** **

**United States****Securitiesand Exchange CommissionWashington, D.C. 20549**

 

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**FORM 10-Q**

 

| **ý**                                                                                                                                                                    | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                          |
| **For the quarterly period ended March 31, 2003**                                                                                                                             |
|                                                                                                                                                                          |
| **or**                                                                                                                                                                        |
|                                                                                                                                                                          |
| **o**                                                                                                                                                                         | **Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|                                                                                                                                                                          |
| **For the transition period from              to             ** |
|                                                                                                                                                                          |
| **Commission file number 0-21196**                                                                                                                                            |
|                                                                                                                                                                          |
| **MOTHERS WORK, INC.**                                                                                                                                                   |
| (Exact name of registrant as specified in  its charter)                                                                                                                       |

 

 
| **Delaware**                                                                           |   | **13-3045573**                              |
|----------------------------------------------------------------------------------------|--------|---------------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                        |   | (I.R.S.  Employer  Identification No.) |
|                                                                                   |   |                                        |
| **456 North 5th  Street, Philadelphia, Pennsylvania**                                  |   | **19123**                                   |
| (Address of principal executive offices)                                               |   | (Zip Code)                                  |
|                                                                                   |   |                                        |
| Registrant’s telephone number,  including area code  **(215) 873-2200** |

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No o

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Act). Yes o No ý

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

 

CommonStock, $.01 par value — 5,256,884 shares outstanding as of May 13, 2003

 

 

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**MOTHERSWORK, INC. AND SUBSIDIARIESINDEX**

 
| PART I —  FINANCIAL INFORMATION |                                                                                        | 1      |
|-------------------------------------------|---------------------------------------------------------------------------------------------|--------|
|                                      |
| Item 1.                                   | Financial Statements (unaudited)                                                            |   | 1 |
|                                      | 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 |   | 12 |
| Item 3.                                   | Quantitative and Qualitative Disclosures  about Market Risk                                 |   | 18 |
| Item 4.                                   | Controls and Procedures                                                                     |   | 19 |
|                                      |                                                                                        |
| PART II — OTHER INFORMATION          |                                                                                        | 20     |
|                                      |
| Item 1.                                   | Legal Proceedings                                                                           |   | 20 |
| Item 4.                                   | Submission of Matters to a Vote of Security  Holders                                        |   | 20 |
|                                      |                                                                                        |   |   |
| Item 6.                                   | Exhibits and Reports on Form 8-K                                                            |   | 21 |
|                                      |                                                                                        |
| Signatures                                |                                                                                        | 22     |
| Certifications                            |                                                                                        | 23     |

 

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**PART I.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

 

**MOTHERSWORK, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**(in thousands, exceptshare and per share amounts)

 
|                                                                                                                                   |   | **March 31, 2003** |    | **September 30, 2002** |       |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|----------------------------------|------------|
|                                                                                                                                   |   | **(unaudited)**    |    |                             | ** ** |
| **ASSETS**                                                                                                                             |   |               |    |                             |       |
| Current Assets:                                                                                                                        |   |               |    |                             |       |
| Cash and cash equivalents                                                                                                              |   | $                  | 16,746  |                             | $          | 14,759 |   |
| Trade receivables                                                                                                                      |   | 5,413              |    | 4,839                            |       |
| Inventories                                                                                                                            |   | 75,664             |    | 76,830                           |       |
| Deferred income taxes                                                                                                                  |   | 6,556              |    | 8,888                            |       |
| Prepaid expenses and other current assets                                                                                              |   | 7,161              |    | 5,126                            |       |
|                                                                                                                                   |   |               |    |                             |       |
| Total current assets                                                                                                                   |   | 111,540            |    | 110,442                          |       |
|                                                                                                                                   |   |               |    |                             |       |
| Property, Plant and Equipment, net                                                                                                     |   | 53,858             |    | 50,460                           |       |
| Assets Held for Sale                                                                                                                   |   | 1,200              |    | 1,200                            |       |
| Other Assets:                                                                                                                          |   |               |    |                             |       |
| Goodwill                                                                                                                               |   | 52,677             |    | 52,677                           |       |
| Deferred financing costs, net of accumulated amortization of $649 and  $465                                                            |   | 4,283              |    | 4,467                            |       |
| Other intangible assets, net of accumulated amortization of $2,380  and $2,249                                                         |   | 1,224              |    | 1,199                            |       |
| Deferred income taxes                                                                                                                  |   | 11,831             |    | 11,831                           |       |
| Other non-current assets                                                                                                               |   | 992                |    | 1,009                            |       |
|                                                                                                                                   |   |               |    |                             |       |
| Total other assets                                                                                                                     |   | 71,007             |    | 71,183                           |       |
|                                                                                                                                   |   |               |    |                             |       |
|                                                                                                                                   |   | $                  | 237,605 |                             | $          | 233,285 |   |
|                                                                                                                                   |   |               |    |                             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                          |   |               |    |                             |       |
| Current Liabilities:                                                                                                                   |   |               |    |                             |       |
| Line of credit borrowings                                                                                                              |   | $                  | —  |                             | $          | — |   |
| Current portion of long-term debt                                                                                                      |   | 269                |    | 369                              |       |
| Accounts payable                                                                                                                       |   | 22,509             |    | 20,110                           |       |
| Accrued expenses and other current liabilities                                                                                         |   | 29,137             |    | 32,045                           |       |
|                                                                                                                                   |   |               |    |                             |       |
| Total current liabilities                                                                                                              |   | 51,915             |    | 52,524                           |       |
|                                                                                                                                   |   |               |    |                             |       |
| Long-Term Debt                                                                                                                         |   | 127,904            |    | 127,913                          |       |
| Deferred Rent and Other Liabilities                                                                                                    |   | 5,559              |    | 5,343                            |       |
| Series C Cumulative Redeemable Preferred Stock                                                                                         |   | —             |    | —                           |       |
|                                                                                                                                   |   |               |    |                             |       |
| Total liabilities                                                                                                                      |   | 185,378            |    | 185,780                          |       |
|                                                                                                                                   |   |               |    |                             |       |
| Commitments and Contingencies (Note 3)                                                                                                 |   |               |    |                             |       |
|                                                                                                                                   |   |               |    |                             |       |
| Stockholders’ Equity:                                                                                                             |   |               |    |                             |       |
| Preferred Stock, 2,000,000 shares authorized                                                                                           |   |               |    |                             |       |
| Series A  cumulative convertible preferred stock, $.01 par value; $280.4878 stated  value; 41,000 shares authorized, none  outstanding |   | —             |    | —                           |       |
| Series B junior participating preferred stock, $.01 par value;  300,000 shares authorized, none outstanding                            |   | —             |    | —                           |       |
| Common stock, $.01 par value; 20,000,000 shares authorized, 5,263,138  and 5,179,901 shares issued and outstanding, respectively       |   | 53                 |    | 52                               |       |
| Additional paid-in capital                                                                                                             |   | 64,401             |    | 63,623                           |       |
| Accumulated deficit                                                                                                                    |   | (12,227            | )       | (16,170                          | )          |
|                                                                                                                                   |   |               |    |                             |       |
| Total stockholders’ equity                                                                                                        |   | 52,227             |    | 47,505                           |       |
|                                                                                                                                   |   |               |    |                             |       |
|                                                                                                                                   |   | $                  | 237,605 |                             | $          | 233,285 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

1

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**MOTHERS WORK, INC.AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(inthousands, except per share amounts)

(unaudited)

 
|                                          |   | **Three Months Ended  March 31,** |       | **Six Months Ended  March 31,** |       |
|-----------------------------------------------|--------|-----------------------------------|------------|---------------------------------|------------|
|                                          |   | **2003**                          | ** ** | **2002**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net sales                                     |   | $                                 | 111,304    |                            | $          | 104,865 |   | $ | 237,644 |   | $ | 219,250 |   |
| Cost of goods sold                            |   | 52,324                            |       | 49,653                          |       | 112,021 |   | 105,635 |   |
| Gross profit                                  |   | 58,980                            |       | 55,212                          |       | 125,623 |   | 113,615 |   |
| Selling, general and  administrative expenses |   | 55,038                            |       | 50,315                          |       | 112,159 |   | 101,251 |   |
| Operating income                              |   | 3,942                             |       | 4,897                           |       | 13,464 |   | 12,364 |   |
| Interest expense, net                         |   | 3,412                             |       | 3,433                           |       | 7,154 |   | 7,020 |   |
| Income before income taxes                    |   | 530                               |       | 1,464                           |       | 6,310 |   | 5,344 |   |
| Income tax provision                          |   | 199                               |       | 642                             |       | 2,367 |   | 1,988 |   |
| Net income                                    |   | 331                               |       | 822                             |       | 3,943 |   | 3,356 |   |
| Dividends on preferred stock                  |   | —                            |       | 733                             |       | — |   | 1,533 |   |
| Net income available to common  stockholders  |   | $                                 | 331        |                            | $          | 89 |   | $ | 3,943 |   | $ | 1,823 |   |
|                                          |   |                              |       |                            |       |   |   |   |   |
| Income per share — basic                 |   | $                                 | 0.06       |                            | $          | 0.02 |   | $ | 0.75 |   | $ | 0.52 |   |
| Average shares outstanding — basic       |   | 5,267                             |       | 3,569                           |       | 5,241 |   | 3,540 |   |
|                                          |   |                              |       |                            |       |   |   |   |   |
| Income per share — diluted               |   | $                                 | 0.06       |                            | $          | 0.02 |   | $ | 0.69 |   | $ | 0.49 |   |
| Average shares outstanding — diluted     |   | 5,660                             |       | 3,718                           |       | 5,691 |   | 3,764 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

2

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**MOTHERSWORK, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**(in thousands)(unaudited)

 
|                                                                               |   | **Six Months Ended  March 31,** |       |
|------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                               |   | **2003**                        | ** ** | **2002** | ** ** |
|                                                                               |   |                            | ** ** |   | ** ** |
| **Cash Flows from  Operating Activities**                                          |   |                            |       |   |   |
| Net income                                                                         |   | $                               | 3,943      |   | $ | 3,356 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                            |       |   |   |
| Depreciation and amortization                                                      |   | 4,741                           |       | 4,884 |   |
| Loss on impairment of long-lived assets                                            |   | 89                              |       | — |   |
| Loss on disposal of assets                                                         |   | 125                             |       | — |   |
| Deferred income tax provision                                                      |   | 2,332                           |       | 1,737 |   |
| Tax benefit of stock option exercises                                              |   | 453                             |       | — |   |
| Amortization of deferred financing costs                                           |   | 184                             |       | 250 |   |
| Accretion of discount on notes                                                     |   | 67                              |       | 106 |   |
| Provision for deferred rent                                                        |   | 179                             |       | 144 |   |
| Changes in assets and liabilities, net of effect of acquisition:                   |   |                            |       |   |   |
| Decrease (increase) in                                                             |   |                            |       |   |   |
| Trade receivables                                                                  |   | (574                            | )          | (522 | ) |
| Inventories                                                                        |   | 1,166                           |       | 11,165 |   |
| Prepaid expenses and other current assets                                          |   | (1,591                          | )          | 1,184 |   |
| Increase (decrease) in                                                             |   |                            |       |   |   |
| Accounts payable, accrued expenses and other liabilities                           |   | 532                             |       | (9,963 | ) |
| Net cash provided by operating activities                                          |   | 11,646                          |       | 12,341 |   |
| **Cash Flows from  Investing Activities**                                          |   |                            |       |   |   |
| Acquisition of iMaternity, net of cash acquired                                    |   | —                          |       | 574 |   |
| Capital expenditures                                                               |   | (10,842                         | )          | (3,236 | ) |
| Purchase of intangible assets                                                      |   | (156                            | )          | (79 | ) |
| Net cash used in investing activities                                              |   | (10,998                         | )          | (2,741 | ) |
| **Cash Flows from  Financing Activities**                                          |   |                            |       |   |   |
| Decrease in line of credit borrowings                                              |   | —                          |       | (11,862 | ) |
| Increase in cash overdrafts                                                        |   | 2,951                           |       | 3,573 |   |
| Repayment of long-term debt                                                        |   | (176                            | )          | (158 | ) |
| Repayment of debt assumed in acquisition of iMaternity                             |   | —                          |       | (8,892 | ) |
| Repurchase of common stock                                                         |   | (123                            | )          | — |   |
| Payment of issuance costs of common stock                                          |   | (210                            | )          | — |   |
| Payment of issuance costs of long-term debt                                        |   | (242                            | )          | — |   |
| Payment of redemption of Series A Preferred Stock                                  |   | (1,310                          | )          | — |   |
| Proceeds from exercise of stock options and warrants                               |   | 449                             |       | 142 |   |
| Net cash provided by (used in) financing activities                                |   | 1,339                           |       | (17,197 | ) |
| **Net Increase  (Decrease) in Cash and Cash Equivalents**                          |   | 1,987                           |       | (7,597 | ) |
| **Cash and Cash  Equivalents, Beginning of Period**                                |   | 14,759                          |       | 10,358 |   |
| **Cash and Cash  Equivalents, End of Period**                                      |   | $                               | 16,746     |   | $ | 2,761 |   |
|                                                                               |   |                            |       |   |   |
| Supplemental Disclosures of Cash Flow Information:                                 |   |                            |       |   |   |
| Cash paid for interest                                                             |   | $                               | 6,710      |   | $ | 6,708 |   |
| Cash paid for income taxes                                                         |   | $                               | 2,484      |   | $ | 2,466 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

