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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 period ended March 31, 1998
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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 (I.R.S. Employer Identification No.)
of 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
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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 - 3,571,213 shares
outstanding as of April 17, 1998
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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 4. Submission of Matters to a Vote for Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Exhibit Index 17
MOTHERS WORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
ASSETS 1997 1998
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,665,760 $ 614,081
Receivables
Trade 2,781,803 4,279,691
Other 164,334 227,771
Inventories 63,812,590 66,723,107
Deferred income taxes 4,050,980 4,284,921
Prepaid expenses and other 2,695,218 2,295,797
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Total current assets 75,170,685 78,425,368
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PROPERTY, PLANT AND EQUIPMENT, net 45,373,439 46,279,769
------------- -------------
OTHER ASSETS:
Deferred income taxes 7,235,600 8,272,143
Goodwill, net 38,752,184 37,634,152
Other intangible assets, net 1,351,221 1,254,914
Deferred financing costs, net 3,339,759 3,145,145
Other assets 494,632 801,322
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Total other assets 51,173,396 51,107,676
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$ 171,717,520 $ 175,812,813
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 11,088,000 $ 17,649,957
Current portion of long-term debt 648,231 719,590
Accounts payable 17,264,704 15,000,732
Accrued expenses 14,087,057 14,294,012
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Total current liabilities 43,087,992 47,664,291
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LONG-TERM DEBT 96,375,620 96,600,164
------------- -------------
ACCRUED DIVIDENDS ON PREFERRED STOCK 2,228,700 2,812,808
------------- -------------
DEFERRED RENT 3,645,651 4,183,377
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
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, none outstanding - -
Common stock, $.01 par value, 10,000,000 shares authorized,
3,564,644 and 3,571,213 shares issued and outstanding 35,646 35,712
Additional paid-in capital 27,740,840 27,768,298
Accumulated deficit (12,896,929) (14,751,837)
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Total stockholders' equity 26,379,557 24,552,173
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$ 171,717,520 $ 175,812,813
============= =============
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,
--------------------------------- ----------------------------------
1997 1998 1997 1998
------------ ------------ ------------- -------------
NET SALES $ 55,755,776 $ 67,760,866 $ 116,989,104 $ 145,157,742
COST OF GOODS SOLD 26,033,562 34,013,978 53,534,324 71,029,467
------------ ------------ ------------- -------------
Gross profit 29,722,214 33,746,888 63,454,780 74,128,275
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 31,857,766 34,517,982 61,046,665 69,567,854
RESTRUCTURING COSTS 5,617,094 - 5,617,094 -
------------ ------------ ------------- -------------
Operating income (loss) (7,752,646) (771,094) (3,208,979) 4,560,421
INTEREST EXPENSE, NET 3,240,093 3,560,518 6,572,231 7,101,705
------------ ------------ ------------- -------------
Loss before income taxes (10,992,739) (4,331,612) (9,781,210) (2,541,284)
INCOME TAX BENEFIT (3,103,413) (2,156,855) (2,359,945) (1,270,484)
------------ ------------ ------------- -------------
NET LOSS (7,889,326) (2,174,757) (7,421,265) (1,270,800)
PREFERRED DIVIDENDS 299,767 292,054 544,142 584,108
------------ ------------ ------------- -------------
NET LOSS AVAILABLE TO
COMMON STOCKHOLDERS $ (8,189,093) $ (2,466,811) $ (7,965,407) $ (1,854,908)
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
BASIC AND DILUTED EPS $ (2.30) $ (0.69) $ (2.24) $ (0.52)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
BASIC AND DILUTED EPS 3,563,342 3,570,662 3,561,306 3,567,653
============ ============ ============ ============
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,
---------------------------------
1997 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,421,265) $(1,270,800)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities-
Depreciation and amortization 6,567,128 6,045,921
Non-cash portion of restructuring charges 3,822,515 -
Imputed interest on debt 56,730 64,344
Deferred tax benefit (2,359,945) (1,270,484)
Amortization of deferred financing costs 212,021 212,573
