SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 2 to
Current Report
Pursuant to Section 13 or 15(d) of
The Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported) : June 1, 1996
MOTHERS WORK, INC.
(Exact name of Registrant as specified in its charter)
Delaware 0-21196 133045573
- -------------------------------------------------------------------------------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) file number) Identification No.)
456 North 5th Street, Philadelphia, Pennsylvania 19123
------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 873-2200
--------------
This Form 8-K/A is being filed to amend the Current Report of Mothers Work,
Inc., a Delaware corporation (the "Registrant"), initially filed on June 17,
1996, as amended on June 18, 1996, relating to the completion of its acquisition
of the leases, associated assets and inventory of 21 stores of Episode USA, Inc.
("Episode"), and the private placement of an aggregate of 200,000 shares of its
common stock to an institutional investor.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
(i) The following financial statements of Episode for the
year ended February 3, 1996 are set forth in Annex A
hereto:
Report of Independent Auditors
Balance Sheets -- February 3, 1996 and January 28, 1995
Statements of Operations -- The years ended February 3, 1996,
January 28, 1995 and January 29, 1994
Statements of Cash Flows -- The years ended February 3, 1996,
January 28, 1995 and January 29, 1994
Notes to Financial Statements
(b) Pro Forma Financial Information
Page Number
Pro Forma Condensed Consolidated Financial Statements -
Basis of Presentation F-1
Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 1996 F-3
Pro Forma Condensed Consolidated Statement of Operations
for the Year Ended September 30, 1995 F-4
Pro Forma Condensed Consolidated Statement of Operations
for the Six Months Ended March 31, 1996 F-5
Notes to Pro Forma Condensed Consolidated Balance Sheet and
Statements of Operations F-6
(c) Exhibits
23.1 Consent of Deloitte & Touche LLP
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MOTHERS WORK, INC.
Date: August 14, 1996 By: /s/ Thomas Frank
--------------------------------
Thomas Frank, Chief Financial
Officer and Vice President -
Finance
ANNEX "A"
EPISODE U.S.A., INC.
(Debtor-in-Possession)
Financial Statements for the
Fiscal Years Ended February 3, 1996,
January 28, 1995, and January 29, 1994, and
Independent Auditors' Report
EPISODE U.S.A., INC.
(Debtor-in-Possession)
TABLE OF CONTENTS
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Page
INDEPENDENT AUDITORS' REPORT 1-2
FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED FEBRUARY 3, 1996,
JANUARY 28, 1995 AND JANUARY 29, 1994:
Balance Sheets 3
Statements of Operations 4
Statements of Changes in Deficiency in Net Assets 5
Statements of Cash Flows 6
Notes to Financial Statements 7-15
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Episode U.S.A., Inc.
We have audited the accompanying balance sheets of Episode U.S.A., Inc.
(Debtor-in-Possession) as of February 3, 1996 and January 28, 1995, and the
related statements of operations, changes in deficiency in net assets and cash
flows for each of the three years in the period ended February 3, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Private Label in
January 29, 1994 (a division of Episode U.S.A., Inc.), which statements reflect
total assets constituting 1.6 percent and total revenues constituting 17.1
percent. Those financial statements were audited by other auditors, whose report
have been furnished to us, and our opinion, insofar as it relates to the amounts
included for Private Label, is based solely on the report of such auditors.
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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, such
financial statements present fairly, in all material respects, the financial
position of Episode U.S.A., Inc. (Debtor-in-Possession) as of February 3, 1996
and January 28, 1995 and the results of its operations and its cash flows for
each of the three years in the period ended February 3, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 1, the Company filed for reorganization under Chapter 11 of
the United States Bankruptcy Code in January 1996. The accompanying financial
statements do not purport to reflect or provide for the consequences of the
bankruptcy proceedings. In particular, such financial statements do not purport
to show (a) as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to pre-petition liabilities, the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company; (d) as to operations, the
effect of any changes that may be made in its business; or (e) as to the
litigation, claims and contingencies discussed in Note 13, the amounts that may
be allowed for such matters. The eventual outcome of these matters is not
presently determinable.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed In Note 1, the bankruptcy
filing and related circumstances and the losses from operations raise
substantial doubt about its ability to continue as a going concern. The
continuation of its business as a going concern is contingent upon, among other
things, future profitable operations, the ability to generate sufficient cash
from operations and financing sources to meet obligations, and the development
and confirmation of a plan or reorganization. Management's plans concerning
these matters are also discussed in Note 1. The financial statements do not
include any adjustments that might result from the outcome of the uncertainties
referred to herein and in the preceding paragraph.
Deloitte & Touche LLP
New York, New York
June 14, 1996
- 2 -
EPISODE U.S.A., INC.
(Debtor-in-Possession)
BALANCE SHEETS
- -------------------------------------------------------------------------------------------
February 3, January 28,
ASSETS 1996 1995
CURRENT ASSETS:
Cash $ 839,375 $ 409,550
Accounts receivable 69,617 92,534
Merchandise inventories (Note 4) 3,230,423 7,269,862
Prepaid expenses and miscellaneous receivables 143,579 852,926
Due from related parties - net (Note 5) 1,424 6,595,351
-------------- --------------
Total current assets 4,284,418 15,220,223
PROPERTY AND EQUIPMENT - Net (Notes 6 and 8) 1,974,989 11,007,969
INTANGIBLE ASSETS - Net (Notes 7 and 8) 18,636 120,889
OTHER ASSETS:
Security deposits 267,875 356,337
-------------- --------------
TOTAL ASSETS $ 6,545,918 $ 26,705,418
============== =============
LIABILITIES AND DEFICIENCY IN NET ASSETS
CURRENT LIABILITIES:
Accounts payable - trade:
Related parties (Note 10) $ -- $ 7,863,567
Other 344,350 446,907
Accrued expenses (Note 9) 427,661 1,457,423
-------------- --------------
Total current liabilities 772,011 9,767,897
-------------- --------------
DEFERRED LIABILITIES (Note 18):
Deferred rent 717,109 1,429,370
Deferred credit 684,685 1,234,739
-------------- --------------
1,401,794 2,664,109
-------------- --------------
OTHER LIABILITIES - Related parties (Note 10) -- 27,588,450
LIABILITIES SUBJECT TO COMPROMISE (Note 13) 37,804,124 --
COMMITMENTS AND CONTINGENCIES (Notes 18 and 19)
DEFICIENCY IN NET ASSETS (Notes 16 and 17) (33,432,011) (13,315,038)
-------------- --------------
TOTAL LIABILITIES AND DEFICIENCY IN NET ASSETS $ 6,545,918 $ 26,705,418
============== =============
See accompanying notes to financial statements.
