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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________________to ________________________
Commission file number 0-21196
Mothers Work, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 133045573
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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NONE
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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 November 15, 1996, the aggregate market value of the Registrant's
Common Stock, $.01 par value, held by nonaffiliates of the Registrant was
approximately $28,988,315.
On November 15, 1996, 3,559,317 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 16, 1997 are incorporated by reference into Part III of this
Form 10-K.
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PART I
ITEM 1. Business(1)
General
Mothers Work, Inc., a Delaware corporation ("Mothers Work(R)" or the
"Company"), which began operations in 1982, is the largest specialty retailer of
maternity clothing in the United States. On June 1, 1996 the Company expanded
into upscale bridge women's apparel through the acquisition of the 21 stores of
Episode USA Inc. ("Episode"). As of September 30, 1996, the Company operated 468
stores under the Maternite(R), Mimi Maternity(R), A Pea in the Pod(R) ("Pea"),
Motherhood Maternity(R) ("Motherhood(R)"), Maternity Works(R) and Episode(R)(2)
concepts offering a full range of career, casual and special occasion maternity
wear and upscale bridge women's apparel. The Company locates its stores
primarily in regional shopping malls and, to a lesser extent, in central
business districts within major metropolitan areas, and in factory-direct outlet
centers. The Company is vertically-integrated, performing design, manufacturing,
distribution and retail sales functions in-house.
The Company currently operates maternity wear retail stores under five
store concepts which, although having different merchandising and marketing
strategies, are all targeted to those 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. Maternite, the Company's original concept (formerly operated
under the name "Mothers Work"), markets traditional clothing. Mimi Maternity,
which was developed in 1990, is designed to meet the needs of fashion forward
women who are willing to spend more to make a fashion statement. Pea, which was
acquired in April 1995, markets the most upscale of the Company's fashions and
offers a premium or "bridge" merchandise selection manufactured by the Company,
including the Company's Mimi Maternity line of clothing, and certain designer
labels. Motherhood, the oldest national chain specialty retailer of maternity
clothing in the United States, was acquired in August 1995 in order for the
Company to enter the moderately-priced maternity clothing market. Maternity
Works, a chain of factory-direct outlet stores, serves the woman who seeks
upscale apparel during her pregnancy but cannot or will not purchase at full
retail prices.
The Company also operates in the non-maternity women's apparel market
through its Episode division, which was acquired in June 1996. Episode
markets bridge women's fashion apparel heavily focused on jackets, skirts, pants
and blouses. Episode was founded by the Fang
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(1) The terms "Mothers Work" and the "Company" as used in this Report
include each of the following subsidiaries of the Company: Mothers Work (R.E.),
Inc., Motherhood Maternity International, Inc., The Page Boy Company, Inc.
("Page Boy"), and Cave Springs, Inc. All references in this Report to stores or
Company-owned stores include leased departments.
(2) Episode, Excursion and Excursions are registered trademarks of Episode
USA, Inc.
brothers of Hong Kong and their company Toppy International Limited ("Toppy"),
from whom the U.S. stores were acquired.
The Company's strategy is to:
o Respond quickly to customer fashion demand utilizing its Real Time
Retailing(R) business model which encompasses computerized point of
sale and merchandising systems, daily replenishment of inventory,
"quick-turn" manufacturing with some product being produced on a
two-week cycle domestically, and "quick-response" in-season design.
o Secure and maintain desirable retail locations within regional
shopping malls and factory-direct outlet centers.
o Capitalize on its retail, merchandising, manufacturing, design and
distribution strengths to diversify its product offering from
maternity apparel to regular sized women's apparel.
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.
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 during the past decade as a result of
the decline in the number of large retailers and department store chains which
market maternity clothing. The Company's vertical integration eliminates the
need for the Company to rely on the availability of merchandise from outside
vendors, providing a competitive advantage for the Company. Management believes
that the market is elastic due in part to customers who shop the regular market
and choose loose-fitting or larger-sized clothing as a substitute for maternity
wear. The Company considers this component of the market to be a revenue
opportunity.
Bridge Fashion Market
The acquisition of Episode represents the Company's first entry into the
regular women's apparel market. Episode markets bridge women's fashion apparel
heavily focused on jackets, skirts, pants and blouses. The women's regular-sized
market segment is extremely competitive and the Company will compete for
customers with large specialty apparel retailers, better department stores,
national apparel chains, designer boutiques and individual apparel stores.
-2-
The Company acquired Episode in June 1996 for $7.4 million, consisting of
217,365 shares of the Company's Common Stock and $2.4 million in cash (including
$400,000 in transaction expenses). See Note 2 of "Notes to Consolidated
Financial Statements." For the fiscal years ended January 29, 1994, January 28,
1995 and February 3, 1996, Episode had net sales of $38.9 million, $34.6 million
and $28.7 million, respectively.
Strategy
The key components of the Company's strategic objectives are described
below.
Real Time Retailing - Real Time Retailing 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, "quick-turn" manufacturing and
"quick-response" design, all managed by an experienced group of executives, the
Company is able to provide its customers with the merchandise that they want
when they want it. The Company believes that this ability to react in real time
to changing consumer tastes and demand for product gives it a competitive
advantage over apparel retailers who source the majority of their product
overseas or with outside vendors which results in long lead times and an
inability to replenish merchandise quickly. 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 also assists the Company in
maximizing its in-store inventory turns and sales per square foot, reducing its
cost of goods sold and leading to higher gross profit margins.
Prime Locations and Broad Distribution - The Company's demonstrated
ability historically to generate high sales per square foot, the fact that its
stores project an image and design consistent with other quality retailers and
its multi-concept store offerings have enabled the Company to secure and
maintain desirable retail locations within regional shopping malls and
factory-direct outlet centers for its Maternite, Mimi Maternity, Pea, Motherhood
and Maternity Works stores. These factors have enabled the Company not only to
locate these stores at many of the most desirable shopping malls and
factory-direct outlet centers, but also to obtain desirable locations within
such malls and centers.
By operating several different store concepts, the Company is positioned
to satisfy demand for maternity clothing throughout the moderate-to-upscale
segments of the market. Mall operators require an appropriate mix of stores for
the mall's perceived consumer and market position. For regional malls that
require one maternity store, the Company provides several different concepts
within the moderate to the upscale segments of the market. Moreover, since there
is some overlap between store concepts (in terms of both stocked merchandise and
price points), the Company expects that customers will shop at more than one of
its store concepts. Accordingly, the Company is positioned to supply mall
operators which require two maternity stores. In the case of multi-mall
operators, the Company has the flexibility to supply packages of stores in
multiple malls utilizing several of its concepts. As a result of the
acquisitions of Pea and Motherhood, the Company will
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achieve broader distribution and be able to offer a wider spectrum of maternity
concepts to potential landlords.
As of September 30, 1996, the Company's operations included 27 leased
departments, 24 of which were added as a result of the acquisition of
Motherhood. Generally, start-up and operating costs for a leased department are
substantially less than for a stand-alone store. A significant part of the
Company's growth strategy for fiscal 1997 includes the opening of leased
departments.
Retail, Merchandising, Manufacturing, Design and Distribution Strengths -
The Company believes it can capitalize on its retail, merchandising,
manufacturing, design and distribution strengths to expand its product offering
from maternity apparel to regular sized women's apparel, through its acquisition
of Episode. Through its Episode division, the Company will be serving the
bridge-level customer with whom it has experience through its Pea store
concepts, and most every member of the Company's design, merchandising, store
operations and manufacturing departments has some level of experience in the
regular women's apparel market. The Company plans to manage the merchandising,
manufacturing and design operations of the Episode division with the same
techniques and skills it has used to operate its maternity business, including
fully-staffed merchandising and design departments, computer systems as well as
quick response design and manufacturing. The Company plans to apply its
marketing techniques and philosophies, to its regular sized women's apparel
business, which have allowed it to successfully operate its maternity business.
Expansion Strategy
Expansion of Apparel Business. Since the time of its initial public
offering in March 1993, the Company has increased its store base by
approximately 600% (from 67 stores to 468 stores) as of September 30, 1996.
These increases include stores acquired as a result of the Company's January
1994 acquisition of Page Boy (22 stores acquired) ("Page Boy Acquisition"), a
Dallas-based maternity clothing chain, its April 1995 acquisition of Pea (66
stores acquired) ("Pea Acquisition"), also a Dallas-based maternity clothing
chain and formerly the nation's second largest maternity retailer, its August
1995 acquisition of Motherhood (217 stores acquired) ("Motherhood Acquisition"),
a California-based maternity clothing chain, and its June 1996 acquisition of
Episode (21 stores acquired) ("Episode Acquisition").
Following the Pea Acquisition, the Company undertook an analysis of all of
its stores and entered into a store rationalization and consolidation program to
determine which acquired stores would be best operated under separate names and
which stores should be closed as redundant. After completion of the Company's
store rationalization program, the Company operates 39 stores under the Pea
name, which sells the most expensive clothing of any of the Company's maternity
concepts. The Motherhood Acquisition provides the Company's biggest opportunity
as it gives the Company more complete mall coverage at all price points ranging
from moderate to upscale and represents the Company's first significant presence
within leased departments. The Company believes that Motherhood has the
potential to double its current store base, subject to capital and marketplace
-4-
availability. The Episode Acquisition gives the Company entry into the bridge
women's fashion apparel and an opportunity to grow outside the maternity
business.
The Company opened 44 stores in fiscal 1996 and 33 in fiscal 1995. At
September 30, 1996, the Company operated 39 Pea stores, 208 Motherhood stores,
25 Motherhood leased departments and 27 Episode stores. The Company plans to add
at least 50 maternity stores, primarily leased departments and approximately 6
Episode stores, in fiscal 1997.
A significant portion of the Company's growth has resulted from the
addition of new stores and 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 the Company's success in identifying
suitable store sites, obtaining leases for those sites on acceptable terms,
constructing or refurbishing the sites where necessary, and hiring and training
skilled store managers and personnel. 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, and the costs
associated with opening such stores may adversely affect the Company's
profitability. Further, from time to time, the Company also evaluates store
closing opportunities.
The Company has identified and is continually re-evaluating real estate
opportunities including those which may be able to accommodate a Motherhood
store. In addition to its current stores, the Company has identified additional
malls or other locations in the United States that would be well suited for a
Motherhood store. The Company considers markets nationwide but favors
metropolitan area populations greater than 500,000. The Company has also
identified additional malls and outlet centers which do not meet the Company's
primary site selection criteria, but which may nevertheless be attractive
locations for one of the Company's stores if lease terms are able to be
negotiated to provide attractive store unit economics.
The Company believes it can further increase sales of the acquired Episode
stores through product line extensions, improved inventory management and
refined store operations. The Company plans to increase sales by augmenting the
Episode store base and merchandise selection. The Company will continue to serve
the existing Episode customer base with a full line of current production from
Toppy, which management believes will minimize risks associated with the bridge
business. In addition, the Company has introduced its own label, Daniel &
Rebecca(R), into the Episode stores. This label will include fashion forward
styles that carry an independent self-confident woman of the 90's from the
boardroom to the beach. This concept is referred to as lifestyle dressing and is
the foundation of the Daniel & Rebecca marketing position.
-5-
Store Concepts
The Company operates its maternity stores under five concepts offering a
full range of career, casual and special occasion maternity wear: Pea, Mimi
Maternity, Maternite, Motherhood and Maternity Works. In addition, the Company
operates upscale bridge women's apparel specialty stores under the Episode name.
