**UnitedStatesSecurities and Exchange Commission**

**Washington, D.C. 20549**

 

**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 June 30, 2004**                                                                                                                             |
| ** **                                                                                                                                                                   | ** ** | ** **                                                                                         |
| **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 itscharter)

 

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

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements 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 Exchange Act). Yes ý  No o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

Common Stock, $.01 par value —5,205,814shares outstanding as of August 13, 2004

 

 

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**INDEX**

 
| PART I —  FINANCIAL INFORMATION |                                                                                        |
|------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                           |                                                                                        |   |
| Item 1.                                        | Financial Statements (unaudited)                                                            |   |
|                                           | Consolidated Balance Sheets                                                                 |   |
|                                           | Consolidated Statements of Operations                                                       |   |
|                                           | Consolidated Statements of Cash Flows                                                       |   |
|                                           | Notes to Consolidated Financial Statements                                                  |   |
|                                           |                                                                                        |   |
| Item 2.                                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 3.                                        | Quantitative  and Qualitative Disclosures about Market Risk                                 |   |
| Item 4.                                        | Controls  and Procedures                                                                    |   |
|                                           |                                                                                        |   |
| PART II — OTHER INFORMATION     |                                                                                        |
| Item 1.                                        | Legal Proceedings                                                                           |   |
| Item  2.                                       | Changes  in Securities, Use of Proceeds and Issuer Purchases of Equity Securities           |   |
| Item 6.                                        | Exhibits  and Reports on Form 8-K                                                           |   |
| Signatures                                     |                                                                                        |   |

 

ii

----

 

**PARTI.  FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**MOTHERS WORK, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(in thousands, except share and per shareamounts)

 
| ** **                                                                                                                        | ** ** | **June 30, 2004** | ** ** | **September 30, 2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|
| ** **                                                                                                                        | ** ** | **(unaudited)**   | ** ** | ** **                       | ** ** |
| **ASSETS**                                                                                                                        |       |              |       |                             |       |
| Current Assets:                                                                                                                   |       |              |       |                             |       |
| Cash and cash equivalents                                                                                                         |       | $                 | 29,734     |                             | $          | 20,731 |   |
| Trade receivables                                                                                                                 |       | 3,151             |       | 2,385                            |       |
| Inventories                                                                                                                       |       | 88,448            |       | 84,505                           |       |
| Deferred income taxes                                                                                                             |       | 4,688             |       | 4,655                            |       |
| Prepaid expenses and other  current assets                                                                                        |       | 4,838             |       | 5,166                            |       |
| Total Current Assets                                                                                                              |       | 130,859           |       | 117,442                          |       |
| Property, Plant and Equipment,  net                                                                                               |       | 59,284            |       | 57,811                           |       |
| Assets Held for Sale                                                                                                              |       | 1,200             |       | 1,200                            |       |
| Other Assets:                                                                                                                     |       |              |       |                             |       |
| Goodwill                                                                                                                          |       | 50,389            |       | 50,389                           |       |
| Deferred financing costs, net  of accumulated amortization of $1,157 and $852                                                     |       | 3,774             |       | 4,080                            |       |
| Other intangible assets, net of  accumulated amortization of $2,557 and $2,447                                                    |       | 959               |       | 1,126                            |       |
| Deferred income taxes                                                                                                             |       | 13,779            |       | 13,586                           |       |
| Other non-current assets                                                                                                          |       | 961               |       | 969                              |       |
| Total Other Assets                                                                                                                |       | 69,862            |       | 70,150                           |       |
| Total Assets                                                                                                                      |       | $                 | 261,205    |                             | $          | 246,603 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                     |       |              |       |                             |       |
| Current Liabilities:                                                                                                              |       |              |       |                             |       |
| Line of credit borrowings                                                                                                         |       | $                 | —     |                             | $          | — |   |
| Current portion of long-term  debt                                                                                                |       | 279               |       | 279                              |       |
| Accounts payable                                                                                                                  |       | 20,276            |       | 19,585                           |       |
| Accrued expenses and other  current liabilities                                                                                   |       | 36,233            |       | 31,346                           |       |
| Total Current Liabilities                                                                                                         |       | 56,788            |       | 51,210                           |       |
| Long-Term Debt                                                                                                                    |       | 127,764           |       | 127,768                          |       |
| Deferred Rent                                                                                                                     |       | 6,884             |       | 6,234                            |       |
| Total Liabilities                                                                                                                 |       | 191,436           |       | 185,212                          |       |
|                                                                                                                              |       |              |       |                             |       |
| Commitments and Contingencies  (Note 8)                                                                                           |       |              |       |                             |       |
|                                                                                                                              |       |              |       |                             |       |
| Stockholders’ Equity:                                                                                                        |       |              |       |                             |       |
| Preferred Stock, 2,000,000  shares authorized                                                                                     |       |              |       |                             |       |
| Series A cumulative convertible  preferred stock, $.01 par 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, 5,192,353 and 5,231,114 shares issued and  outstanding, respectively |       | 52                |       | 52                               |       |
| Additional paid-in capital                                                                                                        |       | 62,448            |       | 63,559                           |       |
| Retained earnings (accumulated  deficit)                                                                                          |       | 7,269             |       | (2,220                           | )          |
| Total Stockholders’ Equity                                                                                                   |       | 69,769            |       | 61,391                           |       |
| Total Liabilities and  Stockholders’ Equity                                                                                  |       | $                 | 261,205    |                             | $          | 246,603 |   |

 

The accompanying notes are an integral partof these Consolidated Financial Statements.

 

1

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except per share amounts)

(unaudited)

 
| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                                     |       | $                                | 139,558    |                            | $          | 132,403 |   | $ | 397,056 |   | $ | 370,047 |   |
| Cost of goods sold                            |       | 60,798                           |       | 56,706                          |       | 182,189 |   | 168,727 |   |
| Gross profit                                  |       | 78,760                           |       | 75,697                          |       | 214,867 |   | 201,320 |   |
| Selling, general and  administrative expenses |       | 63,421                           |       | 58,420                          |       | 187,971 |   | 170,579 |   |
| Operating income                              |       | 15,339                           |       | 17,277                          |       | 26,896 |   | 30,741 |   |
| Interest expense, net                         |       | 3,688                            |       | 3,633                           |       | 11,081 |   | 10,787 |   |
| Income before income taxes                    |       | 11,651                           |       | 13,644                          |       | 15,815 |   | 19,954 |   |
| Income tax provision                          |       | 4,660                            |       | 5,275                           |       | 6,326 |   | 7,642 |   |
| Net income                                    |       | $                                | 6,991      |                            | $          | 8,369 |   | $ | 9,489 |   | $ | 12,312 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Income per share—Basic                   |       | $                                | 1.34       |                            | $          | 1.60 |   | $ | 1.82 |   | $ | 2.35 |   |
| Average shares  outstanding—Basic        |       | 5,201                            |       | 5,239                           |       | 5,215 |   | 5,240 |   |
| Income per share—Diluted                 |       | $                                | 1.28       |                            | $          | 1.50 |   | $ | 1.72 |   | $ | 2.18 |   |
| Average shares  outstanding—Diluted      |       | 5,480                            |       | 5,570                           |       | 5,530 |   | 5,651 |   |

 

The accompanying notes are an integral partof these Consolidated Financial Statements.

 

