United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
-------------------------------------------------
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 incorporation or organization) (I.R.S. Employer Identification No.)
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
-----------------------------
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 - 3,597,997 shares outstanding as of August 3, 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 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
Exhibit Index 16
MOTHERS WORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
ASSETS 1997 1998
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,665,760 $ 660,862
Receivables
Trade 2,781,803 4,515,170
Other 164,334 153,345
Inventories 63,812,590 70,864,597
Deferred income taxes 4,050,980 4,284,921
Prepaid expenses and other 2,695,218 2,420,460
------------- -------------
Total current assets 75,170,685 82,899,355
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, net 45,373,439 43,210,122
------------- -------------
OTHER ASSETS:
Deferred income taxes 7,235,600 9,448,455
Goodwill, net 38,752,184 37,078,922
Other intangible assets, net 1,351,221 1,216,701
Deferred financing costs, net 3,339,759 3,085,934
Other assets 494,632 965,697
------------- -------------
Total other assets 51,173,396 51,795,709
------------- -------------
$ 171,717,520 $ 177,905,186
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of Credit $ 11,088,000 $ 22,367,561
Current portion of long-term debt 648,231 459,416
Accounts payable 17,264,704 10,228,710
Accrued expenses 14,087,057 19,849,457
------------- -------------
Total current liabilities 43,087,992 52,905,144
------------- -------------
LONG TERM DEBT 96,375,620 96,546,226
------------- -------------
ACCRUED DIVIDENDS ON PREFERRED STOCK 2,228,700 3,104,862
------------- -------------
DEFERRED RENT 3,645,651 4,400,386
------------- -------------
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 35,646 35,980
Additional paid-in capital 27,740,840 27,995,694
Accumulated deficit (12,896,929) (18,583,106)
------------- -------------
Total stockholders' equity 26,379,557 20,948,568
------------- -------------
$ 171,717,520 $ 177,905,186
============= =============
The accompanying notes are an integral part of these statements.
1
MOTHERS WORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------- --------------------------------
1997 1998 1997 1998
---- ---- ---- ----
NET SALES $ 64,232,626 $ 79,891,555 $ 181,221,730 $ 225,049,297
COST OF GOODS SOLD 28.317,716 41,556,130 81,852,040 112,585,597
------------- ------------- ------------- -------------
Gross profit 35,914,910 38,335,425 99,369,690 112,463,700
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 31,629,614 35,024,423 92,676,279 104,592,277
RESTRUCTURING COSTS -- 3,788,832 5,617,094 3,788,832
------------- ------------- ------------- -------------
Operating income (loss) 4,285,296 (477,830) 1,076,317 4,082,591
INTEREST EXPENSE, NET 3,247,281 4,236,115 9,819,512 11,337,820
------------- ------------- ------------- -------------
Income (loss) before income taxes 1,038,015 (4,713,945) (8,743,195) (7,255,229)
INCOME TAX EXPENSE (BENEFIT) 105,000 (1,174,732) (2,254,945) (2,445,216)
------------- ------------- ------------- -------------
NET INCOME (LOSS) 933,015 (3,539,213) (6,488,250) (4,810,013)
PREFERRED DIVIDENDS 272,071 292,054 816,213 876,162
------------- ------------- ------------- -------------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ 660,944 $ (3,831,267) $ (7,304,463) $ (5,686,175)
============= ============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ 0.19 $ (1.07) $ (2.05) $ (1.59)
============= ============= ============= =============
DILUTED EPS $ 0.18 $ (1.07) $ (2.05) $ (1.59)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
BASIC 3,564,644 3,575,039 3,562,419 3,567,653
============= ============= ============= =============
DILUTED EPS 3,704,572 3,575,039 3,562,419 3,567,653
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
2
MOTHERS WORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
-----------------------------
1997 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,488,250) $ (4,810,015)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities-
Depreciation and amortization 9,311,896 9,209,714
Stock issuance charged to interest expense -- 227,664
Non-cash portion of restructuring charges 3,822,515 2,036,832
Imputed interest on debt 56,730 97,881
Deferred tax expense (benefit) (2,254,945) (2,446,797)
Amortization of deferred financing costs 313,475 310,430
Provision for deferred rent 703,798 754,735
Changes in assets and liabilities-
Decrease (increase) in--
Receivables (18,008) (1,722,378)
Inventories 1,742,372 (7,052,007)
Prepaid expenses and other (745,280) (196,307)
Increase (decrease) in--
Accounts payable and accrued expense 5,555,062 (2,636,288)
Other liabilities 816,213 876,162
------------ ------------
Net cash provided by (used in) operating activities 12,815,578 (5,350,374)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (7,886,256) (6,692,073)
Increase in intangibles and other assets (339,926) (105,698)
------------ ------------