The Company recently completed the name change of its Mothers Work stores to
Maternite. The following table sets forth certain information regarding the
Company's store composition as of September 30, 1996, including each store
concept's target location, product description and selected price points:
Summary of Store Concepts
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Store Description of Product Price Range for Average Store Typical Anchors and
Concept Typical Location Description Dresses/Blouses Size (Sq. Ft.) Comparable Retailers
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Episode Upscale regional Young $200-500 3,500 Bergdorf Goodman,
malls & affluent Designer at 120-200 Neiman Marcus, Saks
residential Bridge Price Fifth Avenue, Gucci,
districts Point Ralph Lauren
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A Pea in the Upscale regional Bridge, high $200-$400 2,400 Bergdorf Goodman,
Pod malls & affluent fashion 120-180 Neiman Marcus, Saks
residential Fifth Avenue, Gucci,
districts Ralph Lauren
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Mimi Upscale regional Fashion- $158-$198 1,600 Neiman Marcus,
Maternity malls forward, 78-118 Bloomingdales,
contemporary Nordstrom's, Saks Fifth
Avenue, Barney's, Joan
and David, Bebe, Ann
Taylor
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Maternite Upper-moderate Updated $78-$128 1,200 Macy's, Dillard's, Banana
regional malls classic to 38-68 Republic, Eddie Bauer,
contemporary Ann Taylor, Limited
Express
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Motherhood Moderate regional Value- $38-$79 1,100 Sears, J.C. Penney's,
malls and oriented, 28-39 Mervyn's, Casual Corner,
department stores mostly casual Merry-Go-Round,
basics Lerners
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Maternity Factory direct Fashion at $39-$79 2,000 Neiman Marcus' Last
Works outlet malls and marked-down 29-49 Call, Nordstrom Rack,
centers prices Saks Fifth Avenue
Clearinghouse, and
outlets for Ann Taylor,
Polo, Donna Karan, Liz
Claiborne, J. Crew and
Brooks Brothers
====================================================================================================================================
Most malls require only one moderate to upscale maternity store; however,
major regional malls with several department stores may be able to accommodate
two. With Mimi Maternity and
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Pea as the Company's prestige offerings, Maternite as the traditional offering,
and Motherhood as the value oriented, mostly casual basics offering, the Company
has the potential to fill both positions at a given mall. As of September 30,
1996, the Company had two or more maternity stores in 48 major regional malls.
Store Operations
The Company's Senior Vice President - Stores is responsible for all store
operations. The Company's centralized operations allow store personnel to focus
on selling as well as the physical maintenance of merchandise and store
facilities. The Company employs skilled, motivated sales associates who are
trained to provide the detailed assistance and the reassurance needed by the
customer. A visual merchant coordinates with the merchandising department to
develop a space allocation plan and design store display windows and travels
among the Company's stores to enhance merchandise presentation.
Merchandising, Design and Store Inventory Planning
The Company's Vice President - Merchandising is responsible for and
directs the following departments:
Merchandising. Guided by Real Time Retailing, the Company's merchandising
department combines input from the designers, current trends seen generally in
women's clothing, outside vendor resources and store management input, with
TrendTrack 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. These
fashions are generally marketed under the Company's Maternite, Mimi Maternity,
and Steena(R) labels.
TrendTrack includes a computerized open-to-buy system which projects
sales, purchases and inventory levels for each merchandise classification by
store format. This system permits the Company to plan its manufacturing and
outside purchasing weekly to control its inventory on a
classification-by-classification basis, thereby enhancing the Company's ability
to control inventory quantity and mix. By combining information from the
open-to-buy system and the TrendTrack item-tracking system, which measures
up-to-the-prior-day selling and inventory positions on every style, the
Company's merchandising department decides what items to make more of, what to
mark down or up in price, and what to close out.
All of the maternity concepts are on-line with TrendTrack and have
integrated merchandising operations.
Design. The Design department produces samples and patterns for the
Company's manufactured products under the guidance of the Merchandising
department. The design process
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is divided between six design rooms, one for each store concept. The Episode
design room is staffed by a separate team of merchandisers and designers having
experience with upscale bridge women's apparel.
The Company divides the year into six principal seasons and 12 monthly
deliveries. Although the seasons guide general product development, color
coordinated groups are planned for monthly deliveries for each line. 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 constructs profiles of each store
using its inventory planning system to enhance store merchandise coordination
and stock balance, to maintain adequate depth of merchandise by style and to
manage close-out merchandise and end-of-season consolidation of merchandise.
Each season's designs and production for each store are distributed by
allocation based on prior selling history. Stores within each chain are grouped
as career oriented or casual, more or less fashion forward, and higher or lower
price point. These factors are all considered in establishing target inventories
for each store. Stores typically maintain most styles on a one garment per
color, per size, per style basis, and inventories are replenished daily.
Integral to the Company's inventory management program are its proprietary
methods guided by Real Time Retailing and managed by its TrendTrack information
system. The Company consolidates the inventory in its stores every week through
its warehouse to replenish high volume stores on needed items. Every week, a
computer program analyzes data provided by TrendTrack as to all slow selling and
close-out items in every store to rank the stores in order of selling rate by
item. The TrendTrack system will send the stores which are low sellers of an
item a message to send the item back to the Company's warehouse thereby creating
backstock for stores where the item is selling faster. The consolidation program
reduces markdowns and increases sales by getting product to the stores that sell
it fastest.
Upon completion of the Episode Acquisition, Episode was added onto the
Company's TrendTrack system for purposes of inventory control and planning.
Production and Distribution
The Company subcontracts its sewing to shops in the Philadelphia
metropolitan and surrounding area and works with approximately 25
subcontractors. In fiscal 1996 and 1995, four contractors supplied approximately
32% and 57%, respectively, of the Company's total production based on aggregate
cost. On an individual basis, the production supplied by each of these
subcontractors ranged from 6% to 9% in fiscal 1996 and from 11% to 17% in fiscal
1995. The Company does not believe that the loss of any sewing subcontractor
would have a material adverse effect on its business and believes its
relationships with its subcontractors are good. The Company
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obtains fabrics, trim and other supplies from a variety of sources and believes
that its sources of fabrics and other supplies are adequate for its needs.
In fiscal 1996 the Company expanded sourcing to include 807 (value added
duty) operations in the Dominican Republic, Costa Rica and Mexico. In the case
of 807 operations, the products are cut at the Company's headquarters, supplied
with trims and are then shipped out of the country for assembly. A portion of
all production is supplied by independent subcontractors located abroad,
principally in Mexico and the Far East. The Company continues to seek additional
subcontractors throughout the world for its sourcing needs. The Company 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.
That portion of the Company's merchandise imported into the United States
is subject to United States duties. The Company's future import operations may
be adversely affected by political instability resulting in the disruption of
trade from exporting countries, the imposition of additional regulations
relating to, or duties, taxes and other charges on imports, significant
fluctuations in the value of the dollar against foreign currencies and
restrictions on the transfer of funds.
Finished garments from subcontractors and garments from other
manufacturers are received at the Company's central warehouse, inspected and
stored for picking. Each morning, the TrendTrack system prints replenishment
pick lists for each store. The shipments are scanned for comparison against the
bar-coded transaction number on the pick list and then shipped by common
carrier, typically UPS, Emery Air Freight or a similar service providing one- or
two-day delivery throughout the United States.
As part of the Episode Acquisition, the Company entered into a
Distribution Agreement with Toppy, pursuant to which Toppy agreed to sell to the
Company bridge women's apparel and accessories with one of the following
trademark names: Episode(R), Excursion(R) or Excursions(R) (the "Articles") and
other products manufactured by Toppy. Toppy also granted the Company the right
to manufacture Articles for sale in the United States, in consideration of the
payment of a royalty to Toppy equal to two percent of all sales of such Articles
manufactured by the Company. See Note 12 of "Notes to Consolidated Financial
Statements."
In August, 1995, the Company purchased a 186,000 square foot warehouse and
headquarters. In the second quarter of fiscal 1996, the Company completed the
process of occupying and extending the mezzanine to provide for an additional
132,000 square feet, of which 44,000 square feet is dedicated to office space
and the remaining square footage to distribution and manufacturing. With the
purchase of this building and the additional space, the Company consolidated its
operations.
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Management Information and Control Systems
All of the Company's stores have point-of-sale terminals that provide
information used in the Company's custom TrendTrack item and classification
tracking system. This system provides daily financial and merchandising
information integral to the Company's Real Time Retailing strategy. The
TrendTrack system has numerous features designed to integrate the Company's
retail operations with its design and manufacturing 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 daily
collection of credit card receipts.
The Company employs a comprehensive materials requirements planning system
to manage its production inventories, documentation, work orders and scheduling.
Terminals are located throughout the design, patterning and production areas.
This system provides a perpetual raw material inventory, actual job costing,
scheduling and bill of materials capabilities.
Advertising
The Company's advertising and promotion efforts focus on yellow pages and
national local print advertising. Pea and Mimi Maternity are advertised in
magazines such as "Vogue" and "Shape Fit Pregnancy." Motherhood is advertised in
magazines such as "Glamour," "Parent's Expecting," "Baby Talk" and "Parenting."
The Company is planning a major add campaign for Episode featuring the Daniel &
Rebecca line beginning in Spring 1997. The Company produces at least two
Maternite, two Mimi Maternity, and two Motherhood brochures annually, which are
distributed to obstetricians and customers. The customer mailing list, which by
nature is constantly changing, is regularly updated through the Company's
customer response cards, which are added to the computer database.
Competition
All aspects of the retail industry, including attracting customers,
securing merchandise and locating appropriate retail sites, are highly
competitive. The Company, with its Episode division, will compete for customers
with large specialty apparel retailers, better department stores, national
apparel chains, designer boutiques and individual apparel stores. In its
maternity apparel business, the Company faces competition from various
full-price maternity clothing chains, a number of off-price specialty retailers
and catalog retailers, as well as from local, regional and national department
stores and women's and, to some extent, men's clothing stores. Many of these
competitors are larger and have significantly greater financial resources than
the Company.
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Employees
At September 30, 1996, the Company had approximately 1,480 full-time and
approximately 1,093 part-time employees. None of the Company's employees is
covered by a collective bargaining agreement. The Company believes that its
relationship with its employees is good.
Executive Officers of the Company
The executive officers of the Company are:
Name Age Position
---- --- --------
Dan W. Matthias....... 53 Chairman of the Board and Chief
Executive Officer
Rebecca C. Matthias... 43 President, Chief Operating Officer
and Director
Thomas Frank.......... 40 Chief Financial Officer and
Vice President - Finance
Donald W. Ochs........ 55 Senior Vice President - Operations
Lynne M. Wieder....... 36 Senior Vice President - Stores
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. He had previously been involved
in the computer and electronics industry, serving as a director of Zilog, Inc.
and serving 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. Prior to
1982, she was a construction engineer for the Gilbane Building Company. In 1992,
she was chosen as "Regional Entrepreneur of the Year" by Inc. magazine and
Merrill Lynch. Ms. Matthias also serves as a director of the Greater
Philadelphia Chamber of Commerce.
Thomas Frank joined the Company in 1988 and has served the Company as Vice
President - Finance since September 1989 and also as Chief Financial Officer
since September 1995. Mr. Frank was Sales Audit Manager of the Lane Bryant
Division of The Limited, Inc. from 1986 to 1988. Mr. Frank is a Certified Public
Accountant.
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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.
Lynne M. Wieder has been Vice President - Stores since January 1993 and
Senior Vice President - Stores since September 1995. Previously, she had been
Director of Stores since joining the Company in January 1991. Ms. Wieder was
employed by Gap, Inc. as the Director of Stores for its Hemisphere division from
August 1989 to February 1990. Ms. Wieder worked at Ann Taylor from February 1981
to July 1989 and served as Regional Supervisor of Stores in various regions of
the United States.
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 is the owner of the registered trademarks Mothers Work(R), Maternite(R),
Maternity Works(R), Steena(R) and Daniel and Rebecca(R), and the service mark
Mimi Maternity(R), Real Time Retailing(R) and the slogan What's Showing is Your
Style(R). The Company has applied to register the mark MW(TM) as a service mark.
With the acquisition of Pea, the Company became the owner of the registered
trademarks and service marks A Pea in the Pod(R) and Maternity Redefined(R).
Upon the completion of the Motherhood Acquisition, the Company became the owner
of the registered trademarks Motherhood(R), Essential Body Cream(R) and Lauren
Taylor(R). The Company owns a patent for an adjustable waistband for use in
skirts, which allows the garment to be loosened during the course of pregnancy
and, with the acquisition of Motherhood, the Company acquired a patent relating
to the Essential Body Cream product. 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. The loss of any
trademark would not have a material adverse effect upon the Company's business.
As part of the Episode Acquisition, the Company entered into a Trademark
License Agreement, expiring May 31, 2000, with Toppy. The Trademark License
Agreement gives the Company the exclusive license to use the trademark
Episode(R) as a name for the Company's retail stores selling bridge women's
apparel and accessories in the United States. The Trademark License Agreement
requires the Company to pay Toppy a royalty of 5% of net sales of products in
Episode
-12-
stores, with maximum royalties not to exceed $4.5 million. See Note 12 of "Notes
to Consolidated Financial Statements."
