**United StatesSecurities and Exchange Commission**

**Washington,D.C. 20549**

 

**FORM 10-Q/A**

 

**(Amendment No. 1)**

 
| **ý** | ** ** | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|------------|------------|---------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended December 31, 2004**

 

**or**

 
| **o** | ** ** | **Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**For thetransition period from               to               **

 

**Commissionfile number 0-21196**

 

**MOTHERS WORK, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

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

 

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

 

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

 

Indicate by check mark whether the Registrantis a shell company (as defined in Rule 12b-2 of the Act). Yes  o   No  ý

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latest practicabledate.

 

Common Stock,$.01 par value — 5,236,515 shares outstanding as of February 3, 2005

 

 

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**MOTHERSWORK, INC. AND SUBSIDIARIES**

**INDEX**

 
| PART I.  FINANCIAL INFORMATION | 4                                                                                           |
|------------------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                                  | Financial Statements (unaudited)                                                            | 4 |
|                                     | Consolidated Balance Sheets                                                                 | 4 |
|                                     | Consolidated Statements of Operations                                                       | 5 |
|                                     | Consolidated Statements of Cash Flows                                                       | 6 |
|                                     | Notes to Consolidated Financial Statements                                                  | 7 |
| Item 2.                                  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 18 |
| Item 3.                                  | Quantitative and Qualitative Disclosures  About Market Risk                                 | 25 |
| Item 4.                                  | Controls and Procedures                                                                     | 25 |
|                                     |                                                                                        |   |
| PART II.  OTHER INFORMATION    | 27                                                                                          |
| Item 1.                                  | Legal Proceedings                                                                           | 27 |
| Item 2.                                  | Unregistered Sales of Equity Securities and  Use of Proceeds                                | 27 |
| Item  6.                                 | Exhibits                                                                                    | 27 |
|                                     |                                                                                        |   |
| Signatures                               |                                                                                        | 28 |

 

2

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**EXPLANATORYNOTE**

 

As previouslydisclosed in our Current Report on Form 8-K dated May 10, 2005, on May 5,2005, the Audit Committee of our Board of Directors concluded that a restatement of our historical consolidated financial statementswas necessary to correct errors resulting from our prior method of accountingfor lease transactions.  Afterconsultation with our independent registered public accounting firm, KPMG LLP,we determined, like many other publicly-held companies in the retail industry,that we would change our method of accounting for leases, including our methodof accounting for tenant improvement allowances, rent holidays and amortizationof leasehold improvements.  These changesare consistent with the views expressed by the Office of the Chief Accountantof the Securities and Exchange Commission(the “SEC”) on February 7, 2005 in a letter to the AmericanInstitute of Certified Public Accountants and other recent interpretationsregarding certain operating lease accounting issues and their application undergenerally accepted accounting principles. Accordingly, this Amendment No. 1on Form 10-Q/A (the “Form 10-Q/A”) to our Quarterly Report on Form 10-Qfor the three months ended December 31, 2004, initially filed with the SECon February 9, 2005 (the “Original Filing”), is being filed to reflectrestatements of (i) our consolidated balance sheet as of December 31,2004 and (ii) our consolidated statements of operations and cash flows forthe three months ended December 31, 2004 and 2003, and the notes relatedthereto (the “Restatement”).  The restatedconsolidated financial statements reflect adjustments that will not have anyimpact on our previously reported sales, comparable sales or our compliancewith any financial covenant under our revolving credit facility or other debtinstruments.  For a more detaileddescription of the Restatement, see Note 2, “Restatement of ConsolidatedFinancial Statements,” of the notes to the accompanying consolidated financialstatements in this Form 10-Q/A and the section entitled “Restatementof Prior Financial Information” in Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations in this Form 10-Q/A.

 

For theconvenience of the reader, this Form 10-Q/A sets forth both the amendedand restated items, as well as unchanged information from the Original Filingin its entirety.  However, this Form 10-Q/Aonly amends and restates Part I, Items 1, 2, and 4 of the Original Filingto reflect the Restatement.  Theforegoing items have not been updated to reflect other events occurring afterthe Original Filing or to modify or update any other disclosures affected bysubsequent events.  Information notaffected by the Restatement is unchanged and reflects the disclosures made atthe time of the Original Filing. Accordingly, this Form 10-Q/A should be read in conjunction withour filings made with the SEC subsequent to the Original Filing, including anyamendments to those filings.  Inaddition, Part II, Item 6 of the Original Filing has been amended tocontain currently dated certifications from our Chief Executive Officer andChief Financial Officer, as required by Sections 302 and 906 of theSarbanes-Oxley Act of 2002.  Thecertifications of our Chief Executive Officer and Chief Financial Officer areattached to this Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2respectively.

 

We have notamended and do not intend to amend our previously filed Annual Reports on Form 10-Kor our Quarterly Reports on Form 10-Q for the periods affected by theRestatement that ended prior to September 30, 2004.  For this reason, the consolidated financialstatements, report of independent registered public accounting firm and relatedfinancial information for the affected periods contained in such reports shouldno longer be relied upon. 

 

3

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**MOTHERSWORK, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

(in thousands,except share and per share amounts)

(unaudited)

 
| ** **                                                                                                                        | ** ** | **December 31, 2004** | ** ** | **September 30, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                        | ** ** | **(Restated, See Note 2)** | ** ** |
| **ASSETS**                                                                                                                        |       |                       |       |                             |       |
| Current Assets:                                                                                                                   |       |                       |       |                             |       |
| Cash  and cash equivalents                                                                                                        |       | $                          | 14,691     |                             | $          | 8,467 |   |
| Short-term  investments                                                                                                           |       | 2,500                      |       | 6,400                            |       |
| Trade  receivables, net                                                                                                           |       | 4,679                      |       | 4,382                            |       |
| Inventories                                                                                                                       |       | 98,113                     |       | 92,743                           |       |
| Deferred  income taxes                                                                                                            |       | 4,705                      |       | 4,660                            |       |
| Prepaid  expenses and other current assets                                                                                        |       | 4,147                      |       | 5,744                            |       |
| Total  Current Assets                                                                                                             |       | 128,835                    |       | 122,396                          |       |
| Property, Plant and Equipment,  net                                                                                               |       | 81,479                     |       | 78,462                           |       |
| Assets Held for Sale                                                                                                              |       | 1,200                      |       | 1,200                            |       |
| Other Assets:                                                                                                                     |       |                       |       |                             |       |
| Goodwill                                                                                                                          |       | 50,389                     |       | 50,389                           |       |
| Deferred  financing costs, net of accumulated amortization of $1,402 and $1,267                                                   |       | 4,116                      |       | 3,665                            |       |
| Other  intangible assets, net of accumulated amortization of $2,487 and $2,476                                                    |       | 895                        |       | 946                              |       |
| Deferred  income taxes                                                                                                            |       | 13,520                     |       | 13,317                           |       |
| Other non-current  assets                                                                                                         |       | 567                        |       | 995                              |       |
| Total  Other Assets                                                                                                               |       | 69,487                     |       | 69,312                           |       |
| Total  Assets                                                                                                                     |       | $                          | 281,001    |                             | $          | 271,370 |   |
|                                                                                                                              |       |                       |       |                             |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                    |       |                       |       |                             |       |
| Current Liabilities:                                                                                                              |       |                       |       |                             |       |
| Line of  credit borrowings                                                                                                        |       | $                          | —     |                             | $          | — |   |
| Current  portion of long-term debt                                                                                                |       | 728                        |       | 288                              |       |
| Accounts  payable                                                                                                                 |       | 23,145                     |       | 19,779                           |       |
| Accrued  expenses and other current liabilities                                                                                   |       | 39,033                     |       | 34,496                           |       |
| Total  Current Liabilities                                                                                                        |       | 62,906                     |       | 54,563                           |       |
| Long-Term Debt                                                                                                                    |       | 128,585                    |       | 127,629                          |       |
| Deferred Rent and Other  Non-Current Liabilities                                                                                  |       | 26,694                     |       | 26,275                           |       |
| Total  Liabilities                                                                                                                |       | 218,185                    |       | 208,467                          |       |
|                                                                                                                              |       |                       |       |                             |       |
| Commitments and Contingencies  (Note 10)                                                                                          |       |                       |       |                             |       |
|                                                                                                                              |       |                       |       |                             |       |
| Stockholders’ Equity:                                                                                                        |       |                       |       |                             |       |
| Preferred  Stock, 2,000,000 shares authorized                                                                                     |       |                       |       |                             |       |
| Series A  cumulative convertible preferred stock, $.01 par value; 41,000 shares authorized, none outstanding            |       | —                     |       | —                           |       |
| Series  B junior participating preferred stock, $.01 par value; 300,000 shares  authorized, none outstanding                      |       | —                     |       | —                           |       |
| Common  stock, $.01 par value; 20,000,000 shares authorized, 5,226,875 and 5,207,081  shares issued and outstanding, respectively |       | 52                         |       | 52                               |       |
| Additional  paid-in capital                                                                                                       |       | 62,725                     |       | 62,565                           |       |
| Retained  earnings                                                                                                                |       | 39                         |       | 286                              |       |
| Total  Stockholders’ Equity                                                                                                  |       | 62,816                     |       | 62,903                           |       |
| Total  Liabilities and Stockholders’ Equity                                                                                  |       | $                          | 281,001    |                             | $          | 271,370 |   |

 

The accompanyingnotes are an integral part of these Consolidated Financial Statements.