2

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

(unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| **Cash Flows  from Operating Activities**                                          |       |                            |       |   |   |
| Net income                                                                         |       | $                               | 9,489      |   | $ | 12,312 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                      |       | 7,509                           |       | 7,351 |   |
| Loss on impairment of  long-lived assets                                           |       | 470                             |       | 89 |   |
| Loss on disposal of assets                                                         |       | 381                             |       | 156 |   |
| Accretion of discount on senior  notes                                             |       | 110                             |       | 100 |   |
| Deferred income tax provision  (benefit)                                           |       | (226                            | )          | 2,307 |   |
| Tax benefit from exercise of  stock options                                        |       | 225                             |       | 478 |   |
| Amortization of deferred  financing costs                                          |       | 306                             |       | 284 |   |
| Provision for deferred rent                                                        |       | 457                             |       | 443 |   |
| Other                                                                              |       | 194                             |       | — |   |
| Changes in assets and  liabilities:                                                |       |                            |       |   |   |
| Decrease (increase) in —                                                      |       |                            |       |   |   |
| Trade receivables                                                                  |       | (766                            | )          | (290 | ) |
| Inventories                                                                        |       | (3,942                          | )          | (5,378 | ) |
| Prepaid expenses and other  current assets                                         |       | 1,125                           |       | (385 | ) |
| Increase in —                                                                 |       |                            |       |   |   |
| Accounts payable, accrued  expenses and other current liabilities                  |       | 1,537                           |       | 10,687 |   |
| Net cash provided by operating  activities                                         |       | 16,869                          |       | 28,154 |   |
|                                                                               |       |                            |       |   |   |
| **Cash Flows  from Investing Activities**                                          |       |                            |       |   |   |
| Capital expenditures                                                               |       | (10,180                         | )          | (15,979 | ) |
| Purchase of intangible assets                                                      |       | (22                             | )          | (180 | ) |
| Net cash used in investing  activities                                             |       | (10,202                         | )          | (16,159 | ) |
|                                                                               |       |                            |       |   |   |
| **Cash Flows  from Financing Activities**                                          |       |                            |       |   |   |
| Increase in cash overdrafts                                                        |       | 5,345                           |       | 1,334 |   |
| Repayment of long-term debt                                                        |       | (115                            | )          | (212 | ) |
| Repurchase of common stock                                                         |       | (1,775                          | )          | (1,467 | ) |
| Payout for redeemed Series A  Preferred Stock                                      |       | (1,363                          | )          | (1,310 | ) |
| Payment of issuance costs of  long-term debt                                       |       | —                          |       | (242 | ) |
| Payment of issuance costs of  common stock                                         |       | —                          |       | (210 | ) |
| Proceeds from exercise of stock  options                                           |       | 244                             |       | 495 |   |
| Net cash provided by (used in)  financing activities                               |       | 2,336                           |       | (1,612 | ) |
| **Net Increase  in Cash and Cash Equivalents**                                     |       | 9,003                           |       | 10,383 |   |
| **Cash and Cash  Equivalents, Beginning of Period**                                |       | 20,731                          |       | 14,759 |   |
| **Cash and Cash  Equivalents, End of Period**                                      |       | $                               | 29,734     |   | $ | 25,142 |   |
|                                                                               |       |                            |       |   |   |
| Supplemental Disclosures of  Cash Flow Information:                                |       |                            |       |   |   |
| Cash paid for interest                                                             |       | $                               | 7,256      |   | $ | 6,793 |   |
| Cash paid for income taxes                                                         |       | $                               | 2,820      |   | $ | 2,529 |   |

 

The accompanying notes are an integral partof these Consolidated Financial Statements.

 

3

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**MOTHERS WORK, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**June 30, 2004**

(unaudited)

 

**1.   BASIS OF FINANCIAL STATEMENT PRESENTATION**

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with the requirements for Form 10-Q andArticle 10 of Regulation S-X and, accordingly, certain informationand footnote disclosures have been condensed or omitted. Reference is made tothe Annual Report on Form 10-K as of and for the year endedSeptember 30, 2003 for Mothers Work, Inc. and Subsidiaries (the“Company” or “Mothers Work”) as filed with the Securities and ExchangeCommission for additional disclosures including a summary of the Company’saccounting policies.

 

In the opinion of management, the consolidated financial statementscontain all adjustments, consisting of normal recurring adjustments, necessaryto present fairly the consolidated financial position of the Company for theperiods presented. Since the Company’s operations are seasonal, the interimoperating results of the Company may not be indicative of operating results forthe full year.

 

**2.   EARNINGS PER SHARE (EPS)**

 

The Company follows Statement of Financial Accounting Standards(“SFAS”) 128, “Earnings Per Share.”  Basic earnings per share (“BasicEPS”) is computed by dividing net income by the weighted average number ofcommon shares outstanding.  Diluted earnings per share (“Diluted EPS”) iscomputed by dividing net income by the weighted average number of shares ofcommon stock outstanding, after giving effect to the potential dilution fromthe exercise of securities, such as stock options and warrants, into shares ofcommon stock as if those securities were exercised.

 

The following tables summarize the Basic EPS and Diluted EPS calculation(in thousands, except per share amounts):

 
| ** **                                                                              | ** ** | **Three Months Ended  June 30, 2004** | ** ** | **Three Months Ended  June 30, 2003** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                              | ** ** | **Net  Income**                       | ** ** | **Shares**                            | ** ** | **EPS** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic EPS                                                                               |       | $                                     | 6,991      |                                  | 5,201      |   | $ | 1.34 |   | $ | 8,369 |   | 5,239 |   | $ | 1.60 |   |
| Incremental shares from the  assumed exercise of outstanding stock options and warrants |       | —                                |       | 279                                   |       |   |   | — |   | 331 |   |   |   |
| Diluted EPS                                                                             |       | $                                     | 6,991      |                                  | 5,480      |   | $ | 1.28 |   | $ | 8,369 |   | 5,570 |   | $ | 1.50 |   |

 
| ** **                                                                              | ** ** | **Nine Months Ended  June 30, 2004** | ** ** | **Nine Months Ended  June 30, 2003** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                              | ** ** | **Net  Income**                      | ** ** | **Shares**                                | ** ** | **EPS** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic EPS                                                                               |       | $                                    | 9,489      |                                      | 5,215      |   | $ | 1.82 |   | $ | 12,312 |   | 5,240 |   | $ | 2.35 |   |
| Incremental shares from the  assumed exercise of outstanding stock options and warrants |       | —                               |       | 315                                       |       |   |   | — |   | 411 |   |   |   |
| Diluted EPS                                                                             |       | $                                    | 9,489      |                                      | 5,530      |   | $ | 1.72 |   | $ | 12,312 |   | 5,651 |   | $ | 2.18 |   |

 

For the threemonths ended June 30, 2004 and 2003, options to purchase 436,350 and 264,450shares, respectively, were excluded from the calculation of Diluted EPS astheir effect would have been antidilutive. For the nine months ended June 30,2004 and 2003, options to purchase 328,250 and 232,083 shares, respectively,were excluded from the calculation of Diluted EPS as their effect would havebeen antidilutive.  These options couldpotentially dilute EPS in the future.

 

In March 2003, the Board of Directors approved a share repurchaseprogram under which the Company may repurchase up to $10,000,000 of itsoutstanding common stock from time to time until March 2005.  Pursuant tothis program, the Company had repurchased 142,269 shares of its common stock ata cost of $3,243,000 through June 30, 2004, including repurchases during thenine months ended June 30, 2004 of 75,715 shares of its common stock at a costof $1,775,000.

 

4

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**3.   STOCK-BASEDCOMPENSATION**

 

The Company follows the intrinsic value method of accounting forstock-based employee compensation in accordance with Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations.  The followingtables illustrate the effect on net income and earnings per share if theCompany had accounted for its stock option plans using 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 per share amounts):

 
| ** **              | ** **                                                                                                               | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|-------------------------|--------------------------------------------------------------------------------------------------------------------------|----------------------------------|------------|---------------------------------|------------|
| ** **              | ** **                                                                                                               | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income, as reported |                                                                                                                     | $                                | 6,991      |                            | $          | 8,369 |   | $ | 9,489 |   | $ | 12,312 |   |
| Deduct:                 | Total stock-based employee compensation expense determined under the  fair value-based method for all grants, net of tax |                             | (251       | )                               | (198       | ) | (1,153 | ) | (2,709 | ) |
| Pro forma net income    |                                                                                                                     | $                                | 6,740      |                            | $          | 8,171 |   | $ | 8,336 |   | $ | 9,603 |   |
|                    |                                                                                                                     |                             |       |                            |       |   |   |   |   |
| Basic EPS:              |                                                                                                                     |                             |       |                            |       |   |   |   |   |
| As reported             |                                                                                                                     | $                                | 1.34       |                            | $          | 1.60 |   | $ | 1.82 |   | $ | 2.35 |   |
| Pro forma               |                                                                                                                     | $                                | 1.30       |                            | $          | 1.56 |   | $ | 1.60 |   | $ | 1.83 |   |
|                    |                                                                                                                     |                             |       |                            |       |   |   |   |   |
| Diluted EPS:            |                                                                                                                     |                             |       |                            |       |   |   |   |   |
| As reported             |                                                                                                                     | $                                | 1.28       |                            | $          | 1.50 |   | $ | 1.72 |   | $ | 2.18 |   |
| Pro forma               |                                                                                                                     | $                                | 1.24       |                            | $          | 1.49 |   | $ | 1.52 |   | $ | 1.74 |   |
|                         |                                                                                                                          |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |

 

Pro formaDiluted EPS is computed by dividing pro forma net income by the pro formaweighted average number of shares outstanding after giving effect to thepotential dilution from the exercise of securities, such as stock options, intoshares of common stock as if those securities were exercised as of thebeginning of the period presented.