Item 2. Properties
During fiscal 1996, the Company completed the relocation of its principal
executive offices, manufacturing and distribution facilities to 456 North Fifth
Street, Philadelphia, Pennsylvania 19123. The new facility is within two miles
of its previous location. The facility, after completion of improvements,
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 and distribution. The total cost of the facility and improvements
was approximately $9.9 million. The Company has received $6,590,000 in
government-assisted financing for the new facility.
All of the Company's retail stores for each of its six store concepts are
leased pursuant to leases that extend for terms on average for 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
leases include clauses that provide for contingent payments based on sales
volumes and others contain clauses for escalations of base rent as well as
increases in operating costs, marketing costs and real estate taxes. The terms
of the Company's leases expire as follows:
Fiscal Year
Lease Term Expires Number of Stores
------------------ ----------------
1997 75 (includes 27 leased departments
on month to month leases)
1998 38
1999 31
2000 29
2001 41
2002 and later 254
Item 3. Legal Proceedings
On February 7, 1994, prior to the Pea Acquisition in April 1995, a class
action complaint was filed in the United States District Court in Northern
District of Texas by plaintiff Raizy Levitan on behalf of all persons (the
"Class"), other than the defendants named therein, who purchased common stock of
Pea (the "Pea Stock") within a defined time period in connection with the
September 23, 1993 initial public offering of Pea (the "Pea IPO"). The named
defendants include Pea, its directors, those of its officers who are signatories
to the Pea IPO registration statement (the "Pea Registration Statement"), and
certain Pea shareholders who sold shares in the Pea IPO. The plaintiffs allege
that the Pea Registration Statement was false and misleading and failed to
disclose material information concerning Pea such that the information contained
in the Pea Registration Statement was misleading
-13-
and thereby in violation of the Securities Act. The plaintiffs also allege that
the defendants are responsible as direct actors, as aiders, abettors,
co-conspirators, and as control persons. The plaintiffs are seeking an award of
damages, under a variety of theories, the largest of which would yield $9.7
million, the impression of a constructive trust upon the proceeds of the Pea IPO
(and any profits earned thereon), rescission for those members of the Class who
still hold Pea Stock or an award of damages for those members of the Class who
do not, reimbursement of litigation costs and expenses, and such other just and
proper relief. Subsequent to the filing of the complaint, certain claims have
been dismissed with respect to certain of the defendants other than the Company.
Discovery is currently taking place among the parties. While the probability and
the extent of liability that Mothers Work (R.E.), Inc. might incur as a result
of this litigation cannot be predicted with any degree of certainty at this
time, management of the Company intends to vigorously defend against it, and
believes the plaintiffs' damages claim is grossly inflated and that the ultimate
outcome will not have a material impact on the Company's financial position.
In November 1996, plaintiffs Raizy Levitan and Henry Rasmussen filed an
action in the District Court of Dallas County, Texas against A Pea in the Pod,
its former officers and directors, the shareholders who sold shares in Pea's
public offering and all the underwriters in the public offering. This complaint
contains essentially the same factual allegations as the action pending in the
United States District Court for the Northern District of Texas as described
above. The complaint contains claims under the Texas Securities Act, Article
581-33A (primary securities law violation against all defendants), Article
581-33F(1) (control person liability against Pea and the individual defendants),
and Article 581-33F(2) (aiding and abetting liability against all defendants).
In addition to compensatory damages, plaintiffs seek prejudgment and
post-judgment interest and attorneys' fees pursuant to state law. Plaintiffs
have agreed to stay this action until April 1997, when trial of the federal
court action is scheduled.
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.
-14-
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 sales prices per share for the Company's common stock, as reported
on the Nasdaq National Market:
Fiscal 1995 High Low
----------- ---- ---
First Quarter $14 1/4 $ 7 3/4
Second Quarter 13 3/4 8
Third Quarter 14 3/4 12 1/2
Fourth Quarter 19 3/4 14 5/8
Fiscal 1996
-----------
First Quarter 17 12 1/4
Second Quarter 23 3/4 14 1/2
Third Quarter 27 3/4 20 1/2
Fourth Quarter 25 1/2 12 1/4
As of November 8, 1996, there were 222 holders of record and 1,300
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 (the
"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 8 of
"Notes to Consolidated Financial Statements" for further discussion on the
Preferred Stock dividends.
-15-
Item 6. Selected Financial Data
The following selected consolidated financial data as of September 30,
1992, 1993, 1994, 1995 and 1996 and for the 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
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Year Ended September 30
---------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ----------- ---------- ----------- -----------
(In thousands, except per share and operating data)
INCOME STATEMENT DATA:
Net sales $ 19,118 $ 30,872 $ 58,979 $ 106,005 $ 199,180
Cost of goods sold 9,341 13,974 24,945 45,527 88,417
---------- ----------- ---------- ----------- -----------
Gross profit 9,777 16,898 34,034 60,478 110,763
Selling, general and administrative
expenses 8,520 14,996 30,597 53,835 95,395
Nonrecurring charges -- -- -- 5,427 --
---------- ----------- ---------- ----------- -----------
Operating income 1,257 1,902 3,437 1,216 15,368
Interest expense, net 518 285 347 4,484 12,636
---------- ----------- ---------- ----------- -----------
Income (loss) before income
taxes (benefit) and
extraordinary item 739 1,617 3,090 (3,268) 2,732
Income taxes (benefit) 238 580 1,244 (847) 1,828
---------- ----------- ---------- ----------- -----------
Income (loss) before
extraordinary item 501 1,037 1,846 (2,421) 904
Extraordinary item, net
of income tax benefit -- (126) -- (4,215) --
---------- ----------- ---------- ----------- -----------
Net income (loss) 501 911 1,846 (6,636) 904
Preferred dividends -- -- -- 163 978
---------- ----------- ---------- ----------- -----------
Net income (loss) applicable
to common stockholders $ 501 $ 911 $ 1,846 $ (6,799) $ (74)
========== =========== ========== =========== ===========
Net income (loss) per common share:(1)
Before extraordinary item $ .25 $ .44 $ .58 $ (.83) $ (.02)
Extraordinary item -- (.05) -- (1.35) --
---------- ----------- ---------- ----------- -----------
Net income (loss) per common share(1) $ .25 $ .39 $ .58 $ (2.18) $ (.02)
========== =========== ========== =========== ===========
Weighted average common shares
outstanding(1) 2,190,206 2,707,215 3,186,885 3,120,535 3,269,290
========== =========== ========== =========== ===========
-16-
Year Ended September 30
-----------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
OPERATING DATA:
Same-store sales increase (decrease)(2) 16.1% (1.2%) 2.8% (0.7%) 8.0%
Average net sales per gross
square foot(3) $ 390 $ 384 $ 379 $ 360 $ 333
Average net sales per store(3) $401,008 $ 423,998 $439,133 $ 442,113 $452,446
At end of period:
Company-owned stores 53 97 168 451 468
Franchised stores 3 2 1 -- --
Gross square footage 58,385 110,356 218,842 643,175 719,930
September 30
-----------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA:
Working capital $ 2,627 $ 7,591 $ 8,487 $ 31,611 $ 37,435
Total assets 12,406 24,469 40,827 148,562 164,613
Total long-term and short-term debt 4,277 642 10,470 95,373 103,998
Redeemable convertible preferred stock
and warrants 4,929 -- -- -- --
Stockholders' equity 317 17,856 19,810 25,537 35,107
- ----------
(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 Company-owned stores in operation during the entire period.
-17-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following tables set forth, for the periods indicated, the percentages
which the items in the Company's Statements of Operations bear to net sales and
the period-to-period percentage changes:
% Period to Period
Increase (Decrease)
Percentage of Net Sales ----------------------------
Year Ended September 30 Fiscal 1995 Fiscal 1996
-------------------------------------- Compared to Compared to
1994 1995 1996 Fiscal 1994 Fiscal 1995
------- ------- ------- ------------ -----------
Net sales 100.0% 100.0% 100.0% 79.7% 87.9%
Cost of goods sold 42.3 42.9 44.4 82.5 94.2
------ ------ ------
Gross profit 57.7 57.1 55.6 77.7 83.1
Selling, general and
administrative expenses 51.9 50.9 47.9 75.9 77.2
Nonrecurring charges -- 5.1 --
------ ------ ------
Operating income 5.8 1.1 7.7 (64.6) 1,163.7
Interest expense, net 0.6 4.2 6.3 1,191.1 181.8
------ ------ ------
Income (loss) before income
taxes (benefit) and
extraordinary item 5.2 (3.1) 1.4 (205.8) 183.6
Income taxes (benefit) 2.1 (0.8) 0.9 (168.1) 315.8
------ ------ ------
Income (loss) before
extraordinary item 3.1 (2.3) 0.5 (231.1) 137.3
Extraordinary item-debt
extinguishment costs,
net of income tax
benefit -- (4.0) --
------ ------ ------
Net income (loss) 3.1% (6.3%) 0.5% (459.5) 113.6
====== ====== ======
-18-
The following table sets forth certain information representing growth in
the number of Company-owned stores for the periods indicated:
Year Ended September 30
---------------------------------
1994 1995 1996
---- ---- ----
STORES:
Beginning of period 97 168 451
Opened 54 33 44
Acquired 22 283 21
Closed (5) (33) (48)
--- --- ---
End of period 168 451 468
=== === ===
Year Ended September 30, 1996 and 1995
Net Sales. Net sales in fiscal 1996 increased by $93.2 million or 87.9%,
as compared to fiscal 1995. This increase was generated primarily by a $54.7
million increase in sales from stores acquired in the Motherhood Acquisition, a
$23.3 million increase in sales from stores acquired in the Pea Acquisition and
$6.6 million in sales from stores acquired in the Episode Acquisition. In
addition, stores opened or converted during fiscal 1996 accounted for an $8.7
million increase in sales, an 8.0% increase in same store sales, based on 117
stores. Further, an increase in sales for stores opened during fiscal 1995 were
offset by fiscal 1996 store closings. The Company had 468 Company-owned stores
(233 Motherhood stores, 78 Maternite stores, 51 Mimi Maternity stores, 40
Maternity Works outlet stores, 39 Pea stores and 27 Episode stores) at September
30, 1996 compared to 451 (214 Motherhood stores, 96 Maternite stores, 61 Mimi
Maternity stores, 43 Maternity Works outlet stores and 37 Pea stores) at
September 30, 1995.
Gross Profit. Gross profit as a percentage of net sales decreased to 55.6%
in fiscal 1996 as compared to 57.1% in fiscal 1995. This decrease was primarily
due to the full year impact of lower gross margin products sold by the
Motherhood division and lower gross margins generated by the Episode products,
which generally have a lower gross margin than the Company's maternity products.
The Company anticipates that its gross margins could decrease further due to the
integration of the operations of Episode into the Company's operations.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses increased by $41.6 million or 77.2% in fiscal 1996 as
compared to fiscal 1995 and, as a percentage of net sales, decreased from 50.9%
to 47.9%. The decrease as a percentage of sales was primarily due to the
increase in sales and the economies of scale realized through the acquisitions.
The dollar increase in fiscal 1996 as compared to fiscal 1995 was primarily due
to increases in wages and benefits at the store level, and rent at the store
level, which accounted for $14.5 million and $12.0 million of the increase,
respectively. The increases in wages and benefits at the store level were a
result of the full year impact of the increased number of employees required to
staff a larger number of stores due to the acquisitions. In addition, higher
advertising, marketing and depreciation and amortization contributed to the
increase in selling general and administrative expenses. The
-19-
Company reduced selling, general and administrative expenses in fiscal 1996 by
$0.3 million due to a prior year over accrual for store closings.
Operating Income. Operating income in fiscal 1996 was $15.4 million or
7.7% of net sales compared to operating income of $1.2 million or 1.1% of net
sales in fiscal 1995. Fiscal 1995 included non-recurring charges of $5.4
million. Without these nonrecurring charges, operating income in fiscal 1995
would have been $6.6 million or 6.2% of net sales. The dollar increase of $8.7
million, excluding nonrecurring charges, is primarily a result of the increased
sales volume and the percentage of sales improvement is primarily due to the
increase in sales and gross margin exceeding the increase in selling, general
and administrative expenses necessary to support the acquisitions.
