**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 December 31, 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 as specified in itscharter)

 
| **Delaware**                                                    | ** ** | **13-3045573**                    |
|-----------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (IRS Employer Identification No.) |
|                                                            |       |                              |
| **456 North 5th Street,  Philadelphia, Pennsylvania**           | ** ** | **19123**                         |
| (Address of principal executive offices)                        |       | (Zip Code)                        |

 

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

 

Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days.  Yes  ý    No  o

 

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

 

Indicateby check mark whether the Registrant is a shell company (as defined inRule 12b-2 of the Act).  Yes  o    No  ý

 

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

 

Common Stock, $.01 par value 5,270,015 sharesoutstanding as of February 3, 2006

 

 

----

 

**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 | 14 |
| Item  3.        |                   | Quantitative  and Qualitative Disclosures About Market Risk                                 | 19 |
| Item 4.         |                   | Controls  and Procedures                                                                    | 20 |
|            |                   |                                                                                        |   |
| PART  II.  | OTHER  INFORMATION     |                                                                                        |
| Item 1.         |                   | Legal  Proceedings                                                                          | 21 |
| Item 6.         |                   | Exhibits                                                                                    | 21 |
|            |                   |                                                                                        |   |
| Signatures      | 22                     |

 

2

----

 

**PART I.  FINANCIAL INFORMATION**

** **

**Item 1.  Financial Statements**

 

**MOTHERS WORK, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(in thousands, except share and per shareamounts)

(unaudited)

 
| ** **                                                                                                                        | ** ** | **December 31, 2005** | ** ** | **September 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------------|------------|
| **ASSETS**                                                                                                                        |       |                       |       |                             |       |
| Current assets:                                                                                                                   |       |                       |       |                             |       |
| Cash and cash  equivalents                                                                                                        |       | $                          | 13,821     |                             | $          | 3,037 |   |
| Short-term  investments                                                                                                           |       | 11,500                     |       | —                           |       |
| Trade  receivables, net                                                                                                           |       | 9,720                      |       | 7,681                            |       |
| Inventories                                                                                                                       |       | 94,463                     |       | 105,911                          |       |
| Deferred  income taxes                                                                                                            |       | 6,015                      |       | 6,015                            |       |
| Prepaid  expenses and other current assets                                                                                        |       | 4,187                      |       | 4,816                            |       |
| Total current  assets                                                                                                             |       | 139,706                    |       | 127,460                          |       |
| Property, plant and equipment, net                                                                                                |       | 74,610                     |       | 76,173                           |       |
| Assets held for sale                                                                                                              |       | 925                        |       | 925                              |       |
| Other assets:                                                                                                                     |       |                       |       |                             |       |
| Goodwill                                                                                                                          |       | 50,389                     |       | 50,389                           |       |
| Deferred  financing costs, net of accumulated amortization of $2,010 and $1,855                                                   |       | 3,545                      |       | 3,697                            |       |
| Other  intangible assets, net of accumulated amortization of $2,493 and $2,481                                                    |       | 818                        |       | 878                              |       |
| Deferred  income taxes                                                                                                            |       | 13,414                     |       | 13,261                           |       |
| Other  non-current assets                                                                                                         |       | 527                        |       | 534                              |       |
| Total other  assets                                                                                                               |       | 68,693                     |       | 68,759                           |       |
| Total assets                                                                                                                      |       | $                          | 283,934    |                             | $          | 273,317 |   |
|                                                                                                                              |       |                       |       |                             |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                    |       |                       |       |                             |       |
| Current liabilities:                                                                                                              |       |                       |       |                             |       |
| Line of credit  borrowings                                                                                                        |       | $                          | —     |                             | $          | — |   |
| Current  portion of long-term debt                                                                                                |       | 770                        |       | 769                              |       |
| Accounts  payable                                                                                                                 |       | 21,566                     |       | 19,900                           |       |
| Accrued  expenses and other current liabilities                                                                                   |       | 44,278                     |       | 35,563                           |       |
| Total current  liabilities                                                                                                        |       | 66,614                     |       | 56,232                           |       |
| Long-term debt                                                                                                                    |       | 127,975                    |       | 128,087                          |       |
| Deferred rent and other non-current  liabilities                                                                                  |       | 25,327                     |       | 25,670                           |       |
| Total  liabilities                                                                                                                |       | 219,916                    |       | 209,989                          |       |
|                                                                                                                              |       |                       |       |                             |       |
| Commitments and contingencies (Note 9)                                                                                            |       |                       |       |                             |       |
|                                                                                                                              |       |                       |       |                             |       |
| 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, 5,269,535 and 5,268,535 shares  issued and outstanding, respectively |       | 53                         |       | 53                               |       |
| Additional  paid-in capital                                                                                                       |       | 63,426                     |       | 63,164                           |       |
| Retained  earnings                                                                                                                |       | 539                        |       | 111                              |       |
| Total  stockholders’ equity                                                                                                  |       | 64,018                     |       | 63,328                           |       |
| Total  liabilities and stockholders’ equity                                                                                  |       | $                          | 283,934    |                             | $          | 273,317 |   |

 

The accompanying notes are an integral part ofthese Consolidated Financial Statements.

 

3

----

 

**MOTHERS WORK, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(in thousands, except per share amounts)

(unaudited)

 
| ** **                                            | ** ** | **Three Months Ended  December 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
|                                                  |       |                                      |       |   |   |
| Net sales                                             |       | $                                         | 151,393    |   | $ | 133,619 |   |
| Cost of goods sold                                    |       | 75,210                                    |       | 64,004 |   |
| Gross profit                                          |       | 76,183                                    |       | 69,615 |   |
| Selling, general and administrative  expenses         |       | 71,688                                    |       | 66,272 |   |
| Operating  income                                     |       | 4,495                                     |       | 3,343 |   |
| Interest expense, net                                 |       | 3,794                                     |       | 3,755 |   |
| Income (loss) before income taxes                     |       | 701                                       |       | (412 | ) |
| Income tax provision (benefit)                        |       | 273                                       |       | (165 | ) |
| Net income (loss)                                     |       | $                                         | 428        |   | $ | (247 | ) |
|                                                  |       |                                      |       |   |   |
| Net income (loss) per share – Basic and  Diluted |       | $                                         | 0.08       |   | $ | (0.05 | ) |
|                                                  |       |                                      |       |   |   |
| Average shares outstanding - Basic                    |       | 5,269                                     |       | 5,216 |   |
| Average shares outstanding - Diluted                  |       | 5,303                                     |       | 5,216 |   |

 

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

 

4

----

 

**MOTHERS WORK, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

(in thousands)

(unaudited)