- 3 -
EPISODE U.S.A., INC.
(Debtor-in-Possession)
STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------
Fiscal Year Ended
-------------------------------------------------------
February 3, January 28, January 29,
1996 1995 1994
NET SALES $ 28,738,540 $ 34,611,425 $ 38,897,363
COST OF GOODS SOLD 17,621,656 18,918,720 20,170,392
-------------- ------------- -------------
Gross profit 11,116,884 15,692,705 18,726,971
-------------- ------------- -------------
OPERATING EXPENSES:
Store 17,200,317 17,695,308 17,839,510
Warehouse 1,080,425 1,055,674 896,540
General and administrative (Note 18) 3,197,829 3,578,721 4,059,928
Loss on impairment of assets (Note 8) 4,945,181 -- --
-------------- ------------- -------------
Total operating expenses 26,423,752 22,329,703 22,795,978
-------------- ------------- -------------
OPERATING LOSS (15,306,868) (6,636,998) (4,069,007)
INTEREST EXPENSE - Net of interest income of
$13,395 and $4,482 (331,318) (385,793) (321,933)
-------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS
BEFORE REORGANIZATION ITEMS AND
PROVISION FOR INCOME TAXES (15,638,186) (7,022,791) (4,390,940)
REORGANIZATION ITEMS (Note 12) 4,474,658 -- --
-------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (20,112,844) (7,022,791) (4,390,940)
PROVISION FOR INCOME TAXES (Note 11) 4,129 4,705 3,929
-------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (20,116,973) (7,027,496) (4,394,869)
LOSS FROM DISCONTINUED
OPERATIONS (Note 3) -- -- (907,641)
-------------- ------------- -------------
NET LOSS $ (20,116,973) $ (7,027,496) $ (5,302,510)
============== ============= =============
LOSS PER SHARE (Note 2):
Loss from continuing operations $ (6,705.66) $ (2,342.50) $ (1,464.95)
Discontinued operations of Private Label -- -- (302.55)
-------------- ------------- -------------
NET LOSS PER SHARE $ (6,705.66) $ (2,342.50) $ (1,767.50)
============== ============= =============
See accompanying notes to financial statements.
- 4 -
EPISODE U.S.A., INC.
(Debtor-in-Possession)
STATEMENTS OF CHANGES IN DEFICIENCY IN NET ASSETS
FISCAL YEARS ENDED FEBRUARY 3, 1996, JANUARY 28, 1995 AND JANUARY 29, 1994
- ---------------------------------------------------------------------------------------------------------------------------
Preferred Stock, Common Stock,
Par Value $100, Par Value $.01,
Shares: Shares:
Authorized, Authorized
316,000; 3,000;
Issued and Issued and Additional
Outstanding, Outstanding, Paid-in Deficiency in
266,000 3,000 Capital Deficit Net Assets
---------------- --------------- ---------- ------- --------------
BALANCE,
JANUARY 31, 1993 $ 26,600,000 $ 30 $ 399,970 $ (27,985,032) $ (985,032)
Net loss -- -- -- (5,302,510) (5,302,510)
------------- --------- ---------- ------------- --------------
BALANCE,
JANUARY 29, 1994 26,600,000 30 399,970 (33,287,542) (6,287,542)
Net loss -- -- -- (7,027,496) (7,027,496)
------------- --------- ---------- ------------- --------------
BALANCE,
JANUARY 28, 1995 26,600,000 30 399,970 (40,315,038) (13,315,038)
Net loss -- -- -- (20,116,973) (20,116,973)
------------- --------- ---------- ------------- --------------
BALANCE,
FEBRUARY 3, 1996 $ 26,600,000 $ 30 $ 399,970 $ (60,432,011) $ (33,432,011)
============= ========= ========= ============= ==============
See accompanying notes to financial statements.
- 5 -
EPISODE U.S.A., INC.
(Debtor-in-Possession)
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended
----------------------------------------------------------
February 3, January 28, January 29,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,116,973) $ (7,027,496) $ (5,302,510)
Adjustments to reconcile net loss to net cash used
in continuing operations:
Loss from discontinued operations -- -- 907,641
Loss on impairment of assets 4,945,181 -- --
Reorganization reserve 3,338,031 -- --
Depreciation of property and equipment 2,151,952 2,437,879 2,191,732
Amortization of intangible assets 53,749 83,079 110,560
Loss on abandonment of property -- 38,225 --
Increase (decrease) in deferred liabilities 364,424 (46,517) 352,100
Changes in assets and liabilities:
Accounts receivable 22,917 71,313 53,488
Merchandise inventories 4,039,439 875,126 (664,426)
Prepaid expenses and miscellaneous receivables 709,347 (33,635) (75,127)
Due from related parties 6,593,927 (792,285) (1,522,605)
Intangible and other assets 71,470 99,882 (97,303)
Accounts payable - related parties (7,863,567) (303,705) 982,440
Accounts payable - other 597,845 (538,622) 553,049
Accrued expenses (503,272) (361,005) (261,275)
------------- ------------ ------------
Net cash used in continuing operating activities (5,595,530) (5,497,761) (2,772,236)
Net cash used in discontinued operations -- -- (9,765)
------------- ------------ ------------
Net cash used in operating activities (5,595,530) (5,497,761) (2,782,001)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,165,537) (1,573,144) (932,329)
------------- ------------ ------------
Net cash used in investing activities (1,165,537) (1,573,144) (932,329)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Import trade - financing credit facility 2,747,599 -- --
Net advances from related parties 4,443,293 6,700,827 3,750,000
------------- ------------ ------------
Net cash provided by financing activities 7,190,892 6,700,827 3,750,000
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH 429,825 (370,078) 35,670
CASH, BEGINNING OF YEAR 409,550 779,628 743,958
------------- ------------ ------------
CASH, END OF YEAR $ 839,375 $ 409,550 $ 779,628
============= ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest payments $ 294,067 $ 390,274 $ 231,670
============= ============ ============
Income tax payments $ 11,969 $ 3,829 $ 12,909
============= ============ ============
See accompanying notes to financial statements.