 

The weightedaverage fair value of the options granted during the three and nine monthsended June 30, 2004 was estimated at $15.14 and $16.25 per share,respectively.  For the three and ninemonth periods ended June 30, 2003, the weighted average fair value of theoptions granted during those periods was estimated at $15.98 and $23.37 pershare, respectively. The weighted average fair value is calculated on the dateof grant using the Black-Scholes option-pricing model with the followingweighted average assumptions:

 
| ** **                | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Dividend yield            |       | None                             |       | None                            |       | None |   | None |   |
| Expected price volatility |       | 60.7                             | %          | 61.9                            | %          | 61.7 | % | 61.3 | % |
| Risk-free interest rates  |       | 4.5                              | %          | 3.3                             | %          | 3.8 | % | 3.8 | % |
| Expected lives            |       | 8.0 years                        |       | 8.0 years                       |       | 8.0 years |   | 8.0 years |   |

 

**4.   INVENTORIES**

 

Inventories were comprised of the following (in thousands):

 
| ** **       | ** ** | **June 30, 2004** | ** ** | **September 30, 2003** | ** ** |
|------------------|------------|-------------------|------------|-----------------------------|------------|
| Finished goods   |       | $                 | 76,230     |                        | $          | 73,583 |   |
| Work-in-progress |       | 3,743             |       | 2,778                       |       |
| Raw materials    |       | 8,475             |       | 8,144                       |       |
|             |       | $                 | 88,448     |                        | $          | 84,505 |   |

 

5

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**5.   ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES**

 

Accrued expenses and other current liabilities were comprised of thefollowing (in thousands):

 
| ** **                                                   | ** ** | **June 30, 2004** | ** ** | **September 30, 2003** | ** ** |
|--------------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|
| Salaries, wages, and employee  benefits                      |       | $                 | 6,770      |                        | $          | 8,089 |   |
| Income taxes payable                                         |       | 5,570             |       | 1,991                       |       |
| Interest                                                     |       | 5,872             |       | 2,356                       |       |
| Sales taxes                                                  |       | 2,171             |       | 2,306                       |       |
| Insurance                                                    |       | 2,745             |       | 2,135                       |       |
| Rent                                                         |       | 685               |       | 802                         |       |
| Audit and legal                                              |       | 2,586             |       | 2,368                       |       |
| Reserves recorded in the  iMaternity acquisition (Note 6)    |       | 1,009             |       | 1,593                       |       |
| Remaining payout for redemption  of Series A Preferred Stock |       | 1,052             |       | 2,415                       |       |
| Accrued store construction  costs                            |       | 1,694             |       | 1,991                       |       |
| Gift certificates and store  credits                         |       | 2,433             |       | 1,988                       |       |
| Other                                                        |       | 3,646             |       | 3,312                       |       |
|                                                         |       | $                 | 36,233     |                        | $          | 31,346 |   |

 

Interest payments on the senior notes are made semiannually on February1st and August 1st.

 

**6.   iMATERNITY ACQUISITIONEXIT/RESTRUCTURING ACTIVITY**

 

The Company acquired eSpecialty Brands, LLC (“iMaternity”) on October17, 2001 (the “Acquisition Date”). The iMaternity manufacturing and warehousingoperations in Costa Rica have been shut down and are being marketed forsale.  The carrying value of the Costa Rica facilities was recorded at theestimated realizable value as of the Acquisition Date, which was determinedbased on a market survey received from an independent third party, lessestimated selling costs, and is classified as “Assets Held for Sale” in theaccompanying consolidated balance sheets.

 

At June 30,2004, the remaining iMaternity acquisition reserves consisted of: (a) leasetermination fees of $342,000 related to the planned store closures; (b) theseverance reserve outstanding of $450,000 that reflects the remainder of anon-compete and severance arrangement with a former executive of iMaternitythat is payable ratably on a monthly basis through September 2006; and (c) thereserve for exit costs of $217,000 that is principally for the expected costsrelated to the Costa Rican properties.

 

A summary of the charges incurred and the reserve balances inconnection with the iMaternity acquisition exit/restructuring activities as ofSeptember 30, 2003 and for the first nine months of fiscal 2004 is as follows(in thousands):

 
| ** **             | ** ** | **Balance as of  September 30, 2003** | ** ** | **Charges During the  Nine Months  Ended  June 30, 2004** | ** ** | **Balance as of  June 30, 2004** | ** ** |
|------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------|------------|
| Lease termination fees |       | $                                          | 668        |                                                      | $          | (326                             | )          | $ | 342 |   |
| Severance              |       | 600                                        |       | (150                                                      | )          | 450                              |       |
| Exit and other costs   |       | 325                                        |       | (108                                                      | )          | 217                              |       |
|                   |       | $                                          | 1,593      |                                                      | $          | (584                             | )          | $ | 1,009 |   |

 

**7.   GUARANTOR SUBSIDIARIES**

 

Pursuant to the terms ofthe indenture relating to the $125,000,000 of 111⁄4% Senior Notes due 2010 (the“New Senior Notes”), each of the domestic subsidiaries of Mothers Work, Inc.(the “Guarantor Subsidiaries”) has jointly and severally provided anunconditional guarantee of the obligations of Mothers Work with respect to theNew Senior Notes. There are no restrictions on any of the assets of theGuarantor Subsidiaries which would limit their ability to transfer funds toMothers Work in the form of loans, advances or cash dividends, except asprovided by applicable law.  None of theCompany’s foreign subsidiaries (the “Non-Guarantor Subsidiaries”) haveguaranteed the New Senior Notes.  Thecondensed consolidating financial information for the Company, the GuarantorSubsidiaries, and the Company’s Non-Guarantor Subsidiaries as of and for thenine months ended June 30, 2004 as presented below has been prepared from thebooks and records maintained by the Guarantor Subsidiaries and the Company. Thecondensed financial information may not be necessarily indicative of theresults of operations or financial position had the Guarantor Subsidiariesoperated as independent entities. Certain intercompany revenues included in thesubsidiary records are eliminated in consolidation. As a result of thisactivity, an amount due to/due from parent will exist at any time.

 

6

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**Mothers Work, Inc.**

**Condensed Consolidating Balance Sheet**

**June 30, 2004**

(unaudited)

(in thousands)

 
| ** **                                         | ** ** | **Mothers Work  (Parent Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Operations)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| **ASSETS**                                         |       |                               |       |                        |       |                                                   |       |                            |       |                           |       |
| Current Assets:                                    |       |                               |       |                        |       |                                                   |       |                            |       |                           |       |
| Cash and cash equivalents                          |       | $                                  | 29,159     |                        | $          | 45                                                     |       | $                               | 530        |                           | $          | — |   | $ | 29,734 |   |
| Trade receivables                                  |       | 3,112                              |       | —                      |       | 39                                                     |       | —                          |       | 3,151                          |       |
| Inventories                                        |       | 87,303                             |       | —                      |       | 1,145                                                  |       | —                          |       | 88,448                         |       |
| Deferred income taxes                              |       | 4,688                              |       | —                      |       | —                                                 |       | —                          |       | 4,688                          |       |
| Prepaid expenses and other  current assets         |       | 4,838                              |       | —                      |       | —                                                 |       | —                          |       | 4,838                          |       |
| Total Current Assets                               |       | 129,100                            |       | 45                          |       | 1,714                                                  |       | —                          |       | 130,859                        |       |
| Property, Plant and Equipment,  net                |       | 58,186                             |       | —                      |       | 1,098                                                  |       | —                          |       | 59,284                         |       |
| Assets Held for Sale                               |       | —                             |       | —                      |       | 1,200                                                  |       | —                          |       | 1,200                          |       |
| Other Assets                                       |       | 69,862                             |       | —                      |       | —                                                 |       | —                          |       | 69,862                         |       |
| Investments in and Advances to  (from) Affiliates  |       | (9,359                             | )          | 205,494                     |       | (2,901                                                 | )          | (193,234                        | )          | —                         |       |
| Total Assets                                       |       | $                                  | 247,789    |                        | $          | 205,539                                                |       | $                               | 1,111      |                           | $          | (193,234 | ) | $ | 261,205 |   |
|                                               |       |                               |       |                        |       |                                                   |       |                            |       |                           |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |       |                               |       |                        |       |                                                   |       |                            |       |                           |       |
| Current Liabilities:                               |       |                               |       |                        |       |                                                   |       |                            |       |                           |       |
| Line of credit borrowings                          |       | $                                  | —     |                        | $          | —                                                 |       | $                               | —     |                           | $          | — |   | $ | — |   |
| Current portion of long-term  debt                 |       | 279                                |       | —                      |       | —                                                 |       | —                          |       | 279                            |       |
| Accounts payable                                   |       | 20,238                             |       | 38                          |       | —                                                 |       | —                          |       | 20,276                         |       |
| Accrued expenses and other  current liabilities    |       | 22,936                             |       | 12,857                      |       | 440                                                    |       | —                          |       | 36,233                         |       |
| Total Current Liabilities                          |       | 43,453                             |       | 12,895                      |       | 440                                                    |       | —                          |       | 56,788                         |       |
| Long-Term Debt                                     |       | 127,764                            |       | —                      |       | —                                                 |       | —                          |       | 127,764                        |       |
| Deferred Rent                                      |       | 6,803                              |       | —                      |       | 81                                                     |       | —                          |       | 6,884                          |       |
| Total Liabilities                                  |       | 178,020                            |       | 12,895                      |       | 521                                                    |       | —                          |       | 191,436                        |       |
|                                               |       |                               |       |                        |       |                                                   |       |                            |       |                           |       |
| Total Stockholders’ Equity                    |       | 69,769                             |       | 192,644                     |       | 590                                                    |       | (193,234                        | )          | 69,769                         |       |
| Total Liabilities and  Stockholders’ Equity   |       | $                                  | 247,789    |                        | $          | 205,539                                                |       | $                               | 1,111      |                           | $          | (193,234 | ) | $ | 261,205 |   |