 
| ** **                                                                                | ** ** | **Three Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| **Cash Flows from Operating Activities**                                                  |       |                                      |       |   |   |
| Net income (loss)                                                                         |       | $                                         | 428        |   | $ | (247 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                                      |       |   |   |
| Depreciation  and amortization                                                            |       | 4,017                                     |       | 3,722 |   |
| Stock-based  compensation expense                                                         |       | 410                                       |       | — |   |
| Loss on  impairment of long-lived assets                                                  |       | 1,566                                     |       | 585 |   |
| Loss on  disposal of assets                                                               |       | 97                                        |       | 253 |   |
| Accretion of  discount on senior notes                                                    |       | 45                                        |       | 40 |   |
| Deferred  income tax benefit                                                              |       | (153                                      | )          | (248 | ) |
| Tax benefit of  stock option exercises                                                    |       | —                                    |       | 45 |   |
| Excess tax  benefit from exercise of stock options                                        |       | (1                                        | )          | — |   |
| Amortization  of deferred financing costs                                                 |       | 155                                       |       | 135 |   |
| Changes in assets and liabilities:                                                        |       |                                      |       |   |   |
| Decrease  (increase) in —                                                            |       |                                      |       |   |   |
| Trade  receivables                                                                        |       | (2,039                                    | )          | (297 | ) |
| Inventories                                                                               |       | 11,448                                    |       | (5,370 | ) |
| Prepaid  expenses and other current assets                                                |       | 637                                       |       | 2,025 |   |
| Increase  (decrease) in —                                                            |       |                                      |       |   |   |
| Accounts  payable, accrued expenses and other current liabilities                         |       | 6,984                                     |       | 5,312 |   |
| Deferred rent  and other non-current liabilities                                          |       | (501                                      | )          | 419 |   |
| Net cash  provided by operating activities                                                |       | 23,093                                    |       | 6,374 |   |
|                                                                                      |       |                                      |       |   |   |
| **Cash Flows from Investing Activities**                                                  |       |                                      |       |   |   |
| Purchase of short-term investments                                                        |       | (14,500                                   | )          | (2,500 | ) |
| Proceeds from sale of short-term  investments                                             |       | 3,000                                     |       | 6,400 |   |
| Capital expenditures                                                                      |       | (3,388                                    | )          | (6,238 | ) |
| Purchase of intangible assets                                                             |       | (11                                       | )          | (5 | ) |
| Net cash used  in investing activities                                                    |       | (14,899                                   | )          | (2,343 | ) |
|                                                                                      |       |                                      |       |   |   |
| **Cash Flows from Financing Activities**                                                  |       |                                      |       |   |   |
| Increase in  cash overdrafts                                                              |       | 2,739                                     |       | 3,120 |   |
| Repayment of  long-term debt                                                              |       | (156                                      | )          | (83 | ) |
| Payout of  redeemed Series A Preferred Stock                                              |       | —                                    |       | (373 | ) |
| Deferred  financing costs                                                                 |       | (3                                        | )          | (586 | ) |
| Proceeds from  exercise of stock options and warrants                                     |       | 9                                         |       | 115 |   |
| Excess tax  benefit from exercise of stock options                                        |       | 1                                         |       | — |   |
| Net cash  provided by financing activities                                                |       | 2,590                                     |       | 2,193 |   |
| **Net Increase in Cash and Cash Equivalents**                                             |       | 10,784                                    |       | 6,224 |   |
| **Cash and Cash Equivalents, Beginning of  Period**                                       |       | 3,037                                     |       | 8,467 |   |
| **Cash and Cash Equivalents, End of Period**                                              |       | $                                         | 13,821     |   | $ | 14,691 |   |
|                                                                                      |       |                                      |       |   |   |
| Supplemental Disclosures of Cash Flow  Information:                                       |       |                                      |       |   |   |
| Cash paid for  interest                                                                   |       | $                                         | 188        |   | $ | 62 |   |
| Cash paid for  income taxes                                                               |       | $                                         | —     |   | $ | 137 |   |
| Supplemental Disclosures of Non-Cash  Investing and Financing Activities:                 |       |                                      |       |   |   |
| Purchase of  equipment under capital lease obligations                                    |       | $                                         | —     |   | $ | 1,438 |   |

 

The accompanying notes are an integral part ofthese Consolidated Financial Statements.

 

5

----

 

**MOTHERS WORK, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2005**

(unaudited)

 

**1.****             ****BASIS OFFINANCIAL STATEMENT PRESENTATION**

 

The accompanying unaudited consolidated financialstatements have been prepared in accordance with the requirements forForm 10-Q and Article 10 of Regulation S-X and, accordingly,certain information and footnote disclosures have been condensed oromitted.  Reference is made to the AnnualReport on Form 10-K as of and for the year ended September 30, 2005for Mothers Work, Inc. and subsidiaries (the “Company” or “Mothers Work”)as filed with the Securities and Exchange Commission, for additionaldisclosures including a summary of the Company’s accounting policies.

 

In the opinion of management, the consolidated financialstatements contain all adjustments, consisting of normal recurring adjustments,necessary to present fairly the consolidated financial position of the Companyfor the periods presented.  Since theCompany’s operations are seasonal, the interim operating results of the Companymay not be indicative of operating results for the full year.

 

The Company operates on a fiscal year ending September30 of each year.  All references tofiscal years of the Company refer to fiscal years ended on September 30 inthose years.  For example, the Company’s “fiscal2006” will end on September 30, 2006.  Certain reclassifications have been made tothe prior year consolidated financial statements to conform to the current yearpresentation.

 

**2.****             ****EARNINGSPER SHARE (EPS)**

 

Basicearnings per share (“Basic EPS”) is computed by dividing net income (loss) bythe weighted average number of common shares outstanding.  Dilutedearnings per share (“Diluted EPS”) is computed by dividing net income (loss) bythe weighted average number of common 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.

 

Thefollowing table summarizes the Basic EPS and Diluted EPS calculation (inthousands, except per share amounts):

 
| ** **                                                                              | ** ** | **Three Months Ended  December 31, 2005** | ** ** | **Three Months Ended  December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                              | ** ** | **Net   Income**                                    | ** ** | **Shares**                                          | ** ** | **EPS** | ** ** | **Net   Loss** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic EPS                                                                               |       | $                                                   | 428        |                                                | 5,269      |   | $ | 0.08 |   | $ | (247 | ) | 5,216 |   | $ | (0.05 | ) |
| Incremental  shares from the assumed exercise of outstanding stock options and warrants |       | —                                              |       | 34                                                  |       | — |   | — |   | — |   | — |   |
|                                                                                    |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                                                             |       | $                                                   | 428        |                                                | 5,303      |   | $ | 0.08 |   | $ | (247 | ) | 5,216 |   | $ | (0.05 | ) |

 

For the three months ended December 31, 2005, optionsand warrants to purchase 1,066,470 shares were excluded from the computation ofDiluted EPS as their effect would have been antidilutive.  For the three months ended December 31, 2004, since the Company incurred aloss for this period, all 1,527,930 of outstanding stock options and warrants were excluded from the calculation of Diluted EPSas their effect would have been antidilutive. These options and warrants could potentially dilute EPS in the future.

 

**3.****             ****STOCK-BASEDCOMPENSATION**

 

Effective October 1, 2005, the Company adopted Statementof Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment”,using the modified prospective application method.  Prior to adopting SFAS No. 123(R), theCompany followed the intrinsic value method of accounting for stock-basedemployee compensation in accordance with Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  On September 27, 2005, the CompensationCommittee of the Company’s Board of Directors approved, and the Board ratified,the acceleration of the vesting of all outstanding stock options havingexercise prices of $23.50 or more. Options to purchase 133,500 shares, havingexercise prices ranging from $23.62 to $37.05 per share, were affected by thevesting acceleration. The closing price of the Company’s common stock onSeptember 26, 2005 (the trading day prior to the 

 

6

----

 

vestingacceleration) was $11.31 per share.  Theprimary purpose of this accelerated vesting program was to eliminate thecompensation expense associated with these stock options that the Company wouldotherwise have been required to recognize in future financial statementspursuant to SFAS No. 123(R). The amount of future compensation expensethat will be avoided in connection with this acceleration was approximately$1.3 million, net of tax.

 

TheCompany has two stock option plans: the Director Stock Option Plan (the “DirectorPlan”) and the Amended and Restated 1987 Stock Option Plan (the “1987 Plan”).Effective October 1, 2004, each outside director is granted 5,000 fullyvested options on an annual basis, at an exercise price equal to the fairmarket value of the stock on the grant date. The Director Plan expired onDecember 31, 2004 and no further options may be granted under the plan.Options issued under the Director Plan will remain outstanding until they haveexpired, been exercised or have otherwise terminated. Options to purchase anaggregate of 25,000 shares of common stock were issued in January 2005 tothe outside directors (5,000 options to each of the five outside directors) underthe 1987 Plan. Under the 1987 Plan, as amended and restated, officers andcertain employees, including outside directors, may be granted options topurchase the Company’s common stock at exercise prices equal to the fair marketvalue of the stock at the date of grant or at other prices as determined by theCompensation Committee of the Board of Directors. No options have been grantedby the Company at less than the fair market value of the Company’s common stockon the date of grant for any of the periods presented. The majority of theoptions issued under the plans vest ratably over a five-year period, althoughsome options vest immediately, and options issued under the plans generallyexpire ten years from the date of grant. As of December 31, 2005, there were 116,077 options available for grantunder the 1987 Plan.