- 6 -
EPISODE U.S.A., INC.
(Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS
FISCAL YEARS ENDED FEBRUARY 3, 1996, JANUARY 28, 1995 AND JANUARY 29, 1994
- -------------------------------------------------------------------------------
1. CHAPTER 11 PROCEEDINGS AND BASIS OF FINANCIAL STATEMENTS PRESENTATION
On January 26, 1996, Episode U.S.A., Inc. (the "Debtor") filed voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (the
"Filing"). During fiscal 1995, weakening economic conditions experienced
in the retailing industry and the economy in general led to a highly
competitive retail environment. The Company experienced lower than
expected sales results, a significant decrease in cash provided by
operating activities and a deterioration in the Company's liquidity.
Accordingly, on January 26, 1996, the Debtor filed petition for relief
under Chapter 11 of the U.S. Bankruptcy Code in order to restructure its
operations.
The Debtor is presently operating its business as a debtor-in-possession
subject to the jurisdiction of the U.S. Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). The financial statements of
the Company have been presented in accordance with the American Institute
of Certified Public Accountants Statement of Position 90-7; "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP
90-7"); and have been prepared in accordance with generally accepted
accounting principles applicable to a going concern, which principles,
except as otherwise disclosed, assume that assets will be realized and
liabilities will be discharged in the normal course of business.
In the Chapter 11 case, substantially all liabilities as of the date of
the Filing are subject to resolution under a plan of reorganization to be
voted upon by the Debtor's creditors and stockholders and confirmed by the
Bankruptcy Court. Schedules have been filed by the Debtor with the
Bankruptcy Court setting forth the assets and liabilities of the Debtor as
of the date of the Filing as shown by the Debtor's accounting records.
Differences between amounts shown by the Debtor and claims filed by
creditors will be investigated and resolved. The amount and settlement
terms for such disputed liabilities are subject to allowance by the
Bankruptcy Court. Ultimately, the adjustment of the total liabilities of
the Debtor remains subject to a Bankruptcy Court approved plan of
reorganization and, accordingly, the total amount of such liabilities is
not presently determinable. The Debtor presently has the exclusive right
to file a plan of reorganization until August 23, 1996, subject to
Bankruptcy Court approval or further extensions.
Under the Bankruptcy Code, the Debtor may elect to assume or reject real
estate leases, employment contracts, personal property leases, service
contracts and other unexpired executory pre-petition executory contracts,
subject to Bankruptcy Court approval. Upon rejection, under Section 502 of
the Bankruptcy Code, a lessor's claim for damages resulting from the
rejection of a real property lease is limited to the rent to be received
under such lease, without acceleration, for the greater of one year, or
15%, not to exceed three years, of the remaining term of the lease
following the earlier of the date of Filings or the date on which the
property is returned to the landlord. During the Chapter 11 Case, the
Company rejected nine real estate leases which were approved by the
Bankruptcy Courts. For further information, see Note 13 to financial
statements.
The Company's financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets
and the liquidation of liabilities and commitments in the normal course of
business. The Filing, related circumstances and the losses from operations
raise substantial doubt about its ability to continue as a going concern.
- 7 -
The appropriateness of using the going concern basis is dependent upon,
among other things, confirmation of a plan of reorganization, future
profitable operations, and the ability to generate sufficient cash from
operations and financing sources to meet obligations. While under the
protection of Chapter 11, the Company may sell or otherwise dispose of
assets, and liquidate or settle liabilities, for amounts other than those
reflected in the accompanying financial statements. Further, a plan of
reorganization could materially change the amounts reported in the
accompanying consolidated financial statements. The accompanying financial
statements do not include any adjustments relating to the recoverability
of the value of recorded asset amounts or the amounts and classification
of liabilities that might be necessary as a consequence of a plan or
reorganization (see Note 19 for further discussion).
2. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Description of Business - Episode U.S.A., Inc. (the "Company"), a
wholly-owned subsidiary of Toppy International, was incorporated in
Delaware. The Company operates a chain of women's specialty stores
in the United States under the Episode name. During fiscal 1994,
the Company formally changed its name from Florida Adams, Ltd. to
Episode U.S.A., Inc.
Effective August 1, 1992, all of the subsidiaries of Florida Adams,
Ltd. merged into the parent company, Florida Adams, Ltd. In
addition, in fiscal 1993, the Private Label wholesale division was
discontinued and merged into Florida Adams, Ltd. (Note 3).
b. Fiscal Year - The Company's fiscal year ends on the Saturday closest
to January 31. References to fiscal 1995, 1994 and 1993 relate to
the fiscal years ended February 3, 1996, January 28, 1995, and
January 29, 1994, respectively. Fiscal 1995, 1994 and 1993 were
comprised of 53 weeks, 52 weeks and 52 weeks, respectively.
d. Merchandise Inventories - The value of merchandise inventories is
determined by the lower of the first-in, first-out ("FIFO") cost or
market.
e. Property and Equipment - Property and equipment are stated at cost,
less accumulated depreciation and amortization. Provisions for
depreciation and amortization are computed using the straight-line
method based upon the estimated useful lives of the assets, which
are five years for computers and seven years for furniture, fixtures
and equipment. Leasehold improvements are amortized over the shorter
of their economic lives or the terms of the leases.
f. Intangible Assets - Intangible assets, which consist of lease
acquisition costs, are amortized over the remaining life of the
related leases.
g. Store Preopening Expenses - Costs associated with the opening of new
stores are expensed in the fiscal year in which the related stores
are opened.
h. Deferred Liabilities - The Company receives construction allowances
upon entering into certain store leases. These construction
allowances are deferred and are recognized ratably over the lives of
the related leases. In addition, the Company defers the effect of
straight lining its leases, and amortizes the amounts over their
respective lease terms.
i. Income Taxes - The Company follows Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." The
Company provides for deferred income taxes under the asset and
liability ("SFAS") No. 109, whereby deferred income taxes result
from temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements.
- 8 -
j. Loss Per Share - Loss per share was computed by dividing net loss by
the weighted average number of common stock outstanding during the
period.
k. 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. The financial statements include estimates of
restructuring charges for certain facilities closings (see Notes 12
and 13) and do not purport to reflect or provide for the
consequences of the bankruptcy proceedings and other uncertainties.
