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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 1999 or
[_]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-21196
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Mothers Work, Inc.
(Exact name of registrant as specified in its charter)
Delaware 133045573
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
456 North Fifth Street, 19123
Philadelphia, PA (Zip Code)
(Address of principal executive
offices)
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
NONE
N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
On December 7, 1999, the aggregate market value of the Registrant's Common
Stock, $.01 par value, held by nonaffiliates of the Registrant was
approximately $27,215,350.
On December 7, 1999, 3,438,373 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 20, 2000 are incorporated by reference into Part III of this Form
10-K.
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This Page Intentionally Left Blank
2
PART I
Item 1. Business/1/
General
Mothers Work, Inc., a Delaware corporation ("Mothers Work" or the
"Company"), which began operations in 1982, is the largest specialty retailer
of maternity clothing in the United States. As of September 30, 1999, the
Company operated 528 stores through the Mimi Maternity(R), A Pea in the Pod(R)
("Pea"), Motherhood Maternity(R) ("Motherhood") and Motherhood Maternity
Outlet(R) ("Motherhood Maternity Outlet") store concepts offering a full range
of career, casual and special occasion maternity wear. In addition, the
Company operated 97 leased maternity departments in stores such as Lazarus,
Rich's, Babies "R" Us, and Macy's.
The Company locates its stores primarily in regional shopping malls,
factory-direct outlet centers and, to a lesser extent, in central business
districts within major metropolitan areas. The Company is vertically
integrated, performing design, manufacturing, distribution and retail sales
functions primarily in-house. The Company takes sales orders over the phone,
by mail and over the Internet for a selected assortment of its maternity
apparel, gifts and other materials. The Company supplements its in-store
merchandise by various mail order catalogs and brochures.
The Company's maternity wear retail stores, although having different
merchandising and marketing strategies, are all targeted to women seeking to
purchase moderate to upscale maternity fashions. All of the Company's
maternity store concepts sell clothing that is designed to meet an expectant
mother's entire lifestyle fashion needs, including her career requirements, as
well as her casual and special occasion needs. Mimi Maternity is designed to
meet the needs of fashion forward women who are willing to spend more to make
a fashion statement. Pea markets the most upscale of the Company's maternity
fashions and offers a premium merchandise selection manufactured by the
Company, including the Company's Mimi Maternity line of clothing, and certain
designer labels. Mimi Maternity and Pea collectively constitute the Company's
"high end" product line. Motherhood is the oldest chain specialty retailer of
maternity clothing in the United States and markets moderately priced
maternity clothing. Motherhood Maternity Outlet stores,/2/ a chain of factory-
direct outlet stores, serves the woman who seeks maternity clothing but cannot
or will not purchase at full retail prices, and primarily serves the moderate
market.
The Company's strategy is to:
. Respond quickly to customer fashion demand utilizing its Real Time
Retailing(R) business model.
. Secure and maintain desirable retail locations within regional shopping
malls and factory-direct outlet centers.
. Expand presence in the moderate price market by identifying key items
and offering them at everyday low prices.
. Use a combination of domestic and international production to ensure
both responsiveness to market demands and cost efficiencies.
In fiscal 1999, the Company expanded into electronic commerce through its
Maternity Mall.com and Babystuff.com websites which are sites offering
maternity and newborn related products, information and services as well as
links to the websites of other vendors and organizations.
- --------
/1 /The terms "Mothers Work" and the "Company" as used in this Report include
Mothers Work, Inc. and Cave Springs, Inc., its wholly-owned subsidiary. All
references in this Report to stores or Company-owned stores include leased
departments.
/2 /The Company continues to operate stores under the name Mothers Work where
bound by lease arrangements or where it would otherwise not be economical
to change the name of the store.
3
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 over the last few years as full
service retailers are attempting to be more competitive in this commitment.
The Company's vertical integration reduces 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 fact that women may
choose to shop the regular market or choose loose-fitting or larger-sized
clothing as a substitute for maternity wear impacts the maternity apparel
market.
Strategy
The key components of the Company's strategic objectives are described
below.
Real Time Retailing--Real Time Retailing(R) is the Company's proprietary and
comprehensive capability to monitor better and respond more quickly to
consumer fashion demand, thereby reducing the fashion risk inherent in the
apparel business. Through the use of computerized point of sale and
merchandising systems, daily replenishment of inventory to the stores, "quick-
response" design, "quick-turn" domestic manufacturing and cost efficient
international production, the Company is able to provide its customers with
the merchandise that they want when they want it. The objective is to maximize
the sales potential of each store by matching the profile of the store's
customers with the proper merchandise. Real Time Retailing(R) also assists the
Company in increasing its in-store inventory turns and sales per square foot,
reducing its cost of goods sold and generating higher gross profit margins.
Prime Locations and Broad Distribution--The Company's historical ability to
generate high sales per square foot, in addition to the high quality image and
design of the Company's stores and its multiple concept approach, have enabled
the Company to secure and maintain desirable retail locations within regional
shopping malls throughout the United States and factory-direct outlet centers
for its stores. These factors have enabled the Company not only to locate
stores at many of the most desirable shopping malls and factory-direct outlet
centers in the country, but also to obtain desirable locations within such
malls and centers.
By operating four different store concepts, the Company is positioned to
satisfy demand for maternity clothing throughout the moderate and high-end
segments of the market by offering a full range of career, casual, exercise,
and special occasion maternity wear. Mall operators require an appropriate mix
of stores for the mall's consumer and market position. For regional malls that
require one maternity store, the Company provides several different concepts
within the moderate and high-end segments of the market from which the mall
can choose to meet its consumer needs. In the case of multi-mall operators,
the Company has the flexibility to supply packages of stores in multiple malls
utilizing all of its concepts.
As of September 30, 1999, the Company's operations included 97 leased
departments. Generally, start-up and operating costs for a leased department
are substantially less than for a stand-alone store. The departments are
leased from stores such as Lazarus, Rich's, Babies "R" Us, and Macy's, and are
generally staffed with Company employees. The Company terminated its lease
departments in Famous Barr and Macy's West stores during fiscal year 1999. The
inventory of the leased departments is merchandised and owned by the Company
and includes fashions from Motherhood, Mimi, and Pea. The leased departments
also carry a line of maternity clothing designed exclusively for them under
the Steena(R) label. In addition, select department stores carry Essentials by
Mimi Maternity an exclusive department store brand. The Essentials line
contains all of the pieces necessary for an expectant mother to continue
wearing fashionable styles during her pregnancy. Approximately 95% of the
leased departments utilize EDI to capture sales information, and 100% of the
leased departments use
4
Company registers to communicate with its employees. The Company's leased
department arrangements generally have an initial term of one year with an
option for extension of the term.
Key Items--The Company's strategy is to continue to expand on the moderate
item market by offering seasonal items at everyday low prices. Typical
seasonal offerings include denim blue jeans, turtlenecks, t-shirts, leggings,
and additional items identified in the market that fit the key-item profile.
The Company sources this product using a combination of international and
domestic production.
Production--The Company's strategy is to use a combination of domestic and
international production. International sources are used for items such as
those in the moderate business where lower costs are necessary for competitive
reasons, and the fashion marketability of the item is not adversely affected
by the longer lead times which are inherent when a product is acquired from an
international vendor. The Company also uses domestic production which helps
ensure: (1) in-season manufacturing capability for fast selling moderate price
product to reduce stock-outs; (2) preseason production of time-sensitive
fashion apparel, and (3) in-season production of popular fashion items
identified during the season. This domestic manufacturing capability allows
the Company to react in real time to changing market trends providing the
Company with a competitive advantage over other apparel retailers who source
the majority of their product overseas.
Expansion Strategy
Expansion of Apparel Business. Since the time of its initial public offering
in March 1993, the Company has increased its maternity store base by
approximately 833% (from 67 stores to 625 stores) as of September 30, 1999.
These increases include stores acquired as a result of the Company's January
1994 acquisition of Page Boy (22 stores acquired) ("Page Boy Acquisition"),
its April 1995 acquisition of A Pea in the Pod (66 stores acquired) ("Pea
Acquisition"), and its August 1995 acquisition of Motherhood (217 stores
acquired) ("Motherhood Acquisition").
The Company opened 94 locations in fiscal 1999, consisting of 19 leased
departments, 73 Motherhood, Maternity Works and Motherhood Maternity Outlet
stores and two high end stores, compared with 80 locations in fiscal 1998,
consisting of 37 Motherhood and Maternity Works stores, 34 leased departments
and nine Episode and Episode outlet stores. The Company plans to add
approximately 80 maternity stores, principally Motherhood stores, in fiscal
2000.
The Company's growth has resulted from the addition of new stores, the
acquisition of existing maternity stores and the increased sales volume from
such stores. The Company's ability to open new stores on a timely basis will
depend upon the Company's success in identifying suitable store sites,
obtaining leases for those sites on acceptable terms, constructing or
refurbishing the sites where necessary, hiring and training skilled store
managers and personnel, and cash availability. There can be no assurance that
suitable sites will be available for new stores or that new stores will
generate sales volumes comparable to those of the Company's existing stores,
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 continually identifies and evaluates real estate opportunities.
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
maternity stores. The Company considers markets nationwide but favors
metropolitan areas with 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 has also undertaken several other maternity sales initiatives.
In fiscal 1999, it offered selected store merchandise through its Internet
store and ensured convenient, safe shopping for its customers through a secure
website. The Company also expanded its product offering during fiscal year
1999 to include Plus size maternity apparel and more clothing and accessories
suitable for nursing mothers. Nursing products were initially
5
offered through a new mail order catalog and some products were available in
the Company's stores. The Company also offers an expanded selection of nursing
products through its website MaternityMall.com. The addition of several store
locations outside of malls will continue during fiscal 2000 as suitable
locations are identified.
Store Concepts
The Company operates its maternity stores under four concepts offering a
full range of career, casual, exercise and special occasion maternity wear:
Pea, Mimi Maternity, Motherhood and Maternity Works. The following table sets
forth certain information regarding the Company's store composition as of
September 30, 1999, including each store concept's target location, product
description and selected price points:
Summary of Store Concepts
Store Description of Product Price Range for Average Store Typical Anchors and
Concept Typical Location Description Dresses/Blouses Size (Sq. Ft.) Comparable Retailers
- ------------------------ ----------------- ------------- --------------- -------------- -----------------------
A Pea in the Pod........ High end regional Bridge, high $200-$400 2,900 Bergdorf Goodman,
malls & affluent fashion $120-$150 Neiman Marcus, Saks
residential Fifth Avenue, Gucci,
districts Ralph Lauren
Mimi Maternity.......... High end regional Fashion- $128-$248 1,800 Neiman Marcus,
malls forward, $58-$108 Bloomingdales,
Contemporary Nordstrom's, Saks Fifth
Avenue, Barney's, Joan
& David, Bebe, Ann
Taylor, Banana
Republic
Motherhood.............. Moderate regional Value- $29-$98 2,000 Macy's, Sears, J.C.
malls, department oriented, $22-$38 Penney, Mervyn's,
stores, power mostly casual jeans $14.90 Casual Corner, Lerners,
centers and strip basics; key t-shirts $11.90 Limited, Express, Eddie
malls items leggings $12.90 Bauer, Mothertime, Dan
Howard, Target,
K Mart, Kohl's and
Wal-Mart
Maternity Works......... Factory-direct Fashion at $78-$158 2,000 Neiman Marcus' Last
outlet malls and marked-down $48-$78 Call, Nordstrom Off the
centers prices Rack, 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 high-end maternity store; however,
major regional malls with several department stores may be able to accommodate
two. With Mimi Maternity and Pea as the Company's prestige offerings, 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,
1999, the Company had two or more maternity stores in 31 major regional malls.