 

For the three months ended December 31, 2005, theCompany recognized stock-based employee compensation expense of $410,000, lessa related income tax benefit of $160,000 under the provisions of SFAS No.123(R).  For the three months endedDecember 31, 2004, nocompensation expense was recognized for stock option awards granted at fairmarket value under the provisions of APB No. 25.  Thefollowing table illustrates the pro forma effect on net loss andearnings per share if the Company had accounted for its stock option plansprior to October 1, 2005, using the fair value method of accounting under SFASNo. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure” (inthousands, except per share amounts):

 
| ** **             | ** **                                                                                                                | **Three Months   Ended  December 31, 2004** | ** ** |
|------------------------|---------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------|------------|
| ** **             | ** **                                                                                                                | **Pro Forma**                                    | ** ** |
| Net loss, as reported  |                                                                                                                      | $                                                | (247       | ) |
| Deduct:                | Total stock-based employee compensation  expense determined under the fair value based method for all grants, net of  tax |                                             | (727       | ) |
| Pro forma net loss     |                                                                                                                      | $                                                | (974       | ) |
|                   |                                                                                                                      |                                             |       |
| Basic and Diluted EPS: |                                                                                                                      |                                             |       |
| As reported            |                                                                                                                      | $                                                | (0.05      | ) |
| Pro forma net  loss    |                                                                                                                      | $                                                | (0.19      | ) |
|                        |                                                                                                                           |                                                  |            |  |  |

 

Stockoption activity for all plans was as follows:

 
| ** **                            | ** ** | **Outstanding  Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining Life** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **(in thousands)**  | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | **(in thousands)**        | ** ** |
| Balance—September 30,  2005 |       | 1,230                    |       | $                                          | 14.50      |                                       |       |                           |       |   |
| Granted                               |       | 185                      |       | 9.99                                       |       |                                       |       |                           |       |
| Exercised                             |       | (1                       | )          | 9.05                                       |       |                                       |       |                           |       |
| Forfeited                             |       | (2                       | )          | 12.90                                      |       |                                       |       |                           |       |
| Expired                               |       | (71                      | )          | 14.63                                      |       |                                       |       |                           |       |
| Balance—December 31, 2005        |       | 1,341                    |       | 13.89                                      |       | 7.0                                        |       | $                              | 2,449      |   |
| Exercisable—December 31, 2005    |       | 889                      |       | $                                          | 15.08      |                                       | 6.0        |                           | $          | 1,750 |   |

 

 

At December 31, 2005, $3,150,000 of total unrecognizedcompensation cost related to non-vested awards is expected to be recognizedover a weighted-average period of 1.9 years. During the three months ended December 31, 2005 and 2004, the totalintrinsic value of options exercised was $3,000 and $164,000 respectively. Thetotal cash received from these option exercises was $9,000 and $115,000,respectively, and the actual tax benefit realized for the tax deductions from 

 

7

----

 

these option exercises was $1,000 and $45,000,respectively.  During the three months ended December 31,2004, options to purchase 27,270shares of common stock with an aggregate exercise price of $307,000 wereexercised by the option holders tendering 20,286 shares of the Company’s commonstock, which were held by the option holders.

 

The weighted average fair value of the options grantedduring the three months ended December 31,****2005and 2004 is estimated at $6.10 and $8.60 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 December 31,** | ** ** |
|---------------------------|------------|------------------------------------------|------------|
| ** **                | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Dividend yield            |       | none                                     |       | none |   |
| Expected price volatility |       | 59.0                                     | %          | 59.8 | % |
| Risk-free interest rates  |       | 4.4                                      | %          | 4.0 | % |
| Expected lives            |       | 6.5 years                                |       | 8.0 years |   |

 

Expected volatility was determined using a weightedaverage of the historic volatility of the Company’s common stock as of theoption grant date measured over a period equal to the expected life of thegrant.  Risk free interest rates werebased on the U. S. Treasury yield curve in effect at the date of the grant.  Expected lives were determined using thesimplified method, which measures the average of the option vesting term andthe option contractual term.

 

**4.**                 INVENTORIES

 

Inventorieswere comprised of the following (in thousands):

 
| ** **       | ** ** | **December 31, 2005** | ** ** | **September 30, 2005** | ** ** |
|------------------|------------|----------------------------|------------|-----------------------------|------------|
| Finished goods   |       | $                          | 85,694     |                        | $          | 97,056 |   |
| Work-in-progress |       | 3,399                      |       | 3,283                       |       |
| Raw materials    |       | 5,370                      |       | 5,572                       |       |
|             |       |                       | $          | 94,463                      |       | $ | 105,911 |   |
|                  |            |                            |            |                             |            |  |  |  |

 

**5.****                ****ACCRUEDEXPENSES AND OTHER CURRENT LIABILITIES**

 

Accruedexpenses and other current liabilities were comprised of the following (in thousands):

 
| ** **                                                   | ** ** | **December 31, 2005** | ** ** | **September 30, 2005** | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| Salaries, wages, and employee benefits                       |       | $                          | 8,765      |                        | $          | 8,846 |   |
| Income taxes payable                                         |       | 1,189                      |       | 1,161                       |       |
| Interest                                                     |       | 5,933                      |       | 2,483                       |       |
| Deferred rent                                                |       | 3,930                      |       | 3,790                       |       |
| Sales taxes                                                  |       | 2,936                      |       | 2,456                       |       |
| Insurance                                                    |       | 2,789                      |       | 2,671                       |       |
| Rent                                                         |       | 163                        |       | 328                         |       |
| Audit and legal                                              |       | 3,397                      |       | 3,400                       |       |
| Reserves recorded in the iMaternity  acquisition (Note 6)    |       | 157                        |       | 232                         |       |
| Remaining payout for redemption of Series A  Preferred Stock |       | 679                        |       | 679                         |       |
| Accrued store construction costs                             |       | 1,239                      |       | 152                         |       |
| Gift certificates and store credits                          |       | 6,170                      |       | 3,233                       |       |
| Other                                                        |       | 6,931                      |       | 6,132                       |       |
|                                                         |       | $                          | 44,278     |                        | $          | 35,563 |   |

 

Interest payments on the New Senior Notes are madesemiannually on February 1st and August 1st.

 

8

----

 

**6.****             ****iMATERNITYACQUISITION EXIT/RESTRUCTURING ACTIVITY**

 

The Company acquired eSpecialty Brands, LLC (“iMaternity”)on October 17, 2001 (the “Acquisition Date”). The iMaternity manufacturing and warehousing operations in Costa Ricahave been shut down, are being marketed for sale, are not being depreciated and are separatelyreflected in the accompanying Consolidated Balance Sheets as “Assets Held forSale.”  The carrying values of theCosta Rica facilities are recorded at their estimated realizable values,which were determined based on purchase offers from interested parties, lessestimated selling costs.

 

Asummary of the charges incurred and reserves recorded in connection with theiMaternity acquisition exit/restructuring activities as of September 30, 2005and for the three months ended December 31, 2005 is as follows (in thousands):

 
| ** **           | ** ** | **Balance as of  September 30,  2005** | ** ** | **First Quarter  Fiscal 2006 Charges** | ** ** | **Balance as of  December 31, 2005** | ** ** |
|----------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|
| Severance            |       | $                                           | 200        |                                   | $          | (50                                       | )          | $ | 150 |   |
| Exit and other costs |       | 32                                          |       | (25                                    | )          | 7                                         |       |
|                 |       | $                                           | 232        |                                   | $          | (75                                       | )          | $ | 157 |   |

 

Thebalance of the severance reserve reflects a non-compete and severancearrangement that is payable ratably on a monthly basis throughSeptember 30, 2006.

 

**7.****             ****NEWACCOUNTING PRONOUNCEMENTS**

 

*SFASNo. 154*

* *

In May 2005,the Financial Accounting Standards Board issued SFAS No. 154, “AccountingChanges and Error Corrections.” SFAS No.154 provides guidance on the accounting for and reportingof accounting changes and error corrections. This statement is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005.  Early adoption is permitted.  We expect to adopt SFAS No. 154effective as of October 1, 2006.