Provision for deferred rent 546,188 537,726
Changes in assets and liabilities, net of effects
from purchase of businesses-
Decrease (increase) in--
Receivables (759,313) (1,561,325)
Inventories 5,591,251 (2,910,517)
Prepaid expenses and other (327,630) 92,731
Increase in--
Accounts payable and accrued expense 1,964,617 1,726,911
Other liabilities 544,142 584,108
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Net cash provided by operating activities 8,436,439 2,251,188
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,114,254) (5,182,983)
Increase in intangibles and other assets (238,779) (77,252)
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Net cash used in investing activities (4,353,033) (5,260,235)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in line of credit and cash overdrafts, net (3,682,845) 2,193,921
Repayments of long-term debt (209,869) (246,118)
Debt issuance costs (1,851) (17,959)
Proceeds from exercise of options 410 27,524
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Net cash (used in) provided by financing activities (3,894,155) 1,957,368
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 189,251 (1,051,679)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,262,435 1,665,760
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,451,686 $ 614,081
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest $ 6,377,276 $ 6,871,280
=========== ===========
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, 1998
(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. In April 1998, the Company merged two of its subsidiaries,
Mothers Work (R.E.), Inc. and The Page Boy Company, Inc., into Mothers Work,
Inc. Reference should be made to the Form 10-K as of and for the year ended
September 30, 1997 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.
Capital lease obligations of $477,677 were incurred on equipment leases entered
into during the first six months of fiscal 1998.
2. STOCK OPTIONS AND WARRANTS
During the six months ended March 31, 1998, 171,300 options were granted to
certain officers, directors 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
grant.
3. EARNINGS PER SHARE (EPS)
In the first quarter of fiscal 1998 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share", which simplifies the
EPS calculation by replacing primary EPS with basic EPS and fully diluted EPS
with diluted EPS. Due to the Company's net losses, there is no difference
between Basic EPS and Diluted EPS in the quarter and six months ended March 31,
1997 and 1998.
4
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
-- (continued) --
4. LINE OF CREDIT
In April 1998, the Company replaced its existing $30 million Working Capital
Facility with a new Working Capital Facility that expires in April 2001. The new
Working Capital Facility increases the Company's borrowing capacity to $44
million, subject to limitations based upon eligible accounts receivable and
inventory, and reduces interest by 125 basis points and 75 basis points for Base
Rate borrowings and Adjusted LIBOR Rate borrowings, respectively. In addition to
the $44 million available for borrowings and letters of credit, the Company also
has an additional $4 million letter of credit to collateralize an Industrial
Revenue Bond. Further, there are no financial covenant requirements unless the
Aggregate Adjusted Availability, as defined, under the Working Capital Facility
is less than $10 million. If Aggregate Adjusted Availability is less than $10
million, then the Company must achieve a Minimum Cash Flow, as defined in the
agreement, of not less than zero. Consistent with the previous Working Capital
Facility, the new Working Capital Facility is secured by substantially all of
the Company's assets.
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. 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., and Mothers Work
(R.E.), Inc.(d/b/a A Pea in the Pod, Inc.)(collectively, the "Guarantors") have,
jointly and severally, unconditionally guaranteed the obligations of Mothers
Work, Inc. with respect to these Notes. 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:
September 30, 1997 March 31, 1998
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Current assets $ 4,127,213 $ 3,700,264
Noncurrent assets 80,125,458 81,342,659
Current liabilities 3,064,719 1,683,435
Noncurrent liabilities 52,539,740 48,567,703
Six Months Ended Six Months Ended
March 31, 1997 March 31, 1998
-------------- --------------
Net sales $ 23,818,443 $ 29,402,303
Costs and expenses 18,300,470 20,093,860
Net income 3,641,861 6,143,572
5
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
-- (continued) --
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 Guarantors receive all inventories
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.