Interest Expense, Net. Net interest expense increased by $8.2 million in
fiscal 1996 compared with fiscal 1995. Net interest expense as a percentage of
sales increased from 4.2% to 6.3%. This increase was due to higher outstanding
borrowings resulting primarily from the Company's issuance of the 12 5/8% Senior
Unsecured Exchange Notes due 2005 (the "Notes") to fund the Motherhood
Acquisition and repay the debt incurred in the Pea Acquisition. See Note 7 of
"Notes to Consolidated Financial Statements" for further details on the Notes.
Income Taxes. The effective income tax rate was an expense of 66.9% for
fiscal 1996 as compared to a benefit of 25.9% for fiscal 1995. The increased
effective tax rate in fiscal 1996 was primarily due to a full year impact of the
non-deductible amortization of goodwill on the current year pre-tax income
compared to the prior year net loss. See Note 11 of "Notes to Consolidated
Financial Statements" for the reconciliation of the statutory federal income tax
rate to the Company's effective tax rates in fiscal 1996 and 1995.
Year Ended September 30, 1995 and 1994
Net sales. Net sales in fiscal 1995 increased by $47.0 million or 79.7%,
as compared to fiscal 1994. This increase was generated primarily by a $19.7
million increase in sales from stores acquired in the Pea Acquisition, a $9.1
million increase in sales from stores acquired in the Motherhood Acquisition, a
$7.4 million increase from stores opened during fiscal 1995 and an increase of
$11.7 million in net sales from stores opened or converted to a new concept
during fiscal 1994 that were open all of fiscal 1995. The increase was partially
offset by a decrease of $669,000 from stores closed after September 30, 1994 and
a decrease of approximately $255,000 in same store sales. The same store sales
decrease in fiscal 1995 of 0.7% was based on 80 stores. The Company had 451
Company-owned stores (214 Motherhood stores, 96 Maternite stores, 61 Mimi
Maternity stores, 43 Maternity Works outlet stores, and 37 Pea stores) at
September 30, 1995 compared to 168 (84 Maternite stores, 62 Mimi Maternity
stores and 22 Maternity Works outlets) at September 30, 1994.
Gross profit. Gross profit as a percentage of net sales decreased to 57.1%
in fiscal 1995, as compared to 57.7% in fiscal 1994. This decrease was primarily
due to factory overhead increasing at a faster rate than the increase in
manufacturing volume, as the Company increased capacity for
-20-
the integration of the Pea and Motherhood Acquisitions. Additionally, a portion
of the Motherhood inventory purchased in the Motherhood Acquisition and
liquidated during the fourth quarter of fiscal 1995 contributed to the decline
in the gross profit percentage.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $23.2 million or 75.9% in fiscal 1995 as
compared to fiscal 1994, and as a percentage of net sales, decreased from 51.9%
to 50.9%. The dollar increase during fiscal 1995 as compared to fiscal 1994 was
primarily due to increases in wages and benefits at the store level, and rent at
the store level, which accounted for $9.0 million and $7.6 million of the
increase, respectively. The increases in wages and benefits at the store level
were due to increases in the number of employees to staff a larger number of
stores. In addition, higher advertising, marketing, pre-opening costs,
depreciation and amortization contributed to the increase in selling, general
and administrative expenses.
Nonrecurring charges. Nonrecurring charges for fiscal 1995 include $0.9
million accrued for relocation costs associated with the Company's new corporate
headquarters and manufacturing and distribution facility and $4.5 million to
cover the costs of the anticipated closing of 38 Maternite stores as a result of
the Company's fiscal 1995 acquisition of Pea. These costs are primarily
comprised of the anticipated cost to buyout leases and the write-off of
leasehold improvements. As of September 30, 1995, no charges have been incurred
against the corporate relocation reserve and $1.9 million has been charged
against the reserve for the closure of 22 stores.
Operating income. Operating income in fiscal 1995 was $1.2 million or 1.1%
of net sales compared to operating income of $3.4 million or 5.8% of net sales
in fiscal 1994. The decrease in operating income was primarily due to the
nonrecurring charges of $5.4 million. Without taking into consideration these
nonrecurring charges, operating income would have been $6.6 million, an increase
of 94.1% from fiscal 1994. The increase in operating income, without the
nonrecurring charges, is primarily a result of the increased sales volume.
Interest expense, net. Net interest expense increased by $4.1 million in
fiscal 1995 compared with fiscal 1994. This increase was due to higher
outstanding borrowings resulting primarily from the Company's borrowings to fund
the Pea Acquisition and the issuance of the Notes to fund the Motherhood
Acquisition and repay the debt incurred in the Pea Acquisition. See Note 7 of
"Notes to Consolidated Financial Statements" for further details on the Notes.
Income taxes. The effective income tax rate was a benefit of 25.9% for
fiscal 1995 as compared to an expense of 40.3% in fiscal 1994. The lower
effective tax rate in fiscal 1995 was primarily due to the decrease in the
effective state tax rate and the impact of the non-deductible amortization of
goodwill. See Note 11 of "Notes to Consolidated Financial Statements" for the
reconciliation of the statutory federal income tax rate to the Company's
effective tax rates in fiscal 1995 and 1994.
Extraordinary item. In fiscal 1995, the Company incurred an extraordinary
charge of $6.4 million, before the related tax benefit of $2.2 million, in
connection with the early extinguishment
-21-
of the debt incurred to finance the Pea Acquisition with the proceeds from the
sale of the Notes. The charge was comprised of a prepayment penalty of $3.6
million, the write-off of deferred financing costs of $1.7 million and
unamortized original issue discount of $1.0 million on the debt and fees and
expenses of $0.1 million.
Liquidity and Capital Resources
The Company's primary cash needs have been for working capital, primarily
for increased inventories, renovations of a new Company headquarters,
manufacturing and distribution facility, repayment of debt and acquisitions.
Since the Company is vertically integrated, it must maintain inventories of
fabric and other raw materials which other retailers without manufacturing
capabilities do not maintain. Generally, 20% to 25% of the Company's inventories
consist of work-in process fabric and other raw materials. In fiscal 1996, the
Company's cash sources have primarily been bank debt and the sale of common
stock. At September 30, 1996 the Company had available cash and cash equivalents
of $1.3 million, compared to $9.1 million at September 30, 1995.
The cash used in operating activities decreased from $6.4 million in
fiscal 1995 to $5.4 million in fiscal 1996. The decrease in cash used in
operating activities of $1.0 million was primarily due to an increase in net
income, depreciation and amortization and deferred tax liabilities, and a
decrease in accounts receivable and in cash used to pay off accounts payable and
accrued expenses, partially offset by an increase in inventories and a decrease
in accrued store closings. The increase in depreciation and amortization is due
to the full year impact of the assets acquired and the goodwill related to the
Pea Acquisition and the Motherhood Acquisition. The increase in deferred tax
liabilities is due to the utilization of net operating loss carryforwards and
the decrease in accounts receivable is related to a refund of taxes from a net
operating loss carryback. The decrease in cash used to pay off accounts payable
and accrued expenses related to the timing of vendor payments and the decrease
in accrued store closings is due to the final payments related to planned store
closings. The increase in inventories is related to the growth in the number of
stores over the last two years.
Net cash used in investing activities decreased from $60.1 million in
fiscal 1995 to $17.3 million in fiscal 1996. The cash used in investing
activities in fiscal 1996 included $2.4 million used in connection with the
Episode Acquisition, $7.7 million used for capital expenditures for new store
facilities, and $5.7 million for furniture, equipment and improvements to the
Company headquarters, manufacturing and distribution facility purchased in
fiscal 1995. This compares with $48.0 million used in connection with the Pea
and Motherhood Acquisitions, $6.5 million used for capital expenditures for new
store facilities, and $4.4 million for the purchase and related improvements, of
a new Company headquarters, manufacturing and distribution facility.
Net cash provided by financing activities decreased from $75.4 million in
fiscal 1995 to $14.8 million in fiscal 1996. The $14.8 million provided by
financing activities resulted primarily from $8.6 million in short-term
borrowings under the line of credit agreement and cash overdrafts, $4.4 million
from the sale of common stock and $2.3 million of proceeds from the issuance of
long-term debt, partially offset by $0.4 million in repayments of long-term debt
and $0.3 million in debt
-22-
issuance costs. This compares with $75.4 million provided by financing
activities in fiscal 1995 resulting primarily from $143.4 million of proceeds
from the issuance of long-term debt and $1.0 million from the issuance of
warrants, partially offset by $58.5 million in repayments of long-term debt,
$5.8 million in debt issuance costs and $4.7 million in payments as a result of
the early extinguishment of debt.
In April 1996, the Company received $2.0 million from the Pennsylvania
Industrial Development Authority ("PIDA"). The proceeds from this loan were used
to pay a portion of the improvements to the newly acquired headquarters. A
portion of the PIDA loan is secured by a bank letter of credit.
In connection with the financing of the Episode acquisition, to finance
the opening of additional stores and for general working capital purposes, the
Company consummated a private placement of an aggregate of 200,000 shares of its
common stock to a number of institutional investors. The purchase price for the
shares was $22.25 per share, and the net proceeds to the Company, after
deducting expenses, were approximately $4.4 million.
Concurrent with the Episode acquisition, and in order to provide the
Company with additional borrowing capacity under its working capital revolving
line of credit facility ("Working Capital Facility"), the Working Capital
Facility was increased from $15.0 million to $20.0 million. The Working Capital
Facility expires in August 1998 and provides for a revolving credit and letter
of credit facility and for an additional $4.0 million letter of credit to
collateralize an Industrial Revenue Bond. The Company had $6.6 million in
borrowings and $3.9 million in letters of credit issued under the Working
Capital Facility at September 30, 1996.
The Company's consolidated balance sheet at September 30, 1996 includes a
net deferred tax asset of $8.6 million. The Company believes it is more likely
than not that future taxable income will be at a sufficient level to utilize the
net operating loss carryforwards and the deductions that will be created upon
the reversal of existing temporary differences that comprise the deferred tax
asset. The Company's conclusion that it is "more likely than not" that the net
deferred tax asset will be realized is based on its history of earnings,
forecasted earnings for fiscal 1997 and the prospects of continued earnings
after 1997. However, there can be no assurance that the Company's actual
earnings for 1997 and thereafter will be as currently projected, and,
consequently, there can be no assurance that the Company's deferred tax asset
will be realized. The inability of the Company to realize the deferred tax asset
could have a material adverse effect on the Company's financial position and
results of operations. The Company will continue to periodically review the tax
criteria related to the recognition of the deferred tax asset.
The Company intends to focus on growing the Motherhood business. This
business represents the Company's biggest opportunity for growth and has the
potential to more than double its fiscal year end store base of 233 stores,
subject to capital and marketplace availability. In addition, the near term
strategy for the acquisition of Episode is to broaden the product line through
the addition of the Daniel & Rebecca label and to add approximately 6 more
stores in major metropolitan areas, subject to capital and marketplace
availability. The Company plans to apply its
-23-
proven Real Time Retailing(TM) concept to this chain. The Company's entry into
bridge fashion with the Episode acquisition could result in the incurrence of
additional indebtedness, which in turn could result in an increase in the degree
of financial leverage of the Company and a decrease in the Company's financial
flexibility.
The Company believes that its current cash and working capital positions,
available borrowing capacity and net cash expected to be generated from
operations will be sufficient to fund the Company's anticipated capital
expenditures, working capital requirements and semiannual interest payments on
the Notes through fiscal 1997. There are currently no restrictions on the
ability of the Company's direct subsidiaries to transfer funds to the Company in
the form of cash dividends, loans or advances other than restrictions imposed by
applicable law.
Seasonality
The Company's operations are slightly seasonal with the Company's net
sales historically being the lowest in the second fiscal quarter.
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 1997 and beyond to differ materially from those expressed or implied in
any such forward-looking statements: changes in consumer spending patterns, raw
material price increases, consumer preferences and overall economic conditions,
the impact of competition and pricing, changes in weather patterns, availability
of suitable store locations at appropriate terms, continued availability of
capital and financing, ability to develop merchandise and ability to hire and
train associates, changes in fertility and birth rates, political stability,
currency and exchange risks and changes in existing or potential duties, tariffs
or quotas, postal rate increases and charges, paper and printing costs, and
other factors affecting the Company's business beyond the Company's control.