3

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**MOTHERSWORK, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTSMarch 31, 2003**(unaudited)

 

**1.             BASISOF FINANCIAL STATEMENT PRESENTATION**

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the requirements for Form 10-Q and Article 10 ofRegulation S-X and, accordingly, certain information and footnotedisclosures have been condensed or omitted. Reference is made to the AnnualReport on Form 10-K as of and for the year ended September 30, 2002for Mothers Work, Inc. and Subsidiaries (the “Company” or “Mothers Work”)as filed with the Securities and Exchange Commission for additional disclosuresincluding a summary of the Company’s accounting policies.

 

In the opinion ofmanagement, the consolidated financial statements contain all adjustments,consisting of normal recurring adjustments, necessary to present fairly theconsolidated financial position of the Company for the periods presented. Sincethe Company’s operations are seasonal, the interim operating results of theCompany may not be indicative of operating results for the full year.

 

Certain prioryear balances in the financial statements have been reclassified to conformwith the current year presentation.

 

**2.             STOCKOPTIONS AND WARRANTS**

 

During the threeand six months ended March 31, 2003, respectively, a total of 16,000 and210,000 stock options were granted to certain employees and non-employeedirectors for the purchase of the Company’s common stock at prices not lessthan the fair market value of the Company’s common stock on the date of grant.

 

In connectionwith the acquisition of iMaternity on October 17, 2001 (see Note 8), theCompany issued to the sellers warrants to purchase 350,000 shares of theCompany’s common stock at an exercise price of $22.50 per share (the “Warrants”).  The Warrants were immediately vested upongrant and are exercisable for seven years from the date of grant.  During the year ended September 30, 2002(“fiscal 2002”), the Company repurchased Warrants to purchase 125,000 shares ofthe Company’s common stock for a purchase price of $4.50 per underlying share,or a total of $562,500.  In the firstquarter of fiscal 2003, certain holders of the Warrants turned in Warrants topurchase 100,000 shares of the Company’s common stock and were issued 44,113 sharesof the Company’s common stock pursuant to a cashless exercise net issuanceelection. As of March 31, 2003, Warrants to purchase 125,000 shares remainedoutstanding.

 

**3.             COMMITMENTSAND CONTINGENCIES**

 

On July 17, 2002, a purported class action was filed against theCompany in the Superior Court of California for Los Angeles County. Thecomplaint alleged that, under California law, certain former and currentemployees should have received overtime compensation, meal breaks and restbreaks. In March 2003, the Company, without admitting liability, entered into asettlement agreement in connection with this action.  The agreement is subject to court approval.  The Company, as previously disclosed,incurred a charge of approximately $800,000 relating to this settlement duringthe three months ended March 31, 2003.

 

The Company iscurrently a party to an action alleging similar claims under Washington law inSpokane County Superior Court. The plaintiffs in the Washington case areseeking unspecified actual damages, penalties and attorneys’ fees. On or aboutApril 23, 2003, one purported subclass of the plaintiffs accepted a settlementarrangement in the amount of $50,000, plus attorney’s fees and costs incurredthrough such date.  At this stage inthese proceedings, the Company is unable to predict the outcome of theremaining claims in the Washington case, which it continues to vigorouslydefend.

 

In addition, fromtime to time, the Company is named as a defendant in legal actions arising fromits normal business activities. Although the amount of any liability that couldarise with respect to currently pending actions, including the mattersspecifically described above, cannot be accurately predicted, the Company doesnot believe that the resolution of any pending action will have a materialadverse effect on its financial position.

 

**4.             EARNINGSPER SHARE (EPS)**

 

The Company follows Statement of FinancialAccounting Standards (“SFAS”) No. 128, “Earnings Per Share.”  Basic earnings (loss) per share (Basic EPS)is computed by dividing net income (loss) by the weighted average number ofshares of common stock outstanding. Diluted earnings (loss) per share (Diluted EPS) is computed by dividingnet income (loss) by the weighted average number of shares of common stockoutstanding, after giving effect to the potential dilution from the exercise ofsecurities, such as stock options, into shares of common stock as if thosesecurities were exercised.

 

4

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The followingtables summarize the Diluted EPS calculation (in thousands, except per shareamounts):

 
|                                                                                    |   | **Three Months Ended  March 31, 2003** |       | **Three Months Ended  March 31, 2002** |       |
|-----------------------------------------------------------------------------------------|--------|---------------------------------------------|------------|---------------------------------------------|------------|
|                                                                                    |   | **Income**                                  | ** ** | **Shares**                                  | ** ** | **Earnings  Per Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Earnings  Per Share** | ** ** |
| Basic EPS                                                                               |   | $                                           | 331        |                                        | 5,267      |   | $ | 0.06 |   | $ | 89 |   | 3,569 |   | $ | 0.02 |   |
| Incremental shares from the assumed exercise of outstanding stock  options and warrants |   | —                                      |       | 393                                         |       |   |   | — |   | 149 |   |   |   |
| Diluted EPS                                                                             |   | $                                           | 331        |                                        | 5,660      |   | $ | 0.06 |   | $ | 89 |   | 3,718 |   | $ | 0.02 |   |

 
|                                                                                    |   | **Six Months Ended  March 31, 2003** |       | **Six Months Ended  March 31, 2002** |       |
|-----------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|-------------------------------------------|------------|
|                                                                                    |   | **Income**                                | ** ** | **Shares**                                | ** ** | **Earnings  Per Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Earnings  Per Share** | ** ** |
| Basic EPS                                                                               |   | $                                         | 3,943      |                                      | 5,241      |   | $ | 0.75 |   | $ | 1,823 |   | 3,540 |   | $ | 0.52 |   |
| Incremental shares from the assumed exercise of outstanding stock  options and warrants |   | —                                    |       | 450                                       |       |   |   | — |   | 154 |   |   |   |
| Assumed conversion of subordinated notes                                                |   | —                                    |       | —                                    |       |   |   | 19 |   | 70 |   |   |   |
| Diluted EPS                                                                             |   | $                                         | 3,943      |                                      | 5,691      |   | $ | 0.69 |   | $ | 1,842 |   | 3,764 |   | $ | 0.49 |   |

 

Options topurchase 238,550 and 127,740 shares were outstanding as of March 31, 2003 and2002, respectively, but were not included in the computation of diluted EPS astheir effect would have been antidilutive for the three and six month periodsthen ended. These options could potentially dilute EPS in the future.

 

During the second quarter of fiscal 2002,certain holders of Series A Cumulative Convertible Preferred Stock (the “SeriesA Preferred Stock”) elected to convert 7,316 of such shares, with a statedvalue of $2,052,000 and at a conversion rate equal to ten shares of commonstock for each share of Series A Preferred Stock (a total of 73,160 shares ofcommon stock). The Company was restricted under the terms of its old12 5/8% senior notes from paying cash dividends to the holders uponconversion. Accordingly, the Company issued subordinated notes. For the firstsix months of fiscal 2002, a total of 10,531 shares with a stated value of$2,954,000 were converted into 105,312 shares of common stock.  The 27,877 shares of Series A PreferredStock outstanding at March 31, 2002, which were convertible into 278,772 sharesof common stock, were determined to be antidilutive and therefore excluded fromthe EPS computation for the three and six months ended March 31, 2002.  Additionally, in connection with theiMaternity acquisition, the Company issued to the sellers 302,619 shares ofSeries C Cumulative Redeemable Preferred Stock (the “Series C Preferred Stock”)with detachable Warrants.  All of theshares of Series C Preferred Stock and the Warrants were outstanding as ofMarch 31, 2002 and were excluded from the EPS computations as their effectwould have been antidilutive.  Duringthe fourth quarter of fiscal 2002, all of the remaining outstanding Series APreferred Stock, Series C Preferred Stock and subordinated notes were redeemedor repurchased  using proceeds generatedfrom the Company’s August 2002 debt and equity offerings.

 

In February 2003, the stockholders of the Company approved an amendmentto the Company’s 1987 Stock Option Plan, as amended and restated.   This amendment increased the number ofshares of common stock available for issuance upon the exercise of optionsgranted under this plan by 500,000.

 

In March 2003, our Board of Directorsapproved a share repurchase program, under which we may repurchase up to$10,000,000 of the Company’s outstanding common stock from time to time untilMarch 2005.  Pursuant to this program,as of May 13, 2003, we had repurchased approximately 15,000 shares of theCompany’s common stock, of which 6,000 shares had been repurchased throughMarch 31, 2003.

 

**5.             STOCK-BASED COMPENSATION**

 

The Company follows the intrinsic valuemethod of accounting for stock-based employee compensation in accordance withAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations. The following tablesillustrate the effect on net income (loss) and earnings (loss) per share if theCompany had accounted for its stock option plans under the fair value method ofaccounting under SFAS No. 123, “Accounting for Stock-Based Compensation,” asamended by SFAS No. 148, “Accounting for Stock-Based Compensation Transitionand Disclosure” (in thousands, except pershare amounts):

 
|                                                      |                                                                                                                      | **Three  Months Ended March 31,** |   | **Six Months  Ended March 31,** |   |
|-----------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|-----------------------------------|--------|---------------------------------|--------|
|                                                      |                                                                                                                      | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Net income available to common  stockholders, as reported |                                                                                                                      | $                                 | 331    |                            | $      | 89 |   | $ | 3,943 |   | $ | 1,823 |   |
| Deduct:                                                   | Total stock-based employee compensation  expense determined under the fair value-based method for all grants, net of  tax |                              | $      | 394                             |   | $ | 211 |   | $ | 2,750 |   | $ | 519 |   |
| Pro forma net income (loss)                               |                                                                                                                      | $                                 | (63    | )                               | $      | (122 | ) | $ | 1,193 |   | $ | 1,304 |   |
| Diluted EPS:                                              |                                                                                                                      |                              |   |                            |   |   |   |   |   |
| As reported                                               |                                                                                                                      | $                                 | 0.06   |                            | $      | 0.02 |   | $ | 0.69 |   | $ | 0.49 |   |
| Pro forma                                                 |                                                                                                                      | $                                 | (0.01  | )                               | $      | (0.03 | ) | $ | 0.21 |   | $ | 0.35 |   |
|                                                           |                                                                                                                           |                                   |        |                                 |        |  |  |  |  |  |  |  |  |  |

 

5

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Pro forma diluted earnings (loss) per share is computed by dividing proforma net income (loss) by the weighted average number of shares outstandingafter giving effect to the potential dilution from the exercise of securities,such as stock options, into shares of common stock as if those securities wereexercised.  Since the Company hadincurred a pro forma loss for the three months ended March 31, 2003 and 2002,all of the outstanding stock options and warrants during these periods weredetermined to be antidilutive, and therefore excluded from the computations.