7. SUBSEQUENT EVENT
On May 10, 1998 the Company announced that it will restructure its Episode
non-maternity bridge women's apparel business in an effort to eliminate the
losses from that business. As an initial step in that restructuring, during the
third quarter of fiscal 1998, the Company plans to close or convert to maternity
stores, approximately 21 Episode store locations. The majority will be outlet
store locations. Restructuring costs of $5.4 million will be recorded in the
third quarter of fiscal 1998 and include approximately $2.0 million for the
write-off of furniture, fixtures and leasehold improvements, $1.8 million for
lease termination and other costs and $1.6 million for the write-down of certain
finished goods inventory. These restructuring costs include an anticipated cash
payment of approximately $1.8 million that will occur through the fourth quarter
of fiscal 1998.
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:
% Period to Period
Percentage of Net Sales Increase (Decrease)
------------------------------------------- -------------------------------
Three Six
Months Ended Months Ended Three Months Six Months
March 31, March 31, March 1998 March 1998
------------------- ----------------- to to
1997 1998 1997 1998 March 1997 March 1997
------ ------ ----- ----- ------------- ------------
Net sales 100.0% 100.0% 100.0% 100.0% 21.5 % 24.1%
Cost of goods sold 46.7 50.2 45.8 48.9 30.7 32.7
----- ----- ----- -----
Gross profit 53.3 49.8 54.2 51.1 13.5 16.8
Selling, general
and administrative Expenses 57.1 50.9 52.1 48.0 8.4 14.0
Restructuring costs 10.1 - 4.8 -
----- ----- ----- -----
Operating income (loss) (13.9) (1.1) (2.7) 3.1 NM NM
Interest expense, net 5.8 5.3 5.7 4.9 9.9 8.1
----- ----- ----- -----
Income (loss) before income taxes (19.7) (6.4) (8.4) (1.8) NM NM
Income tax provision (benefit) (5.6) (3.2) (2.1) (0.9) NM NM
----- ----- ----- -----
Net income (loss) (14.1)% (3.2)% (6.3)% (0.9)% 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,
1997 1998 1997 1998
--------- --------- --------- ---------
Beginning of period
Stores 455 496 442 473
Leased maternity departments 41 125 26 114
--- --- ---- -----
Total 496 621 468 587
Opened:
Stores 13 10 27 33
Leased maternity departments 55 19 70 31
Closed:
Stores (3) (7) (4) (7)
Leased maternity departments (1) (14) (1) (15)
--- ---- ---- ---
End of period
Stores 465 499 465 499
Leased maternity departments 95 130 95 130
=== ==== ==== ===
Total 560 629 560 629
=== ==== ==== ===
Three Months Ended March 31, 1998 and 1997
Net Sales
Net sales in the second quarter of fiscal 1998 increased by $12.0 million or
21.5%, as compared to the second quarter of fiscal 1997. This increase consists
of $4.6 million generated by a quarterly comparable store sales increases of
10.8% in the Company's core maternity clothing business (based on 394 stores),
$1.3 million generated by an 18.8% quarterly comparable stores sales increase in
the Company's non-maternity Episode store chains (based on 32 stores), a $3.3
million net increase due to other maternity store opening and closing activity,
and a $2.8 million increase due to other Episode store opening activity. The
Company believes that a portion of the comparable store sales increase in the
maternity business is due to the consolidation announced in April 1997, and the
Company does not expect that benefit to continue past the one-year anniversary.
The Company had 629 locations, including 578 maternity clothing locations and 51
Episode(R) upscale "bridge" women's apparel stores at March 31, 1998 compared to
560 locations, including 527 maternity clothing locations and 33 Episode(R)
upscale "bridge" women's apparel stores at March 31, 1997.
Gross Profit
Gross profit in the second quarter of fiscal 1998 increased $4.0 million or
13.5%, as compared to the second quarter of fiscal 1997. This increase was
primarily generated by the increase in sales noted above. Gross profit as a
percentage of net sales decreased to 49.8% in the second quarter of fiscal 1998
as compared to 53.3% in the comparable period of the prior year. The Company's
core maternity business gross profit as a percent of sales decreased slightly in
second quarter of fiscal 1998 as compared to the second quarter of fiscal 1997.