-24-
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements appear at pages F-1
through F-25, as set forth in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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 16, 1997, 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.
-25-
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.
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 Designations 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 Rights Agreement dated as of October 9, 1995 between the
Company and StockTrans, Inc. (Exhibit 4.1 to the Company's
Current Report on Form 8-K, dated October 5, 1995 ("October
1995 8-K")).
-26-
Exhibit No. Description
----------- -----------
*4.4 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).
*10.1 Agreement of Lease dated September 22, 1986 between the
Company and Broad and Noble Associates, Inc., and amendments
thereto (Exhibit 10.1 to the 1993 Registration Statement).
*10.2 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).
*10.3 Voting Agreement dated as of March 12, 1993 among Rebecca C.
Matthias, Dan W. Matthias, Elam M. Hitchner III, Keystone
Venture II, L.P., G-2 Family Partnership, Penn Janney Fund,
Inc., Apex Investment Fund, L.P. and Meridian Venture
Partners (Exhibit 10.10 to the 1993 Registration Statement).
*10.4 Termination of Voting Agreement dated September 28, 1995
among Rebecca C. Matthias, Dan W. Matthias, Keystone Venture
II, L.P., Penn Janney Fund, Inc., G-2 Family Partnership,
Hitchner & Associates Profit Sharing Plan, Meridian Venture
Partners and Apex Investment Fund, L.P. (Exhibit 10.31 to
the 1995 Registration Statement).
*10.5 Stock Subscription Warrant of the Company (No. Penn-Janney:
1992-1) issued to Penn Janney Fund, Inc. dated January 24,
1992 (Exhibit 10.29 to the 1993 Registration Statement).
*10.6 1987 Stock Option Plan.
*10.7 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")).
-27-
Exhibit No. Description
----------- -----------
*10.8 Non-Competition and Confidentiality Agreement dated January
28, 1993 between the Company and Lynne Wieder (Exhibit 10.39
to the 1993 Registration Statement).
*10.9 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")).
*10.10 Employment Agreement dated as of July 14, 1994 between the
Company and Rebecca C. Matthias (Exhibit 10.26 to the 1994
Form 10-K).
*10.11 Employment Agreement dated as of June 19, 1995 between the
Company and Donald W. Ochs (Exhibit 10.3 to the June 1995
10-Q).
*10.12 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).
*10.13 Credit Agreement dated as of August 1, 1995 between the
Company, its subsidiaries and Meridian Bank (Exhibit 10.1 to
the June 1995 10-Q).
*10.14 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")).
*10.15 Amendment to Credit Agreement dated September 1, 1995
between the Company, its subsidiaries and Meridian Bank
(Exhibit 10.28 to the 1995 Registration Statement).
*10.16 Indenture of Trust dated September 1, 1995 between PAID and
Society National Bank (Exhibit 10.29 to the 1995
Registration Statement).
*10.17 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).
-28-
Exhibit No. Description
----------- -----------
*10.18 Agreement and Plan of Merger dated as of July 3, 1995 by and
among the Company, Motherhood Maternity Shops, Inc., The
Shansby Group, TSG International and Motherhood Acquisition
Corp. (Exhibit 2.1 to the June 1995 10-Q).
*10.19 Agreement and Plan of Merger dated as of March 5, 1995 by
and among the Company, A Pea in the Pod, Inc., and MW
Acquisition Corporation (Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended March
31, 1995).
*10.20 Second Amendment to Credit Agreement dated January 25, 1996
between the Company, its subsidiaries and Meridian Bank
(Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the Quarter ended March 31, 1996).
*10.21 Third Amendment to Credit Agreement dated May 31, 1996
between the Company, its subsidiaries and Meridian Bank
(Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1996).
*10.22 Asset Purchase Agreement dated April 25, 1996 among the
Company, T3 Acquisition, Inc. and Episode USA, Inc. (Exhibit
2.1 of the Company's Current Report on Form 8-K, dated June
17, 1996 (the "June 1996 8-K).
*10.23 Trademark License Agreement dated May 31, 1996 between the
Company and Episode USA, Inc. (Exhibit 10.1 to the June 1996
8-K).
*10.24 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).
10.25 Fourth Amendment to Credit Agreement dated September 30,
1996 between the Company, its subsidiaries and Meridian
Bank.
10.26 Consulting Agreement dated September 11, 1996 between the
Company and Marvin Traub Associates, Inc.
10.27 Residential Lease dated June 28, 1996 between the Company
and Daniel and Rebecca Matthias.
10.28 First Amendment to Asset Purchase Agreement dated May 31,
1996 by and among the Company, T3 Acquisition, Inc. and
Episode USA, Inc.
-29-
Exhibit No. Description
----------- -----------
10.29 Note dated February 14, 1996 from the Company to PIDC Local
Development Corporation.
10.30 Installment Sale Agreement dated April 4, 1996 by and
between PIDC Financing Corporation and the Company.
10.31 Open-End Mortgage dated April 4, 1996 between PIDC Financing
Corporation and the Pennsylvania Industrial Development
Authority ("PIDA").
10.32 Loan Agreement dated April 4, 1996 by and between PIDC
Financing Corporation and PIDA.
11 Statement Regarding Computation of Per Share Earnings.
21 Subsidiaries of the Company.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule for the fiscal year ended September
30, 1996.
----------
* Incorporated by reference.
(b) Reports filed on Form 8-K during the last quarter of fiscal 1996:
The Company filed a Current Report on Form 8-K dated June 17, 1996, as
amended by a Form 8-K/A dated June 18, 1996 and Form 8-K/A dated August 14,
1996, relating to the acquisition of Episode and the sale of 200,000 shares of
common stock to a number of institutional investors. The Episode acquisition was
reported under Item 2 of Form 8-K. The audited financial statements of Episode
as of February 3, 1996 and for the three years ended February 3, 1996 were filed
with the Form 8-K/A dated August 14, 1996. In addition, the unaudited pro forma
condensed consolidated balance sheet of Mothers Work at March 31, 1996 and
unaudited pro forma condensed consolidated statements of operations of Mothers
Work for the year ended September 30, 1995 and the six months ended March 31,
1996 were filed with the August 14, 1996 Form 8-K/A.
-30-
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 16th day of December,
1996.
By: /s/ Dan W. Matthias
----------------------------------------------
Dan W. Matthias, Chairman of the Board and
Chief Executive Officer, the principal
executive officer
By: /s/ Thomas Frank
----------------------------------------------
Thomas Frank, Chief Financial Officer, Vice
President-Finance and the principal financial
officer
-31-
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on December 16, 1996, in the
capacities indicated:
/s/ Dan W. Matthias Chairman of the Board, Chief Executive
- -------------------------------------- Officer and Director, the principal
Dan W. Matthias executive officer
/s/ Rebecca C. Matthias President, Chief Operating Officer
- -------------------------------------- and Director
Rebecca C. Matthias
/s/ Thomas Frank Chief Financial Officer, Vice President
- -------------------------------------- - Finance and Chief Accounting
Thomas Frank Officer, the principal financial
officer and principal 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/ Walter F. Loeb Director
- --------------------------------------
Walter F. Loeb
/s/ Marsha R. Perelman Director
- --------------------------------------
Marsha R. Perelman
/s/ William L. Rulon-Miller Director
- --------------------------------------
William L. Rulon-Miller
MOTHERS WORK, INC. AND SUBSIDIARIES
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 to F-7
Notes to Consolidated Financial Statements.......................... F-8 to F-24
F-1
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 subsidiaries as of September 30, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1996. 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 generally accepted auditing
standards. 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
subsidiaries as of September 30, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Philadelphia, Pa.
November 15, 1996
F-2
MOTHERS WORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30
--------------------------------
ASSETS 1995 1996
--------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents $ 9,130,480 $ 1,262,435
Receivables-
Trade 2,318,614 2,141,102
Income taxes 2,808,109 --
Other 147,314 146,924
Inventories 38,421,186 57,209,499
Deferred income taxes 3,169,720 3,815,002
Prepaid expenses and other 1,807,117 1,791,070
--------------- ---------------
Total current assets 57,802,540 66,366,032
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT, net 37,240,939 45,451,114
--------------- ---------------
OTHER ASSETS:
Deferred income taxes 5,707,729 4,741,869
Goodwill, net of accumulated amortization of $1,241,961
and $3,403,751 40,842,586 40,989,708
Other intangible assets, net of accumulated amortization
of $791,174 and $1,244,180 1,441,843 1,310,900
Deferred financing costs, net of accumulated amortization
of $62,839 and $481,576 3,849,744 3,736,937
Other assets 1,676,794 2,016,178
--------------- ---------------
Total other assets 53,518,696 52,795,592
--------------- ---------------
$ 148,562,175 $ 164,612,738
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ -- $ 6,558,193
Current portion of long-term debt 770,133 758,911
Accounts payable 9,985,319 9,102,185
Accrued expenses 10,377,662 12,511,600
Accrued store closings 5,058,199 --
--------------- ---------------
Total current liabilities 26,191,313 28,930,889
--------------- ---------------
LONG-TERM DEBT 94,602,679 96,680,722
--------------- ---------------
DEFERRED RENT 2,068,448 2,754,197
--------------- ---------------
ACCRUED DIVIDENDS ON PREFERRED STOCK 162,916 1,140,416
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Series A Cumulative convertible preferred stock, $.01 par value, $280.4878
stated value, 2,000,000 shares authorized, 41,000
shares issued and outstanding (liquidation value of $11,500,000) 11,500,000 11,500,000
Series B Junior participating preferred stock, $0.01 par value,
10,000 shares authorized in 1996, none outstanding -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
3,122,197 and 3,559,277 shares issued and outstanding 31,222 35,593
Additional paid-in capital 18,101,425 27,740,483
Accumulated deficit (4,095,828) (4,169,562)
--------------- ---------------
Total stockholders' equity 25,536,819 35,106,514
--------------- ---------------
$ 148,562,175 $ 164,612,738
=============== ===============
The accompanying notes are an integral part of these statements.
F-3
MOTHERS WORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30
-------------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
NET SALES $ 58,978,556 $ 106,005,028 $ 199,179,984
COST OF GOODS SOLD 24,944,560 45,527,498 88,416,648
--------------- --------------- ---------------
Gross profit 34,033,996 60,477,530 110,763,336
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 30,596,725 53,834,596 95,394,902
NONRECURRING CHARGES -- 5,426,779 --
--------------- --------------- ---------------
Operating income 3,437,271 1,216,155 15,368,434
INTEREST INCOME 19,146 21,278 228,255
INTEREST EXPENSE (366,456) (4,505,436) (12,864,351)
--------------- --------------- ---------------
Income (loss) before income taxes
(benefit) and extraordinary item 3,089,961 (3,268,003) 2,732,338
INCOME TAXES (BENEFIT) 1,244,110 (847,287) 1,828,572
--------------- --------------- ---------------
Income (loss) before extraordinary item 1,845,851 (2,420,716) 903,766
EXTRAORDINARY ITEM--EARLY
EXTINGUISHMENT OF DEBT, net of
income tax benefit of $2,171,435 -- (4,215,138) --
--------------- --------------- ---------------
NET INCOME (LOSS) 1,845,851 (6,635,854) 903,766
DIVIDENDS ON PREFERRED STOCK -- 162,916 977,500
--------------- --------------- ---------------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS $ 1,845,851 $ (6,798,770) $ (73,734)
=============== =============== ===============
NET INCOME (LOSS) PER COMMON SHARE:
Before extraordinary item $ .58 $ (.83) $ (.02)
Extraordinary item -- (1.35) --
--------------- --------------- ---------------
NET INCOME (LOSS) PER COMMON SHARE $ .58 $ (2.18) $ (.02)
=============== =============== ===============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,186,885 3,120,535 3,269,290
--------------- --------------- ---------------
The accompanying notes are an integral part of these statements.