 

7

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**Mothers Work, Inc.**

**Consolidating Statement of Operations**

**For The Nine Months Ended June 30, 2004**

(unaudited)

(in thousands)

 
| ** **                                    | ** ** | **Mothers Work  (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Operations)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| Net sales                                     |       | $                                   | 391,802    |                        | $          | 28,021                                                 |       | $                               | 5,254      |                           | $          | (28,021 | ) | $ | 397,056 |   |
| Cost of goods sold                            |       | 180,107                             |       | —                      |       | 2,082                                                  |       | —                          |       | 182,189                        |       |
| Gross profit                                  |       | 211,695                             |       | 28,021                      |       | 3,172                                                  |       | (28,021                         | )          | 214,867                        |       |
| Selling, general and  administrative expenses |       | 213,256                             |       | 102                         |       | 2,634                                                  |       | (28,021                         | )          | 187,971                        |       |
| Operating income (loss)                       |       | (1,561                              | )          | 27,919                      |       | 538                                                    |       | —                          |       | 26,896                         |       |
| Interest expense, net                         |       | 11,081                              |       | —                      |       | —                                                 |       | —                          |       | 11,081                         |       |
| Equity in earnings of  subsidiaries           |       | 28,457                              |       | —                      |       | —                                                 |       | (28,457                         | )          | —                         |       |
| Income before income taxes                    |       | 15,815                              |       | 27,919                      |       | 538                                                    |       | (28,457                         | )          | 15,815                         |       |
| Income tax provision                          |       | 6,326                               |       | 9,772                       |       | 207                                                    |       | (9,979                          | )          | 6,326                          |       |
| Net income                                    |       | $                                   | 9,489      |                        | $          | 18,147                                                 |       | $                               | 331        |                           | $          | (18,478 | ) | $ | 9,489 |   |

 

8

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**Mothers Work, Inc.**

**Consolidating Statement of Cash Flow**

**For The Nine Months Ended June 30, 2004**

(unaudited)

(in thousands)

 
| ** **                                                                         | ** ** | **Mothers Work  (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Operations)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| **Cash Flows  from Operating Activities**                                          |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Net income                                                                         |       | $                                   | 9,489      |                        | $          | 18,147                                                 |       | $                               | 331        |                           | $          | (18,478 | ) | $ | 9,489 |   |
| Adjustments to reconcile net income  to net cash provided by operating activities: |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Depreciation and amortization                                                      |       | 7,261                               |       | —                      |       | 248                                                    |       | —                          |       | 7,509                          |       |
| Loss on impairment of  long-lived assets                                           |       | 470                                 |       | —                      |       | —                                                 |       | —                          |       | 470                            |       |
| Loss on disposal of assets                                                         |       | 381                                 |       | —                      |       | —                                                 |       | —                          |       | 381                            |       |
| Accretion of discount on senior  notes                                             |       | 110                                 |       | —                      |       | —                                                 |       | —                          |       | 110                            |       |
| Deferred income tax benefit                                                        |       | (226                                | )          | —                      |       | —                                                 |       | —                          |       | (226                           | )          |
| Tax benefit from exercise of  stock options                                        |       | 225                                 |       | —                      |       | —                                                 |       | —                          |       | 225                            |       |
| Amortization of deferred  financing costs                                          |       | 306                                 |       | —                      |       | —                                                 |       | —                          |       | 306                            |       |
| Provision for deferred rent                                                        |       | 415                                 |       | —                      |       | 42                                                     |       | —                          |       | 457                            |       |
| Other                                                                              |       | 194                                 |       | —                      |       | —                                                 |       | —                          |       | 194                            |       |
| Changes in assets and  liabilities:                                                |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Decrease (increase) in—                                                       |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Trade receivables                                                                  |       | (735                                | )          | —                      |       | (31                                                    | )          | —                          |       | (766                           | )          |
| Inventories                                                                        |       | (4,081                              | )          | —                      |       | 139                                                    |       | —                          |       | (3,942                         | )          |
| Prepaid expenses and other  current assets                                         |       | 1,679                               |       | —                      |       | (554                                                   | )          | —                          |       | 1,125                          |       |
| Investments in and advances to  (from) affiliates                                  |       | 525                                 |       | (19,003                     | )          | —                                                 |       | 18,478                          |       | —                         |       |
| Increase in—                                                                  |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Accounts payable, accrued  expenses and other current liabilities                  |       | 480                                 |       | 868                         |       | 189                                                    |       | —                          |       | 1,537                          |       |
| Net cash provided by operating  activities                                         |       | 16,493                              |       | 12                          |       | 364                                                    |       | —                          |       | 16,869                         |       |
| **Cash Flows  from Investing Activities**                                          |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Capital expenditures                                                               |       | (9,883                              | )          | —                      |       | (297                                                   | )          | —                          |       | (10,180                        | )          |
| Purchase of intangible assets                                                      |       | (22                                 | )          | —                      |       | —                                                 |       | —                          |       | (22                            | )          |
| Net cash used in investing  activities                                             |       | (9,905                              | )          | —                      |       | (297                                                   | )          | —                          |       | (10,202                        | )          |
| **Cash Flows  from Financing Activities**                                          |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Increase in cash overdrafts                                                        |       | 5,345                               |       | —                      |       | —                                                 |       | —                          |       | 5,345                          |       |
| Repayment of long-term debt                                                        |       | (115                                | )          | —                      |       | —                                                 |       | —                          |       | (115                           | )          |
| Repurchase of common stock                                                         |       | (1,775                              | )          | —                      |       | —                                                 |       | —                          |       | (1,775                         | )          |
| Payout for redeemed Series A  Preferred Stock                                      |       | (1,363                              | )          | —                      |       | —                                                 |       | —                          |       | (1,363                         | )          |
| Proceeds from exercise of stock  options                                           |       | 244                                 |       | —                      |       | —                                                 |       | —                          |       | 244                            |       |
| Net cash provided by financing  activities                                         |       | 2,336                               |       | —                      |       | —                                                 |       | —                          |       | 2,336                          |       |
| **Net Increase  in Cash and Cash Equivalents**                                     |       | 8,924                               |       | 12                          |       | 67                                                     |       | —                          |       | 9,003                          |       |
| **Cash and Cash  Equivalents, Beginning of Period**                                |       | 20,235                              |       | 33                          |       | 463                                                    |       | —                          |       | 20,731                         |       |
| **Cash and Cash  Equivalents, End of Period**                                      |       | $                                   | 29,159     |                        | $          | 45                                                     |       | $                               | 530        |                           | $          | — |   | $ | 29,734 |   |

 

9

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**8.   COMMITMENTSAND CONTINGENCIES**

 

From time totime, the Company is named as a defendant in legal actions arising from itsnormal business activities.  Although theamount of any liability that could arise with respect to currently pendingactions cannot be accurately predicted, the Company does not believe that theresolution of any pending action will have a material adverse effect on itsfinancial position, results of operations, or liquidity.