Net cash used in investing activities (8,226,182) (6,797,771)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in line of credit and cash overdrafts, net (4,087,212) 11,766,093
Repayments of long-term debt (279,605) (593,767)
Debt issuance costs (1,851) (56,604)
Proceeds from exercise of options 410 27,524
------------ ------------
Net cash provided by (used in) financing activities (4,368,258) 11,143,246
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 221,138 (1,004,899)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,262,435 1,665,760
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,483,573 $ 660,861
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 6,583,591 $ 7,937,748
============ ============
Cash paid for income taxes $ -- $ --
============ ============
Capital lease obligations incurred $ -- $ 477,677
============ ============
The accompanying notes are an integral part of these financial statements.
3
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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. 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.
2. STOCK OPTIONS AND WARRANTS
During the nine months ended June 30, 1998, 173,300 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 for the quarter ended June 30, 1998 and for
the nine months ended June 30, 1997 and 1998.
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 carries interest rates of the Base Rate plus 25 basis points or
LIBOR plus 225 basis points. 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, 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.
4
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
-- (continued) --
5. RESTRUCTURING COSTS AND OTHER UNUSUAL CHARGES
In May 1998 the Company announced a restructuring of its Episode(R)
non-maternity bridge women's apparel business to eliminate the losses from that
business. As an initial step in this process, the company will close or convert
to maternity approximately 21 Episode retail locations by September 30, 1998.
The majority of these 21 locations will be outlet center locations. As of August
3, 1998, 14 locations remain to be closed or converted, and there are 30 other
locations remaining. In connection with these store closings and related
actions, the Company recorded a charge in the third fiscal quarter of $7.4
million, the cash portion of which is approximately $1.8 million to be paid out
through the fourth quarter of fiscal 1998. This charge was allocated as $3.8
million for store closing costs and leasehold terminations and $3.6 million for
the write-down of certain finished goods inventory, which is included in cost of
goods sold.
6. 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.
5
MOTHERS WORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
-- (continued) --
7. SUBSIDIARY GUARANTORS
Pursuant to the terms of an indenture relating to the 12 5/8% Senior Unsecured
Exchange Notes due 2005, Cave Springs, Inc, a direct subsidiary of Mothers Work,
Inc., (the "Guarantor") has, jointly and severally, unconditionally guaranteed
the obligations of Mothers Work, Inc. with respect to the Notes. Effective April
22, 1998, the Page Boy Company, Inc. and Mothers Work (R.E.), Inc., the former
Guarantors, merged with Mothers Work, Inc. There are no restrictions on the
ability of the Guarantor to transfer funds to Mothers Work, Inc. in the form of
loans, advances, or dividends, except as provided by applicable law.
Accordingly, set forth below is certain summarized financial information (within
the meaning of Section 1-02(bb) of Regulation S-X) for the Guarantor and the
former Guarantors (as applicable):
September 30, 1997 June 30, 1998
------------------ -------------
Current assets $ 4,127,213 $ 2,835
Noncurrent assets 80,125,458 42,925,876
Current liabilities 3,064,719 -
Noncurrent liabilities 52,539,740 1,328,793
Nine Months Ended Nine Months Ended
June 30, 1997 June 30, 1998
----------------- -------------
Net sales $ 35,756,289 $ 9,536,504
Costs and expenses 27,237,568 2,724
Net income 5,622,356 6,292,295
This summarized financial information for the Guarantor and the former
Guarantors has been prepared from the books and records maintained by the
Guarantor and the Company. The summarized financial information may not
necessarily be indicative of the results of operations or financial position had
the Guarantor operated as independent entities. Certain intercompany sales
included in the subsidiary records are eliminated in consolidation. The
subsidiary guarantor receives all inventory and administrative support from and
transfer all cash to Mothers Work, Inc., who, in turn, pays all expenditures on
behalf of the Guarantor. An amount due to/due from parent will exist at any time
as a result of this activity. The summarized financial information includes the
allocation of material amounts of expenses such as corporate services,
administration, and taxes on income. The allocations are generally based on
proportional amounts of sales or assets, and taxes on income are allocated
consistent with the asset and liability approach used for consolidated financial
statement purposes. Management believes these allocation methods are reasonable.