F-4
MOTHERS WORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Additional Retained
Preferred Common Paid-in Earnings Deferred
Stock Stock Capital (Deficit) Compensation Total
----------- ------- ----------- ----------- -------- -----------
BALANCE, SEPTEMBER 30, 1993 $ -- $30,891 $16,984,612 $ 857,091 $(16,770) $17,855,824
Exercise of common stock warrants -- 185 48,545 -- -- 48,730
Exercise of 12,141 stock options -- 122 55,150 -- -- 55,272
Amortization of deferred compensation -- -- -- -- 3,947 3,947
Net income -- -- -- 1,845,851 -- 1,845,851
----------- ------- ----------- ----------- -------- -----------
BALANCE, SEPTEMBER 30, 1994 -- 31,198 17,088,307 2,702,942 (12,823) 19,809,624
Issuance of preferred stock in
connection with acquisition 11,500,000 -- -- -- -- 11,500,000
Issuance of common stock warrants -- -- 1,000,000 -- -- 1,000,000
Exercise of 2,394 stock options -- 24 13,118 -- -- 13,142
Amortization of deferred compensation -- -- -- -- 12,823 12,823
Preferred stock dividends -- -- -- (162,916) -- (162,916)
Net loss -- -- -- (6,635,854) -- (6,635,854)
----------- ------- ----------- ----------- -------- -----------
BALANCE, SEPTEMBER 30, 1995 11,500,000 31,222 18,101,425 (4,095,828) -- 25,536,819
Exercise of 19,715 stock options -- 197 134,350 -- -- 134,547
Tax benefit from exercise of stock options -- -- 117,485 -- -- 117,485
Sales of 200,000 shares of common
stock, net of expenses -- 2,000 4,394,000 -- -- 4,396,000
Issuance of 217,365 shares of common
stock in connection with acquisition -- 2,174 4,993,223 -- -- 4,995,397
Preferred stock dividends -- -- -- (977,500) -- (977,500)
Net income -- -- -- 903,766 -- 903,766
----------- ------- ----------- ----------- -------- -----------
BALANCE, SEPTEMBER 30, 1996 $11,500,000 $35,593 $27,740,483 $(4,169,562) $ -- $35,106,514
=========== ======= =========== =========== ======== ===========
The accompanying notes are an integral part of these statements.
F-5
MOTHERS WORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30
-------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,845,851 $ (6,635,854) $ 903,766
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Extraordinary item, before income
tax benefit -- 6,386,573 --
Depreciation and amortization 2,760,452 5,814,529 10,161,531
Noncash portion of the nonrecurring
charges -- 2,107,773 --
Imputed interest on debt 13,651 21,202 103,284
Deferred tax liability (benefit) (179,221) (814,125) 1,444,151
Amortization of deferred financing costs -- 260,305 418,737
Provision for deferred rent 708,615 805,526 685,749
Changes in assets and liabilities, net of effects
from purchases of businesses-
Decrease (increase) in--
Receivables (221,937) (2,452,597) 2,986,011
Inventories (7,275,870) (6,470,888) (15,879,647)
Prepaid expenses and other (703,320) 1,440,952 64,014
Increase (decrease) in--
Accounts payable and accrued
expenses 2,585,796 (7,717,337) (4,283,509)
Accrued store closings -- 1,196,719 (2,975,657)
Accrued income taxes (244,554) (545,645) --
Other liabilities -- 162,916 977,500
-------------- -------------- --------------
Net cash used in
operating activities (710,537) (6,439,951) (5,394,070)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (915,406) (47,972,035) (2,442,865)
Purchases of property, plant and equipment (8,045,495) (10,943,951) (13,445,841)
Increase in intangible and other assets (909,903) (1,196,250) (1,412,008)
Sales of investments in marketable securities 1,258,496 -- --
-------------- -------------- --------------
Net cash used in
investing activities (8,612,308) (60,112,236) (17,300,714)
-------------- -------------- --------------
--(continued)--
F-6
MOTHERS WORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--(continued)--
Year Ended September 30
---------------------------------------------------------
1994 1995 1996
-------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in line of credit and cash overdrafts,
net -- -- $ 8,638,586
Proceeds from issuance of long-term debt 9,863,800 143,418,430 2,340,000
Repayments of long-term debt (1,012,728) (58,536,641) (376,464)
Debt issuance costs -- (5,840,059) (305,930)
Payments upon early extinguishment of debt -- (4,656,562) --
Net proceeds from sales of common stock -- -- 4,396,000
Issuance of warrants -- 1,000,000 --
Proceeds from exercise of options and warrants 104,002 13,142 134,547
-------------- ---------------- ---------------
Net cash provided by
financing activities 8,955,074 75,398,310 14,826,739
-------------- ---------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (367,771) 8,846,123 (7,868,045)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 652,128 284,357 9,130,480
-------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 284,357 $ 9,130,480 $ 1,262,435
============== ================ ===============
The accompanying notes are an integral part of these statements.
F-7
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business
Mothers Work, Inc. was incorporated in Delaware in 1980 and is a specialty
retailer and manufacturer of maternity clothing and upscale "bridge" women's
apparel operating in 468 retail store locations (including 27 leased
departments) throughout the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of Mothers Work, Inc.
and its wholly owned subsidiaries, Cave Springs, Inc., Mothers Work (R.E.),
Inc., The Page Boy Company, Inc. and Motherhood Maternity International, Inc.
(collectively, the Company) as of September 30, 1996. 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 all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents for the purpose of
determining cash flows. At September 30, 1996, cash and cash equivalents include
cash on hand, cash in the bank and certificates of deposit. Cash overdrafts are
included in accounts payable.
Statement of Cash Flows Information
In fiscal 1994, 1995 and 1996, the Company paid $314,174, $2,833,214 and
$12,137,535 in interest, respectively. Income taxes paid in fiscal 1994 and 1995
were $1,667,885 and $340,949, respectively, and income taxes refunded in fiscal
1996 were $2,524,525. Capital lease obligations of $946,685 and $124,594 were
incurred on equipment leases entered into in fiscal 1994 and 1995, respectively.
The following table lists noncash assets that were acquired and liabilities that
were assumed as a result of the acquisitions discussed in Note 2:
F-8
Year Ended September 30
----------------------------------------
1994 1995 1996
----------- ------------ -----------
Noncash Assets:
Accounts receivable $ 33,385 $ 2,156,704 $ --
Inventories 768,699 13,423,409 2,908,666
Prepaid expenses -- 1,811,739 --
Property and equipment 623,872 17,063,218 4,798,207
Goodwill 817,913 39,994,807 2,308,912
Other intangible assets -- 487,560 --
Deferred income taxes -- 7,467,707 1,006,088
Other assets 213,813 392,693 98,940
----------- ------------ -----------
Net noncash assets acquired 2,457,682 82,797,837 11,120,813
Less - Assumed Liabilities:
Accounts payable and accrued expenses (1,542,276) (19,000,333) (3,682,551)
Accrued store closings -- (4,325,469) --
Common stock issued to seller -- -- (4,995,397)
Preferred stock issued to seller -- (11,500,000) --
----------- ------------ -----------
Net cash used in investing activities $ 915,406 $ 47,972,035 $ 2,442,865
=========== ============ ===========
The above amounts were recorded under the purchase method of accounting and were
based on all available information and management's best estimates. The
September 30, 1996 amounts include adjustments made to original estimates
related to the Pea and Motherhood acquisitions (see Note 2). To the extent that
the amounts related to the Episode acquisition require modification, they will
be adjusted in fiscal 1997.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories manufactured by the Company include the cost of materials, freight,
direct labor, manufacturing and distribution overhead.
Prepaid Expenses and Other
Included in prepaid expenses and other are preopening costs and deferred direct
response advertising and catalog costs. Costs incurred prior to the opening of a
new store are charged to expense over a three-month period after the store
commences operations. Advertising and catalog costs are deferred and amortized
over the period in which the related revenues are earned, not to exceed six
months. Advertising and catalog expenses were $1,570,663, $2,503,732 and
$4,448,821 in fiscal 1994, 1995 and 1996, respectively.
F-9
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Additions or improvements
are capitalized, while repairs and maintenance are charged to expense.
Depreciation is provided over the estimated useful lives of the assets using the
straight-line method. The estimated useful lives are 40 years for the building,
five to ten years for furniture and equipment and the shorter of the estimated
useful life or lease term for leasehold improvements.
Intangible Assets
Goodwill, leasehold interests and other intangible assets are amortized over 20
years, the lease term and 5 to 10 years, respectively. Amortization of
intangible assets was $296,053, $1,094,733 and $2,614,796 in fiscal 1994, 1995
and 1996, respectively.
Deferred Financing Costs
Deferred financing costs relate to debt issued in fiscal 1995 and 1996 and are
amortized over the terms of the related debt using the effective interest
method. Amortization of deferred financing costs was $260,305 and $418,737 in
fiscal 1995 and 1996, respectively.
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.
Net Income (Loss) Per Common Share
Net income (loss) per common share is calculated utilizing the modified treasury
stock method because the Company's outstanding options and warrants exceed 20%
of the number of common shares outstanding at the end of the period. Presently,
per-share computations under the modified treasury stock method are the same as
the treasury stock method. All per-share amounts are based upon the weighted
average common shares and dilutive common share equivalents outstanding during
the period, except where antidilutive.
Primary and fully diluted net income (loss) per common share for fiscal 1995 and
1996 have been computed after deducting dividends accrued on the preferred stock
of $162,916 and $977,500, respectively. Fully diluted earnings (loss) per share
is not presented as it is not materially different than the primary calculation
for the periods presented. Fully diluted earnings per share excludes the effect
of the preferred stock conversion, as this would be antidilutive.
Reclassifications
Certain reclassifications were made to the prior years' financial statements to
conform to the current year presentation.
F-10
Adoption of New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that full
recoverability is questionable. Management evaluates the recoverability of
goodwill and other long-lived assets and several factors are used in the
valuation including, but not limited to, management's future operating plans,
recent operating results and projected cash flows. The Company will adopt SFAS
No. 121 in the first quarter of fiscal 1997 and anticipates an asset writedown
of approximately $250,000.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which the Company is required to adopt in the first quarter of
fiscal 1997. SFAS No. 123 establishes accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. Under SFAS No. 123, the Company may either adopt the new
fair-value-based accounting method or continue the intrinsic-value-based method
under APB 25, "Accounting for Stock Issued to Employees," and provide pro forma
disclosures of net earnings and earnings per share as if the accounting
provisions of SFAS No. 123 had been adopted. The Company plans to adopt only the
disclosure requirements of SFAS No. 123; therefore, such adoption will have no
effect on the Company's consolidated operating results.
2. ACQUISITIONS:
In February 1994, the Company acquired The Page Boy Company, Inc. (Page Boy) for
$1,000,000 in cash. The purchase price was allocated to the fair value of the
net assets acquired, with $818,000 allocated to goodwill under the purchase
method of accounting.
On April 5, 1995, the Company acquired A Pea in the Pod, Inc. (Pea) for
$25,487,000, in cash, including transaction costs, and the assumption of
$2,459,000 in funded debt. The purchase price and the repayment of the funded
debt was financed with borrowings from a bank and an insurance company. The
purchase price was allocated to the fair value of the net assets acquired, with
$21,524,000 allocated to goodwill under the purchase method of accounting.
During fiscal 1996, the goodwill was adjusted to $22,530,000 to reflect
refinements of estimates for certain accrued expenses (see Note 12).
On August 1, 1995, the Company acquired Motherhood Maternity Shops, Inc.
(Motherhood) for $33,985,000, including transaction costs, and the assumption of
$20 million in funded debt and accrued interest. Approximately $22,485,000 was
paid in cash and $11.5 million was paid with newly issued preferred stock (see
Note 8). The purchase price was allocated to the fair value of the net assets
acquired, with $18,471,000 allocated to goodwill under the purchase method of
accounting. During fiscal 1996, the goodwill was adjusted to $19,774,000 to
reflect refinements of estimates for certain accrued expenses. The cash portion
of the purchase price and the repayment of the funded debt and accrued interest
were financed with the sale of Senior Unsecured Notes (see Note 7). Of the
41,000 shares of preferred stock issued to the owners of Motherhood, 21,392
shares, representing $6 million in value, were placed in escrow. Such shares,
plus accrued and unpaid
F-11
dividends, are subject to set-off against any indemnification payments that may
become due. The preferred stock will be released from escrow, net of any claims,
over a three-year period ending August 1, 1998.
On June 1, 1996, the Company assumed leases, acquired associated assets and
inventory of 21 stores of Episode USA Inc. (Episode) for $7.4 million, including
transaction costs. Approximately $2.4 million was paid in cash and $5 million
was paid through the issuance of 217,365 shares of Mothers Work common stock.
