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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 of 15(d) of the Securities Exchange
Act of 1934
For the quarterly report ended March 31, 1997
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or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-21196
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Mothers Work, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 133045573
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
456 North 5th Street, Philadelphia, Pennsylvania 19123
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 873-2200
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
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Common Stock, $.01 par value - 3,564,644 shares outstanding as of April 30, 1997
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MOTHERS WORK, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Cash Flows 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Exhibit Index 16
MOTHERS WORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
ASSETS 1996 1997
-------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,262,435 $ 1,451,686
Receivables
Trade 2,141,102 2,876,081
Other 146,924 171,258
Inventories 57,209,499 51,618,248
Deferred income taxes 3,815,002 4,880,555
Prepaid expenses and other 1,791,070 2,158,537
------------- -------------
Total current assets 66,366,032 63,156,365
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, net 45,451,114 41,950,446
------------- -------------
OTHER ASSETS:
Deferred income taxes 4,741,869 6,036,261
Goodwill, net 40,989,708 39,869,412
Other intangible assets, net 1,310,900 1,385,887
Deferred financing costs, net 3,736,937 3,526,767
Other assets 2,016,178 485,708
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Total other assets 52,795,592 51,304,035
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$ 164,612,738 $ 156,410,846
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of Credit $ 6,558,193 $ 2,883,000
Current portion of long-term debt 758,911 741,980
Accounts payable 9,102,185 9,622,610
Accrued expenses 12,511,600 14,492,282
------------- -------------
Total current liabilities 28,930,889 27,739,872
------------- -------------
LONG TERM DEBT 96,680,722 96,544,514
------------- -------------
ACCRUED DIVIDENDS ON PREFERRED STOCK 1,140,416 1,684,558
------------- -------------
DEFERRED RENT 2,754,197 3,300,385
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY:
Series A Cumulative convertible preferred stock, $.01 par value,
$280.4878 stated value, 2,000,000 shares authorized,
41,000 shares issued and outstanding (liquidation value
of $11,500,000) 11,500,000 11,500,000
Series B Junior participating preferred stock, $.01 par value
10,000 shares authorized in 1996, none outstanding -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
3,559,277 and 3,564,644 shares issued and outstanding 35,593 35,646
Additional paid-in capital 27,740,483 27,740,840
Accumulated deficit (4,169,562) (12,134,969)
------------- -------------
Total stockholders' equity 35,106,514 27,141,517
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$ 164,612,738 $ 156,410,846
============= =============
The accompanying notes are an integral part of these statements.
- 1 -
MOTHERS WORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------------- --------------------------------
1996 1997 1996 1997
------------ ------------ ----------- -------------
NET SALES $ 45,014,474 $ 55,755,776 $95,064,883 $ 116,989,104
COST OF GOODS SOLD 19,343,870 26,033,562 40,067,191 53,534,324
------------ ------------ ----------- -------------
Gross profit 25,670,604 29,722,214 54,997,692 63,454,780
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 22,754,386 31,857,766 45,989,483 61,046,665
RESTRUCTURING COSTS -- 5,617,094 -- 5,617,094
------------ ------------ ----------- -------------
Operating income (loss) 2,916,218 (7,752,646) 9,008,209 (3,208,979)
INTEREST EXPENSE, NET 3,065,284 3,240,093 6,142,324 6,572,231
------------ ------------ ----------- -------------
Income (loss) before income taxes (149,066) (10,992,739) 2,865,885 (9,781,210)
INCOME TAX PROVISION (BENEFIT) (71,211) (3,103,413) 1,364,161 (2,359,945)
------------ ------------ ----------- -------------
NET INCOME (LOSS) (77,855) (7,889,326) 1,501,724 (7,421,265)
PREFERRED DIVIDENDS 244,375 299,767 488,750 544,142
------------ ------------ ----------- -------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (322,230) $ (8,189,093) $ 1,012,974 $ (7,965,407)
============ ============ =========== =============
NET INCOME (LOSS) PER COMMON SHARE $ (0.10) $ (2.30) $ 0.30 $ (2.24)
============ ============ =========== =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,123,170 3,563,342 3,365,362 3,561,306
============ ============ =========== =============
The accompanying notes are an integral part of these statements.
