**United StatesSecurities 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 30,2005**

** **

**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 asspecified in its charter)

 
| **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)                         |

 

Registrant’s telephone number,including area code **(215) 873-2200**

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yesý No o

 

Indicate by check mark whetherthe Registrant is an accelerated filer (as defined in Rule 12b-2 of theAct). Yesý No o

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

Common Stock, $.01 par value — 5,260,535shares outstanding as of August 4, 2005

 

 

----

 

**MOTHERS WORK, INC. ANDSUBSIDIARIES**

**INDEX**

 
| PART I.  FINANCIAL INFORMATION |                                                                                        |
|------------------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                                  | Financial Statements (unaudited)                                                            | 3 |
|                                     | Consolidated Balance Sheets                                                                 | 3 |
|                                     | Consolidated Statements of Operations                                                       | 4 |
|                                     | Consolidated Statements of Cash Flows                                                       | 5 |
|                                     | Notes to Consolidated Financial Statements                                                  | 6 |
| Item  2.                                 | Management’s Discussion and Analysis  of Financial Condition and Results of Operations | 16 |
| Item  3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                 | 24 |
| Item  4.                                 | Controls  and Procedures                                                                    | 24 |
|                                     |                                                                                        |
| PART II.  OTHER INFORMATION    |                                                                                        |
| Item 1.                                  | Legal Proceedings                                                                           | 25 |
| Item 4.                                  | Submission of Matters to a Vote of Security  Holders** **                              | 25 |
| Item 6.                                  | Exhibits                                                                                    | 25 |
|                                     |                                                                                        |
| Signatures                               | 26                                                                                          |

 

2

----

 

**PART I. FINANCIAL INFORMATION**

**Item 1.**** Financial Statements**

 

**MOTHERS WORK, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(in thousands, except share andper share amounts)

(unaudited)

 
| ** **                                                                                                                              | ** ** | **June 30, 2005** | ** ** | **September 30, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                              | ** ** | ** **             | ** ** | **(As Restated  See Note 2)**    | ** ** |
| **ASSETS**                                                                                                                              |       |                   |       |                             |       |
| Current Assets:                                                                                                                         |       |                   |       |                             |       |
| Cash and cash equivalents                                                                                                               |       | $                      | 8,708      |                             | $          | 8,467 |   |
| Short-term investments                                                                                                                  |       | —                 |       | 6,400                            |       |
| Trade receivables, net                                                                                                                  |       | 6,471                  |       | 2,911                            |       |
| Inventories                                                                                                                             |       | 111,758                |       | 92,743                           |       |
| Deferred income taxes                                                                                                                   |       | 4,704                  |       | 4,660                            |       |
| Prepaid expenses and other  current assets                                                                                              |       | 3,581                  |       | 7,215                            |       |
| Total Current Assets                                                                                                                    |       | 135,222                |       | 122,396                          |       |
| Property, Plant and Equipment,  net                                                                                                     |       | 79,515                 |       | 78,462                           |       |
| Assets Held for Sale                                                                                                                    |       | 1,200                  |       | 1,200                            |       |
| Other Assets:                                                                                                                           |       |                   |       |                             |       |
| Goodwill                                                                                                                                |       | 50,389                 |       | 50,389                           |       |
| Deferred financing costs, net  of accumulated amortization of $1,694 and $1,267                                                         |       | 3,859                  |       | 3,665                            |       |
| Other intangible assets, net of  accumulated amortization of $2,484 and   $2,476                                                   |       | 933                    |       | 946                              |       |
| Deferred income taxes                                                                                                                   |       | 13,605                 |       | 13,317                           |       |
| Other non-current assets                                                                                                                |       | 493                    |       | 995                              |       |
| Total Other Assets                                                                                                                      |       | 69,279                 |       | 69,312                           |       |
| Total Assets                                                                                                                            |       | $                      | 285,216    |                             | $          | 271,370 |   |
|                                                                                                                                    |       |                   |       |                             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                          |       |                   |       |                             |       |
| Current Liabilities:                                                                                                                    |       |                   |       |                             |       |
| Line of credit borrowings                                                                                                               |       | $                      | —     |                             | $          | — |   |
| Current portion of long-term  debt                                                                                                      |       | 728                    |       | 288                              |       |
| Accounts payable                                                                                                                        |       | 23,351                 |       | 19,779                           |       |
| Accrued expenses and other  current liabilities                                                                                         |       | 38,286                 |       | 34,496                           |       |
| Total Current Liabilities                                                                                                               |       | 62,365                 |       | 54,563                           |       |
| Long-Term Debt                                                                                                                          |       | 128,367                |       | 127,629                          |       |
| Deferred Rent and Other Non-Current  Liabilities                                                                                        |       | 25,905                 |       | 26,275                           |       |
| Total Liabilities                                                                                                                       |       | 216,637                |       | 208,467                          |       |
|                                                                                                                                    |       |                   |       |                             |       |
| Commitments and Contingencies  (Note 10)                                                                                                |       |                   |       |                             |       |
|                                                                                                                                    |       |                   |       |                             |       |
| 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, 5,259,355   and 5,207,081 shares issued and outstanding, respectively |       | 53                     |       | 52                               |       |
| Additional paid-in capital                                                                                                              |       | 63,076                 |       | 62,565                           |       |
| Retained earnings                                                                                                                       |       | 5,450                  |       | 286                              |       |
| Total Stockholders’ Equity                                                                                                         |       | 68,579                 |       | 62,903                           |       |
| Total Liabilities and  Stockholders’ Equity                                                                                        |       | $                      | 285,216    |                             | $          | 271,370 |   |

 

The accompanying notes are anintegral part of these Consolidated Financial Statements.

 

3

----

 

**MOTHERS WORK, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(in thousands, except per shareamounts)

(unaudited)

 
| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | ** **                            | ** ** | **(As Restated  See Note 2)**        | ** ** | ** ** | ** ** | **(As Restated  See Note 2)** | ** ** |
| Net sales                                     |       | $                                     | 152,740    |                                 | $          | 139,558 |   | $ | 426,390 |   | $ | 397,056 |   |
| Cost of goods sold                            |       | 70,597                                |       | 60,798                               |       | 203,621 |   | 182,189 |   |
| Gross profit                                  |       | 82,143                                |       | 78,760                               |       | 222,769 |   | 214,867 |   |
| Selling, general and  administrative expenses |       | 69,323                                |       | 63,687                               |       | 202,911 |   | 188,748 |   |
| Operating income                              |       | 12,820                                |       | 15,073                               |       | 19,858 |   | 26,119 |   |
| Interest expense, net                         |       | 3,779                                 |       | 3,688                                |       | 11,391 |   | 11,081 |   |
| Income before income taxes                    |       | 9,041                                 |       | 11,385                               |       | 8,467 |   | 15,038 |   |
| Income tax provision                          |       | 3,532                                 |       | 4,567                                |       | 3,303 |   | 6,054 |   |
| Net income                                    |       | $                                     | 5,509      |                                 | $          | 6,818 |   | $ | 5,164 |   | $ | 8,984 |   |
|                                          |       |                                  |       |                                 |       |   |   |   |   |
| Income per share—Basic                   |       | $                                     | 1.05       |                                 | $          | 1.31 |   | $ | 0.99 |   | $ | 1.72 |   |
| Average shares  outstanding—Basic        |       | 5,253                                 |       | 5,201                                |       | 5,235 |   | 5,215 |   |
| Income per share—Diluted                 |       | $                                     | 1.03       |                                 | $          | 1.24 |   | $ | 0.96 |   | $ | 1.62 |   |
| Average shares  outstanding—Diluted      |       | 5,372                                 |       | 5,480                                |       | 5,373 |   | 5,530 |   |

 

The accompanying notes are anintegral part of these Consolidated Financial Statements.

 

4

----

 

**MOTHERS WORK, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

(in thousands)

(unaudited)

 
| ** **                                                                                   | ** ** | **Nine Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                                                                                   | ** ** | ** **                           | ** ** | **(As Restated  See Note 2)** | ** ** |
| **Cash Flows from Operating  Activities**                                                    | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                                    | 5,164      |   | $ | 8,984 |   |
| Adjustments to reconcile net  income to net cash provided by (used in) operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                                |       | 11,543                               |       | 10,487 |   |
| Loss on impairment of long-lived  assets                                                     |       | 1,773                                |       | 507 |   |
| Loss on disposal of assets                                                                   |       | 673                                  |       | 328 |   |
| Accretion of discount on senior  notes                                                       |       | 123                                  |       | 110 |   |
| Deferred income tax benefit                                                                  |       | (332                                 | )          | (498 | ) |
| Tax benefit of stock option  exercises                                                       |       | 100                                  |       | 225 |   |
| Amortization of deferred financing  costs                                                    |       | 427                                  |       | 306 |   |
| Provision for deferred rent                                                                  |       | 356                                  |       | 2,463 |   |
| Other                                                                                        |       | —                               |       | 194 |   |
| Changes in assets and  liabilities:                                                          |       |                                 |       |   |   |
| Decrease (increase) in —                                                                |       |                                 |       |   |   |
| Trade receivables                                                                            |       | (2,089                               | )          | (766 | ) |
| Inventories                                                                                  |       | (19,015                              | )          | (3,942 | ) |
| Prepaid expenses and other  current assets                                                   |       | 3,732                                |       | 1,125 |   |
| Increase in —                                                                           |       |                                 |       |   |   |
| Accounts payable, accrued  expenses and other current liabilities                            |       | 6,430                                |       | 1,537 |   |
| Net cash provided by operating  activities                                                   |       | 8,885                                |       | 21,060 |   |
| **Cash Flows from Investing  Activities**                                                    |       |                                 |       |   |   |
| Proceeds from sale of  short—term investments                                           |       | 13,400                               |       | 27,375 |   |
| Purchase of short-term  investments                                                          |       | (7,000                               | )          | (38,275 | ) |
| Capital expenditures                                                                         |       | (15,281                              | )          | (14,371 | ) |
| Purchase of intangible assets                                                                |       | (162                                 | )          | (22 | ) |
| Net cash used in investing  activities                                                       |       | (9,043                               | )          | (25,293 | ) |
|                                                                                         |       |                                 |       |   |   |
| **Cash Flows from Financing  Activities**                                                    |       |                                 |       |   |   |
| Increase in cash overdrafts                                                                  |       | 1,364                                |       | 5,345 |   |
| Repayment of long-term debt                                                                  |       | (383                                 | )          | (115 | ) |
| Repurchase of common stock                                                                   |       | —                               |       | (1,775 | ) |
| Payout of redeemed  Series A Preferred Stock                                            |       | (373                                 | )          | (1,363 | ) |
| Deferred financing costs                                                                     |       | (621                                 | )          | — |   |
| Proceeds from exercise of stock  options                                                     |       | 412                                  |       | 244 |   |
| Net cash provided by financing  activities                                                   |       | 399                                  |       | 2,336 |   |
| **Net Increase (Decrease) in  Cash and Cash Equivalents**                                    |       | 241                                  |       | (1,897 | ) |
| **Cash and Cash Equivalents,  Beginning of Period**                                          |       | 8,467                                |       | 15,731 |   |
| **Cash and Cash Equivalents,  End of Period**                                                |       | $                                    | 8,708      |   | $ | 13,834 |   |
|                                                                                         |       |                                 |       |   |   |
| Supplemental Disclosures of  Cash Flow Information:                                          |       |                                 |       |   |   |
| Cash paid for interest                                                                       |       | $                                    | 7,345      |   | $ | 7,256 |   |
| Cash paid for income taxes                                                                   |       | $                                    | 1,785      |   | $ | 2,820 |   |
| Supplemental Disclosures of Non-Cash  Investing and Financing Activities:                    |       |                                 |       |   |   |
| Purchase of equipment under  capital lease obligations                                       |       | $                                    | 1,438      |   | $ | — |   |

 

The accompanying notes are anintegral part of these Consolidated Financial Statements.

