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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[ X ] Quarterly Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934
For the quarterly report ended June 30, 1999
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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 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 - 3,462,066 shares outstanding as of August 1, 1999
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MOTHERS WORK, INC. AND SUBSIDIARY
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
Item 3. Qualitative and Quantitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Exhibit Index 17
MOTHERS WORK, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
ASSETS 1998 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,623,003 $ 2,620,557
Receivables 3,554,788 4,096,023
Inventories 61,678,014 71,314,236
Deferred income taxes 8,846,921 8,846,921
Prepaid expenses and other 5,992,273 1,375,265
------------ ------------
Total current assets 83,694,999 88,253,002
PROPERTY, PLANT AND EQUIPMENT, net 37,334,250 37,139,322
Goodwill, net 36,524,960 34,863,070
Deferred income taxes 9,918,455 6,342,758
Deferred financing costs, net 3,118,042 2,737,270
Other intangible assets, net 1,154,801 1,092,347
Other assets 723,558 786,907
------------ ------------
Total other assets 51,439,816 45,822,352
------------ ------------
172,469,065 171,214,676
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of Credit $ 23,095,934 $ 24,437,565
Current portion of long-term debt 464,408 464,408
Accounts payable 14,108,610 13,702,171
Accrued expenses 22,411,762 17,804,739
------------ ------------
Total current liabilities 60,080,714 56,408,883
LONG TERM DEBT 96,421,707 96,271,025
ACCRUED DIVIDENDS ON PREFERRED STOCK 3,396,916 4,335,332
DEFERRED RENT 3,819,998 4,075,555
COMMITMENTS AND CONTINGENCIES (NOTE 3)
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,
3,597,997 and 3,475,700 shares issued and outstanding 35,980 34,757
Additional paid-in capital 27,995,694 26,505,606
Accumulated deficit (30,781,944) (27,916,482)
------------ ------------
Total stockholders' equity 8,749,730 10,123,881
------------ ------------
$172,469,065 $171,214,676
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1
MOTHERS WORK, INC & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- ------------------------------
1998 1999 1998 1999
----------- ----------- ------------ -----------
NET SALES $79,891,555 $79,887,022 $225,049,297 $223,098,471
COST OF GOODS SOLD 41,556,130 37,984,500 112,585,597 109,972,607
----------- ----------- ------------ -----------
Gross profit 38,335,425 41,902,522 112,463,700 113,125,864
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 35,024,423 32,858,225 104,592,277 94,421,552
RESTRUCTURING COSTS 3,788,832 -- 3,788,832 --
----------- ----------- ------------ -----------
Operating income (loss) (477,830) 9,044,297 4,082,591 18,704,312
INTEREST EXPENSE, NET 4,236,115 3,754,979 11,337,820 11,317,503
----------- ----------- ------------ -----------
Income before income taxes (4,713,945) 5,289,318 (7,255,229) 7,386,809
INCOME TAX PROVISION (EXPENSE) (1,174,732) 2,551,807 (2,445,216) 3,582,944
----------- ----------- ------------ -----------
NET INCOME (LOSS) (3,539,213) 2,737,511 (4,810,013) 3,803,865
PREFERRED DIVIDENDS 292,054 312,801 876,162 938,403
----------- ----------- ------------ -----------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $(3,831,267) $ 2,424,710 $ (5,686,175) $ 2,865,462
=========== =========== ============ ===========
INCOME (LOSS) PER SHARE - BASIC $ (1.07) $ 0.69 $ (1.59) $ 0.82
=========== =========== ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 3,575,039 3,489,231 3,570,115 3,489,231
=========== =========== ============ ===========
INCOME (LOSS) PER SHARE - ASSUMING DILUTION $ (1.07) $ 0.66 $ (1.59) $ 0.78
=========== =========== ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - ASSUMING DILUTION 3,575,039 3,680,000 3,570,115 3,695,117
=========== =========== ============ ===========
2
MOTHERS WORK, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
-------------------------------
1998 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(4,810,015) $ 3,803,862
Adjustments to reconcile net income to
net cash provided by (used in) operating activities--
Depreciation and amortization 9,209,714 7,546,297
Stock issuance charged to interest expense 227,664 --
Non-cash portion of restructuring charges 2,036,832
Deferred tax benefit (2,446,797) 3,575,697
Provision for deferred rent 754,735 255,557