6
Store Operations
The Company's store 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. The visual merchant travels
among the Company's stores to enhance merchandise presentation.
Merchandising, Design and Store Inventory Planning
Merchandising. Guided by Real Time Retailing(R), the Company's merchandising
department combines input from Company designers, current trends seen
generally in women's clothing, outside vendor resources and store management
input, with TrendTrack computer analysis of customer preferences to provide a
constant flow of merchandise to the Company's stores. The Company strives to
maintain an appropriate balance between new merchandise and proven successful
styles and utilizes Trend Track's open-to-buy system to plan its domestic and
international production to control inventory quantity and mix. These fashions
are generally marketed under the Company's A Pea in the Pod(R), Mimi
Maternity(R), Steena(R), and Motherhood(R) labels.
Design. The Design department produces samples and patterns for the
Company's manufactured products under the guidance of the Merchandising
department. The design of a product begins with a review of European and New
York trends and current retail trends through fashion reporting service slides
and fabric samples. The designers review the Company's best selling items from
prior seasons and integrate current fashion ideas from the non-maternity
retail market.
Store Inventory Planning. The Company establishes target inventories for
each store using its inventory planning system to enhance store merchandise
coordination and stock balance, to maintain adequate depth of merchandise by
style and to manage close-out merchandise and end-of-season consolidation of
merchandise. Integral to the Company's inventory management program are its
proprietary methods guided by Real Time Retailing(R) and managed by its
TrendTrack information system.
Production and Distribution
The Company is responsible for the design and production of approximately
75% of its merchandise including merchandise produced abroad using the
Company's designs and merchandise assembled abroad using the "807 operations"
described below. The remaining 25% of the Company's merchandise is designed
and produced from several outside sources. The Company obtains fabrics, trim
and other supplies from a variety of sources and believes that as the number
of the Company's stores increases, there will continue to be adequate sources
of fabrics and other supplies to produce a sufficient supply of quality goods
in a timely manner and on satisfactory economic terms. The Company
subcontracts its sewing to shops in the Philadelphia metropolitan and
surrounding area and works with more than 35 subcontractors. No individual
subcontractor represents a material portion of the Company's sewing. In
addition, some production is supplied by independent foreign subcontractors,
principally in Mexico and India, and the Company continues to seek additional
subcontractors throughout the world for its sourcing needs. The Company's
sourcing also includes "807 operations" in the Dominican Republic, Costa Rica,
Guatemala and Honduras. The term "807 operations" refers to articles assembled
abroad with components produced in the United States. The Company's 807
operations and production sourced abroad are generally limited to products
which are moderate in price and are not time-sensitive with respect to fashion
demand (e.g. blue jeans, leggings, T-shirts, etc.). The Company's production
and quality assurance team monitors production at each subcontractor's
facility in the United States and abroad, to ensure quality control,
compliance with its design specifications and timely delivery of finished
goods.
Finished garments from subcontractors and other manufacturers are received
at the Company's central warehouse in Philadelphia, Pennsylvania, inspected
and stored for picking. Shipments to stores are primarily
7
made by common carrier, typically UPS, Airborne, Emery Air Freight or a
similar service providing one-or two-day delivery throughout the United
States.
That portion of the Company's merchandise imported into the United States is
subject to United States duties. The Company cannot predict whether any of the
foreign countries in which its products are currently manufactured or any of
the countries in which the Company may manufacture its products in the future
will be subject to future or increased import restrictions by the U.S.
government, including the likelihood, type or effect of any trade
restrictions. Trade restrictions, including increased tariffs or decreased
quotas, against items sold by the Company could affect the importation of such
merchandise generally and, in that event, could increase the cost or reduce
the supply of merchandise available to the Company and adversely affect the
Company's business, financial condition, results of operations and liquidity.
The Company's merchandise flow may also be adversely affected by political or
economic instability in any of the countries in which its goods are
manufactured, if it affects the production or export of merchandise from such
countries; significant fluctuation in the value of the U.S. dollar against
foreign currencies; and restrictions on the transfer of funds.
Management Information and Control Systems
All of the Company's stores have point-of-sale terminals that provide
information used in the Company's custom TrendTrack item and classification
tracking system. This system provides daily financial and merchandising
information integral to the Company's Real Time Retailing(R) strategy. The
TrendTrack system has numerous features designed to integrate the Company's
retail operations with its design, manufacturing and financial functions.
These features include custom merchandise profiles for each store, daily
inventory replenishment, item tracking providing daily updated selling
information for every style, classification open-to-buy and inventory control,
as well as 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. 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 and local print advertising. Pea and Mimi Maternity are advertised in
magazines such as "Vogue", "In Style", "Women's Magazine", and "Shape Fit
Pregnancy". During 1999, the Company increased its advertising for Motherhood
which is advertised in magazines such as "Shape Fit Pregnancy", "Parent's
Expecting", "Baby Talk", "Parenting", "Healthy Pregnancy", and "American
Baby". In addition, the Company produces maternity brochures, which are
distributed to obstetricians and customers in the store and through direct
mail. The customer mailing list, which by nature is constantly changing, is
regularly updated through the Company's point-of-sale collection system. In
fiscal 2000, the Company intends to distribute maternity brochures quarterly,
rather than semi-annually as done in fiscal 1999. In fiscal 1999, nursing
products were offered through a new mail order catalog, as well as being
advertised in magazines such as "Shape Fit Pregnancy", "American Baby", and
"Baby Talk".
The Company also commenced advertising on the Internet through its websites.
The website www.MaternityMall.com was launched on the Internet in January 1999
with five tenants. In less than a year, it expanded to over 30 tenants. The
Company intends to continue to grow its MaternityMall.com website by expanding
its e-commerce tenants as well as expanding the services offered and
information provided. In September 1999, Mothers Work, Inc. opened its new e-
commerce website, Babystuff.com., which is an on-line website offering a large
selection of the well-known brands in infant clothing, including such vendor
names as Carters, Absorba, Gerber, and Mustela. During fiscal 2000, the
Company plans to continue to increase its investments in advertising and
marketing, however; there can be no assurances that these increased
investments will result in increased sales or profitability.
8
Competition
The Company's business is highly competitive. Depth of selection in sizes,
colors and styles of merchandise, merchandise procurement and pricing, ability
to anticipate fashion trends and customer preferences, inventory control,
reputation, quality of merchandise, store design and location, advertising and
customer service are all important factors in competing successfully in the
retail industry. As a result, in its maternity apparel business, the Company
faces competition from various full-price maternity clothing chains, a number
of off-price specialty retailers, Internet businesses and catalog retailers,
as well as from local, regional and national department stores and women's
and, to some extent, men's clothing stores. The Company faces competition in
the moderate maternity market from retailers such as Target, Kohl's, J.C.
Penney, K Mart, Wal-Mart, Mervyn's, Sears and others. Many of these
competitors are larger and have significantly greater financial resources than
the Company.
Employees
At September 30, 1999, the Company had approximately 2,148 full-time and
approximately 1,650 part-time employees. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its
employee relations to be good.
Executive Officers of the Company
The executive officers of the Company are:
Name Age Position
---- --- --------
Dan W. Matthias......... 56 Chairman of the Board and Chief Executive Officer
Rebecca C. Matthias..... 46 President, Chief Operating Officer and Director
Thomas Frank............ 43 Chief Financial Officer and Vice President--Finance
Donald W. Ochs.......... 58 Senior Vice President--Operations
Frank C. Mullay......... 48 Senior Vice President--Stores
Vana Longwell........... 53 Senior Vice President--Merchandising
Sheryl L. Roth Rogers... 44 Vice President--Marketing
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. Ms. Matthias
also serves as a member of the Board of Trustees of Drexel University.
Thomas Frank joined the Company in 1988 and 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. Mr. Frank resigned from the Company effective December 10,
1999.
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.
9
Frank C. Mullay joined the Company in September 1999 as Senior Vice
President--Stores. Prior to joining the Company he was employed with Limited
Too as Interim Director of Limited Stores and Senior Regional Manager from
1990 to 1999. Mr. Mullay was previously employed with Limited, Inc. from 1983
to 1990.
Vana Longwell joined the Company in 1994 as Vice President--Merchandising
and since April 1999 has served as Senior Vice President--Merchandising. Prior
to 1994, she served as President of Wainscott Sportswear from 1989 to 1993 and
from 1980 to 1989 she was the Executive Vice President and general manager of
Apparel Affiliates.
Sheryl L. Roth Rogers joined the Company in October 1999 as Vice President--
Marketing, with 20 years of experience in branded consumer products marketing
management. Ms. Roth Rogers was most recently Vice President of Marketing in
business to business marketing at Teknion, Inc., an international designer and
manufacturer of office system furniture, and previously led marketing for the
Swanson Frozen Foods Division of Campbell's Soup. From 1985 to 1995 she was
the Group Marketing Manager and Product Manager for New Products, Chicken
Tonight and Ragu pasta sauces at the Ragu Foods Group of Unilever. Ms. Roth
Rogers launched her marketing career managing cereal, yogurt and snack brands
at General Mills Corp. from 1979 to 1985.
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, through its wholly-owned subsidiary, Cave Springs, Inc.,
of registered trademarks including Mothers Work(R), Maternite(R), Motherhood
Maternity(R), Motherhood Maternity Outlet(R), Steena(R), A Pea in The Pod(R),
Maternity Works(R), Maternity Redefined(R), Motherhood(R), Essentiel(R),
JustA-Snap(R), Daniel & Rebecca(R) and Lauren Taylor(R). Additionally, the
Company owns the service marks Mimi Maternity(R), Real Time Retailing(R) and
the slogan What's Showing is Your Style(R). The Company owns a patent for an
adjustable waistband used in skirts, which allows the garment to be loosened
during the course of pregnancy and a patent relating to the Essentiel Body
Cream product. The Company is not aware of any pending claims of trademark
infringement or other challenges to the Company's rights to use its marks in
the United States as currently used by the Company.
Item 2. Properties
The Company's principal executive offices, manufacturing and distribution
facilities are located at 456 North Fifth Street, Philadelphia, Pennsylvania
19123. This facility consists of approximately 318,000 square feet of which
approximately 44,000 square feet is dedicated to office space and the
remaining square footage to manufacturing and distribution.