 

5

----

 

**MOTHERS WORK, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**June 30, 2005**

(unaudited)

 

**1.     BASIS OF FINANCIAL STATEMENT PRESENTATION**

** **

The accompanying unaudited consolidatedfinancial statements of Mothers Work, Inc. and subsidiaries (the “Company”or “Mothers Work”) have been prepared in accordance with the requirements for Form 10-Qand Article 10 of Regulation S-X and, accordingly, certaininformation and footnote disclosures have been condensed or omitted.

 

In the opinion of management, theconsolidated financial statements contain all adjustments, consisting of normalrecurring adjustments, necessary to present fairly the consolidated financialposition of the Company for the periods presented.  Since the Company’s operations are seasonal,the interim operating results of the Company may not be indicative of operatingresults for the full year.

 

The Company operates on a fiscal year ending September 30of each year.  All references to fiscalyears of the Company refer to fiscal years ended on September 30 in thoseyears.  For example, the Company’s “fiscal2005” will end on September 30, 2005. Certain reclassifications have been made to the prior yearconsolidated financial statements to conform to the current year presentation.

 

**2.     RESTATEMENTOF FINANCIAL STATEMENTS**

 

In May 2005, the Company completed a review of its historical leaseaccounting methods to determine whether these methods were in accordance withthe views expressed by the Office of the Chief Accountant of the Securities andExchange Commission (“SEC”) on February 7, 2005 in a letter to theAmerican Institute of Certified Public Accountants and other recentinterpretations regarding certain operating lease accounting issues and theirapplication under accounting principles generally accepted in the United Statesof America (“GAAP”).  As a result of theCompany’s review, it has determined that, with regard to its method ofaccounting for leases, its historical methods of accounting for rent holidaysand tenant improvement allowances, and of determining the amortization periodfor leasehold improvements for certain leased properties, were not inaccordance with GAAP.  As a result, on May 10,2005, the Company filed a Current Report on Form 8-K with the SECannouncing its decision to restate the previously issued consolidated financialstatements contained in its Annual Report on Form 10-K for the year ended September 30,2004 and the Quarterly Report on Form 10-Q for the quarterly period ended December 31,2004  (the “Restatement”).

 

*Rent Holiday*.  The Company has historically recognized rentholiday periods and scheduled rent increases on a straight-line basis over thelease term beginning with the commencement date of the lease which is typicallythe store opening date.  The Company hasdetermined that the lease term should commence on the date it takes possessionof the leased property, which is generally four to six weeks prior to a store’sopening date.

 

*Tenant Improvement Allowances*.  The Company has historically accounted fortenant improvement allowances as reductions to the related leaseholdimprovements in its consolidated balance sheets and as reductions of capitalexpenditures in investing activities in its consolidated statements of cashflows.  The Company has now determinedthat allowances should be recorded as deferred rent liabilities in itsconsolidated balance sheets and as a component of operating activities in its consolidatedstatements of cash flows.

 

*Amortization of Leasehold Improvements.*  Historically, the life used for certainleasehold improvements by the Company in some instances was longer than thelease term for such related leases.  Aspart of the Company’s review associated with lease matters, the Company hasdetermined that the amortization period for leasehold improvements should beconsistent with the straight-line rent expense period for each of itsleases.  The lives for all leaseholdimprovements have been reviewed to ensure that the amortization is now recordedbased on the lesser of the estimated useful life of the asset or the leaseterm.

 

6

----

 

The primary effects of the correctionsare:  (i) to accelerate the rentexpense on properties the Company occupied before payment of rents was required(rent holidays); (ii) to increase depreciation and amortization expenseand decrease store occupancy expense (both of which are components of selling,general and administrative expenses) to reflect the proper accounting for tenantimprovement allowances; and (iii) to accelerate the amortization ofleasehold improvements on those leased properties where the lease term isshorter than the estimated useful economic life of those assets.  The cumulative effect of theseaccounting changes is a reduction to retained earnings of $2,533,000 as of thebeginning of fiscal 2004 and incremental decreases to retained earnings of$834,000 and $304,000 for fiscal 2004 and the first quarter of fiscal 2005,respectively.  The Restatement decreased  reporteddiluted earnings per share by $0.15 and $0.06, respectively, for fiscal 2004 andthe first quarter of fiscal 2005.

 

The consolidated financial statements included in this Form 10-Qhave been restated to reflect the adjustments described above.  The following is a summary of the impact ofthe Restatement on (i) the consolidated balance sheet as of September 30,2004, (ii) the consolidated statements of operations for the three andnine months ended June 30, 2004 and (iii) the consolidated statementof cash flows for the nine months ended June 30, 2004:

 

(in thousands, except per share amounts)

 

***CONSOLIDATED BALANCE SHEET* ***

 
| ** **                                       | ** ** | **September 30, 2004** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **As Reported**             | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| Property,  Plant and Equipment, net              |       | $                           | 60,288     |   | $ | 18,174 |   | $ | 78,462 |   |
| Deferred Income Taxes – Non-Current         |       | 11,504                      |       | 1,813 |   | 13,317 |   |
| Total Other Assets                               |       | 67,499                      |       | 1,813 |   | 69,312 |   |
| Total Assets                                     |       | 251,383                     |       | 19,987 |   | 271,370 |   |
|                                             |       |                        |       |   |   |   |   |
| Accrued Expenses and Other  Current Liabilities  |       | 30,561                      |       | 3,935 |   | 34,496 |   |
| Total Current Liabilities                        |       | 50,628                      |       | 3,935 |   | 54,563 |   |
| Deferred Rent and Other Non-Current  Liabilities |       | 6,856                       |       | 19,419 |   | 26,275 |   |
| Total Liabilities                                |       | 185,113                     |       | 23,354 |   | 208,467 |   |
| Retained Earnings                                |       | 3,653                       |       | (3,367 | ) | 286 |   |
| Total Stockholders’ Equity                  |       | 66,270                      |       | (3,367 | ) | 62,903 |   |
| Total Liabilities and  Stockholders’ Equity |       | 251,383                     |       | 19,987 |   | 271,370 |   |
|                                                  |            |                             |            |  |  |  |  |  |  |  |

 

***CONSOLIDATED STATEMENTS OFOPERATIONS* ***

 
| ** **                                    | ** ** | **Three Months Ended  June 30, 2004** | ** ** | **Nine Months Ended  June 30, 2004** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **As Reported**                            | ** ** | **Adjustments**                           | ** ** | **As Restated** | ** ** | **As Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| Selling, general and  administrative expenses |       | $                                          | 63,421     |                                      | $          | 266 |   | $ | 63,687 |   | $ | 187,971 |   | $ | 777 |   | $ | 188,748 |   |
| Operating income                              |       | 15,339                                     |       | (266                                      | )          | 15,073 |   | 26,896 |   | (777 | ) | 26,119 |   |
| Income before income taxes                    |       | 11,651                                     |       | (266                                      | )          | 11,385 |   | 15,815 |   | (777 | ) | 15,038 |   |
| Income tax provision                          |       | 4,660                                      |       | (93                                       | )          | 4,567 |   | 6,326 |   | (272 | ) | 6,054 |   |
| Net income                                    |       | 6,991                                      |       | (173                                      | )          | 6,818 |   | 9,489 |   | (505 | ) | 8,984 |   |
| Income per share—Basic                   |       | 1.34                                       |       | (0.03                                     | )          | 1.31 |   | 1.82 |   | (0.10 | ) | 1.72 |   |
| Income per share—Diluted                 |       | 1.28                                       |       | (0.04                                     | )          | 1.24 |   | 1.72 |   | (0.10 | ) | 1.62 |   |
|                                               |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

7

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***CONSOLIDATED STATEMENT OF CASHFLOWS* ***

 
| ** **                                 | ** ** | **Nine Months Ended  June 30, 2004** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **As Reported**                           | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| **Cash Flows from Operating  Activities**  | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                 |       | $                                         | 9,489      |   | $ | (505 | ) | $ | 8,984 |   |
| Depreciation and amortization              |       | 7,509                                     |       | 2,978 |   | 10,487 |   |
| Loss on impairment of long-lived  assets   |       | 470                                       |       | 37 |   | 507 |   |
| Loss on disposal of assets                 |       | 381                                       |       | (53 | ) | 328 |   |
| Deferred income tax benefit                |       | (226                                      | )          | (272 | ) | (498 | ) |
| Provision for (reversal of)  deferred rent |       | 457                                       |       | 2,006 |   | 2,463 |   |
| Net cash provided by operating  activities |       | 16,869                                    |       | 4,191 |   | 21,060 |   |
| **Cash Flows from Investing  Activities**  |       |                                      |       |   |   |   |   |
| Capital expenditures                       |       | (10,180                                   | )          | (4,191 | ) | (14,371 | ) |
| Net cash used in investing  activities     |       | (21,102                                   | )          | (4,191 | ) | (25,293 | ) |
|                                            |            |                                           |            |  |  |  |  |  |  |  |

 

----

* The tables include only those line items which have changed as aresult of the Restatement.

 

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

 

The Company follows the Financial Accounting Standards Board (“FASB”)Statement of Financial Accounting Standards (“SFAS”) No. 128, “EarningsPer 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 common sharesoutstanding, after giving effect to the potential dilution from the exercise ofsecurities, such as stock options and warrants, into shares of common stock asif those securities were exercised.