Amortization of deferred financing costs 310,430 373,519
Inputed interest on debt 97,881 80,463
Changes in assets and liabilities:
(Increase) decrease in--
Receivables (1,722,378) (541,235)
Inventories (7,052,007) (9,636,222)
Prepaid expenses and other (196,307) 4,553,659
Increase (decrease) in--
Accounts payable and accrued expense (2,636,287) (5,951,858)
Other liabilities 876,162 938,406
----------- -----------
Net cash provided by operating activities (5,350,373) 4,998,145
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,692,073) (5,530,888)
Increase in intangibles and other assets (105,698) (96,136)
----------- -----------
Net cash used in investing activities (6,797,771) (5,627,024)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in line of credit and cash overdrafts, net 11,766,093 1,341,631
Purchase of common stock -- (1,660,805)
Repayments of long-term debt (593,767) (223,890)
Debt issuance costs (56,604) --
Proceeds from exercise of options 27,524 169,494
----------- -----------
Net cash used in financing activities 11,143,246 (373,570)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,004,898) (1,002,449)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,665,760 3,623,003
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 660,862 $ 2,620,554
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 7,937,748 $ 7,808,651
=========== ===========
Cash paid for income taxes $ -- $ --
=========== ===========
Capital lease obligations incurred $ 477,677 $ --
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3
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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, 1998 for Mothers Work, Inc. and Subsidiary (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 adjustments, necessary to present
fairly the consolidated financial position of the Company for the periods
presented. Since the Company's operations are seasonal, 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 quarter ended June 30, 1999, 17,600 options were granted to certain
officers 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. 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.
4
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
4. EARNINGS PER SHARE (EPS)
Statement of Financial Accounting Standards No. 128, which became effective in
fiscal 1998, requires dual presentation of basic and diluted earnings per share
(EPS) on the face of the income statement for all entities with complex capital
structures. It also requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS is based upon the weighted average number of common
shares outstanding and diluted EPS is based upon the weighted average number of
common shares outstanding plus the dilutive common stock equivalents outstanding
during the period.
The following is a reconciliation of the denominators of the basic and diluted
EPS computations shown on the face of the accompanying statements of income.
For the Quarter Ended June 30, 1999
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
Income available to common stockholders $2,424,710 3,489,231 $0.69
Effect of dilutive securities
Warrants 140,000
Stock options -- 50,769
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Diluted EPS
Income available to common stockholders $2,424,710 3,680,000 $0.66
---------- --------- -----
For the Quarter Ended June 30, 1998
---------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ---------
Basic EPS
Income available to common stockholders $(3,831,267) 3,575,039 $(1.07)
For the Nine Months Ended June 30, 1999
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to common stockholders $2,865,462 3,489,231 $0.82
Effect of dilutive securities
Warrants 140,000
Stock options -- 65,886
----------- -----------
Diluted EPS
Income available to common stockholders $2,865,462 3,695,117 $0.78
---------- --------- -----
5
For the Nine Months Ended June 30, 1998
-----------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic EPS
Income available to common stockholders $(5,686,175) 3,570,115 $(1.59)
Options to purchase 863,319 shares of common stock at prices ranging from $1.67
to $18.75 per share were outstanding during the first nine months of fiscal
1999, and were included in the computation of diluted EPS to the extent that
they were dilutive. The outstanding options expire between 2003 and 2008. In
addition, the 41,000 shares of Series A Cumulative Convertible Preferred Stock
could potentially dilute basic EPS in the future, although they were not
dilutive for the nine month period ended June 30, 1999.