 

4

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**MOTHERSWORK, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(in thousands,except per share amounts)

(unaudited)

 
| ** **                                    | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **(Restated, See Note 2)**                | ** ** |
|                                          |       |                                      |       |   |   |
| Net sales                                     |       | $                                         | 133,619    |   | $ | 131,695 |   |
| Cost of goods sold                            |       | 63,206                                    |       | 61,665 |   |
| Gross  profit                                 |       | 70,413                                    |       | 70,030 |   |
| Selling, general and  administrative expenses |       | 67,070                                    |       | 63,129 |   |
| Operating  income                             |       | 3,343                                     |       | 6,901 |   |
| Interest expense, net                         |       | (3,755                                    | )          | (3,691 | ) |
| Income  (loss) before income taxes            |       | (412                                      | )          | 3,210 |   |
| Income tax provision (benefit)                |       | (165                                      | )          | 1,295 |   |
| Net income (loss)                             |       | $                                         | (247       | ) | $ | 1,915 |   |
|                                          |       |                                      |       |   |   |
| Net income (loss) per  share—Basic       |       | $                                         | (0.05      | ) | $ | 0.37 |   |
| Average shares  outstanding—Basic        |       | 5,216                                     |       | 5,234 |   |
| Net income (loss) per  share—Diluted     |       | $                                         | (0.05      | ) | $ | 0.34 |   |
| Average shares  outstanding—Diluted      |       | 5,216                                     |       | 5,559 |   |
|                                               |            |                                           |            |  |  |  |  |  |

 

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

 

5

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**MOTHERSWORK, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(in thousands)

(unaudited)

 
| ** **                                                                                | ** ** | **Three Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                                                                                | ** ** | **(Restated, See Note 2)**                | ** ** |
| **Cash Flows from Operating  Activities**                                                 |       |                                      |       |   |   |
| Net income (loss)                                                                         |       | $                                         | (247       | ) | $ | 1,915 |   |
| Adjustments to reconcile net  income (loss) to net cash provided by operating activities: |       |                                      |       |   |   |
| Depreciation  and amortization                                                            |       | 3,722                                     |       | 3,438 |   |
| Loss on  impairment of long-lived assets                                                  |       | 585                                       |       | 137 |   |
| Loss on  disposal of assets                                                               |       | 253                                       |       | 61 |   |
| Accretion  of discount on senior notes                                                    |       | 40                                        |       | 36 |   |
| Deferred  income tax benefit                                                              |       | (248                                      | )          | (112 | ) |
| Tax  benefit of stock option exercises                                                    |       | 45                                        |       | 38 |   |
| Amortization  of deferred financing costs                                                 |       | 135                                       |       | 99 |   |
| Changes in assets and  liabilities:                                                       |       |                                      |       |   |   |
| Decrease  (increase) in —                                                            |       |                                      |       |   |   |
| Trade  receivables                                                                        |       | (297                                      | )          | (269 | ) |
| Inventories                                                                               |       | (5,370                                    | )          | 3,727 |   |
| Prepaid  expenses and other current assets                                                |       | 2,025                                     |       | 115 |   |
| Increase  (decrease) in —                                                            |       |                                      |       |   |   |
| Accounts  payable, accrued expenses and other current liabilities                         |       | 5,312                                     |       | (1,882 | ) |
| Deferred  rent and other non-current liabilities                                          |       | 419                                       |       | 1,987 |   |
| Net  cash provided by operating activities                                                |       | 6,374                                     |       | 9,290 |   |
| **Cash Flows from Investing  Activities**                                                 |       |                                      |       |   |   |
| Purchase of short-term  investments                                                       |       | (2,500                                    | )          | (8,050 | ) |
| Proceeds from sale of  short-term investments                                             |       | 6,400                                     |       | 100 |   |
| Capital expenditures                                                                      |       | (6,238                                    | )          | (5,130 | ) |
| Purchase of intangible assets                                                             |       | (5                                        | )          | (8 | ) |
| Net  cash used in investing activities                                                    |       | (2,343                                    | )          | (13,088 | ) |
|                                                                                      |       |                                      |       |   |   |
| **Cash Flows from Financing  Activities**                                                 |       |                                      |       |   |   |
| Increase  in cash overdrafts                                                              |       | 3,120                                     |       | 2,329 |   |
| Repayment  of long-term debt                                                              |       | (83                                       | )          | (38 | ) |
| Repurchase  of common stock                                                               |       | —                                    |       | (392 | ) |
| Payout  of redeemed Series A Preferred Stock                                         |       | (373                                      | )          | (324 | ) |
| Deferred  financing costs                                                                 |       | (586                                      | )          | — |   |
| Proceeds  from exercise of stock options and warrants                                     |       | 115                                       |       | 69 |   |
| Net  cash provided by financing activities                                                |       | 2,193                                     |       | 1,644 |   |
| **Net Increase (Decrease) in  Cash and Cash Equivalents**                                 |       | 6,224                                     |       | (2,154 | ) |
| **Cash and Cash Equivalents,  Beginning of Period**                                       |       | 8,467                                     |       | 15,731 |   |
| **Cash and Cash Equivalents,  End of Period**                                             |       | $                                         | 14,691     |   | $ | 13,577 |   |
|                                                                                      |       |                                      |       |   |   |
| Supplemental Disclosures of  Cash Flow Information:                                       |       |                                      |       |   |   |
| Cash  paid for interest                                                                   |       | $                                         | 62         |   | $ | 212 |   |
| Cash  paid for income taxes                                                               |       | $                                         | 137        |   | $ | 2,188 |   |
| Supplemental Disclosures of  Non-Cash Investing and Financing Activities:                 |       |                                      |       |   |   |
| Purchase  of equipment under capital lease obligations                                    |       | $                                         | 1,438      |   | $ | — |   |

 

The accompanyingnotes are an integral part of these Consolidated Financial Statements.

 

6

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**MOTHERSWORK, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**December 31,2004**

(unaudited)

 

**1.****              BASIS OF FINANCIAL STATEMENTPRESENTATION**

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance with therequirements for Form 10-Q and Article 10 of Regulation S-X and,accordingly, certain information and footnote disclosures have been condensedor omitted.  Reference is made to theAnnual Report on Form 10-K as of and for the year ended September 30,2004 for Mothers Work, Inc. and subsidiaries (the “Company” or “MothersWork”) as filed with the Securities and Exchange Commission, for additionaldisclosures including a summary of the Company’s accounting policies.

 

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

 

The Company operates on a fiscalyear ending September 30 of each year. All references to fiscal years of the Company refer to fiscal yearsended on September 30 in those years. For example, the Company’s “fiscal 2005” will end on September 30,2005.  Certainreclassifications have been made to the prior year consolidated financialstatements to conform to the current year presentation.

 

**2.****              RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS**

 

In May 2005, the Company completed a review ofits historical lease accounting methods to determine whether these methods werein accordance with the views expressed by the Office of the Chief Accountant ofthe Securities and Exchange Commission (“SEC”) on February 7, 2005 in aletter to the American Institute of Certified Public Accountants and otherrecent interpretations regarding certain operating lease accounting issues and theirapplication under accounting principles generally accepted in the United Statesof America (“GAAP”).  As a result of theCompany’s review, it determined that, with regard to its method of accountingfor leases, its historical methods of accounting for rent holidays and tenantimprovement allowances, and of determining the amortization period forleasehold improvements for certain leased properties, were not in accordancewith GAAP.  As a result, on May 10,2005, the Company filed a Current Report on Form 8-K with the SECannouncing its decision to restate the previously issued consolidated financialstatements contained in its Annual Report on Form 10-K for the year ended September 30,2004 and the Quarterly Report on Form 10-Q for the quarterly period ended December 31,2004  (the “Restatement”).

 

A discussion of each of the aforementioned leaseaccounting matters is presented below:

 

*Rent Holiday*.  The Company hashistorically recognized rent holiday periods and scheduled rent increases on astraight-line basis over the lease term beginning with the commencement date ofthe lease, which is typically the store opening date.  The Company has determined that the leaseterm should commence on the date it takes possession of the leased property,which is generally four to six weeks prior to a store’s opening date.

 

*Tenant Improvement Allowances*.  The Company hashistorically accounted for tenant improvement allowances as reductions to therelated leasehold improvements in its consolidated balance sheets and asreductions of capital expenditures in investing activities in its consolidatedstatements of cash flows.  The Companyhas now determined that allowances should be recorded as deferred rentliabilities in its consolidated balance sheets and as a component of operatingactivities in its consolidated statements of cash flows.

 

*Amortization of Leasehold Improvements.* Historically, the life used for certain leasehold improvements by theCompany in some instances was longer than the lease term for such relatedleases.  As part of the Company’s reviewassociated with lease matters, the Company has determined that the amortizationperiod for leasehold improvements should be consistent with the straight-linerent expense period for each of its leases. The lives for all leasehold improvements have been reviewed to ensurethat the amortization is now recorded based on the lesser of the estimateduseful life of the asset or the lease term.

 

7

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The primary effects of thecorrections are: (i) to accelerate the rent expense on properties theCompany occupied before payment of rents was required (rent holidays); (ii) toincrease depreciation and amortization expense and decrease store occupancyexpense (both of which are components of selling, general and administrativeexpenses) to reflect the proper accounting for tenant improvement allowances;and (iii) to accelerate the amortization of leasehold improvements onthose leased properties where the lease term is shorter than the estimateduseful economic life of those assets.  The cumulative effect of these accounting changes is a reduction toretained earnings of $2,533,000 as of the beginning of fiscal 2004 andincremental decreases to retained earnings of $834,000 and $304,000 for fiscal2004 and the first quarter of fiscal 2005, respectively.  TheRestatement decreased  reporteddiluted earnings per share by $0.15 and $0.06, respectively, for fiscal 2004 andthe first quarter of fiscal 2005.  The restated consolidated financialstatements reflect adjustments that have no impact on the Company’s previouslyreported sales or the Company’s compliance with any financial covenant underits revolving credit facility or other debt instruments.

 

The consolidated financial statementsincluded in this Form 10-Q/A have been restated to reflect the adjustmentsdescribed above.  The following is asummary of the impact of the Restatement on (i) the consolidated balancesheets as of December 31, 2004 and September 30, 2004, (ii) theconsolidated statements of operations for the three months ended December 31,2004 and 2003, and (iii) the consolidated statements of cash flows for thethree months ended December 31, 2004 and 2003. In addition, for September 30,2004, investments in auction rate securities have been reclassified from cashand cash equivalents to short-term investments in the consolidated balancesheet.  The reclassification was effectedas the securities had stated maturities beyond three months but are priced andtraded as short-term investments due to the liquidity provisions at specifiedinterest rate reset dates, typically every 7, 28 or 35 days.