Actual results could differ from reported results.
l. Fair Value of Financial Instruments - SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosures or
estimates fair values of financial instruments both reflected and
not reflected in the accompanying financial statements. The
estimated fair values of the Company's cash and cash equivalents,
accounts receivable, borrowings under credit agreements and accounts
payable (post-petition) approximate the carrying amounts at February
3, 1996 and January 28, 1995 due to their short maturities or
variable-rate nature of the borrowings. The fair value of the
Company's liabilities subject to compromise are not presently
determinable as a result of the Chapter 11 proceedings.
m. Reclassifications - Certain items previously reported in specific
captions in the accompanying financial statements have been
reclassified to conform with the current year's classifications.
3. DISCONTINUED OPERATIONS
The Company operated retail and private label (wholesale) divisions. In
fiscal 1993, the Company decided to discontinue its Private Label
operations.
The results of the Private Label division have been reported separately as
a component of discontinued operations in the Statements of Operations.
Net assets of discontinued operations was $(235,459) at January 29, 1994
which consisted of current assets of $63,555, long-term assets of $397,805
and current liabilities of $696,819.
The following is financial information relating to the Private Label
division.
Fiscal 1993
Net sales $ 7,996,977
============
Gross profit (loss) $ (103,902)
=============
Operating profit (loss) $ (907,641)
=============
Net income (loss) $ (907,641)
=============
- 9 -
4. MERCHANDISE INVENTORIES
Merchandise inventories were as follows:
February 3, January 28,
1996 1995
Stores $ 3,631,735 $ 4,366,530
Warehouse -- 3,421,636
In-transit -- 279,079
Inventory reserve (401,312) (797,383)
-------------- --------------
Merchandise inventories $ 3,230,423 $ 7,269,862
============== ==============
5. DUE FROM RELATED PARTIES - NET
Due from related parties - net consists of the following:
February 3, January 28,
1996 1995
Max Point Design Studio, Inc. $ -- $ 2,372,693
Remington Holdings Corporation -- 1,914,340
Wainscott Sportswear, Inc. -- 5,716
Wainscott Sportswear H.K., Ltd. -- (460,912)
Toppy Co. H.K., Ltd. -- 2,690,449
Toppy International -- (46,596)
Maxpoint H.K., Ltd. -- 8,987
Power Run, Ltd. -- 12,194
Other 1,424 98,480
---------- -------------
Due from related parties - net $ 1,424 $ 6,595,351
========== =============
6. PROPERTY AND EQUIPMENT - NET
Major classifications of property and equipment - net are summarized
below:
February 3, January 28,
1996 1995
Furniture and fixtures $ 1,429,559 $ 1,915,641
Computers 368,149 1,085,158
Office equipment 353,128 607,905
Leasehold improvements 10,745,362 17,215,259
-------------- --------------
Property and equipment - gross 12,896,198 20,823,963
Less accumulated depreciation and
amortization (10,921,209) (9,815,994)
-------------- --------------
Property and equipment - net $ 1,974,989 $ 11,007,969
============== ===============
- 10 -
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
February 3, January 28,
1996 1995
Lease acquisition cost $ 191,829 $ 763,257
Less accumulated amortization 173,193 642,368
---------- ----------
Intangible assets - net $ 18,636 $ 120,889
========== ==========
8. IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-lived Assets and for
Long-Lived Assets to Be Disposed of," which provides guidance on when to
assess and how to measure impairment of long-lived assets, certain
intangibles and goodwill related to those assets to be held and used, and
for long-lived assets and certain identifiable intangibles to be disposed
of.
The Company evaluated its investment in long-lived assets, which includes
property and equipment and lease acquisition costs, to be held in
operations on an individual store basis and determined that based upon the
history of operating results and updated operating projections, the
long-lived assets were impaired. The Company estimated the fair value of
the assets based on consideration received from the sale of these stores
to Mothers Work, Inc. (See Note 19 for further discussion.) As a result,
the Company recorded charge of $4,945,181 representing the amount required
to write-down the carrying value of the long-lived assets to their
estimated fair value as of February 3, 1996.
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
February 3, January 28,
1996 1995
Accrued professional fees $ 140,699 $ 154,179
Accrued sales and use taxes payable 119,252 98,313
Reserve for reorganization 164,192 --
Other accrued expenses 3,518 1,204,932
---------- ----------
$ 427,661 $1,457,424
========== ==========
10. RELATED PARTY TRANSACTIONS
The Company imports its merchandise inventory from various related parties
on open account. The Company's ability to purchase its merchandise
inventory on open account and operate as a going concern is contingent
upon the continued support of its shareholders. As of February 3, 1996,
included in liabilities subject to compromise, is accounts payable to
related parties of $32,031,743. Accounts payable to related parties of
$15,252,450, as of January 28, 1995, is included in other liabilities
since payment is not due within the next respective fiscal year.
- 11 -
11. INCOME TAXES
The Company files a consolidated Federal income tax return with its
wholly-owned subsidiaries. State and local income tax returns are filed on
an unconsolidated basis. For fiscal 1995, 1994 and 1993 state and local
income taxes of $4,219, $4,705 and $3,929, respectively, were provided.
The Company has net operating loss carryforwards of approximately
$45,661,000 for Federal income tax purposes which expire in the tax years
2000 through 2010.
The difference between the effective rate and the statutory rate is
primarily due to state and local income taxes and the inability to
recognize the benefit of the loss carryforwards.
The components of the deferred tax assets and liabilities were as follows:
February 3, 1996 January 28, 1995
Current Noncurrent Current Noncurrent
Deferred tax assets:
Operating loss
carryforwards $ -- $ 18,227,539 $ -- $ 11,392,167
Temporary differences 3,685,157 2,680,314 526,431 2,278,846
------------ -------------- ----------- --------------
Subtotal 3,685,157 20,907,853 526,431 13,671,013
Deferred tax liabilities:
Temporary Differences 931,777 -- 233,263 --
------------ -------------- ----------- --------------
Net 2,753,380 20,907,853 293,168 13,671,013
Valuation allowance (2,753,380) (20,907,853) (293,168) (13,671,013)
------------ -------------- ----------- --------------
Net deferred tax assets $ -- $ -- $ -- $ --
============ ============== =========== ==============
The primary sources of temporary differences are the adoption of uniform
capitalization for tax purposes pursuant to the Tax Reform Act of 1986,
excess book depreciation over tax depreciation, amortization of leases
with scheduled rent increases on a straight-line basis, amortization of
preopening expenses, the impairment of long-lived assets, and excess book
over tax basis of inventory. The valuation allowance relates to temporary
differences that currently cannot be realized for Federal, state and local
purposes because future taxable income cannot be reasonably assured.