 

The following table summarizes the Basic EPS and Diluted EPScalculations (in thousands, except per share amounts):

 
| ** **                                                                                     | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Three Months Ended  June 30, 2004** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                     | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(As Restated-See Note 2)** | ** ** |
| ** **                                                                                     | ** ** | **Net  Income**                            | ** ** | **Shares**                                 | ** ** | **EPS** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic EPS                                                                                      |       | $                                          | 5,509      |                                       | 5,253      |   | $ | 1.05 |   | $ | 6,818 |   | 5,201 |   | $ | 1.31 |   |
| Incremental shares from the  assumed exercise of outstanding stock options   and warrants |       | —                                     |       | 119                                        |       | (0.02 | ) | — |   | 279 |   | (0.07 | ) |
|                                                                                           |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                                                                    |       | $                                          | 5,509      |                                       | 5,372      |   | $ | 1.03 |   | $ | 6,818 |   | 5,480 |   | $ | 1.24 |   |

 
| ** **                                                                                     | ** ** | **Nine Months Ended  June 30, 2005** | ** ** | **Nine Months Ended  June 30, 2004** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                     | ** ** | ** **                                     | ** ** | ** **                                | ** ** | ** ** | ** ** | **(As Restated-See Note 2)** | ** ** |
| ** **                                                                                     | ** ** | **Net  Income**                                | ** ** | **Shares**                                | ** ** | **EPS** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic EPS                                                                                      |       | $                                              | 5,164      |                                      | 5,235      |   | $ | 0.99 |   | $ | 8,984 |   | 5,215 |   | $ | 1.72 |   |
| Incremental shares from the  assumed exercise of outstanding stock options   and warrants |       | —                                         |       | 138                                       |       | (0.03 | ) | — |   | 315 |   | (0.10 | ) |
|                                                                                           |       |                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                                                                    |       | $                                              | 5,164      |                                      | 5,373      |   | $ | 0.96 |   | $ | 8,984 |   | 5,530 |   | $ | 1.62 |   |

 

8

----

 

For the three months ended June 30, 2005 and 2004, options topurchase 420,250 and 436,350 shares, respectively, were excluded from thecalculation of Diluted EPS as their effect would have been antidilutive.  For the nine months ended June 30, 2005and 2004, options to purchase 455,933 and 328,250 shares, respectively, wereexcluded from the calculation of Diluted EPS as their effect would have beenantidilutive.  These options and warrants could potentially dilute EPS in the future.

 

**4.     STOCK-BASED COMPENSATION**

 

The Company follows the intrinsic valuemethod of accounting for stock-based employee compensation in accordance withAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations.  The following table illustrates the effect onnet income and earnings per share if the Company had accounted for itsstock option plans using the fair value method of accounting under SFAS No. 123,“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure.”  In December 2004, the FASBrevised SFAS No. 123, by issuing SFAS 123(R), “Share-Based Payment” (seeNote 8).

 
| ** **                                    | ** **                                                                                                                      | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands, except per share amounts):** | ** **                                                                                                                      | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** **                                                                                                                      | ** **                            | ** ** | **(As Restated-  See Note 2)**       | ** ** | ** ** | ** ** | **(As Restated-  See Note 2)** | ** ** |
| Net income, as reported                       |                                                                                                                            | $                                     | 5,509      |                                 | $          | 6,818 |   | $ | 5,164 |   | $ | 8,984 |   |
| Deduct:                                       | Total stock-based employee compensation  expense determined under  the  fair value-based method for all grants, net of tax |                                  | (270       | )                                    | (251       | ) | (1,436 | ) | (1,153 | ) |
| Pro forma net income                          |                                                                                                                            | $                                     | 5,239      |                                 | $          | 6,567 |   | $ | 3,728 |   | $ | 7,831 |   |
|                                          |                                                                                                                            |                                  |       |                                 |       |   |   |   |   |
| Basic EPS:                                    |                                                                                                                            |                                  |       |                                 |       |   |   |   |   |
| As reported                                   |                                                                                                                            | $                                     | 1.05       |                                 | $          | 1.31 |   | $ | 0.99 |   | $ | 1.72 |   |
| Pro forma                                     |                                                                                                                            | $                                     | 1.00       |                                 | $          | 1.26 |   | $ | 0.71 |   | $ | 1.50 |   |
|                                          |                                                                                                                            |                                  |       |                                 |       |   |   |   |   |
| Diluted EPS:                                  |                                                                                                                            |                                  |       |                                 |       |   |   |   |   |
| As reported                                   |                                                                                                                            | $                                     | 1.03       |                                 | $          | 1.24 |   | $ | 0.96 |   | $ | 1.62 |   |
| Pro forma                                     |                                                                                                                            | $                                     | 0.98       |                                 | $          | 1.21 |   | $ | 0.69 |   | $ | 1.42 |   |
|                                               |                                                                                                                                 |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

Pro forma Diluted EPS is computed by dividing pro forma net income bythe pro forma weighted average number of shares outstanding after giving effectto the potential dilution from the exercise of securities, such as stockoptions and warrants, into shares of common stock as if those securities wereexercised as of the beginning of the period presented.   

 

During the three and nine months ended June 30, 2005, options to acquirea total of 21,000 and 349,050 shares of the Company’s common stock,respectively, were granted to certain employees and non-employee directors forthe purchase of the Company’s common stock at prices not less than the fairmarket value of the Company’s common stock on the date of grant.  For the three and nine month periods ended June 30,2004, the stock options granted to certain employees and non-employee directorsfor the purchase of the Company’s common stock were 10,000 and 198,000,respectively.

 

9

----

 

The weighted average fair value of theoptions granted during the three and nine months ended June 30, 2005 wasestimated at $8.41 and $8.78 per share, respectively.  For the three and nine month periods ended June 30,2004, the weighted average fair value of options granted during those periodswas estimated at $15.14 and $16.25 per share, respectively.  The weighted average fair value is calculatedbased on the date of grant using the Black-Scholes option-pricing model withthe following weighted average assumptions:

 
| ** **                | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Dividend yield            |       | None                                  |       | None                                 |       | None |   | None |   |
| Expected price volatility |       | 60.9                                  | %          | 60.7                                 | %          | 60.9 | % | 61.7 | % |
| Risk-free interest rates  |       | 3.9                                   | %          | 4.5                                  | %          | 4.0 | % | 3.8 | % |
| Expected lives            |       | 8.0 years                             |       | 8.0 years                            |       | 8.0 years |   | 8.0 years |   |

 

**5.     INVENTORIES**

 

Inventories were comprised of the following (in thousands):

 
| ** **       | ** ** | **June 30, 2005** | ** ** | **September 30, 2004** | ** ** |
|------------------|------------|------------------------|------------|-----------------------------|------------|
| Finished goods   |       | $                      | 101,147    |                        | $          | 81,428 |   |
| Work-in-progress |       | 3,263                  |       | 3,317                       |       |
| Raw materials    |       | 7,348                  |       | 7,998                       |       |
|             |       | $                      | 111,758    |                        | $          | 92,743 |   |

 

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

 

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

 
| ** **                                                        | ** ** | **June 30, 2005** | ** ** | **September 30, 2004** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| Salaries, wages, and employee  benefits                           |       | $                      | 7,398      |                        | $          | 8,944 |   |
| Income taxes payable                                              |       | 3,341                  |       | 1,344                       |       |
| Interest                                                          |       | 5,901                  |       | 2,358                       |       |
| Deferred rent                                                     |       | 3,875                  |       | 3,935                       |       |
| Sales taxes                                                       |       | 2,434                  |       | 2,458                       |       |
| Insurance                                                         |       | 2,545                  |       | 2,425                       |       |
| Rent                                                              |       | 622                    |       | 608                         |       |
| Audit and legal                                                   |       | 2,643                  |       | 1,671                       |       |
| Reserves recorded in the  iMaternity acquisition (Note 7)         |       | 332                    |       | 850                         |       |
| Remaining payout for redemption  of Series A Preferred Stock |       | 679                    |       | 1,052                       |       |
| Accrued store construction  costs                                 |       | 412                    |       | 1,514                       |       |
| Gift certificates and store  credits                              |       | 3,216                  |       | 2,586                       |       |
| Other                                                             |       | 4,888                  |       | 4,751                       |       |
|                                                              |       | $                      | 38,286     |                        | $          | 34,496 |   |

 

Interest payments on the Company’s $125.0million, 111/4 % senior notes due 2010 (the “New Senior Notes”).

 

**7.     iMATERNITY ACQUISITION EXIT/RESTRUCTURING ACTIVITY**

 

The Company acquired eSpecialty Brands, LLC (“iMaternity”)on October 17, 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 Rican facilities was recorded atthe estimated 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. In July 2004, the Company received an updated market survey from anindependent third party, which survey continued to support the carrying valueof the Costa Rican facilities.

 

10

----

 

As of June 30, 2005, the remaining iMaternity acquisition reservesconsisted of: (a) a severance reserve outstanding of $250,000 thatreflects the remainder of a non-compete and severance arrangement with a formerexecutive of iMaternity that is payable ratably on a monthly basis through September 2006;and (b) the reserve for exit costs of $82,000 that is principally for theexpected costs related to the Costa Rican facilities.

 

A summary of the reserves recorded in connection with the iMaternityacquisition exit/restructuring activities as of September 30, 2004 and theactivity for the nine months ended June 30, 2005 is as follows (inthousands):

 
| ** **             | ** ** | **Balance as of  September 30,  2004** | ** ** | **Charges** | ** ** | **Balance as of  June 30, 2005** | ** ** |
|------------------------|------------|---------------------------------------------|------------|-------------|------------|---------------------------------------|------------|
| Lease termination fees |       | $                                           | 249        |        | $          | (249                                  | )          | $ | — |   |
| Severance              |       | 400                                         |       | (150        | )          | 250                                   |       |
| Exit and other costs   |       | 201                                         |       | (119        | )          | 82                                    |       |
|                   |       | $                                           | 850        |        | $          | (518                                  | )          | $ | 332 |   |

 

**8.     NEW ACCOUNTING PRONOUNCEMENTS**

 

***SFAS No. 123(R****)**.******* In December 2004, the FASB revised SFAS No. 123by issuing SFAS No. 123(R), which replaces SFAS No. 123 and APBOpinion No. 25, and establishes standards for the accounting fortransactions in which an entity exchanges its equity instruments for goods andservices.  SFAS No. 123(R) requiresthat the compensation cost relating to share-based payment transactions berecognized in financial statements, measured by the fair value of the equity orliability instruments issued, and is effective as of the first reporting periodof the fiscal year that begins after June 15, 2005 for public entitiesthat do not file as small business issuers. The fair value-based method of SFAS No. 123 is similar in mostrespects to the fair value-based method under SFAS No. 123(R), however,certain transition rules of SFAS No. 123(R) may affect the impact onthe Company’s consolidated financial position or results of operations.  Such impact, if any, on the Company’sconsolidated financial position or results of operations has not yet beendetermined.  The Company is currentlyevaluating the provisions of SFAS No. 123(R) and will adopt it in thefirst quarter of fiscal 2006.