- 2 -
MOTHERS WORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
March 31,
--------------------------------
1996 1997
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,501,724 $(7,421,265)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities --
Depreciation and amortization 4,870,034 6,567,128
Non-cash portion of restructuring charges -- 3,822,515
Imputed interest on debt 50,016 56,730
Deferred tax expense (benefit) 1,080,576 (2,359,945)
Amortization of deferred financing costs 207,653 212,021
Provision for deferred rent 298,967 546,188
Changes in assets and liabilities, net of effects
from purchase of businesses --
Decrease (increase) in --
Receivables 2,722,610 (759,313)
Inventories (13,912,071) 5,591,251
Prepaid expenses and other 218,777 (327,630)
Increase (decrease) in --
Accounts payable and accrued expense 3,468,231 1,964,617
Accrued store closings (2,208,177) --
Other liabilities 488,750 544,142
------------ -----------
Net cash provided by (used in) operating activities (1,212,910) 8,436,439
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (278,000) --
Purchases of property, plant and equipment (6,364,826) (4,114,254)
Increase in intangibles and other assets (165,722) (238,779)
------------ -----------
Net cash used in investing activities (6,808,548) (4,353,033)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in line of credit and cash overdrafts, net -- (3,682,845)
Proceeds from issuance of long-term debt 340,000 --
Repayments of long-term debt (109,838) (209,869)
Debt issuance costs (210,060) (1,851)
Proceeds from exercise of options 56,175 410
------------ -----------
Net cash provided by (used in) financing activities 76,277 (3,894,155)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,945,181) 189,251
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,130,480 1,262,435
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,185,299 $ 1,451,686
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 6,038,288 $ 6,377,276
============ ===========
Income taxes $ -- $ --
============ ===========
The accompanying notes are an integral part of these financial statements.
- 3 -
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements are presented in
accordance with the requirements for Form 10-Q and do not include all the
disclosures required by generally accepted accounting principles for complete
financial statements. Reference should be made to the Form 10-K as of and for
the year ended September 30, 1996 for Mothers Work, Inc. and subsidiaries (the
"Company") for additional disclosures including a summary of the Company's
accounting policies.
In the opinion of management, the consolidated financial statements contain all
adjustments, consisting of normal recurring accruals, necessary to present
fairly the consolidated financial position of the Company for the periods
presented. The interim operating results of the Company may not be indicative of
operating results for the full year. Certain reclassifications were made to the
prior years' financial statements to conform to the current year presentation.
2. PROPERTY, PLANT AND EQUIPMENT
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that full
recoverability is questionable. Management evaluates the recoverability of
goodwill and other long-lived assets and several factors are used in the
valuation including, but not limited to, management's future operating plans,
recent operating results and projected cash flows. The Company adopted SFAS No.
121 in the first quarter of fiscal 1997 and recorded a charge of approximately
$248,000, related to leasehold improvements and furniture and equipment at two
store locations. In the second quarter, as part of the restructuring discussed
in Note 6, the Company took an additional $704,000 charge for 14 additional
stores. These charges are included in selling, general and administrative
expenses. An impairment was recognized when future net cash flows for each store
are expected to be less than the carrying amount of the assets. The fair value
of each store asset was determined based on a forecast of expected cash flows.
3. STOCK OPTIONS AND WARRANTS
During the six months ended March 31, 1997, 130,000 options were granted to
certain officers (not the Chairman or the President) and employees for the
purchase of the Company's common stock at prices at least equal to the fair
market value on the date of the grant. In addition, pursuant to a cashless
exercise right, warrants were exercised to purchase 7,465 shares of common stock
at $2.72 per share through the surrender of 2,138 shares of common stock.