During October 1999, the Company entered into a lease for an approximately
50,000 square foot warehouse located at 10430 Drummond Road, Philadelphia,
Pennsylvania 19123 for fabric storage. Of the approximately 50,000 square
feet, 5,000 square feet is dedicated to office space and the remaining square
footage is dedicated to the warehouse.
The Company leases virtually all of its store premises. All of the Company's
retail stores are leased pursuant to terms averaging from seven to ten years.
Certain leases allow the Company to terminate its obligations in the event the
specified store does not achieve a specified sales volume. Certain leases
include clauses that provide
10
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, excluding
leased departments, expire as follows:
Fiscal Year
Lease Term Number of
Expires Stores
----------- ---------
2000............................................................... 35
2001............................................................... 47
2002............................................................... 56
2003............................................................... 72
2004 and later..................................................... 318
The Company intends to renew substantially all of the leases upon lease
terms acceptable to the Company.
As of September 30, 1999, the Company's operations included 97 leased
departments. Generally, start-up and operating costs for a leased department
are substantially less than for a stand-alone store. The departments are
leased from stores such as Lazarus, Rich's, Babies "R" Us, and Macy's and are
generally staffed with Company employees. The inventory of the leased
departments is merchandised and owned by the Company. Approximately 95% of the
leased departments utilize Company point-of-sale registers to capture sales
information, and 100% of the leased departments use such registers to
communicate with employees. The Company's leased department arrangements
generally have an initial term of one year.
Item 3. Legal Proceedings
From time to time the Company is named as a defendant in legal actions
arising from its normal business activities. Although the amount of any
liability that could arise with respect to currently pending actions of this
nature cannot be accurately predicted, in the opinion of management, no
liability for any pending action will have a material adverse effect on the
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the Nasdaq National Market under the
symbol "MWRK."
The following table sets forth, for the fiscal quarters indicated, the high
and low closing bid prices per share for the Company's common stock, as
reported on the Nasdaq National Market:
Fiscal 1998 High Low
----------- --------- --------
First Quarter............................................. $10 5/8 $ 7
Second Quarter............................................ 9 1/4 7 1/2
Third Quarter............................................. 9 11/16 6 1/2
Fourth Quarter............................................ 10 3/4 7
Fiscal 1999
-----------
First Quarter............................................. $ 14 $ 8 1/4
Second Quarter............................................ 15 7/8 10 3/8
Third Quarter............................................. 13 10 3/8
Fourth Quarter............................................ 14 1/8 7 5/16
As of December 7, 1999, there were 80 holders of record and 745 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 7
of "Notes to Consolidated Financial Statements" for further discussion on the
Preferred Stock dividends.
12
Item 6. Selected Financial Data
The following selected consolidated financial data as of September 30, 1995,
1996, 1997, 1998 and 1999 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
-----------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(In thousands, except per share and operating data)
Income statement data:
Net sales............. $ 106,005 $ 199,180 $ 246,934 $ 298,991 $ 299,735
Cost of goods sold.... 45,527 88,417 113,886 158,047 150,402
---------- ---------- ---------- ---------- ----------
Gross profit........ 60,478 110,763 133,048 140,944 149,333
Selling, general, and
administrative
expenses............. 53,835 95,395 124,495 139,322 127,390
Restructuring and non-
recurring charges.... 5,427 -- 5,617 10,635 --
---------- ---------- ---------- ---------- ----------
Operating income
(loss)............. 1,216 15,368 2,936 (9,013) 21,943
Interest expense,
net.................. 4,484 12,636 13,252 15,181 15,132
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes
(benefit) and
extraordinary
item............... (3,268) 2,732 (10,316) (24,194) 6,811
Income taxes (bene-
fit)................. (847) 1,828 (2,677) (7,477) 3,424
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary
item............... (2,421) 904 (7,639) (16,717) 3,387
Extraordinary item,
net of income tax
benefit.............. (4,215) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)..... (6,636) 904 (7,639) (16,717) 3,387
Preferred dividends... 163 978 1,088 1,168 1,251
---------- ---------- ---------- ---------- ----------
Net income (loss)
available to common
stockholders....... $ (6,799) $ (74) $ (8,727) $ (17,885) $ 2,136
========== ========== ========== ========== ==========
Net income (loss) per common
share:(1)
Before extraordinary
item............... $ (0.83) $ (0.02) $ (2.45) $ (5.00) $ 0.57
Extraordinary item.. (1.35) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) per
common share(1)...... $ (2.18) $ (0.02) $ (2.45) $ (5.00) $ 0.57
========== ========== ========== ========== ==========
Weighted average
common shares
outstanding(1)....... 3,120,535 3,269,290 3,562,980 3,577,143 3,754,433
========== ========== ========== ========== ==========
Operating data:
Same-store sales
increase
(decrease)(2)........ (0.7)% 8.0% 4.3% 13.4% 12.9%
Average net sales per
gross square
foot(3).............. $ 360 $ 333 $ 338 $ 354 $ 338
Average net sales per
store (3)............ $ 442,113 $ 452,446 $ 508,001 $ 464,080 $ 566,640
At end of period:
Number of stores(4)... 451 468 587 583 625
Gross square footage.. 643,175 719,930 819,900 737,689 851,913
13
September 30
--------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(In thousands)
Balance sheet data:
Working capital................. $ 31,611 $ 37,435 $ 32,083 $ 23,614 $ 24,020
Total assets.................... 148,562 164,613 171,718 172,469 177,608
Total long-term and short-term
debt........................... 95,373 103,998 108,112 119,982 128,661
Stockholders' equity............ 25,537 35,107 26,380 8,750 9,068
- --------
(1) See Note 1 of "Notes to Consolidated Financial Statements".
(2) Based on stores opened at least 24 months in their current store format.
(3) Based on locations in operation during the entire fiscal year.
(4) September 30, 1998 excludes 30 Episode stores, which, while owned by the
Company, were being operated by a liquidator.
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:
Percentage of Net
Sales
Year Ended
September 30,
-------------------
1997 1998 1999
----- ----- -----
Net sales.................................................. 100.0% 100.0% 100.0%
Cost of goods sold......................................... 46.1 52.9 50.2
----- ----- -----
Gross profit............................................. 53.9 47.1 49.8
Selling, general and administrative expenses............... 50.4 46.6 42.5
Restructuring charges...................................... 2.3 3.5 --
----- ----- -----
Operating income (loss).................................. 1.2 (3.0) 7.3
Interest expense, net...................................... 5.4 5.1 5.0
----- ----- -----
Income (loss) before taxes................................. (4.2) (8.1) 2.3
Income taxes (benefit)..................................... (1.1) (2.5) 1.2
----- ----- -----
Net income (loss).......................................... (3.1) (5.6) 1.1
===== ===== =====
The following table sets forth certain information representing growth in
the number of maternity stores and leased maternity departments for the
periods indicated:
Year Ended
September 30
-------------------
1997 1998 1999
----- ----- -----
Stores:
Beginning of period........................................ 468 587 613
Opened................................................... 152 80 94
Closed................................................... (33) (54) (82)
----- ----- -----
End of period.............................................. 587 613 625
===== ===== =====
The table above includes 30 Episode stores in the number for the end of
period fiscal year 1998 and the beginning of period fiscal year 1999. The
Company completed the closure of its remaining Episode stores during the
second quarter of fiscal 1999.
14
Included in the Statements of Operations for fiscal 1998 and fiscal 1999 are
the following amounts for the Episode division:
Year Ended
September 30
------------------
1998 1999
------------ ----
Revenues.................................................... $ 45,684,000 $--
Cost of goods sold*......................................... 39,275,000 --
Gross margin................................................ 6,409,000 --
Contribution margin (loss)*................................. (22,451,000) --
Restructuring charges....................................... (10,635,000) --
* Cost of goods sold for 1998 includes $10,290,000 for writedowns of Episode
inventory related to the Episode closing. Contribution margin is comprised
of gross margin less cost of store operations, royalties and certain related
expenses.
Year Ended September 30, 1999 and 1998
Net Sales. Net sales in fiscal 1999 increased by $0.1 million, or 0.2%, as
compared to fiscal year 1998. Net sales from the Company's core maternity
business increased $46.4 million, or 18.3%, from $253.3 million in fiscal 1998
to $299.7 million in fiscal 1999. This increase was primarily due to a $29.6
million, or 12.9%, net increase in comparable sales in its core maternity
business. The remainder of the increase in sales was due to store openings in
fiscal 1999. At September 30, 1999, the Company operated 625 maternity stores
and leased departments: 351 operating under the Motherhood store concept, 112
under the Pea/Mimi Maternity concept, 65 under the Maternity Works outlet
concept and 97 leased maternity departments. At September 30, 1998, the
Company operated 583 stores and leased departments: 285 operating under the
Motherhood store concept, 115 under the Pea/Mimi Maternity concept, 60 under
the Maternity Works outlet concept, 123 leased maternity departments.
Additionally, the Company had 30 stores in the Episode business being operated
on its behalf by a liquidator. Pursuant to an asset transfer agreement with
The Wet Seal, Inc., a Delaware corporation, the Company agreed to sell its
leasehold rights and interests in most of the remaining Episode stores to The
Wet Seal, Inc. All remaining stores were sold or closed by the end of the
second quarter of fiscal 1999.
Gross Profit. Gross profit as a percentage of net sales increased to 49.8%
in fiscal 1999, as compared to 47.1% in fiscal 1998. This improvement was due
to the lack of non-recurring charges in fiscal 1999 as compared to fiscal
1998.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses decreased by $11.9 million, or 8.6%, in fiscal 1999 as
compared to fiscal 1998 and, as a percentage of net sales, decreased from
46.6% to 42.5%. The decrease was primarily due to elimination of Episode
related selling, general and administrative costs which more than offset
increases in maternity business related store wages, rents and operating
expenses. The decrease in selling, general and administrative expenses as a
percentage of sales is a function of large increases in comparable store sales
combined with an effort to better control costs.
Closing and Restructuring Costs. In May 1998, the Company reported that the
Board of Directors had instructed management to restructure the Episode(R)
non-maternity bridge women's apparel business to eliminate losses from that
business. The initial step of the restructuring resulted in closure or
conversion of 21 stores, principally Episode outlets. Additionally, the
Company retained an advisor to assist in establishing the extent of
restructuring necessary. Subsequently, in September 1998, the Company's
management announced that the remaining Episode stores would be sold or
closed. Costs associated with the closing of Episode include payoff of
royalties, severance, store closings, legal fees, inventory and other costs
incident to the closing. The aggregate charge for closing the Episode
business, all of which was recorded in fiscal 1998, was $20.9 million of which
$10.3 million was included in cost of goods sold.
15
Operating Income. Operating income for fiscal 1999 was $22.0 million, or
7.3%, of net sales, as compared to an operating loss in fiscal 1998 of $9.0
million. Fiscal 1998 operations were negatively impacted due to losses from
the Company's Episode division and the non-recurring charges of $20.9 million.
