory tax rate....................................... 34.0% 34.0% (34.0)%
State taxes, net of federal benefit...................... 3.1 4.9 --
Amortization of goodwill................................. 8.1 11.0 3.1
Other.................................................... 0.5 0.4 --
------- ------- ------
45.7% 50.3% (30.9)%
======= ======= =======
</TABLE>
The deferred tax effects of temporary differences giving rise to the
Company's net deferred tax assets were as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating losses carryforwards.................................. $ 1,995 $ 6,405
Depreciation 7,263 7,780
Deferred rent ...................................................... 1,771 1,615
Inventory reserves.................................................. 514 436
Employee benefit accruals........................................... 427 543
Alternative minimum tax credit carryforwards........................ 394 528
Other accruals...................................................... 719 510
Other............................................................... 681 151
--------- ---------
13,764 17,968
DEFERRED TAX LIABILITIES:
Prepaid expenses.................................................... (92) (160)
--------- ---------
$ 13,672 $ 17,808
========= =========
</TABLE>
The Company has net operating loss carryforwards for tax purposes at
September 30, 2000 of approximately $5,869,000, of which $4,309,000
were acquired in the acquisitions of A Pea in the Pod and Motherhood.
The net operating loss carryforwards expire in 2009 through 2014. The
Company also has alternative minimum tax credits of approximately
$394,000 which can be utilized against regular income taxes in the
future. While the acquired net operating loss carryforwards are subject
to certain annual limitations due to the change in ownership, the
Company does not expect the limitations to reduce its ability to
ultimately use such carryforwards. The entire tax benefit of the net
operating loss carryforwards has been recorded as a deferred income tax
asset, as it is more likely than not that it will be realized during
the carryforward period. The tax benefit of the acquired net operating
loss carryforwards was recorded under the purchase method of
accounting.
No valuation allowance has been provided for the net deferred tax
assets. Based on the Company's historical levels of taxable income, as
adjusted for the restructuring and the
F-16
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
nondeductibility of goodwill amortization and the Episode operations,
management believes it is more likely than not that the Company will
realize the net deferred tax asset at September 30, 2000. Furthermore,
management believes the existing net deductible temporary differences
will reverse during periods in which the Company generates taxable
income. There can be no assurance, however, that the Company will
generate taxable earnings or any specific level of earnings in the
future.
11. COMMITMENTS AND CONTINGENCIES
The Company leases its retail facilities and certain equipment under
various noncancelable operating leases. Certain of these leases have
renewal options. Rent expense, including common area maintenance, was
$44,210,000, $38,001,000 and $42,739,000 in fiscal 2000, 1999 and 1998,
respectively.
Future annual minimum lease payments, as of September 30, are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
2001 .............................................. $ 31,025
2002 .............................................. 28,477
2003 .............................................. 25,819
2004 .............................................. 21,723
2005 .............................................. 16,890
Fiscal 2006 and thereafter......................... 42,522
----------
$ 166,456
==========
</TABLE>
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 management of the
Company, any such liability will not have a material adverse effect on
the financial position or operating results of the Company.
12. SUBSIDIARY GUARANTOR
Pursuant to the terms of the indenture relating to the Notes, Cave
Springs, Inc., a direct subsidiary of Mothers Work (the "Guarantor"),
has jointly and severally unconditionally guaranteed the obligations of
Mothers Work with respect to the Notes. There are no restrictions on
the ability of the Guarantor to transfer funds to Mothers Work 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 102[bb] of Regulation S-X)
for the Guarantor, as of and for the years ended September 30 (in
thousands):
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Current assets......................................... $ 3 $ 3
Non-current assets..................................... 82,740 59,106
Non-current liabilities................................ 17,223 9,148
Net sales.............................................. 23,634 19,377
Costs and expenses..................................... 60 60
Net income............................................. 15,559 12,749
</TABLE>
The summarized financial information for the Guarantor (and its
predecessors) has been prepared from the books and records maintained
by the Guarantor and the Company. The summarized
F-17
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
financial information may not necessarily be indicative of the results
of operations or financial position had the Guarantor operated as
independent entities. Certain intercompany sales included in the
subsidiary records are eliminated in consolidation. Mothers Work 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
consistent with the asset and liability approach used for consolidated
financial statement purposes. Management believes these allocation
methods are reasonable.