4
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
-- (continued) --
4. EARNINGS PER SHARE (EPS)
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", which the Company is required to adopt for both interim and annual
periods ending after December 15, 1997. SFAS No. 128 simplifies the EPS
calculation by replacing primary EPS with basic EPS. Basic EPS is computed by
dividing reported earnings available to common stockholders by weighted average
shares outstanding. Fully diluted EPS, now called diluted EPS, is still
required. Early application is prohibited, although footnote disclosure of
proforma EPS amounts computed is required. Under SFAS No. 128, proforma basic
EPS and diluted EPS for the six months ended March 31, 1996 would have been
$0.32 and $0.30, respectively, as compared to the $0.30 reported. All other EPS
amounts for the periods presented remain the same.
5. CONTINGENCIES
From time to time, the Company is named as a defendant in legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to currently pending actions cannot be accurately
predicted, in the opinion of the Company, any such liability will not have a
material adverse effect on the financial position or operating results of the
Company.
6. RESTRUCTURING COSTS AND OTHER UNUSUAL CHARGES
In April 1997 the Company announced a plan to restructure its core maternity
business by combining the Mimi Maternity and Maternite over-lapping product
lines and closing approximately 30 retail locations serviced by other Company
stores. Restructuring costs of $5.6 million were recorded in the second quarter
of fiscal 1997 and includes approximately $2.6 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 which have no future
value. As of March 31, 1997 one store had been closed and the remaining stores
will primarily be closed in the summer of 1997.
In addition to the charge discussed above, the Company also 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 as discussed in Note 2 for 14 additional facilities and approximately
$0.5 million in selling, general and administrative expense for other occupancy
related items.
5
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
-- (continued) --
7. SUBSIDIARY GUARANTORS
Pursuant to the terms of an indenture relating to the 12 5/8% Senior Unsecured
Exchange Notes due 2005, the direct subsidiaries of Mothers Work, Inc.,
consisting of Cave Springs, Inc., The Page Boy Company, Inc., Mothers Work
(R.E.), Inc.(d/b/a A Pea in the Pod, Inc.), and Motherhood Maternity Shops, Inc.
(collectively, the "Guarantors") have, jointly and severally, unconditionally
guaranteed the obligations of Mothers Work, Inc. with respect to the Notes. The
operations of Motherhood Maternity Shops, Inc. were merged into the operations
of Mothers Work, Inc. as of September 30, 1996. The only subsidiary of the
Company that is not a Guarantor is Motherhood International, Inc.
("International"). International, an indirect wholly-owned subsidiary of the
Company and inconsequential to the assets and operations of the Company and to
the Guarantors in that it has no assets or operations, was dissolved as of
November 28, 1996. There are no restrictions on the ability of any of the
Guarantors to transfer funds to Mothers Work, Inc. in the form of loans,
advances, or dividends, except as provided by applicable law.
Accordingly, set forth below is certain summarized financial information (within
the meaning of Section 1-02(bb) of Regulation S-X) for the Guarantors, as at and
for the six months ended March 31, 1997.
March 31, 1997
--------------
Current assets $ 3,812,584
Noncurrent assets 21,002,585
Current liabilities 3,066,790
Noncurrent liabilities 5,594,853
Six Months Ended
March 31, 1997
----------------
Net sales $23,818,443
Costs and expenses 18,300,470
Net income 3,641,861
This summarized financial information for the Guarantors has been prepared from
the books and records maintained by the Guarantors and the Company. The
summarized financial information may not necessarily be indicative of the
results of operations or financial position had the Guarantors operated as
independent entities. Certain intercompany sales included in the subsidiary
records are eliminated in consolidation. The subsidiary guarantors receive all
inventory and administrative support from and transfer all cash to Mothers Work,
Inc., who, in turn, pays all expenditures on behalf of the Guarantors. An amount
due to/due from parent will exist at any time as a result of this activity. The
summarized financial information includes the allocation of material amounts of