12. REORGANIZATION ITEMS
In 1995, reorganization items consisted of the following:
Restructuring costs due to facilities closing:
Lease rejection obligations $2,054,022
Provisions for abandoned property and equipment 2,099,118
Other 228,428
Professional fees 93,090
----------
Total reorganization items $4,474,658
==========
As discussed in Note 1, the Company rejected nine leases which were
approved by the Bankruptcy Court. The lease obligations and related
reserves for the facilities closings include numerous real property leases
rejected and amounts for other executory contracts that have been
identified for rejection pursuant to Section 365 of the Bankruptcy Code
- 12 -
and are reflected at the estimated amount of the eventually allowed claims
of the lessors in the Chapter 11 case as prescribed by Section 502 of the
Bankruptcy Code for the rejection of leases.
13. LIABILITIES SUBJECT TO COMPROMISE
The following liabilities, including estimated obligations for lease
rejections, are classified as liabilities subject to compromise at
February 3, 1996.
Accounts payable $ 700,402
Related parties 32,031,743
Trade financing credit facility 2,747,599
Rejected leases 1,583,062
Accrued expenses 741,318
-----------
$37,804,124
===========
Liabilities subject to compromise under reorganization proceedings include
substantially all current and long-term unsecured debt as of the date of
the Filing. Pursuant to the provisions of the Bankruptcy Code, payment of
those liabilities may not be made except pursuant to a plan or
reorganization or Bankruptcy Court order while the Debtor continues to
operate as a debtor-in-possession.
The Company has recorded an estimated liability for certain leases that
have been rejected. While the Company believes that the amounts recorded
reflect known claims at this time, the amounts actually claimed by
creditors or allowed by the Bankruptcy Court may be different.
In addition, the Company has guaranteed the lease of an affiliate of the
Company who is unable to meet its obligation. The Company has made an
estimate for this obligation but the actual amount has not been
determined.
14. LINES OF CREDIT
On February 1, 1996, the Bankruptcy Court entered a interim order
approving the Debtor-In-Possession financing arrangement (the "DIP
Facility") as provided under the Loan and Security Agreement dated as of
January 31, 1996 between the Company and Marine Midland Bank ("Marine
Midland"). The final order was approved on February 22, 1996. Pursuant to
the terms of the DIP Facility, which expires on January 31, 1997, Marine
Midland made available to the Company a revolving line of credit not to
exceed $3,500,000. No amount was outstanding as of February 3, 1996.
Borrowings under the DIP Facility may be used to fund working capital,
inventory purchases and other general corporate purposes. The DIP Facility
requires the maintenance of minimum earnings starting February 4, 1996.
The Company received a waiver for the noncompliance of the minimum earning
requirements for the period February 4, 1996 through April 27, 1996.
During the year, the Company had a trade financing credit facility with
Hong Kong Shanghai Bank for the import of goods purchased from its parent.
The financing terms were prime less 0.5 percent due within 120 days of the
document of acceptance date.
- 13 -
15. PROFIT SHARING PLAN
The Company has a 401(k) plan that covers substantially all employees with
one year of service. The Company's contribution is equal to 50 percent of
the eligible employee's contribution to a maximum contribution of 3
percent of compensation. The Company's contribution for fiscal 1995, 1994
and 1993 was $75,434, $46,921 and $61,258, respectively.
16. COMMON STOCK
The Company has authorized 3,000 shares of voting common stock at a par
value of $0.1 per common stock. As of February 3, 1996, the Company had
3,000 shares of common stock outstanding.
17. PREFERRED STOCK
The Company has authorized 316,000 shares of preferred stock at a par
value of $100 per preferred stock. As of February 3, 1996, the Company had
266,000 shares of preferred stock outstanding. The liquidation preference
of the preferred stock is $100 per share.
18. COMMITMENTS AND CONTINGENCIES
The Company leases all of its stores, offices and warehouse. These leases
expire at various dates through 2005. Some leases contain options to renew
for a term of four or five years. The leases on stores generally provide
for payment of real estate taxes, common area charges and for additional
rent based primarily on percentage of sales.
Many of the Company's leases provide for minimum lease payments, which
increase at fixed rates during the lease terms. The Company records rent
expense incurred under its leases on a straight-line basis over the lives
of the underlying leases. Deferred rent represents the excess of rental
expense over amounts paid to landlords for these leases.
Future minimum lease payments at February 3, 1996 (which do not include
rejected leases) for each of the next five fiscal years and thereafter are
as follows:
Fiscal Operating
Year Leases
1996 $ 3,373,208
1997 3,166,396
1998 2,909,619
1999 2,106,229
2000 2,161,934
Thereafter 5,153,333
-----------
Minimum lease payments $18,870,719
===========
The future minimum lease payments noted above relates to stores sold to
Mothers Work. (See Note 19 for further discussion.)
- 14 -
Rental expense for operating leases consisted of:
February 3, January 28,
1996 1995
Minimum rentals $5,018,583 $5,152,119
Straight-line rent 1,041 87,660
---------- ----------
Total $5,019,624 $5,239,779
========== ==========
19. SUBSEQUENT EVENTS
Effective June 1, 1996, pursuant to an Asset Purchase Agreement, Mothers
Work, Inc. ("Mothers Work") purchased all of the assets of 21 of the
Company stores plus additional inventory located at an outside warehouse.
The assets sold under the Asset Purchase Agreement include the leases, the
tangible leasehold assets, inventory supplies, inventory and security
deposits.
The Company will receive approximately $7 million from the sale of these
assets which consists of (a) $4 million in Mothers Work common stock, (b)
$2 million in cash, (c) an amount equal to security deposits held by the
Company's landlords of approximately $100,000 and (d) an adjustment to
common stock if the inventory at the closing date is less than or exceeds
$4.1 million. It is estimated that this adjustment will result in an
increase in the purchase price by approximately $900,000. As of June 14,
1996, the Company has received approximately $2,099,000 in cash.