In addition, the Company's Episode division gross profit as a percent of sales
decreased approximately 27% in the second quarter of fiscal 1998 as compared to
the second quarter of fiscal 1997. This decrease is due to the significant
sell-off of fall merchandise in the second quarter of fiscal 1998. Also
8
contributing to the overall decreased gross profit as a percent of sales is the
increase of Motherhood and Episode sales as a percentage of overall sales. The
continued growth of Motherhood sales as a percentage of overall sales has
contributed to the decrease in gross profit percentage because Motherhood
operates with a lower gross profit percentage as compared to the high-end
maternity divisions. In addition, Episode sales have generated lower overall
margins than the maternity sales due to the high degree of competition in
high-end bridge women's apparel. The Company anticipates that its gross profit
as a percentage of sales may decrease further as the aggregate sales from the
Motherhood and Episode divisions increase as a percentage of gross sales.
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased $2.7 million or 8.4% in
the second quarter of fiscal 1998 as compared to the second quarter of fiscal
1997 and, as a percentage of net sales, decreased to 50.9% from 57.1% in the
second quarter of fiscal 1997. The decrease as a percentage of sales was
primarily due to the increase in net sales. The dollar increase in the second
quarter of fiscal 1998, as compared to the second quarter of fiscal 1997, was
primarily due to increases in store wages and benefits, rents and operating
expenses at the store level, which accounted for $1.9 million, $0.9 million and
$0.8 million of the increase, respectively. The increase in wages and benefits
and rents at the store level resulted from the increased number of stores opened
and the related staffing costs. In addition, higher corporate wages and royalty
expense contributed to the increase in selling, general and administrative
expenses in the second quarter of fiscal 1998 as compared to the second quarter
of fiscal 1997. These expenses increased due to the continued expansion of
operations as a result of new store rollouts. The aforementioned increase was
partially offset by a decrease in advertising expense and depreciation and
amortization of approximately $1.0 million and $0.5 million, respectively.
Advertising expense decreased due to the elimination of certain programs and
depreciation and amortization decreased during the second quarter of fiscal 1998
because during the second quarter of fiscal 1997 the Company recorded a charge
of approximately $0.7 million, under Statement of Financial Accounting Standards
No. 121, related to leasehold improvements and furniture and equipment at 14
store locations.
Restructuring Costs
Restructuring costs of $5.6 million, related to the restructuring of the
Company's core maternity business were recorded in the second quarter of fiscal
1997. The restructuring costs consisted 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 Loss
The operating loss in the second quarter of fiscal 1998 was $0.8 million
compared to an operating loss of $7.8 million in the second quarter of fiscal
1997. Operating income in the second quarter of fiscal 1998, exclusive of
Episode, was $3.9 million compared to operating income in the second quarter of
fiscal 1997 of $2.7 million, exclusive of Episode, restructuring costs and other
one time charges. Operating losses at the Episode division increased in the
second quarter of fiscal 1998 compared to the second quarter of fiscal 1997. Due
to the extremely competitive environment of upscale bridge women's clothing, and
the fact that the selling, general and administrative costs of the Episode
division as a percentage of sales are greater than the maternity division, the
Company must substantially increase revenue at Episode in order to improve
operating results. Since the Episode acquisition in June 1996, the Company has
taken certain initiatives that have resulted in increased revenue at Episode,
however these increases have not been substantial enough to improve operating
results. As a consequence of the Episode losses, the Company announced in May
that it will restructure its Episode non-maternity bridge women's apparel
business in an effort to eliminate the losses from that business. As an initial
step in that restructuring, during the third quarter of fiscal 1998, the Company
plans to close or convert to maternity stores, approximately 21 Episode store
locations. The majority will be outlet store locations. Restructuring costs of
$5.4 million will be recorded in the third quarter of fiscal 1998 and include
9
approximately $2.0 million for the write-off of furniture, fixtures and
leasehold improvements, $1.8 million for lease termination and other costs and
$1.6 million for the write-down of certain finished goods inventory. These
restructuring costs include an anticipated cash payment of approximately $1.8
million that will occur through the fourth quarter of fiscal 1998. Although the
Company continues to take steps to improve the Episode business, there can be no
assurances that these steps will result in the increased revenue needed to
support the Episode operations.