expenses such as corporate services, administration, and taxes on income. The
allocations are generally based on proportional amounts of sales or assets, and
taxes on income are allocated consistent with the asset and liability approach
used for consolidated financial statement purposes. Management believes these
allocation methods are reasonable.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The following tables set forth certain operating data as a percentage of sales
and as a percentage change for the periods indicated:
Percentage of Net Sales % Period to Period
--------------------------------------------- Increase (Decrease)
Three Six --------------------------------
Months Ended Months Ended Three Months Six Months
March 31, March 31, March 1997 March 1997
------------------- ------------------ to to
1996 1997 1996 1997 March 1996 March 1996
----- ----- ----- ----- ---------- ----------
Net sales 100.0 % 100.0 % 100.0% 100.0 % 23.9% 23.1%
Cost of goods sold 43.0 46.7 42.1 45.8 34.6 33.6
----- ----- ----- -----
Gross profit 57.0 53.3 57.9 54.2 15.8 15.4
Selling, general
and administrative
expenses 50.5 57.1 48.4 52.1 40.0 32.7
Restructuring costs - 10.1 - 4.8
----- ----- ----- -----
Operating income
(loss) 6.5 (13.9) 9.5 (2.7) NM NM
Interest expense, net 6.8 5.8 6.5 5.7 5.7 7.0
----- ----- ----- -----
Income (loss) before
income taxes (0.3) (19.7) 3.0 (8.4) NM NM
Income tax provision
(benefit) (0.1) (5.6) 1.4 (2.1) NM NM
----- ----- ----- -----
Net income (loss) (0.2)% (14.1)% 1.6% (6.3)% NM NM
===== ==== ===== =====
NM - Not Meaningful.
7
The following table sets forth certain information representing growth in the
number of leased departments and Company-owned stores for the periods indicated:
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1996 1997 1996 1997
--------- --------- --------- ---------
Beginning of period
Stores 415 455 428 442
Leased maternity departments 23 41 23 26
--- --- --- ---
Total 438 496 451 468
Opened:
Stores 13 13 19 27
Leased maternity departments 1 55 1 70
Closed:
Stores (21) (3) (40) (4)
Leased maternity departments - (1) - (1)
--- --- --- ---
End of period
Stores 407 465 407 465
Leased maternity departments 24 95 24 95
--- --- --- ---
Total 431 560 431 560
=== === === ===
Three Months Ended March 31, 1997 and 1996
Net Sales
Net sales in the second quarter of fiscal 1997 increased by $10.7 million or
23.9%, as compared to the second quarter of fiscal 1996. This increase was
primarily due to sales of $6.9 million generated by Episode(R) America stores,
acquired on June 1, 1996, $0.8 million generated by a quarterly comparable store
sales increase of 2.0% in its core maternity clothing business (based on 384
stores), and a $3.0 million net increase due to other store and leased
department opening and closing activity. The Company had 560 stores and leased
departments (224 Motherhood Maternity(R) stores, 74 Maternite(R) stores, 50 Mimi
Maternity(R) stores, 45 Maternity Works(R) outlet stores, 39 A Pea in the Pod(R)
stores, 95 leased maternity departments and 33 Episode upscale "bridge" women's
apparel stores) at March 31, 1997 compared to 431 (199 Motherhood Maternity
stores, 81 Maternite stores, 52 Mimi Maternity stores, 39 Maternity Works outlet
stores, 36 A Pea in the Pod stores and 24 leased maternity departments) at March
31, 1996.
Gross Profit
Gross profit in the second quarter of fiscal 1997 increased $4.1 million or
15.8%, as compared to the second quarter of fiscal 1996. This increase was
primarily generated by the increase in sales noted above. Gross profit as a
percentage of net sales decreased to 53.3% in the second quarter of fiscal 1997
as compared to 57.0% in the comparable period of the prior year. This decrease
was partially due to an $0.8 million charge to write-down inventory related to
the Company's restructuring and consolidation of its upscale maternity business
(see Restructuring Costs below) and an increase in factory overhead. In
addition, the continued growth of the Motherhood Maternity sales as a percentage
of overall maternity sales has contributed to the decrease in gross profit as a
percentage of sales because Motherhood operates with a lower gross margin
percentage than the upscale maternity divisions. Further, the Episode sales have
generated overall lower margins than the maternity sales, due to the high degree
of competition in upscale bridge women's apparel. The Company anticipates that
its gross margins could decrease further as Episode and Motherhood become more
significant to the Company's operations.