Exclusive of the nonrecurring charges, operating income in fiscal 1998 would
have been $11.9 million, or 4.0% of net sales. The dollar increase of $10.1
million, excluding non-recurring charges, is a result of the increased sales
volume and elimination of selling, general and administrative costs relating
to Episode. Operating income was positive in the core maternity business for
fiscal years 1999 and 1998.
Interest Expense, Net. Net interest expense increased by $0.1 million in
fiscal year 1999 compared to fiscal year 1998. The dollar increase was due to
increased short-term borrowings under the line of credit agreement.
Income Taxes. The effective income tax rate was an expense of 50.3% in
fiscal 1999, as compared to a benefit of 30.9% in fiscal 1998. The increased
effective tax rate in fiscal 1999 was primarily due to the impact of non-
deductible goodwill amortization on the current year pre-tax income compared
to the prior year net loss. See Note 10 of "Notes to Consolidated Financial
Statements" for the reconciliation of the statutory federal income tax rate to
the Company's effective tax rates in fiscal 1999 and 1998.
Year Ended September 30, 1998 and 1997
Net Sales. Net sales in fiscal 1998 increased by $52.1 million, or 21.1%, as
compared to fiscal year 1997. This increase was primarily due to a $23.6
million, or 13.4%, net increase in comparable sales in its core maternity
business, a $16.6 million net increase due to maternity store opening and
closing activity, and an $11.8 million increase in the closed Episode
business. Net sales from the Company's core maternity business increased 18.8%
from $213.2 million in fiscal 1997 to $253.3 million in fiscal 1998. At
September 30, 1998, the Company operated 583 maternity stores and leased
departments: 285 operating under the Motherhood store concept, 115 under the
Pea/Mimi Maternity concept, 60 under the Maternity Works outlet concept and
123 leased maternity departments. Additionally, the Company had 30 stores in
the Episode business being operated on its behalf by a liquidator. Pursuant to
an asset transfer agreement with The Wet Seal, Inc., a Delaware corporation,
the Company agreed to sell its leasehold rights and interests in most of the
remaining Episode stores to The Wet Seal, Inc. All remaining stores are
scheduled to be sold or closed by the end of the second quarter of fiscal
1999. At September 30, 1997, the Company operated 587 stores and leased
departments: 260 operating under the Motherhood store concept, 41 under the
Pea concept, 79 under the Mimi Maternity concept, 51 under the Maternity Works
outlet concept, 114 leased maternity departments and 42 under the Episode
concept.
Gross Profit. Gross profit as a percentage of net sales decreased to 47.1%
in fiscal 1998, as compared to 53.9% in fiscal 1997. This decrease was caused
primarily by markdowns taken on the Episode product line and a $10.3 million
charge related to the closure of the Episode business. Additionally, the
continued growth of the Motherhood sales as a percentage of total sales has
contributed to the decrease in gross profit percentage because Motherhood
operates at a lower gross profit percentage than the high end (Pea/Mimi)
maternity divisions. The Motherhood stores experienced substantial increases
in comparable-store sales as market share is driven through lower price
points.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses increased by $14.8 million, or 11.9% in fiscal 1998 as
compared to fiscal 1997; however, as a percentage of net sales decreased from
50.4% to 46.6%. The decrease in selling, general and administrative expenses
as a percentage of sales is a function of large increases in comparable store
sales combined with an effort to better control costs. In addition, during
fiscal 1997 the Company recorded a charge of approximately $1.0 million under
Statement of Financial Accounting Standards No. 121 related to leasehold
improvements and furniture and equipment at 16 maternity store locations. The
dollar increase in fiscal 1998, as compared to fiscal 1997, was primarily due
to increases in store rents, wages and benefits and operating expenses at the
store level, which accounted for $9.1 million, $7.7 million and $3.2 million
of the increase, respectively. The increases in wages, benefits and rents at
the store level resulted from the increased number of stores opened and the
related staffing costs.
16
Closing and Restructuring Costs. The aggregate charge for closing the
Episode business, all of which was recorded in fiscal 1998, was $20.9 million
of which $10.3 million was included in cost of goods sold.
Operating Loss. Operating loss for fiscal 1998 was $9.0 million as compared
to operating income in fiscal 1997 of $2.9 million, due to losses from the
Company's Episode division and the restructuring charges of $20.9 million in
fiscal 1998. Fiscal 1997 operations were negatively impacted by $9.6 million
of restructuring charges related to the maternity business. Exclusive of the
restructuring and other unusual charges, operating income decreased 4.8% from
$12.5 million in fiscal 1997 to $11.9 million in fiscal 1998. Operating income
was positive in the core maternity business for fiscal years 1998 and 1997.
Interest Expense, Net. Net interest expense increased by $1.9 million in
fiscal year 1998 compared to fiscal year 1997, and as a percentage of sales,
decreased from 5.4% to 5.1%. The dollar increase was primarily due to
increased short-term borrowings under the line of credit agreement.
Income Taxes. The effective income tax rate was a benefit of 30.1% in fiscal
1998, as compared to a benefit of 25.9% in fiscal 1997. The change in the
effective income tax rate was primarily due to the relationship of non-
deductible goodwill amortization to loss before income taxes. See Note 10 of
"Notes to Consolidated Financial Statements" for the reconciliation of the
statutory federal income tax rate to the Company's effective tax rates in
fiscal 1998 and 1997.
Liquidity and Capital Resources
The Company's cash needs have been for debt service, increased inventories
to support the additional retail locations, and fixed assets at both its store
and corporate locations. In fiscal 1999, the Company's cash sources have been
from increases in its borrowings under the line of credit agreement, cash
overdrafts and net cash provided by operating activities. At September 30,
1999, the Company had available cash and cash equivalents of $1.1 million,
compared to $3.6 million at September 30, 1998.
Net cash provided by operating activities was $0.5 million in fiscal 1998
compared with $0.4 million in fiscal 1999. The $0.4 million net cash provided
by operating activities in fiscal 1999 includes cash provided by net income,
offset by adjustments for non-cash items of $12.0 million, less cash used for
working capital of $15.5 million. Non-cash items consisted primarily of $10.5
million in depreciation and amortization and $0.5 million provision for
deferred rent, in addition to, $1.0 million of deferred tax expense. The cash
used for working capital in fiscal 1999 consisted of $13.3 million to increase
inventories and accounts receivable, a $6.5 net decrease in accounts payable
and accrued expense, partially offset by a decrease in prepaid expenses and
other assets of $4.3 million. In fiscal 1999, inventory levels in the moderate
division were increased to facilitate the increasing sales volume.
Net cash used in investing activities increased from $9.6 million in fiscal
1998 to $10.3 million in fiscal 1999. The cash used in investing activities
for fiscal 1999 included $7.8 million used for capital expenditures for new
store facilities, primarily Motherhood, and improvements to existing stores,
$2.2 million for other corporate capital expenditures and $0.2 million for
intangible and other assets. This compares with investing activities for
fiscal 1998 of $6.9 million used for capital expenditures for new store
facilities, $2.5 for other corporate capital expenditures and $0.2 million for
intangible and other assets.
Net cash provided by financing activities decreased $3.7 million, from $11.1
million provided by financing activities in fiscal 1998 to $7.4 million in
fiscal 1999. The $7.4 million provided by financing activities in fiscal
17
1999 resulted primarily from $9.6 million in borrowings under the line of
credit and cash overdraft activity and proceeds from the exercise of stock
options, offset by $2.4 million in repayment of long-term debt and purchases
of common stock authorized by the Board in the first and second quarters of
fiscal 1999. This compares with $11.1 million provided by financing activities
in fiscal 1998 primarily from $12.0 million in borrowings under the line of
credit and cash overdraft activity, partially offset by repayment of $0.9
million of long-term debt and debt issuance costs.
In November 1999, the lender under the Company's working capital facility
informed the Company that it has agreed to increase its $44 million working
capital facility to $50 million and extend the term of the facility from April
2001 to October 2004, subject to the finalization and execution of the working
capital facility documents. In addition to the amount available for borrowing
and letters of credit under the working capital facility, the Company also has
an additional $4 million letter of credit to collateralize an Industrial
Revenue Bond. Further, there are no financial covenant requirements unless
Aggregate Adjusted Availability, as defined in the working capital facility
agreement, falls below $10 million. In the event that the Aggregate Adjusted
Availability falls below $10 million, then the Company must achieve a Minimum
Cash Flow, as defined in the agreement, of not less than zero. Consistent with
the previous working capital facility, the new working capital facility is
secured by substantially all of the Company's assets. On November 24, 1999 the
Company had $42.9 million in borrowings and $0.4 million in additional letters
of credit issued under the working capital facility, including the $4.0
million letter of credit collateralizing the Industrial Revenue Bond.
The Company believes that its current cash and working capital positions,
available borrowing capacity through the Working Capital Facility and net cash
expected to be generated from operations will be sufficient to fund the
Company's working capital requirements and required principal and interest
payments for fiscal 2000.
Seasonality
The Company's business, like that of most retailers, is subject to seasonal
influences. A significant portion of the Company's net sales and profits is
realized during the Company's third fiscal quarter. Results for any quarter
are not necessarily indicative of the results that may be achieved for a full
fiscal year. Quarterly results may fluctuate materially depending upon, among
other things, the timing of new store openings, net sales and profitability
contributed by new stores, increases or decreases in comparable store sales,
adverse weather conditions, shifts in the timing of certain holidays and
promotions, and changes in the Company's merchandise mix.
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.
Year 2000 Readiness
The Year 2000 issue arises primarily from computer programs, commercial
systems and embedded chips that will be unable to properly interpret dates
beyond the year 1999. The Company utilizes a variety of proprietary and third
party computer technologies--both hardware and software--directly in its
business. The Company also relies on numerous third parties and their systems'
ability to address the Year 2000 issue. The Company's critical information
technology (IT) includes: point-of-sale equipment, merchandise distribution,
merchandise and non-merchandise procurement, credit card and banking services,
transportation, and business and accounting management systems. The Company is
using both internal and external resources to complete its Year 2000
initiatives.
18
In order to address the Year 2000 issue, the Company's information
technology department took on the responsibility to oversee, monitor and
coordinate the company-wide Year 2000 effort. This department has developed
and implemented a Year 2000 plan. The implementation included five stages: (i)
awareness, (ii) assessment, (iii) renovation/development, (iv) validation, and
(v) implementation. There are several areas of focus: (1) renovation of non-
compliant systems and components throughout the Company; (2) installation of
new software packages to replace legacy systems; (3) assessment of Year 2000
readiness at key vendors and suppliers; and (4) evaluating facilities and
distribution equipment with embedded computer technology.
The status of each area of focus is as follows:
(1) All five stages of Year 2000 implementation for renovation of non-
compliant systems and components were completed by fiscal year end 1999
for significant IT systems used in the Company's business.
(2) Replacement of significant non-compliant systems and components with
new software packages has been completed. The validation and
implementation stages of these new systems were completed by fiscal
year end 1999.