 

**8.****             ****GUARANTORSUBSIDIARIES**

 

Pursuant to the terms ofthe indenture relating to the New Senior Notes, each of the domesticsubsidiaries of Mothers Work, Inc. (the “Guarantor Subsidiaries”) has jointlyand severally provided an unconditional guarantee of the obligations of MothersWork with respect to the New Senior Notes. There are no restrictions on any of the assets of the GuarantorSubsidiaries which would limit their ability to transfer funds to Mothers Workin the form of loans, advances or cash dividends, except as provided byapplicable law.  None of the Company’sforeign subsidiaries (the “Non-Guarantor Subsidiaries”) have guaranteed the NewSenior Notes.  The condensedconsolidating financial information for the Company, the GuarantorSubsidiaries, and the Non–Guarantor Subsidiaries as of and for the three monthsended December 31, 2005 as presented below has been prepared from thebooks and records maintained by the Guarantor Subsidiaries and theCompany.  The condensed financialinformation may not necessarily be indicative of the results of operations orfinancial position had the Guarantor Subsidiaries operated as independententities.  Certain intercompany revenuesand expenses included in the subsidiary records are eliminated inconsolidation.   As a result of thisactivity, an amount due to/due from parent will exist at any time.

 

9

----

 

**Mothers Work, Inc.**

**Condensed Consolidating BalanceSheet**

**December 31, 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                        |       | $                                   | 13,435     |                        | $          | 15                                                     |       | $                               | 371        |                           | $          | — |   | $ | 13,821 |   |
| Short-term  investments                           |       | 11,500                              |       | —                      |       | —                                                 |       | —                          |       | 11,500                         |       |
| Trade  receivables, net                           |       | 9,619                               |       | —                      |       | 101                                                    |       | —                          |       | 9,720                          |       |
| Inventories                                       |       | 91,908                              |       | —                      |       | 2,555                                                  |       | —                          |       | 94,463                         |       |
| Deferred  income taxes                            |       | 6,015                               |       | —                      |       | —                                                 |       | —                          |       | 6,015                          |       |
| Prepaid  expenses and other current assets        |       | 4,187                               |       | —                      |       | —                                                 |       | —                          |       | 4,187                          |       |
| Total Current  Assets                             |       | 136,664                             |       | 15                          |       | 3,027                                                  |       | —                          |       | 139,706                        |       |
| Property, Plant and Equipment, net                |       | 72,154                              |       | —                      |       | 2,456                                                  |       | —                          |       | 74,610                         |       |
| Assets Held for Sale                              |       | —                              |       | —                      |       | 925                                                    |       | —                          |       | 925                            |       |
| Other Assets                                      |       | 68,536                              |       | 3                           |       | 154                                                    |       | —                          |       | 68,693                         |       |
| Investments in  and Advances to (from) Affiliates |       | 222                                 |       | 249,427                     |       | (3,647                                                 | )          | (246,002                        | )          | —                         |       |
| Total Assets                                      |       | $                                   | 277,576    |                        | $          | 249,445                                                |       | $                               | 2,915      |                           | $          | (246,002 | ) | $ | 283,934 |   |
|                                              |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**     |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Current  Liabilities:                             |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Line of credit  borrowings                        |       | $                                   | —     |                        | $          | —                                                 |       | $                               | —     |                           | $          | — |   | $ | — |   |
| Current  portion of long-term debt                |       | 770                                 |       | —                      |       | —                                                 |       | —                          |       | 770                            |       |
| Accounts  payable                                 |       | 21,554                              |       | 12                          |       | —                                                 |       | —                          |       | 21,566                         |       |
| Accrued  expenses and other current liabilities   |       | 38,974                              |       | 4,766                       |       | 538                                                    |       | —                          |       | 44,278                         |       |
| Total Current  Liabilities                        |       | 61,298                              |       | 4,778                       |       | 538                                                    |       | —                          |       | 66,614                         |       |
| Long-Term Debt                                    |       | 127,975                             |       | —                      |       | —                                                 |       | —                          |       | 127,975                        |       |
| Deferred Rent and Other  Non-Current Liabilities  |       | 24,285                              |       | —                      |       | 1,042                                                  |       | —                          |       | 25,327                         |       |
| Total  Liabilities                                |       | 213,558                             |       | 4,778                       |       | 1,580                                                  |       | —                          |       | 219,916                        |       |
|                                              |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Total  Stockholders’ Equity                  |       | 64,018                              |       | 244,667                     |       | 1,335                                                  |       | (246,002                        | )          | 64,018                         |       |
| Total  Liabilities and Stockholders’ Equity  |       | $                                   | 277,576    |                        | $          | 249,445                                                |       | $                               | 2,915      |                           | $          | (246,002 | ) | $ | 283,934 |   |

 

10

----

 

**Mothers Work, Inc.**

**Consolidating Statement ofOperations**

**For The Three Months EndedDecember 31, 2005**

(in thousands)

(unaudited)

 
| ** **                                    | ** ** | **Mothers Work  (Parent Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Companies)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| Net sales                                     |       | $                                  | 147,535    |                        | $          | 7,893                                                 |       | $                               | 3,858      |                           | $          | (7,893 | ) | $ | 151,393 |   |
| Cost of goods  sold                           |       | 73,811                             |       | —                      |       | 1,399                                                 |       | —                          |       | 75,210                         |       |
| Gross profit                                  |       | 73,724                             |       | 7,893                       |       | 2,459                                                 |       | (7,893                          | )          | 76,183                         |       |
| Selling,  general and administrative expenses |       | 77,325                             |       | 82                          |       | 2,174                                                 |       | (7,893                          | )          | 71,688                         |       |
| Operating  income (loss)                      |       | (3,601                             | )          | 7,811                       |       | 285                                                   |       | —                          |       | 4,495                          |       |
| Interest  income (expense), net               |       | (8,344                             | )          | 4,550                       |       | —                                                |       | —                          |       | (3,794                         | )          |
| Equity in  earnings of subsidiaries           |       | 12,646                             |       | —                      |       | —                                                |       | (12,646                         | )          | —                         |       |
| Income before  income taxes                   |       | 701                                |       | 12,361                      |       | 285                                                   |       | (12,646                         | )          | 701                            |       |
| Income tax  provision                         |       | 273                                |       | 4,326                       |       | 111                                                   |       | (4,437                          | )          | 273                            |       |
| Net income                                    |       | $                                  | 428        |                        | $          | 8,035                                                 |       | $                               | 174        |                           | $          | (8,209 | ) | $ | 428 |   |

 

11

----

 