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
Increase
Percentage of Net Sales -------------------------------------
--------------------------------------------------- Three Months Nine Months
Three Nine Ended Ended
Months Ended Months Ended June 30, June 30,
June 30, June 30, 1998 1998
------------------------ ------------------------- Compared to Compared to
1997 1998 1997 1998 1997 1997
----------- ----------- ------------- ----------- ---------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0% 24.4% 24.2%
Cost of goods sold 44.1 52.0 45.2 50.0 46.7 37.5
------- -------- --------- --------
Gross profit 55.9 48.0 54.8 50.0 6.7 13.2
Selling, general
and administrative
expenses 49.2 43.9 51.1 46.5 10.7 12.9
Restructuring costs - 4.7 3.1 1.7 NM NM
------ ------- ------- ------
Operating income 6.7 (0.6) 0.6 1.8 NM NM
Interest expense, net 5.1 5.3 5.4 5.0 30.5 15.5
------ ------- ------- ------
Income (loss) before
income taxes 1.6 (5.9) (4.8) (3.2) NM 17.0
Income tax provision
(benefit) 0.1 (1.5) (1.2) (1.1) NM 8.4
------ ------- ------- ------
Net income (loss) 1.5% (4.4)% (3.6)% (2.1)% NM 25.9%
====== ======= ======= ======
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 Nine Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1998 1997 1998
-------- -------- -------- --------
Beginning of period
Stores 465 499 442 473
Leased maternity departments 95 130 26 114
--- --- --- ---
Total 560 629 468 587
Acquired stores - -
Opened:
Stores 14 4 41 37
Leased maternity departments - 1 70 32
Closed:
Stores (18) (8) (22) (15)
Leased maternity departments (1) (6) (2) (21)
--- --- --- ---
End of period
Stores 461 495 461 495
Leased maternity departments 94 125 94 125
--- --- --- ---
Total 555 620 555 620
=== === === ===
Three Months Ended June 30, 1998 and 1997
Net Sales
Net sales in the third quarter of fiscal 1998 increased by $15.7 million or
24.4%, as compared to the third quarter of fiscal 1997. This increase was
primarily due to increased sales of $3.8 million generated by Episode America
stores, $8.0 million generated by a quarterly comparable store sales increase of
16.5% in the Company's core maternity clothing business (based on 444 stores),
and a $3.9 million net increase due to other store and leased department opening
and closing activity. The Company had 620 locations, including 574 maternity
clothing locations and 46 Episode(R) upscale "bridge" women's apparel stores at
June 30, 1998 compared to 555 locations, including 517 maternity clothing
locations and 38 Episode(R) upscale "bridge" women's apparel stores at June 30,
1997.
Gross Profit
Gross profit in the third quarter of fiscal 1998 increased by $2.4 million or
6.7%, as compared to the third 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 48.0% in the third quarter of fiscal 1998
as compared to 55.9% in the comparable period of the prior year. This decrease
was primarily due to $3.6 million charge to write-down inventory related to the
Company's restructuring of the Episode division. 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. The
Company anticipates that its gross profit as a percentage of sales may decrease
further as the aggregate sales from the Motherhood division increases as a
percentage of gross sales. 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.