8
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased by $9.1 million or 40.0%
in the second quarter of fiscal 1997 as compared to the second quarter of fiscal
1996 and, as a percentage of net sales, increased from 50.5% to 57.1%. The
increase as a percentage of sales was primarily due to higher rents and wages
necessary to operate the Episode stores, when compared to maternity stores and
$0.3 million of royalty expense to license the Episode trademark. Since the
acquisition of Episode in June 1996, the Company has been paying a royalty of 5%
of Episode sales under its Episode trademark license which royalty will end when
the cumulative royalty payment reaches $4.5 million. As of March 31, 1997 $1.1
million in cumulative royalty charges have been recorded. The dollar increase
during the second quarter of fiscal 1997 as compared to the second quarter of
fiscal 1996 was primarily due to increases in store rents, wages and benefits
and operating expenses at the store level, which accounted for $2.7 million,
$2.3 million and $1.0 million of the increase, respectively. Management
anticipates the restructuring of the core maternity business will reduce
selling, general and administrative expenses for the current maternity store
base. The increases in rents, wages and benefits and operating expenses at the
store level were due to the increase in the number of stores opened and acquired
and additional employees required to operate these stores. In addition, royalty
expense, higher advertising, marketing, depreciation and amortization, and
shipping costs contributed to the dollar increase in selling, general and
administrative expenses.
Further, in the second quarter of fiscal 1997 the Company recorded a charge of
approximately $704,000, under Statement of Financial Accounting Standards No.
121, related to leasehold improvements and furniture and equipment at 14 store
locations.
Restructuring Costs
In April 1997 the Company reported that it will combine the Mimi Maternity and
Maternite over-lapping product lines and close approximately 30 retail locations
serviced by other Company stores. Restructuring costs of $5.6 million, related
to the restructuring of the Company's core maternity business, were charged in
the second quarter of fiscal 1997. The restructuring costs consist primarily of
$2.6 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 which have no future value.
Operating Income (Loss)
The operating loss in the second quarter of fiscal 1997 was $7.8 million
compared to operating income of $2.9 million in the second quarter of fiscal
1996. The fiscal 1997 loss was primarily due to a pre-tax charge of $7.6 million
related to unusual charges for restructuring the Company's core maternity
business and the operating losses incurred at the Episode division. Operating
income for the second quarter of fiscal 1997 for the core maternity business and
exclusive of restructuring costs and other unusual charges was comparable to the
same period in the prior year, however as a percentage of sales it has declined
primarily as a result of the growth of the lower margin Motherhood revenues. The
$7.6 million restructuring charge consists of a $5.6 million charge to
restructure and consolidate upscale maternity lines, a $0.8 million charge to
write-down inventory related to this consolidation and $1.2 million to
write-down long-lived assets at some of its continuing retail locations and for
certain other costs. The Episode stores had negative operating income in the
second quarter of fiscal 1997 which added to the overall decline in the
Company's operating income. In general, the Episode stores have higher selling,
general and administrative expenses, than the maternity stores. The Company has
introduced new merchandise for the division, implemented a re-training program
and a new incentive program for sales associates, in order to increase Episode
revenues to support the higher selling, general and administrative expenses of
this division. In addition, the Company is focused on reducing certain selling,
general and administrative costs associated with Episode. However, there can be
no assurances that the Episode divisions actual performance will improve as a
result of these
9
steps. In addition, due to factors affecting gross profit discussed above, the
gross margin percentage declined at a faster rate than the decline in the
selling, general and administrative expense percentage related to the core
maternity business further effecting operating income.
Interest Expense, Net
Net interest expense increased by $0.2 million in the second quarter of fiscal
1997 compared with the first quarter of fiscal 1996, and as a percentage of
sales, decreased from 6.8% to 5.8%. The dollar increase was primarily due to
short-term borrowings under the line of credit agreement and a reduction of
interest income.
Income Taxes
The effective income tax rate was 28.2% in the second quarter of fiscal 1997 as
compared to 47.8% in the second quarter of fiscal 1996. The change in the
effective income tax rate was primarily due to the impact of non-deductible
amortization of goodwill relative to income before income taxes and the impact
of changing the estimated effective tax rate for fiscal 1997. Income before
income taxes was impacted by the restructuring costs discussed above.