**Mothers Work, Inc.**

**Consolidating Cash Flow Statement**

**For The Three Months EndedDecember 31, 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                                                                                   |       | $                                   | 428        |                        | $          | 8,035                                                 |       | $                               | 174        |                           | $          | (8,209 | ) | $ | 428 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Depreciation  and amortization                                                               |       | 3,903                               |       | —                      |       | 114                                                   |       | —                          |       | 4,017                          |       |
| Stock-based  compensation expense                                                            |       | 410                                 |       | —                      |       | —                                                |       | —                          |       | 410                            |       |
| Loss on  impairment of long-lived assets                                                     |       | 1,566                               |       | —                      |       | —                                                |       | —                          |       | 1,566                          |       |
| Loss on  disposal of assets                                                                  |       | 97                                  |       | —                      |       | —                                                |       | —                          |       | 97                             |       |
| Accretion of  discount on senior notes                                                       |       | 45                                  |       | —                      |       | —                                                |       | —                          |       | 45                             |       |
| Deferred  income tax benefit                                                                 |       | (153                                | )          | —                      |       | —                                                |       | —                          |       | (153                           | )          |
| Excess tax  benefit of stock option  exercises                                          |       | (1                                  | )          | —                      |       | —                                                |       | —                          |       | (1                             | )          |
| Amortization  of deferred financing costs                                                    |       | 155                                 |       | —                      |       | —                                                |       | —                          |       | 155                            |       |
| Changes in  assets and liabilities:                                                          |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Decrease  (increase) in—                                                                |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Trade  receivables                                                                           |       | (2,015                              | )          | —                      |       | (24                                                   | )          | —                          |       | (2,039                         | )          |
| Inventories                                                                                  |       | 11,328                              |       | —                      |       | 120                                                   |       | —                          |       | 11,448                         |       |
| Prepaid  expenses and other current assets                                                   |       | 637                                 |       | —                      |       | —                                                |       |                            |       | 637                            |       |
| Investments in  and advances to (from) affiliates                                            |       | (7,100                              | )          | (1,351                      | )          | 242                                                   |       | 8,209                           |       | —                         |       |
| Increase  (decrease) in—                                                                |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Accounts  payable, accrued expenses and other current liabilities                            |       | 14,019                              |       | (6,706                      | )          | (329                                                  | )          | —                          |       | 6,984                          |       |
| Deferred rent  and other non-current liabilities                                             |       | (542                                | )          | —                      |       | 41                                                    |       | —                          |       | (501                           | )          |
| Net cash  provided by (used in) operating activities                                         |       | 22,777                              |       | (22                         | )          | 338                                                   |       | —                          |       | 23,093                         |       |
| **Cash Flows from Investing Activities:**                                                    |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Purchase of  short-term investments                                                          |       | (14,500                             | )          | —                      |       | —                                                |       | —                          |       | (14,500                        | )          |
| Proceeds of  sale from short-term investments                                                |       | 3,000                               |       | —                      |       | —                                                |       | —                          |       | 3,000                          |       |
| Capital expenditures                                                                         |       | (3,326                              | )          | —                      |       | (62                                                   | )          | —                          |       | (3,388                         | )          |
| Purchase of  intangible assets                                                               |       | (7                                  | )          | —                      |       | (4                                                    | )          | —                          |       | (11                            | )          |
| Net cash used  in investing activities                                                       |       | (14,833                             | )          | —                      |       | (66                                                   | )          | —                          |       | (14,899                        | )          |
| **Cash Flows from Financing Activities:**                                                    |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Increase in  cash overdrafts                                                                 |       | 2,739                               |       | —                      |       | —                                                |       | —                          |       | 2,739                          |       |
| Repayment of  long-term debt                                                                 |       | (156                                | )          | —                      |       | —                                                |       | —                          |       | (156                           | )          |
| Deferred  financing costs                                                                    |       | (3                                  | )          | —                      |       | —                                                |       | —                          |       | (3                             | )          |
| Proceeds from  exercise of stock options                                                     |       | 9                                   |       | —                      |       | —                                                |       | —                          |       | 9                              |       |
| Excess tax  benefit of stock option  exercises                                          |       | 1                                   |       | —                      |       | —                                                |       | —                          |       | 1                              |       |
| Net cash  provided by financing activities                                                   |       | 2,590                               |       | —                      |       | —                                                |       | —                          |       | 2,590                          |       |
| **Net Increase (Decrease) in Cash and Cash Equivalents**                                     |       | 10,534                              |       | (22                         | )          | 272                                                   |       | —                          |       | 10,784                         |       |
| **Cash and Cash Equivalents, Beginning of Period**                                           |       | 2,901                               |       | 37                          |       | 99                                                    |       | —                          |       | 3,037                          |       |
| **Cash and Cash Equivalents, End of  Period**                                           |       | $                                   | 13,435     |                        | $          | 15                                                    |       | $                               | 371        |                           | $          | — |   | $ | 13,821 |   |

 

12

----

 

**9.****                ****COMMITMENTSAND CONTINGENCIES**

 

On January 12, 2005, a purported classaction was filed against the Company alleging that, under applicable federaland state law, certain former and current employees should have receivedovertime compensation. The plaintiffs in this case are seeking unspecifiedactual damages, penalties and attorneys’ fees. The Company is engaged inefforts to resolve these claims and has reached a settlement with theplaintiffs that has received preliminary court approval.

 

Inaddition, from time to time, the Company is named as a defendant in legalactions arising from its normal business activities. Although the amount of anyliability that could arise with respect to currently pending actions cannot beaccurately predicted, the Company does not believe that the resolution of anypending action will have a material adverse effect on its financial position,results of operations or liquidity.

 

**10.**          SEGMENTAND 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 thresholds establishedin SFAS No. 131.  The Company hasdetermined that its business is comprised of one operating segment: the design,manufacture and sale of maternity apparel and related accessories.  While the Company offers a wide range ofproducts for sale, the substantial portion of its products are initiallydistributed through the same distribution facilities, many of the Company’sproducts 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 is as follows (in thousands):

** **
| ** **                              | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| **Net Sales to Unaffiliated Customers** |       |                                 |       |   |   |
| United States                           |       | $                                    | 147,535    |   | $ | 130,683 |   |
| Canada                                  |       | $                                    | 3,858      |   | $ | 2,936 |   |

 
| ** **            | ** ** | **December  31, 2005** | ** ** | **September  30, 2005** | ** ** |
|-----------------------|------------|------------------------|------------|-------------------------|------------|
| **Long-Lived Assets** |       |                   |       |                    |       |
| United States         |       | $                      | 72,818     |                    | $          | 74,398 |   |
| Canada                |       | $                      | 2,610      |                    | $          | 2,658 |   |
| Costa Rica            |       | $                      | 925        |                    | $          | 925 |   |

 

***Major Customers*****. **Forthe periods presented, the Companydid not have any one customer who represented more than 10% of its net sales.

 

**11.**          INTERESTEXPENSE, NET

 

Interestexpense, net is comprised of the following:

 
| ** **            | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------|------------|--------------------------------------|------------|
| ** **            | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Interest expense      |       | $                                    | 3,837      |   | $ | 3,778 |   |
| Interest income       |       | (43                                  | )          | (23 | ) |
| Interest expense, net |       | $                                    | 3,794      |   | $ | 3,755 |   |

 

13

----

 

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

 

**Results of Operations**

 

Thefollowing tables set forth certain operating data as a percentage of net salesand as a percentage change for the three months ended December 31:

 
| ** **                                        | ** ** | **% of Net Sales (1)** | ** ** | **% Increase** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|----------------|------------|
| ** **                                        | ** ** | **2005**               | ** ** | **2004**       | ** ** | **2005 vs. 2004** | ** ** |
|                                              |       |                   |       |           |       |   |   |
| Net sales                                         |       | 100.0                  | %          | 100.0          | %          | 13.3 | % |
| Cost of goods sold (2)                            |       | 49.7                   |       | 47.9           |       | 17.5 |   |
| Gross profit                                      |       | 50.3                   |       | 52.1           |       | 9.4 |   |
| Selling, general and administrative  expenses (3) |       | 47.4                   |       | 49.6           |       | 8.2 |   |
| Operating  income                                 |       | 3.0                    |       | 2.5            |       | 34.5 |   |
| Interest expense, net                             |       | 2.5                    |       | 2.8            |       | 1.0 |   |
| Income (loss)  before income taxes                |       | 0.5                    |       | (0.3           | )          | 270.1 |   |
| Income tax provision (benefit)                    |       | 0.2                    |       | (0.1           | )          | 265.5 |   |
| Net income (loss)                                 |       | 0.3                    | %          | (0.2           | )%         | 273.3 |   |

 

----

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

 

(2)     The “Costof goods sold” line item includes: merchandise costs (including customs dutyexpenses), expenses related to inventory shrinkage, product related corporateexpenses (including expenses related to our payroll, benefit costs andoperating expenses of our buying departments), inventory reserves (includinglower of cost or market reserves), inbound freight charges, purchasing andreceiving costs, inspection costs, warehousing costs, internal transfer costs,and the other costs of our distribution network.

 

(3)     The “Selling,general and administrative expenses” line item includes:**advertisingand marketing expenses, corporate administrative expenses, store expenses(including store payroll and store occupancy expenses), store opening and storeclosing expenses, and store asset impairment charges.

 

The following table sets forth certain informationconcerning the number of our stores and leased departments for the three monthsended December 31:`

 
| ** **          | ** ** | **2005**   | ** ** | **2004**                | ** ** |
|---------------------|------------|------------|------------|-------------------------|------------|
| ** **          | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** |
| Beginning of period |       | 852        |       | 739                     |       | 1,591 |   | 883 |   | 232 |   | 1,115 |   |
| Opened              |       | 6          |       | 10                      |       | 16 |   | 12 |   | 1 |   | 13 |   |
| Closed              |       | (7         | )          | (6                      | )          | (13 | ) | (15 | ) | (2 | ) | (17 | ) |
| End of period       |       | 851        |       | 743                     |       | 1,594 |   | 880 |   | 231 |   | 1,111 |   |

 

Ourfiscal year ends on September 30.  Allreferences in this discussion to our fiscal years refer to the fiscal yearended on September 30 in the year mentioned. For example, our “fiscal 2006” will end on September 30, 2006.