8
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased by $3.4 million or 10.7%
in the third quarter of fiscal 1998 as compared to the third quarter of fiscal
1997 and, as a percentage of net sales, decreased to 43.9% from 49.2% in the
third 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 third
quarter of fiscal 1998, as compared to the third 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 $1.8 million, $0.8 million and
$0.6 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 third quarter of fiscal 1998 as compared to the third quarter of
fiscal 1997. These expenses increased due to the continued expansion of
operations as a result of new store rollouts.
Restructuring Costs
In May 1998 the Company announced the restructuring of its Episode(R)
non-maternity bridge women's apparel business to eliminate the losses from that
business. As an initial step in this process, the company will close or convert
to maternity approximately 21 Episode retail locations by September 30, 1998,
which will primarily be outlet center locations. As of August 3, 1998, 14
locations remain to be closed or converted. In connection with these store
closings and related actions, the Company recorded a restructuring charge of
$3.8 million in the third quarter of fiscal 1998, the cash portion of which is
approximately $1.8 million to be paid out through the fourth quarter of fiscal
1998. In the third of fiscal 1998, the Company also recorded a $3.6 million
charge to cost of goods sold related to the Episode restructuring.
Operating Loss
The operating loss in the third quarter of fiscal 1998 was $0.5 million compared
to $4.3 million operating income in the third quarter of fiscal 1997. The loss
was primarily a result of the $7.4 million ($3.6 million to cost of goods sold
and $3.8 million as restructuring costs) in charges taken related to the Episode
restructuring. Operating income for the third quarter of fiscal 1998 for the
Company and exclusive of restructuring and other unusual charges increased to
$6.9 from $4.6 million for the comparable period in the prior year. Operating
income for the third quarter of fiscal 1998 for the core maternity business
increased when compared to the same period in the prior year and as a percentage
of sales it has increased primarily as a result of the growth of net sales. The
Episode stores had negative operating income in the third quarter of fiscal 1998
and 1997. In general, the Episode stores have higher selling, general and
administrative expenses, than the maternity stores.
Interest Expense, Net
Net interest expense increased by $1.0 million in the third quarter of fiscal
1998 compared with the third quarter of fiscal 1997, and as a percentage of
sales, increased from 5.1% to 5.3%. The dollar increase was primarily due to
$0.5 million in fees paid in conjunction with obtaining the consent of certain
bondholders to increase the working capital facility and $0.1 million of prepaid
charges related to the replacement of the existing bank. In addition the Company
had increased short-term borrowings under the line of credit agreement.
9
Income Taxes
The effective income tax rate was 24.9% in the third quarter of fiscal 1998 as
compared to 10.1% in the third quarter of fiscal 1997. 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 the restructuring and unusual costs discussed above.
Nine Months Ended June 30, 1998 and 1997
Net Sales
Net sales in the first nine months of fiscal 1998 increased by $43.8 million or
24.2%, as compared to the first nine months of fiscal 1997. This increase was
primarily due to increased sales of $14.5 million generated by Episode America
stores, $17.9 million generated by a year-to-date comparable store sales
increase of 13.6% in its core maternity clothing business (based on 376 stores),
and a $11.4 million net increase due to other store and leased department
opening and closing activity.
Gross Profit
Gross profit in the first nine months of fiscal 1998 increased $13.1 million or
13.2%, as compared to the first nine months of fiscal 1997. This increase was
primarily generated by the increase in sales and was partially offset by the
$3.6 million charge in the third fiscal quarter related to the Episode
restructuring noted above. Gross profit as a percentage of net sales decreased
to 50.0% in the first nine months of fiscal 1998 as compared to 54.8% in the
comparable period of the prior year. 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 profit as a percentage
of sales may decrease further as the aggregate sales from the Motherhood
increases as a percentage of sales.
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased by $11.9 million or 12.9%
in the first nine months of fiscal 1998 as compared to the first nine months of
fiscal 1997 and, as a percentage of net sales, decreased to 46.5% from 51.1%.
The decrease as a percentage of sales was primarily due to increased net sales.
The dollar increase during the first nine months of fiscal 1998 as compared to
the first nine months of fiscal 1997 was primarily due to increases in wages and
benefits, store rents, and operating expenses at the store level, which
accounted for $6.7 million, $3.3 million and $1.9 million of the increase,
respectively. The increases in wages and benefits, rents and operating expenses
at the store level were due to the increase in the number of stores opened and
additional employees required to operate these stores.