Six Months Ended March 31, 1997 and 1996
Net Sales
Net sales in the first six months of fiscal 1997 increased by $21.9 million or
23.1%, as compared to the first six months of fiscal 1996. This increase was
primarily due to sales of $13.9 million generated by Episode(R) America stores,
acquired on June 1, 1996, $2.7 million generated by a year-to-date comparable
store sales increase of 3.2% in its core maternity clothing business (based on
379 stores), and a $5.3 million net increase due to other store and leased
department opening and closing activity.
Gross Profit
Gross profit in the first six months of fiscal 1997 increased $8.5 million or
15.4%, as compared to the first six months of fiscal 1996. This increase was
primarily generated by the increase in sales noted above. Gross profit as a
percentage of net sales decreased to 54.2% in the second quarter of fiscal 1997
as compared to 57.9% in the comparable period of the prior year. This decrease
was primarily due to the factors effecting gross profit during the second
quarter of fiscal 1997 discussed above.
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased by $15.1 million or 32.7%
in the first six months of fiscal 1997 as compared to the first six months of
fiscal 1996 and, as a percentage of net sales, increased from 48.4% to 52.1%.
The increase as a percentage of sales was primarily due to higher rents and
wages necessary to operate the Episode stores, when compared to the maternity
stores and $0.7 million of royalty expense to license the Episode trademark. The
dollar increase during the first six months of fiscal 1997 as compared to the
first six months of fiscal 1996 was primarily due to increases in store rents,
wages and benefits and operating expenses at the store level, which accounted
for $4.7 million, $3.7 million and $2.0 million of the increase, respectively.
The increases in rents, wages and benefits and operating expenses at the store
level were due to the increase in the number of stores opened and acquired and
additional employees required to operate these stores. In addition, royalty
expense, higher advertising, marketing, depreciation and amortization, and
shipping costs contributed to the increase in selling, general and
administrative expenses.
10
Further, during the first six months of fiscal 1997 the Company recorded a
charge of approximately $952,000, under Statement of Financial Accounting
Standards No. 121, related to leasehold improvements and furniture and equipment
at 16 store locations.
Restructuring Costs
In April 1997 the Company reported that it will combine the Mimi Maternity and
Maternite over-lapping product lines and close approximately 30 retail locations
serviced by other Company stores. Restructuring costs of $5.6 million, related
to the restructuring of the Company's core maternity business, were charged in
the second quarter of fiscal 1997. The restructuring costs consist primarily of
$2.6 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 which have no future value.
Operating Income (Loss)
The operating loss in the first six months of fiscal 1997 was $3.2 million
compared to operating income of $9.0 million for the comparable period in fiscal
1996. The first six months of fiscal 1997 loss was primarily due to a pre-tax
charge of $7.6 million related to restructuring costs and other unusual charges
for restructuring the Company's core maternity business and the operating losses
incurred at the Episode division. Operating income for the first six months of
fiscal 1997 for the core maternity business and exclusive of restructuring and
other unusual charges was comparable to the same period in the prior year;
however as a percentage of sales, it has declined. The Episode stores had
negative operating income in the first six months of fiscal 1997 which added to
the overall decline in the Company's operating income. The Company believes it
has taken certain initiatives discussed above to support the higher selling
general and administrative expenses of the Episode division. However, there can
be no assurances that the Company's actual performance will improve as a result
of these steps. In addition, due to factors affecting gross profit discussed
above, the gross margin percentage declined at a faster rate than the decline in
the selling, general and administrative expense percentage related to the core
maternity business.
Interest Expense, Net
Net interest expense increased by $0.4 million in the first six months of fiscal
1997 compared with the comparable period in fiscal 1996, and as a percentage of
sales, decreased from 6.5% to 5.7%. The dollar increase was primarily due to
short-term borrowings under the line of credit agreement and a reduction of
interest income.