In addition, the Company entered into a Trademark License Agreement with
Mothers Work for the exclusive right to use the trademark "Episode" in the
United States for which it will receive a maximum of $4.5 million in
royalties based on all sales in Episode Stores.
******
- 15 -
MOTHERS WORK, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION:
On June 1, 1996, the Company acquired leases, associated assets and inventory of
21 stores of Episode for $7.3 million, including transaction costs.
Approximately $2.3 million was paid in cash and $5.0 million was paid through
the issuance of 217,365 shares of Mothers Work common stock. The purchase price
was allocated to the fair value of the net assets acquired under the purchase
method of accounting. Simultaneously, with the purchase of the aforementioned
assets, the Company entered into a trademark licensing agreement and
distribution agreement to operate the Episode stores in their current format and
under their current name. The trademark licensing agreement is for an initial
term of five years, automatically renewable for successive one year periods,
unless terminated by either party. The Company will license the Episode
trademark, payable through a royalty of 5% of Episode store sales, not to exceed
$4.5 million over the term of the agreement. Additionally, on May 31, 1996, in
order to pay the cash portion of the purchase price for the Episode assets
referenced above, to finance the opening of additional stores and for general
working capital purposes, the Company consummated a private placement of an
aggregate of 200,000 shares of its common stock to an institutional investor.
The purchase price for the shares was $22.25 per share, and the net proceeds to
the Company, after deducting commissions and other expenses, were $4.4 million.
During the year ended September 30, 1995, in separate transactions, the Company
completed the acquisitions of Motherhood Maternity Shops, Inc. ("Motherhood")
and A Pea in the Pod, Inc. ("Pea"). On August 1, 1995, concurrent with the
Motherhood acquisition, Mothers Work issued $92 million in face amount of
12.625% senior notes ("Notes") at a price equal to 97.934% of the face amount.
Together with the issuance of the Notes, the outstanding indebtedness incurred
in the Pea acquisition was repaid. The Motherhood purchase price was
approximately $34 million, including transaction costs, of which $22.5 million
was paid in cash and $11.5 million was paid through the issuance of Series A
Convertible Preferred Stock (the "Preferred Stock") to the Sellers. On April 5,
1995 the Company purchased Pea for approximately $25.5 million in cash,
including transaction costs, and the assumption of $2.5 million in funded debt.
The Motherhood audited financial statements are included in the Mothers Work
Form 8-K dated August 14, 1995, and the Pea audited financial statements are
included in the Mothers Work Form 8-K dated April 5, 1995.
F-1
The pro forma financial statements have been prepared to give effect to the
acquisitions of Pea, Motherhood, and Episode and the issuance of shares of
Mothers Work common stock as if these transactions had occurred (i) as of March
31, 1996 in the case of the Pro Forma Condensed Consolidated Balance Sheet, and
(ii) as of October 1, 1994 in the case of the Pro Forma Condensed Consolidated
Statement of Operations.
The pro forma financial information has been prepared on the basis of
assumptions described in the notes thereto and includes assumptions relating to
the allocation of the consideration paid in connection with the acquisitions of
Episode, Motherhood and Pea to the assets acquired and liabilities assumed based
on estimates of their respective fair values. The actual allocation of such
consideration may differ from that reflected in the Pro Forma Condensed
Consolidated Financial Statements after final valuations, liabilities and other
studies have been completed. The pro forma adjustments are based on currently
available information and upon certain assumptions that management believes are
reasonable. THE PRO FORMA FINANCIAL DATA DO NOT PURPORT TO REPRESENT WHAT THE
COMPANY'S RESULTS OF OPERATIONS WOULD ACTUALLY HAVE BEEN IF THE EPISODE
TRANSACTION ABOVE IN FACT HAD OCCURRED AS OF MARCH 31, 1996 IN THE CASE OF THE
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET OR IF ALL TRANSACTIONS ABOVE HAD
OCCURRED AS OF OCTOBER 1, 1994 IN THE CASE OF THE PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS OR TO PROJECT THE COMPANY'S RESULTS OF
OPERATIONS FOR ANY FUTURE DATE OR PERIOD. The unaudited pro forma condensed
consolidated financial statements should be read in conjunction with the Mothers
Work, Inc. audited financial statements included in its Form 10-K for the year
ended September 30, 1995, and the unaudited financial statements included in its
Form 10-Q for the six months ended March 31, 1996. In addition, the pro forma
financial statements should be read in conjunction with the Episode audited
financial statements for the year ended February 3, 1996, set forth in Annex A
hereto, the Motherhood audited financial statements for the year ended January
28, 1995, set forth in the Company's 8-K filed on August 14, 1995 and the Pea
audited financial statements for the year ended January 28, 1995, set forth in
the Company's 8-K dated April 11, 1995.
F-2
MOTHERS WORK, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(Unaudited)
Actual Episode (1) Adjustments Pro Forma
------ ----------- ----------- ---------
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 1,185 $ 811 4,400 (2) $ 3,285
(3,111)(3)
Receivables 2,455 104 (104)(3) 2,455
Receivables Other 96 -- -- 96
Inventories 52,333 3,868 (1,700)(3) 54,501
Prepaid expenses and other 4,954 582 516 (3) 6,052
--------- --------- --------- ---------
Total current assets 61,023 5,365 1 66,389
Property and Equipment, net 39,054 1,072 2,449 (3) 42,575
OTHER ASSETS:
Deferred tax assets 4,420 -- -- 4,420
Goodwill 40,076 -- -- 40,076
Other, primarily debt issuance cost 5,709 262 (164)(3) 5,807
--------- --------- --------- ---------
Total other assets 50,205 262 (164) 50,303
--------- --------- --------- ---------
$ 150,282 $ 6,699 2,286 $ 159,267
========= ========= ========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of long-term debt $ 601 $ -- $ -- $ 601
Accruals for store closings 1,036 -- -- 1,036
Accounts payable and accrued expenses 24,620 6,943 (6,126)(3) 25,437
--------- --------- --------- ---------
Total current liabilities 26,257 6,943 (6,126) 27,074
Long Term Debt 95,052 34,950 (34,950)(3) 95,052
--------- --------- --------- ---------
Deferred Rent 2,367 -- 2,367
--------- --------- --------- ---------
Stockholders' Equity:
Preferred stock 11,500 26,600 (26,600)(3) 11,500
Common stock 31 -- 2 (2) 35
2 (3)
Additional paid-in capital 18,158 400 4,398 (2) 26,322
3,366 (3)
Accumulated deficit (3,083) (62,194) 62,194 (3) (3,083)
--------- --------- --------- ---------
Total stockholders' equity 26,606 (35,194) 43,362 34,774
--------- --------- --------- ---------
$ 150,282 $ 6,699 2,286 $ 159,267
========= ========= ========= =========
The accompanying notes are an integral part of this statement.