Interest Expense, Net
Net interest expense increased by $0.3 million or 9.9%, in the second quarter of
fiscal 1998 compared with the second quarter of fiscal 1997, and as a percentage
of sales, decreased to 5.3% from 5.8% in the second quarter of fiscal 1997. The
dollar increase was primarily due to short-term borrowings under the line of
credit agreement.
Income Taxes
The effective income tax rate was 49.8% in the second quarter of fiscal 1998 as
compared to 28.2% in the second quarter of fiscal 1997. The change in the
effective income tax rate was primarily due to the relationship of
non-deductible goodwill amortization to income before income taxes.
Six Months Ended March 31, 1998 and 1997
Net Sales
Net sales in the first six months of fiscal 1998 increased by $28.2 million or
24.1%, as compared to the first six months of fiscal 1997. This increase was
primarily due to sales of $10.7 million generated by Episode(R) America stores,
acquired on June 1, 1996, $9.9 million generated by a year-to-date comparable
store sales increase of 11.3% in its core maternity clothing business (based on
376 stores), and a $7.6 million net increase due to other maternity store and
leased department opening and closing activity.
Gross Profit
Gross profit in the first six months of fiscal 1998 increased $10.7 million or
16.8%, as compared to the first six months of fiscal 1997. This increase was
primarily generated by the increase in sales noted above. Gross profit as a
percentage of net sales decreased to 51.1% in the first six months of fiscal
1998 as compared to 54.2% in the comparable period of the prior year. The
Company's core maternity business gross profit as a percent of sales decreased
slightly in first six months of fiscal 1998 as compared to the comparable period
in fiscal 1997. In addition, the Company's Episode division gross profit as a
percent of sales decreased approximately 10% in the first six months of fiscal
1998 as compared to the first six months of fiscal 1997. This decrease is due to
the significant sell-off of fall merchandise in the second quarter of fiscal
1998. Also contributing to the overall decreased gross profit as a percent of
sales is the increase of Motherhood and Episode sales as a percentage of overall
sales. The continued growth of Motherhood sales as a percentage of overall sales
has contributed to the decrease in gross profit percentage because Motherhood
operates with a lower gross profit percentage as compared to the high-end
maternity divisions. In addition, Episode sales have generated lower overall
margins than the maternity sales due to the high degree of competition in
high-end bridge women's apparel. The Company anticipates that its gross profit
as a percentage of sales may decrease further as Motherhood becomes a more
significant part of overall operations.
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased by $8.5 million or 14.0%
in the first six months of fiscal 1998 as compared to the first six months of
fiscal 1997 and, as a percentage of net sales, decreased to 48.0% from 52.1% in
the first six months of fiscal 1997. The decrease as a percentage of sales was
primarily due to the increase in net sales. The dollar increase during the first
10
six months of fiscal 1998 as compared to the first six months of fiscal 1997 was
primarily due to increases in store wages and benefits, rents and operating
expenses at the store level, which accounted for $4.9 million, $2.5 million and
$1.3 million of the increase, respectively. The increase in wages and benefits
and rents at the store level resulted from the increased number of stores opened
and the related staffing costs. In addition, higher corporate wages and royalty
expense contributed to the increase in selling, general and administrative
expenses in the first six months of fiscal 1998 as compared to fiscal 1997.
These expenses increased due to the continued expansion of operations as a
result of new store rollouts. The aforementioned increase was partially offset
by a decrease in advertising expense and depreciation and amortization of
approximately $1.0 million and $0.5 million, respectively. Advertising expense
decreased due to the elimination of certain programs and, depreciation and
amortization decreased during the first six months of fiscal 1998 because during
the first six months of fiscal 1997 the Company recorded a charge of
approximately $1.0 million, under Statement of Financial Accounting Standards
No. 121, related to leasehold improvements and furniture and equipment at 16
store locations.