 

The weighted average fair value of the options granted during the threeand six months ended March 31, 2003 and 2002 is estimated at $31.45 and $36.65,and $10.21 and $8.20 per share, respectively, on the date of grant using theBlack-Scholes option-pricing model with the following weighted averageassumptions:

 
|                    |   | **Three  Months Ended March 31,** |       | **Six Months Ended March 31,** |       |
|-------------------------|--------|-----------------------------------|------------|--------------------------------|------------|
|                    |   | **2003**                          | ** ** | **2002**                       | ** ** | **2003** | ** ** | **2002** | ** ** |
| Volatility              |   | 66.9                              | %          | 68.3                           | %          | 60.7 | % | 59.6 | % |
| Risk free interest rate |   | 3.0                               | %          | 3.0                            | %          | 2.7 | % | 2.1 | % |
| Expected life           |   | 10.0 years                        |       | 10.0 years                     |       | 9.6 years |   | 8.3 years |   |

 

**6.             INVENTORIES**

 

Inventories werecomprised of the following (in thousands):

 
|             |   | **March 31, 2003** |       | **September 30, 2002** |       |
|------------------|--------|--------------------|------------|-----------------------------|------------|
|             |   |               | ** ** |                        | ** ** |
| Finished goods   |   | $                  | 63,041     |                        | $          | 64,889 |   |
| Work-in-progress |   | 4,695              |       | 3,740                       |       |
| Raw materials    |   | 7,928              |       | 8,201                       |       |
|             |   | $                  | 75,664     |                        | $          | 76,830 |   |

 

**7.             ACCRUEDEXPENSES AND OTHER CURRENT LIABILITIES**

 

Accrued expensesand other current liabilities were comprised of the following (in thousands):

** **
|                                                         |   | **March 31, 2003** |       | **September 30, 2002** |       |
|--------------------------------------------------------------|--------|------------------------------|------------|----------------------------------|------------|
|                                                         |   |                         | ** ** |                             | ** ** |
| Salaries, wages, and employee benefits                       |   | $                            | 7,484      |                             | $          | 7,686 |   |
| Income taxes payable                                         |   | 265                          |       | 899                              |       |
| Interest                                                     |   | 2,357                        |       | 2,150                            |       |
| Sales taxes                                                  |   | 2,627                        |       | 1,998                            |       |
| Gift certificates and store credits                          |   | 1,917                        |       | 1,504                            |       |
| Rent                                                         |   | 1,119                        |       | 1,603                            |       |
| Insurance                                                    |   | 1,258                        |       | 1,862                            |       |
| Audit and legal                                              |   | 1,834                        |       | 1,129                            |       |
| Reserves recorded in the iMaternity acquisition (see Note 8) |   | 3,660                        |       | 4,330                            |       |
| Remaining payout on redemption of Series A Preferred Stock   |   | 2,415                        |       | 3,725                            |       |
| Accrued store construction costs                             |   | 1,181                        |       | 3,434                            |       |
| Other                                                        |   | 3,020                        |       | 1,725                            |       |
|                                                         |   |                         |       |                             |       |
|                                                         |   | $                            | 29,137     |                             | $          | 32,045 |   |

 

Interest paymentson the senior notes are made semiannually on February 1st and August1st.

 

**8.             ACQUISITIONOF IMATERNITY**

 

The Companyacquired eSpecialty Brands, LLC (“iMaternity”) on October 17, 2001 (the“Acquisition Date”) for $19,748,000, including transaction costs of$875,000.  The acquisition was accountedfor under the purchase method of accounting, and the results of operations ofiMaternity have been included in the Company’s results of operations from theAcquisition Date. Assets acquired and liabilities assumed have been recorded attheir estimated fair values.

 

Based on the allocation of purchase price,the application of the purchase method of accounting resulted in $23,093,000 ofexcess purchase price over the estimated fair value of the net tangible assetsacquired of $22,145,000 less assumed liabilities of $16,553,000 and costs toexit certain operations and locations of iMaternity of $8,937,000. The Companyrecognizes that certain identifiable intangible assets were acquired, primarilytrademarks, trade names, and Internet domain names. However, as determined byan independent third party appraiser, based on the nature of the items and usewithin the Company’s business and industry, no value was assigned to any of theidentifiable intangibles. Accordingly, the excess purchase price has beenassigned to goodwill.  In addition, inconnection with the acquisition, the Company assumed certain liabilities withtrade creditors of approximately $2,300,000 that are still in dispute.  With respect to the effect of these tradepayables on the allocation of the purchase price, to the extent that thesepayables are not paid and the associated liability reduced, then goodwill wouldbe reduced.

 

At the Acquisition Date, iMaternity operateda total of 166 Dan Howard and Mothertime maternity clothing stores, includingsome under the trade name iMaternity, and the online iMaternity.com website.The Company developed a plan in conjunction with the acquisition to closeapproximately 92 iMaternity stores and convert the remaining acquired locationsto the Company’s existing store concepts of Motherhood and Mimi Maternity.Further, the plan included the shutdown of iMaternity’s corporate headquartersand warehouse operation in Chicago, as well as its

 

6

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manufacturing and warehousing facilities in Costa Rica.  In connection with the plan, the Companyrecorded severance costs for involuntarily terminated employees of the acquiredbusiness of $2,587,000, lease termination fees and related legal costs of$4,200,000, and accrued for other costs to be incurred to complete the exitactivities of the acquired business totaling $2,150,000. Approximately 850employees of the acquired business were expected to be terminated as part ofthe plan, consisting of 528 corporate and 322 store employees.

 

During fiscal2002, the Company closed 88 iMaternity stores, of which 75 were included aspart of the 92 planned store closures. Also during fiscal 2002, the Company closed the corporate headquartersand warehouse operation in Chicago, an Internet-related developmentcenter in San Diego, California and other domestic warehousing facilities. TheiMaternity manufacturing and warehousing operations in Costa Rica have beenoperationally shut down.  The carryingvalue of the Costa Rica facility was reduced to its estimated realizable valueas of the Acquisition Date, which was determined based on a market surveyreceived from an independent third party, less estimated selling costs, and isclassified as “Assets Held for Sale” in the accompanying consolidated balancesheets.  During the first six months offiscal 2003, the Company has closed three additional iMaternity stores.  In accordance with its plan, the Companyexpects to close up to an additional 14 of the acquired iMaternity stores.  The timing of the store closures is dependentprimarily upon the Company’s ability to negotiate and complete the lease terminationsettlements.

 

In connectionwith the store closures and the shutdown of the various facilities as describedabove, the Company terminated 820 employees (524 corporate and 296 storeemployees), to whom $1,687,000 in accrued severance was paid out and chargedagainst the liability as of September 30, 2002.  Included in the severance payouts are quarterly installments madewith regard to a non-compete covenant and severance arrangement with a formerexecutive of iMaternity.  The remainingseverance accrual of $800,000 and $900,000 as of March 31, 2003 and September30, 2002, respectively, principally reflects the balance of the non-compete andseverance arrangement that is payable ratably on a monthly basis throughSeptember 2006.

 

A summary of thecharges incurred and reserves recorded in connection with the iMaternityacquisition exit/restructuring activities during fiscal 2002 and the first sixmonths of fiscal 2003 is as follows (in thousands):

 
|                   |   | **Adjustments and  Reserves Recorded in  Purchase Accounting** |       | **Balance as of  September 30, 2002** |       | **Charges During the  Six Months Ended  March 31, 2003** |       | **Balance as of   March 31, 2003** |       |
|------------------------|--------|----------------------------------------------------------------|------------|---------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------|------------|
|                   |   |                                                           | ** ** |                                  | ** ** |                                                     | ** ** |                               | ** ** |
| Lease termination fees |   | $                                                              | 4,200      |                                  | $          | 2,730                                                    |       | $                                  | 455        |   | $ | 2,275 |   |
| Severance              |   | 2,587                                                          |       | 900                                   |       | 100                                                      |       | 800                                |       |
| Exit and other costs   |   | 2,150                                                          |       | 700                                   |       | 115                                                      |       | 585                                |       |
|                   |   | $                                                              | 8,937      |                                  | $          | 4,330                                                    |       | $                                  | 670        |   | $ | 3,660 |   |

 

The followingtable displays the net non-cash assets (liabilities) that were acquired as aresult of the iMaternity acquisition (in thousands):

 
| Non-cash assets (liabilities):                   |   |    |   |
|--------------------------------------------------|--------|---------|--------|
| Inventory                                        |   | $       | 6,168  |   |
| Property, plant and equipment                    |   | 3,412   |   |
| Deferred income taxes                            |   | 11,450  |   |
| Other current assets                             |   | 541     |   |
| Goodwill                                         |   | 23,093  |   |
| Current liabilities, including transaction costs |   | (17,473 | )      |
| Debt                                             |   | (8,892  | )      |
| Net non-cash assets acquired                     |   | 18,299  |   |
| Less: Preferred stock issued                     |   | (17,999 | )      |
| Warrants issued                                  |   | (874    | )      |
| Cash acquired from the acquisition of iMaternity |   | $       | (574   | ) |

 

The following unauditedpro forma summary (in thousands, except per share amounts) combines theconsolidated results of operations of Mothers Work, Inc. and iMaternity as ifthe transaction occurred as of the beginning of the period presented givingeffect to certain adjustments, including recognition of an income tax benefitfor operating losses generated by the acquired business, recognition of accruedand unpaid dividends on the Series C Preferred Stock, discount accretionassociated with the Series C Preferred Stock, and reduction in depreciationexpense as a result of the revaluation of property, plant and equipment. This proforma summary is not necessarily indicative of the results of operations thatwould have occurred if the Company and iMaternity had been combined during suchperiod. Moreover, the pro forma summary is not intended to be indicative of theresults of operations that may be attained in the future.

 
|                                         |   | **Six Months Ended  March 31, 2002** |    |
|----------------------------------------------|--------|-------------------------------------------|---------|
| Net  sales                                   |   | $                                         | 221,447 |   |
| Operating  income                            |   | 11,523                                    |    |
| Net  income                                  |   | 2,708                                     |    |
| Net  income available to common stockholders |   | 1,088                                     |    |
| Income  per share — basic               |   | $                                         | 0.31    |   |
| Income  per share — diluted             |   | $                                         | 0.29    |   |

 

**9.             NEWACCOUNTING PRONOUNCEMENTS**

 

InJune 2001, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143is effective for fiscal years beginning after June 15, 2002, and addressesfinancial accounting and reporting for obligations associated

 

7

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with theretirement of tangible long-lived assets and the associated asset retirementcosts. The Company adopted this statement effective October 1, 2002. Adoptionof SFAS No. 143 has not had a material impact on the Company’s financialposition or results of operations.

 

InAugust 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” which established a singleaccounting model, based on the framework established in SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to beDisposed Of,” and resolved significant implementation issues related to SFASNo. 121 and APB Opinion No. 30, “Reporting the Results ofOperations-Reporting the Effects of a Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions.”SFAS No. 144 superceded SFAS No. 121 and portions of APB OpinionNo. 30.  The Company adopted thisstatement effective October 1, 2002. Adoption of SFAS No. 144 has not had a material impact on theCompany’s financial position or results of operations.