6
MOTHERS WORK, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
5. RESTRUCTURING CHARGES
During fiscal 1998, the Company closed its Episode(R) division, incurring
charges totaling $20,925,000. At June 30, 1999, approximately $1.0 million of
the restructuring costs remain in accrued expenses. The majority of the $1.0
million relates to legal and other fees associated with the transfer of leases.
6. SUBSIDIARY GUARANTOR
Pursuant to the terms of an indenture relating to the 12 5/8% Senior Unsecured
Exchange Notes due 2005 (the "Notes"), the Company's direct subsidiary, Cave
Springs, Inc., has unconditionally guaranteed the obligations of Mothers Work,
Inc. with respect to these Notes. There are no restrictions on the ability of
the Guarantor to transfer funds to Mothers Work, Inc. in the form of loans,
advances, or dividends, except as provided by applicable law.
Accordingly, set forth below is certain summarized financial information (within
the meaning of Section 1-02(bb) of Regulation S-X) for the Guarantor:
September 30, 1998 June 30, 1999
------------------- ------------
Current assets $ 2,865 $ 2,865
Non-current assets $ 39,729,143 $54,140,178
Current liabilities $ -- $ --
Non-current liabilities $ 2,520,464 $ 7,448,941
Net sales $ 12,997,861 $ 5,162,010
Costs and expenses $ 59,410 $ 15,000
Net income $ 8,539.372 $ 3,397,027
This summarized financial information for the Guarantor has been prepared from
the books and records maintained by the Guarantor and the Company. The
summarized financial information may not necessarily be indicative of the
results of operations or financial position had the Guarantor operated as an
independent entity. Certain intercompany sales included in the Subsidiary's
records are eliminated in consolidation. Mothers Work, Inc., 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 consistently with the asset and liability approach used for
consolidated financial statement purposes. Management believes these allocation
methods are reasonable.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The following tables set forth certain consolidated operating data as a
percentage of sales and as a percentage change for the periods indicated:
% Period to Period
Increase (Decrease)
Percentage of Net Sales ------------------------------
----------------------------------------------------- Three Months Nine Months
Three Nine Ended Ended
Months Ended Months Ended June 30, June 30,
June 30, June 30, 1999 1999
----------------------------------------------------- Compared to Compared to
1998 1999 1998 1999 1998 1998
------- ------ ----- ----- ----------- -----------
Net sales 100.0% 100.0% 100.0% 100.0% (0.0)% (0.9)%
Cost of goods sold 52.0 47.5 50.0 49.3 (8.6) (2.3)
------ ----- ----- -----
Gross profit 48.0 52.5 50.0 50.7 9.3 0.6
Selling, general
and administrative
expenses 43.8 41.1 46.5 42.3 (6.2) (9.7)
Restructuring costs 4.7 -- 1.7 -- NM NM
------ ----- ----- -----
Operating income (0.6) 11.3 1.8 8.4 NM NM
Interest expense, net 5.3 4.7 5.0 5.1 (11.4) (0.2)
------ ----- ----- -----
Income (loss) before
income taxes (5.9) 6.6 (3.2) 3.3 NM NM
Income tax provision
(benefit) (1.5) 3.2 (1.1) 1.6 NM NM
------ ----- ----- -----
Net income (loss) (4.4)% 3.4% (2.1)% 1.7% NM NM
====== ===== ===== =====
NM - Not Meaningful.