 

10

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**Item 2.****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**Results of Operations**

 

The following tables setforth certain operating data from our consolidated statements of operations asa percentage of net sales and as a percentage change for the periods indicated:

 
| ** **                                    | ** ** | **Percentage of Net Sales (*)**   | ** ** | **% Period to Period  Increase (Decrease)** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **Three  Months Ended  June 30,** | ** ** | **Nine  Months Ended  June 30,**            | ** ** | **Three  Months  Ended  June 30,** | ** ** | **Nine  Months  Ended  June 30,** | ** ** |
| ** **                                    | ** ** | **2004**                          | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2004 vs.  2003** | ** ** | **2004 vs.  2003** | ** ** |
| Net sales                                     |       | 100.0                             | %          | 100.0                                       | %          | 100.0 | % | 100.0 | % | 5.4 | % | 7.3 | % |
| Cost of goods sold                            |       | 43.6                              |       | 42.8                                        |       | 45.9 |   | 45.6 |   | 7.2 |   | 8.0 |   |
| Gross profit                                  |       | 56.4                              |       | 57.2                                        |       | 54.1 |   | 54.4 |   | 4.0 |   | 6.7 |   |
| Selling, general and  administrative expenses |       | 45.4                              |       | 44.1                                        |       | 47.3 |   | 46.1 |   | 8.6 |   | 10.2 |   |
| Operating income                              |       | 11.0                              |       | 13.0                                        |       | 6.8 |   | 8.3 |   | (11.2 | ) | (12.5 | ) |
| Interest expense, net                         |       | 2.6                               |       | 2.7                                         |       | 2.8 |   | 2.9 |   | 1.5 |   | 2.7 |   |
| Income before income taxes                    |       | 8.3                               |       | 10.3                                        |       | 4.0 |   | 5.4 |   | (14.6 | ) | (20.7 | ) |
| Income tax provision                          |       | 3.3                               |       | 4.0                                         |       | 1.6 |   | 2.1 |   | (11.7 | ) | (17.2 | ) |
| Net income                                    |       | 5.0                               | %          | 6.3                                         | %          | 2.4 | % | 3.3 | % | (16.5 | )% | (22.9 | )% |

 

----

(*)  Components may not add or subtract to totalsdue to rounding.

 

The following tables set forth certain information concerning thenumber of our retail locations, including stores and leased maternitydepartments, for the periods indicated:

 
| ** **           | ** ** | **Three Months Ended** | ** ** |
|----------------------|------------|------------------------|------------|
| ** **           | ** ** | **June 30, 2004**      | ** ** | **June 30, 2003** | ** ** |
| **Retail Locations** | ** ** | **Stores**             | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** |
| Beginning of period  |       | 877                    |       | 155 |   | 1,032 |   | 801 |   | 148 |   | 949 |   |
| Opened               |       | 23                     |       | 71 |   | 94 |   | 25 |   | 5 |   | 30 |   |
| Closed               |       | (17                    | )          | — |   | (17 | ) | (5 | ) | (2 | ) | (7 | ) |
| End of period        |       | 883                    |       | 226 |   | 1,109 |   | 821 |   | 151 |   | 972 |   |

 
| ** **           | ** ** | **Nine Months Ended** | ** ** |
|----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **June 30, 2004**     | ** ** | **June 30, 2003** | ** ** |
| **Retail Locations** | ** ** | **Stores**            | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** |
| Beginning of period  |       | 851                   |       | 155 |   | 1,006 |   | 763 |   | 146 |   | 909 |   |
| Opened               |       | 69                    |       | 74 |   | 143 |   | 73 |   | 9 |   | 82 |   |
| Closed               |       | (37                   | )          | (3 | ) | (40 | ) | (15 | ) | (4 | ) | (19 | ) |
| End of period        |       | 883                   |       | 226 |   | 1,109 |   | 821 |   | 151 |   | 972 |   |

 

###### **Three Months Ended June 30, 2004 and 2003**

 

*Net Sales.* Ournet sales for the third quarter of our fiscal year ended September 30, 2004(fiscal 2004) increased 5.4%, a $7.2 million increase, to$139.6 million from $132.4 million for the third quarter of our fiscalyear ended September 30, 2003 (fiscal 2003).  Net sales for the thirdquarter increased primarily due to the addition of new stores, partially offsetby a decrease in comparable store sales. We ended the third quarter of fiscal 2004 with 1,109 total retaillocations compared to 972 locations at June 30, 2003.  For the quarter ended June 30, 2004, weopened 23 new stores, including 4 new multi-brand stores, and closed 17 stores,with 8 of these closings related to our openings of multi-brand stores.  In addition, during the third quarter offiscal 2004, we opened 71 new leased department locations in Sears® storesto replace the existing maternity lines inthese stores.  These leaseddepartments in Sears offer our new TwoHearts MaternityTM collection, madeexclusively by us for Sears. Comparable store sales decreased 5.0% during thethird quarter of fiscal 2004 (based on 855 retail locations) versus acomparable store sales decrease of 0.4% during the third quarter of fiscal 2003(based on 821 retail locations), reflecting the impact of increased competitionin the maternity apparel market.  Weestimate that there are over 1,000 more competitor locations compared to a yearago.  We believe this increasedcompetition caused an oversupply of Spring maternity apparel in the market andthat the increasingly deep markdowns taken by our competitors to stimulatesales and clear Spring inventories further adversely affected our net sales forthe third quarter.

 

*Gross Profit.* Our gross profit for the third quarter of fiscal 2004 increased by4.0%, a $3.1 million increase, to $78.8 million from $75.7 million for thethird quarter of fiscal 2003, reflecting the increase in net sales, partiallyoffset by a

 

11

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reductionin gross margin. Gross profit as a percentage of net sales (gross margin) forthe third quarter of fiscal 2004 decreased by 74 basis points (0.74 percentagepoints of net sales) to 56.4% from 57.2% for the third quarter of fiscal2003.  The decrease in gross margin versus last year primarily reflectsthe aggressive markdowns we recognized in the third quarter compared to lastyear, to stimulate sales of slower-moving styles and manage overall inventorylevels.

 

*Selling, General and Administrative Expenses. *Our selling, general and administrative expensesfor the third quarter of fiscal 2004 increased by 8.6%, a $5.0 millionincrease, to $63.4 million from $58.4 million for the third quarterof fiscal 2003. Compared to the third quarter of fiscal 2003, store rent andrelated expenses increased by $2.7 million and store wages and related benefitscosts increased by $1.4 million for the third quarter of fiscal 2004,primarily resulting from our new store openings during the past twelvemonths.  As a percentage of net sales, selling, general and administrativeexpenses increased to 45.4% for the third quarter of fiscal 2004 compared to44.1% for the third quarter of fiscal 2003. This increase was principally due to increased store rent and, to alesser extent, increased store payroll expense ratios resulting from thenegative 5.0% comparable store sales for the quarter, partially offset by loweremployee benefits and legal expense ratios.

 

* Operating Income.* Our operating income for the third quarterof fiscal 2004 decreased by 11.2%, a $1.9 million decrease, to$15.3 million from $17.3 million for the third quarter of fiscal2003, due to decreased gross margin and increased operating expenses, whichmore than offset the impact of increased sales volume.  Operating income as a percentage of net salesfor the third quarter of fiscal 2004 decreased to 11.0% from 13.0% for thethird quarter of fiscal 2003, reflecting decreased gross margin and increasedoperating expense ratios.

 

*Interest Expense, Net.* Our interest expense, net of investment income, for the thirdquarter of fiscal 2004 increased by 1.5%, a $0.1 million increase, to $3.7million from $3.6 million for the third quarter of fiscal 2003.

 

*Income Taxes.  *Our income tax provision for the third quarter offiscal 2004 reflects a 40.0% effective tax rate, which we expect to approximateour effective tax rate for the full year fiscal 2004.  This compares to a 38.7% effective tax rate provisionfor the third quarter of fiscal 2003. This increase is due to a projectedincrease in our composite estimated effective state income tax rate for thefull year fiscal 2004.  For the full yearfiscal 2003, our effective income tax rate was 38.5%.

 

*Net Income.  *Net income for the third quarter of fiscal 2004was $7.0 million, or $1.28 per common share (diluted) compared to $8.4 million,or $1.50 per common share (diluted) for the third quarter of fiscal 2003,representing a 16.5% decrease in net income and a 14.7% decrease in diluted earningsper share.  Our average diluted shares outstanding of 5,480,000 for thethird quarter of fiscal 2004 were 1.6% lower than the 5,570,000 shares for thethird quarter of fiscal 2003.  Thisdecrease in average diluted shares outstanding reflects our repurchase ofshares of our common stock pursuant to our stock repurchase program, partiallyoffset by the impact of stock option exercises. As of June 30, 2004, we have repurchased 142,269 shares of our commonstock pursuant to our share repurchase program, of which 33,171 shares wererepurchased in the third quarter of fiscal 2004.

 

**Nine Months Ended June 30, 2004 and 2003**

 

*Net Sales.* Ournet sales for the first nine months of fiscal 2004 increased 7.3%, a$27.0 million increase, to $397.1 million from $370.0 millionfor the first nine months of fiscal 2003.  Net sales for the first ninemonths increased primarily due to the addition of new stores, partially offsetby a decrease in comparable store sales. For the nine months ended June 30, 2004, we opened 69 new stores,including 13 new multi-brand stores, and closed 37 stores, with 19 of theseclosings related to our openings of multi-brand stores, including the openingon March 4, 2004 in Danbury, Connecticut of our first Maternitymall SuperstoreTM.  Inaddition, we opened 74 new leased departments during the first nine months offiscal 2004, of which 71 were in Sears® stores.  Comparablestore sales for the first nine months of fiscal 2004 decreased by 3.6% (basedon 798 retail locations) versus a comparable store sales increase of 1.1%during the first nine months of fiscal 2003 (based on 722 retail locations),reflecting the impact of increased competition in the maternity apparel marketand some weakness in the fashion portion of our product line earlier in theyear. We estimate that there are over 1,000 more competitor locations comparedto a year ago.