 

InApril 2002, the FASB issued SFAS No. 145, “Rescission of FASB StatementsNo. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  The provisions of thisstatement related to the rescission of SFAS No. 4 shall be applied by theCompany effective October 1, 2002. Any gain or loss on extinguishment of debtthat was classified as an extraordinary item in prior periods presented thatdoes not meet the criteria in APB Opinion No. 30 for classification as anextraordinary item shall be reclassified. As a result, it will be necessary to reclassify the loss on the earlyextinguishment of debt as additional interest expense for the period endedSeptember 30, 2002.

 

InJuly 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” SFAS No. 146 supersedesEmerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring),” and is effective fortransactions initiated after December 31, 2002. Under SFAS No. 146, acompany will record a liability for a cost associated with an exit or disposalactivity when that liability is incurred and can be measured at fair value. Aliability is incurred when an event obligates the entity to transfer or useassets. Management does not expect the adoption of this statement to have amaterial impact on the Company’s financial position or results of operations.

 

In November 2002, the FASB issuedInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness to Others, aninterpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASBInterpretation No. 34.” This Interpretation elaborates on the disclosures to bemade by a guarantor in its interim and annual financial statements about itsobligations under guarantees issued. The Interpretation also clarifies that aguarantor is required to recognize, at inception of a guarantee, a liabilityfor the fair value of the obligation undertaken. The initial recognition andmeasurement provisions of the Interpretation are applicable to guaranteesissued or modified after December 31, 2002 and are not expected to have amaterial impact on the Company’s financial position or results of operations.The disclosure requirements are effective for financial statements of interimand annual periods ending after December 31, 2002.

 

In November 2002, the EITF reached aconsensus on EITF Issue No. 02-16, “Accounting by a Customer (Including aReseller) for Certain Consideration Received from a Vendor.” EITF Issue No.02-16 provides guidance as to how customers should account for cashconsideration received from a vendor. EITF Issue No. 02-16 presumes that cashreceived from a vendor represents a reduction of the prices of the vendor’sproducts or services, unless the cash received represents a payment for assetsor services provided to the vendor or a reimbursement of costs incurred by thecustomer to sell the vendor’s products. The provisions of EITF Issue No. 02-16will apply to all agreements entered into or modified after December 31, 2002.We do not expect the provisions of EITF Issue No. 02-16 to have a materialimpact on the Company’s financial position or results of operations.

 

In December 2002, the FASB issued SFAS No. 148.  SFAS No. 148 supersedes SFAS No. 123and is effective for fiscal years ending after December 15, 2002. SFAS No. 148provides alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults. The Company has adopted the disclosurerequirements for interim financial statements for the quarter ended March 31,2003.  The Company has not completed itsevaluation of the alternative methods of transition, and thus has not yet madea determination on whether it will adopt the fair value method of accountingfor stock-based employee compensation under the transition guidance of SFAS No.148. As such, the Company has not yet been able to determine what impact, ifany, the adoption of this statement will have on its financial position orresults of operations.

 

**10.          GUARANTORSUBSIDIARIES**

 

Pursuant to the terms of the indenturerelating to the $125,000,000 of 111⁄4% Senior Notes due 2010 (the “New SeniorNotes”), Cave Springs, Inc. and the wholly-owned domesticsubsidiaries of iMaternity (collectively, the “Guarantor Subsidiaries”) havejointly and severally provided an unconditional guarantee of the obligations ofMothers Work with respect to the New Senior Notes. There are no restrictions onany of the assets of the Guarantor Subsidiaries which would limit their abilityto transfer funds to Mothers Work in the form of loans, advances or cashdividends, except as provided by applicable law. None of the Company’s foreignsubsidiaries have guaranteed the New Senior Notes. The condensed consolidatingfinancial information for the Company, the Guarantor Subsidiaries, and theCompany’s non-guarantor subsidiaries as of and for the six months endedMarch 31, 2003 as presented below has been prepared from the books and recordsmaintained by the Guarantor Subsidiaries and the Company. The condensedfinancial information may not be necessarily be indicative of the results ofoperations or financial position had the Guarantor Subsidiaries operated asindependent entities. Certain intercompany sales included in the subsidiaryrecords are eliminated in consolidation. Mothers Work pays all expenditures on behalfof the Guarantor Subsidiaries. An amount due to/due from parent will exist atany time as a result of this activity. The condensed financial informationincludes the allocation of material amounts of expenses such as corporateservices, administration and taxes on income. The allocations are generallybased on proportional amounts of sales or assets, and taxes on income areallocated consistent with the asset and liability approach used forconsolidated financial statement purposes. Management believes these allocationmethods are reasonable.

 

8

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**MothersWork, Inc.Condensed Consolidating Balance SheetMarch 31, 2003**(unaudited)(in thousands)

** **
|                                             |   | **Mothers Work  (Parent   Company)** |    | **Guarantor  Subsidiaries  (U.S.  Companies)** |   | **Non-Guarantor  Subsidiaries  (Foreign  Companies)** |   | **Consolidating  Eliminations** |   | **Mothers Work  Consolidated** |   |
|--------------------------------------------------|--------|--------------------------------------|---------|------------------------------------------------|--------|-------------------------------------------------------|--------|---------------------------------|--------|--------------------------------|--------|
| **ASSETS**                                       |   |                                 |    |                                           |   |                                                  |   |                            |   |                           |   |
| Current Assets:                                  |   |                                 |    |                                           |   |                                                  |   |                            |   |                           |   |
| Cash and cash equivalents                        |   | $                                    | 15,685  |                                           | $      | 123                                                   |   | $                               | 938    |                           | $      | — |   | $ | 16,746 |   |
| Trade receivables                                |   | 5,147                                |    | 266                                            |   | —                                                |   | —                          |   | 5,413                          |   |
| Inventories                                      |   | 74,054                               |    | 1,271                                          |   | 339                                                   |   | —                          |   | 75,664                         |   |
| Deferred income taxes                            |   | 6,556                                |    | —                                         |   | —                                                |   | —                          |   | 6,556                          |   |
| Prepaid expenses and other current assets        |   | 7,161                                |    | —                                         |   | —                                                |   | —                          |   | 7,161                          |   |
| Total current assets                             |   | 108,603                              |    | 1,660                                          |   | 1,277                                                 |   | —                          |   | 111,540                        |   |
| Property, Plant and Equipment, net               |   | 51,183                               |    | 1,848                                          |   | 827                                                   |   | —                          |   | 53,858                         |   |
| Assets Held for Sale                             |   | —                               |    | —                                         |   | 1,200                                                 |   | —                          |   | 1,200                          |   |
| Other Assets                                     |   | 37,220                               |    | 388                                            |   | 104                                                   |   | 33,295                          |   | 71,007                         |   |
| Investments in and advances to (from) affiliates |   | 36,368                               |    | 163,626                                        |   | (3,506                                                | )      | (196,488                        | )      | —                         |   |
| Total assets                                     |   | $                                    | 233,374 |                                           | $      | 167,522                                               |   | $                               | (98    | )                              | $      | (163,193 | ) | $ | 237,605 |   |
|                                             |   |                                 |    |                                           |   |                                                  |   |                            |   |                           |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**    |   |                                 |    |                                           |   |                                                  |   |                            |   |                           |   |
| Current Liabilities:                             |   |                                 |    |                                           |   |                                                  |   |                            |   |                           |   |
| Line of credit borrowings                        |   | $                                    | —  |                                           | $      | —                                                |   | $                               | — |                           | $      | — |   | $ | — |   |
| Current portion of long-term debt                |   | 269                                  |    | —                                         |   | —                                                |   | —                          |   | 269                            |   |
| Accounts payable                                 |   | 22,509                               |    | —                                         |   | —                                                |   | —                          |   | 22,509                         |   |
| Accrued expenses and other current liabilities   |   | 24,906                               |    | 571                                            |   | —                                                |   | 3,660                           |   | 29,137                         |   |
| Total current liabilities                        |   | 47,684                               |    | 571                                            |   | —                                                |   | 3,660                           |   | 51,915                         |   |
| Long-Term Debt                                   |   | 127,904                              |    | —                                         |   | —                                                |   | —                          |   | 127,904                        |   |
| Deferred Rent and Other Liabilities              |   | 5,559                                |    | —                                         |   | —                                                |   | —                          |   | 5,559                          |   |
| Total liabilities                                |   | 181,147                              |    | 571                                            |   | —                                                |   | 3,660                           |   | 185,378                        |   |
| Stockholders’ Equity:                       |   |                                 |    |                                           |   |                                                  |   |                            |   |                           |   |
| Common stockholders’ equity                 |   | 52,227                               |    | 166,951                                        |   | (98                                                   | )      | (166,853                        | )      | 52,227                         |   |
| Total stockholders’ equity                  |   | 52,227                               |    | 166,951                                        |   | (98                                                   | )      | (166,853                        | )      | 52,227                         |   |
| Total liabilities and stockholders’ equity  |   | $                                    | 233,374 |                                           | $      | 167,522                                               |   | $                               | (98    | )                              | $      | (163,193 | ) | $ | 237,605 |   |

 

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**MothersWork, Inc.Condensed Consolidating Statement of OperationsFor The Six Months Ended March 31, 2003**(unaudited)(in thousands)

 
|                                         |   | **Mothers Work  (Parent  Company)** |       | **Guarantor  Subsidiaries (U.S.  Companies)** |       | **Non-Guarantor  Subsidiaries  (Foreign  Companies)** |       | **Consolidating  Eliminations** |       | **Mothers Work  Consolidated** |       |
|----------------------------------------------|--------|-------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
|                                         |   |                                | ** ** |                                          | ** ** |                                                  | ** ** |                            | ** ** |                           | ** ** |
| Net sales                                    |   | $                                   | 223,508    |                                          | $          | 25,324                                                |       | $                               | 1,575      |                           | $          | (12,763 | ) | $ | 237,644 |   |
| Cost of goods sold                           |   | 106,388                             |       | 5,094                                         |       | 539                                                   |       | —                          |       | 112,021                        |       |
| Gross profit                                 |   | 117,120                             |       | 20,230                                        |       | 1,036                                                 |       | (12,763                         | )          | 125,623                        |       |
| Selling, general and administrative expenses |   | 117,839                             |       | 6,032                                         |       | 1,051                                                 |       | (12,763                         | )          | 112,159                        |       |
| Operating income (loss)                      |   | (719                                | )          | 14,198                                        |       | (15                                                   | )          | —                          |       | 13,464                         |       |
| Interest income (expense), net               |   | (11,142                             | )          | 3,988                                         |       | —                                                |       | —                          |       | (7,154                         | )          |
| Equity in earnings of subsidiaries           |   | 11,773                              |       | —                                        |       | —                                                |       | (11,773                         | )          | —                         |       |
| Income (loss) before income taxes            |   | (88                                 | )          | 18,186                                        |       | (15                                                   | )          | (11,773                         | )          | 6,310                          |       |
| Income tax provision (benefit)               |   | (4,031                              | )          | 6,404                                         |       | (6                                                    | )          | —                          |       | 2,367                          |       |
|                                         |   |                                |       |                                          |       |                                                  |       |                            |       |                           |       |
| Net income (loss)                            |   | $                                   | 3,943      |                                          | $          | 11,782                                                |       | $                               | (9         | )                              | $          | (11,773 | ) | $ | 3,943 |   |

 