8
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,
1998 1999 1998 1999
-------- -------- -------- --------
Beginning of period
Maternity Stores 448 486 431 460
Non-maternity Stores 51 -- 42 --
Leased maternity departments 130 94 114 123
--- --- --- ---
Total 629 580 587 583
Opened:
Maternity stores 4 20 33 48
Non-maternity stores -- -- 4 --
Leased maternity departments 1 1 32 6
Closed:
Maternity stores (3) (4) (15) (6)
Non-maternity stores (5) -- -- --
Leased maternity departments (6) (2) (21) (36)
--- --- --- ---
End of period
Maternity stores 449 502 449 502
Non-maternity stores 46 -- 46 --
Leased maternity departments 125 93 125 93
--- --- --- ---
Total 620 595 620 595
=== === === ===
In 1998, the Company terminated its Episode (R) operations. The Company's
results of operations for the third quarter and the first nine months of fiscal
1998 included the following amounts for the Episode division:
Three Months Ended Nine Months Ended
June 30, 1998 June 30,1998
------------------ -----------------
Revenues $ 13,185,000 $ 37,675,000
Cost of goods sold 11,586,000 26,733,000
Gross profit 1,599,000 10,942,000
Contribution loss* $ (2,404,000) $ (9,357,000)
- -------------
* Contribution loss is comprised of gross profit less cost of store operations,
royalties and certain related expenses.
Three Months Ended June 30, 1998 and 1999
Net Sales
Net sales were $79.9 million in the third quarter of fiscal 1999 and fiscal
1998. The third quarter of fiscal 1998 included $13.2 million of sales from the
now closed Episode(R) America stores. Net sales for the maternity business
increased 19.8% to $79.9 million in the third quarter of fiscal 1999 from $66.7
million in the same quarter of the preceding year. The increase was primarily
due to a comparable store sales increase in its maternity business of 14.3%
during the third quarter of fiscal 1999 (based on 521 stores) versus a
comparable sales increase of 16.5% during the third quarter of fiscal 1998
(based on 444 stores). At June 30, 1999 the Company had 595 maternity clothing
locations, as compared to 620 locations, including 574 maternity clothing
locations and 46 Episode(R) non-maternity locations at June 30, 1998. All of the
Episode(R) stores were closed as of December 31, 1998.
9
Gross Profit
Gross profit in the maternity business in the third quarter of fiscal 1999
increased $5.1 million, or 13.9%, to $41.9 million, as compared to $36.7 million
in the third quarter of fiscal 1998. Maternity gross profit as a percentage of
net sales decreased to 52.5% in the third quarter of fiscal 1999 as compared to
55.0% in the comparable period of the prior year. The decrease in gross profit
as a percentage of sales results from sales in the Motherhood division, which
operates at a lower gross profit percentage, growing at a faster rate than sales
in the high end maternity division.
The Company's expansion efforts will be focused on the moderate Motherhood
business. Consequently, as revenues from the Motherhood business increase as a
percentage of total Company revenues, gross margin percentages for the Company
may decline.
Selling, General & Administrative Expenses
Selling, general and administrative expenses decreased $2.2 million, or 6.2%, in
the third quarter of fiscal 1999 as compared to the third quarter of fiscal 1998
and, as a percentage of net sales, decreased from 43.9% to 41.2%. The decrease
was primarily due to the elimination of Episode(R) related selling, general and
administrative costs which more than offset the increase in the maternity
business store wages, rents and operating expenses. The increase in the number
of maternity stores is the principal cause of the increase in maternity business
expenses.
Operating Income
The operating income in the third quarter of fiscal 1999 was $9.0 million, or
11.3%, of sales as compared to an operating loss of $0.5 million in the third
quarter of fiscal 1998. The increase in operating income is due to the
elimination of losses from Episode(R) and a $0.1 million increase in the
maternity business operating income in the third quarter of fiscal 1999 when
compared to the third quarter of fiscal 1998.
Interest Expense, Net
Net interest expense decreased by $0.5 million in the third quarter of fiscal
1999 compared with the third quarter of fiscal 1998, and as a percentage of
sales, decreased from 5.3% to 4.7%. The decrease is largely attributable to the
absence of fees paid in conjunction with obtaining the consent of certain
bondholders to increase the working capital facility in the third quarter of
1998
Income Taxes
The effective income tax rate was 48.2% in the third quarter of fiscal 1999 as
compared to 24.9% in the third quarter of fiscal 1998. The change in the
effective income tax rate was primarily due to the relationship of
non-deductible goodwill amortization to income before income taxes.