 

(in thousands, except per shareamounts)

 

***CONSOLIDATED BALANCE SHEET****

 
| ** **                                       | ** ** | **December 31, 2004**  | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **As Reported**             | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| Property, plant and equipment,  net              |       | $                           | 63,423     |   | $ | 18,056 |   | $ | 81,479 |   |
| Deferred income taxes –  non-current        |       | 11,504                      |       | 2,016 |   | 13,520 |   |
| Total other assets                               |       | 67,471                      |       | 2,016 |   | 69,487 |   |
| Total assets                                     |       | 260,929                     |       | 20,072 |   | 281,001 |   |
|                                             |       |                        |       |   |   |   |   |
| Accrued expenses and other  current liabilities  |       | 35,251                      |       | 3,782 |   | 39,033 |   |
| Total current liabilities                        |       | 59,124                      |       | 3,782 |   | 62,906 |   |
| Deferred rent and other  non-current liabilities |       | 6,733                       |       | 19,961 |   | 26,694 |   |
| Total liabilities                                |       | 194,442                     |       | 23,743 |   | 218,185 |   |
| Retained earnings                                |       | 3,710                       |       | (3,671 | ) | 39 |   |
| Total stockholders’ equity                  |       | 66,487                      |       | (3,671 | ) | 62,816 |   |
| Total liabilities and  stockholders’ equity |       | 260,929                     |       | 20,072 |   | 281,001 |   |
|                                             |       |                        |       |   |   |   |   |
| ** **                                       | ** ** | **September 30, 2004** | ** ** |
| ** **                                       | ** ** | **As Reported**             | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| Cash and cash equivalents                        |       | $                           | 12,867     |   | $ | (4,400 | ) | $ | 8,467 |   |
| Short-term investments                           |       | 2,000                       |       | 4,400 |   | 6,400 |   |
| Property, plant and equipment,  net              |       | 60,288                      |       | 18,174 |   | 78,462 |   |
| Deferred income taxes –  non-current        |       | 11,504                      |       | 1,813 |   | 13,317 |   |
| Total other assets                               |       | 67,499                      |       | 1,813 |   | 69,312 |   |
| Total assets                                     |       | 251,383                     |       | 19,987 |   | 271,370 |   |
|                                             |       |                        |       |   |   |   |   |
| Accrued expenses and other  current liabilities  |       | 30,561                      |       | 3,935 |   | 34,496 |   |
| Total current liabilities                        |       | 50,628                      |       | 3,935 |   | 54,563 |   |
| Deferred rent and other  non-current liabilities |       | 6,856                       |       | 19,419 |   | 26,275 |   |
| Total liabilities                                |       | 185,113                     |       | 23,354 |   | 208,467 |   |
| Retained earnings                                |       | 3,653                       |       | (3,367 | ) | 286 |   |
| Total stockholders’ equity                  |       | 66,270                      |       | (3,367 | ) | 62,903 |   |
| Total liabilities and  stockholders’ equity |       | 251,383                     |       | 19,987 |   | 271,370 |   |

 

8

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***CONSOLIDATED STATEMENTS OFOPERATIONS****

 
| ** **                                    | ** ** | **Three Months Ended  December 31, 2004** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                    | ** ** | **As Reported**                                | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| Selling, general and  administrative expenses |       | $                                              | 66,563     |   | $ | 507 |   | $ | 67,070 |   |
| Operating income                              |       | 3,850                                          |       | (507 | ) | 3,343 |   |
| Income (loss) before income  taxes            |       | 95                                             |       | (507 | ) | (412 | ) |
| Income tax provision (benefit)                |       | 38                                             |       | (203 | ) | (165 | ) |
| Net income (loss)                             |       | 57                                             |       | (304 | ) | (247 | ) |
| Net income (loss) per share—Basic        |       | 0.01                                           |       | (0.06 | ) | (0.05 | ) |
| Net income (loss) per share—Diluted      |       | 0.01                                           |       | (0.06 | ) | (0.05 | ) |
|                                          |       |                                           |       |   |   |   |   |
| ** **                                    | ** ** | **Three Months Ended  December 31, 2003** | ** ** |
| ** **                                    | ** ** | **As Reported**                                | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| Selling, general and  administrative expenses |       | $                                              | 62,915     |   | $ | 214 |   | $ | 63,129 |   |
| Operating income                              |       | 7,115                                          |       | (214 | ) | 6,901 |   |
| Income before income taxes                    |       | 3,424                                          |       | (214 | ) | 3,210 |   |
| Income tax provision                          |       | 1,370                                          |       | (75 | ) | 1,295 |   |
| Net income                                    |       | 2,054                                          |       | (139 | ) | 1,915 |   |
| Net income per share—Basic               |       | 0.39                                           |       | (0.02 | ) | 0.37 |   |
| Net income per share—Diluted             |       | 0.37                                           |       | (0.03 | ) | 0.34 |   |

 

***CONSOLIDATED STATEMENT OF CASHFLOWS****

 
| ** **                                                        | ** ** | **Three Months Ended  December 31, 2004** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                        | ** ** | **As Reported**                                | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| **Cash Flows from Operating  Activities**                         | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                 |       | $                                              | 57         |   | $ | (304 | ) | $ | (247 | ) |
| Depreciation and amortization                                     |       | 2,623                                          |       | 1,099 |   | 3,722 |   |
| Loss on impairment of  long-lived assets                          |       | 458                                            |       | 127 |   | 585 |   |
| Loss on disposal of assets                                        |       | 263                                            |       | (10 | ) | 253 |   |
| Deferred income tax benefit                                       |       | (45                                            | )          | (203 | ) | (248 | ) |
| Provision for deferred rent                                       |       | 243                                            |       | (243 | ) | — |   |
| Prepaid expenses and other  assets                                |       | 2,249                                          |       | (224 | ) | 2,025 |   |
| Accounts payable, accrued  expenses and other current liabilities |       | 5,089                                          |       | 223 |   | 5,312 |   |
| Deferred rent and other  non-current liabilities                  |       | —                                         |       | 419 |   | 419 |   |
| Net cash provided by operating  activities                        |       | 5,490                                          |       | 884 |   | 6,374 |   |
| **Cash Flows from Investing  Activities**                         |       |                                           |       |   |   |   |   |
| Capital expenditures                                              |       | (5,354                                         | )          | (884 | ) | (6,238 | ) |
| Net cash used in investing  activities                            |       | (1,459                                         | )          | (884 | ) | (2,343 | ) |
| **Net Increase in Cash and Cash Equivalents**                     |       | 6,224                                          |       | — |   | 6,224 |   |
|                                                                   |            |                                                |            |  |  |  |  |  |  |  |

 

9

----

 
| ** **                                                        | ** ** | **Three Months Ended  December 31, 2003** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                        | ** ** | **As Reported**                                | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| **Cash Flows from Operating  Activities**                         | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                        |       | $                                              | 2,054      |   | $ | (139 | ) | $ | 1,915 |   |
| Depreciation and amortization                                     |       | 2,487                                          |       | 951 |   | 3,438 |   |
| Loss on impairment of  long-lived assets                          |       | 142                                            |       | (5 | ) | 137 |   |
| Loss on disposal of assets                                        |       | 77                                             |       | (16 | ) | 61 |   |
| Deferred income tax benefit                                       |       | (38                                            | )          | (74 | ) | (112 | ) |
| Provision for deferred rent                                       |       | 159                                            |       | (159 | ) | — |   |
| Trade receivables                                                 |       | (85                                            | )          | (184 | ) | (269 | ) |
| Prepaid expenses and other  assets                                |       | 787                                            |       | (672 | ) | 115 |   |
| Accounts payable, accrued  expenses and other current liabilities |       | (1,688                                         | )          | (194 | ) | (1,882 | ) |
| Deferred rent and other  non-current liabilities                  |       | —                                         |       | 1,987 |   | 1,987 |   |
| Net cash provided by operating  activities                        |       | 7,795                                          |       | 1,495 |   | 9,290 |   |
| **Cash Flows from Investing  Activities**                         |       |                                           |       |   |   |   |   |
| Capital expenditures                                              |       | (3,635                                         | )          | (1,495 | ) | (5,130 | ) |
| Net cash used in investing  activities                            |       | (11,593                                        | )          | (1,495 | ) | (13,088 | ) |
| **Net Decrease in Cash and Cash Equivalents**                     |       | (2,154                                         | )          | — |   | (2,154 | ) |
|                                                                   |            |                                                |            |  |  |  |  |  |  |  |

 

----

* The tables include only those line items thathave changed as a result of the Restatement.

 

Certain amounts in Notes 3, 4, 6 and 9 havebeen restated to reflect the restatement adjustments described above.

 

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

 

The Company follows the Financial AccountingStandards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 128,“Earnings Per Share.”  Basic earnings pershare (“Basic EPS”) is computed by dividing net income by the weighted averagenumber of common shares outstanding.  Diluted earnings per share (“DilutedEPS”) is computed by dividing net income by the weighted average number ofcommon shares outstanding, after giving effect to the potential dilution fromthe exercise of securities, such as stock options and warrants, into shares ofcommon stock as if those securities were exercised.

 

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

 
| ** **                                                                              | ** ** | **Three Months Ended  December 31, 2004** | ** ** | **Three Months Ended  December 31, 2003** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                              | ** ** | **(As Restated – See Note 2)**                 | ** ** | **(As Restated – See Note 2)**                 | ** ** |
| ** **                                                                              | ** ** | **Net  Loss**                                       | ** ** | **Shares**                                          | ** ** | **EPS** | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Basic EPS                                                                               |       | $                                                   | (247       | )                                                   | 5,216      |   | $ | (0.05 | ) | $ | 1,915 |   | 5,234 |   | $ | 0.37 |   |
| Incremental  shares from the assumed exercise of outstanding stock options and warrants |       | —                                              |       | —                                              |       |   |   | — |   | 325 |   |   |   |
|                                                                                    |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Diluted EPS                                                                             |       | $                                                   | (247       | )                                                   | 5,216      |   | $ | (0.05 | ) | $ | 1,915 |   | 5,559 |   | $ | 0.34 |   |

 

Options to purchase 272,250shares were outstanding as of December 31, 2003, but were not included inthe computation of Diluted EPS as their effect would have beenantidilutive.  For the three months ended December 31, 2004, since the Companyincurred a loss for this period, all of the outstanding stock options andwarrants were excluded from the calculationof Diluted EPS as their effect would have been antidilutive.  These options and warrants could potentiallydilute EPS in the future.

 

On March 5, 2003, the Boardof Directors approved a share repurchase program under which the Company mayrepurchase up to $10,000,000 of its outstanding common stock from time to timein private transactions or on the open market through March 4, 2005,unless extended.  As of December 31, 2004, the Company hadrepurchased and retired

 

10

----

 

142,269 shares in the aggregateat a total cost of $3,243,000, for an average cost of $22.79 per share.  No repurchases were made during the quarterended December 31, 2004.  The indenture governing the Company’s $125,000,000 of 11 1⁄4% senior notes due 2010 (the “New Senior Notes”)and the terms of its credit facility contain restrictions that place limits oncertain payments by the Company, including payments to repurchase shares of ourcommon stock.  The repurchases of commonstock have been made in compliance with all restrictions under the indenturegoverning the New Senior Notes and the terms of both the Company’s former andnew credit facilities.