Restructuring Costs
In May 1998 the Company announced the restructuring of its Episode(R)
non-maternity bridge women's apparel business to eliminate the losses from that
business. As an initial step in this process, the company will close or convert
to maternity approximately 21 Episode retail locations by September 30, 1998,
which will primarily be outlet center locations. As of August 3, 1998, 14
locations remain to be closed or converted. In connection with these store
closings and related actions, the Company recorded a restructuring charge of
10
$3.8 million in the third fiscal quarter in 1998, the cash portion of which is
approximately $1.8 million to be paid out through the fourth quarter of fiscal
1998. In the third of fiscal 1998, the Company also recorded a $3.6 million
charge to cost of goods sold related to the Episode restructuring.
Operating Income
The operating income in the first nine months of fiscal 1998 was $4.1 million
compared to operating income of $1.1 million for the comparable period in fiscal
1997 and, as a percentage of net sales, increased from 0.6% to 1.8%. The first
nine months of fiscal 1998 was impacted by a charge of $7.4 million ($3.6
million charged to cost of goods sold and $3.8 million charged to restructuring
costs) related to restructuring costs and other unusual charges for
restructuring the Company's Episode division. Operating income for the first
nine months of fiscal 1998 for the Company exclusive of restructuring and other
unusual charges increased to $11.5 from $8.9 million for the comparable period
in the prior year, and also increased as a percentage of sales. Operating income
both in dollars and as a percentage of sales for the first nine months of fiscal
1998 for the core maternity business increased when compared to the same period
in the prior year. The increase in operating income as a percentage of sales is
a result of the growth of comparable store revenues, and the decrease in S,G&A
expense as a percentage of sales partially offset by the decrease in cost of
goods sold as a percentage of sales as discussed above.
Interest Expense, Net
Net interest expense increased by $1.5 million in the first nine months of
fiscal 1998 compared with the comparable period in fiscal 1997, and as a
percentage of sales, decreased from 5.4% to 5.0%. The dollar increase was
primarily due to increased short-term borrowings under the line of credit
agreement and the one time charges related to the consent obtained from certain
bondholders discussed in the third quarter information above.
Income Taxes
The effective income tax rate was 33.7% in the first nine months of fiscal 1998
as compared to 25.8% in the first nine months of fiscal 1997. 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 the restructuring and unusual costs discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs during the first nine months ended June 30, 1998 have
been primarily for inventory which increased by $7.1 million and the purchase of
furniture and fixtures and leasehold improvements which was $6.7 million. The
Company's cash sources for the first nine months of fiscal 1998 have primarily
been from borrowings on its line of credit, which were $11.8 million. At June
30, 1998 the Company had available cash and cash equivalents of $0.7 million,
compared with $1.7 million at September 30, 1997.
Net cash consumed by operating activities was $5.4 million in the first nine
months of fiscal 1998 compared with net cash provided by operating activities of
$12.8 million in the first nine months of fiscal 1997. The cash used in
operating activities in the nine months ended June 30, 1998 included cash
provided by a net loss, after adjustments for non-cash items, of $5.4 million,
offset by cash consumed by working capital of $10.8 million. The cash consumed
by working capital consists of $9.0 million resulting from an increase in
inventories, accounts receivable, prepaid expenses and other assets and $2.7
million due to a decrease in accounts payable and accrued expenses, partially
offset by an increase in other liabilities of $0.9 million. This compares with
cash provided by net income, after adjustments for non-cash items, of $5.5
million, plus cash provided by working capital of $7.3 million during the first
nine months of fiscal 1997. The cash provided by working capital in the first
11
nine months of fiscal 1997 consisted of $7.4 million to increase accounts
payable, accrued expenses and other liabilities, and a decrease in inventories
partially offset by an increase in receivables and prepaid expenses and other
assets.
Net cash used in investing activities was $6.8 million in the nine months ended
June 30, 1998 compared with $8.2 million in the nine months ended June 30, 1997.