 

**Three Months Ended December 31, 2005 and 2004**

 

***Net Sales.***  Our net sales for the first quarter of fiscal2006 increased by 13.3%, or $17.8 million, to $151.4 million from$133.6 million for the first quarter of fiscal 2005. Net sales increased primarily due to salesfrom our Oh Baby! by MotherhoodTM licensed arrangement with Kohl’s®, which beganduring the second quarter of fiscal 2005, sales from the expansion of ourproprietary Two HeartsTM Maternity collection to an additional 497 Sears®locations during late March 2005, and our comparable store salesincrease.  Comparable store salesincreased by 3.1% during fiscal 2006, based on 1,019 retail locations, versus acomparable store sales decrease of 4.2% during fiscal 2005, based on 894 retaillocations.  The comparable store salesincrease of 3.1% for the first quarter of fiscal 2006 was favorably impacted byapproximately 0.5 percentage points due to having five Saturdays in December2005 compared to four Saturdays in December 2004.

 

14

----

 

Asof December 31, 2005, we operated a total of 851 stores and 1,594 total retaillocations, compared to 880 stores and 1,111 total retail locations as ofDecember 31, 2004. In addition, our Oh Baby! by Motherhood collection isavailable at Kohl’s stores throughout the United States.  As of December 31, 2005, our store totalincluded 47 multi-brand stores, including eight Destination MaternityTMsuperstores, with the remaining multi-brand stores predominantly under the MimiMaternity® brand.  In comparison, as ofDecember 31, 2004, we operated 39 multi-brand stores, including six DestinationMaternity superstores.  These multi-brandstore figures exclude our A Pea in the Pod® stores, which havetraditionally carried a full line of both A Pea in the Pod and Mimi Maternitybranded merchandise.  During the firstquarter of fiscal 2006, we opened six stores (including the reopening of threestores which had been closed since late August 2005 due to Hurricane Katrina)and closed seven stores.

 

***Gross Profit.***  Our gross profit for the first quarter offiscal 2006 increased by 9.4%, or $6.6 million, to $76.2 million from $69.6million for the first quarter of fiscal 2005, reflecting the increase in netsales, partially offset by a decrease in gross margin.  Gross profit as apercentage of net sales (gross margin) for the first quarter of fiscal 2006 was50.3% compared to 52.1% for the first quarter of fiscal 2005.  The decrease in gross margin of 1.8percentage points compared to the prior year resulted entirely from the plannedlower gross margin associated with sales from our new Kohl’s licensedarrangement.

 

***Selling, General andAdministrative Expenses.***  Ourselling, general and administrative expenses for the first quarter of fiscal2006 increased by 8.2%, or $5.4 million, to $71.7 million from $66.3 millionfor the first quarter of fiscal 2005. Compared to fiscal 2005, rent and related expenses for our retaillocations, including sales-based payments for our leased departments, increasedby $1.7 million and employee wages and benefits for our retail locationsincreased by $1.4 million, primarily resulting from the expansion of our Searsrelationship during late March 2005 and typical expense increases.  As a percentage of net sales, selling,general and administrative expenses decreased to 47.4% for fiscal 2006 comparedto 49.6% for fiscal 2005. This decrease in the expense percentage for thequarter resulted primarily from the favorable expense leverage from theaddition of our licensed business, our comparable store sales increase of 3.1%and a continued sharp focus on expense control, partially offset by stock-basedcompensation expense and increased store-closing and impaired assetwrite-offs.  We also recognized anon-recurring reduction to selling, general and administrative expenses of $0.5million for the first quarter of fiscal 2006, for our portion of theVisa®/MasterCard® class action settlement fund. We incurred $0.4 million of non-cash expenses related to stock-basedcompensation expense, including $0.3 million in selling, general and administrativeexpense, in the first quarter of fiscal 2006 versus none in the first quarterof fiscal 2005, since we adopted the provisions of SFAS No. 123(R) as of thebeginning of fiscal 2006.  We incurredimpairment charges for write-downs of store long-lived assets of $1.6million for fiscal 2006 as compared to $0.6 million for fiscal 2005.  In addition, we incurred charges relating tostore closings of $0.2 million for fiscal 2006 (primarily lease terminationfees) as compared to $0.6 million for fiscal 2005 (of which $0.2 millionrepresented non-cash long-lived asset write-offs).

 

***Operating Income.***  Our operatingincome for the first quarter of fiscal 2006 increased by 34.5%, or $1.2million, to $4.5 million from $3.3 million for the first quarter of fiscal2005, due to increased sales volume and gross profit, which more than offsetthe impact of higher selling, general and administrative expenses.  Operating income as a percentage of net sales(operating income margin) for the first quarter of fiscal 2006 increased to3.0% from 2.5% for the first quarter of fiscal 2005. Excluding non-cashstock-based compensation expense, our operating income for the first quarter offiscal 2006 was $4.9 million, which represents a 3.2% adjusted operating incomemargin. We were not required to recognize and, therefore, did not recognize anynon-cash stock-based compensation expense in fiscal 2005. The increase inoperating income margin was due to our decreased operating expense ratio, whichmore than offset our planned lower gross margin.

 

***Interest Expense, Net.***  Our net interest expense for the firstquarter of fiscal 2006 of $3.8 million was approximately the same as the firstquarter of fiscal 2005.  During the firstquarter of fiscal 2006, our average level of direct borrowings under our creditfacility was $1.3 million, but we did not have any direct borrowings under ourcredit facility as of December 31, 2005. We did not have any direct borrowings under our credit facility duringthe first quarter of fiscal 2005.

 

***Income Tax Provision.*** Our effective tax rate was a provision ofapproximately 39.0% for the first quarter of fiscal 2006 and a benefit of 40.0%for the first quarter of fiscal 2005.  Weexpect our effective tax rate for the fullyear fiscal 2006 to be approximately 39%.

 

***Net Income (Loss).***  Net income for the first quarter of fiscal2006 was $0.4 million, or $0.08 per share (diluted) compared to a net loss of$0.2 million, or $(0.05) per share (diluted) for the first quarter of fiscal2005. Excluding non-cash stock-based compensation expense, net income for thefirst quarter of fiscal 2006 was $0.7 million, or $0.13 per share(diluted).  We were not required torecognize and, therefore, did not recognize any non-cash stock-basedcompensation expense in the first quarter of fiscal 2005.

 

15

----

 

Our average diluted shares outstanding of 5,303,000 forthe first quarter of fiscal 2006 was 1.7% higher than the 5,216,000 averagediluted shares outstanding for the first quarter of fiscal 2005.  The increase in average diluted sharesoutstanding reflects higher shares outstanding in fiscal 2006 compared tofiscal 2005, as well as the dilutive impact of outstanding stock options infiscal 2006. No dilutive impact was included in fiscal 2005, due to the netloss for the first quarter.

 

**Seasonality**

 

Our business, like that of many other retailers, isseasonal.  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 yearoperating income 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 arrangements,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 information systems, and (iii) working capital,including inventory to support our new business initiatives and our new andexisting stores.  We have historicallyfinanced these capital requirements from cash flows from operations, borrowingsunder our credit facility or available cash balances.

 

Cash and cash equivalents increased by $10.8 millionduring the first quarter of fiscal 2006 compared to an increase of $6.2 millionfor the first quarter of fiscal 2005.  Cash provided by operations of$23.1 million for the first quarter of fiscal 2006 increased by $16.7 millionfrom $6.4 million for the first quarter of fiscal 2005.  This increase in cash provided by operationswas primarily the result of cash generated by reducing inventories in the firstquarter of fiscal 2006 compared to an increase in inventories during the firstquarter of fiscal 2005.  Totalinventories at December 31, 2005 were $94.5 million, a decrease of $11.4million or 10.8% below the $105.9 million inventories balance at September 30,2005, and a decrease of $3.6 million or 3.7% below the $98.1 millioninventories balance at December 31, 2004. During the first quarter of fiscal 2006, we used our cash provided byoperations primarily to increase ourshort-term investments and, to a much lesser extent, to pay for capitalexpenditures.  During the first quarter of fiscal 2005, weused our cash provided by operations primarily to pay for capital expenditures.