Nine Months Ended June 30, 1999 and 1998
Net Sales
Net sales of $223.1 million in the first nine months of fiscal 1999 decreased by
$1.9 million, or 0.9%, as compared to $225.0 million in the first nine months of
fiscal 1998 (which included $37.7 million of sales from the now closed
Episode(R) stores). Net sales for the maternity business increased 19.1% to
$223.1 million in the first nine months of fiscal 1999 from $187.3 million in
the same nine months of the preceding year. The increase was primarily due to a
comparable store sales increase in the maternity business of 14.6% during the
first nine months of fiscal 1999 (based on 474 stores) as compared to a 13.6%
comparable store sales increase in the first nine months of fiscal 1998 (based
on 376 stores). The increase is also attributable to sales generated by new
stores, which were partially offset by decreases resulting from the closure of
36 leased maternity departments.
10
Gross Profit
Gross profit in the maternity business in the first nine months of fiscal 1999
increased approximately $0.7 million to $113.1 million or 0.6%, as compared to
$101.5 million gross profit in the maternity business in the first nine months
of fiscal 1998. Maternity gross profit as a percentage of net sales decreased to
50.7% in the first nine months of fiscal 1999 as compared to 54.2% in the
comparable period of the prior year. The decrease in gross profit as a
percentage of sales results from sales in the Motherhood division, which
operates at a lower gross profit percentage, growing at a faster rate than sales
in the high end maternity division.
Selling, General & Administrative Expenses
Selling, general and administrative expenses decreased $10.2 million, or 9.7%,
in the first nine months of fiscal 1999 as compared to the third quarter of
fiscal 1998 and, as a percentage of net sales, decreased from 46.5% to 42.3%.
The decrease was primarily due to elimination of Episode(R) related selling,
general and administrative costs which more than offset increases in maternity
business related store wages, rents and operating expenses.
Operating Income
The operating income in the first nine months of fiscal 1999 was $18.7 million,
or 8.4% of sales, as compared to the first nine months of fiscal 1998 which was
$4.1 million, or 1.8% of sales. The increase in operating income is due to the
elimination of losses from Episode(R) which were offset by a $1.8 million
decrease in the maternity business operating income in the nine months ended
June 30, 1999 when compared to the nine months of June 30, 1998.
Interest Expense, Net
Net interest expense of $11.4 million in the third quarter of fiscal 1999
remained unchanged, as compared to the third quarter of fiscal 1998, and as a
percentage of sales, increased slightly from 5.0% to 5.1%.
Income Taxes
The effective income tax rate was 48.5% in the first nine months of fiscal 1999
as compared to 33.7% in the first nine months of fiscal 1998. The change in the
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 nine months ended June 30, 1999 have
been primarily for the following: debt service, furniture and fixtures and
leasehold improvements required to increase the number of retail locations,
obligations related to the following: a shut down of the Episode(R) division, a
purchase of 156,095 shares of its common stock, and increased inventories to
support the larger moderate maternity business. The Company's cash source for
the first nine months of fiscal 1999 was principally from operations, but also
from additional draws on the line of credit. At June 30, 1999 the Company had
available cash and cash equivalents of $2.6 million, compared to $3.6 million at
September 30, 1998.