 

**4.****              STOCK-BASED COMPENSATION**

 

The Company follows the intrinsicvalue method of accounting for stock-based employee compensation in accordancewith Accounting Principles Board (“APB”) Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations (see Note 8).  The following tables illustrate the effect onnet income and earnings per share if the Company had accounted for its stockoption plans using the fair value method of accounting under SFAS No. 123,“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accountingfor Stock-Based Compensation—Transition and Disclosure” (in thousands, exceptper share amounts):

 
| ** **                   | ** **                                                                                                                | **Three Months Ended  December 31,** | ** ** |
|------------------------------|---------------------------------------------------------------------------------------------------------------------------|-------------------------------------------|------------|
| ** **                   | ** **                                                                                                                | **2004**                                  | ** ** | **2003** | ** ** |
| ** **                   | ** **                                                                                                                | **(As Restated – See Note 2)**       | ** ** |
| Net income (loss)            |                                                                                                                      | $                                         | (247       | ) | $ | 1,915 |   |
| Deduct:                      | Total stock-based employee  compensation expense determined under the fair value based method for all  grants, net of tax |                                      | (727       | ) | (482 | ) |
| Pro forma net income (loss)  |                                                                                                                      | $                                         | (974       | ) | $ | 1,433 |   |
|                         |                                                                                                                      |                                      |       |   |   |
| Basic EPS:                   |                                                                                                                      |                                      |       |   |   |
| As  restated                 |                                                                                                                      | $                                         | (0.05      | ) | $ | 0.37 |   |
| Pro  forma net income (loss) |                                                                                                                      | $                                         | (0.19      | ) | $ | 0.27 |   |
|                         |                                                                                                                      |                                      |       |   |   |
| Diluted EPS:                 |                                                                                                                      |                                      |       |   |   |
| As  restated                 |                                                                                                                      | $                                         | (0.05      | ) | $ | 0.34 |   |
| Pro  forma net income (loss) |                                                                                                                      | $                                         | (0.19      | ) | $ | 0.26 |   |
|                              |                                                                                                                           |                                           |            |  |  |  |  |  |

 

In December 2004, the FASB revised SFAS No. 123,by issuing SFAS 123(R), “Share-Based Payment”-see Note 8.

 

Pro forma Diluted EPS is computed by dividingpro forma net income (loss) by the pro forma weighted average number of sharesoutstanding after giving effect to the potential dilution from the exercise ofsecurities, such as stock options, into shares of common stock as if thosesecurities were exercised as of the beginning of the period presented.

 

During the three months ended December 31,2004 and 2003, a total of 273,550 and 150,200 stock options, respectively, weregranted to certain employees and non-employee directors for the purchase of theCompany’s common stock at prices not less than the fair market value of theCompany’s common stock on the date of grant.

 

The weighted average fair valueof the options granted during the three months ended December 31,****2004 and 2003 is estimated at $8.60 and $16.04 per share,respectively.  The weighted average fairvalue is calculated based on the date of grant using the Black-Scholesoption-pricing model with the following weighted average assumptions:

 
| ** **                | ** ** | **Three Months Ended December 31,** | ** ** |
|---------------------------|------------|------------------------------------------|------------|
| ** **                | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
| Dividend yield            |       | none                                     |       | none |   |
| Expected price volatility |       | 59.8                                     | %          | 62.7 | % |
| Risk-free interest rates  |       | 4.0                                      | %          | 3.3 | % |
| Expected lives            |       | 8.1 years                                |       | 8.3 years |   |

 

11

----

 

**5.****              INVENTORIES**

 

Inventories were comprised of the following(in thousands):

 
| ** **       | ** ** | **December 31, 2004** | ** ** | **September 30, 2004** | ** ** |
|------------------|------------|----------------------------|------------|-----------------------------|------------|
| Finished goods   |       | $                          | 86,186     |                        | $          | 81,428 |   |
| Work-in-progress |       | 3,854                      |       | 3,317                       |       |
| Raw materials    |       | 8,073                      |       | 7,998                       |       |
|             |       | $                          | 98,113     |                        | $          | 92,743 |   |

 

**6.****                 ACCRUED EXPENSES AND OTHER CURRENTLIABILITIES**

 

Accrued expenses and other currentliabilities were comprised of the following (in thousands):

 
| ** **                                                        | ** ** | **December 31, 2004**          | ** ** | **September 30, 2004** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|
| ** **                                                        | ** ** | **(As Restated – See Note 2)** | ** ** |
| Salaries, wages, and employee  benefits                           |       | $                                   | 7,461      |                        | $          | 8,944 |   |
| Income taxes payable                                              |       | 1,245                               |       | 1,344                       |       |
| Interest                                                          |       | 5,896                               |       | 2,358                       |       |
| Deferred rent                                                     |       | 3,782                               |       | 3,935                       |       |
| Sales taxes                                                       |       | 2,977                               |       | 2,458                       |       |
| Insurance                                                         |       | 2,866                               |       | 2,425                       |       |
| Rent                                                              |       | 703                                 |       | 608                         |       |
| Audit and legal                                                   |       | 1,658                               |       | 1,671                       |       |
| Reserves recorded in the  iMaternity acquisition (Note 7)         |       | 624                                 |       | 850                         |       |
| Remaining payout for redemption  of Series A Preferred Stock |       | 679                                 |       | 1,052                       |       |
| Accrued store construction  costs                                 |       | 919                                 |       | 1,514                       |       |
| Gift certificates and store  credits                              |       | 5,131                               |       | 2,586                       |       |
| Other                                                             |       | 5,092                               |       | 4,751                       |       |
|                                                              |       | $                                   | 39,033     |                        | $          | 34,496 |   |

 

Interest payments on the NewSenior Notes are made semiannually on February 1st and August 1st.

 

**7.****              iMATERNITY ACQUISITIONEXIT/RESTRUCTURING ACTIVITY**

 

The Company acquired eSpecialtyBrands, LLC (“iMaternity”) on October 17, 2001 (the “Acquisition Date”).  The iMaternity manufacturing and warehousingoperations in Costa Rica have been shut down and are being marketed forsale.  The carrying value of the Costa Rica facilities was recorded at theestimated realizable value as of the Acquisition Date, which was determinedbased on a market survey received from an independent third party, lessestimated selling costs, and is classified as “Assets Held for Sale” in theaccompanying consolidated balance sheets.

 

As of December 31, 2004, the remainingiMaternity acquisition reserves consisted of: (a) lease termination feesof $108,000 related to planned store closures; (b) a severance reserveoutstanding of $350,000 that reflects the remainder of a non-compete andseverance arrangement with a former executive of iMaternity that is payableratably on a monthly basis through September 2006; and (c) thereserve for exit costs of $166,000 that is principally for the expected costsrelated to the Costa Rican facilities.

 

A summary of the charges incurred andreserves recorded in connection with the iMaternity acquisitionexit/restructuring activities as of September 30, 2004 and for the threemonths ended December 31, 2004 is as follows (in thousands):

 
| ** **             | ** ** | **Balance as of  September 30,  2004** | ** ** | **First Quarter  Fiscal 2005 Charges** | ** ** | **Balance as of  December 31, 2004** | ** ** |
|------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|
| Lease termination fees |       | $                                           | 249        |                                   | $          | (141                                      | )          | $ | 108 |   |
| Severance              |       | 400                                         |       | (50                                    | )          | 350                                       |       |
| Exit and other costs   |       | 201                                         |       | (35                                    | )          | 166                                       |       |
|                   |       | $                                           | 850        |                                   | $          | (226                                      | )          | $ | 624 |   |

 

12

----

 

**8.****              NEW ACCOUNTING PRONOUNCEMENTS**

 

***SFAS No. 123(R****)**.******* In December 2004, the FASB revised SFAS No. 123by issuing SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R)replaces SFAS No. 123 and APB Opinion No. 25 and establishesstandards for the accounting for transactions in which an entity exchanges itsequity instruments for goods and services. SFAS No. 123(R) requires that the compensation cost relating toshare-based payment transactions be recognized in financial statements,measured by the fair value of the equity or liability instruments issued, andis effective as of the first reporting period that begins after June 15,2005 for public entities that do not file as small business issuers.  The Company has previously disclosed the proforma impact on its earnings of adopting the fair value method of accountingfor stock based compensation under SFAS No. 123 in notes to its consolidatedfinancial statements for the years ended September 30, 2002, 2003 and 2004and the pro forma impact on the three months ended December 31, 2004 isshown in Note 4 above.  The fairvalue-based method of SFAS No. 123 is similar in most respects to the fairvalue-based method under SFAS No. 123(R), however, certain transition rules ofSFAS No. 123(R) may affect the impact on the Company’s consolidatedfinancial position or results of operations. Such impact, if any, on the Company’s consolidated financial position orresults of operations has not yet been determined.

 

**9.****              GUARANTOR SUBSIDIARIES**

 

Pursuant to the terms of theindenture relating to the New Senior Notes, each of the domestic subsidiariesof Mothers Work, Inc. (the “Guarantor Subsidiaries”) has jointly andseverally 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 condensed consolidatingfinancial information for the Company, the Guarantor Subsidiaries, and theNon–Guarantor Subsidiaries as of and for the three months ended December 31,2004 as presented below has been prepared from the books and records maintainedby the Guarantor Subsidiaries and the Company. The condensed financial information may not necessarily be indicative ofthe results of operations or financial position had the Guarantor Subsidiariesoperated as independent entities. Certain intercompany revenues and expenses included in the subsidiaryrecords are eliminated in consolidation.  As a result of this activity, an amount due to/due from parent willexist at any time.

 

13

----

 

**MothersWork, Inc.**

**CondensedConsolidating Balance Sheet (Restated)**

**December 31,2004**

(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                        |       | $                                   | 14,110     |                        | $          | 38                                                     |       | $                               | 543        |                           | $          | — |   | $ | 14,691 |   |
| Short-term  investments                           |       | 2,500                               |       | —                      |       | —                                                 |       | —                          |       | 2,500                          |       |
| Trade  receivables                                |       | 4,616                               |       | —                      |       | 63                                                     |       | —                          |       | 4,679                          |       |
| Inventories                                       |       | 96,315                              |       | —                      |       | 1,798                                                  |       | —                          |       | 98,113                         |       |
| Deferred  income taxes                            |       | 4,705                               |       | —                      |       | —                                                 |       | —                          |       | 4,705                          |       |
| Prepaid  expenses and other current assets        |       | 3,880                               |       | —                      |       | 267                                                    |       | —                          |       | 4,147                          |       |
| Total  Current Assets                             |       | 126,126                             |       | 38                          |       | 2,671                                                  |       | —                          |       | 128,835                        |       |
| Property, Plant and Equipment,  net               |       | 79,275                              |       | —                      |       | 2,204                                                  |       | —                          |       | 81,479                         |       |
| Assets Held for Sale                              |       | —                              |       | —                      |       | 1,200                                                  |       | —                          |       | 1,200                          |       |
| Other Assets                                      |       | 69,320                              |       | 3                           |       | 164                                                    |       | —                          |       | 69,487                         |       |
| Investments  in and Advances to (from) Affiliates |       | 1,422                               |       | 218,807                     |       | (4,364                                                 | )          | (215,865                        | )          | —                         |       |
| Total  Assets                                     |       | $                                   | 276,143    |                        | $          | 218,848                                                |       | $                               | 1,875      |                           | $          | (215,865 | ) | $ | 281,001 |   |
|                                              |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**    |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Current Liabilities:                              |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Line of  credit borrowings                        |       | $                                   | —     |                        | $          | —                                                 |       | $                               | —     |                           | $          | — |   | $ | — |   |
| Current  portion of long-term debt                |       | 728                                 |       | —                      |       | —                                                 |       | —                          |       | 728                            |       |
| Accounts  payable                                 |       | 23,119                              |       | 26                          |       | —                                                 |       | —                          |       | 23,145                         |       |
| Accrued  expenses and other current liabilities   |       | 35,085                              |       | 3,487                       |       | 461                                                    |       | —                          |       | 39,033                         |       |
| Total  Current Liabilities                        |       | 58,932                              |       | 3,513                       |       | 461                                                    |       | —                          |       | 62,906                         |       |
| Long-Term Debt                                    |       | 128,585                             |       | —                      |       | —                                                 |       | —                          |       | 128,585                        |       |
| Deferred  Rent and Other Non-Current Liabilities  |       | 25,810                              |       | —                      |       | 884                                                    |       | —                          |       | 26,694                         |       |
| Total  Liabilities                                |       | 213,327                             |       | 3,513                       |       | 1,345                                                  |       | —                          |       | 218,185                        |       |
|                                              |       |                                |       |                        |       |                                                   |       |                            |       |                           |       |
| Total Stockholders’ Equity                   |       | 62,816                              |       | 215,335                     |       | 530                                                    |       | (215,865                        | )          | 62,816                         |       |
| Total  Liabilities and Stockholders’ Equity  |       | $                                   | 276,143    |                        | $          | 218,848                                                |       | $                               | 1,875      |                           | $          | (215,865 | ) | $ | 281,001 |   |