(3) A large network of vendors and service suppliers provide the Company
with merchandise for resale, supplies for operational purposes and
services. The Company identified key vendors and suppliers and made
inquiries to determine their Year 2000 status. The Company has obtained
assurances from a number of its key vendors regarding their Year 2000
status and completed this process by fiscal year end 1999. In addition,
the Company is arranging for alternative vendors and service suppliers
to replace vendor and service suppliers not able to achieve Year 2000
compliance.
(4) The Company also utilizes various facilities and equipment with
embedded computer technology, such as PCs, conveyors, security systems,
fire protection systems, and energy management systems. The Company's
assessment of these systems is complete and all other stages of its
efforts were completed by fiscal year end 1999.
Total incremental expenses incurred to date, and those yet to be incurred,
related to review and remediation of the Year 2000 issue have not been and are
not expected to have a material impact on the Company's financial position.
The year 2000 issue presents a number of risks and uncertainties that could
impact the Company. For example, risks could include the failure of one or
several of the Company's significant vendors to timely fill the Company's
merchandise orders or there could be public utility failures that affect the
Company's retail stores. The Company is currently analyzing these risks and
uncertainties and has developed contingency plans to address material risks
related to the year 2000 issues. These contingency plans include the
following:
a. January 1, 2000 falls on a Saturday, when the Company's distribution
center and corporate offices are normally closed. The contingency plans
include operating the distribution center and corporate systems on
January 1 in order to quickly address any year 2000 issues that may
arise.
b. The Company's stores will be open for business on January 1, 2000.
Contingency plans for the Company's stores include the following: all
store managers will report to their district managers, and district
managers to their regional managers during the morning of January 1,
2000, to notify the corporate office whether they are open and operating
normally, or if they have encountered problems. If any such problems
occur, the use of existing manual sales processing procedures in any
affected stores will be implemented until such time as any year 2000
issues are resolved. The Company's information technology department
will be on hand and available to work on any year 2000 issues on January
1, 2000, after ranking Year 2000 issues reported by stores in order of
importance, using the ability of the store to conduct business and
process sales as the primary criteria.
The Company believes that the reasonably likely worst case scenario would
involve short-term disruption of systems affecting its supply and distribution
channels. At the present time, the Company is not aware of any
19
Year 2000 issues that are expected to materially affect its products,
services, competitive position or financial performance. However, despite the
Company's significant efforts to make its systems, facilities and equipment
Year 2000 compliant, the compliance of third party service providers and
vendors is beyond the Company's control. Accordingly, the Company can give no
assurances that the failure of the Company's systems or the systems of other
companies on which the Company's systems rely, or the failure of key
suppliers, vendors, or other third parties to comply with Year 2000
requirements, will not have a material adverse effect on the Company.
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 2000 and beyond to differ materially from those expressed
or implied in any such forward-looking statements: changes in consumer
spending patterns, raw material price increases, consumer preferences and
overall economic conditions, the impact of competition and pricing, changes in
weather patterns, availability of suitable store locations at appropriate
terms and consequent changes in store opening plans, continued availability of
capital and financing, ability to develop merchandise and ability to hire and
train associates, changes in fertility and birth rates, political stability,
currency and exchange risks and changes in existing or potential duties,
tariffs or quotas, postal rate increases and charges, paper and printing
costs, and other factors affecting the Company's business beyond the Company's
control.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The analysis below presents the sensitivity of the market value of the
Company's financial instruments to selected changes in market rates. The range
of changes chosen reflects the Company's view of changes which are reasonably
possible over a one-year period. The Company's financial instruments consist
principally of its debt portfolio. The market value of the debt portfolio is
referred to below as the "Debt Value". The Company believes that market risk
exposure on other financial instruments is immaterial.
At September 30, 1999, the principal components of the Company's debt
portfolio are Senior Unsecured Exchange Notes (the "Notes") and a Line of
Credit (the "Line"), both denominated in U.S. dollars. The Notes bear interest
at a fixed rate of 12 5/8%, and the Line bears interest at a variable rate,
which at September 30, 1999 was 8.5%. While a change in interest rates would
not affect the interest incurred or cash flows related to the fixed portion of
the debt portfolio, the Debt Value would be affected. A change in interest
rates on the variable portion of the debt portfolio impacts the interest
incurred and cash flows, but does not impact the net financial instrument
position.
The sensitivity analysis as it relates to the fixed portion of the Company's
debt portfolio assumes an instantaneous 100 basis point move in interest rates
from their levels at September 30, 1999 with all other variables held
constant. A 100 basis point increase in market interest rates would result in
a decrease in the Debt Value of $0.9 at September 30, 1999. A 100 basis point
decrease in market interest rates would result in a $0.9 increase in the Debt
Value at September 30, 1999.
Based on the variable rate debt included in the Company's debt portfolio at
September 30, 1999, a 100 basis point increase in interest rates would result
in an additional $0.2 million of interest incurred per year. A 100 basis point
decrease would lower interest incurred by $0.2 million.
20
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements appear at pages F-1 through
F-19, 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 20, 2000, and
information concerning executive officers, appearing under the caption "Item
1. Business--Executive Officers of the Company" in Part I of this Form 10-K,
are incorporated herein by reference in response to this Item 10.
Item 11. Executive Compensation
The information contained in the section titled "Executive Compensation" in
the Proxy Statement, with respect to executive compensation, and the
information contained in the section entitled "Compensation of Directors" with
respect to director compensation, are incorporated herein by reference in
response to this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the section titled "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement, with respect
to security ownership of certain beneficial owners and management, is
incorporated herein by reference in response to this Item 12.
Item 13. Certain Relationships and Related Transactions
The information contained in the section titled "Certain Transactions" of
the Proxy Statement, with respect to certain relationships and related
transactions, is incorporated herein by reference in response to this Item 13.
21
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 Specimen certificate representing shares of the Company's common
stock with legend regarding Preferred Stock Purchase Rights. (Exhibit
4.2 to the October 1995 8-K).
*4.4 Amended and Restated Rights Agreement, dated as of March 17, 1997,
between the Company and StockTrans, Inc. (incorporated by reference
to Exhibit 4.2 to the Company's current report on Form 8-K dated
March 17, 1997).
*4.5 Amendment No. 1, dated as of June 4, 1997, to the Amended and
Restated Rights Agreement, dated as of March 17, 1997, between the
Company and StockTrans, Inc., (Exhibit 4.3 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 1997).
*4.6 Registration Rights Agreement, dated as of June 9, 1998, by and among
the Company and certain of the Selling Stockholders (Exhibit 4.1 of
the Company's Registration Statement on Form S-3, Registration No.
333-59309, dated July 17, 1998).
*4.7 1987 Stock Option Plan (as amended and restated) (Exhibit 4.1 of the
Company's Registration Statement on Form S-3, Registration No. 333-
59529, dated July 21, 1998).
*10.1 Registration Rights and Right of Co-Sale Agreement dated as of May 4,
1992 among the Company, Dan W. Matthias, Rebecca C. Matthias,
Meridian Venture Partners, Penn Janney Fund, Inc., Apex Investment
Fund, L.P., Meridian Capital Corp., Butcher & Singer/Keystone Venture
II, L.P., G-2 Family Partnership, PIISC--Penn Venture Fund, John L.
Plummer, Gail G. Davis, Milton S. Stearns Jr., Trustee U/D/T dated
12/20/88, Stevan Simich, Growth Investors, George P. Keeley, Robert
E. Brown Jr., Bruce II. Hooper, John J. Serrell, Charles G. Schiess,
Terence Kavanagh and Michael B. Staebler (Exhibit 10.8 to the 1993
Registration Statement).
22
Exhibit
No. Description
-------- -----------
*10.2 1994 Director Stock Option Plan (Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1994 (the
"1994 Form 10-K")).
*10.3 Employment Agreement dated as of July 14, 1994 between the Company
and Dan W. Matthias (Exhibit 10.25 to the Company's Current Report on
Form 8-K dated January 31, 1994 (the "1994 Form 8-K")).
*10.4 Employment Agreement dated as of July 14, 1994 between the Company
and Rebecca C. Matthias (Exhibit 10.26 to the 1994 Form 10-K).
*10.5 Registration Rights Agreement dated as of August 1, 1995 among the
Company and Morgan Stanley & Co. Incorporated, Wheat, First
Securities, Inc. and Janney Montgomery Scott Inc. (Exhibit 10.2 to
the June 1995 10-Q).
*10.6 Loan Agreement dated September 1, 1995 between Philadelphia Authority
For Industrial Development ("PAID") and the Company (Exhibit 10.26 to
the Company's Registration Statement on Form S-1, Registration No.
33-97318, dated October 26, 1995 (the "1995 Registration
Statement")).
*10.7 Indenture of Trust dated September 1, 1995 between PAID and Society
National Bank (Exhibit 10.29 to the 1995 Registration Statement).
*10.8 Variable/Fixed Rate Federally Taxable Economic Development Bond
(Mothers Work, Inc.), Series of 1995, in the aggregate principal
amount of $4,000,000 (Exhibit 10.30 to the 1995 Registration
Statement).
*10.9 Trademark License Agreement dated May 31, 1996 between the Company
and Episode USA, Inc. (Exhibit 10.1 to the June 1996 8-K).
*10.10 Distribution Agreement dated April 25, 1996 among Toppy International
Limited, T3 Acquisition, Inc. and the Company (Exhibit 10.2 to the
June 1996 8-K).
*10.11 Residential Lease dated June 28, 1996 between the Company and Daniel
& Rebecca Matthias (Exhibit 10.27 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1996).
*10.12 Note dated February 14, 1996 from the Company to PIDC Local
Development Corporation (Exhibit 10.29 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1996).
*10.13 Installment Sale Agreement dated April 4, 1996 by and between PIDC
Financing Corporation and the Company (Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30,
1996).
*10.14 Open-End Mortgage dated April 4, 1996 between PIDC Financing
Corporation and the Pennsylvania Industrial Development Authority
("PIDA") (Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996).
*10.15 Loan Agreement dated April 4, 1996 by and between PIDC Financing
Corporation and PIDA (Exhibit 10.32 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1996).
*10.16 Loan & Security Agreement dated as of April 24, 1998 by and among,
Mothers Work, Inc., Cave Springs, Inc. and Fleet Capital Corporation
(Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended March 31, 1998).
*10.17 Asset Transfer Agreement dated as of August 31, 1998 by and between
the Company, T3 Acquisition, Inc. and The Wet Seal, Inc. (Exhibit
10.32 to the Company's Annual Report on Form 10-K for the Fiscal Year
ended September 30, 1998).
23
Exhibit
No. Description
-------- -----------
*21 Subsidiary of the Company (Exhibit 21 to the Company's Annual Report
on Form 10-K for the Fiscal Year ended September 30, 1998.)
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule for the fiscal year ended September 30, 1999.
- --------
* Incorporated by reference.
(b) Reports filed on Form 8-K during the last quarter of fiscal 1999:
None.
24
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 7th day of
December, 1999.