 

**9.     GUARANTOR SUBSIDIARIES**

 

Pursuant to the terms of the indenturerelating to the New Senior Notes, each of the domestic subsidiaries of MothersWork, Inc. (the “Guarantor Subsidiaries”) has jointly and severallyprovided an unconditional guarantee of the obligations of Mothers Work withrespect to the New Senior Notes.  Thereare no restrictions on any of the assets of the Guarantor Subsidiaries whichwould limit their ability to transfer funds to Mothers Work in the form ofloans, advances or cash dividends, except as provided by applicable law.  None of the Company’s foreign subsidiaries(the “Non-Guarantor Subsidiaries”) have guaranteed the New Senior Notes.  The condensed consolidating financialinformation for the Company, the Guarantor Subsidiaries, and the Non-GuarantorSubsidiaries as of and for the nine months ended June 30, 2005 aspresented below has been prepared from the books and records maintained by theGuarantor Subsidiaries and the Company. The condensed financial information may not necessarily be indicative ofthe results of operations or financial position had the Guarantor Subsidiariesoperated as independent entities. Certain intercompany revenues and expenses are eliminated inconsolidation.  As a result of thisactivity, an amount due to/due from parent will exist at any time.

 

11

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**Mothers Work, Inc.**

**Condensed Consolidating BalanceSheet**

**June 30, 2005**

(in thousands)

(unaudited)

 
| ** **                                            | ** ** | **Mothers Work  (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Operations)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| **ASSETS**                                            |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Current Assets:                                       |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Cash and cash equivalents                             |       | $                                   | 8,281      |                        | $          | 24                                                     |       | $                               | 403        |                           | $          | — |   | $ | 8,708 |   |
| Trade receivables, net                                |       | 6,409                               |       | —                      |       | 62                                                     |       | —                          |       | 6,471                          |       |
| Inventories                                           |       | 109,684                             |       | —                      |       | 2,074                                                  |       | —                          |       | 111,758                        |       |
| Deferred income taxes                                 |       | 4,704                               |       | —                      |       | —                                                 |       | —                          |       | 4,704                          |       |
| Prepaid expenses and other  current assets            |       | 3,581                               |       | —                      |       | —                                                 |       | —                          |       | 3,581                          |       |
| Total Current Assets                                  |       | 132,659                             |       | 24                          |       | 2,539                                                  |       | —                          |       | 135,222                        |       |
| Property, Plant and Equipment,  net                   |       | 76,729                              |       | —                      |       | 2,786                                                  |       | —                          |       | 79,515                         |       |
| Assets Held for Sale                                  |       | —                              |       | —                      |       | 1,200                                                  |       | —                          |       | 1,200                          |       |
| Other Assets                                          |       | 69,278                              |       | 1                           |       | —                                                 |       | —                          |       | 69,279                         |       |
| Investments in and Advances to  (from) Affiliates     |       | (2,999                              | )          | 237,088                     |       | (3,355                                                 | )          | (230,734                        | )          | —                         |       |
| Total Assets                                          |       | $                                   | 275,667    |                        | $          | 237,113                                                |       | $                               | 3,170      |                           | $          | (230,734 | ) | $ | 285,216 |   |
|                                                  |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**        |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Current Liabilities:                                  |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Line of credit borrowings                             |       | $                                   | —     |                        | $          | —                                                 |       | $                               | —     |                           | $          | — |   | $ | — |   |
| Current portion of long-term  debt                    |       | 728                                 |       | —                      |       | —                                                 |       | —                          |       | 728                            |       |
| Accounts payable                                      |       | 23,318                              |       | 33                          |       | —                                                 |       | —                          |       | 23,351                         |       |
| Accrued expenses and other  current liabilities       |       | 29,778                              |       | 7,611                       |       | 897                                                    |       | —                          |       | 38,286                         |       |
| Total Current Liabilities                             |       | 53,824                              |       | 7,644                       |       | 897                                                    |       | —                          |       | 62,365                         |       |
| Long-Term Debt                                        |       | 128,367                             |       | —                      |       | —                                                 |       | —                          |       | 128,367                        |       |
| Deferred Rent and Other Non-Current  Liabilities      |       | 24,897                              |       | —                      |       | 1,008                                                  |       | —                          |       | 25,905                         |       |
| Total Liabilities                                     |       | 207,088                             |       | 7,644                       |       | 1,905                                                  |       | —                          |       | 216,637                        |       |
|                                                  |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Total Stockholders’ Equity                       |       | 68,579                              |       | 229,469                     |       | 1,265                                                  |       | (230,734                        | )          | 68,579                         |       |
| Total Liabilities and  Stockholders’ Equity |       | $                                   | 275,667    |                        | $          | 237,113                                                |       | $                               | 3,170      |                           | $          | (230,734 | ) | $ | 285,216 |   |

 

12

----

 

**Mothers Work, Inc.**

**Consolidating Statement ofOperations**

**For the Nine Months Ended June 30,2005**

(in thousands)

(unaudited)

 
| ** **                                         | ** ** | **Mothers Work  (Parent Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Companies)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| Net sales                                          |       | $                                  | 416,183    |                        | $          | 22,262                                                |       | $                               | 10,207     |                           | $          | (22,262 | ) | $ | 426,390 |   |
| Cost of goods sold                                 |       | 199,022                            |       | —                      |       | 4,599                                                 |       | —                          |       | 203,621                        |       |
| Gross profit                                       |       | 217,161                            |       | 22,262                      |       | 5,608                                                 |       | (22,262                         | )          | 222,769                        |       |
| Selling, general and  administrative expenses |       | 220,596                            |       | 208                         |       | 4,369                                                 |       | (22,262                         | )          | 202,911                        |       |
| Operating income (loss)                            |       | (3,435                             | )          | 22,054                      |       | 1,239                                                 |       | —                          |       | 19,858                         |       |
| Interest income (expense), net                     |       | (21,045                            | )          | 9,654                       |       | —                                                |       | —                          |       | (11,391                        | )          |
| Equity in earnings of  subsidiaries                |       | 32,947                             |       | —                      |       | —                                                |       | (32,947                         | )          | —                         |       |
| Income before income taxes                         |       | 8,467                              |       | 31,708                      |       | 1,239                                                 |       | (32,947                         | )          | 8,467                          |       |
| Income tax provision                               |       | 3,303                              |       | 11,098                      |       | 483                                                   |       | (11,581                         | )          | 3,303                          |       |
| Net income                                         |       | $                                  | 5,164      |                        | $          | 20,610                                                |       | $                               | 756        |                           | $          | (21,366 | ) | $ | 5,164 |   |

 

13

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**Mothers Work, Inc.**

**Consolidating Cash FlowStatement**

**For the Nine Months Ended June 30,2005**

(in thousands)

(unaudited)

 
| ** **                                                                                   | ** ** | **Mothers Work  (Parent  Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Companies)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| **Cash Flows from Operating  Activities:**                                                   | ** ** | ** **                          | ** ** | ** **                  | ** ** | ** **                                            | ** ** | ** **                      | ** ** | ** **                     | ** ** |
| Net income                                                                                   |       | $                                   | 5,164      |                        | $          | 20,610                                                |       | $                               | 756        |                           | $          | (21,366 | ) | $ | 5,164 |   |
| Adjustments to reconcile net  income to net cash provided by (used in) operating activities: |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Depreciation and amortization                                                                |       | 11,179                              |       | —                      |       | 364                                                   |       | —                          |       | 11,543                         |       |
| Loss on impairment of  long-lived assets                                                |       | 1,773                               |       | —                      |       | —                                                |       | —                          |       | 1,773                          |       |
| Loss on disposal of assets                                                                   |       | 673                                 |       | —                      |       | —                                                |       | —                          |       | 673                            |       |
| Accretion of discount on senior  notes                                                       |       | 123                                 |       | —                      |       | —                                                |       | —                          |       | 123                            |       |
| Deferred income tax benefit                                                                  |       | (332                                | )          | —                      |       | —                                                |       | —                          |       | (332                           | )          |
| Tax benefit of stock option  exercises                                                       |       | 100                                 |       | —                      |       | —                                                |       | —                          |       | 100                            |       |
| Amortization of deferred  financing costs                                                    |       | 427                                 |       | —                      |       | —                                                |       | —                          |       | 427                            |       |
| Provision for deferred rent                                                                  |       | 162                                 |       | —                      |       | 194                                                   |       | —                          |       | 356                            |       |
| Changes in assets and  liabilities:                                                          |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Decrease (increase) in—                                                                 |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Trade receivables                                                                            |       | (2,072                              | )          | —                      |       | (17                                                   | )          | —                          |       | (2,089                         | )          |
| Inventories                                                                                  |       | (18,655                             | )          | —                      |       | (360                                                  | )          | —                          |       | (19,015                        | )          |
| Prepaid expenses and other  current assets                                                   |       | 3,732                               |       | —                      |       | —                                                |       | —                          |       | 3,732                          |       |
| Investments in and advances to  (from) affiliates                                            |       | 967                                 |       | (21,936                     | )          | (397                                                  | )          | 21,366                          |       | —                         |       |
| Increase in—                                                                            |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Accounts payable, accrued  expenses and other current liabilities                            |       | 4,590                               |       | 1,306                       |       | 534                                                   |       | —                          |       | 6,430                          |       |
| Net cash provided by (used in) operating  activities                                         |       | 7,831                               |       | (20                         | )          | 1,074                                                 |       | —                          |       | 8,885                          |       |
| **Cash Flows from Investing  Activities:**                                                   |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Proceeds from sale of  short-term investments                                           |       | 13,400                              |       | —                      |       | —                                                |       | —                          |       | 13,400                         |       |
| Purchase of short-term  investments                                                          |       | (7,000                              | )          | —                      |       | —                                                |       | —                          |       | (7,000                         | )          |
| Capital expenditures                                                                         |       | (13,613                             | )          | —                      |       | (1,668                                                | )          | —                          |       | (15,281                        | )          |
| Purchase of intangible assets                                                                |       | (162                                | )          | —                      |       | —                                                |       | —                          |       | (162                           | )          |
| Net cash used in investing  activities                                                       |       | (7,375                              | )          | —                      |       | (1,668                                                | )          | —                          |       | (9,043                         | )          |
| **Cash Flows from Financing  Activities:**                                                   |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Increase in cash overdrafts                                                                  |       | 1,364                               |       | —                      |       | —                                                |       | —                          |       | 1,364                          |       |
| Repayment of long-term debt                                                                  |       | (383                                | )          | —                      |       | —                                                |       | —                          |       | (383                           | )          |
| Payout for redeemed  Series A Preferred Stock                                           |       | (373                                | )          | —                      |       | —                                                |       | —                          |       | (373                           | )          |
| Deferred financing costs                                                                     |       | (621                                | )          | —                      |       | —                                                |       | —                          |       | (621                           | )          |
| Proceeds from exercise of stock  options                                                     |       | 412                                 |       | —                      |       | —                                                |       | —                          |       | 412                            |       |
| Net cash provided by  financing activities                                              |       | 399                                 |       | —                      |       | —                                                |       | —                          |       | 399                            |       |
| **Net Increase (Decrease) in  Cash and Cash Equivalents**                                    |       | 855                                 |       | (20                         | )          | (594                                                  | )          | —                          |       | 241                            |       |
| **Cash and Cash Equivalents,  Beginning of Period**                                          |       | 7,426                               |       | 44                          |       | 997                                                   |       | —                          |       | 8,467                          |       |
| **Cash and Cash  Equivalents,  End of Period**                                          |       | $                                   | 8,281      |                        | $          | 24                                                    |       | $                               | 403        |                           | $          | — |   | $ | 8,708 |   |

 

14

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**10.          COMMITMENTSAND CONTINGENCIES**

 

On January 12, 2005, a purported class action was filed againstthe Company in the United States District Court for the District ofConnecticut.  The complaint alleges that,under applicable federal and state law, certain former and current employeesshould have received overtime compensation. The plaintiffs in this case are seeking unspecified actual damages,penalties and attorneys’ fees.  At thisstage in these proceedings, the Company is unable to predict the outcome ofthis case, which the Company is vigorously defending.  The Company is engaged in efforts to resolvethese claims.