 

14

----

 

**MothersWork, Inc.**

**ConsolidatingStatement of Operations (Restated)**

**For TheThree Months Ended December 31, 2004**

(in thousands)

(unaudited)

 
| ** **                                    | ** ** | **Mothers Work  (Parent Company)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries  (Foreign  Companies)** | ** ** | **Consolidating  Eliminations** | ** ** | **Mothers Work  Consolidated** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| Net sales                                     |       | $                                  | 130,683    |                        | $          | 7,036                                                 |       | $                               | 2,936      |                           | $          | (7,036 | ) | $ | 133,619 |   |
| Cost of goods sold                            |       | 61,888                             |       | —                      |       | 1,318                                                 |       | —                          |       | 63,206                         |       |
| Gross  profit                                 |       | 68,795                             |       | 7,036                       |       | 1,618                                                 |       | (7,036                          | )          | 70,413                         |       |
| Selling,  general and administrative expenses |       | 72,673                             |       | 63                          |       | 1,370                                                 |       | (7,036                          | )          | 67,070                         |       |
| Operating  income (loss)                      |       | (3,878                             | )          | 6,973                       |       | 248                                                   |       | —                          |       | 3,343                          |       |
| Interest income (expense), net                |       | (6,745                             | )          | 2,990                       |       | —                                                |       | —                          |       | (3,755                         | )          |
| Equity in earnings of  subsidiaries           |       | 10,211                             |       | —                      |       | —                                                |       | (10,211                         | )          | —                         |       |
| Income  (loss) before income taxes            |       | (412                               | )          | 9,963                       |       | 248                                                   |       | (10,211                         | )          | (412                           | )          |
| Income tax provision (benefit)                |       | (165                               | )          | 3,487                       |       | 101                                                   |       | (3,588                          | )          | (165                           | )          |
| Net income (loss)                             |       | $                                  | (247       | )                           | $          | 6,476                                                 |       | $                               | 147        |                           | $          | (6,623 | ) | $ | (247 | ) |

 

15

----

 

**MothersWork, Inc.**

**ConsolidatingCash Flow Statement (Restated)**

**For TheThree Months Ended December 31, 2004**

(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 (loss)                                                                  |       | $                                   | (247       | )                           | $          | 6,476                                                 |       | $                               | 147        |                           | $          | (6,623 | ) | $ | (247 | ) |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Depreciation  and amortization                                                     |       | 3,640                               |       | —                      |       | 82                                                    |       | —                          |       | 3,722                          |       |
| Loss on  impairment of long-lived assets                                           |       | 585                                 |       | —                      |       | —                                                |       | —                          |       | 585                            |       |
| Loss on  disposal of assets                                                        |       | 253                                 |       | —                      |       | —                                                |       | —                          |       | 253                            |       |
| Accretion  of discount on senior notes                                             |       | 40                                  |       | —                      |       | —                                                |       | —                          |       | 40                             |       |
| Deferred  income tax benefit                                                       |       | (248                                | )          | —                      |       | —                                                |       | —                          |       | (248                           | )          |
| Tax  benefit of stock option exercises                                             |       | 45                                  |       | —                      |       | —                                                |       | —                          |       | 45                             |       |
| Amortization  of deferred financing costs                                          |       | 135                                 |       | —                      |       | —                                                |       | —                          |       | 135                            |       |
| Changes in assets and  liabilities:                                                |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Decrease  (increase) in—                                                      |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Trade  receivables                                                                 |       | (279                                | )          | —                      |       | (18                                                   | )          | —                          |       | (297                           | )          |
| Inventories                                                                        |       | (5,286                              | )          | —                      |       | (84                                                   | )          | —                          |       | (5,370                         | )          |
| Prepaid  expenses and other current assets                                         |       | 2,078                               |       | —                      |       | (53                                                   | )          | —                          |       | 2,025                          |       |
| Investments  in and advances to (from) affiliates                                  |       | (2,507                              | )          | (3,657                      | )          | (459                                                  | )          | 6,623                           |       | —                         |       |
| Increase  (decrease) in—                                                      |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Accounts  payable, accrued expenses and other current liabilities                  |       | 8,039                               |       | (2,825                      | )          | 98                                                    |       | —                          |       | 5,312                          |       |
| Deferred  rent and other non-current liabilities                                   |       | 251                                 |       | —                      |       | 168                                                   |       | —                          |       | 419                            |       |
| Net  cash provided by operating activities                                         |       | 6,499                               |       | (6                          | )          | (119                                                  | )          | —                          |       | 6,374                          |       |
| **Cash Flows from Investing Activities:**                                          |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Purchase  of short-term investments                                                |       | (2,500                              | )          | —                      |       | —                                                |       | —                          |       | (2,500                         | )          |
| Proceeds  of sale from short-term investments                                      |       | 6,400                               |       | —                      |       | —                                                |       | —                          |       | 6,400                          |       |
| Capital  expenditures                                                              |       | (5,907                              | )          | —                      |       | (331                                                  | )          | —                          |       | (6,238                         | )          |
| Purchase  of intangible assets                                                     |       | (1                                  | )          | —                      |       | (4                                                    | )          | —                          |       | (5                             | )          |
| Net  cash used in investing activities                                             |       | (2,008                              | )          | —                      |       | (335                                                  | )          | —                          |       | (2,343                         | )          |
| **Cash Flows from Financing Activities:**                                          |       |                                |       |                        |       |                                                  |       |                            |       |                           |       |
| Increase  in cash overdrafts                                                       |       | 3,120                               |       | —                      |       | —                                                |       | —                          |       | 3,120                          |       |
| Repayment  of long-term debt                                                       |       | (83                                 | )          | —                      |       | —                                                |       | —                          |       | (83                            | )          |
| Payout  for redeemed Series A Preferred Stock                                 |       | (373                                | )          | —                      |       | —                                                |       | —                          |       | (373                           | )          |
| Deferred  financing costs                                                          |       | (586                                | )          |                        |       |                                                  |       |                            |       | (586                           | )          |
| Proceeds  from exercise of stock options                                           |       | 115                                 |       | —                      |       | —                                                |       | —                          |       | 115                            |       |
| Net  cash provided by financing activities                                         |       | 2,193                               |       | —                      |       | —                                                |       | —                          |       | 2,193                          |       |
| **Net Increase (Decrease) in Cash and Cash Equivalents**                           |       | 6,684                               |       | (6                          | )          | (454                                                  | )          | —                          |       | 6,224                          |       |
| **Cash and Cash Equivalents, Beginning of Period**                                 |       | 7,426                               |       | 44                          |       | 997                                                   |       | —                          |       | 8,467                          |       |
| **Cash and Cash Equivalents, End of Period**                                       |       | $                                   | 14,110     |                        | $          | 38                                                    |       | $                               | 543        |                           | $          | — |   | $ | 14,691 |   |

 

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**10.****          COMMITMENTS AND CONTINGENCIES**

 

On January 12, 2005, a purported classaction was filed against the Company in the United States District Court forthe District of Connecticut.  Thecomplaint alleges that, under applicable federal and state law, certain formerand current employees should have received overtime compensation.  The plaintiffs in this case are seekingunspecified actual damages, penalties and attorneys’ fees. At this stage inthese proceedings, the Company is unable to predict the outcome of this case,which the Company is vigorously defending. The Company has undertaken preliminary steps to mediate certain of theseclaims.

 

In addition, from time to time, the Company is named as a defendant in legalactions arising from its normal business activities.  Although the amount of any liability thatcould arise with respect to currently pending actions, including the matterspecifically described above, cannot be accurately predicted, the Company doesnot believe that the resolution of any pending action will have a materialadverse effect on its financial position or results of operations.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**Restatement of Prior Financial Information**

 

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

 

A discussion of each of the aforementioned leaseaccounting matters is presented below:

 

*Rent Holiday*.  We historically haverecognized rent holiday periods and scheduled rent increases on a straight-linebasis over the lease term beginning with the commencement date of the lease,which is typically the store opening date. We have determined that the lease term should commence on the date wetake possession of the leased property, which is generally four to six weeksprior to a store’s opening date.

 

*Tenant Improvement Allowances.*We historically accounted for tenantimprovement allowances as reductions to the related leasehold improvements inour consolidated balance sheets and as reductions of capital expenditures ininvesting activities in our consolidated statements of cash flows.  We have now determined that allowances shouldbe recorded as deferred rent liabilities in our consolidated balance sheets andas a component of operating activities in our consolidated statements of cashflows.

 

*Amortization of Leasehold Improvements.* Historically, the life used for certainleasehold improvements by us in some instances was longer than thestraight-line rent expense period for such related leases.  As part of our review associated with leasematters, we have determined that the amortization period for leaseholdimprovements should be consistent with the straight-line rent expense periodfor each of our leases.  The lives forall leasehold improvements have been reviewed to ensure that the amortizationis now recorded based on the lesser of the estimated useful life of the assetor the lease term.