/s/ Dan W. Matthias
By: _________________________________
Dan W. Matthias
Chairman of the Board and Chief
Executive Officer
/s/ Thomas Frank
By: _________________________________
Thomas Frank
Chief Financial Officer, Vice
President--Finance and the
principal financial officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on December 7, 1999, 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 Officer, the
Thomas Frank 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/ William A. Schwartz, Jr. Director
___________________________________________
William A. Schwartz, Jr.
25
MOTHERS WORK, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants............................ F-2
Consolidated Balance Sheets......................................... F-3
Consolidated Statements of Operations............................... F-4
Consolidated Statements of Stockholders' Equity..................... F-5
Consolidated Statements of Cash Flows............................... F-6
Notes to Consolidated Financial Statements.......................... F-7 to F-19
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 subsidiary as of September 30, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
September 30, 1999. 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
subsidiary as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Philadelphia, Pa.
October 29, 1999
F-2
MOTHERS WORK, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30
--------------------------
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................ $ 1,139,563 $ 3,623,003
Receivables:
Trade.......................................... 3,016,541 3,422,848
Other.......................................... 601,283 131,940
Inventories...................................... 74,954,635 61,678,014
Deferred income taxes............................ 6,120,791 8,846,921
Prepaid expenses and other current assets........ 1,625,694 5,992,273
------------ ------------
Total current assets......................... 87,458,507 83,694,999
PROPERTY, PLANT & EQUIPMENT, net................... 39,610,762 37,334,250
OTHER ASSETS
Deferred income taxes............................ 11,687,319 9,918,455
Goodwill, net of accumulated amortization of
$10,084,351 and $7,868,499, respectively........ 34,309,108 36,524,960
Deferred financing costs, net of accumulated
amortization of $1,808,032 and $1,309,971,
respectively.................................... 2,619,981 3,118,042
Other intangible assets, net of accumulated
amortization of $1,865,046 and $1,721,223,
respectively.................................... 1,115,444 1,154,801
Other non-current assets......................... 807,268 723,558
------------ ------------
Total other assets........................... 50,539,120 51,439,816
------------ ------------
$177,608,389 $172,469,065
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit................................... $ 32,003,464 $ 23,095,934
Current portion of long-term debt................ 495,829 464,408
Accounts payable................................. 17,461,343 14,108,610
Accrued expenses................................. 13,477,555 22,411,762
------------ ------------
Total current liabilities.................... 63,438,191 60,080,714
LONG-TERM DEBT..................................... 96,161,561 96,421,707
DEFERRED RENT...................................... 4,292,164 3,819,998
ACCRUED DIVIDENDS ON PREFERRED STOCK............... 4,648,124 3,396,916
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY
Series A Cumulative preferred stock, $.01 par
value, $280.4878 Stated value, 2,000,000 shares
authorized, 41,000 shares Issued and outstanding
(liquidation value of $11,500,000)................ 11,500,000 11,500,000
Series B Junior participating preferred stock, $.01
par value 10,000 shares authorized, none
outstanding....................................... -- --
Common stock, $.01 par value, 10,000,000 shares au-
thorized, 3,446,353 and 3,597,997 shares issued
and outstanding................................... 34,463 35,980
Additional paid-in-capital......................... 26,179,805 27,995,694
Accumulated deficit................................ (28,645,919) (30,781,944)
------------ ------------
Total stockholders' equity................... 9,068,349 8,749,730
------------ ------------
$177,608,389 $172,469,065
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
MOTHERS WORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Net sales........................... $299,734,805 $298,990,616 $246,934,331
Cost of goods sold.................. 150,401,580 158,046,917 113,886,439
------------ ------------ ------------
Gross profit...................... 149,333,225 140,943,699 133,047,892
Selling, general & administrative
expenses........................... 127,390,517 139,322,385 124,494,747
Restructuring charges............... -- 10,634,509 5,617,094
------------ ------------ ------------
Operating income (loss)........... 21,942,708 (9,013,195) 2,936,051
Interest income..................... -- -- 11,339
Interest expense.................... (15,131,608) (15,180,820) (13,263,418)
------------ ------------ ------------
Income (loss) before income
taxes............................ 6,811,100 (24,194,015) (10,316,028)
Income tax expense (benefit)........ 3,423,867 (7,477,216) (2,676,945)
------------ ------------ ------------
Net income (loss)................... 3,387,233 (16,716,799) (7,639,083)
Dividends on preferred stock........ 1,251,208 1,168,216 1,088,284
------------ ------------ ------------
Net income (loss) applicable to
Common Stockholders................ $ 2,136,025 $(17,885,015) $ (8,727,367)
============ ============ ============
Income (loss) per share--Basic...... $ 0.60 $ (5.00) $ (2.45)
============ ============ ============
Average shares outstanding--Basic... 3,538,029 3,577,143 3,562,980
============ ============ ============
Income (loss) per share--Diluted.... $ 0.57 $ (5.00) $ (2.45)
============ ============ ============
Average shares outstanding--
Diluted............................ 3,754,433 3,577,143 3,562,980
============ ============ ============
The accompanying notes are an integral part of these statements.
F-4
MOTHERS WORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Additional
Preferred Common Paid-in Accumulated
Stock Stock Capital Deficit Total
----------- ------- ----------- ------------ -----------
Balance September 30,
1996................... $11,500,000 $35,593 $27,740,840 $ (4,169,562) $35,106,514
Exercise of stock
options.............. -- -- 410 -- 410
Exercise of common
stock warrants....... -- 53 (53) -- --
Preferred stock
dividends............ -- -- -- (1,088,284) (1,088,284)
Net loss.............. -- -- -- (7,639,083) (7,639,083)
----------- ------- ----------- ------------ -----------
Balance, September 30,
1997................... 11,500,000 35,646 27,740,840 (12,896,929) 26,379,557
Exercise of stock
options.............. -- 66 27,458 -- 27,524
Stock issued to senior
note holders......... -- 268 227,396 -- 227,664
Preferred stock
dividends............ -- -- -- (1,168,216) (1,168,216)
Net loss.............. -- -- -- (16,716,799) (16,716,799)
----------- ------- ----------- ------------ -----------
Balance, September 30,
1998................... 11,500,000 35,980 27,995,694 (30,781,944) 8,749,730
Exercise of stock
options.............. -- 355 208,728 -- 209,083
Purchase and
retirement of Common
Stock................ -- (1,872) (2,024,617) -- (2,026,489)
Preferred stock
dividends............ -- -- -- (1,251,208) (1,251,208)
Net income............ -- -- -- 3,387,233 3,387,233
----------- ------- ----------- ------------ -----------
Balance, September 30,
1999................... $11,500,000 $34,463 $26,179,805 $(28,645,919) $ 9,068,349
=========== ======= =========== ============ ===========
The accompanying notes are an integral part of these statements.
F-5
MOTHERS WORK, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30
----------------------------------------
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................. $ 3,387,233 $(16,716,799) $ (7,639,083)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities--
Depreciation and amortization.... 10,516,245 11,991,958 12,169,900
Noncash portion of restructuring
charge.......................... -- 18,167,165 3,731,102
Stock issuance charged to
interest expense................ -- 227,664 --
Imputed interest on debt......... 149,783 131,418 117,147
Deferred taxes................... 957,266 (7,478,796) (2,729,709)
Amortization of deferred
financing costs................. 498,061 394,832 432,172
Provision for deferred rent...... 472,166 867,318 891,454
Changes in assets and liabilities--
Decrease (increase) in:
Receivables.................... (63,036) (608,651) (658,111)
Inventories.................... (13,276,621) (8,155,179) (6,603,091)
Prepaid expenses and other
current assets................ 4,282,869 (3,525,981) (873,235)
Increase (decrease) in:
Accounts payable and accrued
expenses...................... (6,496,114) 5,168,611 6,338,843
------------ ------------ ------------
Net cash provided by
operating activities........ 427,852 463,560 5,177,389
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and
equipment......................... (10,087,343) (9,350,300) (11,699,625)
Increase in intangible assets...... (219,029) (242,075) (435,866)
------------ ------------ ------------
Net cash used in investing
activities.................. (10,306,372) (9,592,375) (12,135,491)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in line of credit and cash
overdrafts, net................... 9,590,994 12,007,934 7,928,940
Purchase of Company's common
stock............................. (2,026,489) -- --
Repayments of long-term debt....... (378,508) (776,286) (532,929)
Debt issuance costs................ -- (173,114) (34,994)
Proceeds from exercise of options
and warrants...................... 209,083 27,524 410
------------ ------------ ------------
Net cash provided by
financing Activities........ 7,395,080 11,086,058 7,361,427
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... (2,483,440) 1,957,243 403,325
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR............................. 3,623,003 1,665,760 1,262,435
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF
YEAR................................ $ 1,139,563 $ 3,623,003 $ 1,665,760
============ ============ ============
The accompanying notes are an integral part of these statements.
F-6
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Business
Mothers Work, Inc. was incorporated in Delaware in 1980 and is a specialty
retailer and manufacturer of maternity clothing. The Company operates in 625
retail store locations, including 97 leased departments throughout the United
States.
Principles of Consolidation
The consolidated financial statements include the accounts of Mothers Work,
Inc. and its wholly owned subsidiary, Cave Springs, Inc (collectively, the
Company), as of September 30, 1999. 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, 1999, cash and cash
equivalents include cash on hand and cash in the bank. Cash overdrafts of
$4,400,079 and $3,716,615 are included in accounts payable at September 30,
1999 and 1998, respectively.
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.
Advertising Costs
Advertising costs are charged to expense as incurred or the first time the
advertising takes place. Catalog production costs are deferred and amortized
over the period in which the related catalogs are distributed. Advertising and
catalog expenses were $6,479,337, $4,652,749 and $5,722,410 in fiscal 1999,
1998 and 1997, respectively.
Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment are computed
for financial reporting purposes on a straight-line basis, using service lives
ranging principally from five to ten years for furniture and equipment to
forty years for the building. Leasehold improvements are amortized over the
shorter of the estimated useful life or the lease term. The cost of assets
sold or retired and the related accumulated depreciation or amortization are
removed from the accounts with any resulting gain or loss included in net
income. Maintenance and repairs are charged to expense as incurred, and major
renewals and betterments that extend the asset life are capitalized. Long-
lived assets are reviewed for impairment whenever events or changes in
F-7
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
circumstances indicate that full recoverability is questionable. Factors used
in the valuation include, but are not limited to, management's plans for
future operations, brand initiatives, recent operating results and projected
cash flows.
Intangible Assets
Goodwill, leasehold interests and other intangible assets are amortized over
twenty years, the lease term and five to ten years, respectively. Amortization
of goodwill, leasehold interests and other intangible assets was $2,451,265,
$2,580,880 and $2,604,642 in fiscal 1999, 1998 and 1997, respectively.
Deferred Debt Issuance Costs
Deferred debt issuance costs are amortized over the terms of the related
debt using the effective interest method. Amortization of deferred debt
issuance costs was $498,061, $478,998 and $432,172 in fiscal 1999, 1998 and
1997, 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.
Stock-Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosure of net income and earnings per share as if the fair value-based
method had been applied in measuring compensation expense (see Note 9).