F-3
MOTHERS WORK, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Year Ended September 30, 1995
-----------------------------------------------------------------------------------
Actual Pea(4) Motherhood(4) Episode(4) Adjustments Pro Forma
------ ------- -------------- ----------- ----------- ---------
(in thousands, except per share data)
Net Sales $ 106,005 $ 22,924 $ 51,696 $ 30,180 $(17,343) (9) $184,201
(9,261)(12)
Cost of Goods Sold 45,527 10,621 23,410 18,157 (7,634) (9) 86,025
1,130 (10)
385 (11)
(5,571)(12)
--------- --------- --------- --------- ------- --------
Gross Profit 60,478 12,303 28,286 12,023 (14,914) 98,176
Selling, General and
Administrative Expenses 53,835 14,018 32,202 22,036 (9,455) (9) 97,603
1,450 (6)
(8,834)(10)
(3,334)(11)
(5,361)(12)
1,046 (13)
Other non-recurring items 5,427 1,258 1,220 1,429 (4,527) (9) 3,378
(1,429)(12)
--------- --------- --------- --------- -------- --------
Operating income (loss) 1,216 (2,973) (5,136) (11,442) 15,530 (2,805)
Interest expense, net 4,484 318 2,143 349 5,566 (7) 12,511
(349)(12)
--------- --------- --------- --------- -------- --------
Loss before income taxes (benefit) (3,268) (3,291) (7,279) (11,791) 10,313 (15,316)
Income taxes (benefit) (847) (281) 44 5 (4,188)(14) (5,267)
--------- --------- --------- --------- -------- --------
Net loss (2,421) (3,010) (7,323) (11,796) 14,501 (10,049)
Extraordinary Item -- Early Extinguishment
of Debt, net of income tax benefit 4,215 (4,215) (8) --
Preferred dividend 163 815 (15) 978
--------- --------- --------- --------- -------- --------
Net loss applicable to common shareholders $ (6,799) $ (3,010) $ (7,323) $ (11,796) $ 17,901 $(11,027)
========= ========= ========= ========= ========= ========
Shares used in computing pro forma net
loss per share 3,484,361 (16)
=========
Pro forma net loss per common share
before Extraordinary Item $ (3.16)
========
The accompanying notes are an integral part of these statements.
F-4
MOTHERS WORK, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended March 31, 1996
---------------------------------------------------------------------------
Actual Episode(5) Adjustments Pro Forma
----------- ----------- --------------- ---------
(in thousands, except per share data)
Net Sales $ 95,065 $ 13,637 $ (2,949) (9) $ 102,617
(3,136)(12)
Cost of Goods Sold 40,067 9,114 (984) (9) 45,593
193 (11)
(2,797)(12)
---------- ----------- --------- -----------
Gross Profit 54,998 4,523 (2,497) 57,024
Selling, General and
Administrative Expenses 45,989 14,329 (1,791)(9) 51,299
(1,027)(11)
(4,945)(12)
(1,781)(12)
525 (13)
Other non-recurring items -- 3,145 (3,145)(12) --
---------- ----------- --------- -----------
Operating income (loss) 9,009 (12,951) 9,667 5,725
Interest expense, net 6,142 54 142 (7) 6,284
(54)(12)
---------- ----------- --------- -----------
Income (loss) before income taxes 2,867 (13,005) 9,579 (559)
Income taxes (benefit) 1,364 4 (1,205)(14) 163
---------- ----------- --------- -----------
Net income (loss) 1,503 (13,009) 10,784 (722)
Preferred dividend 489 489
---------- ----------- --------- -----------
Net loss applicable to common shareholders $ 1,014 $ (13,009) $ 10,784 $ (1,211)
========== =========== ========= ===========
Shares used in computing pro forma net
loss per share 3,486,507 (16)
===========
Pro forma net loss per common share $ (0.35)
===========
The accompanying notes are an integral part of these statements.
F-5
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pro Forma Balance Sheet
The Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996 assumes
the following transactions occurred on March 31, 1996: (i) the Episode
acquisition and issuance of common stock in connection therewith and (ii) the
private placement of 200,000 shares of its common stock, the net proceeds of
which amounted to approximately $4.4 million.
(1) The information for Episode is as of May 4, 1996.
(2) Reflects the sale of a private placement of an aggregate of 200,000 shares
of common stock at $22.25 per share less expenses. The Company is using the
proceeds of the offering to pay the cash portion of the purchase price for the
Episode assets, to finance the opening of additional stores and for general
working capital purposes.
(3) Reflects the application of the purchase method of accounting for the
Episode acquisition and the elimination of assets, liabilities and equity not
acquired (including approximately $807,0000 of cash, $700,000 of inventory
and all long-term debt and equity). Mothers Work acquired certain leases,
associated assets, inventory and certain liabilities, primarily gift
certificates and credit vouchers, of 21 stores of Episode for $2.3 million in
cash and the issuance of 173,913 shares of Mothers Work common stock valued at
$23 per share, plus or minus the Inventory Adjustment Amount. The Inventory
Adjustment Amount is payable or deductible from the Mothers Work common stock
issued in the transaction and is the amount by which the inventory at closing
exceeds or is less than $4.1 million. The Inventory Adjustment Amount resulted
in the issuance of an additional 43,452 shares of Mothers Work common stock. Due
to the aforementioned Inventory Adjustment Amount, the Pro Forma Condensed
Consolidated Balance Sheet reflects the issuance of a total of 163,826 shares of
Mothers Work common stock.