13. RESTRUCTURING CHARGES
In 1998, the Company announced that all of its non-maternity Episode
stores would be closed or converted into maternity clothing stores. In
connection with the closure, the Company recorded charges totaling
$20,925,000 ($13,811,000 net of a tax benefit of $7,114,000) which were
reflected in the accompanying Consolidated Statements of Operations as
cost of goods sold ($10,290,000) and restructuring charges
($10,635,000). The 1998 restructuring costs were comprised of $2.9
million of legal and other fees associated with the transfer of leases,
$7.3 million for losses on fixed assets and leasehold improvements,
$0.2 million for severance and the remainder for other costs. At
September 30, 1998, approximately $4.6 million of the restructuring
costs remained in accrued expenses. Of the $4.6 million, approximately
$2.1 million related to losses on purchase commitments for inventory
and leasehold improvements, $2.2 million related to legal and other
fees associated with lease transfers and the remainder was for other
miscellaneous charges. During fiscal 1999, the Company recorded charges
of approximately $3.6 million against the reserve which included
approximately $2.0 million of charges to settle purchase commitments
for inventory and leasehold improvements and $1.6 million of costs
incurred to settle lease transfers. At September 30, 1999,
approximately $1.0 million of the restructuring costs remained in
accrued expenses. During fiscal 2000, the Company finalized its
remaining lease transfer and incurred costs for miscellaneous related
matters associated with this divestiture and to settle inventory
purchase commitments. At September 30, 2000, approximately $250,000 of
the restructuring costs remains in accrued expenses. It is expected
that the full amount will be used for legal and other fees related to
the final lease transfer.
14. EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has employment agreements with its Chairman of the
Board/Chief Executive Officer ("CEO"), and President/Chief Operating
Officer ("COO"). These agreements provide for base compensation
(approximately $377,000 each for fiscal 2000 and $400,000 each for
fiscal 2001), increasing annually thereafter in an amount determined by
the Compensation Committee of the Board of Directors. The agreements,
which expire on September 30, 2003, automatically extend for successive
one-year periods extending the expiration date into the third year
after the extension, unless either the Company or the executive gives
written notes to the other party that the term will not so extend.
Additionally, the CEO and COO are entitled to an annual cash bonus and
stock options based on performance, as defined.
15. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan for full-time employees who have
at least one year of service and are 21 years of age. Employees can
contribute up to 20% of their annual salary. Effective January 1, 1999,
employees who meet certain criteria are eligible for a matching
F-18
<PAGE>
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
contribution from the Company based on a sliding scale. Company matches
are made on the first day of the succeeding calendar year. Company
matches vest fully on the employee's 4th anniversary date. In addition
the Company may make discretionary contributions to the plan which vest
over a five-year period. Company matching contributions totaling
$47,000 were made in fiscal 2000. There were no Company contributions
in fiscal 1999 or 1998.
16. STOCK BUYBACK
During fiscal 1999, the Board of Directors authorized the Company to
purchase up to 265,000 shares of its own stock in private transactions
or on the open market. As of September 30, 2000, the Company had
purchased 205,185 shares in the aggregate at a total cost of
$2,205,000. As of September 30, 2000, the Company was restricted from
further stock repurchases under the terms of the Notes.
17. RELATED PARTY TRANSACTIONS
Other than the husband and wife relationship between the CEO and COO,
there are no other family relationships among any other executive
officers of the Company.
A Director on the Board of Directors of the Company was paid $120,000
by the Company in fiscal 2000 for merchandising consultant fees. In
addition, another Director has been re-elected effective January 1,
2001 to the partnership at Pepper Hamilton LLP which provides legal
services to Company. The Company paid legal fees to this law firm of
$449,000, $275,000 and $576,000 in fiscal 2000, 1999 and 1998,
respectively.
F-19