 

In addition, from time to time,the Company is named as a defendant in legal actions arising from its normalbusiness activities.  Although the amountof any liability that could arise with respect to currently pending actions, includingthe matter specifically described above, cannot be accurately predicted, theCompany does not believe that the resolution of any pending action will have amaterial adverse effect on its financial position or results of operations.

 

**11.          SEGMENT AND ENTERPRISE WIDE DISCLOSURES**

 

***Operating Segment***.  Under SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” a company may berequired to report segmented information about separately identifiable parts ofits business, which both (i) meet the definition of an “operating segment”under SFAS No. 131, and (ii) exceed certain quantitative thresholdsestablished in SFAS No. 131.  TheCompany has determined that its business is comprised of one operating segment:the design, manufacture and sale of maternity apparel and relatedaccessories.  While the Company offers awide range of products for sale, the substantial portion of its products areinitially distributed through the same distribution facilities, many of theCompany’s products are manufactured at common contract manufacturer productionfacilities, the Company’s products are marketed through a common marketingdepartment, and these products are sold to a similar customer base, consistingof expectant mothers.

 

***Geographic Information***.  Information concerning theCompany’s operations by geographic area are as follows (in thousands): 

 
| ** **                              | ** ** | **Three Months Ended,  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **2005**                               | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net Sales to Unaffiliated Customers** |       |                                   |       |                                 |       |   |   |   |   |
| United States                           |       | $                                      | 148,341    |                                 | $          | 137,388 |   | $ | 416,183 |   | $ | 391,802 |   |
| Canada                                  |       | $                                      | 4,399      |                                 | $          | 2,170 |   | $ | 10,207 |   | $ | 5,254 |   |

 
| ** **            | ** ** | **June 30, 2005** | ** ** | **September 30, 2004**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------|------------|------------------------|------------|------------------------------|------------|------------|------------|------------|------------|
| ** **            | ** ** | ** **             | ** ** | **(As Restated-See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Long-Lived Assets** |       |                   |       |                         |       |       |       |       |       |
| United States         |       | $                      | 76,729     |                         | $          | 76,980     |       |       |       |   |   |
| Canada                |       | $                      | 2,786      |                         | $          | 1,482      |       |       |       |   |   |
| Costa Rica            |       | $                      | 1,200      |                         | $          | 1,200      |       |       |       |   |   |

 

***Major Customers*****. **For theperiods presented, the Company didnot have any one customer who represented more than 10% of its net sales.

 

**12.          INTEREST EXPENSE, NET**

 

Interest expense, net is comprised of the following:

 
| ** **            | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **            | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest expense      |       | $                                     | 3,792      |                                 | $          | 3,741 |   | $ | 11,445 |   | $ | 11,203 |   |
| Interest income       |       | (13                                   | )          | (53                                  | )          | (54 | ) | (122 | ) |
| Interest expense, net |       | $                                     | 3,779      |                                 | $          | 3,688 |   | $ | 11,391 |   | $ | 11,081 |   |

 

15

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**Restatement of Prior Financial Information**

 

In May 2005, we completed a review of our historical leaseaccounting methods to determine whether these methods were in accordance withthe views expressed by the Office of the Chief Accountant of the Securities andExchange Commission (“SEC”) on February 7, 2005 in a letter to the AmericanInstitute of Certified Public Accountants and other recent interpretationsregarding certain operating lease accounting issues and their application underaccounting principles generally accepted in the United States of America (“GAAP”).  As a result of our review, we determinedthat, with regard to our method of accounting for leases, our historicalmethods of accounting for rent holidays and tenant improvement allowances, andof determining the amortization period for leasehold improvements for certainleased properties, were not in accordance with GAAP.  As a result, on May 10, 2005, we filed aCurrent Report on Form 8-K with the SEC announcing our decision to restatethe previously issued consolidated financial statements contained in our AnnualReport on Form 10-K for the year ended September 30, 2004 and ourQuarterly Report on Form 10-Q for the quarterly period ended December 31,2004  (the “Restatement”).

 

*Rent Holiday*.  We historically have recognized rent holidayperiods and scheduled rent increases on a straight-line basis over the leaseterm beginning with the commencement date of the lease, which is typically thestore opening date.  We have determinedthat the lease term should commence on the date we take possession of theleased property, which is generally four to six weeks prior to a store’sopening date.

 

*Tenant Improvement Allowances.*We historically accounted for tenant improvement allowances as reductionsto the related leasehold improvements in our consolidated balance sheets and asreductions of capital expenditures in investing activities in our consolidatedstatements of cash flows.  We have nowdetermined that allowances should be recorded as deferred rent liabilities inour consolidated balance sheets and as a component of operating activities inour consolidated statements of cash flows.

 

*Amortization of Leasehold Improvements.*Historically, the life used for certain leasehold improvements by us in someinstances was longer than the straight-line rent expense period for such relatedleases.  As part of our review associatedwith lease matters, we have determined that the amortization period forleasehold improvements should be consistent with the straight-line rent expenseperiod for each of our leases.  The livesfor all leasehold improvements have been reviewed to ensure that theamortization is now recorded based on the lesser of the estimated useful lifeof the asset or the lease term.

 

The primary effects of the correctionsare:  (i) to accelerate the rentexpense on properties we occupied before payment of rents was required (rentholidays); (ii) to increase depreciation and amortization expense anddecrease store occupancy expense (both of which are components of selling,general and administrative expenses) to reflect the proper accounting fortenant improvement allowances; and (iii) to accelerate the amortization ofleasehold improvements on those leased properties where the lease term isshorter than the estimated useful economic life of those assets.  The cumulative effect of theseaccounting changes is a reduction to retained earnings of $2.5 million as ofthe beginning of fiscal 2004 and incremental decreases to retained earnings of$0.8 million and $0.3 million for fiscal 2004 and the first quarter of fiscal2005, respectively.  The Restatement decreased reported dilutedearnings per share by $0.15 and $0.06, respectively, for fiscal 2004 andthe first quarter of fiscal 2005.

 

The consolidated financial statements included in this Form 10-Qhave been restated to reflect the adjustments described above.  See Note 2 of the Notes To ConsolidatedFinancial Statements included in this Form 10-Q for a summary of theimpact of the Restatement on (i) the consolidated balance sheet as of September 30,2004, (ii) the consolidated statements of operations for the three andnine months ended June 30, 2004 and (iii) the consolidated statementof cash flows for the nine months ended June 30, 2004.

 

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**Results of Operations**

 

The following tables set forth certain operating data as a percentageof net sales and as a percentage change for the three and nine months ended June 30:

 
| ** **                                        | ** ** | **% of Net Sales (1)**                | ** ** | **% 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,** |
| ** **                                        | ** ** | **2005**                              | ** ** | **(As  Restated-  See Note 2)  2004**       | ** ** | **2005** | ** ** | **(As  Restated-  See Note 2)  2004** | ** ** | **2005 vs.  2004** | ** ** | **2005 vs.  2004** | ** ** |
| Net sales                                         |       | 100.0                                 | %          | 100.0                                       | %          | 100.0 | % | 100.0 | % | 9.4 | % | 7.4 | % |
| Cost of goods sold (2)                            |       | 46.2                                  |       | 43.6                                        |       | 47.8 |   | 45.9 |   | 16.1 |   | 11.8 |   |
| Gross profit                                      |       | 53.8                                  |       | 56.4                                        |       | 52.2 |   | 54.1 |   | 4.3 |   | 3.7 |   |
| Selling, general and  administrative expenses (3) |       | 45.4                                  |       | 45.6                                        |       | 47.6 |   | 47.5 |   | 8.8 |   | 7.5 |   |
| Operating income                                  |       | 8.4                                   |       | 10.8                                        |       | 4.7 |   | 6.6 |   | (14.9 | ) | (24.0 | ) |
| Interest expense, net                             |       | 2.5                                   |       | 2.6                                         |       | 2.7 |   | 2.8 |   | 2.5 |   | 2.8 |   |
| Income before income taxes                        |       | 5.9                                   |       | 8.2                                         |       | 2.0 |   | 3.8 |   | (20.6 | ) | (43.7 | ) |
| Income tax provision                              |       | 2.3                                   |       | 3.3                                         |       | 0.8 |   | 1.5 |   | (22.7 | ) | (45.4 | ) |
| Net income                                        |       | 3.6                                   | %          | 4.9                                         | %          | 1.2 | % | 2.3 | % | (19.2 | )% | (42.5 | )% |

 

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(1)     Components may not add tototal due to rounding.

 

(2)     The“Cost of goods sold” line item includes: merchandise costs (including customsduty expenses), expenses related to inventory shrinkage in our warehouses anddistribution centers, product related corporate expenses (including expensesrelated to our payroll, benefit costs and operating expenses of our buyingdepartments), inventory reserves, including lower of cost or market reserves,inbound freight charges, purchasing and receiving costs, inspection costs,warehousing costs, internal transfer costs, and the other costs of ourdistribution network.

 

(3)     The“Selling, general and administrative expenses” line item includes:**advertising and marketing expenses, corporateadministrative expenses, store expenses (including store payroll and storeoccupancy expenses), store opening and store closing expenses, and store assetimpairment charges.