Pro Forma Statements of Operations
The pro forma condensed consolidated statements of operations for the year ended
September 30, 1995 and for the six months ended March 31, 1996 assumes the
following transactions were effected as of October 1, 1994: (i) the issuance of
$92 million in principal amount of Senior Notes at a purchase price equal to
97.934%, (ii) the acquisitions of Pea, Motherhood, and Episode, the issuance of
$11.5 million of Preferred Stock in connection with the Motherhood Acquisition
and the issuance of $9.5 million of common stock in connection with the Episode
acquisition and the aforementioned private placement (iii) the repayment of
F-6
outstanding indebtedness of Pea, Motherhood and Mothers Work, (iv) the
elimination of 53 Mothers Work, Mimi Maternity and Pea stores, and their related
sales, costs of goods sold and selling, general and administrative expenses, (v)
borrowings of $6.6 million (the "Real Estate Loans") for the acquisition of a
new office, distribution and manufacturing facilities, (vi) the closures of
office, distribution and manufacturing facilities of the acquired companies and
the elimination of these costs, offset by additional costs to be incurred at the
Company's corporate facility (vii) the elimination of sales and cost of goods
sold for the Episode stores not purchased in the acquisition and (viii) the
recording of a 5% royalty on Episode store sales for the use of the Episode
trademark.
(4) For the Pro Forma Condensed Consolidated Statement of Operations for the
year ended September 30, 1995, the information in the Episode column is for the
twelve months ended October 28, 1995. Since the Pea acquisition was completed on
April 5,1995, its historical results after the date of acquisition are included
under the "Actual" column and the information in the Pea column is for the six
months ended April 5, 1995. Since the Motherhood acquisition was completed on
August 1, 1995, its historical results after the date of acquisition are
included under the "Actual" column and the information in the Motherhood column
is for the ten months ended July 29, 1995.
(5) For the Pro Forma Condensed Consolidated Statement of Operations for the six
months ended March 31, 1996, the information in the Episode column is for the
six months ended May 4, 1996.
(6) Reflects the increase in goodwill amortization of $1,450,000 for the year
ended September 30, 1995, based on a 20 year life for the Pea and Motherhood
goodwill.
(7) Reflects additional interest expense for the Senior Notes and the $6.6
million in Real Estate Loans with interest assumed at 8%, partially offset by
the elimination of interest expense associated with the existing debt which was
repaid in August 1995. The components of the adjustment to net interest expense
are as follows:
Six Months
Year Ended Ended
September 30, March 31,
1995 1996
------------ ----------
Senior Notes $ 9,679,000 $ --
Real Estate Loans 504,000 142,000
Amortization of deferred financing costs and
debt discount 410,000 --
Less: Interest expense on debt to be repaid
with the proceeds of the offering of the Notes (5,027,000) --
----------- ---------
$ 5,566,000 $ 142,000
=========== =========
F-7
(8) The extinguishment of the existing debt mentioned above results in a
one-time charge of approximately $6,387,000 representing an estimated prepayment
premium of $3,625,000, the write-off of deferred financing costs of $1,787,000
million and unamortized original issue discount of $975,000. This charge was
recorded as an extraordinary item, net of the related income tax benefit, in the
statement of operations for the year ended September 30, 1995 and has been
eliminated in the Pro Forma Condensed Consolidated Statement of Operations. The
extraordinary item, net of the related income tax benefit, is reflected in
Retained Earnings of the Pro Forma Condensed Consolidated Balance Sheet at March
31, 1996.
(9) In conjunction with the Pea acquisition, the Company identified 38 Mothers
Work stores and 15 Pea stores to be closed. As of March 31, 1996 all such stores
have been closed. The net sales and store contribution for each of these stores
has been removed from the Pro Forma Condensed Consolidated Statements of
Operations as though such stores had been closed as of October 1, 1994. The
following operating results were removed:
Six Months
Year Ended Ended
September 30, March 31,
1995 1996
------------ ----------
Net Sales $17,343,000 $2,949,000
Cost of Goods Sold 7,634,000 984,000
----------- ----------
Gross Profit 9,709,000 1,965,000
Direct selling, general and administrative 9,455,000 1,791,000
----------- ----------
Store contribution margin $ 254,000 $ 174,000
=========== ==========
In addition, the charge for the Company's store closings of $4,527,000, which
was reflected in the Company's historical financial statements for the year
ended September 30, 1995, has been eliminated as it was directly related to the
Pea acquisition. The losses on store closings recorded by Pea and Motherhood
have not been eliminated, as they were not related to the acquisitions.
(10) Reflects elimination of $8,834,000 of duplicate distribution, manufacturing
and administrative facilities, personnel and overhead, partially offset by the
additional costs expected to be incurred by the Company in conjunction with the
Pea and Motherhood acquisitions. Also reflects the additional costs of
$1,130,000 expected to be incurred by the Company in manufacturing product for
and managing the acquired stores.
F-8
(11) Reflects the elimination of $3,334,000 and $1,027,000 of excess duplicate
Episode selling, general and administrative expenses, partially offset by
additional costs expected to be incurred by the Company in conjunction with the
Episode acquisition for the year ended September 30, 1995 and the six months
ended March 31, 1996, respectively. Also reflects the additional costs of
$385,000 and $193,000 expected to be incurred by the Company in procuring the
product and managing the acquired stores for the year ended September 30, 1995
and March 31, 1996, respectively.
(12) Reflects the elimination of net sales and related cost of goods sold and
selling, general and administrative expenses for Episode stores closed prior
to the acquisition of Episode by Mothers Work. Amount remaining represents
all of the continuing retail operations. In addition, reflects the elimination
of Episode non-recurring reorganization items of $1,429,000 and $3,145,000 for
the year ended September 30, 1995 and six months ended March 31, 1996,
respectively. Further, reflects the elimination of $4,945,000 of non-recurring
loss on impairment of assets, recorded in January, 1996 in connection with the
sale of certain assets to Mothers Work. All interest expense has been eliminated
as the acquisition and subsequent working capital needs are assumed to be
financed through the sale of common stock reflected above.
(13) Reflects a royalty of 5% of net sales for the licensing agreement entered
into by the Company to use the Episode trademark.
(14) Reflects the estimated income tax benefit of the combined operations of
Pea, Motherhood and Episode for the periods presented.
(15) Reflects the 8.5% dividend, for the ten months prior to the Motherhood
acquisition, on the $11.5 million in Preferred Stock issued in connection
therewith.
(16) The shares used in computing pro forma net loss per share give effect to
200,000 shares of Mothers Work common stock issued to an institutional investor
and 163,826 shares of Mothers Work common stock issued in connection with the
Episode acquisition.
F-9
EXHIBIT INDEX
Exhibit No. Exhibit Description
23.1 Consent of Deloitte & Touche LLP