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**MothersWork, Inc.Condensed Consolidating Cash Flow StatementFor The Six Months Ended March 31, 2003**(unaudited)(in thousands)

 
|                                                                                      |   | **Mothers Work  (Parent  Company)** |   | **Guarantor  Subsidiaries (U.S.  Companies)** |   | **Non-Guarantor  Subsidiaries  (Foreign  Companies)** |   | **Consolidating  Eliminations** |   | **Mothers Work  Consolidated** |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|-----------------------------------------------|--------|-------------------------------------------------------|--------|---------------------------------|--------|--------------------------------|--------|
| **Cash Flows from  Operating Activities:**                                                |   |                                |   |                                          |   |                                                  |   |                            |   |                           |   |
| Net income (loss)                                                                         |   | $                                   | 3,943  |                                          | $      | 11,782                                                |   | $                               | (9     | )                              | $      | (11,773 | ) | $ | 3,943 |   |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |   |                                |   |                                          |   |                                                  |   |                            |   |                           |   |
| Depreciation and amortization                                                             |   | 4,579                               |   | 138                                           |   | 24                                                    |   | —                          |   | 4,741                          |   |
| Loss on impairment of long-lived assets                                                   |   | 89                                  |   | —                                        |   | —                                                |   | —                          |   | 89                             |   |
| Loss on disposal of assets                                                                |   | 125                                 |   | —                                        |   | —                                                |   | —                          |   | 125                            |   |
| Deferred income tax provision                                                             |   | 2,332                               |   | —                                        |   | —                                                |   | —                          |   | 2,332                          |   |
| Tax benefit of stock option exercises                                                     |   | 453                                 |   | —                                        |   | —                                                |   | —                          |   | 453                            |   |
| Amortization of deferred financing costs                                                  |   | 184                                 |   | —                                        |   | —                                                |   | —                          |   | 184                            |   |
| Accretion of discount on notes                                                            |   | 67                                  |   | —                                        |   | —                                                |   | —                          |   | 67                             |   |
| Provision for deferred rent                                                               |   | 179                                 |   | —                                        |   | —                                                |   | —                          |   | 179                            |   |
| Changes in assets and liabilities:                                                        |   |                                |   |                                          |   |                                                  |   |                            |   |                           |   |
| Decrease (increase) in—                                                              |   |                                |   |                                          |   |                                                  |   |                            |   |                           |   |
| Trade receivables                                                                         |   | (387                                | )      | (187                                          | )      | —                                                |   | —                          |   | (574                           | )      |
| Inventories                                                                               |   | 569                                 |   | 749                                           |   | (152                                                  | )      | —                          |   | 1,166                          |   |
| Prepaid expenses and other current assets                                                 |   | (1,472                              | )      | (15                                           | )      | (104                                                  | )      | —                          |   | (1,591                         | )      |
| Intercompany balance                                                                      |   | (1,381                              | )      | (12,168                                       | )      | 1,776                                                 |   | 11,773                          |   | —                         |   |
| Increase (decrease) in—                                                              |   |                                |   |                                          |   |                                                  |   |                            |   |                           |   |
| Accounts payable, accrued expenses and other liabilities                                  |   | 680                                 |   | (59                                           | )      | (89                                                   | )      | —                          |   | 532                            |   |
| Net cash provided by operating activities                                                 |   | 9,960                               |   | 240                                           |   | 1,446                                                 |   | —                          |   | 11,646                         |   |
| **Cash Flows from  Investing Activities:**                                                |   |                                |   |                                          |   |                                                  |   |                            |   |                           |   |
| Capital expenditures                                                                      |   | (9,977                              | )      | (163                                          | )      | (702                                                  | )      | —                          |   | (10,842                        | )      |
| Purchase of intangible assets                                                             |   | (156                                | )      | —                                        |   | —                                                |   | —                          |   | (156                           | )      |
| Net cash used in investing activities                                                     |   | (10,133                             | )      | (163                                          | )      | (702                                                  | )      | —                          |   | (10,998                        | )      |
| **Cash Flows from  Financing Activities:**                                                |   |                                |   |                                          |   |                                                  |   |                            |   |                           |   |
| Increase in cash overdrafts                                                               |   | 2,951                               |   | —                                        |   | —                                                |   | —                          |   | 2,951                          |   |
| Repayment of long-term debt                                                               |   | (176                                | )      | —                                        |   | —                                                |   | —                          |   | (176                           | )      |
| Repurchase of common stock                                                                |   | (123                                | )      | —                                        |   | —                                                |   | —                          |   | (123                           | )      |
| Payment of issuance costs of common stock                                                 |   | (210                                | )      | —                                        |   | —                                                |   | —                          |   | (210                           | )      |
| Payment of issuance costs of long-term debt                                               |   | (242                                | )      | —                                        |   | —                                                |   | —                          |   | (242                           | )      |
| Payment of redemption of Series A Preferred Stock                                         |   | (1,310                              | )      | —                                        |   | —                                                |   | —                          |   | (1,310                         | )      |
| Proceeds from exercise of stock options and warrants                                      |   | 449                                 |   | —                                        |   | —                                                |   | —                          |   | 449                            |   |
| Net cash provided by financing activities                                                 |   | 1,339                               |   | —                                        |   | —                                                |   | —                          |   | 1,339                          |   |
| **Net Increase in  Cash and Cash Equivalents**                                            |   | 1,166                               |   | 77                                            |   | 744                                                   |   | —                          |   | 1,987                          |   |
| **Cash and Cash  Equivalents, Beginning of Period**                                       |   | 14,519                              |   | 46                                            |   | 194                                                   |   | —                          |   | 14,759                         |   |
| **Cash and Cash  Equivalents, End of Period**                                             |   | $                                   | 15,685 |                                          | $      | 123                                                   |   | $                               | 938    |                           | $      | — |   | $ | 16,746 |   |

 

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**Item 2****. Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

**Results of Operations**

 

The following tables set forth certain operating data as a percentageof net sales and as a percentage change for the periods indicated:

** **
|                                          |   | **Percentage of Net Sales**        |       | **% Period to Period  Increase (Decrease)** |       |
|-----------------------------------------------|--------|------------------------------------|------------|---------------------------------------------|------------|
|                                          |   | **Three  Months Ended  March 31,** | ** ** | **Six  Months Ended  March 31,**            | ** ** | **Three Months  Ended  March 31,** | ** ** | **Six Months  Ended  March 31,** | ** ** |
|                                          |   | **2003**                           | ** ** | **2002**                                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2003 vs. 2002** | ** ** | **2003 vs. 2002** | ** ** |
| Net sales                                     |   | 100.0                              | %          | 100.0                                       | %          | 100.0 | % | 100.0 | % | 6.1 | % | 8.4 | % |
| Cost of goods sold                            |   | 47.0                               |       | 47.3                                        |       | 47.1 |   | 48.2 |   | 5.4 |   | 6.0 |   |
| Gross profit                                  |   | 53.0                               |       | 52.7                                        |       | 52.9 |   | 51.8 |   | 6.8 |   | 10.6 |   |
| Selling, general and administrative  expenses |   | 49.5                               |       | 48.0                                        |       | 47.2 |   | 46.2 |   | 9.4 |   | 10.8 |   |
| Operating income                              |   | 3.5                                |       | 4.7                                         |       | 5.7 |   | 5.6 |   | (19.5 | ) | 8.9 |   |
| Interest expense, net                         |   | 3.0                                |       | 3.3                                         |       | 3.0 |   | 3.2 |   | (0.6 | ) | 1.9 |   |
| Income before income taxes                    |   | 0.5                                |       | 1.4                                         |       | 2.7 |   | 2.4 |   | (63.8 | ) | 18.1 |   |
| Income tax provision                          |   | 0.2                                |       | 0.6                                         |       | 1.0 |   | 0.9 |   | (69.0 | ) | 19.1 |   |
| Net income                                    |   | 0.3                                |       | 0.8                                         |       | 1.7 |   | 1.5 |   | (59.7 | ) | 17.5 |   |
| Dividends on preferred stock                  |   | —                             |       | 0.7                                         |       | — |   | 0.7 |   | NM |   | NM |   |
| Net income available to common stockholders   |   | 0.3                                | %          | 0.1                                         | %          | 1.7 | % | 0.8 | % | 271.9 |   | 116.3 |   |

 

The followingtables set forth certain information concerning the number of Company storesand leased departments for the periods indicated:

 
|                                                   |   | **Three Months Ended** |       |
|--------------------------------------------------------|--------|------------------------|------------|
|                                                   |   | **March 31, 2003**     | ** ** | **March 31, 2002** | ** ** |
|                                                   |   | **Stores**             | ** ** | **Leased  Departments** | ** ** | **Total** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total** | ** ** |
|                                                   |   |                   |       |   |   |   |   |   |   |   |   |   |   |
| Beginning of period                                    |   | 785                    |       | 150 |   | 935 |   | 806 |   | 133 |   | 939 |   |
| iMaternity acquired locations, net of related closures |   | (1                     | )          | — |   | (1 | ) | (48 | ) | — |   | (48 | ) |
| Opened                                                 |   | 22                     |       | — |   | 22 |   | 8 |   | — |   | 8 |   |
| Closed                                                 |   | (5                     | )          | (2 | ) | (7 | ) | (5 | ) | (1 | ) | (6 | ) |
| End of period                                          |   | 801                    |       | 148 |   | 949 |   | 761 |   | 132 |   | 893 |   |

 
|                                                   |   | **Six Months Ended** |       |
|--------------------------------------------------------|--------|----------------------|------------|
|                                                   |   | **March 31, 2003**   | ** ** | **March 31, 2002** | ** ** |
|                                                   |   | **Stores**           | ** ** | **Leased  Departments** | ** ** | **Total** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total** | ** ** |
|                                                   |   |                 |       |   |   |   |   |   |   |   |   |   |   |
| Beginning of period                                    |   | 763                  |       | 146 |   | 909 |   | 639 |   | 132 |   | 771 |   |
| iMaternity acquired locations, net of related closures |   | (3                   | )          | — |   | (3 | ) | 103 |   | — |   | 103 |   |
| Opened                                                 |   | 48                   |       | 4 |   | 52 |   | 26 |   | 1 |   | 27 |   |
| Closed                                                 |   | (7                   | )          | (2 | ) | (9 | ) | (7 | ) | (1 | ) | (8 | ) |
| End of period                                          |   | 801                  |       | 148 |   | 949 |   | 761 |   | 132 |   | 893 |   |

 

**Three Months Ended March 31, 2003 and 2002**

 

*Net Sales.*  Our netsales for the second quarter of fiscal 2003 increased 6.1%, a $6.4 millionincrease, to $111.3 million from $104.9 million for the secondquarter of fiscal 2002.  Net sales forthe second quarter increased primarily from the addition of new stores, withthe total number of our locations increasing to 949 at March 31, 2003 comparedto 893 at March 31, 2002. For the quarter ended March 31, 2003, we opened 22new locations and closed eight locations, including one iMaternity store closedin connection with the consolidation of that acquired store chain. Since theacquisition of iMaternity in October 2001, we have closed a total of 91 of the166 acquired iMaternity stores where we believed we could transfer a sufficientportion of the sales to our existing stores within the same area whileeliminating acquired store expenses and improving inventory utilization.Comparable store sales for the second quarter of fiscal 2003 increased by 0.2%,based on 825 locations, versus a comparable store sales increase of 3.9% duringthe second quarter of fiscal 2002, based on 724 locations. The comparable storesales results for the quarter were adversely affected by the difficult retailenvironment, including the weak economy as further impacted by global politicaluncertainty, and adverse weather conditions, including severe winter weather inFebruary and a delay in the onset of Spring weather in much of the UnitedStates compared to last year.  Sales forthe quarter were also somewhat negatively affected by the shift in the timingof Easter from March last year to April this year.

 

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*Gross Profit.*  Our grossprofit for the second quarter of fiscal 2003 increased by 6.8%, a $3.8 millionincrease, to $59.0 million from $55.2 million for the second quarter of fiscal2002.  This increase was attributableprimarily to our increased sales compared to last year.  Gross profit as a percentage of net salesfor the second quarter of fiscal 2003 improved by approximately 34 basis points(0.34 percentage points of net sales) to 53.0% from 52.7% for the secondquarter of fiscal 2002.  The increase ingross margin versus last year primarily reflects the reduction of our productcosts as a result of the continued expansion and refinement of our globalsourcing initiatives, partially offset by the negative impact on gross marginof adverse weather conditions reducing demand for Spring full price merchandiseand increasing demand for Fall markdown merchandise compared to last year.