 

Forthe first quarter of fiscal 2006, we spent $3.4 million on capitalexpenditures, including $2.8 million for leasehold improvements, fixturesand equipment principally for new store facilities, as well as improvements toexisting stores, and $0.6 million for our distribution and corporatefacilities and information systems.  Thiscompares to $6.2 million in capital expenditures for the first quarter offiscal 2005, of which $4.8 million was spent for new store facilities andimprovements to existing stores and retail locations, and $1.4 million forour distribution and corporate facilities and information systems.  Thedecrease in capital expenditures was primarily due to decreased expendituresfor new stores and decreased expenditures for distribution facilities andinformation systems compared to last year.

 

OnOctober 15, 2004, we entered into a new five-year $60.0 million seniorsecured revolving credit facility (the “Credit Facility”).  The Credit Facility will mature onOctober 15, 2009.  There are no financial covenant requirementsunder the Credit Facility unlesseither (i) Excess Availability (as defined in the agreement) falls below$10 million, or (ii) average Financial Covenant Adjusted Availability (asdefined in the agreement) for any calendar month is less than $15 million.  If either of the events in items (i) or(ii) above occurs, we would be required to meet a certain minimum fixedcharge coverage ratio (which increases from 1.00x during the first two years ofthe Credit Facility to 1.10x during the fifth year of the CreditFacility). During the first quarter of fiscal 2006 and the first quarter of fiscal2005, we exceeded the requirements for Excess Availability and averageFinancial Covenant Adjusted Availability.

 

Asof December 31, 2005, outstanding borrowings under the Credit Facilityconsisted of no direct borrowings and $8.4 million in letters of credit, withavailable borrowings of $51.6 million. Our average level of direct borrowings under our 

 

16

----

 

creditfacility was $1.3 million for the first quarter of fiscal 2006, compared to nodirect borrowings under our credit facility during the first quarter of fiscal2005.  We may have borrowings under ourCredit Facility during certain periods in the future, reflecting seasonal and other timing variations in cash flow.

 

Ourmanagement believes that our current cash and working capital positions,expected operating cash flows and available borrowing capacity under our CreditFacility, will be sufficient to fund our working capital, capital expendituresand debt repayment requirements and to fund stock and/or debt repurchases, ifany, for at least the next twelve months.

** **

**Critical Accounting Policies and Estimates**

 

Our consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in the UnitedStates. These generally accepted accounting principles require management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofour consolidated financial statements and the reported amounts of net sales andexpenses during the reporting period.

 

Our significant accounting policies aredescribed in Note 2 of “Notes to Consolidated Financial Statements,” inour Annual Report on Form 10-K for the year ended September 30, 2005. Webelieve that the following discussion addresses our critical accountingpolicies, which are those that are most important to the portrayal of ourfinancial condition and results of operations and require management’s most difficult,subjective and complex judgments, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain. If actualresults were to differ significantly from estimates made, future reportedresults could be materially affected. However, we are not currently aware ofany reasonably likely events or circumstances that would result in materiallydifferent results.

 

Oursenior management has reviewed these critical accounting policies and estimatesand the related Management’s Discussion and Analysis of Financial Condition andResults of Operations with the Audit Committee of our Board of Directors.

 

***Inventories.***  Wevalue our inventories, which consist primarily of maternity apparel, at thelower of cost or market. Cost is determined on the first-in, first-out method(FIFO) and includes the cost of merchandise, freight, duty and broker fees. Aperiodic review of inventory quantities on hand is performed in order todetermine if inventory is properly valued at the lower of cost or market.Factors related to current inventories such as future consumer demand andfashion trends, current aging, current analysis of merchandise based on receiptdate, current and anticipated retail markdowns or wholesale discounts, andclass or type of inventory are analyzed to determine estimated net realizablevalues. Criteria utilized by us 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 itsestimated net realizable value, if required. Inventories as of December 31,2005 and September 30, 2005 totaled $94.5 million and$105.9 million, respectively, representing approximately 33.3% and 38.7%of total assets, respectively.  Given thesignificance of inventories to our consolidated financial statements, thedetermination of net realizable values is considered to be a criticalaccounting estimate. Any significant unanticipated changes in the factors notedabove could have a significant impact on the value of our inventories and ourreported operating results.

 

***Long-Lived Assets.***  Ourlong-lived assets consist principally of store leasehold improvements (includedin the “Property, plant and equipment, net” line item in our consolidatedbalance sheets) and, to a much lesser extent, lease acquisition costs (includedin the “Other intangible assets, net” line item in our consolidated balancesheets). These long-lived assets are recorded at cost and are amortized usingthe straight-line method over the shorter of the lease term or their usefullife. Net long-lived assets as of December 31, 2005 and September 30, 2005totaled $75.4 million and $77.1 million, respectively, representingapproximately 26.6% and 28.2% of total assets, respectively.

 

Inassessing potential impairment of these assets, we periodically evaluate thehistorical and forecasted operating results and cash flows on a store-by-storebasis. Newly opened stores may take time to generate positive operating andcash flow results. Factors such as (i) store type, that is, company storeor leased department, (ii) store concept, that is, Motherhood Maternity®,Mimi Maternity, A Pea in the Pod or Destination Maternity (iii) storelocation, for example, urban area versus suburb, (iv) current marketplaceawareness of our brands, (v) local customer demographic data,(vi) anchor stores within the mall in which our store is located and(vii) current fashion trends are all considered in determining the timeframe required for a store to achieve positive financial results, which isassumed to be within two years from the date a store location is opened. Ifeconomic conditions are substantially different from our expectations, thecarrying value of certain of our long-lived assets may become impaired.  As a result of our impairment assessment,we recorded write-downs of long-lived assets of $1.6 million for the firstquarter of fiscal 2006, and $0.6 million for the first quarter of fiscal 2005.

 

17

----

 

***Goodwill*****.**  The purchase method of accounting forbusiness combinations requires the use of estimates and judgments to allocatethe purchase price paid for acquisitions to the fair value of the net tangibleand identifiable intangible assets. Goodwill represents the excess of theaggregate purchase price over the fair value of net assets acquired in businesscombinations and is separately disclosed in our consolidated balance sheets. Asof both December 31, 2005 and September 30, 2005, goodwill totaled$50.4 million, representing 17.8% and 18.4% of total assets, respectively.In June 2001, the FASB issued SFAS No. 142, “Goodwill and OtherIntangible Assets.” SFAS No. 142 requires that goodwill no longer beamortized, but instead be tested for impairment at least annually or asimpairment indicators arise. Prior to our adoption of SFAS No. 142 onOctober 1, 2001, goodwill was amortized using the straight-line methodover a period of 20 years.

 

Theimpairment test requires us to compare the fair value of business reportingunits to their carrying value, including assigned goodwill. In assessingpotential impairment of goodwill, we have determined that we have one reportingunit for purposes of applying SFAS No. 142 based on our reportingstructure. The fair value of our single reporting unit is determined based onthe fair market value of our outstanding common stock on a control basis and,if necessary, an outside independent valuation is obtained to determine thefair value. The carrying value of our single reporting unit, expressed on a pershare basis, is represented by our book value per share of outstanding commonstock. The results of the annual impairment tests performed as ofSeptember 30, 2005 and 2004 indicated the fair value of the reporting unitexceeded its carrying value. As of September 30, 2005, our book value was$12.02 per share of outstanding common stock and the closing trading price ofour common stock was $10.00 per share. As part of the Company’s impairmentanalysis as of September 30, 2005, an outside independent valuation wasobtained and the fair value of the Company’s single reporting unit exceeded thecarrying value. If the per share fair value of our single reporting unit wasless than the book value per share on September 30, 2005, our goodwillwould likely have become impaired.  As ofDecember 31, 2005, our book value was $12.15 per share of outstandingcommon stock and the closing trading price of our common stock was $12.78 pershare.

 

***Accounting for Income Taxes.***  Aspart of 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 to estimate our actual current tax exposuretogether with assessing temporary differences resulting from differingtreatment of items, such as depreciation of property and equipment andvaluation of inventories, for tax and accounting purposes. We determine ourprovision for income taxes based on federal and state tax laws and regulationscurrently in effect, some of which have been recently revised. Legislationchanges currently proposed by certain of the states in which we operate, ifenacted, could increase our transactions or activities subject to tax. Any suchlegislation that becomes law could result in an increase in our state incometax expense and our state income taxes paid, which could have a material andadverse effect on our net income.