The purchase price was allocated to the fair value of the assets acquired under
the purchase method of accounting. No goodwill was recorded in this transaction.
In connection with the acquisition, the Company entered into a licensing and
distribution agreement with the seller, Toppy International, Inc.
(Toppy) (see Note 12). Costs associated with these agreements will be expensed
as incurred.
If the Pea, Motherhood and Episode acquisitions would have occurred on October
1, 1994, unaudited pro forma net sales would have been approximately
$184,201,000, unaudited pro forma net loss before extraordinary item would have
been approximately $10,049,000, and unaudited pro forma net loss per share would
have been approximately $3.16 for the year ended September 30, 1995.
If the Episode acquisition would have occurred on October 1, 1995, unaudited pro
forma net sales would have been approximately $209,648,000, unaudited pro forma
net loss would have been approximately $2,407,000, and unaudited pro forma net
loss per share would have been approximately $0.68 for the year ended September
30, 1996.
3. INVENTORIES:
September 30
-------------------------
1995 1996
------------ -----------
Finished goods $ 30,442,820 $45,496,732
Work-in-process 2,254,568 2,107,453
Raw materials 5,723,798 9,605,314
------------ -----------
$ 38,421,186 $57,209,499
============ ===========
4. PROPERTY, PLANT AND EQUIPMENT:
September 30
--------------------------
1995 1996
----------- ------------
Land $ 1,400,000 $ 1,400,000
Building and improvements 3,877,533 8,488,598
Furniture and equipment 12,180,316 14,869,223
Leasehold improvements 27,920,972 33,889,168
----------- ------------
45,378,821 58,646,989
Accumulated depreciation and amortization (8,137,882) (13,195,875)
----------- ------------
$37,240,939 $ 45,451,114
=========== ============
In order to consolidate the Motherhood acquisition with existing operations, the
Company purchased a headquarters, manufacturing and distribution facility in
1995. The Motherhood operations were moved to the facility in August 1995, and
the remaining
F-12
operations were moved through the second quarter of fiscal 1996. In fiscal 1995,
the Company accrued $900,000 for relocation expenses and the termination of the
lease on its former facility. This expense is included in nonrecurring charges
on the accompanying statement of operations for fiscal 1995. The remaining
accrual for relocation expenses of approximately $290,000 is considered adequate
to cover the costs, including the remaining lease payments, to vacate the
premises.
5. ACCRUED EXPENSES:
September 30
-------------------------
1995 1996
----------- -----------
Accrued salaries, wages and employee benefits $ 2,965,352 $ 3,587,135
Accrued interest 1,966,379 2,121,414
Accrued sales tax 909,798 1,166,897
Other 4,536,133 5,636,154
----------- -----------
$10,377,662 $12,511,600
=========== ===========
6. LINE OF CREDIT:
In August 1995, the Company entered into a three-year, $19 million working
capital and letter of credit facility, including a $4 million letter of credit
to collateralize an Industrial Revenue Bond (the Working Capital Facility). The
Working Capital Facility is secured by substantially all of the assets of the
Company, excluding raw materials inventory. On May 31, 1996, concurrent with the
Episode acquisition (see Note 2), and in order to provide the Company with
additional borrowing capacity, the revolving credit portion of the Working
Capital Facility was increased from $15 million to $20 million. The Working
Capital Facility expires in August 1998. The Company had $6.6 million in
borrowings and $3.9 million in additional letters of credit issued under the
Working Capital Facility at September 30, 1996, including $1 million to serve as
collateral on an outstanding mortgage note (see Note 7). All of the subsidiaries
of Mothers Work, Inc. are jointly and severally liable for obligations under the
Working Capital Facility.
The interest rate on borrowings under the Working Capital Facility can be
selected by the Company from one of the following two alternatives: (i) the
Alternate Base Rate (8.25% at September 30, 1996) plus 1.5%, or (ii) the
Adjusted LIBOR Rate (5.625% at September 30, 1996) plus 3%. The Alternate Base
Rate is defined as a fluctuating rate of interest equal to the greater of the
Bank's National Commercial Rate, or (b) the Federal Funds Effective Rate, as
defined, plus one-half of 1%. Adjusted LIBOR means the London Interbank Offered
Rate, adjusted at all times for statutory reserves. Overdue amounts under the
Working Capital Facility bear interest at 2% above the interest rate then in
effect. Interest on Alternate Base Rate loans is payable quarterly and interest
on Adjusted LIBOR Rate loans is payable at the end of the relevant interest
period (and quarterly in the case of interest periods in excess of three
months).
The Working Capital Facility includes various restrictive covenants prohibiting
Mothers Work, Inc. and its subsidiaries, with certain limited exceptions, from,
among other things, incurring additional indebtedness and making dividend,
redemption and certain other payments. The Working Capital Facility also
contains financial covenants including current
F-13
ratio, net income, total senior funded debt to operating cash flow and interest
coverage, as defined, and various events of default.
Prior to August 1995, the Company had several different lines of credit. In
fiscal 1995 and 1996, the highest outstanding line of credit balances were
$11,930,683 and $9,241,193, the average outstanding balances were $5,835,722 and
$6,050,510, and the weighted average interest rates were 8.74% and 9.75%,
respectively.
7. LONG-TERM DEBT:
September 30
------------------------
1995 1996
----------- -----------
12-5/8% Senior Unsecured Exchange Notes, due 2005 $90,115,599 $90,218,882
Industrial Revenue Bonds, interest is variable (5.55% at
September 30, 1996), principal due annually through
2025 (collateralized by a $4 million letter of credit). 4,000,000 3,915,000
Mortgage notes:
Interest at 3%, principal due monthly to 2011
(collateralized by a $1 million letter of credit and a
second mortgage on certain property and
equipment at the Company's headquarters). -- 1,964,621
Interest at 2%, principal due monthly to 2011
(collateralized by certain equipment at the
Company's headquarters). -- 291,382
Interest at 4.25%, principal due monthly to 2001
(collateralized by certain equipment at the
Company's headquarters). -- 263,689
Capital lease obligations 797,213 576,059
Other 460,000 210,000
----------- -----------
95,372,812 97,439,633
Less - Current portion (770,133) (758,911)
----------- -----------
$94,602,679 $96,680,722
=========== ===========
F-14
Long-term debt maturities as of September 30, 1996 are as follows:
1997 $ 758,911
1998 422,249
1999 376,009
2000 366,168
2001 277,869
2002 and thereafter 97,019,545
-----------
99,220,751
Less- Unamortized discount (1,781,118)
-----------
$97,439,633
===========
In connection with the Motherhood acquisition, the Company sold 12-5/8% Senior
Unsecured Notes due 2005 (the Notes) with a face amount of $92 million. The
Notes were issued at 97.934% of their face amount, resulting in an annual
effective interest rate of 13%. Interest on the Notes is payable semiannually in
cash on February 1 and August 1, commencing February 1, 1996. The Notes were
issued by Mothers Work, Inc. and are unconditionally guaranteed on a senior
basis by each subsidiary (see Note 13). 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
106.250% 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
addition, at the option of the Company at any time prior to August 1, 1998, up
to 35% of the aggregate face amount of the Notes may be redeemed from the
proceeds of one or more public stock offerings (as defined) at 110% of their
face amount, plus accrued interest, provided that $58.5 million of Notes remain
outstanding immediately after such redemption. 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 proceeds from the sale of the Notes were used to acquire Motherhood and
repay the debt incurred in the Pea acquisition. The early extinguishment of the
Pea debt resulted in an extraordinary charge of $6,387,000 before the related
income tax benefit. The charge was comprised of a prepayment penalty of
$3,550,000, the write-off of deferred financing costs of $1,730,000 and
unamortized original issued discount of $976,000, and fees and expenses of
$131,000. In connection with the debt issued in the Pea acquisition, warrants
were issued to purchase 140,123 of the Company's common stock at $.01 per share.
The warrants were valued at $1 million and remain outstanding (see Note 10).
In connection with the purchase of the land and building for $4,458,000 (see
Note 4) and the related improvements to the building including fixtures and
equipment, the Company received $6,590,000 in government-assisted financing, of
which $2,340,000 was received during fiscal 1996. The financing is comprised of
$4 million of Industrial Revenue Bonds (the Bonds), a $2 million mortgage from
the Pennsylvania Industrial Development Authority and loans totaling $590,000
from the Philadelphia Industrial Development Corporation.
The Company has entered into several leases for equipment, which have been
accounted for as capital leases. The capitalized cost of $1,381,056 and
$1,164,214 is included in furniture
F-15
and equipment at September 30, 1995 and 1996, respectively. The accumulated
amortization on capital leases is $553,482 and $633,333 at September 30, 1995
and 1996, respectively. The present value of the minimum lease payments is as
follows:
September 30
----------------------
1995 1996
---------- ---------
Total minimum lease payments $ 948,351 $ 657,579
Less - Amount representing interest (151,138) (81,520)
---------- ---------
Present value of minimum lease payments $ 797,213 $ 576,059
========== =========
8. COMMON AND PREFERRED STOCK:
Private Placement
On May 31, 1996, the Company completed a private placement of 200,000 shares of
its common stock to a number of institutional investors at $22.25 per share. The
Company used the proceeds to pay the cash portion of the purchase price for the
Episode assets (see Note 2), to finance the opening of additional stores and for
general working capital purposes.
Preferred Stock
In connection with the Motherhood 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, when declared by the Company's Board of Directors, equal to 8.5% of
the stated value ($977,500 per year). Dividends are cumulative to the extent not
paid and compound annually at 8.5%. 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 Series A Preferred Stock have been
declared and paid in full. As of September 30, 1996, accrued dividends on the
Series A Preferred Stock were $1,140,416 and are classified as long-term
liabilities.
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 an initial conversion rate
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
F-16
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. 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 9), 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 (see Note 9). 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.
9. RIGHTS AGREEMENT:
Under 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).
The Rights are not exercisable until the Distribution Date (as defined in the
Rights Agreement) 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% or more of Mothers Work's outstanding common stock, or (ii) ten
business days following the commencement of a tender offer or exchange offer
that would result in a person or group owning 10% or more of Mothers Work's
outstanding common stock.
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.
F-17
10. STOCK OPTION PLAN:
The Company has a stock option plan (the 1987 Stock Option Plan), which provides
for the grant of common stock options to eligible employees and others. Options
granted may be at the fair market value of the stock or at a price determined by
a committee of the Board. The stock options vest over varying periods up to five
years and are exercisable over a period determined by the committee, but not
longer than ten years.
In fiscal 1996, the 1987 Stock Option Plan was amended to provide for the grant
of up to 725,000 shares of common stock. In fiscal 1994, the Company granted
70,672 options at exercise prices ranging from $11 to $17.75 per share to
certain officers, including 30,000 options at an exercise price of $13 per share
to officers who are also Board members. In fiscal 1995, the Company granted
137,506 options at exercise prices ranging from $10.25 to $16.50 per share to
certain officers, including 81,810 options at an exercise price of $11.25 per
share to officers who are also Board members. In fiscal 1996, the Company
granted 90,000 options at an exercise price of $13.50 per share to certain
officers, including 60,000 options to officers who are also Board members.
Information with respect to the 1987 Stock Option Plan, as amended, is as
follows:
Aggregate Option Price
Shares Price Per Share
------- ----------- ----------------
Outstanding, September 30, 1993 72,459 $ 383,805 $ 1.67 - $ 11.00
Granted 147,281 1,926,116 11.00 - 19.50
Exercised (12,141) (55,272) 1.67 - 4.60
Canceled (31,550) (367,318) 4.19 - 16.50
------- -----------
Outstanding, September 30, 1994 176,049 1,887,331 1.67 - 19.50
Granted 272,059 3,117,390 10.25 - 18.75
Exercised (2,394) (13,142) 2.93 - 11.00
Canceled (69,667) (962,362) 2.93 - 17.38
------- -----------
Outstanding, September 30, 1995 376,047 4,029,217 1.67 - 19.50
Granted 210,000 2,889,800 13.50 - 22.75
Exercised (19,715) (134,547) 4.19 - 13.50
Canceled (85,090) (1,161,143) 10.25 - 22.75
------- -----------
Outstanding, September 30, 1996 481,242 $ 5,623,327 1.67 - 18.75
======= ===========
At September 30, 1996, there were 207,892 options available for grant under the
1987 Stock Option Plan. In addition, there were 222,319 exercisable options at
prices ranging from $1.67 to $13.50 per share. The aggregate exercise price of
these options was $2,454,925. At September 30, 1996, warrants are outstanding to
purchase 7,465 shares of common stock at an exercise price of $2.72 per share,
which expire on January 31, 1997, and 140,123 shares of common stock at an
exercise price of $0.01, which expire on April 5, 2002.