Income Taxes
The effective income tax rate was 24.1% in the first six months of fiscal 1997
as compared to 47.6% in the first six months of fiscal 1996. The change in the
effective income tax rate was primarily due to the impact of non-deductible
amortization of goodwill relative to income before income taxes. Income before
income taxes was impacted by the restructuring costs discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs during the six months ended March 31, 1997 have
been for capital expenditures at the store level. In addition, the Company used
excess cash flow to reduce its line of credit balance and net cash overdrafts by
approximately $3.7 million. The Company's cash sources for the first six months
of fiscal 1997 have primarily been from operations. At March 31, 1997 the
Company had available cash and cash equivalents of $1.5 million, compared with
$1.3 million at September 30, 1996.
Net cash provided by operating activities increased from $1.2 million used in
operating activities for the six months ended March 31, 1996 to $8.4 million
11
provided by operating activities in the same period for fiscal 1997. The
increase in cash provided by operating activities of $9.6 million was primarily
due to a decrease in inventories, partially offset by a decrease in net income
and adjustments to reconcile net income (loss) to net cash used in operating
activities, and a decrease in cash provided by accounts receivable. The decrease
in cash used for inventories is a result of company-wide efforts to increase
inventory turn-over ratio for fiscal 1997. In addition, in the prior year first
six months inventories increased as the Company started to supply product to the
newly acquired Motherhood division.
Net cash used in investing activities decreased from $6.8 million in the six
months ended March 31, 1996 to $4.4 million in the six months ended March 31,
1997. The cash used in investing activities for the first six months of fiscal
1997 included $3.2 million used for capital expenditures for new store
facilities and improvements to existing stores, $0.9 million for other corporate
capital expenditures and $0.3 million for intangible and other assets. This
compares with $2.1 million used for capital expenditures for new store
facilities and improvements to existing stores, $4.2 million used for corporate
capital expenditures, including capital improvements to the Company's main
facility and $0.5 million used for intangible and other assets during the six
months ended March 31, 1996.
Net cash used in financing activities increased $4.0 million, from $0.1 million
provided by financing activities in the six months ended March 31, 1997 to $3.9
million used in financing activities for the six months ended March 31, 1997.
The $3.9 million used in financing activities resulted primarily from $3.7
million in repayment of the line of credit and $0.2 million in repayment of
long-term debt. This compares with $0.1 million provided by financing activities
for the first six months of fiscal 1996, primarily from $0.3 million of proceeds
from the issuance of long-term debt and $0.1 million of proceeds from the
exercise of stock options, partially offset by $0.1 million in repayments of
long-term debt and $0.2 million in debt issuance costs.
In April 1997 the Company reported that it will restructure its core maternity
business and consequently, combine the Mimi Maternity and Maternite over-lapping
product lines and close approximately 30 retail locations serviced by other
Company stores, the cash portion of which is approximately $1.3 million and will
be paid out through the second quarter of fiscal 1998.
In connection with the restructuring, the Company obtained a one year extension
and a revision to certain financial covenants pertaining to its $20 million
working capital revolving line of credit facility ("Working Capital Facility").
The Working Capital Facility has been extended through July 31, 1999 and
provides for a revolving credit and letter of credit facility and for an
additional $4.0 million letter of credit to collateralize an Industrial Revenue
Bond. Financial covenant requirements were changed and a monthly rolling
twelve-month operating cash flow covenant was added. In addition, the interest
coverage ratio was replaced with a fixed charge coverage ratio. The Company had
$2.6 million in borrowings and $5.5 million in additional letters of credit
issued under the Working Capital Facility at March 31, 1997.
In its maternity operations, the Company intends to focus on growing the leased
department business. Secondarily, the Company intends to grow the Motherhood
business, subject to capital availability. These businesses represent the
Company's biggest opportunity for growth, subject to capital and marketplace
availability. In comparison to the maternity business as a whole, the Company
does not anticipate the leased departments to have materially different gross
profit and selling, general and administrative expenses as a percentage of
sales. However, gross margin from Motherhood is typically lower than the
remainder of the maternity business and growth in the Motherhood business could
result in lower gross margin.