Earnings per share
Net income (loss) per share is computed in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 128, Earnings Per Share." Earnings
per basic share are computed using the weighted average number of outstanding
common shares. Earnings per diluted share include the weighted average effect
of dilutive options and warrants on the weighted average shares outstanding.
The following summarizes the effects of the assumed issuance of dilutive
securities on weighted average shares for diluted earnings per share:
1999 1998 1997
--------- --------- ---------
Weighted average number of shares-basic......... 3,538,029 3,577,143 3,562,980
Incremental shares from assumed issuance of
stock options.................................. 216,404 -- --
--------- --------- ---------
3,754,433 3,577,143 3,562,980
========= ========= =========
The number of incremental shares from the assumed issuance of stock options
is calculated by applying the treasury stock method. Since the Company has
incurred losses in fiscal 1998 and 1997, the options were antidilutive, and,
therefore, have been excluded from the computation.
F-8
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statement of Cash Flows
In fiscal 1999, 1998 and 1997, the Company paid $14,918,505, $14,481,028 and
$12,619,836 in interest, respectively. Capital lease obligations of $508,177
were incurred on equipment leases entered into in fiscal 1998.
Adoption of New Accounting Standards
In fiscal 1999, the Company adopted Statement of Position (SOP) 98-5,
Reporting on the Costs of Start-Up Activities. This SOP required that the
costs of start-up activities, including organization costs, be expensed as
incurred. Due to the immateriality of these costs to the Company's results of
operations, the initial application was not reported as a cumulative effect of
a change in an accounting principle. The impact of the change did not have a
material effect on any of the years presented.
Reclassifications
Certain prior year balances in the financial statements have been
reclassified to conform with current year presentation.
2. Inventories
Inventories at September 30 were as follows:
1999 1998
----------- -----------
Finished goods....................................... $58,878,676 $47,220,460
Work-in-progress..................................... 6,477,103 5,329,252
Raw materials........................................ 9,598,856 9,128,302
----------- -----------
$74,954,635 $61,678,014
=========== ===========
3. Property, Plant and Equipment
At September 30, property, plant and equipment was comprised of the
following:
1999 1998
----------- -----------
Land.............................................. $ 1,400,000 $ 1,400,000
Building and improvements......................... 10,060,839 9,263,810
Furniture and equipment........................... 21,667,208 19,068,841
Leasehold improvements............................ 40,374,847 34,248,218
----------- -----------
73,502,894 63,980,869
Less: accumulated depreciation and amortization... (33,892,132) (26,646,619)
----------- -----------
$39,610,762 $37,334,250
=========== ===========
During fiscal 1997, the Company recorded charges under SFAS No. 121 of
approximately $952,000, related to the impairment of leasehold improvements
and furniture and equipment at 16 store locations. No such charges were
reflected in fiscal 1999 or 1998.
F-9
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Accrued Expenses
At September 30, accrued expenses were principally comprised of:
1999 1998
----------- -----------
Accrued salaries, wages and employee benefits...... $ 4,213,874 $ 5,690,173
Accrued interest................................... 2,196,260 2,078,157
Accrued sales tax.................................. 1,263,484 1,791,090
Accrued restructuring costs........................ 956,514 4,761,321
Other.............................................. 4,847,423 8,091,021
----------- -----------
$13,477,555 $22,411,762
=========== ===========
5. Line of Credit
In November 1999, the lender under the Company's working capital facility
informed the Company that it has agreed to increase its $44 million working
capital facility to $50 million and extend the term of the facility from April
2001 to October 2004, subject to the finalization and execution of the working
capital facility documents.
The working capital facility bears interest at the Base Rate, as defined,
plus 25 basis points, or LIBOR plus 225 basis points. At September 30, 1999,
the interest rate was 8.5%. In addition to borrowings and letters of credit
available under the working capital facility, the Company has a $4 million
letter of credit that collateralizes an Industrial Revenue Bond (see Note 6).
The facility has no financial covenants provided that the Aggregate Adjusted
Availability, as defined, does not fall below $10 million. At September 30,
1999 the Adjusted Aggregate Availability was approximately $14,430,616 and the
Company was in compliance with all non-financial covenants. If the Aggregate
Adjusted Availability is less than $10 million, then the Company must achieve
a Minimum Cash Flow, as defined, of not less than zero. Consistent with the
previous working capital facility, the Working Capital Facility is secured by
substantially all of the Company's assets.
In fiscal 1999 and 1998, the weighted average interest rates were 8.14% and
8.75%, respectively.
F-10
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-Term Debt
The following table summarizes the Company's long-term debt at September 30:
1999 1998
----------- -----------
12 5/8% Senior Unsecured Exchange Notes due 2005
(less unamortized discount)..................... $90,617,232 $90,467,447
Industrial Revenue Bonds, interest is is variable
(5.00% at September 30, 1999), principal due
annually through 2020 (collateralized by $4
million letter of credit)....................... 3,730,000 3,730,000
Mortgage notes:
Interest at 3%, principal due monthly until 2011
(collateralized by a $1 million letter of credit
and a second mortgage on certain property and
equipment at the Company's headquarters)........ 1,629,795 1,745,114
Interest at 2%, principal due monthly until 2011
(collateralized by certain equipment at the
Company's headquarters)......................... 237,090 255,653
Interest at 4.25%, principal monthly until 2001,
(collateralized by certain equipment at the
Company's headquarters)......................... 93,545 152,935
Capital lease obligations........................ 349,728 534,966
----------- -----------
96,657,390 96,886,115
Less: current maturities......................... (495,829) (464,408)
----------- -----------
$96,161,561 $96,421,707
=========== ===========
Long-term debt maturities as of September 30, 1999 are as follows:
2000............................................................ $ 495,829
2001............................................................ 411,819
2002............................................................ 291,965
2003............................................................ 275,700
2004............................................................ 278,676
2005 and thereafter............................................. 96,286,170
-----------
98,040,159
Less: Unamortized discount...................................... (1,382,769)
-----------
$96,657,390
===========
In connection with the acquisition of Motherhood on August 1, 1995, the
Company sold 12 5/8% Senior Unsecured Notes due 2005 (the Notes) with a face
amount of $92 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. The Notes were
issued by Mothers Work, Inc. and are unconditionally guaranteed on a senior
basis by its subsidiary (see Note 12). The Notes are redeemable at the option
of the Company, in whole or in part, at any time on or after August 1, 2000,
at 106.250% 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 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.
F-11
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Notes impose certain limitations on the ability of the Company to, among
other things, repurchase outstanding common stock, incur additional
indebtedness, pay dividends and enter into certain types of transactions.
7. Common and Preferred Stock:
Preferred Stock
In connection with an acquisition, the Company issued 41,000 shares of
Series A Cumulative Convertible Preferred Stock (the Series A Preferred Stock)
with a stated value of $11.5 million. The Series A Preferred Stock has a
preference in liquidation equal to the stated value, plus accrued but unpaid
dividends. The Company may redeem (but is under no obligation to do so) the
Series A Preferred Stock at any time at a price equal to liquidation
preference, subject to certain limitations imposed by the Working Capital
Facility and the holders of the Notes.
The holders of the Series A Preferred Stock are entitled to receive annual
cash dividends, which are cumulative to the extent not paid, and compound
annually at 8.5%, when declared by the Company's Board of Directors, equal to
8.5% of the stated value. No dividends may be paid on common stock or any
other shares of capital stock of the Company ranking junior to the Series A
Preferred Stock (other than dividends payable in shares of common stock),
until all cumulative and current dividends on Series A Preferred Stock have
been declared and paid in full. As of September 30, 1999 and 1998, accrued
dividends on the Series A Preferred Stock were $4,648,124 and $3,396,916,
respectively 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 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 Senior Unsecured
Exchange 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 8), the Company authorized
10,000 shares of Series B Junior Participating Preferred Stock (the Series B
Preferred Stock). The Series B Preferred Stock can be purchased in units equal
to one one-thousandth of a share (the Series B Units) under the terms of the
Rights Agreement (see Note 8). 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.
F-12
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Rights Agreement
Under a Rights Agreement, the Company has one Right outstanding for each
share of Mothers Work common stock now or hereafter outstanding. Under certain
limited conditions as defined in the Rights Agreement, each Right entitles the
registered holder to purchase from the Company one Series B Unit at $85 per
share subject to adjustment. The rights expire on October 9, 2005 (the Final
Expiration Date).
On March 17, 1997 the Company entered into an amendment to its Rights
Agreement, to provide the independent directors of the Company with some
discretion in determining when the Distribution Date (as defined in the Rights
Agreement) shall occur and the date until which the Rights may be redeemed. In
addition, the Amended and Restated Rights Agreement exempts from its operation
any person that acquires, obtains the right to acquire, or otherwise obtains
beneficial ownership of 10% or more of the then outstanding shares of Company
Common Stock without any intention of changing or influencing control of the
Company provided that such person, as promptly as practicable, divests himself
or itself of a sufficient number of shares of Common Stock so that such person
would no longer be an Acquiring Person.
The Rights are not exercisable until the Distribution Date which will occur
upon the earlier of (i) ten business days following a public announcement that
an Acquiring Person has acquired beneficial ownership of 10% or more of
Mothers Work's outstanding common stock, and ten business days following the
commencement of a tender offer or exchange offer that would result in a person
or group owning 10% or more of Mothers Work's outstanding common stock, or
(ii) such later date as may be determined by action of a majority of the
independent directors.
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-13
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Stock Option Plans
The Company has two stock option plans: the Director Stock Option Plan and
the Amended and Restated 1987 Stock Option Plan. Under the Director Stock
Option Plan, 2,000 options are granted to each director (other than the
Company's Chief Executive Officer and Chief Operating Officer) on an annual
basis, and have an exercise price equal to fair market value on the grant
date, and immediately vest. Under the 1987 Stock Option Plan, as amended and
restated, officers and certain employees may be granted options to purchase
the Company's common stock at exercise prices equal to the fair market value
of the stock at the date of grant or at other prices as determined by the
Compensation Committee of the Board of Directors. Up to a total of 1,425,000
options may be issued under the Plans.
Options generally vest ratably over 5 years. Stock option activity for all
plans was as follows:
Weighted-
Outstanding Average
Options Exercise Price
----------- --------------
Balance at September 30, 1996..................... 523,242 $11.89
Granted........................................... 180,167 10.02
Exercised......................................... (40) 10.25
Canceled.......................................... (33,420) 12.07
-------- ------
Balance at September 30, 1997..................... 669,949 $11.38
Granted........................................... 183,200 8.45
Exercised......................................... (6,569) 4.81
Canceled.......................................... (116,771) 10.06
-------- ------
Balance at September 30, 1998..................... 729,809 $10.85
Granted........................................... 185,000 9.98
Exercised......................................... (31,925) 5.54
Canceled.......................................... (73,932) 10.09
-------- ------
Balance at September 30, 1999..................... 808,952 $10.93
======== ======
Options for 485,889, 452,613 and 348,048 shares were exercisable as of
September 30, 1999, 1998 and 1997, respectively.