 

The primary effects of thecorrections are: (i) to accelerate the rent expense on properties theCompany occupied before payment of rents was required (rent holidays); (ii) toincrease depreciation and amortization expense and decrease store occupancyexpense (both of which are components of selling, general and administrativeexpenses) to reflect the proper accounting for tenant improvement allowances;and (iii) to accelerate the amortization of leasehold improvements onthose leased properties where the lease term is shorter than the estimateduseful economic life of those assets.  The cumulative effect of these accounting changes is a reduction toretained earnings of $2.5 million as of the beginning of fiscal 2004 andincremental decreases to retained earnings of $0.8 million and $0.3 millionfor fiscal 2004 and the first quarter of fiscal 2005, respectively.  TheRestatement decreased  reporteddiluted earnings per share by $0.15 and $0.06, respectively, for fiscal 2004 andthe first quarter of fiscal 2005.  The restated financial statements reflectadjustments that have no impact on the Company’s previously reported sales,comparable sales or the Company’s compliance with any financial covenant underits revolving credit facility or other debt instruments.

 

Theconsolidated financial statements included in this Form 10-Q/A have beenrestated to reflect the adjustments described above.  See Note 2 of the Notes to ConsolidatedFinancial Statements included in this Form 10-Q/A for a summary of theimpact of the Restatement on (i) the consolidated balance sheets as of December 31,2004 and September 30, 2004, (ii) the consolidated statements ofoperations for the three months ended December 31, 2004 and 2003, and (iii) theconsolidated statements of cash flows for the three months ended December 31,2004 and 2003.

 

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**Results of Operations**

 

The following tables set forth certainoperating data as a percentage of net sales and as a percentage change for thethree months ended December 31:

 
| ** **                                    | ** ** | **% of Net Sales (1)** | ** ** | **% Increase  (Decrease)** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **2004**               | ** ** | **2003**                   | ** ** | **2004 vs. 2003** | ** ** |
| ** **                                    | ** ** | **(Restated)**         | ** ** | **(Restated)**             | ** ** |
| Net sales                                     |       | 100.0                  | %          | 100.0                      | %          | 1.5 | % |
| Cost of goods sold                            |       | 47.3                   |       | 46.8                       |       | 2.5 |   |
| Gross  profit                                 |       | 52.7                   |       | 53.2                       |       | 0.5 |   |
| Selling, general and  administrative expenses |       | 50.2                   |       | 47.9                       |       | 6.2 |   |
| Operating  income                             |       | 2.5                    |       | 5.2                        |       | (51.6 | ) |
| Interest expense, net                         |       | 2.8                    |       | 2.8                        |       | 1.7 |   |
| Income  (loss) before income taxes            |       | (0.3                   | )          | 2.4                        |       | (112.8 | ) |
| Income tax provision (benefit)                |       | (0.1                   | )          | 1.0                        |       | (112.7 | ) |
| Net income (loss)                             |       | (0.2                   | )%         | 1.5                        | %          | (112.9 | ) |

 

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

 

The following table sets forthcertain information concerning the number of our stores and leased departmentsfor the three months ended December 31:

 
| ** **          | ** ** | **2004**   | ** ** | **2003**                | ** ** |
|---------------------|------------|------------|------------|-------------------------|------------|
| ** **          | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** | **Stores** | ** ** | **Leased  Departments** | ** ** | **Total Retail  Locations** | ** ** |
| Beginning of period |       | 883        |       | 232                     |       | 1,115 |   | 851 |   | 155 |   | 1,006 |   |
| Opened              |       | 12         |       | 1                       |       | 13 |   | 24 |   | 3 |   | 27 |   |
| Closed              |       | (15        | )          | (2                      | )          | (17 | ) | (5 | ) | (1 | ) | (6 | ) |
| End of period       |       | 880        |       | 231                     |       | 1,111 |   | 870 |   | 157 |   | 1,027 |   |

 

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

 

**Three Months Ended December 31, 2004 and2003**

 

***NetSales.***  Our net sales for the firstquarter of fiscal 2005 increased by 1.5%, or $1.9 million, to $133.6 millionfrom $131.7 million for the first quarter of fiscal 2004.  The increase in net sales for the quarter wasdriven by increased retail location count, as well as increases in sales fromour internet business and marketing partnerships, partially offset by adecrease in comparable store sales. Comparable store sales for the first quarter of fiscal 2005 decreased by4.2%, based on 894 locations, versus a comparable store sales decrease of 5.0%during the first quarter of fiscal 2004, based on 845 locations.  The decrease incomparable store sales in the first quarter of fiscal 2005 reflected thecontinued significant impact on our sales of increased competition in thematernity apparel business.

 

As of December 31, 2004, we operated atotal of 880 stores and 1,111 total retail locations, compared to 870 storesand 1,027 total retail locations as of December 31, 2003.  As of December 31, 2004, our store totalincluded 39 multi-brand stores, including 6 Destination Maternity superstores,with the remaining multi-brand stores predominantly under the Mimi Maternitybrand.  In comparison, as of December 31,2003, we operated 7 multi-brand stores. These multi-brand store figures exclude our A Pea in the Podstores, which have traditionally carried a full line of both A Pea in the Podand Mimi Maternity branded merchandise. During the first quarter of fiscal 2005, we opened 12 stores, including4 multi-brand stores, and closed 15 stores, with 8 of these store closingsrelated to multi-brand store openings, including the opening of 2 DestinationMaternity superstores.

 

***GrossProfit.***  Our gross profit for the firstquarter of fiscal 2005 increased by 0.5%, or $0.4 million, to $70.4 millionfrom $70.0 million for the first quarter of fiscal 2004, reflecting theincrease in net sales, partially offset by a decrease in

 

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gross margin.  Gross profitas a percentage of net sales (gross margin) for the first quarter of fiscal2005 decreased by 48 basis points (0.48 percentage points of net sales) to52.7% from 53.2% for the first quarter of fiscal 2004.  The decrease ingross margin versus last year primarily reflects the additional markdowns recognized compared to last year, to reduceseasonal and overall inventory levels and to stimulate sales.

 

***Selling,General and Administrative Expenses.*** Our selling, general and administrative expenses for the first quarterof fiscal 2005 increased by 6.2%, or approximately $4.0 million, to $67.1million from $63.1 million for the first quarter of fiscal 2004.  Compared to the first quarter of fiscal 2004,store rent and related expenses increased by $1.9 million, primarily resultingfrom our new store openings.  As a percentage of net sales, selling,general and administrative expenses increased to 50.2% for the first quarter offiscal 2005 compared to 47.9% for the first quarter of fiscal 2004.  This increase resulted primarily from anincreased store occupancy expense ratio and, to a lesser extent, an increasedstore payroll expense ratio, each resulting from the4.2% decrease in comparable store sales for the quarter, partially offset by alower employee benefits expense ratio. In addition, we incurred charges relating to store closings of $0.6million for the first quarter of fiscal 2005 versus $0.3 million for the firstquarter of fiscal 2004, and incurred impairment charges for write-downs ofstore long-lived assets of $0.6 million for the first quarter of fiscal 2005versus $0.1 million for the first quarter of fiscal 2004.

 

***OperatingIncome.***  Our operating income for the first quarter of fiscal 2005decreased by 51.6%, or $3.6 million, to $3.3 million from $6.9 million forthe first quarter of fiscal 2004, due to higher selling, general andadministrative expenses which more than offset the impact of increased salesvolume and gross profit.  Operatingincome as a percentage of net sales for the first quarter of fiscal 2005decreased to 2.5% from 5.2% for the first quarter of fiscal 2004 due to ourincreased operating expense ratio and, to a much lesser extent, decreased grossmargin.

 

***InterestExpense, Net.***  Our net interest expense for thefirst quarter of fiscal 2005 increased by 1.7%, or $0.1 million, to $3.8million from $3.7 million for the first quarter of fiscal 2004.  The increase in net interest expense for thefirst quarter of fiscal 2005 reflects decreased interest income, due to asmaller average balance of cash and short-term investments, and increasedamortization expense of deferred financing costs related to our new credit facilityentered into in October 2004.  During thequarters ended December 31, 2004 and 2003, we did not have any directborrowings under either our former or new credit facilities.

 

***IncomeTax Provision.*** Oureffective tax rate was a benefit of 40.0% for the first quarter of fiscal 2005and a provision of 40.3% for the first quarter of fiscal 2004.  We expect our effective tax rate for the full year fiscal 2005 to be 40.0%, equal toour effective tax rate for the full year fiscal 2004.

 

***NetIncome (Loss).***  Net loss for the first quarter offiscal 2005 was $0.2 million, or $(0.05) per share (diluted) compared to netincome of $1.9 million, or $0.34 per share (diluted) for the first quarter offiscal 2004, representing a 112.9% decrease in net income and a 114.7% decreasein diluted earnings per share.

 

Our average diluted sharesoutstanding of 5,216,000 for the first quarter of fiscal 2005 was 6.2% lowerthan the 5,559,000 average diluted shares outstanding for the first quarter offiscal 2004.  Since we incurred a loss forthe first quarter of fiscal 2005, all of the outstanding stock options andwarrants were excluded from the calculationof Diluted EPS as their effect would have been antidilutive.  These options and warrants could potentiallydilute EPS in the future.  Additionally,as of December 31, 2004, we have repurchased 142,269 shares of our commonstock pursuant to our share repurchase program. We did not repurchase any shares of our common stock during the firstquarter of fiscal 2005.

 

**Seasonality**

 

Our business, like that of manyother retailers, is seasonal.  Our quarterly net sales have historically beenhighest in our third fiscal quarter, corresponding to the Spring sellingseason, followed by the first fiscal quarter, corresponding to the Fall/holidayselling season.  Given the typically highergross 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 arrangement,adverse weather conditions, shifts in the timing of certain holidays andpromotions, changes in inventory and production levels and the timing ofdeliveries of inventory, and changes in our merchandise mix.

 

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**Liquidity and Capital Resources**

 

Our cash needs have primarilybeen for: (i) debt service, (ii) capital expenditures, includingleasehold improvements, fixtures and equipment for new stores; storerelocations and expansions of our existing stores as well as improvements andnew equipment for our distribution and corporate facilities and informationsystems, and (iii) working capital, including inventory to support our newbusiness initiatives and our new and existing stores.  We have historically financed these capitalrequirements from cash flows from operations, borrowings under our creditfacility or available cash balances.

 

Cash and cash equivalentsincreased by $6.2 million during the first quarter of fiscal 2005 compared to adecrease of $2.2 million for the first quarter of fiscal 2004.  Cashprovided by operations decreased by $2.9 million to $6.4 million for the firstquarter of fiscal 2005 from $9.3 million for the first quarter of fiscal2004.  This decrease in cash provided byoperations was primarily the result of decreased net income, as well as lesscash generated from operating working capital compared to the first quarter offiscal 2004.  During the first quarter of fiscal 2005, weused our cash provided by operations primarily to pay for capitalexpenditures.  During the first quarterof fiscal 2004, we used our cash provided by operations to pay for capitalexpenditures and to increase our short-term investments.