Operating Income (Loss)
The operating income in the first six months of fiscal 1998 was $4.6 million
compared to an operating loss of $3.2 million for the comparable period in
fiscal 1997. Operating income in the first six months of fiscal 1998, exclusive
of Episode, was $11.3 million compared to operating income in the comparable
period of fiscal 1997 of $8.9, exclusive of Episode, restructuring costs and
other one time charges. Operating losses at the Episode division increased in
the first six months of fiscal 1998 compared to the first six months of fiscal
1997. Due to the extremely competitive environment of upscale bridge women's
clothing, and the fact that the selling, general and administrative costs of the
Episode division as a percentage of sales are greater than the maternity
division, the Company must substantially increase revenue at Episode in order to
improve operating results. Since the Episode acquisition in June 1996, the
Company has taken certain initiatives that have resulted in increased revenue at
Episode, however these increases have not been substantial enough to improve
operating results. As a consequence of the Episode losses, the Company announced
in May that it will restructure its Episode non-maternity bridge women's apparel
business in an effort to eliminate the losses from that business. As an initial
step in that restructuring, during the third quarter of fiscal 1998, the Company
plans to close or convert to maternity stores, approximately 21 Episode store
locations. The majority will be outlet store locations. Restructuring costs of
$5.4 million will be recorded in the third quarter of fiscal 1998 and include
approximately $2.0 million for the write-off of furniture, fixtures and
leasehold improvements, $1.8 million for lease termination and other costs and
$1.6 million for the write-down of certain finished goods inventory. These
restructuring costs include an anticipated cash payment of approximately $1.8
million that will occur through the fourth quarter of fiscal 1998. Although the
Company continues to take steps to improve the Episode business, there can be no
assurances that these steps will result in the increased revenue needed to
support the Episode operations.
Interest Expense, Net
Net interest expense increased by $0.5 million or 8.1% in the first six months
of fiscal 1998 compared with the comparable period in fiscal 1997, and as a
percentage of sales, decreased to 4.9% from 5.7% in the first six months of
fiscal 1997. The dollar increase was primarily due to short-term borrowings
under the line of credit agreement.
Income Taxes
The effective income tax rate was 50.0% in the first six months of fiscal 1998
as compared to 24.1% in the first six months of fiscal 1997. The change in the
11
effective income tax rate was primarily due to the relationship of
non-deductible goodwill amortization to income before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs during the first six months ended March 31, 1998 have
been primarily for furniture and fixtures and leasehold improvements required to
increase the number of retail locations. The Company's cash sources for the
first six months of fiscal 1998 have primarily been from operations and
borrowings on its line of credit. At March 31, 1998 the Company had available
cash and cash equivalents of $0.6 million, compared to $1.7 million at September
30, 1997.
Net cash provided by operating activities was $2.3 million in the first six
months of fiscal 1998 compared with $8.4 million in the first six months of
fiscal 1997. The net cash provided by operating activities in the first six
months of fiscal 1998 includes cash provided by net income, including
adjustments for non-cash items of $4.3 million, less cash consumed by working
capital of $2.0 million. The cash consumed by working capital in the first six
months of fiscal 1998 consisted of $4.5 million from an increase in inventories
and receivables, partially offset by an increase in accounts payable and accrued
expenses and other liabilities and a decrease in prepaid expenses and other
assets. The net cash provided by working capital in the first six months of
fiscal 1997 derives from cash provided by net income, after adjustments of
non-cash items of $1.4 million, plus cash provided by working capital of $7.0
million. The cash provided by working capital in the first six months of fiscal
1997 consisted of $8.1 million from a decrease in inventories and an increase in
accounts payable, accrued expenses and other liabilities, partially offset by an
increase in receivables, prepaid expenses and other assets.
Net cash used in investing activities was $5.3 million in the six months ended
March 31, 1998 compared with $4.4 million in the first six months of fiscal
1997. The cash used in investing activities for the first six months of fiscal
1998 included $4.5 million used for capital expenditures for new store
facilities, primarily Motherhood and Episode, and improvements to existing
stores, $0.7 million for other corporate capital expenditures and $0.1 million
for intangible and other assets. This compares with investing activities for the
first six months of fiscal 1997, which included $3.2 million used for capital
expenditures for new store facilities and improvements to existing stores and
$0.9 million for other corporate capital expenditures and $0.3 million for
intangible and other assets.