The Company has adopted the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation, but has elected to continue to
measure compensation expense in accordance with APB Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, no compensation expense for stock
options has been recognized. Had compensation cost for the Company's stock-
based compensation plans been determined in accordance with SFAS No. 123, the
Company's net income (loss) applicable to common stockholders would have been
decreased/increased to the pro forma amounts indicated below. The effect of
applying SFAS No. 123 in this pro forma disclosure is not indicative of future
amounts. SFAS No. 123 does not apply to awards prior to fiscal year ended
September 30, 1996. Additional awards in future years are anticipated.
1999 1998 1997
---------- ------------ -----------
Net income (loss) applicable to
Common Stockholders:
As reported....................... $2,136,025 $(17,885,015) $(8,727,367)
Pro forma......................... 734,764 (18,817,166) (9,218,623)
Diluted net income (loss) per Common
Share:
As reported....................... $ 0.57 $ (5.00) $ (2.45)
Pro forma......................... 0.20 (5.26) (2.59)
F-14
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair value of the stock options granted during fiscal
1999, 1998 and 1997 was $9.28, $6.15 and $6.93, respectively. The fair value
of each option granted is estimated on the date of grant using the Black-
Scholes option-pricing model with the following assumptions:
1999 1998 1997
--------- --------- -------
Dividend yield................................... none none none
Expected price volatility........................ 75.8% 71.2% 65.2%
Risk-free interest rates......................... 6.05% 6.11% 6.12%
Expected lives................................... 9.1 years 7.1 years 7 years
The following table summarizes information about stock options outstanding
at September 30, 1999:
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Weighted-
Range of Number Average Weighted Average Number Weighted Average
Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
--------------- ----------- -------------- ---------------- ----------- ----------------
$2.28 to $4.55.......... 597 3.0 $ 4.19 597 $ 4.19
$4.55 to $6.83.......... 2,194 5.2 $ 6.44 1,594 $ 6.37
$6.84 to $9.10.......... 214,530 8.7 $ 8.60 17,920 $ 7.97
$9.11 to $11.38......... 331,664 6.2 $10.23 270,331 $10.27
$11.38 to $13.65........ 223,467 6.6 $13.33 162,347 $13.32
$13.66 to $15.92........ 12,500 6.3 $14.50 12,300 $14.50
$15.93 to $18.20........ 7,000 6.3 $16.50 4,200 $16.50
$18.21 to $20.48........ 17,000 4.5 $18.28 16,600 $18.27
------- --- ------ ------- ------
$1.67 to $18.75......... 808,952 7.0 $10.93 485,889 $11.62
======= === ====== ======= ======
At September 30, 1999, warrants are outstanding to purchase 140,123 shares
of common stock at an exercise price of $0.01. These warrants expire on April
2002.
10. Income Taxes
For the years ended September 30, Income taxes (benefit) are comprised of
the following:
1999 1998 1997
---------- ----------- -----------
Current provision......................... $2,466,601 $ -- $ --
Deferred provision (benefit).............. 957,266 (2,676,945) (7,477,216)
---------- ----------- -----------
$3,423,867 $(2,676,945) $(7,477,216)
========== =========== ===========
The reconciliation of the statutory federal rate to the Company's effective
income tax rate on the income (loss) is as follows:
1999 1998 1997
---- ----- -----
Statutory tax rate........................................ 34.0% (34.0)% (34.0)%
State taxes, net of federal benefit....................... 4.9% -- --
Amortization of goodwill.................................. 11.0% 3.1% 7.3%
Other..................................................... .4% -- 0.8%
---- ----- -----
50.3% (30.9)% (30.9)%
==== ===== =====
F-15
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The deferred tax effects of temporary differences giving rise to the
Company's deferred income tax assets are as follows:
1999 1998
----------- -----------
Deferred tax assets:
Net operating loss carryforwards.................... $ 6,404,753 $ 7,578,822
Depreciation........................................ 7,779,536 6,136,967
Deferred rent....................................... 1,615,141 1,285,926
Inventory reserves.................................. 435,949 1,006,878
Employee benefit accruals........................... 542,950 303,794
Alternative minimum tax credit carryforward......... 528,509 528,509
Other accruals...................................... 509,808 1,909,455
Other............................................... 151,224 86,095
----------- -----------
17,967,870 18,836,446
Deferred tax liabilities:
Prepaid expenses.................................... (159,760) (32,099)
Other............................................... -- (38,971)
----------- -----------
$17,808,110 $18,765,376
=========== ===========
The Company has net operating loss carryforwards for tax purposes of
approximately $18,838,510 which expire in 2009 through 2014, 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.
No valuation allowance has been provided for the net deferred tax assets.
Based on the Company's historical levels of taxable income, as adjusted for
the restructuring and the nondeductibility of goodwill amortization and the
Episode operations, management believes it is more likely than not that the
Company will realize the net deferred tax asset at September 30, 1999.
Furthermore, management believes the existing net deductible temporary
differences will reverse during periods in which the Company generates taxable
income. There can be no assurance, however, that the Company will generate
taxable earnings or any specific level of earnings in the future.
F-16
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Commitments and Contingencies
The Company leases its retail facilities and certain equipment under various
noncancelable operating leases. Certain of these leases have renewal options.
Rent expense, including common area maintenance, was $38,000,598, $42,738,584
and $39,022,965 in fiscal 1999, 1998 and 1997, respectively. Future minimum
lease payments as of September 30, 1999 are as follows:
Fiscal 2000.................................................... $ 25,496,109
Fiscal 2001.................................................... 24,183,925
Fiscal 2002.................................................... 21,888,660
Fiscal 2003.................................................... 18,936,615
Fiscal 2004.................................................... 14,433,145
Fiscal 2005 and thereafter..................................... 28,543,578
------------
$133,482,032
============
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.
12. Subsidiary Guarantor
Pursuant to the terms of the indenture relating to the 12 5/8% Senior
Unsecured Exchange Notes due 2005, Cave Springs, Inc., a direct subsidiary of
Mothers Work, Inc. has, jointly and severally, unconditionally guaranteed the
obligations of Mothers Work, Inc. with respect to the Notes. There are no
restrictions on the ability of the Guarantor to transfer funds to Mothers
Work, Inc. in the form of loans, advances or dividends, except as provided by
applicable law.
Accordingly, set forth below is certain summarized financial information
(within the meaning of Section 1-02[bb] of Regulation S-X) for the Guarantor,
as of and for the year ended September 30:
1999 1998
----------- -----------
Current assets...................................... $ 2,865 $ 2,865
Noncurrent assets................................... 59,105,843 39,729,143
Noncurrent liabilities.............................. 9,148,142 2,520,464
Net sales........................................... 19,376,700 12,997,861
Costs and expenses.................................. 60,000 59,410
Net income.......................................... 12,749,022 8,539,372
The summarized financial information for the Guarantor and the former
Guarantor has been prepared from the books and records maintained by the
Guarantor and the Company. The summarized financial information may not
necessarily be indicative of the results of operations or financial position
had the Guarantor operated as independent entities. Certain intercompany sales
included in the subsidiary records are eliminated in consolidation. Mothers
Work, Inc pays all expenditures on behalf of the Guarantor. An amount due
to/due from parent will exist at any time as a result of this activity. The
summarized financial information includes the allocation of material amounts
of expenses such as corporate services, administration and taxes on income.
The allocations are generally based on proportional amounts of sales or
assets, and taxes on income are allocated consistent with the asset and
liability approach used for consolidated financial statement purposes.
Management believes these allocation methods are reasonable.
F-17
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Restructuring Charges
In 1998, the Company announced that all of its non maternity (Episode)
stores would be closed or converted into maternity clothing stores. In
connection with the closure, charges totaling $20,925,000 ($13,811,000 after
consideration of a related tax benefit of $7,114,000) were recorded, and are
reflected in the accompanying consolidated statement of operations as cost of
goods sold ($10,290,000) and restructuring charges ($10,635,000). The 1998
restructuring costs were comprised of $2.9 million of legal and other fees
associated with the transfer of leases, $7.3 million for losses on fixed
assets and leasehold improvements, $0.2 million for severance, and the
remainder for other costs. At September 30, 1999, approximately $1.0 million
of the restructuring cost remains in accrued expenses. It is expected that the
full amount will be used to settle legal and other fees related to finalizing
the lease transfers. At September 30, 1998 approximately $4.6 million of the
restructuring costs remain in accrued expenses. Of the $4.6 million,
approximately $2.1 million relates to losses on purchase commitments for
inventory and leasehold improvements, $2.2 million relates to legal and other
fees associated with the transfer of leases, and the remainder is for other
miscellaneous charges.
In 1997, the Company announced a plan to restructure its core maternity
business by combining the Mimi Maternity and Maternite overlapping product
styles and closing approximately 30 retail locations. Restructuring costs of
$5.6 million were recorded in fiscal 1997 and included approximately $2.6
million for the write-off of furniture, fixtures and leasehold improvements,
$1.7 million for lease termination and other costs, and $1.3 million for the
write-off of patterns related to over-lapping product styles that will no
longer be manufactured by the Company as a result of product line
consolidation. At September 30, 1998 and 1997, $0.2 million and $0.6 million,
respectively, of this restructuring charge remained in accrued expenses. These
balances related principally to early lease terminations. In addition to the
charges discussed above, the Company recorded a $0.8 million inventory reserve
in cost of goods sold for the overlapping product lines, a $0.7 million asset
impairment in selling, general and administrative expense for 14 additional
facilities, and approximately $0.5 million in selling, general and
administrative expense for other occupancy related items.
14. Employment and Consulting Agreements
The Company has employment agreements with its Chief Executive
Officer/Chairman of the Board (CEO), and President/Chief Operating Officer
(COO). The CEO and COO have agreements which expire on September 30, 2001.
These agreements provide for base compensation of $375,000 each for fiscal
2000, increasing annually thereafter. On October 1st, 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.
15. Related-Party Activity
The Company paid legal fees of approximately $275,000, $576,000 and $470,000
in fiscal 1999, 1998 and 1997, respectively, to a firm with which a Director
of the Company was affiliated during 1997, 1998 and 1999.
16. Profit-Sharing Plans
The Company has a 401(k) savings plan for full-time employees who have at
least one year of service and are 21 years of age. Employees can contribute up
to 20% of their annual salary. Effective January 1, 1999, employees who meet
certain criteria are eligible for a matching contribution from the Company
based on a sliding scale. Company matches are made on the first day of the
calendar year. Company matches vest fully on the employee's 4th anniversary.
In addition, the Company may make discretionary contributions to the plan,
which vest over a five-year period. No Company contributions were made in
fiscal 1999, 1998 or 1997.
F-18
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Stock Buyback
During fiscal 1999, the Board of Directors authorized the Company to
purchase up to 265,000 shares of its own stock in private transactions or on
the open market. As of September 30, 1999, the Company has purchased 187,205
shares at a total cost of $2,026,489.
F-19