 

The following table sets forth certaininformation concerning the number of our stores and leased departments for theperiods indicated:

 
| ** **            | ** ** | **Three Months Ended** | ** ** |
|-----------------------|------------|------------------------|------------|
| ** **            | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
| **Retail  Locations** | ** ** | **Stores**             | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** |
| Beginning of period   |       | 869                    |       | 728 |   | 1,597 |   | 877 |   | 155 |   | 1,032 |   |
| Opened                |       | 5                      |       | 10 |   | 15 |   | 23 |   | 71 |   | 94 |   |
| Closed                |       | (17                    | )          | (2 | ) | (19 | ) | (17 | ) | — |   | (17 | ) |
| End of period         |       | 857                    |       | 736 |   | 1,593 |   | 883 |   | 226 |   | 1,109 |   |

 
| ** **            | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------|------------|------------------------|------------|
| ** **            | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
| **Retail  Locations** | ** ** | **Stores**             | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** |
| Beginning of period   |       | 883                    |       | 232 |   | 1,115 |   | 851 |   | 155 |   | 1,006 |   |
| Opened                |       | 25                     |       | 508 |   | 533 |   | 69 |   | 74 |   | 143 |   |
| Closed                |       | (51                    | )          | (4 | ) | (55 | ) | (37 | ) | (3 | ) | (40 | ) |
| End of period         |       | 857                    |       | 736 |   | 1,593 |   | 883 |   | 226 |   | 1,109 |   |

 

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Our fiscal year ends on September 30.  All references in this discussion to ourfiscal years refer to the fiscal year ended on September 30 in the yearmentioned.  For example, our “fiscal 2005”will end on September 30, 2005.

 

**Three Months Ended June 30, 2005 and2004**

 

***Net Sales.***  Our netsales for the third quarter of fiscal 2005 increased by 9.4%, or $13.2 million,to $152.7 million from $139.6 million for the third quarter of fiscal2004.  The increase in net sales for thequarter was driven primarily by sales from our new Oh Baby! By MotherhoodTMlicensed arrangement with Kohl’s®, which began during the second quarter offiscal 2005, and sales from the expansion of our Two HeartsTM Maternitycollection to an additional 497 Sears® locations during late March 2005,bringing the total of our Sears maternity leased departments to 568locations.  Comparable store sales forthe third quarter of fiscal 2005 decreased by 1.9%, based on 978 locations,versus a comparable store sales decrease of 5.0% during the third quarter offiscal 2004, based on 855 locations.  Thedecrease in comparable store sales in the third quarter of fiscal 2005reflected the continued strong competitive pressures in the maternity apparelbusiness, which included  an increasinglysevere clearance environment towards the end of the third quarter and into thefourth quarter as competitors took significant markdowns to clear overstockedinventories of Spring product.

 

As of June 30, 2005, we operated a total of 857 stores and 1,593total retail locations, compared to 883 stores and 1,109 total retail locationsas of June 30, 2004.  As of June 30,2005 our store total included 46 multi-brand stores, including 8 DestinationMaternity superstores, with the remaining multi-brand stores predominantlyunder the Mimi Maternity brand.  Incomparison, as of June 30, 2004, we operated 25 multi-brand stores,including one Destination Maternity superstore. These multi-brand store figures exclude our A Pea in the Podstores, which have traditionally carried a full line of both A Pea in the Podand Mimi Maternity branded merchandise. During the third quarter of fiscal 2005, we opened 10 leased departmentlocations and 5 stores, including 3 multi-brand stores.  During this same period we closed 2 leaseddepartments and 17 stores, with 4 of these store closings related tomulti-brand store openings.  

 

***Gross Profit.***  Our grossprofit for the third quarter of fiscal 2005 increased by 4.3%, or approximately$3.3 million, to $82.1 million from $78.8 million for the third quarter offiscal 2004, reflecting the increase in net sales, partially offset by adecrease in gross margin.  Gross profit as a percentage of net sales(gross margin) for the third quarter of fiscal 2005 decreased by approximately2.6 percentage points of net sales to 53.8% from 56.4% for the third quarter offiscal 2004.  The decrease in gross margin versus last year primarilyreflects the planned lower gross margin associated with sales from ournew licensed arrangement, as well as some impact, as compared to the prioryear, from additional markdowns recognized to stimulate sales and reduceinventory levels at our retail locations. We experienced an increasingly severe clearance environment towards theend of the third quarter and into the fourth quarter as competitors tooksignificant markdowns to clear overstocked inventories of Spring product.

 

***Selling, General andAdministrative Expenses.***  Our selling, general and administrativeexpenses for the third quarter of fiscal 2005 increased by 8.8%, or $5.6million, to $69.3 million from $63.7 million for the third quarter offiscal 2004.  Compared to the thirdquarter of fiscal 2004, rent and related expenses for our retail locations,including sales-based payments for our leased departments, increased by $1.8million, and employee wages and benefits for our retail locations increased by$1.7 million.  As a percentage of net sales, selling, general andadministrative expenses decreased slightly to 45.4% for the third quarter offiscal 2005 compared to 45.6% for the third quarter of fiscal 2004.  This decrease in the expense percentageresulted primarily from the favorable expense leverage from the addition of ourlicensed business and a continued sharp focus on expense control, partiallyoffset by the unfavorable expense leverage resulting from our 1.9% decrease incomparable store sales, as well as increased legal expenses, increased chargesfor store asset impairments and store closings, and increased professional feesrelated to our Sarbanes-Oxley Section 404 compliance program.  We incurred impairment charges forwrite-downs of store long-lived assets of $0.6 million for the third quarter offiscal 2005 versus $0.3 million for the third quarter of fiscal 2004, andincurred charges relating to store closings of $0.5 million for the thirdquarter of fiscal 2005 versus $0.3 million for the third quarter of fiscal2004.

 

***Operating Income.***  Our operating income for the third quarterof fiscal 2005 decreased by 14.9%, or $2.3 million, to $12.8 million from$15.1 million for the third quarter of fiscal 2004, due to higher selling,general and administrative expenses, which more than offset the impact ofincreased sales volume and gross profit. Operating income as a percentage of net sales (operating income margin)for the third quarter of fiscal 2005 decreased to 8.4% from 10.8% for the thirdquarter of fiscal 2004, primarily due to the adverse impact on operating incomemargin of our 1.9% decrease in comparable store sales, our  increased markdowns, and increased operatingexpenses for legal, store asset impairment and closing charges, andprofessional fees.

 

***Interest Expense, Net.***  Our netinterest expense for the third quarter of fiscal 2005 increased by 2.5%, or$0.1 million, to $3.8 million from $3.7 million for the third quarter of fiscal2004.  The increase in interest expensefor the third

 

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quarter of fiscal 2005 resulted from theincreased amortization expense of deferred financing costs related to our newcredit facility entered into in October 2004, having lower invested balances ofcash and short-term investments compared to last year, and having borrowingsunder our credit facility during a portion of the current year thirdquarter.  During the quarter ended June 30,2005, our average level of direct borrowings under our credit facility was $1.2million, but we did not have any direct borrowings under our credit facility asof June 30, 2005.  We did not haveany direct borrowings under our credit facility during fiscal 2004.

 

***Income Tax Provision.***  Ourincome tax provision for the third quarter of fiscal 2005 reflects an effectivetax rate of 39.1%.  This compares to a40.1% effective tax rate provision for the third quarter of fiscal 2004.  Oureffective tax rate for the full year fiscal 2004 was 40.8%.

 

***Net Income.***  Netincome for the third quarter of fiscal 2005 was $5.5 million, or $1.03 pershare (diluted), compared to $6.8 million, or $1.24 per share (diluted), forthe third quarter of fiscal 2004.

 

**Nine Months Ended June 30, 2005 and 2004**

 

***Net Sales.***** Our net sales for the first nine months offiscal 2005 increased 7.4%, a $29.3 million increase, to$426.4 million from $397.1 million for the first nine months offiscal 2004.  The increase in net sales for the first nine months offiscal 2005 was driven primarily by sales from our new Oh Baby! By MotherhoodTMlicensed arrangement, which began during the second quarter of fiscal 2005, andsales from the expansion of our Two HeartsTM Maternity collection to anadditional 497 Sears® locations during late March 2005.  Comparable store sales for the first ninemonths of fiscal 2005 decreased by 3.1%, based on 846 locations, versus acomparable store sales decrease of 3.6% during the first nine months of fiscal2004, based on 798 locations.  Thedecrease in comparable store sales in the first nine months of fiscal 2005reflected the continued strong competitive pressures in the maternity apparelbusiness.  For the first nine months offiscal 2005, we opened 508 leased department locations and 25 stores, including10 multi-brand stores, and closed 51 stores, with 21 of these store closingsrelated to multi-brand store openings, including the opening of 4 DestinationMaternity superstores.

 

***Gross Profit*.**  Ourgross profit for the first nine months of fiscal 2005 increased 3.7%, a $7.9million increase, to $222.8 million compared to $214.9 million for the firstnine months of fiscal 2004, reflecting the increase in net sales, partiallyoffset by a decrease in gross margin. Gross profit as a percentage of net sales for the first nine months offiscal 2005 decreased by 1.9 percentage points of net sales to 52.2% from 54.1%for the first nine months of fiscal 2004. The decrease in gross margin versus last year primarily reflectsthe planned lower gross margin associated with sales from our new licensedarrangement, which began during the second quarter of fiscal 2005, as well assome impact, as compared to the prior year, from additional markdownsrecognized to stimulate sales and reduce inventory levels at our retaillocations.

 

***Selling, General andAdministrative Expenses*.**  Our selling,general and administrative expenses for the first nine months of fiscal 2005increased by 7.5%, a $14.2 million increase, to $202.9 million from $188.7million for the first nine months of fiscal 2004.  Compared to the third quarter of fiscal 2004,rent and related expenses for our retail locations, including sales-basedpayments for our leased departments, increased by $5.0 million, and employeewages and benefits for our retail locations increased by $1.2 million.  Asa percentage of net sales, selling, general and administrative expensesincreased slightly to 47.6% for the first nine months of fiscal 2005 comparedto 47.5% for the first nine months of fiscal 2004.  This slight increase in the expensepercentage resulted primarily from the favorable expense leverage from theaddition of our licensed business and a continued sharp focus on expensecontrol, which was slightly more than offset by the unfavorable expenseleverage resulting from our 3.1% decrease in comparable store sales, as well as increased charges for store assetimpairments and store closings, increased legal expenses, and increasedprofessional fees related to our Sarbanes-Oxley Section 404 complianceprogram.  We incurred impairment charges forwrite-downs of store long-lived assets of $1.8 million for the first ninemonths of fiscal 2005 versus $0.5 million for the first nine months of fiscal2004, and incurred charges related to store closings of $1.4 million for thefirst nine months of fiscal 2005 versus $0.7 million for the first nine monthsof fiscal 2004.