The cash used in investing activities for the first nine months of fiscal 1998
included $5.5 million used for capital expenditures for new store facilities and
improvements to existing stores, $1.2 million for other corporate capital
expenditures and $0.1 million for intangible and other assets. This compares
with $6.5 million used for capital expenditures for new store facilities and
improvements to existing stores and $1.4 million for other corporate capital
expenditures and $0.3 million for intangible and other assets.
Net cash provided by financing activities was $11.1 million in the first nine
months of the fiscal year compared with net cash used in financing activities of
$4.4 million in the first nine months of fiscal 1997. The cash provided by
financing activities in the first nine months of fiscal 1998 resulted primarily
from $11.8 million in net cash borrowings on the line of credit and cash
overdraft activity offset by $0.7 million in repayment of long-term debt. This
compares with $4.1 million of cash used to repay borrowings on the line of
credit and cash overdraft activity plus $0.3 million in repayment of long-term
debt during the first nine months of fiscal 1997.
The Episode division has operated at a loss since the acquisition on June 1,
1996. 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 May 1998, the Company announced
the restructuring of this division.
If the Company is to be successful in eliminating the losses in the remaining
Episode operations, significant changes are required. 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. Moreover,
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 remaining 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 June 30, 1998, the Episode assets consist primarily of inventory
and furniture, equipment and leasehold improvements of approximately $7.6
million and $6.4 million, respectively. The Company also has lease commitments
on Episode stores approximating $36.7 million payable through 2011.
In May 1998 the Company announced the restructuring of its Episode(R)
non-maternity bridge women's apparel business to eliminate the losses from that
business. As an initial step in this process, the company will close or convert
to maternity approximately 21 Episode retail locations by September 30, 1998.
The majority will be outlet center locations. In connection with these store
closings and related actions, the Company recorded a charge in the third fiscal
quarter of $7.4 million, the cash portion of which is approximately $1.8 million
to be paid out through the fourth quarter of fiscal 1998. Restructuring costs of
$7.4 million 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 $3.6 million for the write-down of certain finished goods
inventory.
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 which supports the Company's building
12
mortgage. The new Working Capital Facility increased 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 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 August 3,
1998, after the semi-annual interest payment of $5.8 million, the Company had
$27.7 million in borrowings and $7.6 million in letters of credit issued under
the Working Capital Facility.
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. The Company expects remaining fiscal 1998 capital
expenditures to be approximately $1.1 million. On August 3, 1998 the required
$5.8 million semi-annual interest payment on the Notes was paid. 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.
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
has developed an implementation plan to resolve the issue. Throughout fiscal
1998, the Company will continue to assess its own internal computer systems and
has contacted 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.
13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(c) During the three months ended June 30, 1998, Mothers Work, Inc. issued
26,784 shares (the "Shares") of its Common Stock, par value $.01 per
share, in a transaction that was not registered under the Securities
Act. The Shares were issued to certain holders of the Company's 12 5/8%
Senior Notes due 2005 (the "Notes") as part of the consideration for
their consent to an amendment of indebtedness covenants in the
indenture relating to the Notes.
The issuances of the Shares was deemed to be exempt from registration
under Section 3(b) or 4(2) of the Securities Act because the Shares
were sold to a limited group of persons, each of whom was believed to
have been a sophisticated investor and to have been purchasing for
investment without a view to further distribution. In addition, the
recipients of the Shares represented their intentions to acquire the
Shares for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were
affixed to the share certificates issued in the transaction.
Item 6. Exhibits and Reports on Form 8-K.
(a) 11 Statement re: Computation of per share earnings.
27 Financial Data Schedule (schedule submitted in
electronic format only)
(b) Reports on Form 8-K.
None.
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: August 7, 1998 By: /s/ Dan W. Matthias
-----------------------------------
Dan W. Matthias
Chief Executive Officer
And
Chairman of the Board
Date: August 7, 1998 By: /s/ Thomas Frank
-----------------------------------
Thomas Frank
Chief Financial Officer
and
Vice President - Finance
15
EXHIBIT INDEX
Exhibit
No. Description Page No.
- ------- ----------- --------
11 Statement re: Computation of per share earnings. 17
27 Financial Data Schedule (schedule submitted in
Electronic format only). 18
16