Net cash provided by financing activities was $2.0 in the first six months of
fiscal 1998 compared with net cash used in financing activities of $3.9 million
in the first six months of fiscal 1997. The cash provided by financing
activities in the first six months of fiscal 1998 resulted primarily from $2.2
million in net cash borrowings on the line of credit and cash overdraft activity
offset by $0.2 million in repayment of long-term debt. This compares with $3.7
million of cash used to repay borrowings on the line of credit and cash
overdraft activity plus $0.2 million in repayment of long-term debt during the
first six months of fiscal 1997.
In April 1998, the Company replaced its existing $30 million Working Capital
Facility with a new $44 million Working Capital Facility that expires in April
2001. In addition to the $44 million available for borrowings and letter of
credit, the Company also has an additional $4 million letter of credit to
collateralize an Industrial Revenue Bond. The new Working Capital Facility
increases the Company's borrowing capacity, subject to limitations based upon
eligible accounts receivable and inventory, and reduces interest by 125 basis
points and 75 basis points for Base Rate borrowings and Adjusted LIBOR Rate
borrowings, respectively. In addition, at such time as the monthly rolling
twelve-month earnings before interest, taxes and depreciation and amortization
reaches $30.0 million and remains at $30.0 million, interest will be reduced by
25 additional basis points under each borrowing. Further, contrary to the
previous Working Capital Facility, there are no financial covenant requirements
unless the Aggregate Adjusted Availability under the Working Capital Facility is
less than $10 million. If Aggregate Adjusted Availability is less than $10
12
million, then the Company must achieve a Minimum Cash Flow, as defined in the
agreement, of not less than zero. Consistent with the previous Working Capital
Facility, the new Working Capital Facility is secured by substantially all of
the Company's assets. On May 8, 1998, the Company had $21.6 million in
borrowings and $ 7.0 million in letters of credit issued under the Working
Capital Facility.
In its maternity operations, the Company intends to focus primarily on growing
the moderate priced Motherhood and leased department business, subject to
capital and marketplace availability. The Company began expanding into the
leased department business approximately one year ago, and to date, revenue from
the leased departments has been below management's estimates. As a result,
selling, general and administrative expenses as a percentage of sales have been
higher than the maternity business as a whole. In addition, the gross margin
from Motherhood and the leased departments is typically lower than the remainder
of the maternity business, consequently as the Motherhood and leased department
business increases as a percentage of the maternity business it will produce
overall lower margins in the maternity business.
The Episode division has operated at a loss since the acquisition on June 1,
1996. The Company's strategy to broaden the product line at the Episode stores
and to add several stores in major metropolitan areas, has resulted in increased
revenue for the Episode division. However, revenue remains below management's
expectations. In addition, gross profit as a percentage of sales has decreased
and operating losses have increased when compared with the prior comparable
period. In order for the Episode division to endure, significant changes are
required. On May 10, 1998 the Company announced that its Board of Directors had
instructed management to restructure it Episode non-maternity bridge women's
apparel business to eliminate the losses from that business. During the third
quarter of fiscal 1998, and as an initial step, the Company plans to close or
convert to maternity stores, approximately 21 Episode store locations.
Restructuring costs of $5.4 million will be recorded in the third quarter of
fiscal 1998 and include approximately $2.0 million for the write-off of
furniture, fixtures and leasehold improvements, $1.8 million for lease
termination and other costs and $1.6 million for the write-down of certain
finished goods inventory. These restructuring costs include an anticipated cash
payment of approximately $1.8 million that will occur through the fourth quarter
of fiscal 1998. Based on the expected remaining Episode operations, the Company
must substantially increase revenues and gross profit percentage, and reduce
costs at its remaining locations 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 restructuring could result in 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. At March 31, 1998, the Episode assets consist primarily of
inventory and furniture, equipment and leasehold improvements of approximately
$13.7 million and $8.7 million, respectively. The Company also has lease
commitments on Episode stores approximating $39.1 million payable through 2011.