 

*Selling, General and Administrative Expenses.*  Ourselling, general and administrative (“SG&A”) expenses for the secondquarter of fiscal 2003 increased by 9.4%, a $4.7 million increase, to$55.0 million from $50.3 million for the second quarter of fiscal2002. Compared to the second quarter of fiscal 2002, store wages and relatedbenefit costs increased by $2.6 million and store rent and relatedexpenses increased by $1.7 million, primarily resulting from our new storeopenings during the past twelve months and increased medical benefits expenses.  In addition, our SG&A expenses for thesecond quarter of fiscal 2003 include a pre-tax legal expense charge ofapproximately $0.8 million related to the estimated settlement cost of thepreviously disclosed purported class action lawsuit filed against us inCalifornia.  This charge was recorded asa result of a settlement agreement, which is subject to court approval, reachedin March 2003 in connection with this lawsuit. As a percentage of net sales,SG&A expenses increased to 49.5% for the second quarter of fiscal 2003compared to 48.0% for the second quarter of fiscal 2002, primarily reflectingincreased store payroll, benefits and rent expenses as a percentage of netsales, and the impact of the $0.8 million pre-tax legal charge.  The increase in store expenses as apercentage of net sales primarily reflects the relatively low comparable storesales increase for the quarter as well as the higher store expense ratios ofour newer stores.

 

*Operating Income.*  Ouroperating income for the second quarter of fiscal 2003 decreased by 19.5%, a$1.0 million decrease, to $3.9 million from $4.9 million for thesecond quarter of fiscal 2002, because our higher SG&A expenses more thanoffset the impact of our higher sales volume and improved gross margin.Operating income as a percentage of net sales for the second quarter of fiscal2003 decreased to 3.5% from 4.7% for the second quarter of fiscal 2002 becausethe increase in our SG&A expenses as a percentage of net sales exceeded theincrease in our gross margin compared to last year’s second quarter.

 

*Interest Expense, Net.*  Our netinterest expense was $3.4 million for the three months ended March 31, 2003 and2002.  The essentially equivalentinterest expense for the current and prior year periods reflects the offsettingeffects of a somewhat higher overall debt balance compared to last year, dueto the net impact of our August 2002 debt and equity offerings, and a $0.3 million non-recurring interestexpense credit related to our credit facility.

 

*Income Taxes.*Our effectiveincome tax rate was a provision of 37.5% for the second quarter of fiscal 2003compared to a provision of 43.9% for the second quarter of fiscal2002.   The effective income tax rate of 43.9% for the secondquarter of fiscal 2002 was computed based on an estimated annualeffective tax rate of 37.2% for fiscal 2002.  The increase in theestimated annual effective tax rate for fiscal 2002 during the second quarterof fiscal 2002 was based on increases in our statutory federal taxrate and our estimated effective state income tax rate.

 

*Dividends on Preferred Stock. *Preferred dividends were zero for the secondquarter of fiscal 2003 compared to $0.7 million for the second quarter offiscal 2002, reflecting the redemption of our Series A Preferred Stock andrepurchase of our Series C Preferred Stock in the fourth quarter of fiscal2002. Consequently, we will no longer recognize any preferred stock dividendswith respect to these two series of preferred stock.  As of March 31, 2003, $2.4 million has not yet been paid for the redeemed Series A PreferredStock and will be paid out upon submission of proper documentation from theremaining holders of those shares.

 

*Net Income Available to CommonStockholders. *Net income available to common stockholders forthe second quarter of fiscal 2003 was $0.3 million, or $0.06 per common share(diluted), compared to $0.1 million, or $0.02 per common share (diluted), forthe second quarter of fiscal 2002, representing a 271.9% increase in net incomeand a 200.0% increase in diluted earnings per share.  The average diluted shares outstanding of 5,660,000 for thesecond quarter of fiscal 2003 were 52.2% higher than the 3,718,000 shares forthe second quarter of fiscal 2002.  Theincrease in shares reflects the 1,165,0000 common shares issued pursuant to ourAugust 2002 common stock offering, as well as the impact of stock options andwarrants exercised during the past twelve months and the increased dilutiveeffect of outstanding stock options and warrants resulting from the higheraverage level of our stock price this year compared to last year.  As of March 31, 2003, we had 5,263,138outstanding common shares, which reflects the retirement of 6,000 shares werepurchased during the month of March 2003 pursuant to our share repurchaseprogram.

 

**Six Months Ended March 31, 2003 and 2002**

 

*Net Sales.*  Our netsales for the first six months offiscal 2003 increased 8.4%, a $18.4 million increase, to$237.6 million from 219.3 million for the first six months of fiscal 2002. Net sales for the first six months increased due to the addition of newstores and, to a lesser extent, an increase in comparable store sales.  Comparable store sales for the firstsix months of fiscal 2003 increased by 2.4%,based on 736 locations, versus a comparable store sales increase of 0.3% duringthe first six months of fiscal 2002,based on 679 locations. For the six months ended March 31, 2003, we opened 52new locations and closed 12 locations, including three iMaternity stores closedin connection with the consolidation of the acquired store chain.

 

*Gross Profit*.    Our gross profit for the first six months of fiscal 2003increased 10.6%, a $12.0 million increase, to $125.6 million compared to $113.6million for the first six months of fiscal 2002, due to increased sales andimproved gross margin compared to last year. Gross profit as a percentage ofnet sales for the first six months of fiscal 2003 increased by 104 basis pointsto 52.9% from 51.8% in the comparable period of fiscal 2002. The improvement ingross margin versus last year primarily reflects our continued success atreducing product costs through our global sourcing initiatives.

 

*Selling, General and Administrative Expenses*.    Our selling, general and administrativeexpenses for the first six months of fiscal 2003 increased by 10.8%, a $10.9million increase, to $112.2 million from $101.3 million for the first sixmonths of fiscal 2002. Compared to the first six months of fiscal 2002, storewages and related benefit costs increased by $4.5 million and store rent andrelated expenses increased by $3.2 million, primarilyresulting from our new store openings during the past twelve months andincreased medical benefits expenses.   In addition, our SG&A

 

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expensesfor the first six months of fiscal 2003 include the pre-tax legal expensecharge of approximately $0.8 million. As a percentage of net sales, SG&A expenses increased to 47.2% forthe first six months of fiscal 2003 compared to 46.2% for the first six monthsof fiscal 2002, primarily reflecting increased store payroll, benefits and rentexpenses as a percentage of net sales, and the impact of the $0.8 millionpre-tax legal charge.  The increase instore expenses as a percentage of net sales primarily reflects the relativelylow comparable store sales increase for the first six months as well as thehigher store expense ratios of our newer stores.

 

*Operating Income*.    Our operating income for the first sixmonths of fiscal 2003 increased by 8.9%, a $1.1 million increase, to $13.5million compared to $12.4 million in the first six months of fiscal 2002, dueto the higher sales volume and improved gross margin, partially offset byhigher SG&A expenses. Operating income as a percentage of net sales for thefirst six months of fiscal 2003 increased slightly to 5.7% from 5.6% in thecomparable period of fiscal 2002 because the increase in our gross marginslightly exceeded the increase in ourpercentage of net sales compared tolast year.

 

*Interest Expense, Net*.    Our net interest expense for the first sixmonths of fiscal 2003 increased by 1.9%, or $0.1 million, to $7.2 millioncompared to $7.0 million for the first six months of fiscal 2002. The increasereflects the somewhat higher overall debt balance compared to last year due tothe net impact of our August 2002 debt and equity offerings and a $0.3 million non-recurring interest expense credit related toour credit facility.

 

*Income Taxes*.    Our effective income tax rate was aprovision of 37.5% for the first six months of fiscal 2003 compared to 37.2%for the first six months of fiscal 2002. The change in the effective income taxrate primarily reflects an increase in our effective state income tax rate.

 

*Dividends onPreferred Stock. *Preferred dividends were zero for the first sixmonths of fiscal 2003 compared to $1.5 million for the first six months offiscal 2002, reflecting the redemption of our Series A Preferred Stock andrepurchase of our Series C Preferred Stock in the fourth quarter of fiscal2002.

 

*Net IncomeAvailable to Common Stockholders. *Net income available to common stockholders forthe first six months of fiscal 2003 was $3.9 million, or $0.69 per common share(diluted), compared to $1.8 million, or $0.49 per common share (diluted), forthe first six months of fiscal 2002, representing a 116.3% increase in netincome and a 40.8% increase in diluted earnings per share.  The average diluted shares outstanding of5,691,000 for the first six months of fiscal 2003 were 51.2% higher than the3,764,000 shares for the first six months of fiscal 2002, due to the sharesissued in our August 2002 common stock offering as well as the impact of stockoptions and warrants exercised during the past 12 months and the increaseddilutive effect of outstanding stock options and warrants compared to lastyear.

 

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**Seasonality**

 

Our business, like that of certain other retailers, is seasonal. Asignificant portion of our net sales and profits are typically realized duringthe first and third fiscal quarters, corresponding to the holiday and Springselling seasons. Results for any quarter are not necessarily indicative of theresults that may be achieved for a full fiscal year.  Quarterly results may fluctuate materially depending upon, amongother things, the timing of new store openings, net sales and profitabilitycontributed by new stores, increases or decreases in comparable store sales,adverse weather conditions, shifts in the timing of certain holidays andpromotions, changes in inventory and production levels and the timing ofdeliveries of inventory, and changes in our merchandise mix.

 

**Liquidity and Capital Resources**

 

Our cash needs have primarily been for (i) debt service on our seniornotes and our credit facility, (ii) capital expenditures, includingleasehold improvements, fixtures and equipment for new stores, storerelocations and expansions, and existing stores, as well as for ourdistribution and corporate facilities and information systems, and (iii)working capital, including inventory to support our new stores as well asexisting stores. We have historically financed these capital requirements fromcash flows from operations and borrowings under our credit facility.

 

In August 2002, we completed debt and equityofferings whereby we issued $125.0 million of 11 1/4% senior notes due 2010(the “New Senior Notes”) and 1,165,000 new shares of common stock (including the full exercise of theover-allotment option by the underwriters of our common stock offering), andused the net proceeds (i) to repay the $92.0 million of 12 5/8% senior notes(the “Old Senior Notes”) plus accrued and unpaid interest; (ii) to repaysubordinated notes issued to former holders of shares of our Series A PreferredStock in lieu of accrued and unpaid dividends; (iii) to redeem all of theoutstanding shares of our Series A Preferred Stock and to purchase, through anoffer to purchase, all of the outstanding shares of our Series C PreferredStock, in each case, for a price which included all accrued and unpaiddividends; (iv) to repay the outstanding borrowings under our credit facilityand (v) for general corporate purposes. We received net proceeds from these debt and equity offerings ofapproximately $147.9 million, after deducting fees and expenses of theofferings.  We used approximately $92.6million of the net proceeds of the offerings for the repurchase of our OldSenior Notes, including accrued and unpaid interest and related fees andexpenses.  We used approximately $2.6million for the repayment of subordinated notes that had been issued in lieu ofcash dividends on shares of Series A Preferred Stock previously converted intocommon stock. We used approximately $13.4 million to redeem all of the outstandingSeries A Preferred Stock, including accrued and unpaid dividends, of which$11.0 million has been paid as of March 31, 2003, and $2.4 million will be paidout upon submission of proper documentation from the remaining holders of theSeries A Preferred Stock.  The $2.4million amount is reflected in our consolidated balance sheet as of March 31,2003 in accrued expenses and other current liabilities.  We used approximately $20.9 million of thenet proceeds from the offerings for the repurchase of all of the outstandingSeries C Preferred Stock issued to the sellers of iMaternity in October 2001,including accrued and unpaid dividends. The remaining $18.4 million of netproceeds from the offerings were used to repay all of the outstanding borrowingsunder the credit facility, with the balance invested in short-term investmentsand available for general corporate purposes. The net proceeds of approximately $147.9 million from the debt andequity offerings includes approximately $0.6 million of cash proceeds from theexercise of stock options by certain selling stockholders in conjunction withthe equity offering.