 

For the first quarter of fiscal 2005, wespent $6.2 million on capital expenditures, including $4.8 millionfor leasehold improvements, fixtures and equipment principally for new storefacilities, as well as improvements to existing stores, and $1.4 millionfor our distribution and corporate facilities and information systems.  This compares to $5.1 million in capitalexpenditures for the first quarter of fiscal 2004, of which $4.0 millionwas spent for new store facilities and improvement to existing stores andretail locations, and $1.1 million for our distribution and corporatefacilities and information systems.  The increase in capital expenditures wasprimarily due to increased expenditures compared to last year for new storeopenings, primarily due to multi-brand store openings, as well as increasedexpenditures for store relocations and expansions, and improvements to existingstores.

 

On March 5, 2003, our Board of Directorsapproved a share repurchase program under which we may repurchase up to $10.0million of our outstanding common stock from time to time in privatetransactions or on the open market through March 4, 2005, unlessextended.  As of December 31, 2004,we have repurchased and retired 142,269 shares in the aggregate pursuant tothis program at a total cost of $3.2 million, at an average cost of $22.79 pershare.  No repurchases were made during the quarter ended December 31,2004.  The indenture governing theNew Senior Notes and the terms of both our former and new credit facilitiescontain restrictions that place limits on certain payments by us, includingpayments to repurchase shares of our common stock.  Our repurchases of common stock have beenmade in compliance with all restrictions under the indenture governing the New SeniorNotes and the terms of both the former and new credit facilities (see below).

 

On October 15, 2004, we entered into anew five-year $60.0 million senior secured revolving credit facility (the “NewCredit Facility”) which replaced our former $60 million credit facility.  The New Credit Facility will mature on October 15,2009.  We paid certain closing fees inconnection with the negotiation and execution of the New Credit Facility.  We also pay an unused line fee under the NewCredit Facility and certain early termination fees if the New Credit Facilityis terminated prior to its third anniversary. There are no financial covenantrequirements under the New Credit Facility unless either (i) Excess Availability (as defined in the agreement)falls below $10 million, or (ii) average Financial Covenant AdjustedAvailability (as defined in the agreement) for any calendar month is less than$15 million. If either of the events in items (i) or (ii) aboveoccurs, we would be required to meet a certain minimum fixed charge coverageratio (which increases from 1.00x during the first two years of the New CreditFacility to 1.10x during the fifth year of the New Credit Facility).  Duringthe period of time that the New Credit Facility was outstanding during the firstquarter of fiscal 2005, we exceeded the requirements of Excess Availability andFinancial Covenant Adjusted Availability. The New Credit Facility issecured by a security interest in our accounts receivable, inventory, realestate interests, cash, intangibles and certain other assets.  The interest rate on outstanding borrowingsis equal to, at our election, either the lender’s prime rate or the lender’sLIBOR rate plus the applicable margin. The applicable margin for LIBOR rate borrowings is variable, rangingfrom 1.25% to 1.75%, based upon the availability calculation made in accordancewith the agreement.

 

The letter of credit obligations that were inplace under the former credit facility and the special purpose letter of creditfacility are now governed by the terms of the New Credit Facility.  Asof December 31, 2004, outstanding borrowings under the New Credit Facilityconsisted of no direct borrowings and $6.9 million in letters of credit, withavailable borrowings of $53.1 million.   We expect that we will have directborrowings under our New Credit Facility during certain periods of fiscal 2005,reflecting seasonal variations in cash flow.

 

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

 

**Critical Accounting Policies and Estimates**

 

Our consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States. 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 ofthe consolidated financial statements and the reported amounts of net sales andexpenses during the reporting period.

 

Our significant accountingpolicies were described in Note 3 of “Notes to Consolidated FinancialStatements” contained in our Annual Report on Form 10-K/A for the fiscalyear ended September 30, 2004.  We believe that the followingdiscussion addresses our critical accounting policies, which are those that aremost important to the portrayal of our financial condition and results ofoperations and require management’s most difficult, subjective and complexjudgments, often as a result of the need to make estimates about the effect ofmatters that are inherently uncertain.  If actual results were to differsignificantly from estimates made, future reported results could be materiallyaffected.  However, we are not currently aware of any reasonably likelyevents or circumstances that would result in materially different results.

 

Our senior management hasreviewed these critical accounting policies and estimates and the relatedManagement’s Discussion and Analysis of Financial Condition and Results ofOperations with the Audit Committee of our Board of Directors.

 

***Inventories.*** We value our inventories, whichconsist primarily of maternity apparel, at the lower of cost or market. Cost isdetermined on the first-in, first-out method (FIFO) and includes the cost ofmerchandise, freight, duty, agent commissions and broker fees.  A periodic review of inventory quantities onhand is performed in order to determine if inventory is properly valued at thelower of cost or market.  Factors relatedto current inventories such as future consumer demand and fashion trends,current aging, current analysis of merchandise based on receipt date, currentand anticipated retail markdowns or wholesale discounts, and class or type ofinventory are analyzed to determine estimated net realizable values. Criteria utilized by the Company to quantify aging trends include factors suchas the amount of merchandise received within the past twelve months,merchandise received more than one year before with quantities on-hand inexcess of 12 months of sales, and merchandise currently selling belowcost.  A provision is recorded to reduce the cost of inventories to theestimated net realizable values, if required. Inventories as of December 31,2004 and September 30, 2004 totaled $98.1 million and $92.7 million,respectively, representing approximately 34.9% and 34.2% of total assets,respectively.  Given the significance ofinventories to our consolidated financial statements, the determination of netrealizable values is considered to be a critical accounting estimate.  Any significant unanticipated changes in thefactors noted above could have a significant impact on the value of ourinventories and our reported operating results.

 

***Long-LivedAssets.***  Our long-lived assets consistprincipally of store leasehold improvements and are included in the “Property,Plant and Equipment, net” line item in our consolidated balance sheets.  These long-lived assets are recorded at costand are amortized using the straight-line method over the shorter of the leaseterm or their estimated useful life, generally ten years.  Net property,plant and equipment as of December 31, 2004 and September 30, 2004totaled $81.5 million and $78.5 million, respectively, representingapproximately 29.0% and 28.9% of total assets, respectively.

 

In assessing potential impairmentof these assets, we periodically evaluate the historical and forecastedoperating results and cash flows on a store-by-store basis.  Newly opened stores may take time to generatepositive operating and cash flow results. Factors such as (i) store type, that is, company store or leaseddepartment, (ii) store concept, that is, Motherhood, Mimi Maternity, A Peain the Pod or Destination Maternity, (iii) store location, for example,urban area versus suburb, (iv) current marketplace awareness of ourbrands, (v) local customer demographic data, (vi) anchor storeswithin the malls in which our stores are located and (vii) current fashiontrends are all considered in determining the time frame required for a store toachieve positive financial results, which is assumed to be within two yearsfrom the date a store location is opened. If economic conditions are substantially different from our expectations,the carrying value of certain of our long-lived assets may becomeimpaired.  As a result of our impairment assessment, we recordedwrite-downs of long-lived assets of $0.6 million for the first quarter offiscal 2005, and $0.1 million for the first quarter of fiscal 2004.

 

***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 business

 

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combinations and is separatelydisclosed in our consolidated balance sheets.  As of both December 31,2004 and September 30, 2004, goodwill totaled $50.4 million, representingapproximately 17.9% and 18.6%, respectively, of total assets.  In June 2001,the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFASNo. 142 requires that goodwill no longer be amortized, but instead betested for impairment at least annually or as impairment indicators arise.

 

The impairment test requires usto compare the fair value of business reporting units to their carrying value,including assigned goodwill.  In assessing potential impairment ofgoodwill, we have determined that we have one reporting unit for purposes ofapplying SFAS No. 142 based on our reporting structure.  The fair value of our single reporting unitis determined based on the fair market value of our outstanding common stock ona control basis.  The factors taken into account in determining the fair market valueof our outstanding common stock on a control basis are: (i) the tradingvalue of our outstanding common stock on an established public market, and (ii) thepremium over the trading price of our outstanding common stock that an investorwould pay for a control ownership interest in our Company, as determinedthrough a third party evaluation.  Thecarrying value of our single reporting unit, expressed on a per share basis, isrepresented by our book value per share of outstanding common stock.  We performed the initial adoption impairmenttest in early fiscal 2002.  The resultsof the initial impairment test and the annual impairment test performed as of September 30,2004, 2003 and 2002 indicated the fair value of the reporting unit exceeded thecarrying value.  As of September 30,2004, our book value was $12.08 per share of outstanding common stock and the closingtrading price of our common stock was $14.50 per share.  If the fair value of our outstanding commonstock on a control basis were less than $12.08 per share on September 30,2004, our goodwill would have become impaired.

 

***Accountingfor Income Taxes.***  As partof the process of preparing our consolidated financial statements, we arerequired to estimate our income taxes in each of the jurisdictions in which weoperate.  This process requires us toestimate our actual current tax exposure together with assessing temporarydifferences resulting from differing treatment of items, such as depreciationof property and equipment and valuation of inventories, for tax and accountingpurposes.  We determine our provision forincome taxes based on federal and state tax laws and regulations currently ineffect, some of which have been recently revised.  Legislation changes currently proposed bycertain of the states in which we operate, if enacted, could increase our transactionsor 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.

 

The temporary differences betweenthe book and tax treatment of income and expenses result in deferred tax assetsand liabilities, which are included within our consolidated balancesheets.  We must then assess thelikelihood that our deferred tax assets will be recovered from future taxableincome.  Actual results could differ fromthis assessment if adequate taxable income is not generated in futureperiods.  As of December 31, 2004and September 30, 2004, net deferred tax assets totaled $18.2 million and$18.0 million, respectively, representing approximately 6.5% and 6.6%,respectively, of total assets.  To theextent we believe that recovery of the deferred tax assets is not more likelythan not, we must establish a valuation allowance.  To the extent we establish a valuationallowance or change the allowance in a period, income tax expense will beimpacted.

 

***Accountingfor Contingencies*.**  Fromtime to time, we are named as a defendant in legal actions arising from ournormal business activities.  We account for contingencies such as these inaccordance with SFAS No. 5, “Accounting for Contingencies.”  SFAS No. 5requires us to record an estimated loss contingency when information availableprior to issuance of our consolidated financial statements indicates that it isprobable that an asset has been impaired or a liability has been incurred atthe date of the consolidated financial statements and the amount of the losscan be reasonably estimated.  SFAS No. 5further states that when there is a range of loss and no amount within thatrange is a better estimate than any other, then the minimum amount of the rangeshall be accrued.  Accounting for contingencies arising from contractualor legal proceedings requires our management, after consultations with outsidelegal counsel, to use its best judgment when estimating an accrual related tosuch contingencies.  As additional information becomes known, our accrualfor a loss contingency could fluctuate, thereby creating variability in ourresults of operations from period to period. Likewise, an actual loss arising from a loss contingency whichsignificantly exceeds the amount accrued for in our consolidated financialstatements could have a material adverse impact on our operating results forthe period in which such actual loss becomes known.