 

*Gross Profit*.   Our gross profit for the first nine months of fiscal 2004increased 6.7%, a $13.5 million increase, to $214.9 million compared to $201.3million for the first nine months of fiscal 2003, reflecting the increase innet sales partially offset by a decrease in gross profit margin. Gross profitas a percentage of net sales was 54.1% for the first nine months of fiscal 2004compared to 54.4% for the first nine months of fiscal 2003.  The 29 basis point decrease in gross margincompared to last year primarily reflects the increased markdowns compared tolast year, partially offset by the impact of increased revenue generated fromour marketing partnership programs.

 

*Selling, General and Administrative Expenses*.   Our selling, general andadministrative expenses for the first nine months of fiscal 2004 increased by10.2%, a $17.4 million increase, to $188.0 million from $170.6 million for thefirst nine months of fiscal 2003. Compared to the first nine months of fiscal2003, store rent and related expenses increased by $8.8 million and store wagesand related benefits costs increased by $6.5 million, primarily resulting fromour new store openings

 

12

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duringthe past twelve months.  As a percentage of net sales, selling, generaland administrative expenses increased to 47.3% for the first nine months offiscal 2004 compared to 46.1% for the first nine months of fiscal 2003.  This increased expense ratio for the firstnine months of fiscal 2004 consisted primarily of increased store rent andstore payroll expense ratios resulting from the negative 3.6% comparable storesales for the nine-month period, partially offset by lower legal expense andemployee benefits expense ratios.  Inaddition, we incurred charges relating to store closings of $0.7 million forthe first nine months of fiscal 2004 versus $0.2 million for the first ninemonths of fiscal 2003.

 

* Operating Income*.   Our operating income for the firstnine months of fiscal 2004 decreased by 12.5%, a $3.8 million decrease, to$26.9 million compared to $30.7 million in the first nine months of fiscal2003, due to decreased gross margin and increased operating expenses, whichmore than offset the impact of increased sales volume.  Operating income as a percentage of net salesfor the first nine months of fiscal 2004 decreased to 6.8% from 8.3% in the comparableperiod of fiscal 2003, reflecting our increased operating expense ratio and, toa much lesser extent, decreased gross margin.

 

*Interest Expense, Net*.   Our net interest expense for the first nine months offiscal 2004 increased by 2.7%, or $0.3 million, to $11.1 million comparedto $10.8 million for the first nine months of fiscal 2003.  Last year’s expense for the first nine monthswas reduced by a $0.3 million non-recurring interest expense credit related toour credit facility.

 

*Income Taxes*.   Our effective income tax rate was a provision of 40.0%for the first nine months of fiscal 2004 compared to 38.3% for the first ninemonths of fiscal 2003, due to a projected increase in our composite estimatedeffective state income tax rate for the full year fiscal 2004.  For the full year fiscal 2003, our effectiveincome tax rate was 38.5%.

 

*Net Income.  *Net income for the first nine months of fiscal2004 was $9.5 million, or $1.72 per common share (diluted) compared to $12.3million, or $2.18 per common share (diluted) for the first nine months offiscal 2003, representing a 22.9% decrease in net income and a 21.1% decreasein diluted earnings per share.  Our average diluted shares outstanding of5,530,000 for the first nine months of fiscal 2004 were 2.1% lower than the5,651,000 shares outstanding for the first nine months of fiscal 2003.  The decrease in average diluted sharesoutstanding reflects our repurchase of shares of our common stock pursuant toour stock repurchase program, partially offset by the impact of stock optionand warrant exercises. As of June 30, 2004, we have repurchased 142,269 sharesof our common stock pursuant to our share repurchase program, of which 75,715shares were repurchased in the first nine months of fiscal 2004.

 

**Seasonality**

 

Our business,like that of many other retailers, is seasonal. Our quarterly net sales havehistorically been highest in our third fiscal quarter, corresponding to theSpring selling season, followed by our first fiscal quarter, corresponding tothe Fall/holiday selling season. Given the typically higher gross margin weexperience in the third fiscal quarter compared to other quarters, therelatively fixed nature of most of our operating expenses and interest expense,and the historically higher sales level in the third quarter, we have typicallygenerated a very significant percentage of our full year operating income andnet income during the third quarter. Results for any quarter are not necessarily indicative of the resultsthat may be achieved for a full fiscal year. Quarterly results may fluctuate materially depending upon, among otherthings, 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) debtservice on our senior notes and our credit facility, (ii) capitalexpenditures, including leasehold improvements, fixtures and equipment for newstores, store relocations and expansions of our existing stores as well asimprovements and new equipment for our distribution and corporate facilitiesand information systems, and (iii) working capital, including inventory tosupport our new and existing stores. We have historically financed thesecapital requirements from cash flows from operations and borrowings under ourcredit facility.

 

Cash and cash equivalents increased $9.0 million for the first ninemonths of fiscal 2004, a decrease of $1.4 million compared to the increase of$10.4 million for the first nine months of fiscal 2003.  Cash provided byoperations of $16.9 million for the first nine months of fiscal 2004decreased by $11.3 million, from the $28.2 million for the first nine months offiscal 2003.  The decrease in cash from operations primarily reflects alesser increase in current liabilities and reduced net income compared to lastyear.  During the first nine months offiscal 2004 and 2003, we used our cash provided by operations primarily to payfor capital expenditures and, to a lesser extent, to increase our cash and cashequivalents.

 

For the first nine months of fiscal 2004, we spent $10.2 million oncapital expenditures, including $7.7 million on furniture, fixtures andleasehold improvements principally for new store facilities, as well asimprovements to existing stores, and $2.5 million for our distribution andcorporate facilities and information systems. This compares to $16.0 million incapital expenditures in the first nine months of fiscal 2003, of which $11.1million was spent for new store facilities and improvements to existing storesand retail locations, and $4.9 million for our distribution and corporatefacilities and information systems.  The decrease in capital expendituresis due to reduced expenditures for store remodelings, relocations andexpansions compared to last year and the completion last year of severalprojects relating to expanding the capacity and

 

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throughputof our distribution center and the 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 our outstanding common stock from time totime in private transactions or open market purchases until March 2005.  As of June 30, 2004, we have repurchased andretired 142,269 shares in the aggregate pursuant to this program at a totalcost of $3.2 million, for an average cost of $22.79 per share, includingrepurchases during the first nine months ended June 30, 2004 of 75,715 sharesof our common stock at a cost of $1.8 million. The indenture governing the New Senior Notes and the terms of our creditfacility contain restrictions that place limits on certain payments by us,including payments to repurchase shares of our common stock. Our repurchases ofcommon stock have been made in compliance with all restrictions under theindenture governing the New Senior Notes and the terms of our credit facility.

 

Our $60 million existing credit facility, which previously had amaturity date of September 15, 2004, now matures on September 15, 2005 due to arenewal provision under the facility agreement. In addition, we are currently negotiating a longer-term successor creditfacility, which we expect to complete and to become effective within the nextthree months.  The existing creditfacility includes a $56.0 million borrowing base revolving line of creditand approximately $4 million to support a special purpose letter of creditfacility.  The existing credit facility has an unused facility fee of10 basis points per annum.  Interest on borrowings outstanding iscurrently based on the lender’s prime rate or, at our election, an alternativerate of LIBOR plus 200 basis points for all or part of the direct borrowingsoutstanding. As of June 30, 2004, there were no direct borrowings under thecredit facility.  Borrowings under the existing credit facility would haveborne interest at the rate of between approximately 3.4% and 4.0% per annum asof June 30, 2004.  Amounts available for direct borrowings, net of lettersof credit outstanding, are limited to the lesser of (a) the unused portionof the credit facility or (b) the Aggregate Adjusted Availability (“AAA”)as defined 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 firstnine months of fiscal 2004 and all of fiscal 2003, we always exceeded theminimum required AAA.  As of June 30, 2004, outstanding borrowings underthe credit facility consisted of no direct borrowings and $4.3 million inletters of credit, with AAA and available borrowings of $51.7 million,compared to no direct borrowings and $3.5 million in letters of credit,with AAA and available borrowings of $52.5 million as of September 30,2003. In addition, as of June 30, 2004 and September 30, 2003, pursuant to thespecial purpose letter of credit facility, we have an outstanding $3.3 millionstandby letter of credit to collateralize an outstanding industrial revenuebond and a $1.0 million standby letter of credit to collateralize agovernment mortgage note.