 

Thetemporary differences between the book and tax treatment of income and expensesresult in deferred tax assets and liabilities, which are included within ourconsolidated balance sheets. We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income. As ofSeptember 30, 2005, we determined that the deferred tax assets shouldreflect the state tax benefits for several of the states in which we areoperating. This determination was made in accordance with the provisions ofSFAS No. 109, “Accounting for Income Taxes.” Actual results could differfrom our assessments if adequate taxable income is not generated in futureperiods. Net deferred tax assets as of December 31, 2005 and September 30,2005 totaled $19.4 million and $19.3 million, respectively,representing approximately 6.8% and 7.1% of total assets, respectively. To theextent we believe that recovery is not more likely than not, we must establisha valuation allowance. To the extent we establish a valuation allowance orchange the allowance in a future period, income tax expense will be impacted.

 

***Accounting for Contingencies*****.**  From time to time, we are named as adefendant in legal actions arising from our normal business activities. Weaccount for contingencies such as these in accordance with SFAS No. 5, “Accountingfor Contingencies.” SFAS No. 5 requires us to record an estimated losscontingency when information available prior to issuance of our financialstatements indicates that it is probable that an asset has been impaired or aliability has been incurred at the date of the financial statements and theamount of the loss can be reasonably estimated. An interpretation of SFASNo. 5 further states that when there is a range of loss and no amountwithin that range is a better estimate than any other, then the minimum amountof the range shall be accrued. Accounting for contingencies arising fromcontractual or legal proceedings requires management, after consultation withoutside legal counsel, to use its best judgment when estimating an accrualrelated to such contingencies. As additional information becomes known, ouraccrual for a loss contingency could fluctuate, thereby creating variability inour results of operations from period to period. Likewise, an actual lossarising from a loss contingency which significantly exceeds the amount accruedfor in our financial statements could have a material adverse impact on our operatingresults for the period in which such actual loss becomes known.

 

18

----

 

**New Accounting Pronouncements**

 

*SFASNo. 154*

 

InMay 2005, the Financial Accounting Standards Board issuedSFAS No. 154, “Accounting Changes and Error Corrections.”  SFAS No.154 provides guidance on theaccounting for and reporting of accounting changes and error corrections.  This statement is effective for accountingchanges and corrections of errors made in fiscal years beginning afterDecember 15, 2005.  Early adoptionis permitted.  We expect to adoptSFAS No. 154 effective as of October 1, 2006*.*

** **

**Forward-Looking Statements**

 

Someof the information in this report, including the information incorporated byreference (as well as information included in oral statements or other writtenstatements made or to be made by us), contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended (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, butare not limited to: the success of our new business initiatives, future salestrends in our existing store base, changes in consumer spending patterns, rawmaterial price increases, consumer preferences and overall economic conditions,the impact of competition and pricing, availability of suitable storelocations, continued availability of capital and financing, ability to hire anddevelop senior management and sales associates, ability to develop and sourcemerchandise, ability to receive production from foreign sources on a timelybasis, potential stock repurchases, potential debt repurchases, war or acts ofterrorism and other factors referenced in our Annual Report on Form 10-K,including those set forth under the caption “Risk Factors.”

 

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

 

**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

Mothers Work is exposed to market risk from changes ininterest rates.  We have not entered into any market sensitive instrumentsfor trading purposes.  The analysis below presents the sensitivity of themarket value of our financial instruments to selected changes in marketinterest rates.  The range of changes presented reflects our view ofchanges that are reasonably possible over a one-year period.

 

As of December 31, 2005, the principal componentsof our debt portfolio were the $125.0 million of Senior Notes and the$60.0 million Credit Facility, both of which are denominated in U.S.dollars.  The fair value of the debt portfolio is referred to as the “debtvalue.”  The Senior Notes bear interest at a fixed rated of 111⁄4%. Although a change in market interest rates would not affect the interestincurred or cash flow related to this fixed rate portion of the debt portfolio,the debt value would be affected.

 

Our Credit Facility carries a variable interest ratethat is tied to market indices.  As of December 31, 2005, we had nodirect borrowings and $8.4 million of letters of credit outstanding under ourCredit Facility.  Borrowings under the Credit Facility would have borneinterest at a rate between approximately 5.6% and 7.3% per annum as ofDecember 31, 2005.  Any future borrowings under the Credit Facilitywould, to the extent of outstanding borrowings, be affected by changes inmarket interest rates.  A change inmarket interest rates on the variable portion of the debt portfolio impacts theinterest incurred and cash flows, but does not impact the value of thefinancial instrument.

 

The sensitivity analysis as it relates to the fixed rateportion of our debt portfolio assumes an instantaneous 100 basis point move ininterest rates from their levels as of December 31, 2005, with all othervariables held constant.  A 100 basis point increase in market interestrates would result in a decrease in the value of the debt by approximately $4.3million as of 

 

19

----

 

December 31, 2005.  A 100 basis point declinein market interest rates would cause the debt value to increase byapproximately $4.5 million as of December 31, 2005.

 

Basedon the variable rate debt included in our debt portfolio as ofDecember 31, 2005, a 100 basis point increase in interest rates would resultin additional interest 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 not believe thatthe market risk exposure on other financial instruments is material.

 

**Item 4.  Controls and Procedures**

 

***Disclosure Controls and Procedures***

 

Our disclosure controls and procedures aredesigned to ensure that information required to be disclosed by us in thereports that are filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms. These disclosurecontrols and procedures include controls and procedures designed to ensure thatinformation required to be disclosed under the Exchange Act is accumulated andcommunicated to our management on a timely basis to allow decisions regardingrequired disclosure. We evaluated the effectiveness of the design and operationof our disclosure controls and procedures as of December 31, 2005. Basedon this evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer have concluded that as of December 31, 2005, these controls andprocedures were effective.

 

***Internal Control over Financial Reporting***

* *

Therehave been no changes in internal control over financial reporting identified inconnection with the foregoing evaluation that occurred during the fiscalquarter ended December 31, 2005, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

20

----

 

**PARTII. OTHER INFORMATION**

** **

**Item1.  Legal Proceedings**

 

On January 12, 2005, a purported classaction was filed against the Company alleging that, under applicable federaland state law, certain former and current employees should have receivedovertime compensation. The plaintiffs in this case are seeking unspecified actualdamages, penalties and attorneys’ fees. The Company is engaged in efforts toresolve these claims and has reached a settlement with the plaintiffs that hasreceived preliminary court approval.

 

Inaddition, from time to time, the Company is named as a defendant in legalactions arising from its normal business activities. Although the amount of anyliability that could arise with respect to currently pending actions cannot beaccurately predicted, the Company does not believe that the resolution of anypending action will have a material adverse effect on its financial position,results of operations or liquidity.

 

**Item6.  Exhibits**

 
| **Exhibit   No.** | ** ** | **Description**                                                                                                                                                                              |
|-------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **        | ** ** | ** **                                                                                                                                                                                   |
| 10.1              |       | Amendment  to Amended and Restated Employment Agreement dated as of December 29, 2005,  between Mothers Work, Inc. and Dan W. Matthias.                                                 |
| 10.2              |       | Amendment  to Amended and Restated Employment Agreement dated as of December 29, 2005,  between Mothers Work, Inc. and Rebecca C. Matthias.                                             |
| 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. |

 

21

----

 

**Signatures**

 

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

 
|                   |     | MOTHERS WORK, INC.                                              |       |
|------------------------|----------|-----------------------------------------------------------------|------------|
|                   |     |                                                            |       |
| Date: February 9, 2006 | By:      | **/s/ DAN W. MATTHIAS**                                         | ** ** |
|                   |     | Dan W. Matthias                                                 | * *   |
| * *               | * * | *Chairman of the Board and Chief  Executive Officer*            |       |
| * *               | * * | * *                                                        | * *   |
|                   |     |                                                            |       |
| Date: February 9, 2006 | By:      | **/s/ EDWARD M. KRELL**                                         | ** ** |
|                   |     | Edward M. Krell                                                 |       |
| * *               | * * | *Executive Vice President—* *Chief Financial Officer* |       |

 

22

----