 

**New Accounting Pronouncements**

 

***SFAS No. 123(R).***  In December 2004, theFASB revised SFAS No. 123 by issuing SFAS No. 123(R), “Share-BasedPayment.”  SFAS No. 123(R) replacesSFAS No. 123 and APB Opinion No. 25 and establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods and services.  SFAS No. 123(R)requires that the compensation cost relating to share-based paymenttransactions be recognized in financial statements,

 

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measured by the fair value of the equity orliability instruments issued, and is effective as of the first reporting periodthat begins after June 15, 2005 for public entities that do not file assmall business issuers.  We havepreviously disclosed the pro forma impact on our earnings of adopting the fairvalue method of accounting for stock-based compensation under SFAS No. 123in notes to our consolidated financial statements for the years ended September 30,2002, 2003 and 2004 and the three months ended December 31, 2004.  The fair value-based method of SFAS No. 123is similar in most respects to the fair value-based method under SFAS No. 123(R);however, certain transition rules of SFAS No. 123(R) may affect theimpact on our consolidated financial position or results of operations.  Such impact, if any, on our consolidatedfinancial position or results of operations has not yet been determined.

 

**Forward-Looking Statements**

 

Some of the information in thisreport, including the information incorporated by reference (as well asinformation included in oral statements or other written statements made or tobe made by us), contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended (the “Exchange Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended.  The forward-looking statements involve anumber of risks and uncertainties.  Anumber of factors could cause our actual results, performance, achievements orindustry results to be materially different from any future results,performance or achievements expressed or implied by these forward-lookingstatements.  These factors include, 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/A,including those set forth under the caption “Risk Factors.”

 

In addition, theseforward–looking statements necessarily depend upon assumptions, estimates anddates that may be incorrect or imprecise and involve known and unknown risks,uncertainties and other factors. Accordingly, any forward-looking statements included in this report donot purport to be predictions of future events or circumstances and may not berealized. Forward-looking statements can be identified by, among other things,the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,”“seeks,” “pro forma,” “anticipates,” “intends,” “continues,” “could,” “estimates,”“plans,” “potential,” “predicts,” “goal,” “objective,” or the negative of anyof these terms, or comparable terminology, or by discussions of outlook, plans,goals, strategy or intentions. Forward-looking statements speak only as of the date made.  We assume no obligation to update any ofthese forward–looking statements to reflect actual results, changes inassumptions or changes in other factors affecting these forward-lookingstatements.

 

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**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

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

 

As of December 31, 2004, theprincipal components of our debt portfolio were the $125.0 million of NewSenior Notes and the $60.0 million credit facility, both of which aredenominated in U.S. dollars.  The fair value of the debt portfolio isreferred to as the “debt value.”  The New Senior Notes bear interest at afixed rated of 111⁄4%.  Although a change in market interest rates would notaffect the interest incurred or cash flow related to this fixed rate portion ofthe debt portfolio, the debt value would be affected.

 

Our revolving credit facilitycarries a variable interest rate that is tied to market indices.  As of December 31,2004, we had no direct borrowings and $6.9 million of letters of creditoutstanding under our credit facility.  Borrowings under the creditfacility would have borne interest at a rate between approximately 3.7% and5.3% per annum as of December 31, 2004.  Any future borrowings underthe credit facility would, to the extent of outstanding borrowings, be affectedby changes in market interest rates.  Achange in market interest rates on the variable portion of the debt portfolioimpacts the interest incurred and cash flows, but does not impact the value ofthe financial instrument.

 

The sensitivity analysis as itrelates to the fixed rate portion of our debt portfolio assumes aninstantaneous 100 basis point move in interest rates from their levels as of December 31,2004, with all other variables held constant.  A 100 basis point increasein market interest rates would result in a decrease in the value of the debt byapproximately $5.0 million as of December 31, 2004.  A 100 basispoint decline in market interest rates would cause the debt value to increaseby approximately $5.2 million as of December 31, 2004.

 

Based on the variable rate debt included inour debt portfolio as of December 31, 2004, a 100 basis point increase ininterest rates would result in additional interest incurred for the year ofless than $0.1 million.  A 100 basispoint decrease in interest rates would correspondingly lower our interestexpense for the year by less than $0.1 million.

 

Other than as described above, wedo not believe that the market risk exposure on other financial instruments ismaterial.

 

**Item 4. Controls and Procedures**

 

***(a) Evaluation of disclosure controls and procedures*****.** Our disclosure controls and procedures are designed to ensure thatinformation required to be disclosed by us in the reports that are filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.  Thesedisclosure controls and procedures include controls and procedures designed toensure that information required to be disclosed under the Exchange Act isaccumulated and communicated to our management on a timely basis to allowdecisions regarding required disclosure.

 

Inconnection with our preparation of this Form 10-Q/A for the quarter ended December 31,2004, after consultation with the Company’s independent registered publicaccounting firm, KPMG LLP, we implemented changes to our method of accountingfor leases, including our method of accounting for tenant improvementallowances, rent expense during store build-out periods (rent holidays), andamortization of leasehold improvements. These changes are consistent with the views expressed by the Office ofthe Chief Accountant of the SEC on February 7, 2005 in a letter to theAmerican Institute of Certified Public Accountants and other recentinterpretations regarding certain operating lease accounting issues and theirapplication under generally accepted accounting principles.  Because of these changes in our leaseaccounting practices, we concluded that we had a material weakness in theeffectiveness of controls over the selection and monitoring of appropriate practicesused in accounting for leases during the quarter. We also concluded that thedesign and operations of our disclosure controls and procedures as of September 30,2004 and December 31, 2004 were not effective.  For the quarter ended March 31, 2005, weremediated the material weakness in internal control and the ineffectiveness ofour disclosure controls and procedures by implementing additional reviewprocedures over the selection and monitoring of appropriate practices affectinglease-related accounting to ensure that U.S. generally accepted accountingprinciples are

 

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appropriatelyapplied.  As a result, our ChiefExecutive Officer and the Chief Financial Officer each concluded that theCompany’s disclosure controls and procedures were effective as of March 31,2005.

 

Weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of the date of this filing.  In performing this evaluation, we consideredthe foregoing changes in our method of accounting for leases, as well as theremediation activities described above. Based on this evaluation, the Company’s Chief Executive Officer andChief Financial Officer have concluded that as of the date of this filing,these controls and procedures were effective.

 

On May 5,2005, the Audit Committee of our Board of Directors concluded that arestatement of the Company’s historical consolidated financial statements wasnecessary to correct errors resulting from our prior method of accounting forleases.  The restatements involveadjustments that have no impact on our previously reported sales, comparablestore sales or our compliance with any financial covenant under our revolvingcredit facility or other debt instruments.

 

***(b) Change in internalcontrols*.**  There have been no changes in internalcontrol over financial reporting identified in connection with the foregoingevaluation that occurred during the fiscal quarter ended December 31,2004, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

On January 12, 2005, a purported classaction was filed against us in the United States District Court for theDistrict of Connecticut.  The complaintalleges that, under applicable federal and state law, certain former andcurrent employees should have received overtime compensation.  The plaintiffs in this case are seekingunspecified actual damages, penalties and attorneys’ fees.  At this stage in these proceedings, we areunable to predict the outcome of this case, which we are vigorouslydefending.  We have undertakenpreliminary steps to mediate certain of these claims.  We understand that similar proceedings havebeen brought against other retail companies.

 

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

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

The following table providesinformation about purchases by us during the quarter ended December 31,2004 of equity securities that are registered by us pursuant to Section 12of the Securities Exchange Act of 1934:

 

**Issuer Purchases of Equity Securities**

 
| **Period**                                 | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased as  Part of a Publicly  Announced Program  (1)** | ** ** | **Maximum  Approximate Dollar  Value of Shares that  May Yet Be  Purchased  Under the Program  (2)** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| October 1  to October 31, 2004   |       | —                                  |       | —                            |       | —                                                                                    |       | $                                                                                                         | 6,756,983  |   |
| November 1  to November 30, 2004 |       | —                                  |       | —                            |       | —                                                                                    |       | $                                                                                                         | 6,756,983  |   |
| December 1  to December 31, 2004 |       | —                                  |       | —                            |       | —                                                                                    |       | $                                                                                                         | 6,756,983  |   |
| Total                                      |       | —                                  |       | —                            |       | —                                                                                    |       | $                                                                                                         | 6,756,983  |   |

 

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(1) As of December 31,2004, we had repurchased an aggregate of 142,269 shares at a total cost ofapproximately $3.2 million pursuant to the repurchase program that was publiclyannounced in March 2003.

 

(2) On March 5, 2003,we announced that our Board of Directors had approved a share repurchaseprogram under which we may buy up to $10.0 million of our outstanding commonstock from time to time in open market purchases or through private transactionsuntil March 4, 2005, unless extended.

 

**Item 6. Exhibits**

 
| **Exhibit  No.** | ** ** | **Description** |
|------------------|------------|-----------------|
| 3.1              | ** ** |            | By-Laws of the Company (Exhibit 3.2 to  the Company’s Current Report on Form 8-K dated November 17, 2004).***** |
| 10.1             | ** ** |            | Amended and  Restated Loan and Security Agreement dated as of October 15, 2004 by and  among Mothers Work, Inc., Cave Springs, Inc., Mothers Work Canada, Inc.,  and Fleet Retail Group, Inc. (Exhibit 10.2 to the Company’s Current  Report on Form 8-K dated October 15, 2004).***** |
| 31.1             |       |            | Certification of the Chief Executive  Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2             |       |            | Certification of the Executive Vice  President-Chief Financial Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
| 32.1             |       |            | Certification of the Chief Executive  Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |
| 32.2             |       |            | Certification of the Executive Vice  President-Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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*Incorporated by reference.

 

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**Signatures**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                  | MOTHERS WORK, INC. |                                                       |                    |
|-----------------------|--------------------|------------------------------------------------------------|-------------------------|
|                  |               |                                                       |                    |   |
| Date: October 4, 2005 |               | By:                                                        | **/s/ DAN W. MATTHIAS** | ** ** | ** ** |
|                  |               | Dan W.  Matthias                                           | * *                | * * |
| * *              | * *           | *Chairman  of the Board and  Chief Executive Officer*      |                    |   |
| * *              | * *           | * *                                                   | * *                | * * |
|                  |               |                                                       |                    |   |
| Date: October 4, 2005 |               | By:                                                        | **/s/ EDWARD M. KRELL** | ** ** | ** ** |
|                  |               | Edward M.  Krell                                           |                    |   |
| * *              | * *           | *Executive  Vice President—  Chief Financial Officer* |                    |   |
|                       |                    |                                                            |                         |  |  |  |

 

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