Net cash provided by operating activities was $5.0 million in the first nine
months of fiscal 1999 as compared with net cash used in operating activities of
$5.4 million for the same period in 1998. The net cash provided by operating
activities in the first nine months of fiscal 1999 includes cash provided by net
income, including adjustments for non-cash items of $15.6 million, partially
offset by cash used by working capital of $10.6 million. The principal component
of cash used for working capital in the first nine months of fiscal 1999 was a
$6.0 million decrease in accounts payable and accrued expenses and a $9.6
million increase in inventory, which were partially offset by a $4.5 million
decrease in prepaid expenses. The reduction in accrued expenses and prepaid
expenses largely related to Episode(R) expenses and cash receipts. The net cash
provided by operating activities in the first nine months of fiscal 1998 was
derived from cash provided by net income, after adjustments for non-cash items
of $5.4 million, which was partially offset by cash used by working capital of
$10.8 million. The cash used by working capital in the first nine months of
fiscal 1998 consisted of $9.0 million resulting from an increase in inventories,
11
accounts receivable, prepaid expenses and other assets, and $2.6 million due to
a decrease in accounts payable and accrued expenses, partially offset by an
increase in other liabilities of $0.9 million.
Net cash used in investing activities decreased from $6.8 million in the nine
months ended June 30, 1998 to $5.6 million in the nine months ended June 30,
1999. The cash used in investing activities for the first nine months of fiscal
1998 included $6.7 million used for capital expenditures for new store
facilities, primarily for Motherhood and Episode(R), and improvements to
existing stores, and $0.1 million for intangible and other assets. This compares
with investing activities amounting to $5.6 million for the first nine months of
fiscal 1999, which derives principally from capital expenditures for new
Motherhood stores.
Net cash provided by financing activities decreased from $11.1 million for the
nine months ended June 30, 1998 to net cash used in financing activities of $0.4
million for the nine months ended June 30, 1999. The cash used in financing
activities in the first nine months of fiscal 1999 resulted primarily from $1.3
million in net cash borrowings on the line of credit and cash overdraft and $0.2
million from the exercise of options offset by the purchase of 156,905 Company
shares at a total cost of $1.7 million and repayments of long-term debt of $0.2
million. This compares with $11.8 million in net cash borrowings on the line of
credit and cash overdraft activity offset by $0.6 million in repayment of
long-term debt in the first nine months of fiscal 1998.
During the second quarter of fiscal 1999 the Company purchased 115,000 shares of
its common stock. On March 31, 1999, the Board of Directors authorized the
repurchase of 150,000 additional shares of the Company's common stock, which
represents approximately 4.1% of the total common shares outstanding, from time
to time during the period from April 1, 1999 through September 30, 2002.
Purchases will be dependent upon market conditions and will be made through open
market purchases, negotiated transactions or other types of repurchases. Since
April 1, 1999, the Company has purchased 41,905 shares at a total cost of $0.4
million.
In April 1998 the Company entered into a $44 million Working Capital Facility
Agreement (the "Agreement") which expires in April 2001. In addition to the
Working Capital Facility, which can be used 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
requirements under the Agreement unless the Aggregate Adjusted Availability
("AAA"), as defined in the Agreement, falls below $10 million. If the AAA falls
below $10 million, then the Company must achieve a Minimum Cash Flow, also
defined in the Agreement, of not less than zero. During the first nine months of
fiscal 1999 the Company achieved a positive cash flow, and the AAA did not fall
below $10 million. As of July 31, 1999 the Company had $28.5 million in
borrowings and $3.6 million in additional letters of credit under the Working
Capital Facility, which includes approximately $4 million collateralizing the
Industrial Revenue Bond.
The Company believes that its current cash and working capital positions,
available borrowing capacity through the Working Capital Facility and net cash
expected to be generated from operations will be sufficient to fund the
Company's working capital requirements and required principal and interest
payments for the foreseeable future. Based on the Company's fiscal 1999
expansion plan, the Company expects capital expenditures to be approximately
$7.1 million, of which approximately $5.5 million was expended by June 30, 1999.
Most of the planned capital expenditures related to new store openings and
computer equipment.
INFLATION
The Company does not believe that inflation has had a material effect on the
results of operations during the past three years. There can be no assurance
that the Company's business will not be affected by inflation in the future.