The Company believes that its current cash and working capital positions,
available borrowing capacity through the Working Capital Facility and net cash
expected to be generated from operations will be sufficient to fund the
Company's working capital requirements and required principal and interest
payments for fiscal 1998. Based on the Company's fiscal 1998 expansion plan, the
Company expects capital expenditures to be approximately $8.5 million, of which
$5.2 million has been expended through March 31, 1998. These expenditures
consist primarily of new Motherhood and Episode stores. 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.
13
The Company has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the Year 2000("Y2K") issue and
is developing an implementation plan to resolve the issue. Throughout fiscal
1998, the Company will assess its own internal computer systems and will contact
third parties with which it interacts electronically in order to get an
assessment of their Y2K issues. Based on preliminary results, the Company does
not believe the Y2K issue on its internal computer systems will have a material
adverse impact on operations. Notwithstanding the Company's efforts in this
regard, there does exist the risk that the Y2K issue will manifest itself in
unanticipated ways, thereby adversely affecting the Company's performance in the
future. In addition, the Company cannot give assurance that the third parties
with whom it does business will address any Y2K issues in their own systems on a
timely basis; their failure to do so could have a material adverse impact on the
Company.
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 1998 and beyond to
differ materially from those expressed or implied in any such forward-looking
statements: changes in consumer spending patterns, raw material price increases,
consumer preferences and overall economic conditions, the impact of competition
and pricing, changes in weather patterns, availability of suitable store
locations at appropriate terms, continued availability of capital and financing,
ability to develop merchandise and ability to hire and train associates, changes
in fertility and birth rates, political stability, currency and exchange risks
and changes in existing or potential duties, tariffs or quotas, postal rate
increases and charges, paper and printing costs, and other factors affecting the
Company's business beyond the Company's control.
14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on January
15, 1998, the shareholders of the Company elected three
directors of the Company, ratified the appointment of Arthur
Andersen LLP as the Company's independent auditors for the year
ending September 30, 1998, and approved an amendment to the
Company's Stock Option Plan to increase the number of shares
reserved for issuance.
Messrs. Dan W. Matthias, William L. Rulon-Miller and Elam M.
Hitchner, were elected to serve as directors at the meeting. The
voting results for Messrs. Matthias and Rulon-Miller were
2,354,903 shares in favor and 10,900 shares withheld. The voting
results for Mr. Hitchner were 2,342,703 shares for and 23,100
shares withheld. The vote ratifying the appointment of Arthur
Andersen LLP as independent auditors was 2,362,683 shares for,
1,900 shares against and 1,620 shares withheld. The vote to
amend the Stock Option Plan was 1,625,240 shares for, 330,417
shares against and 11,760 shares withheld.
Item 6. Exhibits and Reports on Form 8-K
(a) 10.1 Loan and Security Agreement dated as of April 24, 1998
by and among, Mothers Work, Inc., Cave Springs, Inc. and
Fleet Capital Corporation.
11 Statement re: Computation of per share earnings.
27 Financial Data Schedule (schedule submitted in electronic
format only)
99 Press Release
(b) Reports on Form 8-K.
None.
15
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, 1998 By: /s/ Dan W. Matthias
--------------------------------
Dan W. Matthias
Chief Executive Officer
And
Chairman of the Board
Date: May 14, 1998 By: /s/ Thomas Frank
--------------------------------
Thomas Frank
Chief Financial Officer
And
Vice President - Finance
16
EXHIBIT INDEX
Exhibit
No. Description Page No.
- ------ ----------- --------
10.1 Loan and Security Agreement dated as of April 24, 1998 1
By and among Mothers Work, Inc., Cave Springs, Inc.,
And Fleet Capital Corporation.
11 Statement re: Computation of per share earnings. 70
27 Financial Data Schedule (schedule submitted in
Electronic format only). 71
99 Press Release 72
17