The near-term strategy for the Episode division is to broaden the product line
through the growth of the Daniel & Rebecca(R) product and to add several stores
in major metropolitan areas, subject to capital and marketplace availability.
12
The Episode division has operated at a loss since the acquisition on June 1,
1996, and the losses for fiscal 1997 exclusive of restructuring and other
unusual charges are primarily attributable to Episode operations. Although sales
levels improved in March and April, Episode revenues remain below management's
initial estimates and are currently at levels which would not support profitable
operations of the Episode division. Based on the existing operations at Episode
the Company needs to increase revenues substantially in order to be profitable
at that division. The Company's management has limited experience in the bridge
women's apparel business and the integration of Episode into the rest of the
Company's operations has required substantial management time and other
resources. In addition, the operations of a bridge women's fashion business are
subject to numerous risks, unanticipated operating problems, and greater
competition and fashion risk than the Company's core maternity business. Based
on the foregoing factors, there can be no assurance that the Company's Episode
operations will become profitable. Further, the Episode acquisition could result
in the incurrence of additional indebtedness, which in turn could result in an
increase in the degree of financial leverage of the Company and a decrease in
the Company's financial flexibility.
The Company believes that its current cash and working capital positions,
available borrowing capacity and net cash expected to be generated from
operations will be sufficient to fund the Company's anticipated fiscal 1997
capital expenditures, working capital requirements and the $5.8 million
semi-annual interest payment on the Notes due in August 1997. There are
currently no restrictions on the ability of the Guarantors to transfer funds to
the Company in the form of cash dividends, loans or advances other than
restrictions imposed by applicable law.
SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
Item 2, Management's Discussion and Analysis of Financial Condition and Results
of Operations, of this Report or made from time to time by management of the
Company involve risks and uncertainties, and are subject to change based on
various important factors. The following factors, among others, in some cases
have affected and in the future could affect the Company's financial performance
and actual results and could cause actual results for fiscal 1997 and beyond to
differ materially from those expressed or implied in any such forward-looking
statements: changes in consumer spending patterns, raw material price increases,
consumer preferences and overall economic conditions, the impact of competition
and pricing, changes in weather patterns, availability of suitable store
locations at appropriate terms, continued availability of capital and financing,
ability to develop and source merchandise, consumer acceptance of merchandise
and ability to hire, train and provide incentive to associates, particularly at
the Episode division, ability of Company to capture sales from store closings at
proximate locations, ability to negotiate satisfactory lease buy-outs at store
closing locations, changes in fertility and birth rates, global stability,
currency and exchange risks and changes in existing or potential duties, tariffs
or quotas, and other factors affecting the Company's business beyond the
Company's control.
13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) 10.1 Sixth Amendment to Credit Agreement dated April 16, 1997
between the Company, its subsidiaries and CoreStates Bank.
10.9 Amendment No. 1 to Stock Subscription Warrant of the
Company (No. Penn-Janney: 1992-1) issued to Penn Janney
Fund, Inc. dated January 14, 1997.
11 Statement re: Computation of per share earnings.
27 Financial Data Schedule (schedule submitted in electronic
format only)
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated March 17, 1997,
relating to an amendment to the Company's Rights Agreement. The amendment was
reported under Item 5 of Form 8-K.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTHERS WORK, INC.
Date: May 14, 1997 By: /s/ Dan W. Matthias
-------------------------------
Dan W. Matthias
Chief Executive Officer
and
Chairman of the Board
Date: May 14, 1997 By: /s/ Thomas Frank
--------------------------------
Thomas Frank
Chief Financial Officer
and
Vice President - Finance
15
EXHIBIT INDEX
Exhibit
No. Description Page No.
------- ----------- --------
10.1 Sixth Amendment to Credit Agreement dated April 16,
1997 between the Company, its subsidiaries and
CoreStates Bank 1
10.9 Amendment No. 1 to Stock Subscription Warrant of the
Company (No. Penn-Janney: 1992-1) issued to Penn Janney
Fund, Inc. dated January 14, 1997. 9
11 Statement re: Computation of per share earnings 11
27 Financial Data Schedule (schedule submitted in
electronic format only) 12
16