NEW ACCOUNTING PRONOUNCEMENTS
Accounting for Derivatives and Hedging Activities -- In June 1998, the FASB
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivatives and Hedging Activities"(SFAS 133), which establishes standards for
the recognition and measurement of derivatives and hedging activities. This
standard is effective for the Company's Fiscal 2000 annual report, however, the
Company has not engaged in these types of risk management or investment
activities, therefore this statement is not expected to have a significant
impact on the Company's consolidated financial statements.
12
In fiscal 1999, the Company adopted Statement of Position (SOP) 98-5 "Reporting
on the Costs of Start-Up Activities". The SOP requires that the costs of
start-up activities, including organization costs, be expensed as incurred. Due
to the immateriality to the Company's results of operations, the initial
application was not reported as a cumulative effect of a change in an accounting
principle. The impact of the change did not have a material effect on any of the
years presented.
YEAR 2000 READINESS
The Year 2000 issue arises primarily from computer programs, commercial systems
and embedded chips that will be unable to properly interpret dates beyond the
year 1999. The Company utilizes a variety of proprietary and third party
computer technologies - both hardware and software - directly in its business.
The Company also relies on numerous third parties and their systems' ability to
address the Year 2000 issue. The Company's critical information technology (IT)
includes: point-of-sale equipment, merchandise distribution, merchandise and
non-merchandise procurement, credit card and banking services, transportation,
and business and accounting management systems. The Company is using both
internal and external resources to complete its Year 2000 initiatives.
In order to address the Year 2000 issue, the Company's information technology
department took on the responsibility to oversee, monitor and coordinate the
company-wide Year 2000 effort. This department has developed and is implementing
a Year 2000 plan. The implementation includes five stages: (i) awareness, (ii)
assessment, (iii) renovation/development, (iv) validation, and (v)
implementation. There are several areas of focus: (1) renovation of
non-compliant systems and components throughout the Company; (2) installation of
new software packages to replace legacy systems; (3) assessment of Year 2000
readiness at key vendors and suppliers; and (4) evaluating facilities and
distribution equipment with embedded computer technology.
The status of each area of focus is as follows:
(1) All five stages of Year 2000 implementation for renovation of non-compliant
systems and components are nearly complete or will be completed by fiscal
year end 1999 for significant IT systems used in the Company's business.
(2) Replacement of significant non-compliant systems and components with new
software packages has been completed. The validation and implementation
stages of these new systems are substantially complete and will be
completed by fiscal year end 1999.
(3) A vast network of vendors and service suppliers provide the Company with
merchandise for resale, supplies for operational purposes and services. The
Company has identified key vendors and suppliers and is making inquiries to
determine their Year 2000 status. The Company has obtained assurances from
a number of its key vendors regarding their Year 2000 status and expects to
complete this process by fiscal year end 1999. In addition, the Company is
arranging for alternative vendors and service suppliers to replace vendor
and service suppliers not able to achieve Year 2000 compliance.
(4) The Company also utilizes various facilities and equipment with embedded
computer technology, such as PCs, conveyors, security systems, fire
protection systems, and energy management systems. The Company's assessment
of these systems is complete and all other stages of its efforts are
expected to be complete by fiscal year end 1999.
Total incremental expenses incurred to date, and those yet to be incurred,
related to review and remediation of the Year 2000 issue have not been and are
not expected to have a material impact on the Company's financial position.
The year 2000 issue presents a number of risks and uncertainties that could
impact the Company. For example, risks could include the failure of one or
several of the Company's significant vendors to timely fill the Company's
merchandise orders or there could be public utility failures that affect the
Company's retail stores. The Company is currently analyzing these risks and
uncertainties and has begun to develop contingency plans to address material
risks related to the year 2000 issues. These contingency plans include the
following:
13
a. January 1, 2000 falls on a Saturday, when the Company's distribution
center and corporate offices are normally closed. The contingency plans
include operating the distribution center and corporate systems on
January 1 in order to quickly address any year 2000 issues that may
arise.
b. The Company's stores will be open for business on January 1, 2000.