 

***Operating Income*.**  Ouroperating income for the first nine months of fiscal 2005 decreased by 24.0%,an approximately $6.2 million decrease, to $19.9 million compared to $26.1million in the first nine months of fiscal 2004, due to higher selling, generaland administrative expenses, which more than offset the impact of increasedsales volume and gross profit.  Operatingincome as a percentage of net sales for the first nine months of fiscal 2005decreased to 4.7% from 6.6% in the comparable period of fiscal 2004, primarilydue to the adverse impact on operating income margin of our 3.1% decrease incomparable store sales, our increased markdowns, and increased operatingexpenses for store asset impairment and closing charges, legal expenses, andprofessional fees.

 

19

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***Interest Expense, Net*.**  Ournet interest expense for the first nine months of fiscal 2005 increased by2.8%, or $0.3 million, to $11.4 million compared to $11.1 million for thefirst nine months of fiscal 2004.  Theincrease in interest expense resulted from the increased amortization expenseof deferred financing costs related to our new credit facility entered into inOctober 2004, having lower invested balances of cash and short-term investmentscompared to last year, and having borrowings under our credit facility during aportion of the current year.  During thenine months ended June 30, 2005, our average level of direct borrowingsunder our credit facility was $2.2 million, but we did not have any directborrowings under our credit facility as of June 30, 2005.  We did not have any direct borrowings underour credit facility during fiscal 2004 or the first quarter of fiscal 2005.

 

***Income Taxes*.**  Ourincome tax provision for the first nine months of fiscal 2005 reflectsan effective income tax rate of 39.0%. Thiscompares to a 40.3% effective tax rate provision for the first nine months of fiscal 2004. Our effective tax rate forthe full year fiscal 2004 was 40.8%.

 

***Net Income.**** *Net income for the first nine months of fiscal2005 was $5.2 million, or $0.96 per common share (diluted), compared to $9.0million, or $1.62 per common share (diluted), for the first nine months offiscal 2004.

 

**Seasonality**

 

Our business, like that of many otherretailers, is seasonal.  Our quarterly net sales have historically beenhighest in our third fiscal quarter, corresponding to the Spring sellingseason, followed by the first fiscal quarter, corresponding to the Fall/holidayselling season.  Given the typicallyhigher gross margin we experience in the third fiscal quarter compared to otherquarters, the relatively fixed nature of most of our operating expenses andinterest expense, and the historically higher sales level in the third quarter,we have typically generated a very significant percentage of our full year operatingincome and net income during the third quarter.  Results for any quarter are notnecessarily indicative of the results that may be achieved for a full fiscalyear.  Quarterly results may fluctuate materially depending upon, amongother things, the timing of new store openings and new leased departmentopenings, net sales and profitability contributed by new stores and leaseddepartments, increases or decreases in comparable store sales, the timing ofthe fulfillment of purchase orders under our product and license arrangement,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, (ii) capital expenditures, including leasehold improvements,fixtures and equipment for new stores; store relocations and expansions of ourexisting stores as well as improvements and new equipment for our distributionand corporate facilities and management information systems, and (iii) workingcapital, including inventory to support our new business initiatives and ournew and existing stores.  We havehistorically financed these capital requirements from cash flows fromoperations, borrowings under our credit facility or available cash balances.

 

Cash and cash equivalents increased by $0.2million during the first nine months of fiscal 2005 compared to a decrease of****$1.9 million for the first nine months of fiscal2004.  Cash provided by operations was $8.9 million for the first ninemonths of fiscal 2005, compared to cash provided by operations of $21.1 millionfor the first nine months of fiscal 2004, a decrease of $12.2 million.  Thisdecrease in cash provided by operations was primarily the result of an increasein the amount of cash used to increase operating working capital, especiallyinventory.  Our increase in inventory wasdriven largely by inventory for our new initiatives with Kohl’s and Sears, as well as  intentionally increasing inventory for our Fall selling season earlierthan last year to enable earlier positioning of Fall merchandise in ourstores.  During the first nine months offiscal 2004, we used our cash provided by operations primarily to pay forcapital expenditures and, also, to increase our short-term investments.  During the first nine months of fiscal 2005,we paid for our capital expenditures through cash provided by operations, aswell as the utilization of proceeds from sales of short-term investments.

 

For the first nine months of fiscal 2005, we spent $15.3 millionon capital expenditures, including $11.8 million for leaseholdimprovements, fixtures and equipment principally for new store facilities, aswell as improvements to existing stores, and $3.5 million for ourdistribution and corporate facilities and management information systems.  This compares to $14.4 million incapital expenditures for the first nine months of fiscal 2004, of which$11.9 million was spent for new store facilities and improvement toexisting stores and retail locations, and $2.5 million for ourdistribution and corporate facilities and management information systems.  Theincrease in capital expenditures versus last year resulted from increasedexpenditures with respect to our distribution facilities and managementinformation systems.

 

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On October 15, 2004, we entered into a new five-year $60.0 millionsenior secured revolving credit facility (the “New Credit Facility”) whichreplaced our former $60 million credit facility.  The New Credit Facility will mature on October 15,2009.  There are no financial covenant requirements under the New CreditFacility unless either (i) Excess Availability(as defined in the agreement) falls below $10 million, or (ii) averageFinancial Covenant Adjusted Availability (as defined in the agreement) for anycalendar month is less than $15 million. If either of the events in items (i) or (ii) above occurs, wewould be required to meet a certain minimum fixed charge coverage ratio (whichincreases from 1.00x during the first two years of the New Credit Facility to1.10x during the fifth year of the New Credit Facility).  Duringthe period of time that the New Credit Facility was outstanding during thefirst nine months of fiscal 2005, we exceeded the requirements for ExcessAvailability and Financial Covenant Adjusted Availability.

 

As of June 30, 2005,outstanding borrowings under the New Credit Facility consisted of no directborrowings and $7.4 million in letters of credit, with available borrowings of$52.6 million.  Our average level ofdirect borrowings under our credit facility was $2.2 million for the first ninemonths of fiscal 2005, compared to no direct borrowings under our creditfacility during fiscal 2004, reflecting our reduced cash provided by operationscompared to last year.  We expect that we will have direct borrowingsunder our New Credit Facility during certain periods during the remainder offiscal 2005 and fiscal 2006, reflecting seasonal and other timing variations incash flow.

 

Our management believes that our current cashand working capital positions, expected operating cash flows and availableborrowing capacity under our credit facility will be sufficient to fund ourworking capital, capital expenditures and debt repayment requirements and tofund stock and/or debt repurchases, if any, for at least the next twelvemonths.

 

**Critical Accounting Policies and Estimates**

 

Our consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States.  These generallyaccepted accounting principles require management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of net sales and expenses duringthe reporting period.

 

We believe that the following discussionaddresses our critical accounting policies, which are those that are mostimportant to the portrayal of our financial condition and results of operationsand require management’s most difficult, subjective and complex judgments,often as a result of the need to make estimates about the effect of mattersthat are inherently uncertain.  If actual results were to differsignificantly from estimates made, future reported results could be materiallyaffected.  However, we are not currently aware of any reasonably likelyevents or circumstances that would result in materially different results.

 

Our senior management has reviewed thesecritical accounting policies and estimates and the related Management’sDiscussion and Analysis of Financial Condition and Results of Operations withthe Audit Committee of our Board of Directors.

 

***Inventories.*** We value our inventories, which consistprimarily of maternity apparel, at the lower of cost or market. Cost isdetermined on the first-in, first-out method (FIFO) and includes the cost ofmerchandise, freight, duty, agent commissions and broker fees.  A periodic review of inventory quantities onhand is performed in order to determine if inventory is properly valued at thelower of cost or market.  Factors relatedto current inventories such as future consumer demand and fashion trends,current aging, current analysis of merchandise based on receipt date, currentand anticipated retail markdowns or wholesale discounts, and class or type ofinventory are analyzed to determine estimated net realizable values. Criteria utilized by the Company to quantify aging trends include factors suchas the amount of merchandise received within the past twelve months,merchandise received more than one year before with quantities on-hand inexcess of 12 months of sales, and merchandise currently selling belowcost.  A provision is recorded to reduce the cost of inventories to theestimated net realizable values, if required. Inventories as of June 30,2005 and September 30, 2004 totaled $111.8 million and $92.7 million,respectively, representing approximately 39.2% and 34.2% 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.  Any significant unanticipated changes in thefactors noted above could have a significant impact on the value of ourinventories and our reported operating results.

 

***Long-Lived Assets.***  Ourlong-lived assets consist principally of store leasehold improvements and areincluded in the “Property, Plant and Equipment, net” line item in ourconsolidated balance sheets.  Theselong-lived assets are recorded at cost and are amortized using thestraight-line method over the shorter of the lease term or their estimateduseful life.  Net property, plant and equipment as of June 30, 2005and September 30, 2004 totaled $79.5 million and $78.5 million,

 

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respectively, representing approximately27.9% and 28.9% of total assets, respectively.

 

In assessing potential impairment of theseassets, we periodically evaluate the historical and forecasted operatingresults and cash flows on a store-by-store basis.  Newly-opened stores may take time to generatepositive operating and cash flow results. Factors such as (i) store type,that is, company store or leased department, (ii) store concept, that is,Motherhood Maternity, Mimi Maternity, A Pea in the Pod or DestinationMaternity, (iii) store location, for example, urban area versus suburb, (iv) currentmarketplace awareness of our brands, (v) local customer demographic data, (vi) anchorstores within the malls in which our stores are located and (vii) currentfashion trends are all considered in determining the time frame required for astore to achieve positive financial results, which is assumed to be within twoyears from the date a store location is opened. If economic conditions are substantially different from ourexpectations, the carrying value of certain of our long-lived assets may becomeimpaired.  As a result of our impairment assessment, we recordedwrite-downs of long-lived assets of $1.8 million for the first nine months offiscal 2005, and $0.5 million for the first nine months of fiscal 2004.

 

***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 sheets.  As of both June 30,2005 and September 30, 2004, goodwill totaled $50.4 million, representingapproximately 17.7% and 18.6%, respectively, of total assets.  In June 2001,the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFASNo. 142 requires that goodwill no longer be amortized, but instead betested for impairment at least annually or as impairment indicators arise.

 

The impairment test requires us to comparethe fair value of business reporting units to their carrying value, includingassigned goodwill.  In assessing potential impairment of goodwill, we havedetermined that we have one reporting unit for purposes of applying SFAS No. 142based on our reporting structure.  Thefair value of our single reporting unit is determined based on the fair marketvalue of our outstanding common stock on a control basis.  The factors taken into accountin determining the fair market value of our outstanding common stock on acontrol basis are: (i) the trading value of our outstanding common stockon an established public market, and (ii) the premium over the tradingprice of our outstanding common stock that an investor would pay for a controlownership interest in our Company, as determined through a third partyevaluation.  The carrying value of oursingle reporting unit, expressed on a per share basis, is represented by ourbook value per share of outstanding common stock.  We performed the initial adoption impairmenttest in early fiscal 2002.  The resultsof the initial impairment test and the annual impairment test performed as of September 30,2004, 2003 and 2002 indicated the fair value of the reporting unit exceeded thecarrying value.  As of September 30,2004, our book value was $12.08 per share of outstanding common stock and theclosing trading price of our common stock was $14.50 per share.  If the fair value of our outstanding commonstock on a control basis were less than $12.08 per share on September 30,2004, our goodwill would have become impaired.