 

The New Senior Notes were issued at 98.719%of their face amount, resulting in an annual effective interest rate of11.50%.  Interest on the New SeniorNotes is payable semi-annually in cash on February 1st and August 1st,and commenced on February 1, 2003.  TheNew Senior Notes were issued by Mothers Work, are senior unsecured obligationsof Mothers Work, and are unconditionally guaranteed on a senior basis by all ofour domestic subsidiaries.  See Note 10of “Notes to Consolidated Financial Statements.”  The New Senior Notes are redeemable at our option, in whole or inpart at any time on or after August 1, 2006 at 105.625% of their face amount,plus accrued and unpaid interest, declining ratably to 100% of their faceamount, plus accrued and unpaid interest, on and after August 1, 2009.  Additionally, before August 1, 2005, we mayredeem, at our option, up to 35% of the aggregate principal amount of the NewSenior Notes with the proceeds from equity offerings at 111.25% of theirprincipal amount, plus accrued and unpaid interest.  The New Senior Notes impose certain restrictions on our abilityto, among other things, incur additional indebtedness, pay dividends,repurchase stock, and enter into other various types of transactions.

 

Cash and cashequivalents increased by $2.0 million during the first six months of fiscal2003 compared to a decrease of $7.6 million for the first six months of fiscal2002.  Cash provided by operations was$11.6 million for the first six months of fiscal 2003, a decrease of $0.7million from the $12.3 million for the first six months of fiscal 2002.  During the first six months of fiscal 2003,we used cash provided by operations primarily to pay for $10.8 million ofcapital expenditures.  During the firstsix months of fiscal 2002, we used our cash provided by operations, along withexcess cash balances, primarily to reduce borrowings under our credit facilityby $11.9 million and to repay outstanding iMaternity debt of$8.9 million assumed upon our acquisition of iMaternity in October 2001.

 

For the firstsix months of fiscal 2003, we spent $10.8 million on capital expenditures,including $7.3 million on furniture, fixtures and leasehold improvementsprincipally for new store facilities, as well as improvements to existingstores, and $3.5 million for our distribution and corporate facilities andinformation systems. In comparison, we spent a total of $3.2 million on capitalexpenditures in the first six months of fiscal 2002, of which $2.8 million wasspent for new store facilities, as well as improvements to existing stores and$0.4 million on distribution and corporate facilities and information systems.  The increase in capital expendituresprimarily reflects the increased number of our new store openings compared to ayear ago, as well as expenditures to expand the capacity and throughput of ourdistribution center and increased investment in our management informationsystems, including the continued rollout of our new proprietary point-of-salesystem.

 

In March 2003,our Board of Directors approved a share repurchase program, under which we mayrepurchase up to $10.0 million of the Company’s outstanding common stock fromtime to time until March 2005.  Pursuantto this program, as of May 13, 2003, we had repurchased approximately 15,000shares of the Company’s common stock, of which 6,000 shares had beenrepurchased through March 31, 2003.

 

We have a$60 million credit facility that includes a $56.0 million borrowingbase revolving line of credit and approximately $4 million to support aspecial purpose letter of credit facility. This $60 million creditfacility matures on September 15, 2004. In October 2001, the credit facility was amended and restatedprimarily to increase the collateral base to include the assets acquired in ourpurchase of iMaternity.  On August 5,2002, we

 

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furtheramended the credit facility to, among other things, permit the consummation ofthe debt and equity offerings and the use of proceeds thereof, and modify thecovenants in order to increase the annual capital expenditures limit to $30.0million and permit acquisitions, capital stock repurchases and earlyredemptions of senior notes within specified limits. The amendment also addedan unused facility fee of 10 basis points per annum.  Interest on direct borrowings under the credit facility is currentlybased on the lender’s prime rate or, at our election, an alternative rate ofLIBOR plus 200 basis points for all or part of the direct borrowingsoutstanding. At March 31, 2003, there were no direct borrowings under thecredit facility.  Borrowings under thecredit facility would have borne interest at the rate of between approximately3.38% and 4.25% per annum as of March 31, 2003.  Amounts available for direct borrowings, net of letters of creditoutstanding, are limited to the lesser of (a) the unused portion of thecredit facility or (b) the Aggregate Adjusted Availability (“AAA”) asdefined in the agreement based on a percentage of eligible inventory,receivables and cash. The credit facility is secured by a security interest inour accounts receivable, inventory, equipment, fixtures, cash and other assets.There are no financial covenant requirements in the agreement unless the AAAfalls below $10.0 million. In such event, we would have to achieve minimumcash flow, as defined in the agreement, of not less than zero. During the firstsix months of fiscal 2003 and all of fiscal 2002, we have exceeded the AAAminimum.  As of March 31, 2003,outstanding borrowings under the credit facility consisted of no directborrowings and $3.1 million in letters of credit, with AAA and availableborrowings of $51.8 million, compared to $20.4 million of directborrowings and $2.8 million in letters of credit, with AAA and availableborrowings of $28.0 million as of March 31, 2002. In addition, pursuant tothe special purpose letter of credit facility, as of March 31, 2003 we have anoutstanding $3.4 million standby letter of credit to collateralize anoutstanding industrial revenue bond and a $1.0 million letter of credit tocollateralize a government mortgage note.

 

Management of the Company believes that our current cash and workingcapital positions, expected operating cash flows and available borrowingcapacity under the credit facility will be sufficient to fund our workingcapital, capital expenditures and debt repayment requirements and to fund stockrepurchases, if any, for the foreseeable future.

 

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**Critical Accounting Policies and Estimates**

 

Ourconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States. These generallyaccepted accounting principles require management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of net sales and expenses during thereporting period.

 

Oursignificant accounting policies were described in Note 2 of “Notes toConsolidated Financial Statements” contained in the Annual Report on Form 10-Kas filed for the fiscal year ended September 30, 2002.  We believe that the following discussionaddresses our critical accounting policies, which are those that are mostimportant to the portrayal of our financial condition and results of operationsand require management’s most difficult, subjective and complex judgments,often as a result of the need to make estimates about the effect of mattersthat are inherently uncertain.  Ifactual results were to differ significantly from estimates made, the reportedresults could be materially affected. However, the Company is not currently aware of any reasonably likelyevents or circumstances that would result in materially different results.

 

The Company’ssenior management has reviewed these critical accounting policies and estimatesand Management’s Discussion and Analysis regarding them with its auditcommittee.

 

*Inventories.*  We value our inventories, which consistprimarily of maternity apparel, at the lower of cost or market. Cost isdetermined on the first-in, first-out method (FIFO) and includes the cost ofmerchandise and freight. A periodic review of inventory quantities on hand isperformed in order to determine if inventory is properly positioned at thelower of cost or market. Factors related to current inventories such as futureconsumer demand and fashion trends, current analysis of merchandise based onreceipt date, current and anticipated retail markdowns or wholesale discounts,and class or type of inventory are analyzed to determine estimated netrealizable values.  Criteria utilized bythe Company to quantify aging trends include factors such as amount ofmerchandise received within the past twelve months, merchandise received morethan one year before with quantities on-hand in excess of 12 months of sales,and merchandise currently selling below cost. A provision is recorded to reduce the cost of inventories to theestimated net realizable values, if required. Inventories as of March 31, 2003and September 30, 2002 totaled $75.7 million and $76.8 million, respectively,representing approximately 31.8% and 32.9% of total assets, respectively. Giventhe significance of inventories to the Company’s consolidated financialstatements, the determination of net realizable values is considered to be acritical accounting estimate. Any significant unanticipated changes in thefactors noted above could have a significant impact on the value of ourinventories and our reported operating results.

 

*Long-Lived Assets.*  Our long-lived assets consist principally ofstore leasehold improvements and are included in the “Property, Plant andEquipment, net” line item in our consolidated balance sheets. These long-livedassets are recorded at cost and are amortized using the straight-line method,which deducts equal amounts of costs from earnings every year over the lesserof the applicable store lease term or the estimated useful life of theleasehold improvements. The typical initial lease term for our stores is tenyears.  Net property, plant andequipment as of March 31, 2003 and September 30, 2002 totaled $53.9 million and$50.5 million, respectively, representing approximately 22.7% and 21.6% oftotal assets, respectively.

 

In assessingpotential impairment of these assets, we periodically evaluate the historicaland forecasted operating results and cash flows on a store-by-store basis.Newly-opened stores may take time to generate positive operating and cash flowresults. Factors such as (i) store type, that is, company store or leaseddepartment, (ii) store concept, that is, Motherhood, Mimi Maternity, or A Peain the Pod, (iii) store location, for example, urban area versus suburb, (iv)current marketplace awareness of our brands, (v) local customer demographicdata and (vi) current fashion trends are all considered in determining the timeframe required for a store to achieve positive financial results, which isassumed to be within two years from the date a store location is opened. Ifeconomic conditions are substantially different from our expectations, thecarrying value of certain of our long-lived assets may become impaired.  In the second quarter of fiscal 2003, werecorded $89,000 in write-downs of long-lived assets.

 

*Goodwill*.  The purchase method of accounting forbusiness combinations requires the Company to make use of estimates andjudgments to allocate the purchase price paid for acquisitions to the fairvalue of the net tangible and identifiable intangible assets.  Goodwill represents the excess of the aggregatepurchase price over the fair value of net assets of an acquired entity.  As of both March 31, 2003 and September 30,2002, goodwill totaled $52.7 million, representing approximately 22.2% and22.6% of total assets, respectively.  InJune 2001, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards, or SFAS, No. 142, “Goodwill and OtherIntangible Assets.” SFAS No. 142 requires that goodwill no longer be amortized,but instead be tested for impairment at least annually or as impairmentindicators arise. Prior to our adoption of SFAS No. 142 on October 1, 2001,goodwill was amortized using the straight-line method over a period of 20years.

 

The impairmenttest requires the Company to compare the fair value of business reporting unitsto their carrying value, including assigned goodwill.  SFAS No. 142 required an initial impairment test within sixmonths after adoption by the Company and annually thereafter.  In addition, goodwill is tested morefrequently if changes in circumstances or the occurrence of events indicateimpairment exists.  In assessingpotential impairment of goodwill, we have determined that we have one reportingunit for purposes of applying SFAS No. 142 based on our reporting structure.The fair value of our single reporting unit is determined based on the fairmarket value of our outstanding common stock on a control basis. The Companyperformed the initial adoption impairment test in early fiscal 2002.  The results of the initial impairment test andthe annual impairment test performed as of September 30, 2002 indicated fairvalue amounts exceeded carrying amounts by a substantial margin.  If any significant unanticipated change inthe fair value of our outstanding common stock on a control basis occurs, ourgoodwill may become impaired.

 

*Accounting for Income Taxes.*  As part of the process of preparing ourconsolidated financial statements, we are required to estimate our income taxesin each of the jurisdictions in which we operate. This process requires us toestimate our actual current tax exposure together with assessing temporarydifferences resulting from differing treatment of items, such as depreciationof property and equipment and valuation of inventories, for tax and accountingpurposes.  We determine our provisionfor income taxes based on taxes as currently in effect. Legislation changescurrently proposed by certain states in which we operate, if enacted, couldincrease the transactions or activities subject to tax. Any such legislationthat becomes law could result in an increase in our income tax expense and ourincome taxes paid, which could have a materially adverse effect on our resultsof operations.

 

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The temporarydifferences result in deferred tax assets and liabilities, which are includedwithin our consolidated balance sheets. We must then assess the likelihood thatour deferred tax assets will be recovered from future taxable income. Actualresults could differ from this assessment if adequate taxable income is notgenerated in future periods. Deferred tax assets as of March 31, 2003 andSeptember 30, 2002 totaled $18.4 million and $20.7 million, respectively,representing approximately 7.7% and 8.9% of total assets, respectively. To theextent we believe that recovery of the deferred tax assets is not more likelythan not, we must establish a valuation allowance. To the extent we establish avaluation allowance or increase the allowance in a period, we must include anexpense within the tax provision in the statement of operations.