Contingency plans for the Company's stores include the following: all store
managers will report to their district managers, and district managers to
their regional managers during the morning of January 1, 2000, to notify
the corporate office whether they are open and operating normally, or if
they have encountered problems. If any such problems occur, the use of
existing manual sales processing procedures in any affected stores will be
implemented until such time as any year 2000 issues are resolved. The
Company's information technology department will be on hand and available
to work on any year 2000 issues on January 1, 2000 after ranking Year 2000
issues reported by stores in order of importance, using the ability of the
store to conduct business and process sales as the primary criteria.
The Company believes that the reasonably likely worst case scenario would
involve short-term disruption of systems affecting its supply and distribution
channels. At the present time, the Company is not aware of any Year 2000 issues
that are expected to materially affect its products, services, competitive
position or financial performance. However, despite the Company's significant
efforts to make its systems, facilities and equipment Year 2000 compliant, the
compliance of third party service providers and vendors is beyond the Company's
control. Accordingly, the Company can give no assurances that the failure of the
Company's systems or the systems of other companies on which the Company's
systems rely, or the failure of key suppliers, vendors, or other third parties
to comply with Year 2000 requirements, will not have a material adverse effect
on the Company.
SAFE HARBOR 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, including those relating to Year 2000 issues, involve risks and
uncertainties, and are subject to change based on various important factors. The
following factors (and the other cautionary factors set forth herein), 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 1999 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, ability to
hire and train associates, changes in fertility and birth rates, political
stability, currency and exchange risks, 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 which are beyond the
Company's control.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The analysis below presents the sensitivity of the market value of the Company's
financial instruments to selected changes in market rates. The range of changes
chosen reflects the Company's view of changes which are reasonably possible over
a one-year period. The Company's financial instruments are primarily comprised
of its debt portfolio. The Company believes that the market risk exposure on
other financial instruments is immaterial.
At June 30, 1999, the major components of the Company's debt portfolio are
Senior Unsecured Exchange Notes (the " Notes") and a Line of Credit (the
"Line"); both are denominated in US dollars. The Notes bear interest at a fixed
rated of 12 5/8%, and the Line bears interest at a variable rate which, at June
30, 1999 was approximately 8%. While a change in interest rates would not affect
the interest incurred or cash flow related to the fixed portion of the debt
portfolio, the Debt Value would be affected. A change in interest rates on the
variable portion of the debt portfolio impacts the interest incurred and cash
flows, but does not impact the net financial instrument position.
The sensitivity analysis as it relates to the fixed portion of the Company's
debt portfolio assumes an instantaneous 100 basis point move in interest rates
from their levels at June 30, 1999 with all other variables held constant. A 100
basis point increase in market interest rates would result in a decrease in Debt
Value of $0.9 million at June 30, 1999. A 100 basis point decrease in market
interest rates would result in a $0.9 million increase in Debt Value at June 30,
1999.
Based on the variable rate debt included in the Company's debt portfolio at June
30, 1999, a 100 basis point increase in interest rates would result in an
additional $0.2 million of interest incurred per year. A 100 basis point
decrease would lower interest expense by $0.2 million.
15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (schedule submitted in electronic
format only)
(b) Reports on Form 8-K.
None.
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 10, 1999 By: /s/ Dan W. Matthias
--------------------------------
Dan W. Matthias
Chief Executive Officer
And
Chairman of the Board
Date: August 10, 1999 By: /s/ Thomas Frank
--------------------------------
Thomas Frank
Chief Financial Officer
And
Vice President - Finance
16
EXHIBIT INDEX
Exhibit
No. Description Page No.
------ --------
27 Financial Data Schedule (schedule submitted in
Electronic format only) 16
17