 

Our management believes that our current cash and working capitalpositions, expected operating cash flows and available borrowing capacity underthe credit facility (including any successor credit facilities to our currentfacility which expires September 15, 2005) will be sufficient to fund ourworking capital, capital expenditures and debt repayment requirements and tofund stock and/or debt repurchases, if any, for the foreseeable future.

 

**Critical Accounting Policies and Estimates**

 

Our Consolidated Financial Statements have been prepared in accordancewith accounting principles generally accepted in the United States. Thesegenerally accepted accounting principles require management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the ConsolidatedFinancial Statements and the reported amounts of net sales and expenses duringthe reporting period.

 

Our significant accounting policies are described in Note 2 of“Notes to Consolidated Financial Statements” contained in our Annual Report onForm 10-K as filed for our fiscal year ended September 30, 2003.  Webelieve that the following discussion addresses our critical accountingpolicies, which are those that are most important to the portrayal of ourfinancial condition and results of operations and require management’s mostdifficult, subjective and complex judgments, often as a result of the need tomake estimates about the effect of matters that are inherently uncertain. If actual results were to differ significantly from estimates made, thereported results could be materially affected.  However, we are not currentlyaware of any reasonably likely events or circumstances that would result inmaterially different results.

 

Our senior management has reviewed these critical accounting policiesand estimates and the related Management’s Discussion and Analysis with theAudit Committee of our Board of Directors.

 

*Inventories.*  We value our inventories, which consist primarily of maternityapparel, at the lower of cost or market. Cost is determined on the first-in,first-out method (FIFO) and includes the cost of merchandise, freight, duty andbroker fees.  A periodic review ofinventory quantities on hand is performed in order to determine if inventory isproperly valued at the lower of cost or market. Factors related to current inventoriessuch as future consumer demand and fashion trends, current aging, currentanalysis of merchandise based on receipt date, current and anticipated retailmarkdowns or wholesale discounts, and class or type of inventory are analyzedto determine estimated net realizable values.  Criteria utilized by us toquantify aging trends include factors such as the amount of merchandisereceived within the past twelve months, merchandise received more than one yearbefore with quantities on-hand in excess of 12 months of sales, and merchandisecurrently selling below cost.  A provision is recorded to reduce the costof inventories to the estimated net realizable values, if required. Inventoriesas of June 30, 2004 and September 30, 2003 totaled $88.4 million and $84.5million, respectively, representing

 

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approximately33.9% and 34.3% of total assets, respectively. Given the significance ofinventories to our Consolidated Financial Statements, the determination of netrealizable values is considered to be a critical accounting estimate. Anysignificant unanticipated changes in the factors noted above could have asignificant impact on the value of our inventories and our reported operatingresults.

 

*Long-Lived Assets.*  Our long-lived assets consist principally of store leaseholdimprovements and are included in the “Property, Plant and Equipment, net” lineitem in our consolidated balance sheets. These long-lived assets are recordedat cost and are amortized using the straight-line method over the lesser of theapplicable store lease term or the estimated useful life of the leaseholdimprovements.  The typical initial leaseterm for our stores averages from seven to ten years.  Net property, plantand equipment as of June 30, 2004 and September 30, 2003 totaled $59.3 millionand $57.8 million, respectively, representing approximately 22.7% and 23.4% oftotal assets, respectively.

 

In assessing potential impairment of these assets, we periodicallyevaluate the historical and forecasted operating results and cash flows on astore-by-store basis. Newly opened stores may take time to generate positiveoperating and cash flow results. Factors such as (i) store type, that is,company store or leased department, (ii) store concept, that is, Motherhood,Mimi Maternity, or A Pea in the Pod, (iii) store location, for example, urbanarea versus suburb, (iv) current marketplace awareness of our brands, (v) localcustomer demographic data and (vi) current fashion trends are all considered indetermining the time frame required for a store to achieve positive financialresults, which is assumed to be within two years from the date a store locationis opened.  If economic conditions aresubstantially different from our expectations, the carrying value of certain ofour long-lived assets may become impaired.  As a result of our impairmentassessment, we recorded write-downs of long-lived assets of $0.5 million forthe first nine months of fiscal 2004 and $0.1 million for the first nine monthsof fiscal 2003.

 

*Goodwill*. The purchase method of accounting for business combinations requires the use ofestimates and judgments to allocate the purchase price paid for acquisitions tothe fair value of the net tangible and identifiable intangible assets. Goodwill represents the excess of the aggregate purchase price over the fairvalue of net assets acquired in business combinations and is separatelydisclosed in our consolidated balance sheet.  As of both June 30, 2004 andSeptember 30, 2003, goodwill totaled $50.4 million, representing approximately19.3% and 20.4% of total assets, respectively.  In June 2001, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) 142, “Goodwill and Other Intangible Assets.” SFAS142 requires that goodwill no longer be amortized, but instead be tested forimpairment at least annually or as impairment indicators arise. Prior to ouradoption of SFAS 142 on October 1, 2001, goodwill was amortized using thestraight-line method over a period of 20 years.

 

The impairment test requires us to compare the fair value of businessreporting units to their carrying value, including assignedgoodwill.  In assessing potential impairment of goodwill, we havedetermined that we have one reporting unit for purposes of applying SFAS 142based on our reporting structure. The fair value of our single reporting unitis determined based on the fair market value of our outstanding common stock ona control basis. We performed the initial adoption impairment test in early fiscal2002.  The results of the initial impairment test and the annualimpairment test performed as of September 30, 2003 indicated fair value amountsexceeded carrying amounts by a substantial margin.  If any significantunanticipated change in the fair value of our outstanding common stock on acontrol basis were to occur in the future, the carrying balance of our goodwillmay 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 provision for income taxes based on federaland state tax laws and regulations currently in effect, some of which have beenrecently revised.  Legislation changescurrently proposed by certain of the states in which we operate, if enacted,could increase our transactions or activities subject to tax. Any suchlegislation that becomes law could result in an increase in our state income taxexpense and our state income taxes paid, which could have a material andadverse effect on our net income.

 

The temporary differences result in deferred tax assets andliabilities, which are included within our consolidated balance sheets. We mustthen assess the likelihood that our deferred tax assets will be recovered fromfuture taxable income. Actual results could differ from this assessment ifadequate taxable income is not generated in future periods. Net deferred taxassets as of June 30, 2004 and September 30, 2003 totaled $18.5 million and$18.2 million, respectively, representing approximately 7.1% and 7.4% of totalassets, respectively. To the extent we believe that recovery of the deferredtax assets is not more likely than not, we must establish a valuationallowance. To the extent we establish a valuation allowance or change theallowance in a period, income tax expense will be impacted.

 

*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 these in accordance with SFAS 5,“Accounting for Contingencies.”  SFAS 5 requires us to record an estimatedloss contingency when information available prior to issuance of our financialstatements indicates that it is probable that an asset has been impaired or aliability has been incurred at the date of the financial statements and theamount of the loss can be reasonably estimated.  An interpretation of SFAS5 further states that when there is a range of loss and no amount within thatrange is a better estimate than any other, then the minimum amount of the rangeshall be accrued.  Accounting for contingencies arising from contractualor legal proceedings requires company

 

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managementto use its best judgment when estimating an accrual related to suchcontingencies, which includes consultation with our outside legal counsel. Asadditional information becomes known, our accrual for a loss contingency couldfluctuate, thereby creating variability in our results of operations fromperiod to period. Likewise, an actual loss arising from a loss contingencywhich significantly exceeds the amount accrued for in our financial statementscould have a material adverse impact on our operating results for the period inwhich such actual loss becomes known.

 

**Forward-Looking Statements**

 

Some of the information in this report, including the informationincorporated by reference (as well as information included in oral statementsor other written statements made or to be made by us), contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. The forward-looking statements involve a number of risks anduncertainties. A number of factors could cause our actual results, performance,achievements or industry results to be materially different from any futureresults, performance or achievements expressed or implied by theseforward-looking statements. These factors include, but are not limited to:changes in consumer spending patterns, raw material price increases, consumerpreferences and overall economic conditions, the impact of competition andpricing, availability of suitable store locations, continued availability ofcapital and financing, ability to hire and develop senior management and salesassociates, ability to develop and source merchandise, ability to receiveproduction from foreign sources on a timely basis, potential stock and/or debtrepurchases, war or acts of terrorism and other factors referenced in ourAnnual Report on Form 10-K, including those set forth under the caption “RiskFactors.”