 

***Accounting for Income Taxes.***  As partof the process of preparing our consolidated financial statements, we arerequired to estimate our income taxes in each of the jurisdictions in which weoperate.  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 forincome taxes based on federal and state tax laws and regulations currently ineffect, some of which have been recently revised.  Legislation changes currently proposed bycertain of the states in which we operate, if enacted, could increase ourtransactions or activities subject to tax. Any such legislation that becomes law could result in an increase in ourstate income tax expense and our state income taxes paid, which could have amaterial and adverse effect on our net income.

 

The temporary differences between the bookand tax treatment of income and expenses result in deferred tax assets and liabilities,which are included within our consolidated balance sheets.  We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income.  Actual results could differ from thisassessment if adequate taxable income is not generated in future periods.  As of June 30, 2005 and September 30,2004, net deferred tax assets totaled $18.3 million and $18.0 million,respectively, representing approximately 6.4% and 6.6%, respectively, of totalassets.  To the extent we believe thatrecovery of the deferred tax assets is not more likely than not, we mustestablish a valuation allowance.  To theextent we establish a valuation allowance or change the allowance in a period,income tax expense will be impacted.

 

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***Accounting for Contingencies*.** From time to time, we are named as a defendant in legal actions arisingfrom our normal business activities.  We account for contingencies such asthese in accordance with SFAS No. 5, “Accounting for Contingencies.” SFAS No. 5 requires us to record an estimated loss contingency wheninformation available prior to issuance of our consolidated financialstatements indicates that it is probable that an asset has been impaired or aliability has been incurred at the date of the consolidated financialstatements and the amount of the loss can be reasonably estimated.  SFAS No. 5 further states that whenthere is a range of loss and no amount within that range is a better estimatethan any other, then the minimum amount of the range shall be accrued. Accounting for contingencies arising from contractual or legal proceedingsrequires our management, after consultations with outside legal counsel, to useits best judgment when estimating an accrual related to suchcontingencies.  As additional information becomes known, our accrual for aloss contingency could fluctuate, thereby creating variability in our resultsof operations from period to period.  Likewise,an actual loss arising from a loss contingency which significantly exceeds theamount accrued for in our consolidated financial statements could have amaterial adverse impact on our operating results for the period in which suchactual loss becomes known.

 

**New Accounting Pronouncements**

 

***SFAS No. 123(R).***  In December 2004, the FASB revised SFAS No. 123by issuing SFAS No. 123(R), which replaces SFAS No. 123 and APBOpinion No. 25, and establishes standards for the accounting fortransactions in which an entity exchanges its equity instruments for goods andservices.  SFAS No. 123(R) requiresthat the compensation cost relating to share-based payment transactions berecognized in financial statements, measured by the fair value of the equity orliability instruments issued, and is effective as of the first reporting periodof the fiscal year that begins after June 15, 2005 for public entitiesthat do not file as small business issuers. The fair value-based method of SFAS No. 123 is similar in mostrespects to the fair value-based method under SFAS No. 123(R); however,certain transition rules of SFAS No. 123(R) may affect the impact onour consolidated financial position or results of operations.  Such impact, if any, on our consolidatedfinancial position or results of operations has not yet been determined.  We are currently evaluating the provisions ofSFAS No. 123(R) and plans to adopt it in the first quarter of fiscal 2006.

 

**Forward-Looking Statements**

 

Some of the information in this report,including the information incorporated by reference (as well as informationincluded in oral statements or other written statements made or to be made byus), contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”).  The forward-looking statements involve anumber of risks and uncertainties. A number of factors could cause our actualresults, performance, achievements or industry results to be materiallydifferent from any future results, performance or achievements expressed orimplied by these forward-looking statements. These factors include, but are not limited to: leaseaccounting and restatements of historical financial statements, the success of our new business initiatives,future sales trends in our existing store base, changes in consumer spendingpatterns, raw material price increases, consumer preferences and overalleconomic conditions, the impact of competition and pricing, availability ofsuitable store locations, continued availability of capital and financing,ability to hire and develop senior management and sales associates, ability todevelop and source merchandise, ability to receive production from foreignsources on a timely basis, potential stock repurchases, potential 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 statementsnecessarily depend upon assumptions, estimates and dates that may be incorrector imprecise and involve known and unknown risks, uncertainties and otherfactors.  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 the negative of any of theseterms, or comparable terminology, or by discussions of outlook, plans, goals,strategy or intentions. Forward-looking statements speak only as of the datemade.  We assume no obligation to updateany of these forward–looking statements to reflect actual results, changes inassumptions or changes in other factors affecting these forward-looking statements.

 

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**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Mothers Work is exposed to market risk fromchanges in interest rates.  We have not entered into any market sensitiveinstruments for trading purposes.  The analysis below presents thesensitivity of the market value of our financial instruments to selectedchanges in market interest rates.  The range of changes presented reflectsour view of changes that are reasonably possible over a one-year period.

 

As of June 30, 2005, the principalcomponents of our debt portfolio were the $125.0 million of New SeniorNotes and the $60.0 million credit facility, both of which are denominatedin U.S. dollars.  The fair value of the debt portfolio is referred to asthe “debt value.”  The New Senior Notes bear interest at a fixed rated of111⁄4%.  Although a change in market interest rates would not affect theinterest incurred or cash flow related to this fixed rate portion of the debtportfolio, the debt value would be affected.

 

Our revolving credit facility carries avariable interest rate that is tied to market indices.  As of June 30,2005, we had no direct borrowings and $7.4 million of letters of creditoutstanding under our credit facility.  Borrowings under the credit facilitywould have borne interest at a rate between approximately 4.6% and 6.3% perannum as of June 30, 2005.  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 thefixed rate portion of our debt portfolio assumes an instantaneous 100 basispoint move in interest rates from their levels as of June 30, 2005, withall other variables held constant.  A 100 basis point increase in marketinterest rates would result in a decrease in the value of the debt byapproximately $4.7 million as of June 30, 2005.  A 100 basis pointdecline in market interest rates would cause the debt value to increase byapproximately $4.8 million as of June 30, 2005.

 

Based on the variable rate debt included in our debt portfolio as of June 30,2005, a 100 basis point increase in interest rates would result in additionalinterest incurred for the year of less than $0.1 million.  A 100 basis point decrease in interest rateswould correspondingly lower our interest expense for the year by less than $0.1million.

 

Other than as described above, we do notbelieve that the market risk exposure on other financial instruments ismaterial.

 

**Item 4. Controls and Procedures**

 

***(a) Evaluation of disclosure controlsand procedures*.** Our disclosure controls and procedures are designed to ensure thatinformation required to be disclosed by us in the reports that are filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules andforms.  These disclosure controls andprocedures include controls and procedures designed to ensure that informationrequired to be disclosed under the Exchange Act is accumulated and communicatedto our management on a timely basis to allow decisions regarding requireddisclosure.  We evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures as of June 30, 2005. Based on this evaluation, the Company’s Chief Executive Officer andChief Financial Officer have concluded that as of June 30, 2005, thesecontrols and procedures were effective.

 

***(b) Change in Internal Controls*.**  There have been no changes in internalcontrol over financial reporting identified in connection with the foregoingevaluation that occurred during the fiscal quarter ended June 30, 2005,that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 1.  LegalProceedings**

 

On January 12, 2005, a purported class action was filed against usin the United States District Court for the District of Connecticut.  The complaint alleges that, under applicablefederal and state law, certain former and current employees should havereceived overtime compensation.  Theplaintiffs in this case are seeking unspecified actual damages, penalties andattorneys’ fees.  We are engaged inefforts to resolve these claims.  Weunderstand that similar proceedings have been brought against other retailcompanies.

 

In addition, from time to time, we are namedas a defendant in legal actions arising from our normal businessactivities.  Although the amount of anyliability that could arise with respect to currently pending actions, includingthe matter specifically described above, cannot be accurately predicted, we donot believe that the resolution of any pending action will have a materialadverse effect on our financial position or results of operations.

 

**Item 4.   Submission of Matters to a Vote of SecurityHolders**

 

At the Company’s Annual Meeting ofStockholders held on January 21, 2005, the stockholders of the Companyelected three directors of the Company and ratified the Audit Committee’sappointment of KPMG LLP as the Company’s independent registered publicaccounting firm for the fiscal year ending September 30, 2005.  The shareholders voted 4,067,326 shares for,9,500 shares against, and 315 shares abstained for the ratification of theappointment of KPMG LLP.

 

Ms. Rebecca C. Matthias, Mr. JosephA. Goldblum and Mr. David Schlessinger were elected to serve asdirectors at the meeting.  The votingresults were 4,037,739 shares for and 39,402 shares abstained for Ms. Matthias, 3,943,504shares for and 133,637 shares abstained for Mr. Goldblum, and 4,043,768shares for and 33,373 shares abstained for Mr. Schlessinger.  DanW. Matthias, Lee Hitchner, William A. Schwartz, Jr. and StanleyC. Tuttleman continue to serve their terms as directors.

 

**Item 6.  Exhibits**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                   |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.20           | ** ** | Amended and Restated Employment Agreement dated as of April 28, 2005,  between Mothers Work, Inc. and Dan W. Matthias (Exhibit 10.20 to the Company’s  Current Report on Form 8-K dated April 26, 2005).     |
| *10.21           | ** ** | Amended and Restated Employment Agreement dated as of April 28, 2005,  between Mothers Work, Inc. and Rebecca C. Matthias (Exhibit 10.21 to the  Company’s Current Report on Form 8-K dated April 26, 2005). |
| *10.22           | ** ** | Amended and Restated Employment Agreement dated as of April 26, 2005,  between Mothers Work, Inc. and Edward M. Krell (Exhibit 10.22 to the Company’s  Current Report on Form 8-K dated April 26, 2005).     |
| 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 to 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 the Sarbanes-Oxley Act of 2002.                       |

 

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*  Incorporated by reference

 

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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 9, 2005 | By:      | **/s/ DAN W. MATTHIAS** | ** ** | ** ** |
|                      |     | Dan W. Matthias | * * | * * |
| * *                  | * * | *Chairman of the Board and  Chief Executive Officer* |   |   |
| * *                  | * * | * * | * * |
|                      |     |   |   |
| Date: August 9, 2005 | By:      | **/s/ EDWARD M. KRELL** | ** ** | ** ** |
|                      |     | Edward M. Krell |   |   |
| * *                  | * * | *Executive Vice President–  Chief Financial Officer* |   |   |
|                           |          |  |  |  |  |  |

 

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