In fiscal 1994, the shareholders approved the Director Stock Option Plan
(Director Plan), which provides for the grant of 2,000 options to each director
on an annual basis. Options granted under the Director Plan are nonqualified,
have an exercise price equal to fair market value, a ten-year term and fully
vest on the grant date. A total of 200,000 shares of
F-18
common stock were reserved for issuance under the Director Plan, with 16,000
options granted at an exercise price of $18.25 per share in fiscal 1994, 14,000
options granted at an exercise price of $9.50 per share in fiscal 1995 and
12,000 options granted at an exercise price of $14.50 per share in fiscal 1996.
11. INCOME TAXES:
Income taxes (benefit) are comprised of the following:
Year Ended September 30
----------------------------------
1994 1995 1996
---------- --------- ----------
Current provision (benefit) $1,423,331 $(893,214) $ 384,421
Deferred provision (benefit) (179,221) 45,927 1,444,151
---------- --------- ----------
$1,244,110 $(847,287) $1,828,572
========== ========= ==========
The extraordinary item generated an additional income tax benefit of $2,171,435
in fiscal 1995, of which $1,311,383 was a current tax benefit and $860,052 was a
deferred tax benefit.
The reconciliation of the statutory federal rate to the Company's effective
income tax rate on the income (loss) before extraordinary item is as follows:
Year Ended September 30
---------------------------------
1994 1995 1996
---- ----- ----
Statutory tax rate 34.0% (34.0)% 34.0%
State taxes, net of federal benefit 3.6 -- 3.7
Amortization of goodwill .9 8.0 27.3
Other 1.8 .1 1.9
---- ----- ----
40.3% (25.9)% 66.9%
==== ===== ====
F-19
The deferred tax effects of temporary differences giving rise to the Company's
deferred income tax assets are as follows:
September 30
------------------------
1995 1996
---------- ----------
Deferred tax assets:
Net operating loss carryforwards $2,381,177 $2,765,391
Depreciation of property, plant and equipment 3,163,110 2,076,929
Deferred rent 653,175 826,557
Inventory reserves 339,389 995,124
Store closings accrual 1,760,377 --
Employee benefit accruals 278,417 381,941
Other accruals 878,558 1,262,806
Alternative minimum tax credit carryforward 99,778 528,509
Other 116,693 261,327
---------- ----------
9,670,674 9,098,584
Deferred tax liabilities:
Prepaid expenses (203,714) (175,665)
Other (589,511) (366,048)
---------- ----------
$8,877,449 $8,556,871
========== ==========
The Company has net operating loss carryforwards for tax purposes of
approximately $8,034,000 which expire in 2009 through 2011, of which $4,309,000
were acquired in the acquisitions of Pea and Motherhood. The Company also has
alternative minimum tax credits of approximately $529,000 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, while the remainder of the
benefit was recorded as an income tax benefit in the accompanying statement of
operations.
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
nonrecurring charges in fiscal 1995, the nondeductibility of goodwill
amortization and the extraordinary items in fiscal 1993 and 1995, management
believes it is more likely than not that the Company will realize the benefit of
the net deferred tax assets existing at September 30, 1996. Furthermore,
management believes the existing net deductible temporary differences will
reverse during periods in which the Company generates net taxable income. There
can be no assurance, however, that the Company will generate taxable earnings or
any specific level of continuing earnings in the future.
F-20
12. COMMITMENTS AND CONTINGENCIES:
The Company leases its retail facilities and certain equipment under various
noncancelable operating leases. Certain of these leases have renewal options.
Future minimum lease payments as of September 30, 1996 are as follows:
1997 $ 24,249,742
1998 23,183,982
1999 20,864,590
2000 19,225,615
2001 17,427,481
2002 and thereafter 36,467,467
------------
$141,418,877
============
Rent expense, including common area maintenance, was $10,236,212, $18,081,333
and $30,196,546 in fiscal 1994, 1995 and 1996, respectively.
In connection with the Episode acquisition, the Company entered into a licensing
agreement and distribution agreement to operate the Episode stores in their
current format and under their current name. The Company licensed the Episode
trademark and is required to pay through a royalty of 5% of sales, with the
royalty payment not to exceed $4.5 million. The distribution agreement provides
for Toppy to sell inventory to the Company with certain Toppy trademarks. The
distribution agreement also permits the Company to manufacture articles with
such trademarks in consideration of the payment by the Company to Toppy of a 2%
royalty on all sales of such manufactured articles by the Company. Additionally,
Mothers Work is required to have items purchased from Toppy represent 50% of the
inventory value at each Episode store.
From time to time, the Company is named as a defendant in legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to currently pending actions cannot be accurately
predicted, in the opinion of the Company, any such liability will not have a
material adverse effect on the financial position or operating results of the
Company.
In connection with the Pea acquisition, Mothers Work (R.E.), Inc. assumed Pea's
outstanding litigation and potential claims. On February 7, 1994, a civil
complaint was filed in a United States District Court against Pea and its
then-officers and Board of Directors, and its former preferred shareholders. The
complaint alleges omissions by the defendants in connection with Pea's initial
public offering and seeks rescission or damages of up to $9.7 million and
attorney's fees. The complaint has been certified as a class action for certain
claims and denied class action status for one claim. While the ultimate outcome
of this matter cannot be determined at this time, management and legal counsel
believe the Company's potential liability, if any, has been adequately reserved.
In November 1996, an action was filed in the District Court of Dallas County,
Texas containing similar claims and including the underwriters in the Pea
initial public offering.
In August 1995, Pea's founders, who were formerly members of its management and
who ceased employment prior to the acquisition, filed a lawsuit claiming damages
for wrongful termination, breach of employment agreement, mental anguish,
emotional distress and punitive damages. In April 1996, in order to avoid the
costs and uncertainties of further
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litigation, the Company settled this lawsuit. This settlement has been accounted
for in conjunction with the purchase method of accounting for the Pea
acquisition.
13. SUBSIDIARY GUARANTORS:
Pursuant to the terms of the indenture relating to the 12-5/8% Senior Unsecured
Exchange Notes due 2005, the direct subsidiaries of Mothers Work,
Inc.--consisting of Cave Springs, Inc., The Page Boy Company, Inc., Mothers Work
(R.E.), Inc. (d/b/a/ A Pea in the Pod, Inc.), and Motherhood Maternity Shops,
Inc. (collectively, the Guarantors)--have, jointly and severally,
unconditionally guaranteed the obligations of Mothers Work, Inc. with respect to
these notes. The operations of Motherhood Maternity Shops, Inc. were merged into
the operations of Mothers Work, Inc. as of September 30, 1996. The only
subsidiary of the Company that is not a Guarantor is Motherhood International,
Inc. (International). International is an indirect, wholly owned subsidiary of
the Company which is inconsequential to the assets and operations of the Company
and to the Guarantors in that it has no assets or operations and, accordingly,
does not contribute to the revenue or profits of the Company or any of the
Guarantors. There are no restrictions on the ability of any of the Guarantors to
transfer funds to Mothers Work, Inc. in the form of loans, advances or
dividends, except as provided by applicable law.
Accordingly, set forth below is certain summarized financial information (within
the meaning of Section 1-02[bb] of Regulation S-X) for the Guarantors, as of and
for the year ended September 30, 1996:
September 30, 1996
------------------
Current assets $ 5,601,825
Noncurrent assets 20,963,279
Current liabilities 3,059,322
Noncurrent liabilities 3,835,768
For the Year Ended
September 30, 1996
------------------
Net sales $51,284,307
Costs and expenses 40,273,798
Net income 7,158,349
The summarized financial information for the Guarantors has been prepared from
the books and records maintained by the Guarantors and the Company. The
summarized financial information may not necessarily be indicative of the
results of operations or financial position had the Guarantors operated as
independent entities. Certain intercompany sales included in the subsidiary
records are eliminated in consolidation. The Guarantors receive all inventory
from and transfer all cash to Mothers Work, Inc., who, in turn, pays all
expenditures on behalf of the Guarantors. An amount due to/due from parent will
exist at any time as a result of this activity. The summarized financial
information includes the allocation of material amounts of expenses such as
corporate services, administration and taxes on income. The allocations are
generally based on proportional amounts of sales or assets, and taxes on income
are allocated consistent with the asset and liability approach used for
consolidated financial statement purposes. Management believes these allocation
methods are reasonable. The financial information of
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Motherhood Maternity Shops, Inc. has been excluded from the table above due to
the merger on September 30, 1996.
14. NONRECURRING CHARGES:
Nonrecurring charges for the year ended September 30, 1995, include $900,000
accrued for the relocation to the acquired facility (see Note 4) and $4,527,000
for planned closings of Mothers Work stores. On March 31, 1995, the Company
implemented a one-year plan, due to excess capacity in certain markets, to close
38 Mothers Work stores and, in conjunction with the Pea acquisition, to close 15
Pea stores. Under the terms of the plan, stores were closed, leases terminated
and inventory shipped to other store locations. The Company actually closed 43
Mothers Work stores and 11 Pea stores at a cost that was $341,000 less than was
accrued, which was recorded as a reduction to selling, general and
administrative expenses in fiscal 1996. The net sales and store operating income
before corporate overhead allocations for the stores closed in fiscal 1996 that
are included in the accompanying statement of operations for the year ended
September 30, 1996, are $3,538,804 and $206,858, respectively.
15. EMPLOYMENT AND CONSULTING AGREEMENTS:
The Company has employment agreements with its Chief Executive Officer/Chairman
of the Board (CEO), its President/Chief Operating Officer (COO), its Senior Vice
President--Operations and its Head Pattern Maker. The CEO and COO have
agreements which expire on September 30, 1999. These agreements provide for base
compensation of $275,000 for fiscal 1997, increasing annually thereafter. On
October 1 of each year the term of each agreement automatically extends for
successive one year periods extending the expiration date into the third year
after the extension. Additionally, the CEO and COO are entitled to an annual
cash bonus and stock options based on performance, as defined.
The agreement with the Senior Vice President--Operations is through June 19,
1997, and provides for an initial base salary of $250,000 per year, incentive
bonuses based upon specified goals and a one-time grant of 20,000 stock options.
The agreement with the Head Pattern Maker is through July 17, 1997, and provides
for an initial base salary of $100,000 per year, an annual bonus and a one-time
grant of 3,000 stock options.
On October 1, 1996, the Company entered into a one-year agreement with an
individual. The agreement requires the individual to perform consulting and
advisory services for the Company in connection with the growth and strategic
development of the maternity and Episode businesses. The agreement provides for
payment of $200,000, payable in equal monthly installments, a grant of 16,667
fully vested stock options, and an obligation to serve as a Director of the
Company, if elected. The stock options are exercisable up to one year after the
individual ceases to be a Director of the Company.
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16. RELATED-PARTY ACTIVITY:
The Company paid legal fees of approximately $1.1 million and $680,000 in fiscal
1995 and 1996, respectively, to a firm whose partner is a Director of the
Company.
17. PROFIT-SHARING PLANS:
Effective January 1, 1993, the Company established 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 15% of their annual salary. The Company may
make contributions to the plan, which vest over a five-year period. No Company
contributions were made in fiscal 1994, 1995 or 1996.
In conjunction with the acquisition of Pea, the Company assumed responsibility
for Pea's 401(k) Employees' Savings Plan. Employees who have at least one year
of service may participate in the plan, and the Company may make contributions
to the plan that vest over a four-year period. No Company contributions were
made in fiscal 1995 or 1996. The Company terminated this plan in fiscal 1996 by
merging the plan into the Mothers Work 401(k) Savings Plan. In conjunction with
the acquisition of Motherhood, the Company assumed responsibility for the final
distribution and termination of the Motherhood Retirement Savings Plan. The
Company expects that final distributions of this plan will be made in fiscal
1997.
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