 

In addition, these forward-looking statements necessarily depend uponassumptions, estimates and dates that may be incorrect or imprecise and involveknown and unknown risks, uncertainties and other factors. Accordingly, anyforward-looking statements included in this report do not purport to bepredictions of future events or circumstances and may not be realized.Forward-looking statements can be identified by, among other things, the use offorward-looking terms such as “believes,” “expects,” “may,” “will,” “should,”“seeks,” “pro forma,” “anticipates,” “intends,” “continues,” “could,”“estimates,” “plans,” “potential,” “predicts,” “goal,” “objective,” or thenegative of any of these terms, or comparable terminology, or by discussions ofoutlook, plans, goals, strategy or intentions. Forward-looking statements speakonly as of the date made. We assume no obligation to update any of theseforward-looking statements to reflect actual results, changes in assumptions orchanges in other 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 any market sensitive instruments fortrading purposes.  The analysis below presents the sensitivity of themarket value of our financial instruments to selected changes in marketinterest rates.  The range of changes presented reflects our view ofchanges that are reasonably possible over a one-year period.

 

At June 30, 2004, 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 fairvalue of the debt portfolio is referred to as the “debt value.”  The NewSenior Notes bear interest at a fixed rate of 111⁄4%.  While a change inmarket interest rates would not affect the interest incurred or cash flowrelated to this fixed rate portion of the debt portfolio, the debt value wouldbe affected.

 

Our revolving credit facility carries a variable interest rate that istied to market indices.  At June 30, 2004, we had no direct borrowings and$4.3 million of letters of credit outstanding under our credit facility (plusan additional $4.3 million of letters of credit outstanding under a specialpurpose letter of credit facility).  Borrowings under the credit facilitywould have borne interest at a rate between approximately 3.4% and 4.0% perannum as of June 30, 2004.  Any future borrowings under the creditfacility would, to the extent of outstanding borrowings, be affected by changesin market interest rates. A change in market interest rates on the variableportion of the debt portfolio impacts the interest incurred and cash flows, butdoes not impact the value of the 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 as of June 30, 2004 with all other variables heldconstant.  A 100 basis point increase in market interest rates wouldresult in a decrease in the value of the debt by approximately $5.3 million asof June 30, 2004.  A 100 basis point decline in market interest rateswould cause the debt value to increase by approximately $5.5 million as of June30, 2004.

 

Based on thevariable rate debt included in our debt portfolio as of June 30, 2004, a 100basis point increase in interest rates would result in additional interestincurred for the year of less than $0.1 million. A 100 basis point decrease ininterest rates would correspondingly lower our interest expense for the year byless than $0.1 million.

 

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

 

**Item 4.****Controls and Procedures**

 

*(a)Evaluation of disclosure controls and procedures*.   Our disclosure controls and procedures aredesigned to ensure that information required to be disclosed by us in thereports that are filed or submitted under the Securities Exchange Act of 1934is recorded, processed, summarized and reported within the time periodsspecified in the Securities and

 

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Exchange Commission’s rules andforms.  These disclosure controls andprocedures include controls and procedures designed to ensure that informationrequired to be disclosed under the Securities Exchange Act of 1934 isaccumulated and communicated to our management on a timely basis to allowdecisions regarding required disclosure. We evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures as of June 30, 2004. Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that as of June 30, 2004, these controls and procedures wereeffective.

 

*(b) Changein Internal Controls*.  There have been no changes in internal control over financial reportingidentified in connection with the foregoing evaluation that occurred during ourlast fiscal quarter that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

From time to time, we arenamed as a defendant in legal actions arising from our normal businessactivities. Although the amount of any liability that could arise with respectto currently pending actions cannot be accurately predicted, we do not believethat the resolution of any pending action will have a material adverse effecton our financial position, results of operations or liquidity.

 

**Item 2. Changes i****n Securities, Use of Proceeds andIssuer Purchases of Equity Securities**

 

The following tableprovides information about purchases by us during the quarter ended June 30,2004 of equity securities that are registered by us pursuant to Section 12 ofthe Securities Exchange Act of 1934:

 

**Issuer Purchases of Equity Securities**

 
| **Period**                | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased as  Part of a Publicly  Announced Program (1)** | ** ** | **Maximum  Approximate Dollar  Value of Shares that  May Yet Be Purchased  Under the Program (2)** | ** ** |
|---------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| April 1 to April 30, 2004 |       | 27,270                                  | (3)        | $24.55                            |       | 14,954                                                                              | (3)        | $7,150,517                                                                                         |       |
| May 1 to May 31, 2004     |       | 18,217                                  |       | $21.60                            |       | 18,217                                                                              |       | $6,756,983                                                                                         |       |
| June 1 to June 30, 2004   |       | —                                  |       | —                            |       | —                                                                              |       | $6,756,983                                                                                         |       |
| Total                     |       | 45,487                                  | (3)        | $23.37                            |       | 33,171                                                                              | (3)        | $6,756,983                                                                                         |       |

 

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(1) As ofJune 30, 2004, we had repurchased an aggregate of 142,269 shares at a totalcost of approximately $3.2 million pursuant to the repurchase program that wepublicly announced in March 2003.

 

(2) OnMarch 6, 2003, we announced that our Board of Directors had approved a sharerepurchase program under which we may buy up to $10.0 million of ouroutstanding common stock from time to time in open market purchases or throughprivate transactions until March 2005.

 

(3) Includedin the 33,171 shares purchased by us during the quarter pursuant to a publiclyannounced program is an aggregate of 14,954 shares of our stock purchased by usfrom our Chief Executive Officer and our President in April 2004.  In addition to the 33,171 shares purchased byus during the quarter pursuant to a publicly announced program, we alsoreceived from our Chief Executive Officer and our President an aggregate of12,316 shares of our stock in April 2004 as payment of the exercise price ofemployee stock options.

 

**Item 6.****Exhibits and Reports on Form 8-K**

 

(a)  Exhibits.

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                       |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1             |       | Certification of the Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                              |
|             |       |                                                                                                                                                                                  |
| 31.2             |       | Certification of the Executive Vice President-Chief Financial Officer  Pursuant of Section 302 of the Sarbanes-Oxley Act of 2002.                                                     |
|             |       |                                                                                                                                                                                  |
| 32.1             |       | 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.                              |
|             |       |                                                                                                                                                                                  |
| 32.2             |       | Certification of the Executive Vice President-Chief Financial Officer  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  Section Sarbanes-Oxley Act of 2002. |

 

(b)  Reports on Form 8-K.

 

As of the date of filingof this Form 10-Q, the Company did not file any Current Reports on Form 8-Kduring or after the third quarter of fiscal 2004.  The following is a list of Current Reports onForm 8-K furnished by the Company during the third quarter of fiscal 2004:

 

The Company furnished a Current Report onForm 8-K dated April 8, 2004, under Item 12 — Results of Operations andFinancial Condition, announcing that it had issued a press release on April 8,2004, discussing its sales results for both the month of March 2004 and for thesecond quarter of fiscal year 2004 ended March 31, 2004.

 

The Company furnished a Current Report onForm 8-K dated April 27, 2004, under Item 12 — Results of Operations andFinancial Condition, disclosing that it issued a press release and held abroadly accessible conference call to discuss its financial results for itssecond fiscal quarter of fiscal year 2004 ended March 31, 2004.

 

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The following is a listof Current Reports on Form 8-K furnished by the Company after the third quarterof fiscal 2004 and prior to the filing of this Form 10-Q:

 

The Company furnished a Current Report on Form 8-K dated July 8, 2004,under Item 12 — Results of Operations and Financial Condition, announcing thatit had issued a press release on July 8, 2004, discussing its sales results forboth the month of June 2004 and for the third quarter of fiscal year 2004 endedJune 30, 2004.

 

The Company furnished a Current Report onForm 8-K dated July 27, 2004, under Item 12 — Results of Operations andFinancial Condition, announcing that it had issued a press release and held abroadly accessible conference call to discuss its financial results for itsthird fiscal quarter of fiscal year 2004 ended June 30, 2004.

 

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**Signatures**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                  |     | MOTHERS WORK, INC.                                        |     |
|-----------------------|----------|-----------------------------------------------------------|----------|
|                  |     |                                                      |     |
| Date: August 16, 2004 | By:      | **/s/ DAN W. MATTHIAS**                                   |     |
|                  |     |                                                      | * * |
|                  |     | Dan W. Matthias                                           | * * |
| * *              | * * | *Chairman of the Board and  Chief Executive Officer*      |     |
|                  |     |                                                      |     |
|                  |     |                                                      |     |
| Date: August 16, 2004 | By:      | **/s/ EDWARD M. KRELL**                                   |     |
|                  |     |                                                      |     |
|                  |     | Edward M. Krell                                           |     |
| * *              | * * | *Executive Vice President—  Chief Financial Officer* |     |

 

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