 

*Accounting for Contingencies*.  From time to time, we are named as adefendant in legal actions arising from our normal business activities.  We account for contingencies such as thesein accordance with SFAS No. 5, “Accounting for Contingencies.”  SFAS No. 5 requires us to record anestimated loss contingency when information available prior to issuance of ourfinancial statements indicates that it is probable that an asset has beenimpacted or a liability has been incurred at the date of the financialstatements and the amount of the loss can be reasonably estimated.  SFAS No 5. further states that when there isa range of loss and no amount within that range is a better estimate than anyother, then the minimum amount of the range shall be accrued.  Accounting for contingencies arising fromcontractual or legal proceedings requires management to use its best judgmentwhen estimating an accrual related to such contingencies, which includesconsultation with the Company’s legal counsel. As of March 31, 2003, accrualsfor loss contingencies includes acharge of $0.8 million because we entered into a settlement agreement (that isstill subject to court approval) in connection with the previously disclosedemployment-related action filed against us in California.  As additional information becomes known, ouraccrual for a loss contingency could fluctuate, thereby creating variability inour results of operations from period to period. Likewise, an actual lossarising from a loss contingency which significantly exceeds the amount accruedfor in our financial statements could have a material adverse impact on ouroperating results for the period in which such actual loss becomes known.

 

**Forward-Looking Statements**

 

Some of theinformation in this report, including the information incorporated by reference(as well as information included in oral statements or other written statementsmade or to be made by us), contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Theforward-looking statements involve a number of risks and uncertainties. Anumber of factors could cause our actual results, performance, achievements orindustry results to be materially different from any future results,performance or achievements expressed or implied by these forward-lookingstatements. These factors include, but are not limited to: changes in consumerspending patterns, raw material price increases, consumer preferences andoverall economic conditions, the impact of competition and pricing,availability of suitable store locations, continued availability of capital andfinancing, ability to hire and develop senior management and sales associates,ability to develop and source merchandise and ability to receive productionfrom foreign sources on a timely basis, potential stock repurchases and otherfactors referenced in our Annual Report on Form 10-K, including those set forthunder the caption “Risk Factors.”

 

In addition,these forward-looking statements necessarily depend upon assumptions,estimates and dates that may be incorrect or imprecise and involve known andunknown risks, uncertainties and other factors. Accordingly, any forward-lookingstatements included in this report do not purport to be predictions of futureevents or circumstances and may not be realized. Forward-lookingstatements can be identified by, among other things, the use of forward-lookingterms such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “proforma,” “anticipates,” “intends,” “continues,” “could,” “estimates,” “plans,”“potential,” “predicts,” “goal,” “objective,” or the negative of any of theseterms, or comparable terminology, or by discussions of outlook, plans, goals,strategy or intentions. Forward-looking statements speak only as of thedate made. We assume no obligation to update any of these forward-lookingstatements to reflect actual results, changes in assumptions or changes inother factors affecting these forward-looking statements.

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

 

Mothers Work is exposed to market risk from changes in interestrates.  We have not entered into anymarket sensitive instruments for trading purposes.  The analysis below presents the sensitivity of the market valueof our financial instruments to selected changes in market interest rates.  The range of changes presented reflects ourview of changes that are reasonably possible over a one-year period.

 

At March 31, 2003, the principal components of our debt portfolio werethe $125.0 million of New Senior Notes due 2010 and the $60 millioncredit facility, both of which are denominated in U.S. dollars.  The fair value of the debt portfolio isreferred to as the “debt value.”  TheNew Senior Notes bear interest at a fixed rate of 111⁄4%.  While a change in market interest rateswould not affect the interest incurred or cash flow related to this fixed rateportion of the debt portfolio, the debt value would be affected.

 

Our revolving credit facility carries a variable interest rate that istied to market indices.  At March 31,2003, we had no direct borrowings and $3.1 million of letters of creditoutstanding under our credit facility (plus an additional $4.4 million ofletters of credit outstanding under a special purpose letter of creditfacility).  Direct borrowings under thecredit facility would have borne interest at a rate between approximately 3.38%and 4.25% per annum as of March 31, 2003. Any future borrowings under the credit facility would, to the extent ofoutstanding borrowings, be affected by changes in market interest rates. Achange in market interest rates on the variable portion of the debt portfolioimpacts the interest incurred and cash flows, but does not impact the value ofthe financial instrument.

 

The sensitivity analysis as it relates to the fixed portion of our debtportfolio assumes an instantaneous 100 basis point change in interest ratesfrom their levels at March 31, 2003 with all other variables heldconstant.  A 100 basis point increase inmarket interest rates would result in a decrease in the debt value of the NewSenior Notes by $6.0 million at March 31, 2003.  Conversely, a 100 basis point decline in market interest rateswould cause the debt value to increase by $6.3 million at March 31, 2003.

 

Other than as described above, we do not believe that the market riskexposure on other financial instruments is material.

 

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**Item 4. Controls and Procedures**

 

We carried outan evaluation under the supervision and with the participation of our internalreview committee and our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in Rules 13a-14(c) and15d-14(c) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of a date within 90 days prior to the date of filing this QuarterlyReport on Form 10-Q (the “Evaluation Date”). Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that, as of theEvaluation Date, our disclosure controls and procedures are effective to ensurethat information required to be disclosed by us in our Exchange Act reports wasrecorded, processed, summarized and reported within the applicable timeperiods.  Since the Evaluation Date,there have been no significant changes in internal controls or, to ourknowledge, in other factors that could significantly affect these controlsincluding any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

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**PART II. OTHERINFORMATION**

 

**Item 1. LegalProceedings**

 

On July 17, 2002, a purported class action was filed against theCompany in the Superior Court of California for Los Angeles County. Thecomplaint alleged that, under California law, certain former and currentemployees should have received overtime compensation, meal breaks and restbreaks. In March 2003, the Company, without admitting liability, entered into asettlement agreement in connection with this action.  The agreement is subject to court approval.  The Company, as previously disclosed, incurreda charge of approximately $800,000 relating to this settlement during the three months ended March 31, 2003.

 

The Company iscurrently a party to an action alleging similar claims under Washington law inSpokane County Superior Court. The plaintiffs in the Washington case areseeking unspecified actual damages, penalties and attorneys’ fees. On or aboutApril 23, 2003, one purported subclass of the plaintiffs accepted a settlementarrangement in the amount of $50,000, plus attorney’s fees and costs incurredthrough such date.  At this stage inthese proceedings, the Company is unable to predict the outcome of theremaining claims in the Washington case, which it continues to vigorouslydefend.

 

In addition, from time to time, the Company is named as a defendant inlegal actions arising from its normal business activities. Although the amountof any liability that could arise with respect to currently pending actions,including the matters specifically described above, cannot be accuratelypredicted, the Company does not believe that the resolution of any pendingaction will have a material adverse effect on its financial position.

 

**Item4. Submission of Matters to a Vote of Security Holders**

 

At theCompany’s Annual Meeting of Stockholders held on February 7, 2003, thestockholders of the Company elected two directors of the Company; approved anamendment to the Mothers Work 1987 Stock Option Plan to authorize the Companyto grant options to purchase up to an additional 500,000 shares; approved anamendment to the Company’s restated Certificate of Incorporation to increasethe number of authorized shares of common stock, $.01 par value, from 10million to 20 million; and, ratified the appointment of KPMG LLP as theCompany’s independent auditors for the fiscal year ending September 30,2003.

 

Mr. WilliamA. Schwartz and Mr. Stanley C. Tuttleman were elected to serve asdirectors at the meeting.  The votingresults were 3,587,814 shares for and 352,134 shares abstained forMr. Schwartz and 3,681,990 shares for and 257,958 shares abstained forMr. Tuttleman. Dan W. Matthias, Elam M. Hitchner, III, Rebecca C.Matthias, Joseph A. Goldblum and David Schlessinger also continue to servetheir terms as directors.  The voteratifying the amendment to the Mothers Work 1987 Stock Option Plan was1,917,938 shares for, 1,216,060 shares against and 803,684 abstained. The voteratifying the amendment to the Mothers Work restated Certificate ofIncorporation was 3,759,189 shares for, 182,957 shares against and 802 abstained.  The vote ratifying the appointment of KPMGLLP as independent auditors was 3,869,511 shares for, 69,949 shares against and789 abstained.

 

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**Item6. Exhibits and Reports on Form 8-K**

 

(a)   Exhibits.

** **
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                          |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                     |
| 3.3             |   | Amendment to the Amended and  Restated Certificate of Incorporation of the Company dated February 11, 2003.                                                                                                              |
| 3.4             |   | Amendment to the Certificate  of Designation of the Series B Junior Participating Preferred Stock of the  Company dated February 11, 2003.                                                                               |
| *4.7            |   | Amendment No. 4 to the Amended  and Restated Rights Agreement dated February 14, 2003 between the Company and  StockTrans, Inc. (Exhibit 4.7 to the Company’s Current Report on Form 8-K  dated February 14, 2003). |
| 10.25           |   | Amendment to the Company’s  1987 Stock Option Plan, as amended and restated, effective as of November 13,  2002.                                                                                                    |
| 10.26           |   | Amendment Agreement dated as  of March 14, 2003 between the Company and Dan W. Matthias                                                                                                                                  |
| 10.27           |   | Amendment Agreement dated as  of March 14, 2003 between the Company and Rebecca C. Matthias                                                                                                                              |
| 99.1            |   | Certification of the Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                             |
| 99.2            |   | Certification of the Senior  Vice President-Chief Financial Officer Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                 |

 

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* Incorporated byreference.

 

 

(b)   Report on Form 8-K.

 

The Company filed a Current Report on Form 8-K dated February 19, 2003under Item 5—Other Events disclosing that it had amended itsAmended and Restated Rights Agreement dated as of March 17, 1997, as amended,between the Company and StockTrans, Inc. to increase the number of shares ofthe Company’s Series B Junior Participating Preferred Stock available forissuance under the Amended and Restated Rights Agreement from 10,000 shares to300,000 shares.

 

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**Signatures**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|               | MOTHERS WORK, INC. |
|--------------------|--------------------|
|               |               |   |
| Date: May 15, 2003 | By:                | /s/ DAN W. MATTHIAS |
|               |               | Dan W. Matthias |
|               |               | *Chairman of the  Board and  Chief Executive Officer* |
|               |               |   |
|               |               |   |
| Date: May 15, 2003 | By:                | /s/ EDWARD M. KRELL |
|               |               | Edward M. Krell*Senior* |
|               |               | *Vice President**—Chief Financial Officer* |

 

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**CERTIFICATIONS**

 

**CERTIFICATIONOF CHIEF EXECUTIVE OFFICER**

 

I, Dan W. Matthias, certify that:

 

1.             Ihave reviewed this quarterly report on Form 10-Q of Mothers Work, Inc.;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.             Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) forthe registrant and we have:

 

a)             designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)            evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)             presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors:

 

a)             allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| May 15, 2003 |                      | /s/ Dan W. Matthias |
|--------------|---------------------------|---------------------|
| Date         | Dan W. Matthias           |
|         | *Chief Executive Officer* |

 

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**CERTIFICATIONOF CHIEF FINANCIAL OFFICER**

 

I, Edward M. Krell, certify that:

 

1.             Ihave reviewed this quarterly report on Form 10-Q of Mothers Work, Inc.;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.             Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) forthe registrant and we have:

 

a)             designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)            evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)             presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors:

 

a)             all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.             Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| May 15, 2003 |                                            | /s/ Edward M. Krell |
|--------------|-------------------------------------------------|---------------------|
| Date         | Edward M. Krell                                 |
|         | *Senior Vice President-Chief Financial Officer* |

 

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